In recent years, sourcing products from all over the world has become very popular with entrepreneurs and business owners due to a few big factors: lower costs, faster production times, and potentially higher profit margins. Unfortunately, while some aspects of this practice are easy and beneficial, others can be challenging or even downright dangerous if not handled properly. If you’re planning on going the global sourcing route in your business, be aware of these seven of the biggest challenges you might face along the way so you can prepare to tackle them head-on when they arise.
1) Currency Fluctuations
Most companies sourcing products globally do so because they’re seeking cost savings. But when exchange rates move, that can hurt—or help—your margins. You want to make sure you’re accounting for any global currency fluctuations and adjusting your product pricing accordingly. If you’re working with a contract manufacturer in China, for example, it might seem like a good idea to take advantage of weaker renminbi (that’s China’s currency) and negotiate a price with them in U.S. dollars (which is stronger). But if your renminbi were to strengthen significantly between placing an order and delivery date, you could end up paying more for each unit than anticipated.
2) International Shipping
Shipping products internationally can be a nightmare. Getting products from one country to another means dealing with international shipping logistics, import taxes, customs clearance, shipment delays, and more. If you’re planning on selling products globally it’s essential to have a clear understanding of what challenges you might encounter.
3) Communication Problems
Companies that want to start sourcing products overseas with the help of procurement companies in the USA need to consider how they will communicate with their new manufacturer. Language barriers can be a significant problem if your manufacturing partner doesn’t speak your language. Not only will you have trouble understanding them, but they’ll also have trouble understanding you. You may want to consider using Google Translate or hiring a local expert to help facilitate communication with your overseas manufacturers.
4) Logistics Integration
Logistics integration is one of those challenges. It’s really easy to imagine it going off without a hitch—but reality can be a different story. For example, you might find that having multiple freight companies is not as efficient as it seems and that shipping by sea will end up costing significantly more than anticipated.
Obviously, it depends on what you’re selling and what you’re sourcing from a China sourcing company, but integration issues are definitely something to look out for when sourcing globally. To make sure you don’t fall victim to logistics integration issues, make sure to be incredibly clear with your vendors about everything from timelines to packaging requirements.
5) Exchange Rates
Currency exchange rates are among one of the biggest headaches for business owners working with international suppliers. Exchange rates can fluctuate up and down each day, making it hard to predict how much money you’ll actually be paying for goods and services from your foreign suppliers. If you need to make an order right away, many online currency converters will allow you to lock in an exchange rate at a specific time; set a reminder on your phone so that you don’t forget!
If your payment is due in a month or more, you should shop around for a longer-term currency option that doesn’t have as much volatility as daily exchange rates. You might also want to consider insuring any shipments going across borders if your products could be damaged during transport.
6) Import Duties & Taxes
It’s easy to forget about import duties and taxes when planning a global sourcing strategy, but these costs can be substantial. In some countries, such as China, duties and taxes for imports can total as much as 12% or more of a product’s value.
This means even if you find an awesome deal on something in China, you could lose part of your profit margin due to import duties and other fees. Always check with your local customs agency before importing products so you know exactly what to expect in terms of fees or how you should classify your product for duty purposes.
7) Trade Agreements
For a long time, getting products in and out of other countries was a big challenge. But in recent years, there have been a number of agreements created to ease trade across borders. The biggest two are:
1) The North American Free Trade Agreement (NAFTA), which links Canada, Mexico and America together for free trade, and
2) The European Union-Mercosur agreement linking South America with Europe.
I each case it’s essentially an elimination or phasing out of tariffs between participating countries. NAFTA came into force January 1st 1994 when then president Bill Clinton signed an executive order to start its implementation. NAFTA has been one of the most successful trading agreements ever since it was created in 1994.