Companies seek to purchase goods overseas for a variety of reasons, such as buying bulk items at a lower cost, gaining access to raw materials not available in local markets, or being unable to find local companies that are willing or able to provide a complex service.
Whether your company needs to purchase raw materials overseas or wants to increase revenue by buying cheaper supplies, there are many issues to consider if you choose to go down this road. Your company will need to determine whether it is capable of taking on the risks associated with international trade and developing a contingency plan for potential issues that may occur in the future is an essential component of mitigating these risks.
This blog post should serve as a starting point to gauge whether the risk of using overseas suppliers is too high for your business and guide you in developing a plan to minimize your risk if buying overseas.
Quality & Condition
Quality is an essential component of any product and a lack of it can be financially devastating if your contract does not have any requirements for stipulating quality. Using overseas suppliers can translate into taking on greater risks and consequences, which can impact the quality and condition of your goods and services.
You should consider how this factors into your decision to purchase overseas. Consider what you will do if the product you ordered does not meet your expectations. By working with foreign suppliers, your operations will become dependent on the quality and conditions of the goods they provide. When issues with the quality of the goods arise, the extra distance between you and your overseas suppliers, along with the differences in language, culture, and legal regulations can result in lengthy delays in operations, manufacturing, and delivery. So ask yourself:
- How will you determine what can be considered as meeting a sufficient "quality"? The quality can vary greatly depending on your line of business, your industry, and your goals.
- How will you deal with the issue of quality when dealing with companies and people from a different country, which may have a different understanding of what is considered a "quality" product?
- What if the product arrives damaged, unusable or in unsellable condition?
- In the case of perishable goods, what if the refrigeration unit malfunctions and the product spoils during transit?
In order to use any raw materials, it has to arrive first and assurance of delivery can be a cause of concern, especially if you are manufacturing a product.
- What will you do if the item does not arrive on time or if it never arrives?
- How will you determine if the delivery is complete and what will you do if it is incomplete? This question may seem simple enough if you're ordering a box of 100 items, but the process of checking each order can become more complicated with each additional box ordered.
- What will you do if an order is incomplete and what effect will this have on your business? For instance, what are the implications of receiving only 65 items from an order that was placed for 100 items?
Transportation may not only be costly, but there can be risks associated with it and the risks increase relative to the distance between you and the supplier. It can also be costly to transport heavy, bulky, or perishable goods, especially when it requires special handling. Depending on your business, you may want to consider the following questions relating to the transportation risk of buying overseas:
- Is the cost of transporting the good high in proportion to the sale price of the product being sold?
- Can your company bear the cost of transportation?
At what physical point will your company accept responsibility for transportation? International transactions can take several months for the delivery to leave the supplier and arrive at the doors of the buyer. For instance, will your company be responsible for transportation:
- as soon as the delivery leaves the factory doors of the overseas supplier?
- as soon as the delivery leaves the port from the country that is exporting the product?
- as soon as the delivery arrives at the port of your country?
In business, timing can be everything. If you're purchasing goods that are seasonal, the timing of how you receive goods will be important to consider.
- Timing your payments can also be tricky. When will you pay the supplier: prior to delivery or upon receipt of the shipment? Also, will you pay the financing costs while the goods are in transit?
- In the case of manufactured products, will the late arrival of a component cause the production line to be held up? If so, how dependent is your business on this component and what is the financial risk associated with not receiving the component on time?
Consider the case where your business purchases Christmas merchandise, which is originally scheduled for arrival in October, but arrives at the port in early December.
- Will there be enough time to deliver the goods to the appropriate stores in time for the Christmas selling season?
- Will your customers refuse to pay if the goods do not arrive on time?
- Will there be enough time for the goods to sell before Christmas? If not, what will you do with the inventory after Christmas? How much will you lose in sales and how much will it cost to store this inventory?