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By: IBISWorld Analyst, Thomas Larson
“Locally Sourced” signs are plentiful in the aisles of farmers’ markets, grocery stores and retail businesses. These signs signify that goods have not traveled across oceans or through airports. The idea of sourcing inputs domestically is not new, and has actually been prominent in clothing and produce markets for years. Moreover, the benefits of procuring goods and services from domestic suppliers extends beyond these markets. In the aftermath of Brexit and President Trump’s campaign promises to renegotiate trade deals (such as NAFTA) and levy a 20.0% border-adjustment tax on imported goods, IBISWorld suggests that businesses consider localizing some of their supply chains.
Benefits of Domestically Sourced Inputs
Businesses stand to gain a lot from considering domestic over international suppliers, ranging from more streamlined procurement and cost benefits to boosting credibility among customers and prospective customers. Primarily, businesses that opt to source from within the United States have more control of their supply chains, diminishing supply chain risk. When importing, businesses run a greater risk of encountering quality issues and having their shipments delayed due to port strikes and other factors. When sourcing domestically, however, businesses have the luxury of being able to physically travel to a supplier’s facility to inspect the product. The reduced travel distance also lessens the risk of delayed shipments due to weather, and there is essentially no risk of shipments being delayed because of geopolitical disagreements.
Sourcing from domestic suppliers, especially local businesses, also significantly reduces the need for logistics services used to transport products across oceans. This is especially important considering that IBISWorld projects the price of third-party logistics services to increase at an annualized rate of 2.1% in the three years to 2020. Businesses can slash their logistics costs by simplifying the path products must take to arrive at their final destination. Cutting down on international imports will allow businesses to reduce their total cost of ownership as they decrease shipping and logistics costs. Businesses will also see their lead times decline, empowering them to reduce costs associated with storage and warehousing because they are able to make purchases as needed.
There are also several ways sourcing locally can help boost a company’s credibility among customers, which can also help drive sales. According to research from ThomasNet, an online registry of suppliers in the United States and Canada, nearly three-quarters of buyers “always or generally” prefer locally sourced goods. By localizing more of their supply chain, businesses can take advantage of this growing consumer preference, boosting their image in the eyes of their customers. Furthermore, sourcing domestically improves the local economy by discouraging upstream suppliers from offshoring their operations. As domestic economies flourish, businesses benefit from higher consumer spending, which improves their bottom lines.
Identifying Import-Heavy Markets
One of the primary reasons businesses import is cost. Overseas manufacturers can take advantage of lower wage costs and fewer regulations to charge lower prices. Therefore, when deciding which products business should consider sourcing through local suppliers, IBISWorld advises businesses to look at markets with high import penetration. By looking at markets that have been flooded with imported products, businesses are able to leverage the presence of cheap imports and negotiate lower prices on domestic products, while also reaping the aforementioned benefits of shorter supply chains.
Imports account for a sizable portion of domestic demand in many electronic parts and electronic component manufacturing markets. Businesses can consider sourcing light bulbs and tubes domestically, because imports account for a staggering 66.0% of domestic demand, according to IBISWorld estimates. IBISWorld suggests looking at other electronic components as well. For instance, imports make up almost half of domestic demand for sprockets. Accordingly, there are opportunities for buyers to negotiate for lower prices while seeing portions of their supply chain move closer to home.
Even though businesses have historically looked to imported inputs as a means of lowering production costs, the benefits of sourcing domestically should not be discounted. With uncertainty surrounding the future of multilateral trade deals like NAFTA and the long-term implications of Brexit and other nationalist movements, now is an excellent time for businesses to reevaluate their input sources. Considering domestic suppliers is a relatively simple way to avert supply chain problems while building a locally sourced image.