In modern supply chain management, global procurement of raw materials, components, and manufacturing is the norm. Over the last decades, businesses have increasingly cultivated relationships with third-party suppliers outside their country. The production of goods integral to international trade is spread across a supply chain of factories in multiple countries.
The rise of global sourcing leads to new supply chain management challenges that change daily and hourly. Today, it means activating manufacturing partners early to anticipate shortages and demand spikes. Tomorrow, it could mean scaling down production if demand shifts. That type of agility is difficult to achieve.
Looking at global procurement through a strategic lens leads to smarter decisions in the last mile. It also means strategic sourcing and working with redundancies in supply while keeping costs down. Today’s supply chain leaders must create a procurement plan that includes contingencies for logistics and raw material suppliers as well as factors in tariffs, embargoes, and trade wars.
While the COVID-19 pandemic highlighted the importance of effective supply chain management to keep global commerce moving, it also accelerated the broad adoption of best practices integral to a sustainable supply chain. As we’ve seen from supply chain leaders like Apple and Amazon, focusing on global procurement provides a competitive advantage over companies that limit procurement to domestic production.
What is Global Procurement?
Procurement is one of the most critical supply chain functions. Global purchasing in supply chain management differs from international procurement, which focuses on purchasing and managing a cross-border supply chain between two countries. For example, if a car manufacturer in Michigan sources floormats from Canada but manufactures other components domestically, that is an international supply chain. On the other hand, if the automaker sources brakes from China, engine parts from Japan, and partial assembly in Mexico, this is global procurement.
A global focus is key to realizing a product margin that drives success for the organization. Global procurement is vital because it enables companies to maximize operational efficiency and realize healthy margins, allowing more profit and investment into growth. In short, procurement drives the total value of the end-to-end supply chain. Supply chain managers must consider many factors to create a global procurement process.
Strategic sourcing decisions weigh logistical costs and transport time against raw material quality and pricing. A procurement strategy must consistently support the manufacturing operational strategy and the end-to-end supply chain strategy. Because of the possibility of disruption, procurement leaders must establish alternate sourcing and logistics options. We’ve seen the delays and risks associated with significant supply chain disruption in 2020.
Developing a global sourcing strategy requires unifying a company’s risk factors, operational requirements, and sales goals with the latest technology. Complex business problems require modern technology. Today’s supply chain professionals can’t build and monitor a global supply chain using only spreadsheets. Innovative global procurement processes are made possible with emerging technologies such as artificial intelligence (AI) and big data.
Supply chain managers must use that technology to monitor all the moving parts. This can include weather forecasts, the movement of container ships, the efficiency of warehouse operations, and inventory levels. Big data can help create demand forecasts and other predictive analytics. For supply chain leaders, leveraging modern cloud technology leads to better decision-making, and harnessing the power of tech is the secret to driving better margins.
What to Understand about Sourcing Supply Chain Components Globally
Large companies are diversifying and optimizing procurement strategies beyond domestic providers to meet the rising demand accelerated by increased e-commerce and shifting consumer spending behaviors. Global sourcing of raw materials and products is top of mind for facilitating boosts in supply and production. But this comes with its risks.
When a trade barrier goes up in one country or a natural disaster takes a supplier offline, an agile supply chain manager can utilize another relationship to meet the demand. Using the learnings from the Global Supply Chain Institute white paper, “EPIC Global Supply Chain Risk Assessment,” supply chain managers can better assess these global sourcing risks. The white paper lays a framework for evaluating countries based on Economy, Politics, Infrastructure, and Competence (EPIC). By quantifying the risks in 10 world regions, the paper helps supply chain managers develop a sourcing strategy that maximizes the benefits while managing the risks.
Global supply chains also strengthen trade relationships between countries that exchange raw materials in high volumes. If a large part of a country’s economy depends on trade, that can be a source of positive pressure against volatile government action that could lead to a trade embargo. Cross-border supply chains are one factor that incentivizes governments to maintain friendly relationships, reduce tensions, and generate tax revenue.
Responsible global sourcing also allows procurement professionals to source the best quality raw material at the lowest price and highest operational efficiency. This creates the best total value for the enterprise. Global supply chain management can also take advantage of skilled regional workforces, which can help drive product innovation and delivery. This type of global purchasing strategy can give your company a competitive advantage. Leveraging the workforces of global trade partners has significant macroeconomic benefits as well: the global supply chain lifts workers’ wages in low-wage countries. Domestically, global trade supports 39 million jobs.
What Supply Chain Managers Must Consider for Global Procurement
Successful supply chain managers always think several steps ahead to assess the risk of multiple variables simultaneously. The complexity and solutions-oriented work makes supply chain management both exciting and demanding, and it’s one of the reasons that capable professionals are in such high demand in the labor market.
To create a global sourcing value chain, you must build in resilience. Supply chain risk is a top priority for many companies, notably as COVID-19 delivered a lesson in the chaos created by supply chain disruptions. Concern about the risks to global supply chains has led to a reduction in global sourcing in the past decade.
A key consideration of supply chain professionals specializing in global procurement is building an agile supply chain with low-risk vendor relationships. Some of the most important factors to consider in creating a supply chain strategy for global procurement include:
- Develop the capability in the supply chain to manage risk. Creating “produce to demand” and agile capabilities in key partners is the most cost-effective method to reduce risk. First, establish the capability to deliver reliable supply in any situation. Inventory should be the last resort of protection to avoid inaccurate forecasts.
- Source components and products from reliable suppliers. Building supplier capability is a vital element of all sourcing work. Beyond this agility and reliability work, using various suppliers sourcing a raw material or finished product from different regions can build a competitive advantage. When your value chain is too reliant on one country or region, your company is more susceptible to disruption and risks interrupting order fulfillment and customer expectations.
- Build supplier partnerships and relationships. The pandemic reminded us that the supply chain is only as strong as its weakest element. Today’s global supply chains are very complex. Successful supply chains must have dependable and capable partners. Building proactive relationships with suppliers is good for business and an intelligent strategy. If you have built trust with domestic and global suppliers, they will be incentivized to overdeliver and step in to help overcome supply chain disruptions.
- Employ end-to-end supply chain management. End-to-end supply chain planning is essential for any supply chain. Still, visibility into all supply chain elements is challenging and meaningful in global sourcing. End-to-end management includes demand planning, root cause analysis to uncover weak aspects of the value chain, and creating a plan for the human resources needed to develop a resilient supply chain.
Following these best practices for global procurement can minimize the risk of supply chain disruption. But of course, there’s no way to eliminate risk entirely. Companies value skilled supply chain professionals who constantly evaluate their procurement strategy while lowering costs, fulfilling orders on time, practicing responsible inventory management, and investing in product innovation.
Trends in Global Procurement for Supply Chain Management
The predominant global trend in global supply chain management is addressing the continued risk posed by COVID-19. Some countries have had the disease under control at different times since the pandemic, while others demonstrated significant volatility due to partial and complete shutdowns. When one major supply center returns to work, another may be shut down due to a coronavirus flare-up.
To address current supply chain risks, GSCI cautioned supply chain leaders to expect some disruption for the foreseeable future. We’re seeing a trend toward more agile supply chains that can quickly adapt to emerging supply chain disruptions. Procurement will play a significant role.
Other major supply chain trends to watch include a continued emphasis on sustainable supply chains that minimize the environmental and human impacts of raw and processed materials. Organizations are also focusing more on diversity to support communities traditionally left behind by global procurement practices. Tomorrow’s supply chain leaders must prioritize ethics, from both human and ecological perspectives, at the center of their procurement strategy.
Supply chain management challenges have cast a spotlight on the procurement team, with more opportunities for advancement as the Chief Procurement Officer (CPO) role takes on more responsibilities.
Building Your Career in Supply Chain Management
For procurement professionals who want to advance their careers, a Master of Science in Supply Chain Management Online at the Haslam College of Business is a terrific place to start. Supply chain leaders will be more vital than ever in a world where disruptions will come with grander scale and frequency. The MS SCM Online is a great way to prepare for the challenges and rewards of a career as a procurement professional.
Learn more about the MS SCM Online program, including key dates, informational webinars, graduate testimonials, and registration information. Fill out the form below to request more information.