manufacturingtechnologyinsights

The Pros and Cons of Local and Global Sourcing

By Steve Ilmrud, VP, Operations, Hexagon Manufacturing Intelligence

Steve Ilmrud, VP, Operations, Hexagon Manufacturing Intelligence

Advancements in telecommunications, transportation and business systems have made the world smaller, more connected, and readily accessible to companies seeking to expand their businesses beyond their local areas. While this smaller world makes it easier to learn about, communicate with and potentially use suppliers from around the world, optimizing your supply chain still requires in-depth analysis and careful consideration of the many aspects of doing business.

The immediate availability of necessary raw materials is critical to the operations of any successful manufacturing facility. It is also essential to manage the quality, cost and delivery of these input materials to remain competitive in the marketplace. The supply chain-the system of organizations, people, activities, information and resources involved in moving a product from supplier to customer–plays an integral role in a production strategy.

Sourcing–Choices, Choices

As a company goes out to source, qualify and purchase required goods and materials, it needs to determine if a local or global supply chain approach is optimal. The structure of a specific supply chain can range from very simple to relatively complex depending on the number of intermediate process steps, how materials are procured, and where they are located.

Hexagon Manufacturing Intelligence develops data-driven technologies that enable industrial manufacturers to improve output quality, process efficiency and production speed. Our extensive product portfolio includes everything from precision coordinate measurement machines to portable laser trackers, which essentially help manufacturers make their products and services better. The company has more than twenty manufacturing facilities around the globe providing both finished goods and intermediate components used by other Hexagon factories.

"The supply chain-the system of organizations, people, activities, information and resources involved in moving a product from supplier to customer–plays an integral role in a production strategy"

Because of this structure, our supply chains consist of both local and global approaches and range from the simple to complex. Many of our global factories provide very specialized goods and materials that would be extremely difficult to source outside of Hexagon. But in many cases, goods and materials are sourced locally from smaller independently owned companies.

Service and Responsiveness

When considering whether to source materials or services locally or globally, a manufacturer should consider the advantages of working with a local supplier. These business partnerships can generally be more advantageous in regards to service and responsiveness, logistics and supplier relationships.

The service and responsiveness delivered by a local supplier will generally be improved as there are no language barriers, time zone differences or long distance traveling. With local suppliers, there are also no language interpretation issues when reviewing important forecasts, order commitments, and technical specifications. Even if a global supplier communicates in your native tongue, a manager can never underestimate the potential for differences in the understanding of certain words and phrases.

Logistics and the Global Supply Chain

In regards to logistics when working with a global supplier, there are major considerations such as transportation costs, duty fees and time delay of clearing customs at international borders. Air freight carriers have seen considerable consolidation in the past 2-3 years in an effort to control their capacity which results in higher rates. Ocean freight carriers are now following this trend and their markets expect additional consolidation in the next few years. With the uncertain global political climate, it would not be surprising to see drastic changes in the duty rates in and out of many countries in the very near future.

Supplier Relationships

Perhaps the most important, and least tangible, advantage of a local supply chain is the ability to easily engage in personal interactions and develop strong supplier relationships. Forging a strong partnership between supplier and manufacturer allows both parties to better understand the customer’s business dynamics. The supplier also gains a better understanding of an OEM’s need to be more agile in responding to unanticipated changes due to business volatility.

Hexagon has organized several workshops with our key local suppliers, focusing on Lean, Kaizen, and Six Sigma initiatives. These continuous improvement events facilitate the collaboration process, provide insight into the vital needs of our operations, and the invited suppliers benefit greatly from shared experiences and close coordination.

In my experience, a global supply approach does not preclude a strong supplier relationship. But the alliance with a remote supplier requires our production team to work harder to maintain a comparable relationship by utilizing technology such a video conferencing and advanced telecommunications, and periodic face-to-face meetings planned to accommodate time zone differences.

Just-In-Time (JIT) Programs

One of the most impactful benefits of a local supplier is the ability to establish a Just-In-Time (JIT) program, which is setup to minimize the inventory investment at both the supplier and the customer, and effectively reduce operating costs for both parties. In a JIT program, companies coordinate production processes to deliver only what is needed, when it is needed. For a JIT approach to work well, the supplier and customer must clearly understand the production demand. Both companies must also be synchronized to quickly react and adapt to changes in the production demand. While this is not impossible to accomplish with a global supplier, there are many potential pitfalls to consider when depending on a global JIT delivery such as delays in transport, customs clearance, or damage in transit due to handling.

Price Competitiveness

With all the advantages discussed with utilizing a local supply chain, why subject your company to the risks and challenges of global sourcing? In many cases, depending on where your manufacturing facilities are located, you may find global sources provide excellent price competitiveness and technical expertise.

Labor rates obviously differ significantly throughout the world, but other social effects and government restrictions can impact the cost of a good or material sourced globally. Often currency effects, due to exchange rates and differences in government restrictions, can have significant cost impact, tilting the balance in favor of global sourcing even when considering logistics costs. In all these cases, it is always extremely important to consider the “total cost of procurement”. It is a common pitfall to consider only the piece price and not consider the additional procurement and logistics costs.

Technical Expertise, Natural Resources

There can also be reasons to source globally due to the availability of technical competence or even the availability of natural resources in different parts of the world. Depending on the size and structure of a manufacturing facility, it may also make sense to leverage economies of scale, pooling material or goods requirements to increase production volume, driving costs down.

A Sourcing Plan

How do you find a viable sourcing partner? In our case, Hexagon has worked to develop and/or strengthen its sourcing plan by collaborating with local universities which offer supply chain development. These universities and our local MEP offer free or deeply discounted programs that assist in locating viable local or global sources for your specific needs.

One additional consideration that must be noted is a secondary sourcing approach that leverages an alternative supply chain utilizing more than one source for a good or material. This is especially important for critical components that could not be quickly resourced if there was a significant disruption to a primary supply chain. With the ever-increasing focus on business continuity, it is imperative to have a backup plan! Now back to answering the original question–“Which is the better sourcing approach local or global?” The answer is a function of your individual production process, the product produced and the goods or materials required. The size and geographical footprint of your company will play a significant role, as well as the current economic and political policies. In my experience, start locally when sourcing. It will be easier, probably cheaper, and strategic to developing a close and efficient relationship with your supply chain.

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