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Global sourcing is a procurement strategy aimed at exploiting global efficiencies in production, and a standard step in the global expansion of firms. The advantages of global sourcing include identifying alternate supplier sources, utilizing buffer capacities and taking advantage of specific geographic talent pools. Global sourcing may reduce and control costs, free up internal resources, gain access to world class capabilities, increase revenue potential, reduce time to market, increase process efficiencies, follow company philosophy of outsourcing non-core activities and compensate for lack of appropriate skills.

Organizations, however, are recognizing the real costs and inherent risks of outsourcing. Instead of simplifying operations, outsourcing often introduces complexity, increased cost and friction into the value chain, which require more senior management attention and deeper management skills than anticipated. Two major challenges facing organizations that outsource the fabrication of their products are in understanding the correct price that should be expended for any given outsourced commodity and understanding the total cost of that commodity in real terms.

In the manufacturing sector, global procurement organizations, or commodity management teams, are essential elements of a company’s global sourcing strategy. These procurement organizations are primarily responsible for identifying and developing key suppliers across sourcing categories and helping satisfy periodic sourcing requirements of the parent organization. These procurement organizations deal directly with the supply chain, spending significant time in negotiations to obtain the best product price. This is a critical function, as the impact on profitability can be significant over the life cycle of a program. During the negotiation phase, focus on employing a “should cost” model provides a significant value proposition, providing the procurement/commodity manager the necessary information that can be leveraged to obtain the best possible pricing.

Whether an organization has personnel with experience in the manufacturing process or not, global sourcing is critically important, particularly when assessing vendor quotes and/or discussing cost improvements by various manufacturing process trade-offs. There are multitudes of parameters that contribute to the ultimate cost of producing a given part or assembly, which may create a challenge for any one individual to be a process expert and/or to address the volume of commodities that are being outsourced to a variety of companies in the vendor pool.

In order to perform “should cost” analysis, a procurement organization requires tools and methods to accurately determine the fair price it should pay for a given commodity, from a given vendor. Parametric cost estimating models, such as SEER for Hardware, Electronics & Systems

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