National University of Singapore

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Global Sourcing & Supply

Management
Nephy Perez

Lecture 7
Slide 1.2

Are stocks overvalued?

Macro-micro economic environment - The financial markets as much as

government policy play a role in Sourcing decisions too.

Whether currency, commodities or general financing conditions they all

have considerations in sourcing.

There are ways to deal with some of those, including trading on terms that
add a level of protection to both buyers and sellers.

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Slide 1.4

Cost Management

Quality + Technology + Service + Cycle Time

Value =
Price

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Slide 1.5

Cost Management

Cost Management

Price analysis
Process of comparing supplier
prices against external price
benchmarks without
Tier 2 Tier 1
knowledge of supplier costs Suppli Suppli
Enterp
rise
Custo
mer
Consu
mer
er er
Cost analysis
Process of analyzing each
Customer Needs
individual cost element that
add up to final price
Total cost analysis Single Company Focused Cost-
Reduction Initiatives
Strategic Cost Management –
Finished Product/Service Focus
Applies price/cost equation throughout the
Supply Chain
across multiple processes that
span two or more
organizations across a supply
chain

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Slide 1.6

Cost Management

Historical Cost Reduction Cost Reduction Possibilities

approaches 1 Challenge existing contracts for ▪ Select long-term contracts

▪ Value analysis price competitiveness ▪

▪
Conduct market benchmarking
Establish cost drivers

▪ Process improvements 2 Challenge the design or

specifications
▪
▪
Use concurrent engineering
Implement design for lean
▪ Standardization ▪ Use value analysis methods

3 Negotiate reductions in overhead ▪ Adopt electronic procurement systems and

▪ Improvements in efficiency using
technology
Value analysis/Value engineering
charges or the cost of doing
business
4 Adopt standardization
5 Challenge supply chain costs
▪
integration
Reduce levels of inventory
▪ Build to order
▪ Reduce varieties and variations
▪ Use one supplier’s range
▪ Design out duplicate ranges
▪ Incoterms

▪ Team-based ▪
▪
Packaging
Mode of transport
▪
▪ Cross-enterprise
Network design

6 Consider outsourcing ▪ Select non-core services

▪ Test the market
▪ Leverage specialty centers

On-site supplier development 7 Better use of working capital ▪

▪
Payment terms
Avoid advance payments
▪ Process to accomplish supplier ▪ Reduce inventory
8 Eradicate uncompetitive ▪ Issue tenders/RFQs
continuous improvement suppliers ▪ Negotiation and bring in new suppliers
▪ Reduce reliance or terminate ineffective
contracts

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Slide 1.7

Global Sourcing

Advantages Disadvantages
Also known as professional Turnkey solutions No industrial differentiation or
Know-how outsourcing. Backoffice call centres, IT Innovative professionals competitive value proposition
support centres, finance services etc Optimizations of flows Control of the standard of quality or
subcontracting are common examples Reduce overheads experience

Subcontracting for dealing with peak Quick deployment No product innovation

Capacity of demand or issues in production, or Easier flexibility Control of the standard of quality
focus on only certain types of Process expertise Management of upstream and
subcontracting production. So then determine to downstream flows
outsource that aspect of overflow or
non- core.

Creating JVs that have favorable Sharing of risks and Deployment lead time
Joint-contracting conditions to both companies. competencies/capabilities Cost of deployment
Example one provides certain product Proximity of clients Constraints and rigidity of the solution
(JV) expertise, the other local expertise or
sometimes due to trade/regulatory
constraints a JV is necessary to
operate, market or trade in certain
countries.

Offshoring of production or finding
Industrial de- alternative locations abroad that have
access to cheaper or larger pools of
localizaton talent. Often applied in labor intensive
industries.
Depends on the formula or approach
to delocalization (integration, JV,
subcontracting)
Actions on the costs
Proximity to potential markets
Costly in terms of resources
(monitoring)
No contribution of external expertise

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Slide 1.9

Trade Economics & Sourcing

Counter Trade
Countertrade means exchanging goods or
services which are paid for, in whole or part,
with other goods or services, rather than with
money. A monetary valuation can however be
used in countertrade for accounting purposes.
In dealings between sovereign states, the term
bilateral trade is used.

Some countries lack hard currency to purchase goods. So,

Countertrade provides means to sell products in that market.
Factors
• Typically involve large dollar amounts
• Found in countries with perceived low or non-differentiated (commodity-like) goods

Requires selling firm to purchase specified amount of goods from country that purchased its
product. Generally percentage of original sale Involves products unrelated to company’s
primary business Issue of disposition of goods

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Slide 1.10

Trade Economics & Sourcing

Counter Trade
The purchase of products by either party may be staggered over a relatively long period. Purchases are
invoiced and paid in currencies in both directions. The value of the reverse flow is the object of a coverage
rate, a percentage of the value of the forward flow. The rate is fixed by authorities depending on the crucial
nature of the imported product to the country's development, and may be higher than 100 per cent:

for example, to sell $100 worth of perfume, it may be necessary to locally purchase $125 worth of products,
whereas to sell medicines, the rate remains very low. Meanwhile, the sum is determined by the competition;
in terms of commercial strategy, the company that can generate the maximum reverse flow is favourably
positioned to obtain the contract. Records are made of purchases in evidence accounts held by banks
approved by the parties.

If the coverage rate is not respected, two sanctions are possible: payment of a contractually fixed penalty,
payable pro rata of the value of counterpart purchases not carried out; cancellation of the forward-flow import
licenses.

If it proves impossible to find a 'straight' importer to meet all the import requirements, it is then necessary to
approach the target country demanding counter-purchases and to look for products that are available, and
above all, eligible. If the company manages to find products that it can buy itself, the problem of the reverse
flow is resolved. Otherwise, it is necessary to find a trading company that commits to subrogate the
counterpart procurement obligations. Often, the design, packaging and characteristics of the products on
offer may not correspond with the standards applicable in Western countries. This is not the case for raw
materials, such as petrol products, which are not always eligible or are only eligible at an extra cost.

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Slide 1.11

Trade Economics & Sourcing

Counter Trade – by outsourcing or subcontracting

Delocalized outsourcing of production
Before renouncing a sale, why not outsource production, in the country in question, of a product meeting
European standards that already has secured trade opportunities? Indeed, another solution adopted by
many companies consists in subcontracting, by delocalizing part of their annex production to a target
country, thus also benefiting from savings on labour costs. By choosing to buy rather than to produce, they
generate purchase consideration that may be deemed goodwill purchases which will facilitate the obtaining
of import licences for future sales contracts on condition that they are classified as such by local authorities.
Countertrade procurement is justified for all countries that have a trade balance deficit in a foreign
currency, on the understanding that funding of their external debt absorbs a significant share of their
currency exports. Being unable to ensure the unrestricted convertibility of their own currency, the solution for
finding the cash that they lack is to demand that all their suppliers purchase locally for a sum in proportion
with their sales, in order to contribute to offsetting their balance of payments. Additional countertrade
should therefore be used as an argument in negotiation, to facilitate sales flows and to tackle the
competition. Let's not forget that all such purchases need to be recorded before and not after the fact, not
only in order to obtain a certificate discharging the party of its commitments, but above all, in order to
generate extra cash to favour their obtaining future contracts.

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Slide 1.12

Trade Economics & Sourcing

Repurchase and buyback agreements

This is a system thanks to which an exporter sells technology from one of their products or a turnkey
production unit to a partner-client, who pays largely with products based on the technology sold. This
partial recovery of production of the new capacity set up may stretch out over several years until the
contracted amount is settled and bridge loans reimbursed. The products may be commercialized by
the licensor or by third parties such as trading companies. Motivations of the technology licensor As
the technological advantage of a product lasts for shorter and shorter periods, companies are
condemned to continually look for more innovative products corresponding to the requirements of an
ever more demanding market.

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Trade Economics & Sourcing
Slide 1.13

Trade Economics & Sourcing

Direct Offset
This offset implies the buyer's participation in the manufacturing of the sold good, and is translated
by two features: local production of part of the purchased good, which reduces the cost, on
condition that the buyer has the necessary skills; and a technology transfer including a transfer of
patents and licences, staff training, or even the supply of certain specific equipment.

The supplier is therefore obliged to take on a new subcontractor, knowing that the buyer will
subsequently continue this production for its own purposes. This is a type of forced delocalization,
which may prove positive either in terms of economic gains, or in terms of markets. In this way,
such a sale comprising offset obligations compels the seller to rethink its production strategy
especially if sales of the good in question are carried out in different countries demanding offsets.
The buyer's role is essential, for it is this party that sets the requirements specifications of
products handed over and oversees checks on them before the end- product is assembled. When
the buyer's country lacks the industrial infrastructure and adequate techno- logical level to enter
into co-production agreements, or when the seller refuses to cede the key technology to avoid
creating a new competitor, there may be recourse to indirect offsets.

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Slide 1.14

Trade Economics & Sourcing

Indirect offset

Indirect offset This term covers a technology transfer that bears no relationship with the purchased
good, requested when a direct offset is not possible. This arrangement may be made in the form of a
buyback and/or a simple counter-purchase of goods and/or services. Once again, the requester country
wishes to put a value on purchases by asking the supplier to contribute know-how in order to
accelerate development of the former's industrial network using high-performance technology, to
enhance natural resources by investing upstream to create a maximum level of added value, and
above all, to create jobs. Offsets are one of the keys to opening up a country's market. The buyer, now
a partner, can market the products stemming from the co-production to other companies engaging in
offset obligations, doing so in the form of buybacks. Sales to countries with which duty-free cooperation
agreements exist may also be facilitated. In this context, exporting also means delocalizing know-how
and production, strengthening commercialization networks in order to sell one's own products, as well
as those manufactured by these partners, for in the event of default, foreseen penalties risk whittling
away margins.

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Slide 1.15

Trade Economics & Sourcing

BOT: build-operate-transfer
The term corresponds to the following triad:
• building or making a planned investment;
• operating the completed installation;
• transferring ownership of the installation to the licensor.

From the viewpoint of a government or local authority, this is a way to get a priority investment made by a
consortium - the concessionaire - that will benefit from a long-term operating concession allowing the latter to
make a profit from the investment. Once again, a search for savings in cash is the trigger for this mechanism
which enables heavy investments to be made without spending liquid assets that may be unavailable. Many
areas of application exist, in industrialized as well as emerging countries: roads, highways, public transport,
irrigation and electricity production dams, water treatment, household and industrial waste treatment,
telephone lines, ports, airports, hotels, shopping malls, hospitals, mining, agriculture and so on.

Thousands of projects are filed with the World Bank by emerging or developing countries looking for foreign
investments as their local companies do not adequately master the technologies necessary for the
construction or operation associated with the planned investments, not forgetting political risks that make
investors nervous. The structure of a BOT implies two categories of protagonists:

1The granting power: the authority of the country that plans the investment, sets the time period of the
concession, defines the requirements specifications, and specifies the guarantees granted in order to offset
any possible political and economic instability that may be detrimental to the project's profitability.
2The concessionaire: a consortium of local and foreign private companies that, in the context of a joint
venture to be created, commits to an industrial or public infrastructure investment that needs to be made
profitable during the lifespan of the concession.
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Slide 1.16

Inventory

Definition of inventory
A term used to describe
• All the goods and materials held by an organisation for sale or use
• A list of items held in stock.

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Slide 1.17

Matching supply with demand

Reasons for keeping inventory

Reduce the risk of supplier failure

Protection against lead-time uncertainties

Meet unexpected demands

Smooth seasonal or cyclical demand

Lot size considerations

Hedge against anticipated shortages and price

increases
Ensure rapid replenishment of items in constant
demand

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Slide 1.18

Matching supply with demand

Inventory classifications

Components
Raw material and sub- Consumables
assemblies

Primary Support inventory

inventory (maintenance,
Finished goods (including work- repair and
in-progress) operating)

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Slide 1.19

Matching supply with demand

Aims of inventory management

Provide internal and external customers with required

service levels at optimum cost

Ascertain present and future requirements for all types

of inventory to avoid overstocking

Keep stocks to a minimum by variety reduction

Provide upstream and downstream inventory visibility

in the supply chain

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Slide 1.20

Matching supply with demand

Benefits of barcoding or similar technologies

• Faster data entry

• Greater accuracy
• Reduced labour costs
• Elimination of costly overstocking or understocking
• Better decision making
• Faster access to information
• Ability to automate warehousing
• Greater responsiveness to customers and suppliers

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Slide 1.21

Matching supply with demand

Range

Line of sight Bulk read

Radio frequency identification

(RFID) advantages

Read/write Selectivity

Durability

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Slide 1.22

Matching supply with demand

Key performance indicators for inventory

➢ Lead times defined and managed

➢ Service levels

➢ Rate of stock turn

➢ Stockouts in a given period

➢ Stock cover, e.g. days of cover per stock keeping unit (SKU)

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Slide 1.23

Matching supply with demand

Manufacturing/assembly type organisations

Factors The demand for the final product

that The inventory policy

Whether job, batch, assembly or process

determine production methods are applicable
Whether demand is independent or dependent
the

The service level

right
Market conditions
quantity Factors determining economic order quantity (EOQ)

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Slide 1.24

Matching supply with demand

Forecasting issues – questions

1. What is the purpose of the forecast?

2. What is the time horizon?

3. What forecasting technique(s) is far most appropriate?

shall it be analysed?

?
4. On what data must the forecasting be based and how

5. In what form shall the completed forecast be presented?

6. How accurate is the forecast?

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Slide 1.25

Matching supply with demand

Inventory control systems

‘Push’ systems Elements of ‘Pull’ systems

both ‘push’ and
‘pull’ systems

Predetermined MRP and JIT systems

re-order levels optimised
Periodic review production
systems technology
(OPT) systems

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Slide 1.26

Matching supply with demand

Economic order quantity

EOQ = 2DS
CI

where EOQ = Economic order quantity

C = Cost of the item
I = Annual carrying cost interest rate
D = Annual anticipated demand
S = Order cost per order

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Slide 1.27

Matching supply with demand

Why procurement professionals should have a grasp of inventory

management

1. Inventory is an asset

Inefficient inventory management will increase costs and

2.
reduce profitability

3. Inventory can enhance flexibility and provide competitive advantages

4. It needs the cooperation of efficient and effective suppliers

The armed forces need inventory to maintain operational

5.
readiness and performance

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Slide 1.28

Supplier Assessment

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Slide 1.29

Global Supplier Assessment

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Global Supplier Assessment

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Global Supplier Assessment

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Global Supplier Assessment

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Slide 1.33

Corporate Sourcing Guidelines

Refer to Files under Supply Management:

• Inditex Supplier Code of Conduct

• Volvo Supplier Code of Conduct

• Volvo General Purchasing Conditions

• Inditex Safety product Policy

• Volvo Quality Assurance Manual

Supplier Portals – Suppliers find you!

https://www.wowlink.com.au/
https://sp.fairprice.com.sg/home.action
https://corporate.walmart.com/suppliers/apply-to-be-a-supplier
https://b2b.bmw.com/web/b2b/registration
TSC 3222 Global Sourcing & Supply Management