Global Procurement: The Risks and Benefits to the Supply Chain
In the modern supply chain, global procurement of raw materials, components and manufacturing is the norm rather than the exception. Over the last few decades, businesses have increasingly cultivated relationships with third-party suppliers outside of their own country. The production of goods integral to international trade is spread across a global supply chain that involves multiple factories in multiple countries.
The rise of global sourcing leads to new supply chain management challenges that can change daily or hourly. Today, it means activating manufacturing partners early to anticipate shortages and demand spikes before they happen. Tomorrow, it could mean being able to scale down production if demand shifts. That type of agility is difficult to achieve, so supply chain leaders need to be aware of circumstances around the globe. Looking at global procurement through a strategic lens leads to smarter decisions in the last mile of global procurement. It also means strategic sourcing and working with redundancies in supply; all, of course, while keeping costs down. Today’s supply chain leaders must create a procurement process that includes contingencies for logistics and raw material suppliers. Any procurement professional needs to factor tariffs, embargoes, and trade wars into their global procurement plan.
While the COVID-19 pandemic has highlighted the importance of effective supply chain management to keep global commerce moving, it has also accelerated the wide adoption of best practices that are integral to a sustainable supply chain. As we’ve seen from supply chain leaders like Apple and Amazon, focusing on global procurement provides a significant competitive advantage over companies that limit procurement to domestic production.
What is global procurement for supply chains?
Global procurement is one of the most important responsibilities of managing a supply chain. It is integral to a supply chain that truly spans the world. This is different from international procurement, which focuses on the purchasing and managing a cross-border supply chain between just two countries. For example, if a car manufacturer in Michigan sources floor mats from Canada but manufactures the rest of its 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 complex supply chain with a global focus.
That global focus is key to realizing a product margin that drives success for the organization. Global procurement is vital to supply chain management because it enables companies to maximize operational efficiency and realize healthy margins that allow more profit and investment into growth - in short procurement drives the total value of the end to end supply chain (not just piece price) To create a global procurement process, supply chain managers must consider a myriad of factors.
For example, strategic sourcing decisions weigh logistical costs and transport time against raw material quality and pricing to develop the ideal procurement strategy. This strategy must be consistent and supportive of the manufacturing operational strategy and the end to end supply chain strategy. Because of the possibility of supply chain disruption, procurement leaders must also establish alternate sourcing and logistics options. We’ve seen the delays and risks associated with significant supply chain disruption in 2020, and procurement teams are viewing risk differently as the world slowly manages the health crisis.
Developing a global sourcing strategy means 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 will need to 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 procuring supply chain components from global sources
To meet the rising demand accelerated by increased ecommerce and shifting consumer spending behaviors, large companies are diversifying and optimizing procurement strategies beyond domestic providers. Global sourcing of raw materials and products are top of mind as a solution to facilitate boosts in supply and production. But this comes with its own risks.
When a trade barrier goes up in one country or a natural disaster takes a supplier offline, the agile supply chain manager can utilize another supplier relationship to meet the demand. Global supply chain management keeps manufacturing and delivery on track and on time. Using some of the learnings from the Global Supply Chain Institute’s whitepaper, EPIC Global Supply Chain Risk Assessment, supply chain managers can better assess these global sourcing risks. The whitepaper lays out 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 of global sourcing 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 to the enterprise. . Global supply chain management can take advantage of skilled regional workforces as well, 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 wages of workers in low-wage countries. Domestically, global trade also supports 39 million jobs in the U.S.
What supply chain managers need to consider for global supply chain procurement
A successful supply chain manager is always thinking several steps ahead to assess the risk of multiple variables at once. The complexity and solutions-oriented work is what makes the field of supply chain management both exciting and demanding, and it’s one of the reasons that capable supply chain professionals are in such high demand in the labor market.
To create a value chain using global sourcing, you must build a resilient supply chain. Supply chain risk is a top priority for many companies, particularly as the past year has delivered an object lesson in the chaos created by supply chain disruptions. In fact, 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 who specialize 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. The first question is how to create 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 solid competitive advantage. When your value chain is too reliant on one country or area, your company is more susceptible to supply chain 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, with 1000’s of nodes and activities. Successful supply chains must have dependable and capable partners. Building proactive relationships with your suppliers is good for business and a smart supply chain strategy, even if you aren’t working with them immediately. 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, but visibility into all elements of your supply chain is both more challenging and more important in global sourcing. Aspects of end-to-end management for global supply chains include demand planning, root cause analysis to uncover weak elements of the value chain, and creating a plan for the human resources needed to create a resilient supply chain.
If global procurement professionals follow these best practices for global supply chain procurement, you can minimize the risk of supply chain disruption. Of course, there’s no way to eliminate risk completely. That’s why companies value skilled supply chain professionals who can constantly evaluate their procurement strategy while considering other factors that are important in supply chain management: lowering supply chain costs, fulfilling orders on time, practicing responsible inventory management, and investing in product innovation.
Trends in global supply chain procurement
The predominant trend in global supply chain management is addressing the continued supply chain risk posed by COVID-19. At different times since the beginning of the pandemic, some countries have appeared to have the disease under control while others demonstrated significant volatility due to partial and full shutdowns. This is a proof point for a robust procurement strategy: when one major supply center is back at work, another may be completely shut down due to a coronavirus flare-up.
The pandemic also disrupted transportation systems. To address the realities of the current supply chain risk, researchers from the Global Supply Chain Institute at the University of Tennessee, Knoxville’s Haslam College of Business are cautioning supply chain leaders to expect some level of 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 big role here.
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 material. In addition, organizations are placing greater focus on diversity in sourcing to support communities that global procurement practices have traditionally left behind. Tomorrow’s supply chain leaders must prioritize an ethical procurement process - from both human and ecological perspectives - at the center of their procurement strategy.
The last item is less of a trend than a welcome realization: the growing recognition of how vital supply chain and procurement is as a field. Global supply chain management challenges in today’s world have cast a spotlight on the procurement team. Procurement professionals can expect more opportunities for advancement, as the Chief Procurement Officer (CPO) role takes on more responsibilities in many companies.
Building your career in global supply chain management
For procurement professionals who want to advance their careers, a Master of Science in Supply Chain Management - Online (MS SCM - Online) at Haslam is a terrific place to start. Haslam’s MS SCM - Online program is one of the top-rated supply chain degree programs in the country. With the online course of study, you can take advantage of the opportunity to move your supply chain career into high gear, no matter where you live. You can even continue working while you earn your degree, applying principles from the classroom directly into your work.
Supply chain leaders will be more vital than ever in the world still adapting to the effects of COVID-19. The Master of Science in Supply Chain Management - Online is a great way to prepare yourself for the challenges and rewards of a career as a procurement professional.