Global Business Strategy and Innovation: A Canadian Logistics Perspective

Global Sourcing

The sharp increase in international trade in Canada since the early 1990s has boosted the expansion of global supply chains and propelled logistics activities to the forefront of business strategy. This can be seen in Canada's West Coast container port traffic, which increased by 592 percent between 1990 and 2010, while Canada's East Coast port traffic grew 83 percent. (Figure 3).

As global customer service level requirements increase, lead-time variability, logistics costs and on-time shipments have become major factors for global sourcing activities. Firms are utilizing a mix of strategies within a 4 Tier global sourcing framework to estimate the trade-offs between opportunities in Canada/U.S., Europe, Mexico and China (Table 1).

Table 1

4 Tier Global Sourcing Framework ⁶

Location	Velocity / Agility	Production cost	Logistics cost
Canada/U.S.	High	High	Low
Europe	Medium	High	Medium
China	Low	Low	High
Mexico	Medium	Medium	Medium

Supply chain managers require a detailed picture of total landed cost beyond the costs of offshore wages and transportation. By incorporating a holistic approach, some firms have aligned their sourcing strategies to include velocity/agility factors that take into account inventory carrying costs (e.g., depreciation of obsolete goods), out-of-stock opportunity costs, customer service level responsiveness, production costs, and logistics costs (including reworking errors, managing product returns, and incremental financing) to better reflect the total landed cost reality. Where velocity and agility are a priority, products that were once profitably sourced in low production cost areas, such as China, might be moved to nearer shoring zones, such as Mexico and in some instances to Canada/U.S. ²

Using secondary sources to supply critical production components from more agile regions/ countries (having a supply base in North America) is another emerging trend for industrial goods manufacturers. Firms can also increase their agility by having the capability to use air transportation. This is especially important for sectors outsourcing high-value goods or products with time-sensitive and fluctuating demand. ²

As expected, most manufacturers have strategic suppliers in the U.S. due to their proximity, variety, and agility (Figure 4). Overall, because of process complexity and headquarters locations, large manufacturers are more likely to have global suppliers than small or medium manufacturers. While the likelihood of a manufacturer having a strategic supplier in Europe is similar to having one in Asia Pacific, the method or approach to the relationship often varies by region. Canadian firms usually manage their strategic sourcing activities internally when procuring goods from the U.S., Europe and other developed countries; however, the strategy used for Asia Pacific sourcing differs. Due to differences in cultural and business practices, many Canadian companies seek support from specialized firms that provide global trade management services. ²

Many Canadian firms call on European companies to supply inputs to production, such as locomotive, aerospace, motor vehicle, ^{Footnote H} and industrial electronics firms that mainly carry out the final assembly of products at the continental level (Figure 5). ² Meanwhile, pharmaceutical manufacturers often import finished products from Europe, which reflects headquarters' locations and their strategy to have dedicated global production facilities. ²

Asia Pacific countries provide an important source of supply for 63 percent of industrial electronics manufacturing firms (electronic components as inputs into production) and for 57 percent of pharmaceutical firms (mainly packaging and inputs into production). Also, some aerospace manufacturers import electronic components for their North American production (Figure 6).

The strategy for sourcing auto parts from Asia Pacific can be broken down into two distinct strategies. The flow of inputs into North American production of either motor vehicles or motor vehicle parts is critical, and both the reliability and efficiency of the supply chain are of utmost importance. Meanwhile, the after-sales auto parts market requires less focus on supply chain agility factors because products are not used as inputs to production; rather, the sourcing strategy of the aftersales auto parts market is geared toward lower production and logistics costs. ² Finally, consumer products goods (CPG) manufacturers often source finished goods from Asia Pacific that are complementary to final products made in North America. ²

Global Sourcing Practices

Global sourcing is complex due to complicated processes, country-specific regulations and cultural considerations. This complexity makes additional steps necessary to ensure efficiency of the overall supply chain cycle. The key activity in strategic global sourcing is the implementation of a dedicated team to interact with internal and external stakeholders, and integrate a total landed cost approach. In addition, the development of specific practices such as project management, quality assurance, expediting, loading/unloading supervision, inspection, vendor assessment and failure analysis are essential for an efficient and effective global logistics network (Table 2).

Table 2

Global Sourcing Practices ²

Project management services	Coordination of the review, verification, inspection, testing and approval steps in all phases of a project.
Quality assurance and quality control	Assures quality for customers with respect to defined standards and specifications. Includes assessment of suppliers and verification of materials, parts and final products through checks, audits, inspection and witnessing.
Expediting	Ensures the delivery of purchased goods to a pre-determined and promised delivery schedule or critical path network, and analyzes areas that might cause delays.
Loading / unloading supervision	During loading and/or unloading operations at the source and on arrival, assures that the goods are correctly presented, properly handled and secured on the means of transport and that quality and safety requirements are met.
Industrial pre-shipment inspection	Before shipping, assures compliance to agreed quality and quantity as well as to marking, packing and loading of industrial goods.
Manufacturing technical inspection	Entails the supervision and control of product tests, and the quality inspection of products. Aims to control the conformity of the manufactured products with purchase specifications, applicable drawings, codes and standards, and other relevant contractual documents.
Vendor assessment / technical audit	Involves a technical audit carried out at the vendor or supplier location to evaluate their ability to undertake a specific order according to the client's requirements.
Failure analysis and failure prevention	If a component or product fails in service or if a failure occurs during manufacturing, identifies and determines the cause of the failure to prevent future occurrences and/or improve the performance of the device, component or structure.
Factory acceptance test	Determines and documents whether the equipment or plant operates as intended and meets contractual specifications.

Footnotes

Footnote 8

Motor vehicle manufacturers represent firms that have production cycles in Canada. Therefore, European manufacturers that do not have production facilities in Canada are not included in this definition.

Return to footnote H referrer