Strategic productions management: is local sourcing a solution?

In its renewed investment strategy for India, Ferrero has opted to source for its raw materials locally to a tune of 90%. This has, however, come with the commitment that the company will work with local suppliers to enable them improve the quality of their supplies. It brings to the fore the trade-off between international and local sourcing and implications for strategic management. Local sourcing has a number of merits, main among them being that the products acquire the image of local products.

Research into consumer trends around the world indicate that demand for local products is on the rise. The only time the consumer will prefer a foreign product is when there are few local alternatives that measure up to the quality and consumption experience derived from it. The tendency of the consumer to see their own as being beautiful and equal to the international standards tends to be high. This is especially so among countries with a high level of national pride such as India and China. For organisations that opt to maintain their global brands, the alternative approach is to source for raw materials locally. They can then use this argument to appeal to the consumers and emphasise on their products being local.

The second merit of local sourcing is the benefit of gaining access to the existing business networks for these suppliers. In countries such as China where networking is an important element of business success, gaining access to such networks is essential. This strengthens the local positioning of these international brands; enabling them to negotiate and gain affordable access to the existing distribution networks among other advantages. The cost merits can also play an important role. Where an organisation is operating in a low-income country, the cost of raw materials is likely to be much lower. Its presence in the market enables such a company to bypass brokers and deal directly with the primary producers. This saves on the cost of supplies.

On the other hand, local sourcing makes it difficult for the organisations to obtain the best quality supplies. This can be a major challenge in strategic management; especially where product quality is considered to be one of the main strategic elements of the products. If product quality cannot be assured, the organisation becomes less competitive. As can be seen in the case of Ferrero, the decision to source for supplies locally was implemented together with a quality development programme aimed at enabling suppliers improve on the quality of the products. The cost of such a programme must be diagnosed to be less costly than the benefits derived from it. Strategic managers should be able to compare the benefits of local sourcing to the costs and determine whether or not to pursue this strategy.

In Ferrero’s case, the decision was to invest in improving the quality of the milk producers and source for 90% of its raw materials locally. On whether this strategy will work in favour of Ferrero in India, the performance of the company will tell.