Worldwide SourcingWorldwide Sourcing

Chapter 10Chapter 10

Impact of Globalization

InterdependenceInterdependence ConnectivityConnectivity Integration of economiesIntegration of economies

SocialSocial TechnicalTechnical PoliticalPolitical

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Impact of Globalization

Cost savings opportunities on supply Cost savings opportunities on supply sideside

Opportunities for new markets on Opportunities for new markets on demand sidedemand side

Issue of trade balances and currency Issue of trade balances and currency fluctuationsfluctuations

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U.S. Trading Partners (2009)

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Definitions

International purchasingInternational purchasing Commercial purchase transaction between Commercial purchase transaction between

buyer and supplier in different countriesbuyer and supplier in different countries

Global sourcingGlobal sourcing Proactively integrating and coordinating Proactively integrating and coordinating

common items and materials, processes, common items and materials, processes, designs, technologies, and suppliers designs, technologies, and suppliers across worldwide purchasing, across worldwide purchasing, engineering, and operating locationsengineering, and operating locations

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Why Source Worldwide?

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Cost/Price Benefits

Lower labor ratesLower labor rates Different productivity levelsDifferent productivity levels Possible willingness to accept lower Possible willingness to accept lower

profit marginprofit margin Exchange rate differencesExchange rate differences Lower-cost materials and inputsLower-cost materials and inputs Government subsidiesGovernment subsidies

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Barriers to Worldwide Sourcing

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Lack of Knowledge and Skills

Ignorance of intricacies of global Ignorance of intricacies of global sourcingsourcing

How to identify potential sources of How to identify potential sources of supplysupply

Documentation issuesDocumentation issues

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Documentation Requirements

Letters of creditLetters of credit Multiple bills of Multiple bills of

ladinglading Dock receiptsDock receipts Import licensesImport licenses Certificates of originCertificates of origin

Inspection Inspection certificatescertificates

Certificates of Certificates of insurance coverageinsurance coverage

Packing listsPacking lists Commercial Commercial

invoicesinvoices

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Resistance to Change

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

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Longer Lead Times

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

datesdates Possibility of transit and/or customs Possibility of transit and/or customs

delaysdelays

Greater logistical, political, and Greater logistical, political, and financial risksfinancial risks

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Other Barriers

Offshore business practicesOffshore business practices LanguageLanguage CultureCulture More difficult negotiationsMore difficult negotiations Need to more closely manage delivery Need to more closely manage delivery

and engineering changesand engineering changes More difficult interpersonal More difficult interpersonal

relationshipsrelationships

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Currency Fluctuations

Daily or hourly fluctuationsDaily or hourly fluctuations Need to understand highly complicated Need to understand highly complicated

financial optionsfinancial options How to price purchasesHow to price purchases

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Increased Supply Risks

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

Types of risks vary between different Types of risks vary between different countriescountries

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Supplier Qualificationand Selection Issues

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

Will foreign supplier maintain price Will foreign supplier maintain price differentials over time?differentials over time?

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

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Supplier Selection Issues

What are supplier’s technical and What are supplier’s technical and quality capabilities?quality capabilities?

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

performance?performance? What types of quality systems does What types of quality systems does

supplier have in place?supplier have in place?

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Supplier Qualificationand Selection Issues

Supplier Selection Issues

Is supplier capable of consistent Is supplier capable of consistent delivery schedules?delivery schedules?

How much lead time does supplier How much lead time does supplier require?require?

Can we develop longer-term Can we develop longer-term relationship with this supplier?relationship with this supplier?

Are patents and proprietary technology Are patents and proprietary technology safe with supplier?safe with supplier?

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Supplier Qualificationand Selection Issues

Supplier Selection Issues

Is supplier trustworthy?Is supplier trustworthy? What legal system does supplier expect What legal system does supplier expect

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

exchange issues?exchange issues?

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Supplier Qualificationand Selection Issues

Understanding Cultural Issues

Culture is “sum of all understandings Culture is “sum of all understandings that govern human interaction in that govern human interaction in society”society” LanguageLanguage ReligionReligion Values and attitudesValues and attitudes CustomsCustoms Social institutionsSocial institutions Education Education

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Values vs. Behavior

ValuesValues Shared beliefs or group norms that are Shared beliefs or group norms that are

internalizedinternalized Affect the way people Affect the way people thinkthink

BehaviorBehavior Based on values and attitudesBased on values and attitudes Affect the way people Affect the way people actact

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Language Differences

Communicating purchase requirements Communicating purchase requirements clearly and effectivelyclearly and effectively

Not everyone speaks and understands Not everyone speaks and understands English the same way Americans doEnglish the same way Americans do

Message speedMessage speed Level of contentLevel of content

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Recommendations from An Expert

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

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

military metaphorsmilitary metaphors

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Recommendations from An Expert

Bring interpreter to all but the most Bring interpreter to all but the most informal meetingsinformal meetings

Allow extra day to educate interpreters Allow extra day to educate interpreters on your issues and vocabularyon your issues and vocabulary

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

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Negotiation with United Kingdom

2525

We can’t assume that the English and We can’t assume that the English and American businesses operate in the same American businesses operate in the same manner. manner.

English executives may appear polite and English executives may appear polite and friendly, but they can be tough and ruthless friendly, but they can be tough and ruthless when appropriatewhen appropriate..

Negotiation with GermanyGermany

2626

Most of the executives you encounter will Most of the executives you encounter will have attended a university, and 50 percent have attended a university, and 50 percent hold doctorates. The title “Dr.” commands hold doctorates. The title “Dr.” commands instant respect. Germans tend to be instant respect. Germans tend to be specialists in one industry with multiple specialists in one industry with multiple company experiences.company experiences.

Due to technical expertise, German Due to technical expertise, German negotiators are extremely cautious. The negotiators are extremely cautious. The opponent should be well prepared on opponent should be well prepared on technical details.technical details.

Negotiation with FranceFrance

2727

When doing business in France, you will often When doing business in France, you will often go through an intermediary contact whose go through an intermediary contact whose credentials are impeccable. Your choice of credentials are impeccable. Your choice of intermediary is important. intermediary is important.

The best contacts are French people who have The best contacts are French people who have ties with the person you want to contact—ties with the person you want to contact—through family status, money, or schooling. through family status, money, or schooling.

Schooling is the most important aspect Schooling is the most important aspect because the elite of French management are because the elite of French management are linked by having attended prestigious schools.linked by having attended prestigious schools.

Negotiation with ChinaChina

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China is now a major player in the world China is now a major player in the world economy and accounts for more than 6 percent economy and accounts for more than 6 percent of world trade. This is remarkable for a of world trade. This is remarkable for a developing economy. There has been strong developing economy. There has been strong import growth, both for processing trade and for import growth, both for processing trade and for domestic consumption.domestic consumption.

The major problems when doing business in The major problems when doing business in China are the language barrier, business China are the language barrier, business practices, and a fluid and diverse legal system. practices, and a fluid and diverse legal system.

A well-specified procurement strategy is a basic A well-specified procurement strategy is a basic requirement when buying from China.requirement when buying from China.

Logistical Issues

Extended pipelinesExtended pipelines Additional planning and management Additional planning and management

requiredrequired Shipping delays are to be expectedShipping delays are to be expected Often less capable transportation Often less capable transportation

infrastructureinfrastructure Role of INCOTERMSRole of INCOTERMS

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Countertrade Requirements

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

Purchasing is often responsible for Purchasing is often responsible for negotiating and managing countertrade negotiating and managing countertrade agreementsagreements

3030

Reasons for Countertrade

Some countries lack hard currencySome countries lack hard currency Countertrade provides means to sell Countertrade provides means to sell

products in that countryproducts in that country FactorsFactors

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

non-differentiated (commodity-like) goodsnon-differentiated (commodity-like) goods

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Types of Countertrade

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Barter

Straight exchange of goods for goods Straight exchange of goods for goods with with nono exchange of currency exchange of currency

Involves single contractInvolves single contract Usually relates to specific transaction Usually relates to specific transaction

and covers shorter period of timeand covers shorter period of time

3333

Counterpurchase

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

Generally percentage of original saleGenerally percentage of original sale Involves products Involves products unrelatedunrelated to to

company’s primary businesscompany’s primary business Issue of disposition of goodsIssue of disposition of goods

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Offset

Closely related to counterpurchaseClosely related to counterpurchase Generally percentage of original sale Generally percentage of original sale

over specified periodover specified period Government or military itemsGovernment or military items

3535

Buy-Back

Sometimes called compensation Sometimes called compensation tradingtrading

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

technology to support a planttechnology to support a plant

Building company agrees to buy back Building company agrees to buy back some or all of plant’s output as some or all of plant’s output as paymentpayment

3636

Switch Trading

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

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

3737

Costs Associated withInternational Purchasing

Comparable costsComparable costs Similar to costs in domestic sourcingSimilar to costs in domestic sourcing

Purchase pricePurchase price Tooling chargesTooling charges Transportation from supplier to buyerTransportation from supplier to buyer

International transaction costsInternational transaction costs Additional costs over and above domestic Additional costs over and above domestic

sourcingsourcing

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International Transaction Costs

Base priceBase price ToolingTooling PackagingPackaging EscalationEscalation TransportationTransportation Customs dutyCustoms duty Insurance premiumsInsurance premiums Payment termsPayment terms Fees and commissionsFees and commissions

Port terminal and Port terminal and handling feeshandling fees

Customs brokers’ Customs brokers’ feesfees

TaxesTaxes Communication costsCommunication costs Payment and Payment and

currency feescurrency fees Inventory carrying Inventory carrying

costscosts

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Letters of Credit

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

bank when LOC terms are fulfilledbank when LOC terms are fulfilled Paid when accurate and appropriate Paid when accurate and appropriate

documents are presented to buyer’s bankdocuments are presented to buyer’s bank

4040

Measures to Deal with Currency Risk

PPP(Purchasing Power Parity)PPP(Purchasing Power Parity) Purchase in U.S. dollarsPurchase in U.S. dollars Sharing currency fluctuation riskSharing currency fluctuation risk Currency adjustment contract clausesCurrency adjustment contract clauses Currency hedgingCurrency hedging Finance department expertiseFinance department expertise Tracking currency movementsTracking currency movements

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Currency Hedging

Form of risk insurance that can protect Form of risk insurance that can protect both partiesboth parties Seeks risk aversion, Seeks risk aversion, notnot monetary gain monetary gain

OptionOption Buy or sell foreign currency at certain Buy or sell foreign currency at certain

future ratefuture rate

Forward exchange contractForward exchange contract Agreement to pay pre-established rate for Agreement to pay pre-established rate for

currency in futurecurrency in future

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