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8/8/2019 Risks of Global Sourcing
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Risks Involved In Global
Sourcing
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Global sourcing is a term used to describepractice of sourcing from the global marketfor goods and services across geopoliticalboundaries.
Global sourcing often aims to exploit globalefficiencies in the delivery of a product orservice. These efficiencies include low costskilled labour, low cost raw material andother economic factors like tax breaks and
low trade tariffs.
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Need for global sourcing
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Costs
Quality requirementsAvailability of Materials or Technology only from Global
Sources
To establish additional sources of supply
Anticipation of actual material shortages Expansion in the domestic market
Global Sourcing for large variety and volume of products
Global Sourcing to tap worldwide scientific talents and
technological skills.
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Risks Involved
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Risk of not estimating the labour cost
The sourcing company has to study the
prevailing costs and wages in the target
country from where it plans to procure thegoods and services, failing which it may
end up paying more than fair price for the
products and services, which will affect its
profitability
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Estimation of Prevailing Wages
For example, salaries in Northern and
Western China are 60% lower than
Shenzhen. So if the sourcing companydoes not know this fact and sources from
Northern China, it may pay more for the
goods and services thinking that Northern
China salaries are equal to Shenzhen.
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Improper Product Classification
Different products attract different taxes & tariffs In the
country of supply.
Different products attract different shipping charges In
the Country of supply. Different products attract different taxes,
& tariffs in the country of Import (destination)
Proper calculation of total costs, otherwise the products
which should attract lower tariffs may attract higher tariffs causing loss.
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Ambiguity In Terms Of Trade
The International Commercial Terms (Inco terms) were
devised so that there is uniform understanding all over
the world about each of the terms.
Ambiguity or lack of clarity about the terms of trade in theagreement may lead to disputes, supply interruptions
and expensive litigation
The agreement should mention whether the price offered
and accepted is Ex Factory,FOB,CIF
Etc
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Overlooking Packaging Process
Depending on the product shipped and
transportation mode chosen, product
packaging must be given consideration for
protection against damage, spoilage and
corrosion.
The wrong packaging can negatively
impact the cost savings potential of aglobal sourcing model
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In House Logistics Management
Sourcing Companies lacking In house experiencedteam, in supply chain management, may
invite the risk of losses by procuring the productsthrough longer shipping routes ,delayed
arrivals, etc.
It is better to outsource the work to 3 PLs that is thirdparty logistic companies which have the
expertise to ensure supply through the
cheapest,quickest and most efficient mode and route of transportation
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Product Quality
Deviations by supplier from prescribed quality
causes multiple losses.
Rectifying the defect at destination plant or
business also increases the cost .
Cost Of returning the defective parts to Supplier
will also entail losses. Some multinational
sourcing companies station their quality controlexperts at suppliers plant to ensure quality of
production
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Fluctuations In Exchange Rates
Fluctuations In Exchange Rate may cause
uncertainty In total costing.
Usually Sourcing companies (Clients) AndService Providers (Suppliers, Vendors)
agree at the time of contract, to
renegotiate price if the exchange rate
rises above or falls below, a certain level.
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Political Risks
Macro level risks all over the suppliers
Country,such as unforeseen increase in customs duty,
value added tax(VAT),riots, strikes ,terrorism,
coups, civil war etc..
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Micro Level Unrests
Micro level risks at the suppliers plant like strike by
workers, change of ownership, default by suppliers, their
refusal to share financial data, seizure of plant and
equipment of defaulting suppliers by financial institutions
etc.
For example The vast accounting scandal at
Satyam Computer Services increased investor
nervousness about weak corporate governance in
emerging markets and strained its relations with existing
clients till Tech Mahindra Ltd ,took over the company.
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Risks Of IPR Violations
Supplier May Violate Intellectual Property Rights
(IPRs) of sourcing company (Client).
For example, the product plans, specifications,
drawings may be given for rival companies ofclients.
The specifications, drawings could be given to
another country Inimical To clients country
India & China figure among major violators of IPR
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Thank u
Pradeep Imandi