Chapter 10 Worldwide Sourcing

Chapter Overview
Worldwide sourcing overview

Developing a worldwide sourcing
program
Moving to a global sourcing philosophy
2012 Cengage Learning. All rights reserved. May

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a publically accessible website, in whole or in part.
Purchasing & Supply Chain Management, 5e
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)

Billions of U.S. Dollars
Canada
China
Mexico
Japan
Germany
U.K.
S. Korea
France
Netherlands
Taiwan
0
50

100
150
200
250
300
350
400
450
500
4
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
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 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
10
Resistance to Change
Established, routine sourcing patterns
Shifting from longstanding suppliers
Domestic market nationalism

11
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
12
Other Barriers
Offshore business practices
Language
Culture
More difficult negotiations
Need to more closely manage delivery
and engineering changes
More difficult interpersonal
relationships

13
Currency Fluctuations
Daily or hourly fluctuations
Need to understand highly complicated
financial options
How to price purchases

14
Increased Supply Risks

Need for critical assessment
Prior to sourcing
Look at more than just price
Types of risks vary between different

countries

15
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

16
Developing a Worldwide Sourcing

Program
No suitable domestic supplier exists
Competitors are gaining competitive
advantage from overseas suppliers
Triggering events in supply markets

17
Developing a Worldwide Sourcing

Program
Information about worldwide sources
Supplier qualification and selection
issues
Understanding cultural issues
Language and communication
differences
Logistical issues
18
Developing
a Worldwide
Sourcing
From Domestic
to International
Program
Legal systems
Countertrade requirements
Costs associate with international
purchasing
Managing currency risks

19
Triggering Events
Supply disruption
Rapidly changing currency exchange
rates
Declining domestic supply base
Inflation within home market
Sudden emergence of worldwide
competitors
20
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)

21
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 countertrade requirements
Perform supplier
site visits
22
Supplier Qualification
and 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?
23
SupplierSelection
Qualification
Supplier
Issues
What are suppliers technical and
quality capabilities?
Can supplier assist with new designs?
What is suppliers quality
performance?
What types of quality systems does
supplier have in place?
24
SupplierSelection
Qualification
Supplier
Issues
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?
25
SupplierSelection
Qualification
Supplier
Issues
Is supplier trustworthy?
What legal system does supplier
expect to follow?
What are suppliers payment terms?
How does supplier manage currency
exchange issues?

26
Understanding Cultural Issues

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

27
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

28
Language Differences
Communicating purchase requirements
clearly and effectively
Not everyone speaks and understands
English the same way Americans do
Message speed
Level of content

29
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
30
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

31
Logistical Issues
Extended pipelines
Additional planning and management
required
Shipping delays are to be expected
Often less capable transportation
infrastructure
Role of INCOTERMS
32
INCOTERMS 2010
Location
Seller
Premise
Export
Formalities
Named
Place or
Terminal
Loading
Port of
Shipment
On Board
Ship/Rail/
Plane
Discharge
Port of
Arrival
Named
Place or
Terminal
Import
Formalities
Buyer
Premise
Ex Works
(EXW)
Seller
***
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Free Carrier
(FCA)1
Seller
***
Seller
Seller
***
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Free
Alongside
Ship
(FAS)
Seller
Seller
Seller
Seller
***
Buyer
Buyer
Buyer
Buyer
Buyer
Free on
Board
(FOB)
Seller
Seller
Seller
Seller
Buyer
***
Buyer
Buyer
Buyer
Buyer
Cost &
Freight
(CFR)
Seller
Seller
Seller
Seller
Buyer
***
Buyer
Buyer
Buyer
Buyer
Cost,
Insurance,&
Freight
(CIF)
Seller
Seller
Seller
Seller
Buyer
***
Buyer
Buyer
Buyer
Buyer
Freight
Responsibility

33
INCOTERMS 2010
Location
Seller
Premise
Export
Formalities
Named
Place or
Terminal
Loading
Port of
Shipment
On Board
Ship/Rail/
Plane
Discharge
Port of
Arrival
Named
Place or
Terminal
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
Seller
Seller
***
Buyer
Buyer
Delivered
Duty Paid
(DDP)
Seller
Seller
Seller
Seller
Seller
Seller
Seller
Seller
Seller
***
Freight
Responsibility
Notes:
*** Where risk passes
1 Delivery can occur at seller premise or place of departure
2 Risk passes from seller to buyer when the goods are delivered to the first carrier
34
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)
35
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
36
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

37
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

38
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

39
Types of Countertrade
Counterpurchase
Barter
Buyback
Offset
Switch
trading
40
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

41
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
companys primary business
Issue of disposition of goods
42
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

43
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 plants output as
payment
44
Switch Trading
Occurs when selling company agrees
to accept goods from buying country
as partial payment
Company may decide to utilize thirdparty to sell or market goods

45
Costs Associated with

International 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

46
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
47
Letters of Credit
Assure supplier that it will be paid for
shipment
Issued by the buyers bank to suppliers
bank when LOC terms are fulfilled
Paid when accurate and appropriate
documents are presented to buyers bank
Revocable vs. irrevocable

48
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
49
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
50
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
51
Moving to a Global Sourcing

Philosophy
Domestic purchasing
Level I no foreign purchases
International purchasing
Level II foreign purchases as needed
Level III part of strategic sourcing

52
Moving to a Global Sourcing

Philosophy
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

53
Global Sourcing Success Factors

54
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
55
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
56

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Chapter 10 Worldwide Sourcing

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Chapter Overview

Worldwide sourcing overview

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

U.S. Trading Partners (2009)

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Purchasing & Supply Chain Management, 5e

Why Source Worldwide?

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Purchasing & Supply Chain Management, 5e

Barriers to Worldwide Sourcing

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Lack of Knowledge and Skills

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Longer Lead Times

Greater logistical, political, and

Purchasing & Supply Chain Management, 5e

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Increased Supply Risks

Types of risks vary between different

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Overcoming Barriers to Worldwide

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Developing a Worldwide Sourcing

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Developing a Worldwide Sourcing

Purchasing & Supply Chain Management, 5e

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Purchasing & Supply Chain Management, 5e

Information about Worldwide Sources

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Purchasing & Supply Chain Management, 5e

Purchasing & Supply Chain Management, 5e

Purchasing & Supply Chain Management, 5e

Purchasing & Supply Chain Management, 5e

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Understanding Cultural Issues

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

Values vs. Behavior

2012 Cengage Learning. All rights reserved. May

Purchasing & Supply Chain Management, 5e

2012 Cengage Learning. All rights reserved. May