In order to more successfully compete for their customers, businesses are using global sourcing, which is rapidly becoming the best strategy for businesses try to reduce their costs for selling, building, and buying their goods and services. However, they are also extending the supply lines overseas which brings with it new operational and commercial difficulties which expose their businesses to brand new types of management requirements, resource acquisition, liabilities, partners, costs, and investments which are much more complex than they were previously.
The end result is that the sourcing initiatives don’t provide the projected profits/cost savings since the costs and risks are much more complicated supply chains that are across the border, aren’t understood correctly, managed, and tracked, and are longer.
Because businesses are under ever increasing pressure to be completive when it comes to price, their hurry to use inexpensive manufacturing techniques and labor from overseas by outsourcing to developing countries resembles a modern version of the historic gold rush in California. The biggest difference is that they aren’t using covered wagon and horses and are using airplanes and ships for the mode of transportation.
In the year 2000 it wasn’t unusual for businesses that were based in the United States to have less than 10 percent of their goods and services outsourced. These days, there are many thousands of businesses who are outsourcing their manufacturing processes to countries overseas. These days, those same businesses are outsourcing as much as 90 percent of their goods and services to countries overseas.
Although all of the purchasing departments in all of those businesses are quick to explain that they are saving their businesses a considerable amount of money, it is a completely different in the department of supply and in the logistics department. When a business runs a logistics department from New York, or Buffalo to Austin, Texas there are far less and fewer complex cost components, much fewer moving parts, and much less of a impact on the cash flow than an across the border supply chain from Columbus, Ohio to Osaka, Japan. The challenges and risks are considerably greater.
As a result of the procurement and logistics departments being focused on how they are compensated and how they are measured, they frequently become single minded and wind up actually working for different purposes, with one department losing or gaining at the expense of the other. The unit price is what the people in the purchasing department care about. The logistics department cares about the cost of the entire logistics effort and the cost of transportation as a percent of the profit.