International procurement practices: a matter of relationships

Paul Herbig Visiting Professor of Marketing, Graduate School of International Trade and Business Administration, Texas A&M International University, Laredo, Texas, USA Brad OHara College of Business, Southeastern Louisiana University, Hammond, Louisiana, USA
The globalization of business is a fact of life that many managers are waking up to quickly. For rms, small and large alike, the move towards internationalization implies a different role for every aspect of the organization. One important function within the rm which is becoming more and more global in orientation is the purchasing department. Many corporations realize that in order to be successful and competitive, an expanded focus for this area is necessary. However, procurement activities on an international scale have unique considerations of which many of us may not be aware. Discusses several important developments in an effort to broaden our understanding in this area. Although somewhat diverse in nature, the underlying current is that the development of relationships is necessary in the international environment.
Companies dont make purchases; they establish relationships (Charles S. Goodman).

International buying: just relationships?

Webster and Wind[2] dene organizational buying as the decision-making process by which formal organizations establish the need for products, and identify, evaluate, and choose among alternative brands and suppliers. This process of choosing between vendors and selecting the one which best meets organizational needs has traditionally been viewed with an economic orientation. The assumption that buyers typically do business with a supplier which offers the lowest price, or best product, or simply the best service for the money tended to dominate thinking in this area. However, some have challenged this view as being rather simplistic, as evidenced by a study of buyers representing ten major corporations which concluded that:
corporate decision makers remain human after they enter the office. They respond to image; they buy from companies to which they feel close; they favor suppliers who show them respect and personal consideration and who do extra things for them; they over-react to real or imagined slights tending to reject companies which fail to respond or delay in submitting requested bids[3].

Management Decision 34/4 [1996] 4145 MCB University Press [ISSN 0025-1747]

Relationships are seemingly the obsession of marketers in the 1990s. For some, the development and solidication of long-term relationships is tantamount to success. However, practitioners and academicians have been saying for years that to succeed in business, rms must adhere to the principles of the marketing mix. The 4Ps of Marketing are an old standby with which many of us are familiar. Nonetheless, before developing a price, product, promotional and place/distribution strategy, managers must understand that the foundation for such a strategy rests with a rm grasp of the marketing environment. As the marketing environment is a very powerful force which continually affects the rm and its marketing mix, marginal comprehension in this area can spell doom for many rms. For corporations engaged in international marketing, understanding the marketing environment becomes even more acute. Varied cultures, demographics, economic conditions and political systems suggest that marketers must be sensitive to unique situations abroad if any signicant amount of business is to be conducted. This is particularly true with respect to the procurement function of the rm. With the globalization of markets combined with a restructuring of US rms with an eye towards costs, quality, exibility and technology[1] a new role for procurement has emerged. Purchasing, in many organizations, has suddenly become a very active group with a broadened, international focus. This has meant that old ways of doing business may not necessarily apply today . In an attempt to understand better the marketing environment to be faced by international procurement managers, this paper outlines some of the important developments in this area. Although not all inclusive by any means, it is hoped that this overview will help to broaden our appreciation of what doing business in the international arena actually entails.

As noted in this statement, the economic dimension of organizational purchasing is intertwined with the relationship established with the supplier. This implies that when various offers from suppliers are fairly uniform and similar, the purchasing agent can opt for the vendor with which the rm has established the best relationship. However, relationships with vendors do not exist in isolation of important determinants or variables. Managers must understand that, in the formation of buyer/seller relationships, buyers are subservient to a host of inuences in connection with their purchasing decisions. One important inuence, at a personal level, concerns individual factors. Individual preferences, perceptions and personal motivations can have a profound impact on how buying decisions are analysed and subsequently determined. Additionally, individual characteristics such as age, income, education, personality, attitudes

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Paul Herbig and Brad OHara International procurement practices: a matter of relationships Management Decision 34/4 [1996] 4145

towards risk and job position can have a strong inuence on a participants overall philosophy towards the buying process. Essentially, these characteristics help to develop and establish a purchasing agents own buying style. For decision makers, it is critical that purchasing styles be identied and managed properly . A successful purchasing style for doing business with vendors in the American Midwest may not be appropriate for interacting with suppliers from the Middle East, for example! In addition to personal factors, group dynamics or interpersonal factors within the buying centre also affect the development of relationships. The various individuals who constitute the buying centre have different statuses, authority, varying degrees of empathy and persuasiveness. This collection of attributes can impound a certain benevolent form of behaviour that is explicitly pronounced in the day-to-day dealings of organizational buyers overseas. Attending to the composition of these groups can dramatically affect the ability of the corporation to deal with international suppliers. Organizational dimensions also play a key role in the development of buyer/seller relationships. The behaviour of organizational buyers can be moderated by their companys specic corporate objectives, policies and procedures, corporate structure and internal systems. The rms marketing strategy can also affect the performance of this individual. For example, a strategy of trying to capture additional market share, entering a new market with an established product, or introducing a new product to an existing market can affect the manner in which the buyer negotiates a purchase in an overseas market. Additionally, the dominant policies and procedures established within the corporation may induce different tactics with regard to how the purchasing department actually operates. For example, policies may allow the use of intermediaries abroad. If a company relies on middlemen as part of the purchasing process, what types are employed? Are Sogo-Shoshas used in dealing with the Japanese in their market, or are other international trading companies employed in various parts of the world? The use of foreign intermediaries has challenging implications which the rm may or may not have experience with. Thus, as one digs beneath the surface, it is apparent that international procurement is not simply based on relationships, rather, it is also predicated on a series of factors individual, interpersonal and organizational which managers can affect. However, the

world of international procurement presents a set of unique variables over which managers have little or no inuence. These unique, uncontrollable variables are called environmental factors, and can severely limit a rms ability to do business internationally[4]. Understanding social/cultural dimensions, economic conditions, technological developments and political/legal systems are fundamental to doing business outside the USA. Ultimately, a sound grounding in the various components of external environment will reduce the odds of failure in establishing that all-important relationship with foreign contacts!

New relationships
As there has been a notable increase in international purchasing within the USA, the need to understand the components of relationship development is necessary . However, a return to more pragmatic issues is necessary . Specifically, how has the internationalization of this function evolved? More importantly, how has the purchasing function responded to this dramatic change in focus? An appreciation of this revolution towards international sourcing and the resulting formation of new relationships is essential for those considering a similar course in the future.

The US experience
The remarkable move towards international purchasing by US rms has been precipitated in part by the internationalization of the marketplace, global competition and changes within the business environment. Although the general public might think that this increase in international purchasing is limited to industry giants, this is not necessarily the case as small businesses have come to rely on international sources as a matter of survival as well. The linkage between the function of purchasing and the other requisite functions carried out by the company has assumed a heightened degree of importance[5]. Managers are starting to realize that purchasing decisions have a dynamic impact on such factors as capacity requirements, equipment needs (i.e. make versus buy decisions), product costs (i.e. General Motors Corporation spends over 58 per cent of its sale dollars on purchased components), and quality performance[6]. One factor which has prompted a considerable amount of international purchasing concerns the fact that domestic suppliers alone may not be able to meet the needs of the rm. International buying has, therefore,

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become a necessary competitive weapon in the battle of survival and prosperity . In this regard, the move to international buying is an attempt to lower overall costs, increase product quality, increase exibility in manufacturing, and/or improve product design. Intense competition from abroad, pressures stemming from the need to reduce trade decits through exports, and the interdependence of global economies have all served to internationalize the marketplace. Surviving and thriving in todays global markets requires that manufacturers be truly world class. The USA has lost its competitive edge to other countries which have taken a more proactive marketing strategy to maintain their position within the changing world of business. For example, the American steel, automobile and consumer electronic industries have lost a signicant proportion of their market share to more competitively oriented countries. As a result, US rms are beginning to realize that in order to compete, especially in the manufacturing world, one must strive to be a low-cost, high-quality producer. For many manufacturers, this emphasis on cost reduction is critical as operating within mature markets implies that little or no product differentiation exists. Cost, in addition to quality, and customer satisfaction have become the foundation on which a successful competitive strategy is built. A response by American manufacturers, in recognition that US labour rates are signicantly higher than labour rates in other countries, is to purchase labour intensive components in cheaper labour markets. Another approach is to pursue extensive automation in an effort to cut these premium costs of labour which typify US manufacturing. With respect to quality, the Japanese have played a major role in this area. Historically, US rms believed that was a tradeoff between quality and cost. That is to say, the pursuit of higher quality meant a corresponding increase in manufacturing costs. However, an understanding of Japanese manufacturing methodologies has instilled a different point of view among many of our manufacturing managers. Through diligent planning, careful design, and efficient and effective processes, American rms are now able to add a new dimension to quality, without incurring additional costs. The basis for success in todays highly competitive environment allows no room for companies which do not produce quality products. A good example of this is the Control Data Corporation (CDC), which was losing US$3 million annually to defective disk drive components. CDC instituted a total

quality improvement programme and was able to establish production output of disk drives at a 95 per cent defect-free level. Success stories such as CDC do not come without cost. In the past, US corporations were negligent towards investing in the requisite capital expenditures to modernize their production facilities. However, the CDC experience demonstrates that modernization is necessary (yet costly). Further, it points out that technology is essentially a double-sided sword. On one side, technological innovations represent a defensive strategy which US rms use against unwanted competition. On the other side, technological advancements are perceived as an offensive strategy to gain market share. For purchasing, the implication is clear: outsourcing for supplies is a predominant strategy to be employed in achieving this technological edge. This is reected in the tremendous amount of money being spent by US rms for overseas purchases. More fundamentally, however, adaptation of this Japanese philosophy of quality has provided further impetus towards the development of internationally-based relationships. Not surprisingly, US corporations are relying increasingly on suppliers to acquire new technology and manufacturing capacity as investments in capital equipment are becoming outlandishly high. This necessitates a certain degree of manufacturing exibility, which in turn should help to introduce new products to the market quicker. As part of this strategy to ensure exibility, companies are directing more purchasing activity to offshore suppliers with demonstrated engineering, technological and process capabilities. Outsourcing and off-shore buying are increasingly being given attention as corporate strategies to enhance manufacturing exibility . Competitive pressures to reduce the cycle time from product design to market introduction continues to exert an important inuence on changes in manufacturing operations. Supplier rms are getting in on product development early on, for instance during the design stage of a product, in order to facilitate a decrease in time of the product development cycle. This concept of simultaneous engineering is gaining acceptance from domestic manufacturers. This results in a better utilization of the suppliers capabilities, a better quality product and a reduction in the time to develop a product (which subsequently saves on labour costs). US corporations are looking for suppliers worldwide which have the capacity to reduce product development lead times.

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The European Community

Perhaps one of the biggest developments for American rms on the international scene concerns the formation of the European Community . The European family of nations is seriously considering regarding itself as a single market; a market equal to size and buying power of that of the USA. Clearly, this will bring forth dramatic changes to current methods of manufacturing, which subsequently will have an impact on the purchasing behaviour of most corporations. The elimination of long-standing trade barriers and tariffs between the 12 countries which make up the European Community will have signicant consequences on purchasing behaviour overseas. For example, the requisite amount of paperwork just to cross boundaries within most of Europe has been reduced from an average of 35 pieces of paper to a mere two pieces. As a result, transportation concerns have become a less critical factor in the European organizational purchasing decision. Other changes are imminent. It is anticipated that the reduction of trade barriers and tariffs will subsequently cause consumers to increase their wants as they will be exposed to a wider variety of goods. This means that price and quality will become important considerations which in turn will necessitate changes in product development strategies. Relationships between buyers and suppliers will consequently be altered to give way to this increase in consumer demand. When combined with a more diverse assemblage of suppliers from which to choose (as articial barriers will no longer constrain the business environment) manufacturers will have several options at their disposal which until now did not exist.

market development, with regard to its purchasing processes and buying behaviour[7]. This means that the typical Hungarian purchasing agent plays a lesser role in the overall purchasing process. However, because of the centralized character of Hungarian organizations, senior members of the rm play a greater role in major purchasing decisions.

Global sourcing
In response to the ever changing worldwide environment, several new approaches to conducting business beyond our borders have been instituted. Perhaps these new methods for doing business abroad can be summarized best by the term global sourcing. Global sourcing is the efficient use of worldwide human, material, energy and capital resources[8]. It presents different strategies for developing relationships abroad. The three approaches which are most commonly used are: 1 working with qualied suppliers; 2 joint ventures; and 3 100 per cent equity investment. The former can be viewed as a relatively short-term approach and appears less preferred to partnerships that are equity based. Further, the type of global sourcing strategy depends on a number of factors. Company capability and resources, the availability and resources of suppliers or partners, projected sourcing volumes and variability, and the degree of integration of offshore sourcing with other operations are four important determinants in this respect. Global sourcing is rapidly becoming a prerequisite to competing in todays marketplace. Traditionally, the most widely recognized benet of global sourcing has been lower costs. Less-expensive labour, lessrestrictive work rules, and lower land and facility costs have enticed companies to foreign suppliers; reduced product cost remains the main attraction for perhaps one-third to one-half of those companies currently pursuing global sourcing[9]. However, other payoffs from global sourcing exist. Typically, many proponents of this approach point to potential tax advantages. In this respect, a nation may use favourable tax treatment to lure foreign companies. Firms may be able to avoid some taxes outright. For example, the use of free trade zones to process products and then re-exporting them eliminates inventory holding taxes or duties in some cases. Tax advantages, however, are not the only reason to pursue global sourcing. Availability is another important advantage of this approach to doing business. Some rms

and to the East

With the demise of communism, new opportunities for business with the former Eastern bloc countries and those beyond are emerging. Perhaps these new opportunities, with their subsequent changes on purchasing activities, are best exemplied by Hungarys experience. As a result of decades of centralization, manufacturing organizations in Hungary declined steadily in numbers; by 1980 there were only 1,200 companies in existence. This number has since grown to over 2,000 with a move to decentralization. The outcome of this philosophical about face in eastern Europe has meant that purchasing has become an important part of the Hungarian economy . Stimulated by the reduction of state intervention in the decisionmaking process, it has been determined that Hungary is probably in an early stage of

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Paul Herbig and Brad OHara International procurement practices: a matter of relationships Management Decision 34/4 [1996] 4145

source globally to: strengthen the reliability of their supply, supplement their domestic sources or meet an increase in product demand. Technical specications or capabilities of products manufactured overseas may exceed those which can be found domestically . A related factor in the decision to go globally is the issue of quality . Higher quality products can sometimes be found overseas, which perhaps may give the US rm a competitive advantage at home. Despite these appealing features of global sourcing, it must be recognized that there are disadvantages to this approach to procurement. High costs of overseas travel and communications are two commonly offered drawbacks to this method. In addition, brokers and agents fees, increased costs associated with physical distribution (the extra logistics involved can add as much as 10 to 15 per cent to the per unit cost of the product and the need for additional inventory buffers can add an additional 5 to 10 per cent to the per unit cost), paper work concerns and cash ow issues (i.e. letter of credit costs and cost of capital) are considerations for the procurement manager. Also, two other risks can wipe out any prot that might result in dealing in this international environment: exchange rate uctuations and political risks inherent with the foreign supplier.

activities. The reduction of trade barriers throughout the world has caused a proliferation of foreign sourcing. The ever changing business environment necessitates that corporations maximize the use of organizational buying overseas in order to maintain their competitiveness, cut costs, establish a quality product, and maintain a technological edge. The establishment of new relationships is therefore necessary to conduct business effectively in our global society .

References
1 Wilson, D.T. and Mummalaneni, V ., Modeling and Measuring Buyer-Seller Relationships, Report 3, Institute for the Study of Business Markets, New York, NY, 1988. 2 Webster, F.E. Jr and Wind, Y., Organizational Buying Behavior, Prentice-Hall, Englewood Cliffs, NJ, 1972. 3 Harding, H., Who really makes the purchasing decisions?, Industrial Marketing, Vol. 27 No. 9, September 1986, p. 76. 4 Lamb, C.W., Hair, J.F. and McDaniel, C., Principles of Marketing, South-Western, Cincinnati, OH, 1992. 5 Burt, D.N., Proactive procurement the key to increased prots, Industrial Marketing Management, Vol. 13, 1984, pp. 1-21. 6 Carter, J.R. and Narashimham, R., Purchasing in the international marketplace implications for operations, Journal of Purchasing and Materials Management, Vol. 26 No. 3, 1990, pp. 2-11. 7 Banting, P., Beracs, J. and Gross, A., The industrial buying process in capitalist and socialist countries, Industrial Marketing Management, Vol. 2, 1991, pp. 105-13. 8 Heer, D., Global sourcing, Journal of Business Strategy, Vol. 9 No. 4, 1988, pp. 7-12. 9 Fagan, M.L., A guide to global sourcing, The Journal of Business Strategy, Vol. 12 No. 2, 1991, pp. 21-6.

Summary
International purchasing has increased in importance exponentially, as it has become a corporate competitive weapon to maintain or gain market share. Organizational and environmental factors have signicantly contributed to this change in procurement

Application questions
1 Describe your rms procurement style. 2 Take one product or service that your rm purchases from a foreign vendor. What steps can be taken to improve the relationship with that vendor?

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