Chapter 10 Worldwide Sourcing

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Chapter Overview

Worldwide sourcing overview Developing a worldwide sourcing

program Moving to a global sourcing philosophy

Purchasing & Supply Chain Management, 5e1


Impact of Globalization

Interdependence Connectivity Integration of economies

Social Technical Political



Impact of Globalization

Cost savings opportunities on supply side

Opportunities for new markets on demand side

Issue of trade balances and currency fluctuations



U.S. Trading Partners (2009)

Taiwan

Netherlands

France

S. Korea

U.K.

Germany

Japan

Mexico

China

Canada

0 50 100 150 200 250 300 350 400 450 500

Billions of U.S. Dollars



Definitions

International purchasing Commercial purchase transaction between

buyer and supplier in different countries Global sourcing

Proactively integrating and coordinating common items and materials, processes, designs, technologies, and suppliers across worldwide purchasing, engineering, and operating locations



Why Source Worldwide?

Cost/Price benefits

Access to technology

Quality

Availability

Competition to domestic

suppliers

Meet competitors’

buying patterns

Presence in foreign markets



Cost/Price Benefits

Lower labor rates Different productivity levels Possible willingness to accept lower

profit margin Exchange rate differences Lower-cost materials and inputs Government subsidies



Barriers to Worldwide Sourcing

Lack of skills

Resistan

ceto

change

Longer lead times

Customs, language,

and culture

Currency

fluctuati

ons

Increased supply risk



Lack of Knowledge and Skills

Ignorance of intricacies of global sourcing

How to identify potential sources of supply

Documentation issues



Documentation Requirements

Letters of credit Multiple bills of

lading Dock receipts Import licenses Certificates of origin

Inspection certificates

Certificates of insurance coverage

Packing lists Commercial

invoices



Resistance to Change

Established, routine sourcing patterns Shifting from longstanding suppliers Domestic market nationalism



Longer Lead Times

Extended material pipelines Forecasting over longer time horizons Need to more closely manage delivery

dates Possibility of transit and/or customs

delays Greater logistical, political, and

financial risks



Other Barriers

Offshore business practices Language Culture More difficult negotiations Need to more closely manage delivery

and engineering changes More difficult interpersonal

relationships



Currency Fluctuations

Daily or hourly fluctuations Need to understand highly complicated

financial options How to price purchases



Increased Supply Risks

Need for critical assessment Prior to sourcing Look at more than just price

Types of risks vary between different countries



Overcoming Barriers to Worldwide Sourcing

Education and training Publicizing success stories Globally linked technologies Supplier providing U.S.-based support

personnel Measurement and reward systems Third-party intermediaries or agents Top management support



Developing a Worldwide Sourcing Program

No suitable domestic supplier exists Competitors are gaining competitive

advantage from overseas suppliers Triggering events in supply markets



Information about worldwide sources Supplier qualification and selection

issues Understanding cultural issues Language and communication

differences Logistical issues




From Domestic to International

Legal systems Countertrade requirements Costs associate with international

purchasing Managing currency risks




Triggering Events

Supply disruption Rapidly changing currency exchange

rates Declining domestic supply base Inflation within home market Sudden emergence of worldwide

competitors



Information about Worldwide Sources

Worldwide sourcing directories Trade shows Intermediaries and organizations

Trading companies Third-party support Trade consulates Foreign nationals International purchasing offices (IPOs)



Role of IPOs

Identify potential suppliers

Solicit quotes or proposals

Expedite and trace shipments

Negotiate supply contracts

Obtain product samples

Manage technical and commercial concerns

Represent the buyer to suppliers

Manage counter-trade requirements

Perform supplier site visits



Supplier Qualificationand Selection Issues

Does significant total cost difference exist between domestic and foreign sources?

Will foreign supplier maintain price differentials over time?

What is effect of longer material pipelines and increased average inventory levels?



Supplier Selection Issues

What are supplier’s technical and quality capabilities?

Can supplier assist with new designs? What is supplier’s quality

performance? What types of quality systems does

supplier have in place?





Is supplier capable of consistent delivery schedules?

How much lead time does supplier require?

Can we develop longer-term relationship with this supplier?

Are patents and proprietary technology safe with supplier?





Is supplier trustworthy? What legal system does supplier expect

to follow? What are supplier’s payment terms? How does supplier manage currency

exchange issues?




Understanding Cultural Issues

Culture is “sum of all understandings that govern human interaction in society” Language Religion Values and attitudes Customs Social institutions Education



Values vs. Behavior

Values Shared beliefs or group norms that are

internalized Affect the way people think

Behavior Based on values and attitudes Affect the way people act



Language Differences

Communicating purchase requirements clearly and effectively

Not everyone speaks and understands English the same way Americans do

Message speed Level of content



Recommendations from An Expert

If supplier is using English as second language, buyer should be responsible for preventing communication problems

To aid in communication Speak slowly Use more communication graphics Eliminate jargon, slang, and sports and

military metaphors



Recommendations from An Expert

Bring interpreter to all but the most informal meetings

Allow extra day to educate interpreters on your issues and vocabulary

Document, in writing, conclusions and decisions made in a meeting before adjourning



Logistical Issues

Extended pipelines Additional planning and management

required Shipping delays are to be expected Often less capable transportation

infrastructure Role of INCOTERMS



INCOTERMS 2010


Location

FreightResponsibility

SellerPremise

ExportFormalities

Named Place or Terminal

Loading Port of

Shipment

On Board Ship/Rail/

Plane

Discharge Port of Arrival


Import Formalities

Buyer Premise

Ex Works(EXW)

Seller***

Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer

Free Carrier(FCA)1

Seller***

SellerSeller

***Buyer Buyer Buyer Buyer Buyer Buyer

Free Alongside

Ship(FAS)

Seller Seller SellerSeller

***Buyer Buyer Buyer Buyer Buyer

Free on Board(FOB)

Seller Seller Seller SellerBuyer

***Buyer Buyer Buyer Buyer

Cost & Freight(CFR)



Cost, Insurance,&

Freight(CIF)




INCOTERMS 2010


Location

FreightResponsibility

SellerPremise

ExportFormalities


Loading Port of

Shipment

On Board Ship/Rail/

Plane

Discharge Port of Arrival


Import Formalities

Buyer Premise

Carriage Paid to

(CPT)2

Seller***

Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer

Carriage & Insurance to

(CIP)2

Seller***

Seller Buyer Buyer Buyer Buyer Buyer Buyer Buyer

Delivered at Terminal

(DAT)Seller Seller Seller Seller Seller

Seller***

Buyer Buyer Buyer

Delivered at Place DAP)

Seller Seller Seller Seller Seller SellerSeller

***Buyer Buyer

Delivered Duty Paid

(DDP)Seller Seller Seller Seller Seller Seller Seller Seller

Seller***

Notes:*** Where risk passes1 Delivery can occur at seller premise or place of departure2 Risk passes from seller to buyer when the goods are delivered to the first carrier


Legal Issues

Common law vs. codified or civil law Different levels of protection for the

buyer Role of trust and personal relations Intellectual property issues U.N.’s Convention on Contracts for the

International Sale of Goods (CISG) World Trade Organization (WTO)



U.S. Foreign Corrupt Practices Act

Designed to prevent companies from making questionable or illegal payments to foreign officials, politicians, and political parties to secure or retain business

Applies to U.S. citizens and their agents Requires accurate recordkeeping and

adequate controls



U.S. Foreign Corrupt Practices Act

Also applies to foreign nationals who make such payments while in U.S.

No dollar threshold amount Enforcement focuses on intent



Countertrade Requirements

Refers to all international trade where there is full or partial exchange of goods for goods

Purchasing is often responsible for negotiating and managing countertrade agreements



Reasons for Countertrade

Some countries lack hard currency Countertrade provides means to sell

products in that country Factors

Typically involve large dollar amounts Found in countries with perceived low or

non-differentiated (commodity-like) goods



Types of Countertrade

Barter Counter-purchase Offset

Buy-back

Switch trading



Barter

Straight exchange of goods for goods with no exchange of currency

Involves single contract Usually relates to specific transaction

and covers shorter period of time



Counterpurchase

Requires selling firm to purchase specified amount of goods from country that purchases its products

Generally percentage of original sale Involves products unrelated to

company’s primary business Issue of disposition of goods



Offset

Closely related to counterpurchase Generally percentage of original sale

over specified period Allowed to offset its countertrade

requirements with any company or industry – more flexible



Buy-Back

Sometimes called compensation trading

Occurs when … Building a plant in third world country or Providing services, equipment, or

technology to support a plant Building company agrees to buy back

some or all of plant’s output as payment



Switch Trading

Occurs when selling company agrees to accept goods from buying country as partial payment

Company may decide to utilize third-party to sell or market goods



Costs Associated withInternational Purchasing

Comparable costs Similar to costs in domestic sourcing

Purchase price Tooling charges Transportation from supplier to buyer

International transaction costs Additional costs over and above domestic

sourcing



International Transaction Costs

Base price Tooling Packaging Escalation Transportation Customs duty Insurance premiums Payment terms Fees and commissions

Port terminal and handling fees

Customs brokers’ fees

Taxes Communication costs Payment and

currency fees Inventory carrying

costs



Letters of Credit

Assure supplier that it will be paid for shipment Issued by the buyer’s bank to supplier’s

bank when LOC terms are fulfilled Paid when accurate and appropriate

documents are presented to buyer’s bank Revocable vs. irrevocable



Port Terminal and Handling Fees

Unloading of cargo Administrative services of port

authority personnel General use of port Temporary storage for goods awaiting

customs and/or documentation clearance



Measures to Deal with Currency Risk

Purchase in U.S. dollars Sharing currency fluctuation risk Currency adjustment contract clauses

Delivery-triggered vs. time-triggered Currency hedging Finance department expertise Tracking currency movements



Currency Hedging

Form of risk insurance that can protect both parties Seeks risk aversion, not monetary gain

Option Buy or sell foreign currency at certain

future rate Forward exchange contract

Agreement to pay pre-established rate for currency in future



Moving to a Global Sourcing Philosophy

52Purchasing & Supply Chain Management, 5e

Domestic purchasing Level I – no foreign purchases

International purchasing Level II – foreign purchases as needed Level III – part of strategic sourcing


Moving to a Global Sourcing Philosophy

53Purchasing & Supply Chain Management, 5e

Global sourcing Level IV – integration and coordination of

global sourcing strategies across worldwide business units

Level V – integration and coordination of global sourcing strategies with other functional groups


Global Sourcing Success Factors


Defined process to support global

sourcing

Centrally coordinated and

centrally led decision making

Site-based and decentralized

control of operational

activities

Real-time communication

tools

Information sharing with

suppliers

Availability of critical

resources

Sourcing and contracting

systems

International purchasing

office support


Future Trends in Global Sourcing

Development of higher level skill sets Need to reach agreement on global

performance measures Need to establish integrated systems Continued development and refinement

of global sourcing strategies Greater internal integration



Future Trends in Global Sourcing

Seeking suppliers highly capable of conducting global business

Shift from component sourcing to subsystems, systems, and services sourcing

Continued cost reduction pressures More suppliers in low-cost, emerging

markets


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Chapter 10 Worldwide Sourcing

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