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The global world of sourcingRight-cost,not low-cost sourcingA range of potential risks, from the reputational to the regulatory, await firmsthat don't consider the full costs of what they're sourcing. Investing in deepersupplier relationships can ensure a positive outcome. By Thomas Clouse.Stories about sourcing in low-cost countries tend toward the extreme.Some tell of tremendous savings while others complain aboutpoor-quality products and dishonest local partners. In most cases, acompany’s success in sourcing depends upon its priorities and itspreparation. Often the companies that boast of savings initially becomethe same companies that later suffer from unexpected cost andquality issues.Chris Runckel, President of US-based Runckel and Associates, a consultingfirm, explains: “The most common mistake companies makeis to chase low prices. If you focus only on price, you often missother potential costs.”Many of these other potential costs stem from quality issues, saysRunckel. While companies can save money initially by using lowercostsuppliers, they must often pay more to remedy problems whenthose suppliers are unable to meet quality requirements. In such situations,companies not only face the direct costs associated with replacingfaulty products but also the potential damage to their reputationsif the products reach their customers. In one example, UStoymaker Mattel had to recall almost a million toys in 2007 after itwas discovered that one of its suppliers has used lead paint.Clearly communicate your expectationsCommunication is an important element in ensuring quality. Companiesmust be clear about their product specifications and business expectations,a task which is complicated by differences in culture andlanguage. “Companies should put out a package of requirements tosuppliers that explains in easily understood terms what is expected andhow the whole process will take place,” says Runckel. And poor qualityis not the only issue that can damage a company’s reputation, he adds.Companies should also make sure the suppliers they work with haveethical business practices. “More companies want to know that theirsuppliers treat their workers decently, follow business standards andlegal procedures, and know how to treat the environment properly.”Mario Preissler, Head Business Unit Performance Materials at DKSH,explains: “The most important factor is really making sure the suppliersyou identify are professional companies that will follow thestandards that you expect and will still be around in the future.”Visiting the supplier companies can serve as a first step in determiningtheir level of professionalism. It also gives companies a chance toevaluate the logistical costs of a company’s location. As Runckel mentions,lower-cost producers are often located further from ports andrailroad lines, which can translate into higher shipping costs and longertravel times. This also increases companies’ exposure to priceshocks when oil prices rise.Handling regulatory risksThe location of the company not only matters for transportationcosts but for regulatory risks as well. Tariffs, which can vary greatlyfrom country to country, add significantly to product costs and canincrease quickly when trade tensions surface. In the first half of 2010,for example, more than 32 WTO members implemented anti-dumpingmeasures to slow the inflow of imports.Regulatory risks can take place on a smaller scale, too, such as whenlocal authorities increase minimum wages as they have in recentmonths in Shanghai, Jiangsu, and other parts of China. They mayalso be less direct. For example, weak enforcement of intellectualproperty rights can endanger companies’ technological assets.DKSH’s magazine for Market Expansion Services 15