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Risk Management in Global Sourcing

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global-risk-mgmtBy Dr. Stacey Little
Assistant Professor, Transportation & Logistics Management at American Public University

Reports indicate an increase in global sourcing each year as companies attempt to capitalize on the business benefits of cost reductions, enhanced quality, improved efficiencies, and a competitive edge. However, organizations that participate in global supply chains can be exposed to increased complexity and uncertainty compared to those that operate domestically. If not managed properly, these risks can undermine the benefits of global sourcing.

While the risks associated with global sourcing can impact an organization’s bottom line, a proactive approach to global sourcing can bring improved efficiencies and costs. Just as with domestic sourcing, global sourcing strategy should include proper evaluation of global suppliers, supply chain relationships, and the risk associated with each.

Global sourcing managers should choose global sources based on risk level and their company’s ability to address that risk.  According to David Cowell, chief procurement officer at Coca-Cola HBC, it is more important to identify whether a potential supplier is low-risk rather than how competitive the supplier is on price, as reported by Robin Parker in the 2001 Supply Management article, “Manage Risks in Emerging Markets.”

Some global sourcing risks can lead to decreased quality of supplies or products, interruption of supply chain processes, and increased costs in materials. In fact, without proper identification of such potential risks, hidden costs may negate any benefits achieved.

A past example of decreased quality of products, is the recall of millions of toys from China because of lead-paint hazards to children. A more recent example of interruptions in the global supply chain that could lead to increased costs in materials is the earthquake in Japan.

It is obvious that every possible risk occurrence cannot be predicted, however, proactive consideration of potential risks can help companies reduce the damaging consequences. A simple three-step process can help organizations begin to manage risks.

  • Step 1: Identify the possible risks associated with each potential initiative. This may include a visit to the country and/or supplier.  At minimum, this step involves extensive research on the sourcing country.
  • Step 2: Assess risks based on the probability of occurrence and the impact they would have on the initiative and the organization.
  • Step 3: Create a process to monitor and strategies to mitigate these potential risks.

If global sourcing choices are made without consideration and assessment of risk it could be detrimental to an organization. Today’s supply chain managers need to be prepared to take the steps to properly develop global sourcing efforts so that the organizations will successfully gain the competitive advantages they are seeking.

About the Author:

Dr. Stacey Little is an Assistant Professor in the Transportation & Logistics Management program. She has over 11 years of experience in teaching in Business and Logistics in both the online and traditional format.  She has a Professional Designation in Logistics and Supply Chain Management and a Certification in Transportation and Logistics from the American Society of Transportation and Logistics. Her research interests are in the area of cultural intelligence and global preparation of future managers and leaders.

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