Global Supply Chain Mgt. and Outsourced Mfg13

GLOBAL SUPPLY
CHAIN MANAGEMENT AND

OUTSOURCED MANUFACTURING
Sub Code - 709
Developed by
Prof. Smitesh Bhosale
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe 2. Dr. B.P. Sabale 3. Prof. Dr. Vijay Khole 4. Prof. Anuradha Deshmukh
Group Director Chancellor, D.Y. Patil University, Former Vice-Chancellor Former Director
Welingkar Institute of Navi Mumbai (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Program Design and Advisory Team
Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant
Prof. Kanu Doshi Prof. B.N. Chatterjee

Dean – Finance Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Dean – Management Development Programs Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ
Prof. B.N. Chatterjee Prof. Vineel Bhurke

Dean – Marketing Faculty – Rural Management
Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.
Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.
Prof. Sandeep Kelkar Mr. Anuj Pandey

Faculty – IT Publisher
Welingkar Institute of Management, Mumbai Management Books Publishing, Mumbai
Prof. Dr. Swapna Pradhan Course Editor

Faculty – Retail Prof. Dr. P.S. Rao
Welingkar Institute of Management, Mumbai Dean – Quality Systems
Welingkar Institute of Management, Mumbai
Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Dean – Banking Dean – Marketing
Mr. P.M. Bendre Course Coordinators

Faculty – Operations Prof. Dr. Rajesh Aparnath
Former Quality Chief – Bosch Ltd. Head – PGDM (HB)
Welingkar Institute of Management, Mumbai
Mr. Ajay Prabhu Ms. Kirti Sampat

Faculty – International Business Manager – PGDM (HB)
Corporate Consultant Welingkar Institute of Management, Mumbai
Mr. A.S. Pillai Mr. Kishor Tamhankar

Faculty – Services Excellence Manager (Diploma Division)
Ex Senior V.P. (Sify) Welingkar Institute of Management, Mumbai
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1st Edition, July 2020

CONTENTS
Contents
Chapter Chapter Name Page No.

No.
1 Introduction and Background to Global Supply Chain 4-36

2 Cost Management in Global Procurement 37-60
3 Sourcing Methodology and Process 61-96
4 Changing Role of Procurement Function and the 97-124
Emergence of Global Sourcing Manager
5 International Packaging 125-146
6 Role of International Logistics in Global Procurement 147-185
7 Measuring Performance in International Procurement 186-201
8 Ethics, CSR, Sustainability and other Considerations 202-232
in Global Purchasing
9 Role of Information Technology in Global Sourcing 233-253
10 Risk Management in Global Supply Chain 254-271
Management and Sourcing
11 Quality Management in Global Procurement 272-291
12 International Trade Payment Process in Global Sourcing 292-306
13 Outsourced Manufacturing 307-342
3
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
Chapter 1
Introduction and Background to Global
Supply Chain
Objectives
The key learning objectives is to –

• Understand the basics of global procurement
• Understand the need for global procurement
• Understand the important features of global procurement
• Understand important differences between domestic purchasing and
global procurement
Structure
1.1 Introduction to Global Procurement
1.2 Objectives, Features and Key Activities of Global Procurement
1.3 Important Differences between Domestic Sourcing and Global
Procurement
1.4 Introduction to Supply Chain 4.0
1.5 Activity for Students
1.6 Summary
1.7 Self-Assessment Questions
1.8 Multiple Choice Questions
4
1.1 Introduction to Global Procurement
Procurement as an activity is of strategic importance to the management of

any organization. The procurement function is an important driver of cost
and responsible for spending the allocated budget, be it a regular
operational expenditure, e.g., raw material, consumables, services or a
one-time capital expenditure, e.g., projects, plant and machinery.
Traditionally, organizations have been depending primarily on local vendors
for their purchasing needs. With the advent of technology, development of
international trade, increased level of awareness about potential sources of
procurement, increased pressure on profitability and continual cost
optimization initiatives often has led to unique challenges and well as
opportunities for Purchasing Function. The need of the hour is to ensure
least cost and best quality purchasing from a vendor wherever it may be
located. This need has also resulted into evolution of Global Procurement
Function and Global Procurement Companies in the business structure of
large number of multinational corporations. It is, thus, a business process
which involves identification, evaluation, negotiation and design of supply
chain across multiple locations, suppliers and geographies around the
globe. It has also led to emergence of a new role – “Global Procurement
Manager”. Depending on the level of global activities, e.g., manufacturing,
exports and distribution, organizations develop a sourcing strategy based
on the integration and coordination of suppliers across worldwide
purchasing, engineering, and operating locations with regard to materials,
processes, designs, technologies, services among other things. Global
sourcing is, thus, defined as a centralized procurement strategy for a
multinational company, wherein a central buying organization seeks
economies of scale through corporate-wide standardization and
benchmarking.
The key drivers which are shaping up the global sourcing are as follows:
1. Political influences
2. Infrastructure in respective geographies
3. Currency
4. Climate changes and shifts
5. Culture
5
There is also a significant gap in terms of understanding of the scope and

coverage under global procurement and global supply chain management.
The terms are definitely related however those are not interchangeable.
The fundamental difference between the two terms is “Procurement” by
definition is the process of getting the goods and/or services your company
needs to fulfill its business model. Some of the tasks involved in the
procurement process include developing standards of quality, financing
purchases, creating purchase orders, negotiating price, buying goods,
inventory control, inventory management, and disposal of waste products
like the packaging. In the overall supply chain process, procurement stops
once your company has possession of the goods. To make a profit, the cost
of procuring your goods must be less than the amount you can sell the
goods for, minus whatever costs are associated with processing and selling
them.
While, Global supply chain by definition consists of everybody involved in

getting your product in the hands of a customer. It includes raw material
gatherers, manufacturers, transportation companies, wholesale
warehouses, in-house staff, stock rooms and the teenager at the register.
It also includes the tasks and functions that contribute to moving that
product, such as quality control, market research, procurement, and
strategic sourcing. Using the above analogy, the supply chain can be
considered the entire chair, while procurement and sourcing are parts of
the chair.
There is also significant change that has happened in the role of Chief
Procurement Officer (CPO). Traditionally, those who contribute to the top
line are still regarded as contributing the most to corporate success. Those
who improve the bottom line with things like cost improvements and
volume reduction, still have less of a reputation for contributing to
corporate success. This is changing. More and more organizations in the
automotive industry, which is like the front runner in this dimension, have
a CPO function on the board level. That had not been the case some 10 or
15 years ago. In most organizations, the CPOs reported either to the chief
technical officer, the chief engineering officer, the COO, or the CFO. Now we
see that the CPO has his own position in the organization.
6
1.2 EVOLUTION, Objectives, Features and key activities of

Global Procurement
While the overall objective is to ensure procurement at least cost and best
quality, over a period of time, innovation, efficiency, transparency, ethics
and compliances have also become equally important. Global Procurement
as a key Function/Vertical in any organization has evolved significantly over
a period of time. The evolution can be explained in following six steps-
1. The first step was something like “Serve the Factory,” if you call that the
theme. Purchasing was more in clerical and logistics activities, so these
skills were requested.
2. The next step was more like reaching the lowest unit cost. Call this
theme, “Lowest Unit Cost.” Here, the purchasing organization was
focused on pushing and pressing the supplier, and negotiating tasks,
and that was sufficient enough.
3. Suddenly, we had the third step — we will call this theme, “Coordinated
Purchasing.” Sourcing needed to have the input of other functions to
make the supplier customer relationship better.
4. In the fourth step, we had the theme “Cross- Functional Purchasing,”

which is what you asked about. Suddenly, the purchasing department
was an equal part across different functions, in which all contributed to
the corporate success. Each function was dependent on the other,
especially technical improvement leaders like make or buy; like
standardization; like design to cost and process improvement leaders;
and like demand bundling. So, to enable those leaders, you need to
have cross-functional work, where purchasing is across engineering,
quality management, and sales/marketing.
5. The fifth step is “World-Class Supplier Management,” and here you have
even more of an intercultural aspect.
6. And, the sixth step, which we regard as the highest aspirational level, is
“Entrepreneurial Purchasing” and with entrepreneurial purchasing,
purchasing behaves like a cost and profit center as well.
7
While the global procurement activity can commence as a purely

transactional level, soon it needs to evolve at a different scale and
complexity. One of the biggest challenge for Chief Procurement Officers is
to be able to segment the suppliers into those that are really meaningful
and can deliver partnership value, that is moving beyond the transactional.
Objectives of Global Procurement
1. Low Landed Cost of Materials: Purchasing managers often compare

various options while carrying out the procurement activity. One of the
important objective of a global purchasing manager is to scout of new
vendors so that the landed cost, i.e., total cost of procuring the material
at the consumption location, is the least. In this endeavor, the
purchasing manager may need to evaluate vendors for more than one
geography.
2. Elimination of Inefficiencies in Procurement and Control Over

Costs: Considering the current economic situation, cost savings has
become of prime importance. However, as the businesses become
increasing complex, there is a need for constantly innovating and
seeking every opportunity to eliminate the inefficiencies. Generation of
value for the organization through constant improvement is
3. Evaluation of Own Manufacturing and Outsourcing Decisions: The

organization constantly evaluates opportunities where the non-core
activities can be outsourced to a significant extent. The outsourcing
framework leads to saving of organization’s limited resources and help
the management to deploy on sharpening the core
4. Reducing Risks to the Business through Managing Supplier

Concentration: One of the important aim of global procurement is also
to develop a resilient supplier network. In the recent Tsunami in Japan,
number of organizations dependent on Japanese supplier faced a high
level risk of business disruption. An alternate supplier network, could
have mitigated the risk of dependency of single supplier or sourcing
materials from suppliers concentrated in a single location.
5. Embedding Global Best Practices in the Procurement Process: As

the organizations actively mature their process from local procurement
to global procurement, the best practices of respective geography, over
8
a period of time are consciously embedded in the procurement process.

The global best practices foster innovation and continuous improvement
in the overall purchasing process.
6. Result Based Purchasing and Reduced Learning Curve: As the

businesses become more complex and technology advances, the
business needs become more critical and expect a faster response. One
of the important objective of the global procurement is also to enable
business achieve faster results and by-pass the learning curve. Some of
the initiatives which enable achievement of this objective is engaging a
global sourcing partner, promotion of multi-vendor scenario with clear
business allocation inter alia.
7. Innovation Led Purchasing: With the advent of technology and

political lines fading away, e.g., formation of Brazil, Russia, India and
China (BRIC) as group of emerging economies, constant innovation is
an important challenge for the business. One of the key objective of
global procurement is to inculcate an innovation culture in the
purchasing function.
8. Develop New Technology and Capacity: More often than not, the
domestic supplier lacks capacity to significant extent for want of
investments. The technology advances also occur at a relatively slow
pace. Thus, dependence of domestic sources may lead the business not
being able to keep up with the global competitive forces. One of the key
deliverable of global procurement is to enable superior quality product
and service sourcing.
9
Strategic Importance of Global Procurement
To gain efficiencies and achieve cost reductions, businesses globally are

looking at sourcing from low cost countries as one of the key strategies
under the global procurement. However, as pointed out in the recent
Boston Consulting Group Study, “There are a lot of advantages to going to
low-cost countries to source, but it has to be done right. I think the biggest
mistake that companies make is that they try to source things and forget it
— and you can’t forget it.” —Hal Sirkin, senior partner and managing
director, BCG .
Corporations need to consider the following key inputs while formulating a

global procurement strategy-
1. It is crucial to understand the technical capabilities of the supplier and

suitability for the product profile of the company. Number of occasions,
the product to be sourced may have a viable alternative than from
China. It is important for the companies to understand the cost
components of manufacturing the product to be sourced. E.g. In the
major component of manufacturing, the product is labour cost, then it
makes perfect sense to source the product from countries like China.
However, if the labour cost component is just 10% to 15%, it will be
prudent to buy closer to home.
2. Ensure that your prospective supplier has sustainable Technical

Capabilities to support your sourcing requirements at all times.
3. Ensure that the savings generated from procuring from low cost
countries, do not get eaten up by maintenance of high level of
inventories, bulk procurement costs and high risk of obsolescence,
especially if you are in an industry with high level of variable demand
scenario.
4. Over a period of time, safety and environmental compliance is emerging

as one of the key criteria. Ensure that the product do not carry any long
term safety and environmental related risks. While you save on cost of
procurement, your cost to compliance disposal process will be
significant.
10
5. In global sourcing, it is important to select a right location and many

factors play a role in deciding the same. The absolute lowest direct cost
is not always the best thing to do. Back to supply chain issues, if you’re
thinking about bringing something to China, you’ll also probably — if
you’re in the U.S. — want to consider Mexico. Or if you’re in Western
Europe, you’ll want to consider Eastern Europe because you may have a
much better balance there even though the direct cost may be higher]
of avoiding supply chain problems, such as large variability and
inventories, and the hidden costs of other things.
6. It is also important to critically evaluate the decision of setting up of

manufacturing plant in overseas locations. Some companies spend
billions of dollars building plants and then recognize that they’ve made
mistakes. The biggest mistake that they often make is to duplicate a
plant that they have either in Europe or in the U.S. and because in low-
cost countries the value is in the low wages, you don’t necessarily want
to put in a lot of automation. If you’ve put in a lot of automation, of
course, you haven’t taken advantage of the fact that the wages are
lower.
7. It is also crucial to understand the impact of compromising intellectual

property while sourcing from low cost countries. You have to find ways
to protect your intellectual property. You need to be explicit about the
trade-off between the cost savings and the risk of losing your
intellectual property and make some real decisions. We’ve seen
companies lose intellectual products because they sent them to
countries with lower protection. Best example will be of certain
companies in France adopted a unique global sourcing strategy. French
company that makes a tri-metal alloy for which the end part of the
production process is the important part of the intellectual property.
They made a decision not to bring that technology to a low-cost country,
but to keep it in France even though it costs them more. They put all of
the complex assembly in China, but ship the tri-metal from France to
protect their intellectual property.
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Features of Global Procurement
Key features of Global procurement are provided as under:
1. Promotes Procurement of Near Shore Countries as a part of

Global Sourcing Strategy: Multinational organization prefer
procurement from countries like Mexico, Brazil and Argentina as a part
of their global sourcing strategy. Corporations in Germany look forward
for sourcing of supply across the European Union. Asian Multinational
Corporation’s focus of procurement from countries like China for
majority of the material based needs. There is also a focus on
development of new suppliers across the near shore countries to
mitigate the supplier concentration risk.
2. Requires a Trade-off Between Low Cost Procurement Vis-à-Vis

Investment in Inventory and Increased Transportation Cost: One
of the unique feature of global sourcing is that the supply chain needs to
be constantly innovated to ensure that the benefit of low cost sourcing
is not lost because of increased investment in inventory and the
transportation cost. Organizations often use Total Cost of Ownership
(TCO) approach to factor in the various costs and benefits before taking
the procurement decision.
3. Endeavors to Move Beyond Just the Cost Advantage: Organization

often focus on engaging in mutually rewarding business partnerships,
alliances, develop skills and expertise in the sourcing, and enhance
transparency in the purchasing in addition to just achieving the
objective of realizing cost advantage through global sourcing. Over a
period of time, global sourcing becomes an essential core of the
business strategy. Experience of sourcing for multiple geographies
enables the management to understand the DNA of business at
respective geographies. This understanding also helps the organization
to explore additional business opportunities on the sales, business
development, and marketing and distribution side of the organization.
4. Requires Set Up of a Local Procurement Office at Respective

Geography: Organizations with global sourcing at the core to their
business strategy often set up Representative Office (RO) or Local
Procurement Office (LPOs), for the respective supplier/country/region.
The key activities of the LPO is to perform as follows:
12
a. Market research for identification of new suppliers
b. Evaluate suppliers for necessary qualification on a basis of defined

criteria
c. Perform inspections to get assurance that suppliers will be able to

meet the quality expectation of the organization
d. Study the logistics planning and execution of procurement operations
e. Evaluate the local and global regulations impacting the procurement
f. Develop a qualified supplier database for future procurement purpose
g. Explore opportunities to integrate the procurement process into the

organization
The additional key activities undertaken by the LPO post establishment

includes execution of bidding process, establish and provision of
Logistics Management services, facilitation of procurement
transactions, contract and project management and administration of
invoicing and payments.
5. Management of Extra-Territorial Regulations: Organization with

global sourcing strategy often need to comply with country specific as
well as international/extra-territorial regulations. For example, recent
enforcement of Foreign Account and Tax Compliance Act (FATCA) by
United States requiring information of payments made to US-based
vendors/ citizens by non-US financial institutions.
6. Category Management: Global sourcing requires high level of

expertise in specific areas of procurement. Multinational Corporation,
thus, define Category Management as a sub-function within the
Purchasing Department. For example, information technology
purchasing which may include hardware, software, IT services, requires
special technical expertise and domain knowledge. Corporations have IT
procurement as a separate category.
7. Subject to Global Risks: Global procurement is subject to additional

risks in comparison to domestic procurement. Some of the important
risks include:
13
(a) Increased level of supply lead times

(b) Increased transportation and logistics costs
(c) Delivery concerns from supplier end
(d) Variation in the quality of material
(e) High level of dependence on supplier’s intellectual property in
certain cases
(f) Cultural and language barriers.
8. Use of Advanced Demand Planning and Forecasting Methods: On

account of significant lead time and country specific challenges, it is
very crucial that the organization plans the requirements well in
advance to eliminate the last moment surprises. Organizations globally
deploy advance demand planning and forecasting tools to formulate a
robust purchasing plan.
9. Involves Engagement of Global Sourcing Representatives: As

coordinating with suppliers for multiple geographies can become
increasing complex, certain organization establish tie-ups with overseas
sourcing agents for countries where setting up of Local Procurement
Office may not seem feasible. The important benefits gained by
purchasing companies include:
a. Reduced search and response period
b. No overhead costs as the agent works primarily on a commission

basis
c. Overseas representatives are aware of the reputation and delivery

capabilities of the supplier
d. Ability to find small and medium suppliers with quality deliverable

which lead to substantial reduction in cost
e. Higher level of awareness and understanding of local customs and

culture
f. Improved negotiation opportunities
g. Facilitates performance of onsite supplier inspections
h. Faster communication and expediting the supply chain
14
Some of the key services provided by Overseas Sourcing

Agent (OSA) are as follows:
i. Understanding the purchaser’s requirements in detail.

ii. Finding and qualifying potential suppliers that meet the purchaser’s
requirements.
iii. Helping potential suppliers understand requirements and ensure
they provide all information necessary to the buyer.
iv. Obtaining Quotes and details of rates/commercials.
v. Negotiations with suppliers in the best interest of the buyer.
vi. Arranging for evaluation visits by purchaser. Certain products may
require the buyer to visit the premises of the purchaser.
vii. Escorting purchasers while in country/at the sourcing location.
viii. Ensure that the orders are entered and placed.
ix. Resolve any issues or differences between buyer and seller.
x. Facilitate timely communication with the stakeholders.
xi. Expedite for delivery as per the provided timelines of the buyer.
xii. Resolve any quality issues and initiate resolution/corrective steps.
xiii. Orders can be placed on OSA who will place the same on the end
supplier.
xiv. OSA can arrange for make payment to supplier and obtaining the
settlement of the purchase contract.
xv. With sufficient delegation of authority by the purchaser, the OSA can
perform inspection of the products, supplier site as required.
xvi. Often the OSA can assume full responsibility for the quality and
meeting other requirements of the purchaser.
15
Significant Advantages of Engaging an Overseas Sourcing

Agent (OSA)
a. The search and response period is significantly reduced.
b. The OSA generally works on commission basis, which is of
assistance to the buyer as significant payments are to be made only
on success.
c. OSAs are aware of the reputations of the suppliers overseas and
they share this understanding and knowledge with the buyer entity.
d. OSAs have an ability to locate and discover very small and obscure
suppliers.
e. OSAs are well aware of the customs and culture.
f. OSAs are able to act as in country escorts for the buyer.
g. The buyer has chance of improve negotiations with the supplier
through engagement of the OSAs.
h. OSAs can perform the necessary inspections and provide report to
the buyer.
i. OSAs play an important role in expediting and providing
communication assistance to the buyer.
Limitations or Disadvantages of Using Overseas Sourcing

Agent (OSA)
a. Engaging an Overseas Sourcing Agent may lead to additional costs to

the direct material which can range from 5% to 20% at times.
b. May limit number of potential suppliers as the OSA could be aware of
few suppliers.
c. Buyer may face difficulties in terms of identification of right OSA.
d. Successful OSA model works in the relationship is continued for long
term.
e. There could be conflict of interest if the OSAs are also paid by
suppliers.
f. It is very difficult to remove OSA from supplier/purchaser relationship
over a longer horizon.
16
10.Requires Significant Change in the Structure of Purchasing

Function: Global sourcing calls for higher level of cross-functional and
cross-location coordination within the organization. Use of ERP or
advanced procurement/sourcing software platforms could be an
important enabler to facilitate such coordination.
Key Strategic Initiatives in Global Procurement
The critical questions that business needs to address before going forward
for global procurement are as under-
a. Procurement Spend-map: Do you understand the overall spend at an

organizational level rather than just divisional or geographic level?
b. Savings Generation: How much and when? Does you company has
right balance between short and long term savings.
c. Savings Initiatives Across Value Chain: Does your organization

consider a big picture and not just the unit costs when evaluating global
procurement strategies?
d. Contract and Supplier Relationship Management Framework: It is

important that the value generated is not lost due to lack of a
comprehensive contract management framework that delivers the
expected performance and also helps the organizations to manage the
risks well.
e. Procurement Capability and Operating Model: Is the global

procurement set up designed for success and whether the company has
adequate global sourcing expertise.
17
Key strategic initiatives of a global procurement functions with

multinational corporations are listed as under:
1. Understanding and identification of need for global procurement.

2. Development the management expertise and talent for effective
administration of procurement process.
3. Defining the procurement strategy for the Group and different Business
Units.
4. Evaluation of opportunities for sourcing across the globe.
5. Bringing in standardization in the global procurement process.
6. Prioritization of opportunities and identifying the focus areas.
7. Develop Global, Regional and Local (Country) sourcing teams.
8. Communication and development of implementation road map of global
sourcing strategies.
9. Establishment of business processes, technology support and
performance measures.
10.Setting up a performance evaluation mechanism for the global sourcing
function.
While procuring globally aims are reducing costs and improving overall
business performance, following are some of the key risks associated with
global procurement-
(i) Transportation and Logistics challenges
(ii) Taxation Structures
(iii) Warehousing and Storage related costs
(iv) Regulatory compliance and meeting required standards
(v) Cost of quality / re-work / re-export
(vi) Incremental inventory levels and working capital requirements
(vii) Vendor performance management, monitoring and ensuring
compliance
(viii) Compliance with ever evolving environmental standards
(ix) Investment in organization structure, procurement office
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1.3 Important differences between Domestic Sourcing and

Global Procurement
Following table indicates some of the key differences between domestic

sourcing and global procurement:
Particulars Domestic Sourcing Global Sourcing
Acquisition of resources is Purchasing activity extends to

Purchasing
restricted to one country/ sourcing from multiple
Area
region countries
Large scale and magnitude of

Entails limited risks for the purchasing transaction exposes
Supplier Risk
purchasing organization the organization to higher level
of risks
Subject to local country Subject to International/extra-

Regulations
regulations territorial regulations
Supplier
identification Need higher level of supplier
Requires limited amount of
and selection and qualification
standardization
purchasing criteria
criteria
Quality of products and Quality of products and

Quality services aligned to local services is comparable with the
standards International standards
Level of Purchasing management Purchasing organization

purchasing perceived to be an formulates global sourcing as a
management operational activity business strategy
Table 1.1
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1.4 INTRODUCTION TO sUPPLY CHAIN 4.0
Supply Chain 4.0: the application of the Internet of Things, the use of
advanced robotics, and the application of advanced analytics of big data in
supply chain management, place sensors in everything, create networks
everywhere, automate anything, and analyze everything to significantly
improve performance and customer satisfaction”.
Over the last thirty years, logistics has undergone a tremendous change,
from a purely operational function that reported to sales or manufacturing
and focused on ensuring the supply of production lines and the delivery to
customers, to an independent supply chain management function that in
some companies is already being led by a CSO - the Chief Supply Chain
Officer. The focus of the supply chain management function has shifted to
advanced planning processes, such as analytical demand planning or
integrated S&OP, which have become established business processes in
many companies, while operational logistics has often been outsourced to
third-party LSPs. The supply chain function ensures integrated operations
from customers to suppliers.
Industry 4.0 creates a disruption and requires companies to rethink the

way they design their supply chain. Several technologies have emerged
that are altering traditional ways of working. On top of this, mega trends
and customer expectations change the game. Besides the need to adapt,
supply chains also have the opportunity to reach the next horizon of
operational effectiveness, to leverage emerging digital supply chain
business models, and to transform the company into a digital supply chain.
Several mega trends have a heavy influence on supply chain management,

there is a continuing growth of the rural areas worldwide, with wealth
shifting into regions that have not been served before. Pressure to reduce
carbon emissions as well as regulations of traffic for socio-economic
reasons add to the challenges that logistics are facing. But changing
demographics also lead to reduced labour availability as well as increasing
ergonomic requirements that arise as the workforce age increases.
At the same time customer expectations are growing, the online trend of
the last years has led to increasing service expectations combined with a
much stronger granularization of orders. There is also a very definite trend
towards further individualization and customization that drives the strong
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growth of and constant changes in the SKU portfolio. The online-enabled

transparency and easy access to a multitude of options regarding where to
shop and what to buy drives the competition of supply chains.
To build on these trends and cope with the changed requirements, supply
chains need to become much faster, more granular, and much more
precise.
Supply Chain 4.0 –Depiction[ Mckinsey & Co]
Fig. 1.1
Vision of the Future State
The digitization of the supply chain enables companies to address the new
requirements of the customers, the challenges on the supply side as well
as the remaining expectations in efficiency improvement. Digitization
brings about a Supply Chain 4.0, which will be-
21
Faster
New approaches of product distribution reduce the delivery time of high
runners to few hours. The basis for these services is built by advanced
forecasting approaches, e.g., predictive analytics of internal (e.g., demand)
and external (e.g., market trends, weather, school vacation, construction
indices) data as well as machine status data for spare-parts demand, and
provides a much more precise forecast of customer demand. Forecasts are
not carried out on a monthly basis, but weekly, and for the very fast-
moving products even every day. In the future we will see "predictive
shipping," for which Amazon holds a patent - products are shipped before
the customer places an order. The customer order is later on matched with
a shipment that is already in the logistics network (being transported
towards the customer region) and the shipment is rerouted to the exact
customer destination.
More Flexible
Ad hoc and real-time planning allows a flexible reaction to changing
demand or supply situations. Planning cycles and frozen periods are
minimized and planning becomes a continuous process that is able to react
dynamically to changing requirements or constraints (e.g., real-time
production capacity feedback from machines). Once the products are sent,
increased flexibility in the delivery processes allows customers to reroute
shipments to the most convenient destination.
New business models, such as Supply Chain as a Service for supply chain
planning functions or transport management, increase the flexibility in the
supply chain organization. Supply chain can be bought as a service and
paid for on a by-usage basis instead of having the resources and
capabilities in-house. The specialization and focus of service providers
allow them to create economies of scale as well as economies of scope and
also attractive outsourcing opportunities.
For example, we will see an "Uberization" of transport, crowd-sourced,

flexible transport capacity, which will lead to a significant increase in agility
in distribution networks.
22
More Granular
The demand of customers for more and more individualized products is
continuously increasing. That gives a strong push towards micro
segmentation, and mass customization ideas will finally be implemented.
Customers are managed in much more granular clusters and a broad
spectrum of suited products will be offered. This enables customers to
select one of multiple "logistics menus" that exactly fits their need.
New transport concepts, such as drone delivery, allow companies to

manage the last mile efficiently for single and high-value dense packages.
More Accurate
The next generation of performance management systems provides real-
time, end-to-end transparency throughout the supply chain. The span of
information reaches from synthesized top-level KPIs, such as overall
service level, to very granular process data, such as the exact position of
trucks in the network. This range of data provides a joint information basis
for all levels of seniority and functions in the supply chain. The integration
of data of suppliers, service providers, etc. in a "supply chain cloud"
ensures that all stakeholders steer and decide based on the same facts.
In digital performance management systems, clean-sheet models for

warehousing, transport, or inventory are used to set targets automatically.
To keep the aspiration of targets also in case of supply chain disruptions,
systems will automatically adjust targets that cannot be achieved anymore
to a realistic aspiration level. We will see performance management
systems that "learn" to automatically identify risks or exceptions and will
change supply chain parameters in a closed-loop learning approach to
mitigate them. That enables the automatic performance management
control tower to handle a broad spectrum of exceptions without human
involvement and to only leverage the human planner for the disruptive
events/new events - with this, a supply chain is continuously developing
towards its efficient frontier.
23
More Efficient
Efficiency in the supply chain is boosted by the automation of both physical
tasks and planning. Robots handle the material (pallets/boxes as well as
single pieces) completely automatically along the warehouse process -
from receiving/unloading to putting away to pick, pack, and ship.
Autonomous trucks transport the products within the network. To optimize
truck utilization and increase transport flexibility, cross-company transport
optimization is applied to share capacities between companies. The
network setup itself is continuously optimized to ensure an optimal fit to
business requirements.
To create an ideal workload in the supply chain, various transparency and

dynamic planning approaches are leveraged to drive advanced demand
shaping activities (e.g., special offers for delivery time slots with low truck
utilization).
Digital waste prevents supply chains from leveraging the potential of

Supply Chain 4.0.
In today's supply chains, many sources of digital waste can be found (in
addition to the existing waste) that prevent the potential of Supply Chain
4.0. It is crucial to understand the sources of waste and develop solutions
to reduce/avoid it in the future state. The sources of digital waste can be
classified in three types:
1. Data Capturing and Management: Often, available data is handled

manually (data collection in a system, paper-based data handling, etc.)
and not updated regularly, e.g., master data on supplier lead time that
is entered once (sometimes even only dummy numbers) and then
remains unchanged for years. Another example in warehousing is
advanced shipping notifications, which are received but not used to
optimize the inbound process.
On top of these examples, it is typically not clear which additional data

could be leveraged to improve processes, e.g., sensing of supply
disruptions - if the lead time of a supplier is continuously increasing, a
warning should be sent out to make planners aware of the situation and
enable them to mitigate supply disruptions at an early stage. In current
systems, this signal will not be recognized and will lead to a lower
supplier service level reported at the end of the month. If the worst
24
comes to the worst, the issue will cause trouble in the assembly line
replenishment and operational problems.
2. Integrated Process Optimization: Many companies have started to

implement an integrated planning process, but very often this is still
done in silos and not all information is leveraged to achieve the best
planning result possible. In addition, it can frequently be observed that
automatically determined planning or statistical forecast data is
manually overwritten by planners. Especially for parts moving at
medium or high speed, the manual overwrites usually have a negative
impact on the forecasting accuracy. Beside the intracompany
optimization, the process optimization between companies has not been
fully leveraged yet and improvement potentials created by increased
transparency are not realized.
To get to the advanced level of integrated process optimization, the

organizational setup, governance, processes, and incentives need to be
aligned within and between partners in the supply chain.
3. Physical Process Execution of Humans and Machines: Now-a-days,

warehousing, assembly line replenishment, transport management, etc.
is often done based on gut feeling, but not leveraging available data,
e.g., to improve pick paths in the warehouse. Warehouse operations are
still managed in batches of one to two hours, not allowing the real-time
allocation of new orders and dynamic routing. Also, opportunities arising
from new devices, such as wearables (e.g., Google Glass) or
exoskeletons, are not leveraged.
Increasing Operational Efficiency Leveraging Supply Chain 4.0:

Supply Chain 4.0 will impact all areas in supply chain management. We
have developed the McKinsey Digital Supply Chain Compass (see figure on
next page) to structure the main Supply Chain 4.0 improvement levers and
to map them to six main value drivers. In the end, the improvements
enable a step change in service, cost, capital, and agility.
25
Planning
The future supply chain planning will largely benefit from big data and
advanced analytics as well as from the automation of knowledge work. Two
example levers with significant impact are “
“predictive analytics in demand planning" and "closed-loop planning.”
Predictive analytics in demand planning analyzes hundreds to thousands of

internal as well as external demand influencing variables (e.g., weather,
trends from social networks, sensor data) with Bayesian network and
machine learning approaches to uncover and model the complex
relationships and derive an accurate and granular demand plan. These new
technologies enable a significant improvement of demand forecast
accuracy, often reducing the forecasting error by 30 to 50 percent. Also,
the days of a "single truth" regarding the forecasting numbers are over -
these advanced algorithms provide probability distributions of the expected
demand volume rather than a single forecast number. This allows for
targeted discussions, including upside potential and downside risks in the
S&OPs, and advanced inventory management approaches.
Widely automated and fully integrated closed-loop demand and supply

planning breaks the traditional boundaries between the different planning
steps and transforms planning into a flexible, continuous process. Instead
of using fixed safety stocks, each replenishment planning considers the
expected demand probability distribution and replenishes to fulfill a certain
service level - the resulting implicit safety stocks are therefore different
with every single reorder. Another powerful feature of closed-loop planning
is the integration of pricing decisions with the demand and supply
planning; depending on the stock levels, expected demand, and capability
to replenish, prices can be dynamically adapted to optimize the overall
profit made and minimize inventories at the same time.
26
Physical Flow
Logistics will take a huge step change through better connectivity,

advanced analytics, additive manufacturing, and advanced automation. For
example, as warehouses are being automated, we will see a significantly
increasing amount of autonomous and smart vehicles, and 3-D printing
changes warehousing and inventory management strategies completely.
The next generation of touch, voice, and graphical user interfaces and their
quick proliferation via consumer devices facilitates a much better
integration of machines in almost any process in warehousing operations.
For example, the breakthrough of optical headmounted displays, such as
Google Glass, enables location-based instructions to workers, giving
guidance for the picking process. Advanced robotics solutions have
emerged for the improved picking of cases and single pieces, and the use
of exoskeletons (that emulate the human physiology and can support
straining manual movements) will have a major impact on warehouse
productivity. In total, warehouse automations become much more holistic,
with some warehouses being fully linked to production loading points, so
that the entire process is carried out without manual intervention.
Autonomous and smart vehicles will lead to significant operating cost

reduction in transportation and product handling and at the same time
provide benefits regarding lead times and lower environmental costs. The
use of self-guided vehicles in controlled environments (e.g., mines) or on-
premise solutions (e.g., trains) as well as AGVs in warehouse environments
are already operational and will further grow significantly in the near
future. Autonomous trucks for use on public streets, however, are just
being piloted in Europe and North America with promising results so far.
Besides the automation of warehouse processes, additive manufacturing

will also have a significant impact on physical flows in the supply chain. For
example, 3-D printing has become much more relevant for a broad range
of business applications, such as local production of slowly moving spare
parts or tools. This development is driven by an expanding range of
printing materials, rapidly declining prices for the printers, and increased
precision and quality. By now, the first production facilities that operate
exclusively with 3-D printers have been established.
27
Performance Management
Performance management is indeed changing tremendously. Whereas in

the past, the generation of KPI dashboards was a major task and KPIs
were only available at aggregated levels, now granular data is available in
real time from internal and external sources. This moves the performance
management process from a regular, often monthly process to an
operational process aimed at exception handling and continuous
improvement. For example, planners can be pointed to critical supply chain
disruptions and further supported by an automatic handling of minor
exceptions or potential solutions for the larger ones.
Automated root cause analyses are one approach for exception handling.
The performance management system is able to identify the root causes of
an exception by either comparing it to a predefined set of underlying
indicators or by conducting big data analyses, leveraging data mining and
machine learning techniques. Based on the identified root cause, the
system will automatically trigger countermeasures, such as activating a
replenishment order or changing parameter settings in the planning
systems, such as safety stocks.
Order Management
Two examples of how order management is improved are no-touch order

processing and real-time replanning, which lead to lower costs through
automation of efforts, higher reliability due to granular feedback, and
superior customer experience through immediate and reliable responses.
No-touch order processing is the logical next step after implementing a

reliable available-to-promise (ATP) process. Through an integration of the
ordering systems, linking to ATP, and through an enrichment with order
rules, the system can be used to fully automate the ordering process. The
goal is to have a complete "no-touch" process, where no manual
intervention is required between order intake and order confirmation. Very
stringent order rules that have to be followed, and continuously updated
master data are prerequisites.
28
Real-time replanning enables order date confirmations through

instantaneous, in-memory replanning of the production schedule and the
replenishment in consideration of all constraints. Therefore, the supply
chain setup is always up-to-date, leading to a very reliable planning base.
On top, additional services can be offered to the customers, e.g., a faster
lead time for a certain premium fee, so the customer can see the feasibility
and the updated dates at a glance.
Collaboration
The supply chain cloud forms the next level of collaboration in the supply
chain. Supply chain clouds are joint supply chain platforms between
customers, the company, and suppliers, providing either a shared logistics
infrastructure or even joint planning solutions. Especially, in non-
competitive relationships, partners can decide to tackle supply chain tasks
together to save admin costs, and also to leverage best practices and learn
from each other.
Another major field within collaboration is the end-to-end/multitier

connectivity. Where some automotive companies have already started
collaborating throughout the entire value chain (e.g., from the cow farmer
to the finished leather seat in the car), other companies still need to close
this gap. The collaboration along the value chain allows for overall much
lower inventories through an exchange of reliable planning data, a step
change in lead time reduction through instantaneous information provision
throughout the entire chain, and an early-warning system and the ability to
react fast to disruptions anywhere.
Supply Chain Strategy
Following the need for further individualization and customization of the

supply chain, supply chain set-ups adopt many more segments. To excel in
this setting, supply chains need to master "micro-segmentation." The
granularization of the supply chain into hundreds of individual supply chain
segments based on customer requirements and own capabilities designed
in a dynamic, big data approach allows to mass-customize supply chain
offerings. Tailored products provide optimal value for the customer and
help minimize costs and inventory in the supply chain.
29
Impact of Supply Chain 4.0
Eliminating today's digital waste and adopting new technologies is a major

lever to increase the operational effectiveness of supply chains. The
potential impact of Supply Chain 4.0 in the next two to three years is huge
upto 30 percent lower operational costs and a reduction of 75 percent in
lost sales while decreasing inventories by upto 75 percent are expected, at
the same time increasing the agility of the supply chains significantly.
How did we calculate these numbers? The impact numbers are based on
our experience from numerous studies and quantitative calculations - the
three performance indicators are highly correlated, e.g., an improved
inventory profile will lead to improved service level and lower cost.
Supply chain service/lost sales. Low customer service is either driven by a

wrong promise to the customer (e.g., unrealistic lead times), a wrong
inventory profile (ordered products are not available), and/or an unreliable
delivery of parts. Lost sales in addition occur if the required products are
not available on the shelf or in the system - customers will decide to switch
to another brand. This is true for both B2C and B2B environments.
By significantly improving the way we interact with the customer, by

leveraging all available POS data/market intelligence, improving the
forecast quality significantly (up to more than 90 percent in the relevant
level, e.g., SKU), and applying methods of demand shaping in combination
with demand sensing to account for systematic changes/trends, the service
level will increase dramatically and with this lost sales will decrease
significantly.
We clearly need to keep in mind that industries like Pharma Rx, where the
service level is often in the upper 90ies, will benefit less from the reduction
of lost sales, but more from insights into the patient - and by providing
individual service, they will be able to increase revenue.
30
Supply chain costs, driven by transportation, warehouse, and the set-up of

the overall network, the costs can be reduced by up to 30 percent. Roughly
50 percent of this improvement can be reached by applying advanced
methods to calculate the cleansheet (bottom-up calculation of the "true"
costs of the service) costs of transport and warehousing and by optimizing
the network - the goal should always be to have minimal touch points and
minimal kilometers driven, still meeting the required service level of the
customer. In combination with smart automation and productivity
improvement in warehousing, on-board units in transportation, etc., the
savings potential can be achieved. The remaining 15 percent cost reduction
can be reached by leveraging approaches of dynamic routing, Uberization
of transport, leveraging autonomous vehicles, and - where possible - 3-D
printing.
Supply chain planning: The planning tasks such as demand planning,

preparation of S&OP process, aggregated production planning, and supply
planning are often time intensive and conducted mainly manually. With
advanced system support, 80 to 90 percent of all planning tasks can be
automated and still ensure better quality compared to tasks conducted
manually. The S&OP process will move to a weekly rhythm and the decision
process will be built on scenarios that can be updated in real time. This
accuracy, granularity, and speed has implications for the other elements,
such as service, supply chain costs, and inventory. Systems will be able to
detect the exception where a planner needs to jump in to decide.
Inventory: Inventory is used to decouple demand and supply, to buffer

variability in demand and supply. By implementing new planning
algorithms, the uncertainty (the standard deviation of the demand/supply
or forecast error) will be reduced significantly, making safety stock
unnecessary. The other important variable to drive inventory is the
replenishment lead time - with more production of Lot Size 1 and fast
changeover, the lead time will be reduced significantly. Also, long transport
time, e.g., from Asia to the EU or the US, will be reduced due to a
significant increase in local-for-local production. In addition, 3-D printing
will reduce the required inventory. We believe in an overall inventory
reduction of 75 percent.
31
Capturing the value is a journey that can be started right away. Where it
starts depends on the digital maturity of the current supply chain. The
McKinsey digital walk-through helps companies appreciate the current
digital maturity of the organization, create a sound understanding of the
required levers to pull to reach the next performance level leveraging
Supply Chain 4.0 tools to shape the road map for digitization, and estimate
the potential impact.
The diagnostic tool assesses the supply chain systematically based on six
value drivers and five assessment dimensions (e.g., data, analytics). It
differentiates between three archetypes of maturity levels. Supply Chain
2.0 characterizes "mainly paper-based" supply chains with a low level of
digitization. Most processes are executed manually. The digital capabilities
of the organization are very limited and available data is not leveraged to
improve business decisions. Supply Chain 3.0 describes supply chains with
"basic digital components in place." IT systems are implemented and
leveraged, but digital capabilities still need to be developed. Only basic
algorithms are used for planning/forecasting and only few data scientists
are part of the organization to improve its digital maturity. Supply Chain
4.0 is the highest maturity level, leveraging all data available for improved,
faster, and more granular support of decision making. Advanced algorithms
are leveraged and a broad team of data scientists works within the
organization, following a clear development path towards digital mastery.
The transformation into a digital supply chain requires two key enablers -
capabilities and environment. Capabilities regarding digitization need to be
built in the organization (see the chapter on capability building) but
typically also require targeted recruiting of specialist profiles. The second
key prerequisite is the implementation of a two-speed architecture/
organization. This means that while the organization and IT landscape are
established, an innovation environment with a start-up culture has to be
created. This "incubator" needs to provide a high degree of organizational
freedom and flexibility as well as state-of-the-art IT systems (two-speed
architecture independent of existing legacy systems) to enable rapid cycles
of development, testing, and implementation of solutions. Fast realization
of pilots is essential to get immediate business feedback on suitability and
impact of the solutions, to create excitement and trust in innovations (e.g.,
new planning algorithms), and to steer next development cycles. The
"incubator" is the seed of Supply Chain 4.0 in the organization - fast,
flexible, and efficient.
32
1. Explore any multinational company’s website and seek information

about the global sourcing process.
.........................................................................................................
........................................................................................................
.........................................................................................................
.........................................................................................................
.........................................................................................................
1.6 Summary
On account of increased costs of transportation and logistics, local labour

and contractors issues, domestic regulations, sub-optimal quality and
globalization, organization across the world are compelled to rethink their
sourcing strategy and global procurement has solutions to address most of
these challenges. Companies have been forced by increasing global
competition to formulate and pursue international purchasing strategies
that have a primary focus on reduction in the cost of procurement and
optimization of product and service quality. Such global procurement
strategy focusses on supplies from vendors across the globe instead of
limiting options only to sourcing from domestic vendors. Over a period of
time, global sourcing has evolved in an independent management function
and often operates as a core or nucleus to the overall organization’s
business strategy. Digitalization of supply chain has brought up new
opportunities in the form of Supply Chain 4.0. The new wave includes
implementation of AI, ML, Analytics, IOT in the overall supply chain
landscape.
33
1.7 Self Assessment Questions

1. Identify and explain the factors that have compelled the organization to
switch over to global procurement instead of depending of local sources
of supply.
2. Explain the important objectives of global procurement.
3. What are the features of global procurement?
4. Highlight important differences between domestic sourcing and global

procurement.
5. Explain how global procurement has evolved “Six Steps“ over a period
of time and its relevance in today’s volatile business environment.
6. What are the key risks and challenges associated with global
procurement?
7. As a procurement manager, what are the evolving strategies you will

adopt with respect to global procurement to meet the business
objectives applicable to your industry?
8. Explain the concept of Supply Chain 4.0. Elaborate about key features
and steps that companies are required to initiate to implement the
same.
34
1. Which of the following is least likely to be an important factor driving

organization globally to pursue global sourcing strategies?
(a) Low cost and best quality material availability in domestic
market
(b) Increased level of global competition
(c) Globalization
(d) Changing consumer preferences
2. Which of the following is not likely to be an important advantage of

global sourcing?
(a) Increased quality levels
(b) International supplier follow higher standards of production
(c) Exposure to increased lead times
(d) Optimal cost
3. Which of the following is not likely to be an important feature of

domestic sourcing?
(a) Entails limited risks for the purchasing organization
(b) Subject to local country regulations
(c) Need higher level of supplier selection and qualification criteria
(d) Requires limited amount of standardization
Answers: 1. (a), 2. (c), 3. (c).
35
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
36
COST MANAGEMENT IN GLOBAL PROCUREMENT
Chapter 2
Cost Management in Global Procurement
Objectives

• Understand the Total Cost of Ownership (TCO) Concept in Procurement
• Understand implications of the Logistics Costs
• Understand the role of Taxation, Incentives and Other Credits in global
sourcing
• Understand how global sourcing manager should implement practices for
effective tax, incentives and credits management
Structure
2.1 Total Cost of Ownership (TCO) Concept in Cost Management
2.2 Impact of Logistics Costs
2.3 Role of Taxation Costs, Taxation Incentives and Other Credits in
Global Sourcing
2.4 Implementation Aspects for Global Sourcing Manager for Effective Tax
and Incentives Management
2.5 Best Practices for Effective Tax and Incentives Management – A

Global Sourcing Manager Guide
2.6 Impact of global tariff and protective policies adopted by United
States and china
2.8 Summary
37
2.1 Total cost of Ownership (TCO) Concept in Cost

Management
The global sourcing manager is expected to have a detailed understanding

of all costs associated with the procurement of any product, be it capital
expenditure or operational expenditure. The TCO concept considers
lifecycle costs of the equipment, goods and services. The costs perspective
the expected cash outgo reduced by any benefits over the lifetime of the
goods/asset purchased. The costs include money spent or costs involved
right from the requisition stage to the disposal of the asset. It considers full
costs instead of only focus on purchase price. For example, if any
organization decides for technology procurement, the global sourcing
manager will have to consider the costs as indicated below:
Computer and Hardware Other Long-term

Operation Expenses
Programs Expenses
• Network hardware and software • Infrastructure (floor space • Replacement costs

costs occupied by the equipment) • Future upgrade or
• Server hardware and software • Electricity (for related scalability
costs and other associated costs equipment, cooling, backup expenses
• Workstation hardware set-up and power, etc.) • Decommissioning
software installation costs • Testing costs of the • Disposal costs
• Installation and integration of equipment and software
hardware and software costs • Downtime, outage and
• Purchasing research costs failure expenses related
• Warranties and licenses associated • Diminished performance
with the equipment and related costs for
• License tracking – compliance maintaining the equipment
costs • Security (including
• Migration expenses, if any breaches, loss of
• Risk management costs associated reputation, recovery and
with susceptibility to prevention)
vulnerabilities, availability of • Backup and recovery
upgrades, patches and future process of the software
licensing policies related to the • Technology training to the
equipment employees/operators
• Audit (internal and
external) costs
• Insurance premium for the
lifetime of the equipment
• Information technology
personnel deployment costs
• Corporate management
time
38
If the TCO concept is to be applied to the procurement of transportation

equipment, the lifecycle costs to be consider will be as follows:
1. Purchase Price
2. Tax Benefit on Depreciation (reduction)
3. Insurance Costs
4. Fuel Costs
5. Financing Costs
6. Repairs Costs
7. Fees and Taxes applicable to the transportation equipment
8. Costs of Maintenance
9. Opportunity Costs
10. Downtime Costs associated with the transportation equipment
Provided herewith the following illustration for computation of Total Cost of

Ownership on procurement of Computers:
Sr. No. Cost Source +/– $
1 Purchase price/fixed price of the laptop + 100
2 Cost of warranty or maintenance + 50
3 Cost of delivery of the laptop + 10
4 Disposal of delivery packaging + 5
5 Set-up and installation costs + 5
6 Testing cost + 10
7 End-user training + 20
8 Accessory cost + 30
9 Energy consumption (over lifetime) + 60
10 Purchase of energy saving devices + 15
11 Support/maintenance/management costs + 30
12 Repairs and lost productivity (based on probability) + 20
13 Recycling and disposal of laptop + 20
14 Value added tax + 15
15 Input credit on value added tax – 10
39
16 Tax benefit on depreciation – 25
Total Cost of Ownership (over Lifetime) 355

Table 2.2
2.2 Impact of Logistics Costs
Logistics costs are an important component of the landed cost of

procurement. In addition to quality and other standards related to products
and services, logistics costs is the key driver of global procurement
decisions. The common concerns that many MNCs engaged in global
sourcing have is the selection of the most cost-effective transportation
mode and the total amount spent on sourcing from foreign/supplier
countries. It is generally agreed that manufacturing cost is significantly
lower in developing countries, however, the extended distance, the
coordination between the partners, and numerous other problems related
to international trade often complicate the profit picture. Certain locations
can lead to significant level of additional costs. The logistics costs can be
broadly classified into following categories:
1. Transportation
2. Inventory holding
3. Administration
4. Customs charges
5. Risk and damage
6. Handling and packaging
40
Let us have a look at each of the category
1. Transportation Costs: Transportation costs is further segregated into

various categories.
a. Freight charge: Cost incurred during delivery using various
transportation modes.
b. Consolidation: The fee for combining small shipments to form larger
shipments.
c. Transfer fee: Cost incurred during the transfer of goods between
different modes of transportation.
d. Pick-up and delivery: Transportation charges incurred between
shipper’s warehouse and air, rail consolidator’s terminal.
2. Inventory Holding: The key inventory holding costs depends on the

quantity and the location of the inventory.
a. Pipeline holding: Holding cost during the transfer.
b. Safety stock: Holding cost of safety stock.
3. Administration: Administration consists of order processing,

communication and other overheads.
a. Order Processing: Salaries of employees responsible for
purchasing and order management.
b. Communication Expenses: Telephone, fax and information
transfer related costs associated with international logistics.
c. Overheads: Rent paid by the international logistics group.
4. Expenses related to customs and clearance procedure are

significant component of the logistics costs in case of imports and
exports.
a. Customs Clearance Expenses: Fee imposed by local customs to
clear goods.
b. Brokerage Fee: Charge levied by an agent acting on behalf of the
shipper or the receiver depending on the delivery terms.
c. Allocation Fee: Allocation fee is charged per house bill.
41
5. There is also a risk of damage to cargo and expenses are also incurred
for protecting the cargo in international logistics.
a. Damage/loss/delay: Percentage of the value of each unit shipped
that will be lost, damaged or delayed.
b. Insurance: Generally charged as a percentage of the value of
goods insured.
6. Significant costs in global procurement is also on handling and
packaging of the material. The key expenses incurred are as follows:
a. Terminal Handling: Material handling fee charged by the
transportation company.
b. Material Handling: Cost of labour and equipment used to move
goods within the shipper’s or receiver’s warehouse.
c. In/out Handling: Material handling charge levied by the freight
forwarder for use of its facilities.
d. Disposal Charge: Fee for taking away an empty container from the
receiver’s warehouse.
e. Packaging/Supplies of Materials: Cost of preparing goods for
shipment.
f. Storage: Rental fee of the warehouse space.
2.3 Role of Taxation Costs, Taxation Incentives and Other

Credits in Global Sourcing
Globalization is changing how we do business in every industry, business,

region, product line and in every part of the world. Global companies are
rapidly transforming their supply chains and sourcing practices and
procedures to go wherever necessary to reduce costs, launch products and
enter lucrative new markets. Operating in this volatile, uncertain, complex
and ambiguous global environment presents a range of challenges for
indirect taxes such as value added tax (VAT), goods and services tax
(GST), customs and excise duties, environmental duties, grants and
incentives. Addressing those challenges and finding effective solutions will
continue to be crucial as the business landscape continues to change in the
global environment.
42
Taxation laws and regulations have a very broad impact on the way goods
and services are procured in International market. The developments have
profound effects on global supply chains and the sourcing process
effectively changing how and where materials and products are sourced,
manufactured, distributed and sold.
Indirect taxes are based on transactions, flow of goods and services and
not on the income or profits. This taxes are completely linked to the supply
chain activities. Changes in the tax regulations can impact the following
areas:
• Where the supply chain and sourcing activities are carried out
• The cost of finished products and delivery routes and timing
• Grants and incentives like export benefits, tax rebates, etc.
• Costs and risks of doing business internationally
The key indirect taxation challenges that may arise, which the global
sourcing manager should be aware of, throughout the supply chain
includes:
(a) Procurement of services from many countries
(b) Selling in, from and to many countries
(c) Ownership of goods in many countries
(d) Transacting in goods on consignment basis
(e) Movement of goods across the borders for storage
(f) Storage of goods as multiple geographies
(g) Movement of goods across various geographies for process and
repair
(h) Provision of services in many countries
(i) Ownership of raw material, semi-finished products and finished
products throughout the global supply chain
(j) Maintaining title of ownership of the goods till last leg of the
supply chain
43
Each time the goods cross the border, the goods are subject to many taxes
and compliance obligations. Some of those are provided as under:
1. Import and Export licensing
2. Value Added Tax and Goods and Service Tax Reporting and
Documentation
3. Customs and excise duty reporting and compliance documentation
4. Excise duties on importation (countervailing duties)
5. Import and Export compliance obligations
Some of the important factors which need to be considered to evaluate the

impact of taxation on supply chain and global procurement are as follows:
• Shift in the Trade Pattern Across The Globe: In 1990, the world
trade was dominated by developed nations. However, in the last few
decades as the new markets are opening up, companies are exporting to
more countries than ever before and trade routes are changing. People’s
Republic of China is now the biggest trading partner for countries like
Australia, Japan, South Korea, India, Russia and South Africa and China
is increasing its share of trade with Europe and the United States as well.
As the current emerging economies (such as Brazil, Russia, India and
China, commonly referred as BRIC) grow, evolve and mature, new
developing economies are likely to emerge (such as Vietnam and
Cambodia, Indonesia among others).
• Ever Changing and Transforming Supply Chains: With changing

patterns and shift in global trade, companies are increasingly
transforming their supply chains to go across the world as necessary to
support growth, reduce costs and minimize the risks of doing business.
For number of organizations, supply chain activities, e.g., product
engineering, sourcing, manufacturing and logistics are spread across and
widely dispersed around the world. As increasingly the activities are
outsourced to emerging markets, centralized through set up of a
procurement company and streamlined to gain efficiencies and maximize
utilization of the scarce resources, corporate structures and functions are
also being transformed. Number of organizations has set up a structure
called as Global Procurement Company established to carry out global
sourcing activities for the parent and fellow subsidiaries across the globe.
For example, Vodafone, the largest telecom player group across the
globe has set up a Vodafone Procurement Company, with head office in
44
Luxembourg. The company is established as strategic purchasing centre

for the Group and now serves third parties as well. This company
manages approximately Euro 10 billion of procurement in a year.
• Shift in the Taxation Regime Across The Globe: Governments

around the world are primarily focusing on indirect taxes to increase
revenues and provide funding to the tax reforms. Global Sourcing
Manager needs to be aware of the main trends and changing pattern in
indirect taxation and its impact not only on supply chain evolution or
change but also on the existing supply chains. Broadly, most of the
recent changes across the globe include increasing tax rates for Value
Added Tax (VAT), Goods and Services Tax (GST), Excise duties and
Customs duties. Emerging market like India has also recently introduced
the common indirect taxed, i.e., GST Regime. The GST regime in India is
expected to counter double taxation of goods. The average rate of tax is
expected to be approximately 27% as against the global average of
16.5%.
VAT and GST regime is now applicable in more than 150 countries across
the globe. For example, an increasing number of emerging markets are
adopting Value Added Tax and Goods and Service Tax regime in
preference to single-stage sales taxes or a range of local sales taxes. In
January 2012, China launched a Value Added Tax pilot scheme in
Shanghai with a view of eventually replacing its Business Tax (BT) and
VAT with a broad-based VAT throughout the whole country. India is also
undergoing reform in this area. The country has recently finalized its
“negative list” for excluded supplies and bringing the introduction of a
new, centralized GST one step closer.
Value Added Tax (VAT) and Goods and Service Tax (GST) is generally
borne by the final consumer, but the tax is collected and remitted by
business entities that supply taxable goods and services. The indirect tax
is charged on transactions at each stage of the supply chain and it is
very crucial that the global sourcing manager is completely aware of all
the incidences of the indirect taxation. The taxation generally applies to
imports of goods. Businesses are treated as VAT taxpayers who collect
and remit the tax. VAT taxpayers charge VAT/GST on their sales (output
Value Added Tax) and recover Value Added Tax paid on their business
purchases and overheads (input VAT). Organizations also get input credit
for the input VAT paid to the vendors. Therefore, businesses effectively
45
account for Value Added Tax on the value they have added, created at
that stage in the supply chain, as applicable.
• Trade Agreements, Bans, Action Against Dumping of the

Products: Number of emerging geographies like India have trade
agreements with other nations. The trade agreement’s objective is to
promote international trade between participating nations in specified
commodities and services. Further, certain products are also subject to
anti-dumping duties under a protective taxation regime. For example, in
March 2015, to protect the domestic manufacturers of industrial grade
stainless steel, Indian trade ministry recommended anti-dumping duties
ranging from $180 to $306 per tonne for some industrial-grade stainless
steel imported from China, Malaysia and South Korea. The Ministry’s
report depicts that China’s annual stainless steel surplus is more than
4 million tonnes, compared with India's annual demand of about 2.6
million tonnes and which leads to cheap supplies coming in from China
and hence to protect the domestic industry, it is important for
introduction of anti-dumping duty.
• Tax and Other Incentives of the Business: The Global sourcing

manager should be aware of the various incentives across the globe for
various transactions. These incentives go a long way to reduce the cost
of strategic as well as transaction sourcing. Indicative list of the
incentives is provided as under:
46
Type of Utility for the Particulars

Incentives Global Sourcing
Manager
Tax Incentives Reduced cost of • Sales/use tax exemptions/refunds

sourcing across • Deferment of the tax payments (VAT)
the globe • Additional input credit on capital
purchases
• Export Zone credits
• Research and development credits
• Capital investment tax credits
• Credit for alternative energy
• New markets tax credit
Hiring Outsourcing/ • Wage rebates

Incentives Co-sourcing • Grants for job creation
Decisions • Employment related tax incentives
• Hiring and employee screening
incentives in some geography
Research and Useful for • Federal Government/State R&D credits

Development sourcing • Tax incentives for investments in
Incentives managers of R&D Research and Development Labs and
driven expenditure
pharmaceutical • R&D cash grants
companies • Additional/increased deduction for
Research and Development spend in
Corporate Tax
Property Tax Useful for set up • Exemption of property or establishment

Relief of overseas tax for setting up manufacturing/service
supplier centre in certain locations
establishment as • Favorable property tax treatment for
subsidiary certain industries
company
Green Selection of right • Carbon credits

Incentives suppliers/ • Greenhouse Gas (GHG) reductions
outsourcing and • Incentives for LEED certified premises
co-sourcing • R&D and manufacturing incentives for
decisions green products
47
Training Outsourcing, • Incentives of training spends

Benefits overseas • Supplier development programs and
manufacturing incentives (especially for small and
hub medium businesses)
• Tax credits on training spend
Other Useful for • Infrastructure grant and set-up

Incentives reducing the total assistance
cost of ownership • Low cost financing for capital
expenditures
• Discounts on sourcing various utilities
• Waiver of permit/license fees
• Discounted land
Table 2.4
2.4 Implementation aspects for Global Sourcing Manager

for effective tax and incentives management
The global sourcing manager is expected to perform the following action

points to effectively manage the tax issues in global sourcing:
1. Identification and quantification of the indirect taxes and incentives that
the organization is currently pays and receives.
2. Identification and quantification of the areas of current and future risks
and opportunity, including the costs of related to tax compliance
obligations.
3. Assignment of clear role and responsibilities for managing company’s
indirect tax performance and incentives.
4. Ensure that the team across various functions has understanding of
implications of taxes
5. Ensure that standardized processes are implemented and leading
practices are encouraged throughout the organization for effective tax
management.
6. Outsourced and co-sourced partners of the organization ensure
compliance with the tax laws and periodic submission of the report to
global sourcing manager.
48
7. Establishment and measurement of the indirect taxes and incentives by

adopting key performance indicators (KPIs) related to organization’s
supply chain and procurement goals.
Implications of Taxation on Global Sourcing Models – Case Study of

a Large Multinational Company
ABC Global Group manufactures and distributes a wide range of consumer

products across many geographies. In recent years, the Group undertook
several transformation projects to streamline production and distribution
centers. The first project, carried out across three continents, i.e., Europe,
the America and Asia. The Global Head of Transfer Pricing (International
Taxation) discusses how the Group’s attitude to indirect taxes has evolved
from dealing with VAT and customs compliance resulting from these
transformations to basing decisions about where to carry out production, at
various sites across the globe, based on indirect tax considerations.
The Head of Transfer Pricing observed difference in the importance of

indirect taxes on the projects on a regional basis (across three continents).
The Group noted that in Europe the biggest challenge in general has been
making sure that the ERP systems process, the indirect tax aspects of
various supply chain transactions in such a way that there is less manual
activity, that the invoices are all prepared accurately and that the electronic
invoicing systems operate effectively. Harmonization of Value Added Tax
and customs processes in the European Union has significantly helped the
group.
In Latin America, indirect tax was one of the key focus areas of the Group,
both on the legal entities set-up and for the transaction flows. Further, in
deciding where to build or set up a manufacturing unit in Asia and customs
and free trade agreements and other indirect taxes and indirect tax
incentives were key decision drivers.
49
2.5 Best Practices for Effective tax and Incentives

Management – A Global Sourcing Manager Guide
Global Sourcing Manager needs to formulate proper strategies to

effectively manage the taxes, reduce the overall cost of purchasing and
also avail various incentives available. Some of the best practices which
can be adopted by the global sourcing manager with respect to various
taxes is provided as under:
Valued Added Tax/Good and Service Tax
1. Reduce the burden of VAT/GST, in terms of absolute costs and in terms

of negative cash flow.
2. Maximization of positive VAT/GST cash flow on sales and procurement.
3. Reducing the costs of compliance and the risk of incurring penalties.
4. Adopting an effective and efficient VAT/GST management framework for

identification, quantification and management of transactions and cross-
border movements of goods, throughout the end-to-end supply chain.
5. Mapping out VAT/GST transaction flows to business processes and

against costs to identify opportunities to eliminate or reduce VAT/GST
costs and improve the cash flow.
6. Standardization and automation of end-to-end processes (especially

Accounts Receivable and Accounts Payable processes).
7. Centralizing Indirect Tax compliance in global or regional shared

services centers.
8. Routing cross-border movements of goods to make best use of import

valued added tax and GST deferments, free trade zones, reverse charge
accounting, and other aspects to improve cash flow and avoid
irrecoverable (without input credit or refund) VAT/GST.
50
Customs Duties
a. Ensure compliance to all activities and process involved in customs.
b. Adopt effective customs duty management framework throughout the

supply chain covering end-to-end activities.
c. Use of economic customs procedures and customs planning tools, e.g.,

harmonized system of classification where available.
d. Routing cross-border movement through Free Trade Zones and other

locations to make best use of the free trade agreements.
e. Optimizing purchasing through imports of goods to maximize the use of

customs procedures and duty benefits, e.g., avoiding procurement from
origin which is subject to anti-dumping duty.
f. Using accreditations of various organizations (SAARC) to transit goods

more quickly through international borders without any hassle.
g. Linking the use of special customs regimes in the end-to-end supply

chain for optimizing the custom duty incidence..
Excise and Other Duties
• Avoid sourcing goods on which the excise duty is irrecoverable unless

absolutely necessary and if there is no other alternative.
• Use the manufacturing locational advantage for availing certain excise

duty related benefits.
51
Management of Incentives
1. Adopting an effective management incentive identification,

quantification and management framework to gain maximum benefit
out of the incentives structure
2. The global sourcing manager can look forward to centralize the activities
related to management of grants and incentives to improve controls,
improve decision-making and maximize the benefit.
3. Periodically evaluate the benefits available compared with the

compliance conditions and costs, as on account of dynamic business
environment the decision may become unviable, e.g., issuance of new
policy, withdrawal of incentives, expiry of incentives, etc.
4. Identifying potential investment destinations (industrial policy,

investment policy, state benefits) and negotiating investment packages
that are tailored to the company’s needs to maximize benefits and cost
reductions.
5. Combining grants or credits for new investment, employment and R&D,

etc. to minimize input costs throughout the end-to-end supply chain
activity.
2.6 Impact of Global Tariff and Protective Policies adopted

by United States and China
Earlier 2019, President Donald Trump suggested that a new round of tariffs
on Chinese imports would hit several categories of products not previously
impacted by the escalating trade war between the two countries. The
proposed measures would cover an additional $300 billion of Chinese-made
products, primarily consumer goods such as electronics, apparel, footwear
and toys.
Originally, these tariffs were scheduled to kick in Sept. 1, just ahead of the
critical holiday shopping season. More recently, however, the administration
has signaled it will hold off until December.
52
Over the past year, the consumer goods sector has explored a variety of
mitigation strategies to cope with tariffs, including — perhaps most notably
— moving production out of China. This latest back-and-forth may
accelerate this response as companies seek increased certainty by shifting
to suppliers in countries not embroiled in trade disputes. However, rapid
changes to supply chains also may expose companies to greater risks.
Eager to avoid the higher costs associated with tariffs, several consumer
goods companies are considering shifting, or already have shifted, their
supply chains away from China — in most cases seeking alternative
manufacturers in countries that offer similar manufacturing capacity for a
comparable cost.
Data from the U.S. Census Bureau documents this shift. The bureau
reports that imports from China fell 13 percent in the first six months of
2019, while Vietnam’s imports to the United States have risen 36 percent
from 2018. According to the Wall Street Journal, companies that make
consumer goods as varied as Crocs shoes, Yeti beer coolers and Roomba
vacuums have begun to move production to other countries to lower costs.
Establishing compliant, reliable and secure supply chains takes time, and
failure to properly vet suppliers can have material consequences. John
Hoge, co-owner of Sea Eagle Boats Inc., headquartered in Port Jefferson,
New York, noted that it took his company 20 years to establish its supply
chain in China. To cultivate a partnership, companies typically vet new
suppliers by executing multiple inspections and verifying compliance with
company-specific policies and codes of conduct.
Once suppliers achieve these initial requirements, they’re monitored on an

ongoing basis and must comply with periodic audits. Companies invest a
significant amount of time and money to establish and maintain a secure
supply chain, and over the long term such investment typically results in
fewer production disruptions and reduces a company’s exposure to
regulatory, social and environmental and reputational risks, among others.
As China and the United States continue to introduce new tariffs and
exchange threats, companies may forego these precautions as they
attempt to quickly redirect production. This situation could be exacerbated
given that the factories with available capacity to accept new orders are
likely to have lower standards.
53
"What we see in terms of standards is that China is way above countries

like Bangladesh, Malaysia and Vietnam,” Sebastien Breteau told the New
York Times. Breteau, CEO of QIMA, which audits supply chains for large
U.S. retailers, noted that quickly relocating supply chains intensifies risks
related to child labor, human trafficking, environmental violations and
dangerous working conditions.
For instance, in 2013, 23 workers were injured as police attempted to

break up a 3,000-strong protest at a facility in Cambodia that produced
clothing for Nike. More recently, CNBC reported, "Amazon investigating
claims its Chinese supplier used illegal child labour to make Alexa devices."
These are consumer-facing brands and such reputational damage can
extract a toll on business.
Companies and investors alike have long recognized the importance of

effective supply chain management. Correspondingly, the Sustainability
Accounting Standards Board, or SASB, has identified supply-chain
management as an issue that is likely to have material financial
implications in four out of the seven industries in the consumer goods
sector.
While it’s still too early to determine how this regional shift in production
will affect companies in the sector, investors and investment stewardship
teams would be well served to engage with company management, as well
as the board of directors, to better understand how they are managing the
risks as they move production to new geographies.
To help facilitate this conversation, SASB’s Engagement Guide for Asset

Owners & Asset Managers provides investors with industry-specific
questions directed at the financially material sustainability risks and
opportunities faced by a company.
In the context of supply chains, these questions focus on matters such as a

company's approach to auditing supplier labor and safety conditions, and
the company’s efforts to mitigate the greatest labor, environmental, health
and safety risks within its supply chain. Gauging the response from
company management and the board of directors should provide significant
insight into how well positioned the company is to manage the risks
associated with relocating supply chains.
54
Here, perhaps more than usual, corporate risk managers — and those who
oversee their efforts — will be walking a fine line between caution and
imprudence. Amid this market uncertainty, however, investors still can
count on relevant and reliable information to provide the bedrock for
effective decision making.
The series of tariffs imposed by the United States on Chinese goods has
impacted both U.S. and China-based Amazon vendors, but U.S. sellers are
taking a bigger hit to their sales. The gap has widened since the round of
tariffs on Chinese goods announced in the summer of 2018 by the Trump
administration.
In July 2018, a U.S. tariff on $34 billion in Chinese goods went into effect.
That month, Chinese vendors’ sales grew 174% year-over-year, while U.S.
sellers saw a 124% increase. As the tariff war between China and the U.S.
intensified that summer, however, U.S. and China-based sellers saw their
growth stall, with U.S. sellers coping with a bigger impact. September
2018, when the U.S. placed a 25% tariff on $50 billion in Chinese goods,
plus a 10% tariff on $200 billion in Chinese goods, U.S. sellers saw their
year-over-year sales growth slow down to 54%, compared Chinese sellers’
sales growth of 111%.
U.S.-based Amazon sellers have seen their year-over-year monthly sales

decrease every month since November 2018. By March 2019, when a 25%
tariff was placed on $250 billion in Chinese goods, Chinese vendors’ year-
over-year sales grew by 61%, but U.S. sellers saw their sales decrease by
3%.
While many U.S.-based Amazon sellers also get their supplies from China,
Chinese sellers have better control over their supply chain and closer
relationships with their suppliers (in some cases, even equity
partnerships), allowing them more flexibility. These deeper ties give
vendors the leeway to negotiate things like smaller batches of products
when necessary. As the tariff war forces smaller competitors out of the
market, having more control over the supply chain lets these sellers quickly
step into the gaps they leave behind. “Whoever is quick to grab these
fragments will become even larger in size, because the market is there and
that can help with growth momentum for the largest companies,” Chen
says.
55
Chen adds that the way many Chinese e-commerce sellers organize their
operations may also give them an edge over U.S. sellers. The company
currently has about 60,000 clients in China and launched in the U.S. in
June.
“I have been talking to a lot of U.S. and Chinese clients and the way that
these Chinese clients are organized is that usually for each product group.
So, if there is an electronics company selling iPhone charging cables and
also headsets, each of these product groups would probably have two to
five people running the thing, like a mini-company, and they are organized,
incentivized and almost completely independent within their group and
given a lot of autonomy,” Chen says. “This is a very common form of
organization within the Chinese retail and e-commerce industry and this is
something we believe could have given them an edge in terms of the speed
that they react to external impacts such as the tariffs.”
1. Download the Annual Report of any publicly listed company from any
sector and analyses the purchase and other costs.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
2. Perform research on various factors affecting Total Cost of Ownership

and its impact on procurement decision of an organization.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
3. Evaluate the impact of implementation of Goods and Services Tax (GST)

in India on the sourcing or outsourcing strategy of multinational
companies.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
56
2.8 Summary
Over a period of time, there has been a shift in the way organization take
the procurement decisions. The traditional methods directs towards
purchase price and so selection of the supplier with least quotes seems to
be most practical solution. However, the traditional approach completely
ignores the costs associated with the ownership of the asset, material over
its lifetime. To address this lacuna in the traditional approach and provide a
holistic perspective to taking procurement decisions, especially in a global
environment, Total Cost of Ownership (TCO) provides an appropriate
method to have end-to-end look of the costs. The TCO considers costs
which not only includes the initial purchase price but also considers the
costs of operations, utility, maintenance and disposal at the end of
economic life of the product. Some of the other cost components like
Transportation and Logistics, Taxation also contribute to the cost built up.
In global sourcing environment, consideration of the logistics costs,
incidence of various direct and indirect taxes and also availing benefit of
various tax incentives become very important, especially while spending on
capital equipment, incurring research and development expenses,
development of an outsourced vendor, evaluating offshore outsourcing/
service centre set-up and such many decisions. The global sourcing
manager should adopt various practices to identify, assess, quantify and
optimize processes so that the incidence of tax is reduced and the
organization is positioned to maximize the utilization of various benefits.It
is important for the industry to watch out for changes and updates related
to global tariff war between United States and China. Protectionism based
policies adopted various nations, including developed and developing
nations is expected to have considerable impact on the costs structures in
global procurement.
57
1. Explain the concept of Total Cost of Ownership? Provide suitable

illustration.
2. What are the various categories of transportation and logistics costs

which the Global Sourcing Manager should consider while evaluating a
capital asset procurement decision?
3. What role does taxation plan play in global sourcing?
4. What are the various practices that can be adopted by Global Sourcing
Manager to reduce the incidence of taxation and increase utilization of
tax incentives?
5. Explain you views on impact that Indian Industry is likely to face on

account of changes in tariff structure in United States for International
Trade?
1. Which of the following statement is least likely to be true about the Total
Cost of Ownership (TCO) methods of evaluation in global sourcing?
(a) Warranties costs are included
(b) Focus on end-to-end life-cycle cost
(c) Ignore the tax incentives
(d) Considers the incidence of non-refundable taxes
2. Which of the following is not likely to be part of the life-cycle cost of the
product to be purchased?
(a) Operations and maintenance costs
(b) Purchase price
(c) Warranty costs
(d) None of the above
58
3. Which of the following is least likely to be tax incentive?

(a) Non-refundable taxes
(b) Valued added tax with inputs credit
(c) Additional depreciation on capital equipment
(d) Reduced tax liability on research and development expenses
Answers: 1. (c), 2. (d), 3. (a).
59
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
60
SOURCING METHODOLOGY AND PROCESS
Chapter 3
Sourcing Methodology and Process
Objectives

• Understand the strategic global sourcing process
• Understand the Global Procurement Cycle
• Understand various procurement methods – focus on procurement
through tendering process
• Understand the supplier selection and evaluation process
• Understand methods of supplier development in global procurement
• Understand the methods to enter into a formal contract with the
suppliers – a global sourcing perspective
• Understand various Global Sourcing Models
• Understand the use of Free Trade Zones (FTZs) in Global Sourcing
61
Structure
3.1 Introduction to Strategic Global Sourcing Process
3.2 Global Procurement Cycle
3.3 Procurement Methods – Special Focus on Project Procurement and
Purchasing through Tendering Process
3.4 Supplier Selection and Evaluation Process
3.5 Supplier Evaluation Criteria
3.6 Supplier Development in Global Procurement
3.7 Entering into a Formal Contract with Supplier – a Global Sourcing
Perspective
3.8 Global Sourcing Models
3.9 Impact of Brexit on Global Supply Chain, Procurement and
Outsourced Manufacturing
3.10 Use of Free Trade Zones (FTZs) in Global Sourcing
3.12 Summary
62
3.1 Introduction to Strategic Sourcing Process
Strategic purchasing is the process of planning, implementing, evaluating,

and controlling strategic and operating purchasing decisions for directing all
activities of the purchasing function towards opportunities consistent with
the firm's capabilities to achieve its long-term goals. The key steps adopted
by large number of organizations in the strategic sourcing process may
vary significantly with respect to the business profile of the organization,
nature of the product, region and other factors. Broadly, the process can
be classified in following seven activities:
1. Developing the profile of category/nature of purchases required
2. Define appropriate sourcing strategy for each of the type of product/

service category
3. Generation of supplier portfolio
4. Select appropriate implementation path
5. Negotiations and selections of suppliers/vendors
6. Integration of suppliers
7. Bench-marking supplier market and periodic review
The important sub-steps are provided as under:
1. Developing Profile of Category/Nature of Purchases:
At this stage, it is important for organization to understand the nature of

products/services to be procured. Ordinarily, a category consists of a
number of products from similar vendors that can be grouped together in a
competitive sourcing exercise. For example, an automotive company might
purchase different tyres for different vehicles from different manufacturers.
It may make sense to group the total spent on tyres together into one
category in order to identify the savings potentials. Carrying out a vendor
segmentation analysis is one way to position the product in relation to
others purchased by the organization.
63
i. Analysis of the spend is an important step for understanding the need of

the organization. This activity may consists of following important sub-
steps:
a. Information related to the total spending of vendor can be sought

from the accounts payable department.
b. Existing contracts with the vendors needs to be reviewed to estimate

the spend in terms of dollar amounts, locations, number of users and
volume of usage, pricing, terms and conditions and which sources are
used most heavily.
ii. Analysis of the need for procurement is also an important steps. This
may include following key activities:
a. Interview key current users to develop a thorough understanding of

their needs.
b. Seek user’s views on supplier’s performance, and any enhancements

that they would like to see in the product/services.
iii. Supplier market analysis is also a critical step in the process of global
procurement. The key activities include:
a. Understand the external supply market in which the supplier operates

and the market pressures the supplier faces.
b. Evaluate what is the current competitive situation? Are the providers

under cost pressures, competitive pressures, technology pressures?
c. Understand what other suppliers could supply either the same

product/services or nearly so?
d. Assess what are the trends in the relevant product/service industry?
e. Check what insights are available into the value chain, suppliers’ cost
structures and pricing.
64
iv. At times, it is also advisable to adopt the Porter’s five forces model in
analyzing the supplier portfolio. The analysis includes:
a. Evaluate bargaining power of the suppliers
b. Understand the threat of new entrants
c. Understand the bargaining power of buyer purchasing organization
d. Evaluate the threat of substitute products
e. Evaluate the implications of rivalry among the existing supplier firms
on the procurement cost
v. It is very important to carefully evaluate and understand the vendor

pricing structures.
2. Selection of Appropriate Sourcing Strategy:
Organization here needs consider how the product you are sourcing aligns
with company’s overall strategy. Where to place the product the company
is sourcing within a category positioning matrix The product can be, thus,
broadly classified into four broad category positions
(a) Leverage
(b) Strategic
(c) Non-critical
(d) Bottleneck
65
The details of each category is provided in the category positioning matrix

as under:
Fig. 3.1
The sourcing strategies depend on the objectives the organization which it

wants to achieve. The following strategies need to be deployed-
a. Volume Concentration: This step involves consolidation of the

suppliers.
(i) Consolidate number of suppliers
(ii) Aggregate volume across units
(iii) Re-distribute volume among suppliers
b. Best Price Evaluation: In this strategy, the focus of the organization is

to achieve best possible pricing for the desired product/service.
(i) Compare “total” costs
(ii) Model “should-costs”
(iii) Renegotiate prices
(iv) Unbundle pricing
(iv) Hold an online auction
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c. Global Sourcing: Organization needs to explore multiple sources of

procurement.
(i) Expand geographic supply base
(ii) Develop new suppliers
(iii) Exploit global supply/demand imbalances
d. Improvement of Specification of the Product: Organizations need

to improve the products over a period of time. This objective is an
important for evolution of the sourcing strategy.
(i) Conduct product value analysis
(ii) Optimize lifecycle costs
(iii) Rationalize/standardize specification
(iv) Substitute materials
e. Joint Process Improvement: Number of organizations across the

world engage with the suppliers for improvement of the process.
(i) Re-engineer joint processes
(ii) Support supplier operations improvement
(iii) Share productivity gains
(iv) Develop integrated supply chain
f. Relationship Restructuring: Engaging into strategic partnership with

supplier assist the organization in a big way to evaluate the strategic
decision of direct procurement or outsourcing.
(i) Establish/develop key suppliers
(ii) Employ strategic alliances/partnering
(iii) Examine strategic “make versus buy”
3. Generate the Supplier Portfolio:
It is very crucial for all organizations to develop a robust portfolio or

database of suppliers. While organization may not purchase from all the
suppliers, it is important to understand the availability of robust database
will assist organization to send enquiries and seek quotations from multiple
suppliers in the process of procurement. Some of the important questions
that the organization should ask in the process of supplier selection is as
follows:
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Criteria Factors
Geographic Coverage Details of geography which supplier is covering

Interiors and key locations across the geographies of
coverage
Industry and Market Understand the depth of coverage of the supplier across
Coverage various Industries/product use
Product Content Availability of the material about the product/services
Pricing Pricing structure of the supplier

Combinations of prices – fixed per unit, discounts,
payment terms
Billing Frequency of the billing
KPIs Suppliers past performance on some of the important

key performance indicators that matter to the
organization, e.g., product delivery time, periodic
reports to customers, representations and warranties
Table 3.1
At this stage, the organization should not discard any of the suppliers. It is
possible that Even if some of the suppliers are smaller or newer suppliers
with whom the organization may not be familiar, those small/new suppliers
may offer more favourable contract terms than some of the large suppliers.
4. Selection of the Appropriate Implementation Path:

From the portfolio of suppliers, the organization may need to shortlist
some of the suppliers for sending enquiries and calling for negotiations.
Many different routes are adopted by organizations to achieve this
objective. One of the traditional method adopted by buyers across the
globe is to conduct a Request for Proposal (RFP). In the RFP, the buyer
states his requirements and asks suppliers to set forth the specifics of their
proposed offer including pricing. Requiring the vendors to complete a
standard pricing matrix will allows the buyers to compare their offers on an
equal basis. A set of criteria and weightings for evaluating the completed
RFPs must then be developed. The use of an electronic RFP tool can be a
real asset in making sure that all potential suppliers respond in a
consistent manner, speeding up the entire process and simplifying the
analysis of responses.
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• It is worthwhile to discuss the role of internet based negotiations in the

RFP process. Some of the important activities involved in internet
negotiations are as follows:
a. Suppliers that have successfully got through the RFP process will
then be invited to number of negotiations rounds.
b. Negotiations may be conducted either face-to-face or, depending on
the situation, by internet negotiations (sometimes called reverse
auctions or e-auctions).
c. The advantage of using an Internet negotiation is that it compresses
the time to arrive at the suppliers’ “best offer” from days or weeks
to a matter of hours.
d. Even with the use of an Internet negotiation, however, there will still
be a final contract negotiations process with the successful bidder.
e. Internet negotiations work best when there are atleast three or
more suppliers whose products are broadly similar in the structure,
size and nature of the organization.
f. If a large organization has relatively high spend on any product or
service with a number of suppliers, internet negotiations would be a
technique worth considering.
• In a situation where there is only one viable supplier to consider, the best
approach is to negotiate directly with them instead of routing through an
RFP route.
5. Negotiation and Selection of Suppliers:

Negotiating is very crucial step in the process of global procurement.
Important aspect here is availability of information and development of the
negotiation strategy. Following are some of the important activities
involved in the negotiation and selection of suppliers:
a. Setting up of the negotiation team – the team may comprise of

technical experts, finance and accounts, senior authority, observer,
user function and procurement manager.
b. Understanding the bargaining position of the organization and

determine most desired outcome (MDO), least acceptable agreement
(LAA) and best alternative to a negotiated agreement (BATNA).
c. Identification of negotiation drivers.
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d. Identification of concessions the organization is willing to give.
e. Organization should never concede anything without getting

something from the supplier in return.
f. Thinking about the supplier’s objectives and consider the same in the
negotiation process.
g. Understanding the supplier’s negotiating position.
h. The negotiations process may require several meetings with each of

organization’s potential suppliers before the buyer comes to an
agreement.
• The organization needs to remember that everything is negotiable. The

organization can enter into various types of contracts as follows:
a. Fixed Price Contracts: Most favoured contract method as the price is

set and there is no room for further increase in the prices. Any cost
increases affects adversely the profitability of the vendor and not that of
the buyer.
b. Cost Plus Contracts: In the “Cost Plus” arrangement type of contracts,

all allowable costs are reimbursed to the supplier. Additional fixed
amount or a percentage based fixed fee is paid as a contribution
towards the profit of the supplier.
c. Time and Materials based: Hybrid form of contracts. Contains aspects

of both reimbursable model, i.e., cost plus contract as well as fixed price
contracts.
6. Integrate Suppliers:
If organization decides to work with a new supplier and/or to discontinue

an old one, organization will need to:
(a) Identify any transition issues
(b) Consider the organizational implications and any required
changes
(c) Create new processes and procedures, if necessary
(d) Create a transition/implementation plan
(e) Communicate the changes to organization’s user function
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7. Monitoring of Supplier Market and Supplier Performance:

Once the organization execute the new agreement with suppliers, it is also
important to plan ahead and stay abreast of supply market conditions, so
that next time when the contract is up for renewal organization’s team is
already done part of the groundwork. The new contract/agreement with
the supplier it is important to define state performance metrics like joint
process improvements, quarterly meetings, turnaround time, delivery
times, monthly/quarterly/ annual reports. It is also important to put in
place to monitor supplier performance on a regular basis, and how will the
organization develop relationship with the supplier so that organization has
a foundation to work from next time.
Common Action Points in Sourcing
Some of the important action points are as follows:

1. Planning for the sourcing exercise at least 2 months in advance to
provide adequate time for the procurement activity.
2. The new contract should be executed and signed atleast 2 weeks before
the existing contract expires.
3. Active engagement of the procurement function right at the planning
stage is very crucial.
4. Involvement of an experienced negotiator will add value to the
procurement process.
5. Prior knowledge of the pricing structure across the industry is very vital.
6. Seeking legal advice is appropriate to understand the implications of
important terms and conditions of the contract.
7. In the process of negotiation with a single supplier, demand
management is the key.
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Fiat Global Procurement Model – A Case Study
Objectives of Global Sourcing
The company defined the following key objectives in the process of setting
up a global procurement function:
a. Extreme standardization of models across the globe to facilitate same
level of design, contents, quality levels, robustness and compliance with
the European regulations.
b. Clear identification of internal and external supply chain, i.e.,
components manufactured in-house and components sourced globally/
through outsourced manufacturing.
c. Ensure stable group of supplier throughout the globe.
d. To guarantee cross-plant and cross-market component uniformity and
worldwide efficiency in sourcing worldwide information transparency on
prices, quality and service.
e. Decrease level of vertical integration.
f. Simplification of production arrangements.
g. Reduction of investments in fixed and non-fixed assets.
h. Enhance company’s focus on core activities and development of
distinctive capabilities streamline their purchasing structure and
continue to put strong pressure on suppliers to systematically reduce
costs.
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High Level Implementation Steps to Achieve the Above Objectives
1. Define a family of new models – to facilitate the aggregation of the

models and its component requirements.
2. Creation of worldwide supply chain to manufacture, in different places of
the world. This also reduces the supplier concentration risk.
3. Explore and engage into right composition and mix of sourcing and take
advantage of the cost differentials.
4. Establishment of the organizational learning process.
5. Development of a global supply chain flexibly and efficiently using the
production capacity and the supplier base available in different
countries.
6. Development of a world material flow and world information flow.
3.2 Global Procurement Cycle
Global procurement process can be broken down into various stages. The
key stages are provided as under:
1. Plan for the Procurement: Involves identification of need for goods,

services or works. Develop procurement plan.
2. Formulate the Budget: Ensure availability of the funds for purchase.
3. Requirement specification: Provide clear and accurate specification.

4. Commitments of Funds Available From the Budget: Organize
approval of treasury for allocation of funds.
5. Tender: Ensure the preparation of tender and release of tender

documents.
6. Contract Establishment: Evaluate bids and award of the contract to

the eligible supplier.
7. Contract Management: Once the contract is awarded to an eligible

supplier, entire activity of receipt of goods, services, inspection, review
of quality, review of performance, monitoring and reporting of the
contract execution
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8. Handover of the Contract Management: Once the contract

management reaches a maturity level, handover of the management to
regular operations. Periodic review of the supplier performance and
annual supplier evaluation.
3.3 Procurement Methods – Special focus on Project

Procurement and Purchasing through Tendering process
In global procurement, various methods can be deployed for optimizing the

process. Some of the important methods applicable to the tendering
process is provided as under:
1. Request for Quotation (RFQ): The most standard process across the
globe in RFQ. The RFQ process involves requesting and obtaining three
(generally procurement department across corporates require 3
quotations) written quotes should be used for purchases worth less than
the value defined by the management.
2. Public Tender Process: Public tendering process is followed by most

of the government entities for procurement of goods/services beyond a
particular limit defined by the management.
3. Tender by Pre-qualification: A standard process of limited tender by

pre-qualification can be used when the technical complexity or the high
value involved require a prior assessment of the financial, commercial
and technical capacities of the bidders or suppliers. The pre-qualification
process can take place at any time on application by a potential supplier
or business. Where a pre-qualified list of bidders or suppliers has been
made, limited tenders are invited from one or more suppliers using a
quotation process.
4. Restricted Tenders: It is a process of restricted tender can be used

when the time and costs necessary to examine and assess a large
number of bids are much higher than the small amount of goods,
services or works to be procured. It is generally directed to registered
suppliers who are already known to have the capacity needed.
5. Procurement Only by Negotiation: In exceptional circumstances, the

entity of the organizations may need to directly shift to negotiation,
especially of urgent/emergency purchases.
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6. Agreement of Standing Offer: This process of standing offer

agreement entails approaching a pre-qualified/pre-registered supplier
listed on the supplier’s registry and inviting them to provide an offer in
response to a prospective supply requirement. The supplier would
commit to make their offer valid for a specified time period. Such offer
is also referred to as standing offer agreement. It is at the option of the
procurement function to avail the standing offer as per the requirement
of the organization.
Use of Exemptions from the Normal Procurement Process
In the process of global procurement, organization define a detailed

procurement policy and standard operating procedure manual. At times,
procurement department is under business pressure to purchase and
without complying the operating procedure requirements. Some of the
exceptions are provided as under:
• Matters of urgency, matters considering the health and safety or
concerning life
• Absence of competition in the materials and services required by the
organization
• Unavailability of reasonable alternative or substitute goods or services
• Trial procurement, research and development related procurement
Often, the exceptions require approval of the management of different

levels.
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Important Rules and Conditions for the Tender Process in the

Procurement Activity
The rules governing the procurement of the tender needs to be

documented and followed by the organization. Some of the important rules
are provided as under:
1. Document restrictions on the eligibility of parties to bid against the
tender issued.
2. Objectives for the tendering process to be defined.
3. Scope, content and format required of bids, should be formulated.
4. Essential requirements of bids or bidders, for instance any skills or
experience, technical requirements which the bidder must have to
participate in the tendering process needs to be defined.
5. Desirable requirements of bids or bidders which would be advantageous
for the procurement process and the organization.
6. Defined and documented the criteria against which bids are to be
evaluated.
7. Deadline for the submission of bids, and the location for lodging them.
8. Adequate procedures for managing late submissions by the bidders.
9. Defining what can constitute as non-conforming bids and procedures for
managing such bids.
10.Formulating procedures for handling day-to-day contacts procurement
team (managing the bids) and bidders.
11.Definition of other procedures governing the provision of information to
bidders, including any confidentiality arrangements, procedures for
variation in bids before execution.
12.Developing procedures for maintaining the confidence of bidders that a
decision to terminate a process will be taken with due care.
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Checklist for Procurement through Tendering Process
Components Explanation
General Information • User function representation

• Responsible and Accountable staff from the
procurement team
Procurement Requirement • Brief requirement and title of the project, e.g.,

Title maintenance of equipment, turnkey project,
installation of machinery, etc.
Background of the Project • Brief background of the procurement

requirement
• Some information for the bidders
Objectives • Outline the key objectives of the project
Steps and Timelines • Detailing of the key steps and outline of the
project timelines
• Defining key milestones is advisable
Procurement Team • Name, title and role of the procurement team

from the buyer organization.
• The procurement team may consists of Project
Manager, Team member, Commercial Adviser,
Legal Adviser, technical expert of the panel, etc.
Responsibilities of the • Identification and definition of responsibilities of

Tender Evaluation Team the tender evaluation team. The key
responsibilities may include the following
aspects:
❖ Evaluation of the procurement responses
according to the tender evaluation criteria.

❖ Testing and verification of the claims
made by the suppliers/service providers

participating in the tendering process.
❖ Preparation of the initial documents.
❖ Proposing any variations in the initial
tender documents.
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Key Requirements/ • Defining how the effective competition will be

Compliances to be Ensured achieved
• Methods that will be adopted for the tendering
process, e.g., RFP, Standing offer agreement,
etc.
• Methods adopted to achieve consistency and
transparency in the process.
Costs of Tendering • Defined costs for the potential tender

participants.
Query Handling and • Contact and other details of the desk handling
Responses and responding to the queries related to
tendering process.
Briefing Meetings • Dates and other details of the supplier meetings.
Security and • Process for receipt of tender

Confidentiality • Date of opening the tender and procedure to be
followed for ensuring adequate security and
confidentiality
Managing Conflicts • Process to identify and declare areas of potential

conflict for the suppliers responding to the
tender.
Notifications • Notification for shortlisting and its timelines

• Notification of unsuccessful tenders
Table 3.2
3.4 Supplier Selection and Evaluation Process
Evaluation and selection of supplier is the most crucial event in the entire
global purchasing cycle. The manufacturing or user function needs to have
a supplier who is reliable and keeps promises in order to maintain an
efficient production. Some of the important steps involved in supplier
selection are as follows:
a. Screening: Screening of the suppliers starts with a sourcing request

from the organization that initiates a finding process in order to find
potential suppliers. The sourcing request could contain finding a supplier
that could provide the sourcing company with material in order to
produce a special product. Another initiator could be that the
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manufacturer is dissatisfied with the current supplier and needs to find

another one to cover the needs. The screening process can be further
broken down into the following sub-steps:
1. General and preliminary screening: This step consists of evaluation of

supplier on the basis of financial statements and other factors which
may include the past performance of supplier with similar customers,
environmental issues, compliances, etc. In this stage, the objective of
the buyer is to evaluate whether the potential supplier will be suitable or
no. If supplier fails at this stage of evaluation, no further assessment is
conducted and supplier may be outright rejected.
2. Further screening: Once the supplier passes the initial screening

process, the additional evaluation can be performed. In order to do this,
the material manufactured by the supplier is being tested and evaluated
in order to find out if the physical product is suitable for the production
or not at the buyer organization.
3. Specific screening: In the last step of the screening, the supplier is

evaluated on specific aspects related to material or services required by
the organization. The potential supplier will be evaluated in more detail
and will be given scores on the basis of a pre-determined criteria. Post
the screening process, the supplier with the best overall scores will be
selected and will supply the sourcing company as per the need of the
buyer.
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3.5 Supplier evaluation criteria
The buyer organization can evaluate the supplier on various parameters.

Some of the important parameters can be as follows:
Component Sub-criteria
Performance Assessment Shipment
Delivery
Cost
Human Resources Number of employees
Organizational structure
Training
Number of technical staff
Quality Management Systems Management commitment to quality
Inspection and control
Quality planning
Quality assurance
Manufacturing Expertise and Production capacity

Capability
Maintenance process and upkeep
Lead-time management
Up-to-date processes
Storage facilities
Product research and development
Business Specific Criteria Reputation of the supplier
Location of the supplier
Price offered
Patents and products available
Technical capabilities of the supplier
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Information Technology Connected to Internet across locations
Information technological compatibility
3.6 Supplier Development in Global procurement
In global sourcing, it is very crucial for the buyer organization to focus on

supplier development activities. Development of suppliers can be defined
as follows:
• Supplier development is defined as any set of activities undertaken by a

buying firm to identify, measure and improve supplier performance and
facilitate the continuous improvement of the overall value of goods and
services supplied to the buying company’s business unit.
• Supplier development is as any activity that a buyer undertakes to

improve a supplier’s performance and/or capabilities to meet the buyer’s
short-term or long-term supply need.
• Supplier development is a procedure by a company to help improve its

suppliers’ capabilities. More specifically, it may be interpreted as a firm’s
attempt to transfer (or replicate) some aspects of its in-house
organizational capability across firm boundaries.
Supplier development generally refers to efforts made by procuring firms

to improve their suppliers’ performance and capabilities, which focus on the
strategies and activities the procuring firms adopt. The starting point will
be reviewing suppliers’ performance in order to identify which ones need to
be improved, and to ensure that the investment and efforts are worthwhile.
Supplier Developmental Activities
Supplier developmental activities are dependent on the buyer firm’s

objectives. Some of the initiatives through the suppliers can be developed
are as follows:
• Considerable time and financial investments in supplier’s manufacturing

capacities
• Training
• Supplier assessment and incentive program
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Number of initiatives can be further segregated into following main

category of initiatives:
• Direct involvement of the firm,
• Providing incentives, and
• Ensuring enforced competition.
Let us evaluate the above categories in further detail.
Direct Involvement of the Firm is a kind of relationship where a buying

firm is actively involved in its suppliers’ development processes, which
entail investments and affords in order to achieve improvements. Some of
the sub-activities involved in this category are as follows:
1. Buyer creates specific developmental plan for the suppliers based on its
procurement plan and the potential of the suppliers.
2. Supplier site visit by purchasing firm premises help supplier to improve
its performance, when viewing the process and estimating its
advantages and disadvantages.
3. Inviting supplier personnel to the company’s site to increase its
awareness of how its product is used.
4. Motivational development can be achieved through consideration of the
recognition of suppliers performance and providing appropriate
incentives
5. Use of supplier certification programs in order to certify supplier’s
quality, making incoming inspection unnecessary is implemented by
many buying firms.
6. Buyer firm can contribute to its supplier’ development by providing
trainings and education.
Thus, direct firm involvement activities include formal supplier evaluation,

feedbacks, supplier site visit, inviting supplier personnel, certification
programs, award programs, supplier verbal or written request, top
management involvement, trainings and education programs.
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Provision of Incentives to Suppliers
In this type of supplier development programs, following could be some of

the features:
a. Supplier and a procuring firm agree upon particular current and future
benefits, which they both expect from being involved in these
relationships.
b. Buying firm commits only if a supplier improves, motivating supplier to
improve performance.
c. To encourage suppliers to develop, the firm may give such promises as
to purchase of large volumes from particular suppliers.
d. Preference treatment to suppliers, when other suppliers provide with the
same kind of product.
e. Proactive consideration of some of the suppliers for future business
activities, etc.
However, it is very important to understand that in such relationships the

buyer firm is committed to give particular benefits to the suppliers only if
they improve their performance and deliver as per the expectations of the
buyer.
Enforced Competition Process
In this kind of association with the supplier, importance is not given to

trust, continual commitment, proactive support and sharing of risks. The
key feature of such relationship is to motivate suppliers through the
competition.
Some of the features of enforced competition process are as follows:

• Choosing the right suppliers is very crucial through competition to
prevent serious quality defects.
• No commitment with the suppliers and a purchasing firm is not directly
involved in the supplier’s efforts to improve their performance.
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• In such kind of process, when a buying firm is not satisfied with the
supplier, regarding its price, location, delivery timelines, quality of the
product, behaviour, it may switch the supplier.
Collaboration with Suppliers in Global Sourcing
Collaboration in buyer-supplier relationships has a far-reaching impact on

the purchasing performance. It is one of the crucial area in the global
sourcing arena. Over a period of time, it has generated interest for
redefining the buyer-supplier relationships. Collaboration is the key.
Some of the important benefits that are likely to be realized in a

collaborative buyer-supplier collaborative relationships are as follows:
• Short-term benefits: Reduction of inventory risks and costs as well as
warehousing, distribution and transportation costs.
• Long-term benefits: Cost reduction through increased productivity as
well as streamlined business processes in procurement and purchasing,
timely order fulfilment, prudent management of receivable and payable
accounts and greater level of confidence in exception management.
Measuring the Benefits of Collaboration
The buyer-supplier collaboration should reflect in the top-line (revenue)

and the bottom-line (profitability) of both the entities over a period of time.
Some of the measures can be as follows:

• Enhanced Focus on Innovation: As a success factor in terms of
reduced R&D expenses in combination with the product and process
improvement level.
• Purchasing Cost Reduction and Benefits Realized in Total Cost of
Ownership: As a success factor containing communication,
transportation and ordering costs.
• Financial Performance: As a success factor including the return on
assets and the return on sales for the collaborators.
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3.7 Entering into a formal contract with supplier – a global

Sourcing perspective
Documenting the key terms and conditions through a formal contractual

arrangement is an important process in the global sourcing space. The
following are the key terms that should be included in the contract or
purchase order with the supplier:
1. Rights and obligations of both the parties

2. Process of invoicing and payments
3. Applicability of audits, if any
4. Delivery terms
5. Scenarios that may lead to cancellation of purchase order/
contract
6. Quantity and quality conditions
7. Transfer of title
8. Incidence of loss in case of goods in transit
9. Insurance and claim process
10. Applicability of various taxes – Local, Regional, Export and
Import
11. Representations and warranties
12. Indemnification by the supplier
13. Limitation of liability of the vendor/customer
14. Use of copyrights and trademarks
15. Confidentiality of information
16. Conditions and scenarios of force majeure
17. Compliance with respective laws and regulations
18. Governing law and jurisdiction
19. Resolution of disputes
20. Escalation matrix and process applicable
21. Compliance to the ethical purchasing guidelines of the buyer
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Models of International Sourcing
Broadly, six reasons which drive the organizations to source internationally.

These are:
1. Increasing level of competition and pressure on prices
2. Constant pressure on the business to reduce the costs
3. Businesses need to be very flexible in term of manufacturing capacity
4. There is need to further reduce the product development cycles
5. Customer need and emphasize very stringent quality standards
6. Technological advancements across the globe can make some of the
products technologically obsolete in certain geographies. There is a need
for exploring newer technologies.
Case Study on International Sourcing – Toyota Global Sourcing

Operations
Toyota’s global sourcing operations is a classic case of true implementation

of global sourcing strategy. To begin with, the Japanese car manufacture is
equipping its operations in the United States, Europe, and Southeast Asia,
i.e., across the three continents with integrated capabilities for creating
and marketing automobiles. The company gives the global sourcing
managers at those operations ample authority to accommodate local
circumstances and values without diluting the benefit of integrated global
operations. This also ensures that the local understanding and the
knowledge of the global procurement manager is effectively utilized.
Thus, in the United States, Calty Design Research, a Toyota subsidiary in

California, designs the bodies and interiors of new Toyota models with
constant focus on Research and Development. The company also has
technical centers in the United States and in Brussels to adapt engine and
vehicle specifications to local needs. This also ensures that the company
considers the local requirements and accordingly suitably performs the
modifications to the production process.
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Toyota operations centre that make automobiles in South-East Asia supply

each other with key components to foster increased economies of scale and
standardization in those components—gasoline engines manufacturing in
Indonesia, production of steering components in Malaysia, manufacturing
of transmissions in the Philippines, and production of diesel engines in
Thailand. In this process, Toyota has ensured that local expertise of
respective geographies is fully leveraged. The procurement strategy has
gone a long way to ensure that it procures the best of the components
from external or internal vendors through creation of group companies
across the world and provides best value to the end consumer.
Toyota has also started developing vehicles in Australia and Thailand since
2003 which also demonstrates that the corporation. These new bases
develop passenger cars and trucks for production and sale only in the Asia-
Pacific region. The Australian base is engaged mainly in designing cars,
whereas the Thailand facility is responsible for testing those cars.
3.8 Global Sourcing Models
From a contracting perspective, firms may follow different sourcing models.
Some of the models which the companies follow are as follows:
• Parent to Subsidiary – Intra-Firm or Intra-Group Procurement

Model: The intra-firm procurement can be further segregated into
domestic and international. In domestic in-house sourcing, a
company procures major components in house by producing them
domestically. In offshore subsidiary sourcing, a company procures major
components from its foreign subsidiary.
• Sourcing from Independent Suppliers – Outsourcing: The

outsourcing can also be broken down into the primary two segments
which include engaging into domestic purchasing agreement where a
company buys major components from independent suppliers at home.
Offshore outsourcing where company buys major components from
independent suppliers overseas. For example, Apple, Dell, and Gateway
outsource 100 percent of their Laptop computers from Quanta Computer
Inc., a Taiwanese company and the world’s largest maker of Laptop
computers. Dell Computer alone accounts for half of Quanta’s sales.
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3.9 Impact of Brexit on Global Supply Chain, Procurement

and Outsourced Manufacturing
Britain’s exit from the EU is now the buzzword among the hoi polloi. The
event has created ripples among all sectors, with automotive, financial
services, chemicals & plastics, and food & beverages being some of the
worst-hit sectors. This is due to the impact on the supply chain caused by
potential changes in trade arrangements within the Europe and the U.K.
The food & beverage industry is one of the largest sectors in the U.K.,
accounting for more than 16 percent of its total manufacturing revenue.
Labour Issues
Creative and digital marketers are watching these developments with bated
breath. Both the industries collectively account for about 13 percent of the
U.K.’s GDP. It is interesting to note that among the 400,000 people
employed in the sector, about 130,000 are non-U.K. nationals. This is a
presage to the soon-to-be labour shortages in the region. This will impact
businesses, as the marketing talent majorly flows in from the European
countries. About 57 percent of the marketing talent comes in from the
European region, while the remaining based out of the U.K.
Declining Ad Spend
Marketers, especially in the food and retail sectors, are slashing ad spend
due to Brexit and increasing inflation in the region. According to IHS Markit
and IPA, about 80 percent of the companies in the region have frozen or
reduced their media budgets in the third quarter. However, the companies
are investing in digital media channels at the expense of traditional media.
There has been a net 17 percent increase in the spending on digital
channels, whereas the spend on traditional channels including TV and radio
witnessed a net balance of 0 percent increase in the budgets in comparison
to 9.8 percent during the second quarter.
According to the U.K. Advertising Association, about 36 percent of the

clientele in the industry does not belong to the U.K. and accounts for 40
percent of the revenue. It is also imperative to note that half of the
workforce in London’s advertising industry flows in from overseas.
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With the Brexit headache looming large, companies are revising their
strategies to stay afloat. The businesses are more likely to abandon the
product & service developments, reduce supply chain costs, staff
recruitment, change in location, etc. The Institute of Practitioners in
Advertising reported that about 70 percent of the marketers have withheld
their advertising spend. Lower sales and a desire to keep costs down also
contributed to advertisers freezing their budgets.
Shortly, after the result of the referendum, Nestle announced its decision
to move the production of its Blue Riband chocolate bar from the U.K. to
Poland. The decision was made in view of increasing import costs and the
uncertainty due to Brexit.
Unilever, on the other hand, selected the Netherlands as its global

headquarter over London. The move is likely to keep Unilever’s
headquarter within the EU, post the U.K.’s departure from the bloc. The
organization’s new base in the Netherlands would enable free cross-border
flow of the labour.
Coca-Cola, the soft drinks giant, has also announced the closure of their
manufacturing sites in Milton Keynes and their distribution center in
Northampton. The decision has been made to improve productivity and
develop greater efficiencies in the current situation. Procter & Gamble is
slashing its TV ad spend in the U.K. due to Brexit and currency pressures.
On the other hand, Unilever is also making changes to the structure of the
company from dual governance to single entity.
Marketers based in Europe are reassessing their advertising spend, shifting

their locations and closing manufacturing units to stay afloat in the Brexit
situation. Brands need to strategize on where and how to spend on
advertising during Brexit. Marketing procurement needs to be on its toes
while doing media reviews and changing media agencies.
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3.10 Use of Free Trade Zones (FTZs) in Global Sourcing
A Free Trade Zone (FTZ) is an area located within a nation (say, India) but
is considered outside of the customs territory of the nation. The use of
FTZs has become an integral part of global sourcing strategy as they offer
various tax benefits and marketing flexibility on a global basis. Many
geographies/countries also have FTZs. For example, in the United States, a
free trade zone is officially called a Foreign Trade Zone. FTZs are licensed
by the Foreign Trade Zone (FTZs) Board and operated under the
supervision of the Customs Service. The level of demand for FTZ
procedures has followed the overall growth trend in global trade and
investment. Presently, some 700 FTZs are in operation and, as part of their
activity, about 540 manufacturing plants are operating with subzone
status. Subzones are adjuncts to the main zones when the main site
cannot serve the needed purpose and are usually found at manufacturing
plants.
Annexure – Limitation of Liability Related Regulations in United

States
Limitation of vendor/contractor’s liability is also governed by laws in

respective country. The United States alone has different laws across
various states.
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Following table highlights the differences.
State Rule Applicable for Limitation of Liability in Contracts

Alaska The contractor’s liability for damages to the state for any cause
shall be limited to the greater of $100,000 or the purchase price
of the specified equipment which caused the damage or that is
the subject matter of, or is directly related to, the cause of action.
Arkansas Cannot indemnify any party for liability or damages
California The contractor’s liability for damages to the state for any cause
whatsoever, and regardless of the form of action, whether in
contract or in tort, shall be limited to two times the purchase
price.
District of There is not a standard limitation on liability, but the District of
Columbia Columbia does grant limitations on liability to vendors on a case-
by-case basis.
Illinois Case-by-case basis, usually 100% of contract value.
Iowa No more than 150% of contract maximum.
Montana The contractor’s liability for contract damages is limited to direct
damages and further to no more than twice the contract amount.
The contractor shall not be liable for special, incidental,
consequential, punitive, or indirect damages.
New Jersey New Jersey does have limitations on liability and the terms start
at 500% and have been negotiated down to 200% at times. This
is on a case-by-case basis.
West West Virginia is unaware of any liability limitations for IT
Virginia contracts.
Wyoming Wyoming does not have limitations on liability included in the
boilerplate contracts.
Table 3.3
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1. Select any large automotive company or Fast Moving Consumer Goods

(FMCG) company and analyses their global sourcing model.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
2. Select an emerging economy or geography, e.g., China, Philippines and

India and understand the factors impacting development of suppliers in
those geography.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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3.12 Summary
Global Sourcing Process is one of the important strategic component of the

business. The process commences from development of the supplier profile
based on various criteria and at the close, it focusses on the periodic
evaluation of the suppliers. The organization needs to understand global
procurement cycle which starts with planning and over a period of time
ensure supplier empowerment to become an integral part of the business.
While selecting various methods of procurement, most common is
tendering and auction. The methods results into high level of competition
among the competent suppliers and generates a best possible value
addition for the buyer organization. It is also crucial that organization
adopt a robust supplier selection and evaluation technique and process.
Further, the organization also needs to identify suppliers who have
potential to become a strategic business partner in the long run. Such
suppliers should be segregated from the transactional suppliers and right
investment of supplier development should be done. It is also crucial for
organization to enter into a formal agreement or contract with the
suppliers. One of the important clause which the organization should be
paying attention is the limitation of liability of the suppliers. This clause
defers from geography to geography and in times of distress, it is possible
that organization may find itself at risk and may have to suffer the loss of
supply chain disruption without any fallback option. It is critical for
organizations involved in global procurement to understand the
implications of Brexit on their respective procurement strategies. It is
crucial for organizations to formulate an alternate plan.
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1. Explain, in detail, the key steps involved in the strategic sourcing

process.
2. ABC Limited is keen to develop a robust supplier portfolio. You are
required to highlight and explain the important factors which the
management of ABC Limited should consider while developing the
supplier portfolio.
3. Write a short note on Global Procurement Cycle.
4. Highlight the important methods which can be adopted by organizations
for sourcing through tendering approach.
5. Explain the criteria to be adopted for selection and evaluation of
suppliers.
6. Highlight the important benefits of collaborating with suppliers as a part
of global sourcing strategy.
7. Write a short note on important models of global sourcing followed by
MNCs.
8. Explain the importance of limitation of liability clause and its
implications on the buyer in global sourcing.
9. Explain the key implications that events like Brexit will have on global
procurement related risks.
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1. Which of the following clause is most important to be evaluated by

global sourcing manager in the process of entering into contract with
the supplier?
(a) Rights and obligations of both the parties
(b) Billing timelines
(c) Applicability of audits
(d) Order processing TAT
2. Which of the following is least likely to be a benefit of providing

incentives to suppliers for better performance?
(a) Preferential treatment to buyer
(b) Increased Total Cost of Ownership
(c) Deterioration in quality
(d) Higher involvement of the suppliers
3. Which of the following is not a supplier development initiative?

(a) Training to supplier
(b) Offering higher price
(c) Supplier incentive program
(d) Engagement on technical process
Answers: 1. (a), 2. (c), 3. (b).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
96
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
Chapter 4
Changing Role of Procurement Function and
the Emergence of Global Sourcing Manager
Objectives

• Understand the global developments and evolving role of the Global
Sourcing Manager
• Role and responsibilities of the sourcing manager
• Gain a high level view of the procurement function
• Understand the various levels of maturity of a global sourcing function
• Understand the emergence of a CXO Role – Chief Procurement Officer
(CPO)
• Understand how the supply chain analytics can be deployed by the global
sourcing manager
• Understand the process of performing health check of the procurement
function
• Identify and understand the factors to be considered by Global Sourcing
Manager while pursuing the procurement
• Understand the key difference between the traditional role and the
emerging new role of the global sourcing manager
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Structure
4.1 Evolving Role of Global Sourcing Manager
4.2 Emergence of New Role and Responsibilities – Key Positions in Global
Sourcing Organization
4.3 High Level View of the Procurement Function
4.4 Levels of Global Procurement Function Maturity
4.5 Emerging CXO Role in MNCs – Chief Procurement Officer (CPO)
4.6 Supply Chain and Global Sourcing – Analytics
4.7 Health Check of Global Sourcing/Supply Chain Function
4.8 Factors Which a Global Sourcing Manager Should be Aware While
Pursuing International Procurement
4.9 Managing Specific Aspects and Expectations in International
Procurement – Traditional vs. New Strategic Role
4.10 China V/s Africa- A Perspective on Global Sourcing and Outsourced
Manufacturing
4.12 Summary
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4.1 Evolving role of global sourcing manager
The Global Sourcing Manager has multi-dimensional role to play in an

organization. His has duties towards the internal aspects of the
organization as well as external aspects. The internal duties of a
purchasing manager are:
1. Collaboration with the internal network

2. Making operating purchasing decisions
3. Definition of purchasing strategies
4. Formulate and organize the boundary interaction
The external duties of a purchasing manager includes:

(a) Ensure collaboration with the external network
(b) Effective management of supplier relationships
(c) Coordination of joint activities
(d) Periodically monitor, evaluate and develop suppliers
The trends in global sourcing affecting the evolution of role of global

sourcing manager are:
i. Increasing strategic role of purchasing in corporate policy across
number of multinational organizations.
ii. Shift towards more centralized control and establishment of global
procurement companies/business set-ups.
iii. Continual effort towards decreasing number of suppliers.
iv. Focus over entering into long-term contracts instead of transaction
based procurement.
v. Use of category management/functional management in the
process of global procurement - buying groups organized around
end items rather than commodities.
Sourcing managers need to be experts who help make the sourcing

process of a company or institution more efficient. They do this through
building relationships with suppliers, negotiating cost and developing
agreements that ultimately help a company grow and become more
profitable.
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4.2 Emergence of new role and responsibilities – Key

Positions in global sourcing organization
Corporate • Responsible for development of corporate purchasing

Procurement Officer strategies, systems and reporting
(CPO) • Provides overall guidance to various buyers
Corporate Buyer • Manages Strategic commodities – large volumes, high
investment projects and services
• Responsible for developing sourcing strategy for key
commodities
• Focus on long range planning horizon
Purchasing Engineer/ • Explores new materials and components
Technical Expert • Identifies and supports development of new suppliers
• Discusses and evolves new specifications
• Performs market research, assists in selection of
suppliers and negotiations.
• Often work on a decentralized level
• Important single point of contact of liaison between
purchasing and R&D function
Project Purchaser/ • The Project Buyer holds similar responsibilities except
Buyer that the key focus of buying is on equipment and
capital goods
Material • Role involves materials planning and ordering
Management/ • Order handling – ensuring material supply, calling off
Planner materials against annual agreements
• Vendor rating – monitor and control suppliers quality
and delivery performance
Table 4.1
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4.3 High Level view of the Procurement Function
Procurement Function increasingly is considered to be enabler of business

strategy. It also drives sustainable methods of continual cost reduction
exercises. What can be expected from the ever evolving global
procurement function? The important expectations of the Top Management
and the Board of Directors is provided as under:
• Spend Map and Its Visibility: The procurement function is expected to

have a detailed spend map across entire organization and preferably the
same needs to be updated quarterly or other periodic intervals defined
by the management. Mapping spend and periodically updating the map
will provide the procurement function invaluable insights. Some of the
important insights can be as follows:
1. Knowing the total quantum and what total spend of the organization is
2. Knowing who is spending and on what activities/purposes
3. Identification of vendors supply multiple business units
4. Identification of business units that buy the same or similar goods and
services across the globe
5. Knowing what portion of organization’s spend is with the core suppliers
(e.g., top 10 suppliers)
6. Having information about the total number of one-off and small value
transactions suppliers
7. How many transactions organization processes and what is the
associated administrative cost of such transactions.
• Driver of Savings: Procurement function is seen to be a driver of
sustainable savings (proving perspective of when, where,why and how)
across the organization.
• Cost Reduction Across Value Chain: The function is expected to be
engaged with the wider organization to understand how procurement can
reduce costs across the value chain in the organization globally. The
necessary factors which should be considered here are:
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1. Eliminating demand where applicable and opportunity exists

2. Reviewing volume requirements of the organization
3. Achieving reduction in the demand frequency
4. Evaluating alternatives to filling need
5. Encouraging reuse
6. Simplifying and/or standardizing the product/service specification and
7. Reducing portfolio range and complexity.
• Realization of Value: The procurement function should ensure that the
value is realized through robust contract management and supplier
relationship management frameworks which are operationalized across
the organization.
• Optimizing Commercial and Technical Capability: The global
procurement function is expected to deliver procurement within an
operating model that connects commercial and technical capability to
drive optimal client outcomes.
• Formulation and Implementation of Robust Contract and Supplier
Relationship Management Framework: Over a period of time, the
Procurement Function is expected to build a robust contract and supplier
management framework. Number of times, large organizations fail in
implementation of a good contract and supplier management framework.
Some of the key reasons for failure include:
1. Excessive focus and time spent in managing transactional suppliers and
inadequate attention to suppliers of strategic importance.
2. Issue based management for key suppliers and informal mechanism.
3. Late involvement of legal team. Only after a legal issue arises.
4. Lack of continuous improvement program as a part of supplier
management framework.
5. Lack of periodic conversations with strategic suppliers on various
aspects related to procurement.
6. Inability to identify supplier and assess on various aspects like financial
stability, performance on ethics, quality control standards, technical
capabilities and experience in the business value chain.
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4.4 Levels of Global Procurement Function Maturity
The Global Sourcing/Procurement Function can evolve over a period of time

from just being passive, to an independent function and further maturing
to supportive to the business and reaching highest level of maturity of
integrative function. Thus, the four stages are:
• Passive
• Independent
• Supportive
• Integrative
The characteristics of the procurement function is provided as under:
Passive Procurement Function

1. Lack of strategic direction
2. Function as a reaction to the requests of other departments
3. Time spent on quick fix, routine, trivial and transaction oriented
operations
4. Selection of supplier is purely based on price and material/service
availability
5. More focused on efficiency and timely purchasing
6. Very limited amount of inter-functional communication
7. Very low visibility of the procurement function in an organization.
Independent Procurement Function

a. The Procurement Function deploys latest purchasing techniques and
practices.
b. Strategic direction is, however, independent of the firm’s competitive
business strategy.
c. Performance of the function is largely evaluated on the basis of cost
reduction achieved and efficiencies gained.
d. Good level of coordination links exist between purchasing and technical
departments.
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e. Top management of the organization fully aware and recognizes the

importance of professional development and opportunities that exist in
the procurement function which contribute to the profitability of the
organization.
Procurement as Supportive Function

i. The procurement departments provide active support to the
organization’s competitive strategy by implementing innovative
purchasing techniques and practices.
ii. The actions of procurement function strengthen the competitive
positioning of the organization.
iii. Representatives from the purchasing team often are part of the sales/
proposal teams.
iv. Suppliers/vendors are looked at from the perspective as a business
resource/partner. Those vendors are carefully selected and continually
motivated to excel.
v. The procurement function continuously monitors the markets, products,
vendors and other clues from the business.
Procurement as an Integrative Function

• The Procurement Function is completely integrated into the organization’s
competitive strategy.
• The Procurement Function is one of the key contributor to the strategy
development process.
• Permanent lines of communication exist between other key functions and
the Procurement Function.
• Performance of the Procurement Function is clearly linked to the strategic
outcome and contributing factor to the organization’s success.
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4.5 Emerging CXO role in MNC’s – Chief Procurement

Officer (CPO)
Considering the strategic importance of the procurement functions,

organizations globally has seen an emergence of a CXO role, often
designated as Chief Procurement Officer and responsible for number of
strategic and policy matters related to global sourcing. Some of the
important responsibilities a CPO is expected to deliver are:
1. Achieving financial objectives through cost reduction, purchase price
variance, sourcing from low cost markets.
2. Re-engineering business process and supply chain to increase efficiency
and effectiveness.
3. Satisfying business needs in delivery time and quality thereby meeting
the business objectives.
4. Managing outsourcing activity and delivering contracts, identify and
develop new avenues for sourcing.
5. Managing and enhancing the purchasing system, organization and
policy, promote deployment of technology.
6. Guaranteeing quality of purchase at all times.
CPO need to have competencies across diverse areas of management.

Some of the key competencies will include:
(a) Information Management and Technology Enablement

• Focus on innovation
• Ensure seamless integration with business processes
• Managing complexity of business
(b) Task and Process management

• Organizing skills
• General business management skills
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(c) Interpersonal skills

• Networking
• Developing relationship and engagement
• Influencing skills
(d) People management

• Motivating and driving the performance
• Directing the team to achieve the business objectives
The Chief Procurement Officer (CPO) should essentially have the following
traits:
(i) Trading skills and street smartness
(ii) High level of logical thinking capability
(iii) Attention to details
(iv) Thought leadership
(v) Ability to share and socialize ideas
(vi) Self confidence
(vii) Charismatic personality
(viii) Ability to look at leverage, often useful for negotiations
(ix) Extrovert
(x) Appreciation of simplicity and common sense
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4.6 Supply Chain and Global Sourcing – Analytics
The Global Sourcing Manager or Chief Procurement Officer needs to be well

versed with supply chain and procurement analytics. Some of the areas
where analytics are very important are:
• Spend Analytics: The CPO can have the data from the procurement
system/ERP pulled out and perform analysis. There is need to be able to
interpret it, understand what it means, and determine the right potential
opportunities and courses of action arising. The analysis of data can
provide inputs for drawing out a good and implementable procurement
strategy.
• Market Analysis: Availability of big data is providing ample opportunity
to CPO for performing analysis of the market and come out with
meaningful analysis.
• Negotiation: Availability of information and performing analysis for
input to negotiation and seeking the best price and terms available in the
market.
• Selection of Supplier and Sourcing: Analytics can be used for
designing evaluation methodologies, determining evaluation criteria and
weights, scoring systems, or balancing cost and qualitative factors.
• Informed Market Sourcing: The most crucial and complex task in
sourcing is increasingly addressed using market-informed or collaborative
sourcing tools and techniques. Organizations have been investing in
analysis of the market and taking very informed decisions.
• Contract Management and Supplier Performance Evaluation:
Availability of the detailed information related to delivery timelines,
quality results, outcome of inspections, rejections, discounts, etc. is in a
way assisting the CPO to perform a meaningful analysis of the supplier
service and periodically evaluate. The parameters used for analysis of the
supplier quality have gone beyond the material quality and price, but the
focus is on multiple factors such as innovation, pro-activeness, customer
centricity, etc.
• Procurement/Supply Chain Risk Management: Analysis is a very
important input risk management. The CPO should analyse the data to
assess the price risk, supplier concentration, unavailability of material,
quality, etc. on the basis of available information. CPO should also use
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analytics for basic risk analysis including review of expected risk events,
their probability and impact.
Types of Analysis
• The global procurement manager can perform some of the following key
analysis and assist the organization to achieve the business objectives:
• Category Analysis: This analysis is performed by the global sourcing
manager to answer the question whether the organization is buying the
same/similar goods and services from different vendors or too many
vendors. Generally, organizations follow three categories based approach
that reflect the business and industry. The categories can be Super
category, Main Category and Subcategory. The category analysis allows
the organization to identify spend leakage issues such as fragmented
purchasing across vendors and across the organization for specific
categories, rogue spend, etc.
• Analysis of Items Procured: Item analysis is performed to know
whether the organization is buying the same item from different vendors,
in different geographies or business units at different prices. The item
analysis allows the organization to focus on fragmented purchasing in the
business and identify spend leakage issues such as purchasing from non-
preferred vendors, fragmented purchasing across the organization and
rogue spending patterns.
• Analysis of Payments: This analysis is performed to understand
whether the organization is leveraging all possible discounts or interest
from the invoice payment process. The analysis of vendor assists the
organization in analyzing the payment practices and terms within the
organization’s procure to payment processes to identify issues such as
unrealized discounts through late payments of invoices or unrealized
interest/cash discounts from early payments of invoices.
• Analysis of Vendors: Vendor analysis allows the organizations to create
different spend profile of the vendors. Vendor profiling will allow the
organization to assess vendor spend by category, organization structure,
item, payment, contracts (where applicable) and historic spend over
time. Analysis of vendors help procurement function to provide a single
view of total organization engagement with a single vendor.
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• Contract Analysis: Contract analysis provides a good perspective to the

procurement function of the compliance levels with the existing
negotiated contract terms. Where contract data is available and used in
organizational finance system, the analysis will help identify spend
leakage through contract over spend and/or contract non-compliance.
4.7 Health Check of Global Sourcing/Supply Chain

Function
For evolution of a successful and performance driven global sourcing

function, it is crucial to periodically perform the health check of the
function. The health check of global sourcing function can be various
aspects which may include:
• Capturing voice of internal customer and external supplier

• Evaluating the financial and non-financial benefits accruing to the
organization
• Ensuring that the procurement function is operationally effective and
efficient
• Ensuring right data and information is available for procurement
decisions
• Risk management and robust compliance framework
Sample global sourcing health check questionnaire provided in the table

below:
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Area Particulars Key Questions

Spend Understanding how and on • How much is the organization
map what the organization spending?
spends • On what activities, services, and
products is the organization
spending?
• Is per unit cost varying significantly?
• How much is the spend associated
with strategic suppliers or top 10
suppliers?
• How many suppliers does the
organization have who supply same
or similar products/services?
Savings Short-term and long-term • Does the organization evaluate the
saving generated by the short-term and long-term saving? Is
procurement function the organization striking a right
balance between the savings?
• Are potential savings part of the
planning, budgeting and forecasting
cycle?
• How effective is the procurement
activity?
• How the organization is tracking the
realized and unrealized benefits/
savings in the procurement function?
Procure End to end management of • Focus of the initiatives just on saving
ment procurement activity costs or saving on total cost of
Value including demand, inventory ownership?
Chain and not just costs • Segregating between desirable or
good to have and what is necessary
for the organization?
• Approach towards the suppliers –
whether collaborative or just a
vendor?
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Contract Realization to the full • Generating the benefits as promised

and potential of the value of by the suppliers?
Supplier supplier relationship • Whether the integration of strategic
Relation supplier with the long-term planning,
ship budgeting and forecasting achieved?
Manage • Whether the organization is occupied
ment in addressing the transactional issues
or looking at business partnering with
suppliers?
Procure Building of the procurement • Is the vision, mission and objectives
ment model on the basis of of the procurement documented?
Model strength, skills and expertise • Does the organization have all
necessary team with technical and
commercial expertise?
• Does procurement function command
credibility in the organization?
Table 4.2
4.8 Factors which a Global Sourcing Manager should be

aware while pursuing international procurement
Sourcing internationally, especially to China and other low cost countries

(LCCs) involves a carefully evaluated strategy and more than just
managing the concept of ‘purchasing’. Global sourcing involves all aspects
related to helping make the product ‘happen’ on time, on budget, and with
quality standards good companies have come to expect.
By signing international sourcing agreements, executives put their name

(and their company) on the line. Decisions to manufacture company
products half way across the globe should be made very carefully. When
sourcing offshore or overseas, more often than not, supplier and buyer
management can be comprised of significantly different cultural
backgrounds. Additionally, foreign management may also have quite
different business objectives and, sometimes, may even employ business
ethics that could be deemed questionable. These factors make the role of
purchasing manager challenging. Some of the important aspects which
purchasing manager/buyer should be aware are as follows:
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1. Familiarize Oneself with Local Social and Business Cultures:

Inadequacy of familiarity with foreign social and business cultures and,
communication issues that surface based on differences, are some of
the important reasons for failure of international sourcing activities fail,
especially in the Asian region.
2. Establish Clear Communication Channels with Functional

Departments and Management Levels: The purchasing manager
must be in a position to be able to address and deal with issues within
the company at the corporate level while developing a cooperative team
to address offshore or outsourcing issues that may arise. If top
management support is not available for any reason, the job of
purchasing manager may become more difficult.
3. Source from within Organization’s Geographic Region, First, if

Internal Prototype and Pilot Production Capabilities Do Not
Exist: Before moving production to low cost regions (like China or other
low cost countries, it is very crucial to understand basic technical
aspects of items and products to be sourced. The key activities which
include supplier qualification (including design, quality, production, and
financial capabilities) visit to potential suppliers at their factory sites
(not supplier corporate offices). This may also involve verification of
relative ISO and other international standard certifications. Additionally,
the process should include potential supplier qualification for
subcontractors (e.g., plastics, metal, and critical components not
manufactured or produced by organization’s direct product supplier).
4. Develop a Working Knowledge of Contracts: The global purchase

manager should be able to negotiate not only price but also payment
terms, return or repair compensation, and safety or buffer consignment
inventories, to mention a few items key to good supplier contracts. The
purchase manager should be well aware of the factory ‘sales’ tour. Many
low cost countries suppliers provide predetermined, well-tuned
customer tours of their facility. Make an effort to get off the beaten path
to see additional areas other buildings or, out back — where scrap is
sorted — to find out what’s really happening. Some suppliers try to
present only the latest high tech portions of their factories that may
have nothing to do with manufacturing processes required by
organization’s products.
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5. Informed About the Phases Involved in the Supplier Selection:

The global procurement manager should work closely with suppliers
from prototype and new product introduction (NPI) through first article
unit inspection and production volume increases. Develop a working
knowledge of product test yields (focus on first pass yield) and
reasonable rates for product field returns. Product export documentation
requirements Freight consolidation, and other aspects of supply chain
management through product end of life (EOL) are also each equally
important to understand. It is a well-known attribute that good suppliers
anticipate problems. For example, from general experience, Japanese
and South Koreans companies are typically good at anticipating
problems. However, many mainland Chinese suppliers may not
anticipate the problems and may act only after the problems is noted at
its peak surface.
6. Engaging Services of Local Sourcing Agents: The global

procurement Manager should be aware of local sourcing agent’s
practices and the tricks of the trade. Employ caution if the decision is
made to use local sourcing agents. Perhaps not surprising, companies
paying the best commissions typically get the best service since
sourcing agents rarely work with one client. Some of the local sourcing
agents in Low Cost Countries may earn a 3% FOB value fee from their
clients and an additional 5% kickback from the actual supplier. Beware
of such practices, as such activities may unreasonably increase the total
cost of purchase.
7. Getting Right the Quality Aspects of the Product Intended to be

Purchased: Inconsistent quality can sometimes be an issue because
documented procedures can be ‘forgotten’ in order to get a shipment
out. If shipping by sea, organization could find itself in a situation with
one to two months’ worth of sub-optimal product quality already on the
high seas en route to buyer’s location.
8. Use of Offshore Sourcing Office: It may become at a point of time,

when it makes sense, to significantly reduce traveling back and forth to
the low cost country/another sourcing location. An offshore sourcing
office staffed with trained managers and staff for purchasing quality
control, production control, product engineering, export documentation
and other functional areas can be appropriate to the solution. This
location may also provide capable product design activity. There is a
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practical limit as to what can be managed effectively and efficiently

throughout the world. While offshore sourcing offices could appear to
help reduce total cost of ownership (TCO), they can also create
challenges for organization.
9. Deep understanding of the International Sourcing: International

sourcing is not just purchasing. The sourcing Managers must understand
the social and business cultural differences of the LCC, the sourcing
office General Manager on the ground in the LCC must understand
culture and business practices, especially those specific to his/her
organization company. Global sourcing managers must have a broad
background across several functional disciplines have access to
corporate resources, and employ a great deal of common understanding
of the international purchasing practices.
International Procurement – Changing Role as a Management

Service
Procurement today is a complex management service, intended to support

the strategic aims of the organization. The global procurement department
has three broad functions:
1. Managing the internal transactions for ordering goods and services. The
function is also responsible to manage the procurement data. The
function here is expected to bring maximum efficiency in the end to end
transaction flow and reporting.
2. Supporting the vendor contracting and management process. The key

activities include identification of vendor, negotiation. Most of the
activities can be tactical and transaction focused.
3. Value based procurement to ensure addition of significant savings and

improvement of the profitability of the organization.
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The advent of internet has created significant level of opportunities to gain

efficiencies in the end to end procurement to payment (P2P) process.
Some of the areas could be as follows:

(a) Automating ordering process
(b) Online bid management systems
The new role which procurement function is expected to manage in the

new age is:
i. Assume increased responsibility for buying non-traditional services, e.g.,
consultancy, legal, audit, training and development
ii. Challenging the requirements assessment of the user functions to better
plan and negotiation with the suppliers/service providers. Also add value
to the business through innovation.
iii. Contribution to the strategy of buying goods and services with high
transaction volumes
iv. Leading and supporting the outsourcing projects
4.9 Managing specific aspects and expectations in

International Procurement – Traditional vs. New Strategic
Role
1. Price Discovery Vs. Value Addition: In international procurement,

more than the price, other aspects like quality, business specification,
lead time, compliances matter. Internal customers often appreciate the
involvement of the global procurement function with the business
verticals.
2. Providing Market Based Solutions: In international procurement, the

aim is to formalize the requirements, remove subjectivity, and bring the
service similar to commodity. Main aim in the international procurement
and also the challenge for the procurement manager is to commoditise
all goods and services. However, the user function may explore
relationship with the vendor who they feel to be quite comfortable with.
The decision making model followed by the user function could be
completely different and off the line in comparison to the usual
screening and evaluation model followed by the procurement function.
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3. Managing Explicit vs. Implicit Contracts: While explicit contracts are

well written and formal, the implicit contracts are created during the
work relationship and based on trust. However, procurement function
unique challenge here is to prevent any circumvention of the formal
buying process by the user function and prevent any emergence of
implicit conditions. For example, vendor, in anticipation from the user
function and his discussions, may invest a significant money in the
production capacity and may request for premium from the buyer. He
may eventually find that the contract now has been awarded to the
lowest bidder. In such cases, the procurement function may win a war
on price ground. However, the user function may lose the relationships.
4. Conducting Strategic Discussions: In the process of international

procurement, the procurement team is required to get involved with the
business function earlier and more strategically. The objective being to
drive efficiencies and cost avoidance during the planning stages of
procurement.
5. Setting up Appropriate Measurement for Cost Savings: Depending

only on transaction based evaluations can create serious issues in
measurement of cost saving in the procurement activity. Some of the
benefits/savings which the procurement team can measure may
include:
(a) Difference between two supplier quotes

(b) Comparison of procurement value/price against the external
benchmarks
(c) Internal savings/reductions (e.g., reduction in jobs)
(d) Production efficiencies gained
(e) Reduction in wastages across key processes
(f) Reduction in working capital requirements
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4.10 – China V/s Africa- A Perspective on Global Sourcing

and Outsourced Manufacturing
Fig. 4.1
China designed and executed a policy that shrank the industrialization

process in a mere 25 years — something that many economies took atleast
a century to do. That redesign has brought immense dislocation in global
commerce and industry, enabling China to become one of the world’s
leading economies.
China’s success has led many African capitals to pursue the country’s same
industrialization trajectory. Over the last few years, African leaders have
been pursuing policies designed to mimic the path China took. Some of
these policies include creating special economic zones after China’s
Shenzhen and positioning the manufacturing sector as a fulcrum to attract
investments and create new jobs. Despite these efforts, Africa has yet to
advance in its industrialization at the same speed China did.
Put simply, the things that worked for China will not work for Africa.
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China had already won sizable global manufacturing, accounting for more
than 32% of the world’s industrial production as of May 2019. It became
the world’s manufacturing capital through a combination of factors,
including optimal infrastructure and price-competitive local manufacturing
talent. In doing so, China created a well-differentiated comparative
advantage that made companies from the U.S. and Europe — and later,
other parts of the world — outsource manufacturing activities to China.
For more than three dozen years, a virtuous circle was created: The
availability of demand from the U.S. and Europe provided China the
opportunity to invest to meet its needs. And over time, China moved from
basic manufacturing into advanced manufacturing domains, where state-
of-the-art technologies are used to improve processes and many lower-skill
processes are automated. Consequently, China has improved its
capabilities in robotics and broad emerging technologies like virtual reality,
augmented reality, and artificial intelligence. Today China is recognized as a
leading AI player.
It is in these technological advancements that China can continue to

dominate while Africa may struggle. AI is expected to distort the
equilibrium of the global labour market, eliminating many factory jobs.
Most Western companies will use AI to do most of the manufacturing jobs
that they are currently outsourcing to China. Indeed, AI will create a
massive shift in how products and services of the 21st century are
developed, manufactured, and distributed.
If the manufacturing jobs by global entities like Dell, HP, and Siemens do
not need to be outsourced, the expected opportunity Africa is banking on
may not materialize. African leaders have expected that as China rises
further, its wage levels will create disincentives for global manufacturers to
continue sending work there. As that happens, they hope countries like
Ethiopia, Rwanda, and Kenya can be seen as reliable alternatives that
provide affordable labour with enough infrastructures for basic
manufacturing. But with AI advancements decreasing outsourcing, the
availability of cheap wage becomes irrelevant. China understands that, and
is investing heavily to win the race of advanced manufacturing, tapping
into the capabilities it acquired by making things for the world. If any
outsourced manufacturing will remain, it is the advanced manufacturing.
Based on available reports, Africa is not preparing for that level yet, as it
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continues to struggle with basic enablers like electricity, challenges that

many countries solved many decades ago.
Africa can find the paths to industrialization, but in ways that do not mimic
China’s. Here are some of the paths for the continent; some are already in
progress and need to be deepened:
Encourage Internal Consumption and Intra-Trade: Africa should build

processes to improve internal consumption, rather than focusing on using
cheap labour as a comparative advantage for global manufacturing. If
Africa expands internal consumption by trading more among member
states, decoupling from old colonial trade routes, it can industrialize, as it
has sizable markets to support the growth of companies. Today, the share
of intra-African exports as a percentage of total African exports is about
17%, well below the 69% recorded for Europe and 59% for Asia.
Improving intra-African commerce will advance the continent.
Push Forward the Free Trade Agreement: The African Continental Free
Trade Agreement, which entered its operational phase on July 7, will
remove some inherent barriers for intra-continental trade that have caused
most African countries to favour trade with European countries and other
global counterparts, rather than with African nations. The agreement has
been designed to make goods produced in Africa move within the continent
at negligible tariffs. The expectation is that manufacturers will be
incentivized to invest in Africa in order to have access to the integrated
market. If it works as planned, the trade agreement will be a catalyst to
African industrialization.
Create a Single African Currency: The planned currency got a boost

when a regional economy, the Economic Community of West African
States, announced plans to launch the ECO as a regional currency in 2020.
The expectation is that once regional economies have monetary union
convergence, a continental-level monetary union will be formed. A single
currency will reduce barriers in trade by eliminating multiple exchanges,
wherein currencies have to be converted to one of the leading global
currencies, like the U.S. dollar, euro, or British pound sterling, before
trading in Africa. This drastic reduction on trade frictions will boost
industrialization.
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There are risks to these structural redesigns, however, which must be

managed. A union arising out of the single currency will require a
supranational bank to coordinate monetary policies, depriving member
countries of individual flexibility on areas of monetary policies. The
implication is that some bigger economies will have undue influence on the
performance of the union. Without careful management, the smaller
economies affected could experience welfare losses, making them worse
off than before the integration.
Improve Infrastructure: In its 2019 African Economic Outlook, the

African Development Bank wrote that “trade costs due to poorly
functioning logistics markets may be a greater barrier to trade than tariffs
and nontariff barriers.” Africa needs more deep seaports, railway lines,
airports, and other critical enablers of modern commerce in order to
advance. It remains more expensive for an operating factory in Accra,
Ghana, to import coffee from Rwanda than from a Paris-based company,
for instance. And most exports outside Africa are unprocessed raw
materials that, because of supply chains and the disparate natures of the
markets, have not stimulated local processing. Investment in
infrastructures will close the gaps.
Invest in Education: Africa also needs to invest in education to compete

and advance its citizens so that it can boost internal consumption. The
continent must make primary and secondary education compulsory — and
free — while boosting quality by committing more resources to education.
Unless Africa can educate its citizens to compete with the best in the world,
it will struggle to rise.
As robotics and AI advance, most countries will keep their production

processes at home, eliminating the need for cheaper labor abroad. In this
redesign, Africa’s competitor is not China; robots and AI are the real
competitors. Africa can no longer depend on global manufacturing to
become industrialized, nor can it simply mimic China’s policies. But if Africa
educates its citizens, integrates effectively on trade and currency, and
improves intra-African trade, its industries can compete at least to serve its
local markets. Where that happens, Africa can attain industrialization faster
by scaling indigenous innovations and utilizing AI as enablers.
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1. Conduct a brief interview of Heads of Procurement Function of any

multinational company and understand the factors leading to change in
the role.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
4.12 Summary
As globalization is compelling, the various geographies to ignore the

geographical boundaries and new economic boundaries are being drawn.
The Free Trade Agreements, emergence of internet and increase in global
trade has led to evolution of a new role, the Global Sourcing Manager and
Global Procurement Function. Over a period of time, the expectation of the
management has also undergone a sea change. Procurement Functions
across the globe are evolving from just being a passive observers to
provide support to the business processes. In some of the organizations,
the role has further evolved to being integral part of the business and not
just a passive, independent or supportive function. Role such as Chief
Procurement Officer (CPO) is finding its way to the C-Suite and the
Boardroom. The function is also increasingly deploying supply chain
analytics to facilitate procurement decisions. There are number of
differences between the traditional and evolved role of global sourcing
manager some of which includes increase focus on business partnering,
providing dynamic procurement solutions, driving cost reductions among
other things. In addition to China being a global sourcing hub, Latin
America and African region are emerging as the new sourcing hub for the
many multi-national organizations. It is important for procurement
manager to evaluate the new options that are featuring on the global
procurement landscape.
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1. Explain the factors affecting the evolving role of Global Procurement
Manager.
2. Highlight and explain the important expectations of the top
management from Global Procurement Function.
3. Write a short note on various levels of maturity of the Global Sourcing
Function.
4. Explain the emerging role and responsibilities of Chief Procurement
Officer (CPO).
5. Highlight the importance of supply chain analytics as an important tool
for Global Sourcing Manager.
6. Anand, an experienced professional in a supply chain, is assuming
leadership position of ABC Incorporated’s Global Sourcing Function.
Which of the factors he should be aware of while discharging his duties
in executing International Procurement?
7. Distinguish between the Traditional and Emerging Role of Global
Sourcing Manager.
8. Highlight the key features and difference between key sourcing hubs i.e.
China, Latina America and Sub-Saharan Africa.
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1. Which of the following is least likely to be part of internal duties of a

global sourcing manager?
(a) Collaboration with the internal network
(b) Effective management of supplier relationships
(c) Making operating purchasing decisions
(d) Definition of purchasing strategies
2. Which of the following is not likely to be an important expectation of

management from the global procurement function?
(a) Enabler of savings
(b Cost reduction across value chain
(c) Deterioration of supplier relationship management
(d) Providing spend map and visibility to management
3. Which of following is not a stage of evolution of global procurement
function’s maturity level?
(a) Passive
(b Responsive
(c) Integrative
(d) Supportive
Answers: 1. (b), 2. (c), 3. (b).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
124
INTERNATIONAL PACKAGING
Chapter 5
International Packaging
Objectives
• Understand the need and importance of international packaging
• Understand the types of packaging standards
• Understand the various factors which determine the type of packaging
• Understand the various International Standards in packaging
• Understand the advantages and disadvantages of various methods of
international packaging methods
• Understand the checklist to be adopted by the global sourcing manager
• Gain understanding of various recommendations by International
Logistics Providers for packaging needs
Structure
5.1 Introduction and Key Aspects of Proper Packaging
5.2 Types of Packaging
5.3 Factors Affecting the Type of Packing
5.4 Packaging Standards in International Sourcing
5.5 Advantages and Disadvantages of the International Packing Methods
5.6 Checklist for Global Sourcing Manager for the Packaging
Requirements
5.7 Illustrative General Guidelines on Packaging – FedEX Express Broad
Guidelines
5.8 Trends in International Packaging
5.10 Summary
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5.1 Introduction and Key aspects of proper packaging

1. Reduction in the product to market time.
2. Reduction in the damages and product losses.
3. Balancing distribution and transportation costs with product packaging
costs.
4. Meant towards enhancing the customer satisfaction.
5.2 Types of Packaging
a. Primary Packaging: Constitutes the first level of packaging of the

product.
b. Secondary Packaging: Secondary level consists of intermediate levels.

It is very essential to have it labelled for the recipient giving information
about the contents. A label must be affixed either to the top and/or
front surface of the secondary packages. It should indicate the type/
nature of the product, the name of the manufacturer, batch number,
date of manufacture, date of expiry, quantity, storage conditions and
information required from regulatory perspective.
c. Tertiary packaging: Third level of packaging which can be the outer

box or shipping container that contains the secondary packages. It must
be clearly labelled for international transport with the final address and
other details. Generally, labels on tertiary packaging must be attached
to all four sides.
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5.3 Factors affecting the type of packing
1. Dimensions, weight, centre of gravity of the product

2. Sensitivity of the cargo to external conditions
3. Base surface area of the product
4. Kind of transport and storage period required for the cargo
6. Intended transit method and storage requirements
The global sourcing manager can use modern logistics and packaging
software and input the above factors. With the assistance of the software,
the procurement function will be able to optimize the construction of the
packages, calculate the loading volume, and optimize the positioning of the
packages on the transport vehicle and issuance of the detailed packing lists
per order.
5.4 Packaging Standards in International Sourcing
Air Freight
Packing standards are defined by International Air Transport Association

(IATA). The packaging guidelines provide prescription related to the
primary, secondary and rigid outer packaging.
Primary receptacles must be packed in secondary packaging in such a way

that, under normal conditions of transport, they cannot break, be
punctured or leak their contents into the secondary packaging.
Secondary packaging must be secured in outer packaging with suitable

cushioning material. Any leakage of the contents must not compromise the
integrity of the cushioning material or of the outer packaging.
The general requirements include the packaging must be of good quality,

strong enough to withstand the shocks and loadings normally encountered
during transport, including trans-shipment between transport units and
between transport units and warehouses as well as any removal from a
pallet or over-pack for subsequent manual or mechanical handling.
Packaging must be constructed and closed so as to prevent any loss of

contents that might be caused under normal conditions of transport, by
vibration, or by changes in temperature, humidity or pressure.
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Sea Freight
The packaging structure in sea freight is governed by various regulations

like International Maritime Dangerous Goods (IMDG) Code, Guidelines by
International Chamber of Shipping, World Shipping Council, Global
Shipper’s Forum and similar bodies.
The packaging guidelines of World Shipping Council have been produced to

minimize the dangers to container ships, their crews, and all personnel
involved with containers throughout the transport chain, and were
developed by an expert industry working group, meeting in London and
Washington DC during 2008.
Some of the key requirements of the guidelines are provided as under:

1. Subject to booking request, select the most suitable container type to
accommodate the cargo.
2. Prepare a pre-stow plan before commencing stuffing so that weight/
volume considerations are covered and point loading limits are
observed.
3. Never load by weight above the payload limits of the container, i.e.,
the cargo and container net weight must not exceed the container’s
gross safe working load.
4. Never load by weight above the road regulations applicable on the
transit.
5. Distribute the weight of the cargo evenly over the floor of the
container.
6. Never stow heavy items in one section and light items in another.
7. The weight of the cargo should not exceed 60% within half the length
rule.
8. Do not stow heavy goods on top of light goods.
9. Stow and secure all cargo tightly.
10. Observe all the handling instructions on cargo such as “Do not drop” or
“This side up”.
11. Stow goods with sharp corners separate from other softer
merchandise.
12. Use dividers and separating material as appropriate.
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13. Where possible with mixed loads, place packages containing liquid
cargo on the bottom tiers with dry cargo on top.
14. Use cargo liners for obnoxious cargo such as hides and carbon black.
15. Do not use clamps or other loading devices unless the goods can
withstand them.
16. When loading Dangerous Goods, ensure that the IMDG Code packaging
requirements are always observed.
17. Do not load goods in a container with damaged packaging.
18. Do not stow wet and damp goods with dry goods.
19. Do not use dunnage or packaging which is incompatible with the
cargo.
Road/Surface Transportation/Other Inland Transportation
The road/surface transportation seek guidance from various regulations

across the globe. The important basic guidance on packaging is provided
by IMO for cargo transport units, Inland Transport committee inter alia.
The packaging in road transportation should be able to address the
breaking forces acting forward, turning forces acting sideways, speed
increase forces acting backwards, and shunting forces acting front and
backwards. Following key aspects need to be followed in the packaging and
transportation.
a. Outer and inner inspection should be performed over the cargo prior to
deciding the packaging requirements.
b. The cargo should be clearly marked with terms like Protect from frost,
this way up, maximum stacking height.
c. Compliance should be ensured with the ISO requirements.
d. Some of the important rules applicable for inland transportation and
packaging need to be adhered. Those will include:
i. European Agreement concerning the International Carriage of

Dangerous Goods by Road (ADR)
ii. Regulations concerning the International Carriage of Dangerous
Goods by Rail (RID)
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iii. Regulations for the Carriage of Dangerous Substances on the Rhine

(ADNR) based on the provisions contained in the European
Agreement concerning the International Carriage of Dangerous Goods
by Inland Waterways (ADN)
Some of the Packaging Type Used for Standard and Homogenous

Products in International Procurement
1. Standard package: The packaging is of traditional fibreboard cartons

as well as plastic, wooden or cylindrical containers.
Fig. 5.1
2. Small packages consists of products where the volume is less than

13000 cm3, longest dimension is 350 mm, weight in 4.5 kg.
Fig. 5.2 Fig. 5.3
3. Flat Packaged Products: Mainly consists of packaged product where

the shortest dimension is 200 mm, longest dimension is more or more
times large than the shortest dimension, volume is 13000 cm3.
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4. Elongated Packaged Products: In case of elongated packages, the

longest dimension is 900 mm or greater. Other dimensions are each
20% or less than that of the longest dimension.
Fig. 5.4
5.5 Advantages and Disadvantages of the International
Packing methods
Based on the International Guidelines for Packing, provided herewith the

basic advantages and disadvantages of different types of packing.
Limitations/
Type of Packing Advantages
Disadvantages
• This method of packing • Provides limited
tends to be less expensive protections against manual
• Significant reduction in the mishandling, corrosion
packing time damages.
Packing on
• Multiple transportation may
Pallets
lead to excessive time as
the loading and unloading
has to be carefully
handled.
• Protection levels are good • Being non-returnable and
• Ease in handling standard, the packing can
• Outdoor storage of the tend to be expensive.
Packing in Non- package is possible
returnable • This packing helps the
Cases transporter to optimally
utilize the capacity as it fits
under various volume
dimensions
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• Higher level of protection • Expenses on the logistics

against mechanical for return of the
damages containers/ cases can
Packing in
• Ease of handling increase.
Returnable
• Economical
Cases
• Environmentally friendly as
there is a possibility of
reuse
• Safe protection against • Outdoor storage span is
various kinds of mechanical limited as the containers
damages need to be returned to the
• Tends to be less expensive shipping company.
Container • This limitation can be
Packing overcome by procuring
own containers in which
the packaging can be
maintained for outdoor
storage purpose.
Table 5.1
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5.6 Checklist for global sourcing manager for the

packaging requirements
The Global Sourcing Manager should follow the following important aspects
provided in the checklist.
Key Aspects of Packaging Checklist Points

Understanding • Evaluate potential injuries to personnel and
consequence of badly environment
packed cargo • Understand implications of potential damage to
the transport vehicle
• Understand the issues and challenges with the
cargo
• Evaluate economic consequences related to the
cargo damage
Understanding of • Different parties involved in cargo transport.
liabilities The packaging role and responsibility of each
party can be different
• The sourcing manager needs to be aware of the
legal responsibility involved
• Goodwill responsibility
• Quality assurance
Principles of cargo • Packaging should ensure prevention from
packing and sliding
transportation • The packaging should prevent from tipping
• Packaging process should consider the influence
of friction
Packaging dangerous • Awareness of the regulations for the transport
cargo of dangerous cargoes
• Understand various Definitions and Packing
regulations
• Packing, separation and securing, labelling and
placarding
• Information transfer when transporting
dangerous cargoes and understand the
liabilities
Table 5.2
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5.7 Illustrative General Guidelines on packaging – FedEX

Express Broad Guidelines
1. Use of corrugated boxes for gift articles, e.g., shoes, gift boxes, etc.
2. Using double wall packaging for heavier items.
3. Position bottles that contain liquids upright. Use an inner seal and
perforated breakaway cap. The inner packaging must be able to contain
leaks.
4. Place items that might be damaged by normal handling, such as soiling,
marking, or application of adhesive labels, in a protective outer box.
5. For odd or irregular shaped items, at a minimum you should wrap and
tape all sharp edges or protrusions.
6. Enclose an extra label, business card, or letterhead with the shipper’s
address and phone number and the recipient’s address and phone
number inside the package before sealing it.
7. Remove all old address labels from reused boxes before shipping, and
make sure there are no holes, tears, or corner dents in the outer box.
General Packing Methods
Single Box Packing Method
a. Ship non-fragile products like soft goods inside a sturdy outer box.
b. Use fillers like crumpled newspaper, loosefill peanuts, or air-cellular
cushioning material such as bubble.
c. Wrap to fill void spaces and prevent movement of goods inside the box
during shipping.
d. Place goods that might be affected by dirt, water, or wet conditions
inside a plastic bag.
e. Consolidate small parts or spillable granular products in a strong sealed
container, such as a burlap or siftproof plastic bag, then package in a
sturdy outer box.
f. Use the H taping method for sealing your package.
134
Fig. 5.5: Single Box Packing – Illustration
135
Box-in-Box Packing Method
1. Wrap product(s) individually with at least 2" thickness of air-cellular

cushioning or foam material to fit snugly inside a corrugated box.
2. Restrict product movement inside the box using filler like crumpled
newspaper, loose fill peanuts, or other cushioning material.
3. Close and tape the inner box using the H taping method. This will help
prevent accidental opening.
4. Use a second box that is at least 6" longer, wider, and deeper than the
inner box.
5. Choose the wrap or fill method to cushion the inner box inside the larger
sturdy outer box.
6. Ship fragile products individually, wrapping them in a minimum 3"
thickness of air-cellular cushioning material.
7. Wrap the inner box with 3" thickness of air-cellular cushioning material
or use at least 3" of loosefill peanuts or other cushioning material to
fill the spaces between the inner box and outer box on the top, bottom,
and all sides.
8. Fill any void spaces with more cushioning material.
9. Use the H taping method for sealing your package.
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Fig. 5.6: Illustration of Box-in-box Packing Method
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5.8 Trends in International Packaging
Sustainable packaging is a leading trend in the International Packaging

Market. Companies are moving away from plastic to other forms of
packaging, especially with focus on Bio-Degradable packaging solutions.
Provided below is a case study of leading global retailer on commitment to

reduce the plastic packaging.
Sainsbury’s is Announcing an Ambitious New Commitment to

Reduce Plastic Packaging by 50% by 2025.
1. This new target includes all branded food packaging, Sainsbury’s brand
food packaging and packaging across all of Sainsbury’s operations.
Sainsbury’s currently uses almost 120,000 tonnes of plastic packaging
per year and believes a transformational leap in thinking is required to
move the industry beyond existing efforts at reducing packaging.
Sainsbury’s reduced plastic packaging by 1% in 2018.
2. To meet this goal, Sainsbury’s will launch a programme to accelerate

change, which will include switching to alternative materials, using
lighter-weight plastics and introducing refillable packaging at scale.
Following rigorous analysis of its plastic footprint, the key areas of focus
for the biggest impact are: plastic milk bottles, packaging for fruit and
vegetables, fizzy drinks, water and fruit juices.
3. Some of these alternatives will require customers to change their

behaviour – for example, plastic milk bottles are currently one of largest
sources of plastic packaging. Sainsbury’s is reviewing alternative options
including the introduction of refillable bottles, introducing returnable
milk bottles or offering a reusable jug with milk in a lightweight plastic
pouch.
4. Sainsbury’s recognizes it cannot achieve this commitment on its own. To

achieve its ambition, Sainsbury’s will pioneer new ways to collaborate
with food manufacturers, packaging suppliers, raw material scientists
and other retailers, alongside the waste and recycling industry. To kick
start this collaboration, Sainsbury’s is co-hosting a summit with the
Natural Environment Research Council (NERC), part of UK Research and
Innovation (UKRI), today Friday 13th September, which will bring
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together branded suppliers, researchers and government stakeholders

to identify potential breakthrough innovation projects.
5. Sainsbury’s is also looking to open source ideas. From today, it will have
an area on its website for customers, colleagues, manufacturers,
entrepreneurs and other interested parties to submit ideas to help
reduce plastic packaging: wwwaboutsainsburyscouk/help reduceplastic.
6. Sainsbury’s will work with Greenpeace on this commitment and will

report publicly on progress every six months.
Mike Coupe, Chief Executive of Sainsbury’s, said:
“We have set ourselves a bold ambition because we understand that we

urgently need to reduce our impact on the planet and to help drive change
across our industry. “Reducing plastic and packaging is not easy. Packaging
plays a vital role in keeping our food safe and fresh and minimizing food
waste. We must therefore find alternatives to plastic that protect the
quality of our food while minimizing our impact on the environment. “We
can’t do this on our own and we will be asking our suppliers and our
customers to work with us to help us make this important change.”
Theresa Villiers, Environment Secretary, said:
“I commend the leadership shown by Sainsbury’s and their efforts to

introduce new industry-wide standards and reporting, ensuring that our
environment is protected for future generations. “This is a brilliant example
of the integral role business has to play in cutting plastic waste,
empowering consumers to make more sustainable choices.”
Sainsbury’s will continue to work with suppliers and other partners to

develop and implement innovative solutions to the plastics challenge,
including through collaborative project bids within the Government’s new
£60m Smart Sustainable Plastic Packaging challenge programme.
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How Sainsbury’s is Planning to Achieve this Reduction?
Remove
• Lightweight loose produce bags will be removed by September 2019 (489
tonnes).
• Plastic trays are being removed from asparagus and sweetcorn (144
tonnes); cream pots (114 tonnes); tomatoes (102 tonnes); carrots (38
tonnes); and herb pots (18 tonnes).
• Plastic has already been removed from cauliflowers, organic bananas,
easy peeler citrus fruit, brassicas and tomatoes.
• Microbeads were removed from our Own Brand products in 2013.
Replace
1. Fresh food black plastic trays will be replaced with recyclable
alternatives (6000 tonnes) by end of this year.
2. PVC and polystyrene trays will be replaced with recyclable alternatives
(1213 tonnes).
3. Plastic film on fruit and vegetables will be replaced with a recyclable
alternative (2518 tonnes) by end 2020.
4. All our Own Brand flushable wipes are plastic free and compliant with
industry guidelines which are recognized across the UK and Europe.
We’re also working to meet the new ‘Fine to Flush’ standard in the
future while ensuring we do not compromise the quality of the product.
5. Plastic cutlery was replaced with wooden cutlery in Food to Go, saving
38 tonnes of plastic.
Re-use
• Fresh water stands will be available for customers to refill their own
water bottles in 326 supermarket cafe’s across the country.
• Customers are encouraged to bring their own containers to meat and deli
counters.
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Recycle
• A ‘pre-cycle’ area will be trailed in stores for customers to remove
unwanted packaging and leave it for recycling.
• Customers will be able to use recycling facilities at further 125 stores
(currently 275).
• Collaboration with others on research to develop new packaging and
recycling technologies.
• Deposit Return Schemes are being piloted so customers can return
recyclable packaging simply and easily.
This month Sainsbury’s will remove single use plastic bags from bakery
aisles and single use plastic bags from loose produce – removing a total of
489 tonnes of plastic. Sainsbury’s has previously committed to making all
plastic packaging recyclable, reusable or compostable by 2023.
In 2005, Sainsbury’s signed up to the Courtauld Commitment, a voluntary

government target to reduce packaging in the grocery sector. This
agreement focused on reducing the weight of packaging and resulted in
retailers reducing glass and fiberboard packaging in favour of lighter weight
and more versatile plastic packaging.
Innovation in Micro Packaging

Micro packaging refers to the integration of nano-materials such as nano-
coatings and films to form a high barrier packaging solution, resistant to
light, air and heat. Micro packaging is a relatively new concept that
presents numerous opportunities of growth, in all verticals of the global
packaging industry. It is anticipated that various industries, especially the
food industry, are to benefit from micro packaging. Micro packaging
technology is anticipated to enjoy increased preference in all industries,
owing to its nanotechnology roots. Technological advancement in various
fields, such as in the healthcare industry has paved way for increased need
of more advanced packaging solutions, thereby fueling demand for micro
packaging. For instance, the advent of nanotechnology has led to the
conceptualization of new drug delivery forms, which demand increased
protection against elements such as moisture, heat and light, to protect
the drug. In addition, ongoing research and development in
nanotechnology has revealed a plethora of possibilities for the global micro
packaging industry. Improved bio-availability, antimicrobial activity,
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enhanced sensory acceptance, and targeted delivery of bioactive

compounds are some of the factors, expected to increase credibility and
preference for micro packaging. Overall, nanotechnology is said to be the
‘future’, and therefore, it is anticipated that micro packaging will witness
rapid penetration in the markets, in the future.
The global packaging industry has transformed over the past few decades,
creating an absolute need for customization. Innovation in form of
materials used in new products, dictates the momentum of technological
advancement in the global packaging industry. There are various factors
which are expected to positively impact the global micro packaging market
and facilitate its growth. These include, a global effort to move to more
sophisticated yet safer technology, in order to increase consumer
convenience, as well as maintain the quality of products. Many people
believe ‘edible packaging’ to be the future of food packaging. A few years
ago, in 2011, a team of students from Texas A&M University developed a
new thin-coating polymer, which had food-preservation abilities, equivalent
to that of glass. The micro packaging solution could be switched back and
forth between polymers, depending on food-contact approval.
Customizability of this technology, coupled with the excellent gas barrier
properties drew the attention of various food companies to its discovery.
Furthermore, micro packaging is also poised to immensely benefit the
pharmaceutical packaging industry. Various applications in the healthcare
and pharmaceutical industry, including implant packaging, micro-
fabrication, and micro-assembly, demand the level of sophistication that
micro packaging has on offer. It is therefore anticipated that technological
advancement in the healthcare and pharmaceutical packaging sector will
drive growth of the global micro packaging market. The consumer
electronics industry is expected to be another major contributor to growth
of the global micro packaging market, over the forecast period. Despite the
positive outlook, there are several factors which might hamper growth of
the global micro packaging market. Micro packaging involves a very
technologically advanced field of packaging science, which might be new to
many manufacturers across the world, and therefore, it will take time for it
to be accepted as a safe packaging solution, as is the case with all new
technology. It has been observed that companies such as McDonald’s
prefer to steer clear of new entrants in the packaging industry until they
have been proven to be safe and risk-free. Adoption of micro packaging
might be slow and gradual, over the forecast period. However, the future of
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the global micro packaging market looks promising, and will be so, once
consumer and manufacturer awareness regarding its benefits increases.
1. Visit manufacturing sites, warehouses in your vicinity and observe the

various types of packaging methods deployed by organizations.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
2. Study guidelines for packaging of global Air Freight, Sea Freight

operators and identify common aspects as well as distinguishing
features.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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5.10 Summary
The product is as good as its packaging and looks. In the international

trade and logistics, packaging assume very high importance as it not only
safeguards the product but also depicts the brand of the organization. Any
lapse in packing will not only damage the product but also lead to high
level of revenue loss to the shipper. Bad packaging can also lead to loss of
utility of the cargo for the purchaser. Organizations deploy packing and
packaging as per the recommended standards of global logistics
association and freight service providers. Inaccuracies and gaps in
packaging may also lead to loss of right over insurance claim in the event
of damage to cargo on account of packaging defects. It is expected that
the global sourcing manager should enforce the compliance of the
packaging standards with the suppliers. The industry is moving towards
more sustainable sources and methods of packaging. The most common
method is exploring use of material that is bio-degradable and alternate to
plastic.

1. Explain the need and importance of packaging of products in
international logistics.
2. Write a short note of various types of packaging methods.
3. Highlight and explain advantages and limitations of various methods of
packaging.
4. Amit, a global sourcing manager seeking you advice for formulating a
robust checklist to be deployed for implementation of packaging
standards in the international procurement. You are required to
highlight the points to be considered by Amit.
5. Explain various types of alternate packaging materials that the industry
should adopt to reduce the use of plastic in International packaging.
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1. Which of the following type of packaging constitutes the basic and first
level of packaging the product?
(a) Primary
(b) Secondary
(c) Tertiary
(d) All of the above
2. Which of the following factors is least likely to impact the type of

packaging?
(a) Dimension of the product
(b) Colour of the primary packaging
(c) Base surface area of the goods
(d) Intended transit method
3. Which of the following standards are least likely to govern the type of
packaging to be adopted for international logistics?
(a) World Shipping Council
(b) Global Shipper’s Forum
(c) Internal Adhoc Standards of the Shipper
(d) International Maritime Dangerous Goods Code
Answers:1. (a), 2. (b), 3. (c).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
146
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
Chapter 6
Role of International Logistics in Global
Procurement
Objectives
• Understand the role of international logistics in global procurement
• Understand the evolution of logistics activity and its impact on global
procurement
• Gain an insight into various issues and challenges in managing
procurement in global logistics
• Understand the important performance indicators for global logistics
• Understand emergence of e-commerce and its impact on logistics
• Understand factors in considering right mode of transportation
• Understand the contribution of air freight in international procurement
• Understand the role of sea freight in international procurement
• Understand the role of surface transportation in international
procurement
• Gain a detailed understanding of pre- and post-shipment activities
• Gain an understanding of International Commercial (INCO) terms and its
implications on global sourcing
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Structure:
6.1 Introduction to Role of Global Logistics in International Procurement
6.2 Evolution of Logistics and its Implications on Global Procurement
6.3 Issues and Challenges in Managing Procurement and Global Logistics
6.4 Important Performance Indicators for Global Logistics
6.5 E-Commerce, Global Procurement and Logistics
6.6 Choosing Right Mode of Transportation
6.7 Role of Air Freight in Global Procurement and Logistics
6.8 Role of Sea Freight in Global Procurement and Logistics
6.9 Pre- and Post-shipment Activities to be followed
6.10 International Commercial Terms (INCO Terms) and its Relevance for
Global Sourcing
6.11 Technology Trends in Global Logistics
6.12 Other Key Trends in Global Logistics
6.14 Summary
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6.1 Introduction to role of global Logistics in International

Procurement
Any discussion on International Procurement will not be completed without

detailed review of the role of logistics. It is worthwhile, to look at Global
Logistics now. International Purchasing Manager need to have a good
understanding of global logistics to effectively and efficiently execute their
duties and deliver value add to the organization. Global logistics is more
complex than the domestic logistics, consisting of multiple services like
multi-modal transportation, cross-docking, storage, and customs clearance.
Globalization and the increasing outsourcing of manufacturing and sourcing

operations to the low cost countries have resulted in advanced and
complex logistics services. Consider an example of the hi-tech electronics
manufacturer in Hong Kong, who wants to ship its products to Bangalore in
India. The preferred route is via Singapore (transshipment hub) and
Chennai (port of entry). The products/cargo is transported by ships till
Chennai and then by trucks to Bangalore. It is composed of several
services like trade documentation, customs clearance at various points,
cross-docking, and multi-modal transportation. Some services like the
customs clearance and cross-docking at Singapore can naturally be
bundled and provided by a single 2PL or 3PL. On the other hand, shipping
from Singapore to Chennai and from Chennai to Bangalore, can possibly be
provided by a single provider or by two different providers.
Logistics is concerned with the broad range of activities which includes

effective and efficient movement of semi-finished or finished goods from
one business to another and from manufacturers/ distributors/retailers to
the end consumers. This includes:
1. Freight transportation
2. Warehousing
3. Material handling
4. Protective packaging
5. Cross-docking
6. Order processing
7. Documentations
Logistics costs often constitutes 10-15% of every product produced.
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6.2 Evolution of Logistics and its implications on global

procurement
Traditionally, manufacturers/suppliers and buyers handled all logistics

functions including trucking and warehousing through own logistics
departments. As a first step, the trucking and warehousing were then
procured from first party logistics (1PL) providers, who were individual
owners of trucks and warehouses. Large-scale transportation lead to
procuring service from second party logistics (2PL) providers like a
transportation company that owns a fleet of vehicles.
In the recent past, logistics services were outsourced to third party

logistics (3PL) providers. The 3PLs are non-asset based providers, who
manage the end-to-end process by procuring the transportation and other
services from 2PLs and 1PLs.
New players, 4PL also emerged, who is an integrator that assembles the
resources, capabilities, and technology of its own organization and other
organizations to design, build and run comprehensive supply chain
solutions. Use of technology here is very crucial for effective management
of 4PL activities.
The emergence of 1PL to 4PLs led to various procurement scenarios, which

the global procurement manager should have a deeper understanding. To
assist effective execution of the role of global procurement manager, the
logistics services are classified under two categories – Basic and Advanced.
Basic Services: Basic services are the single services like transport from A
to B with tangible service definitions. The transaction is one-time for the
current demand, with no contractual agreements for future requirements.
Such services can be purchased on the Internet from freight exchanges.
Advanced Services: Advanced services comprises of multiple and bundled

services with intangible outcome requirements. This refers to purchasing of
3PL services with contractual agreements to transport goods in future for a
specified period of time.
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International trade and procurement, thus, by its very nature involves

multi-modal transportation and customs clearances across international
borders. Cross-docking at transshipment hubs is a significant milestone. A
global logistics service is, thus, composed of many logistics services like
multi-modal freight transfer, packaging, cross-docking, warehousing and
other supporting services like customs clearance, trade documentation,
exception notification, exception handling, etc.
6.3 Issues and Challenges in Managing procurement and

global logistics
The global sourcing manager should be conversant with the issues and
challenges of global logistics in taking the procurement decisions. Some of
the important factors are:
1. Geographical Distance: The first basic and fundamental difference in

comparing the domestic and international logistics is the distance.
Global logistics frequently require the transportation of parts,
accessories, essentials, supplies, and finished goods over much longer
distances than is the norm domestically. A longer distance will lead to
increased level of costs of transportation, storage and insurance for
damages, deterioration, and pilferage in transit and higher indirect costs
of warehousing and inventory. Selection of appropriate mode for
transportation is also very important.
2. Foreign Exchange Fluctuation: The second most important difference

pertains to currency variations in international logistics. While the
procurement manager may become extremely successful in negotiating
the purchase rates downwards along with the most favourable terms
and conditions in imports/global sourcing, the CPO need to take care of
the foreign exchange fluctuation risk. A slight increase in the forex
rates, e.g., depreciation of rupee by 5-10% may lead to increased costs
and may wipe out the price benefits completely.
3. Engagement of Foreign Intermediaries: Number of intermediaries

participate in the global logistics process because of an important need
to negotiate border regulations of countries and deal with local
government officials and distributors. A connect with all relevant
stakeholders is very crucial for efficient and effective global sourcing. At
times, home country import/export agents, brokers, and import/export
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merchants and dealers work as intermediaries providing an exporting

service for manufacturing firms, those home-based intermediaries do
not necessarily have sufficient knowledge about the foreign countries’
market conditions or sufficient connections with local government
officials and distributors. For example, in Asian countries such as Japan,
Korea, and China, personal network, connections and rapport of who
knows whom frequently seem to outweigh the Western economic
principle of profit maximization or cost minimization in conducting
business. Therefore, working with local procurement agents/partners
has proved very important in building initial connections with the local
business community as well as local government regulators.
4. Understanding of Regulations: Large quantum of international trade

is handled by ocean shipping. Because the United States is the world’s
largest single trading country in both exports and imports, and most of
its trading partners are located across the Pacific and the Atlantic
Oceans, US regulations on ocean transport services directly affect
foreign exporters to the United States. Further, in Sub-Saharan African
region for transit from one land locked country to another locked
country and then to the port is very costly and can contribute to more
than 30% of the product costs itself. It will be very crucial for the CPO
to understand the intricacies of the regulations and its impact on the
logistics turnaround time as well as cost.
5. Security of Cargo: In the ocean route, patches like Somalia are

infested by pirates. Such routes can pose a significant risk to the cargo
security and also significantly increase the cost of insurance. In certain
countries, government-imposed user fees or carrier surcharges are too
high or come without sufficient advance notice, some importers could
even lose economies of sourcing from overseas location due to
increased shipping costs and insurance premiums, as applicable and
terms negotiated with the suppliers.
6. Selecting Right Mode of Transportation: Important factors while

selecting the right mode of transportation include value-to-volume ratio
is determined by how much value is added to the materials used in the
product. Perishability of the product refers to the quality degradation
over time and/or product obsolescence. The cost of transportation is
affected on account of the volume and the perishability of the product.
For example, certain kinds of vaccines in the pharmaceuticals needs a
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very robust and complex storage methods and transportation

conditions. The broad factors affecting the selection of the right mode of
transportation with respect to various modes available is provided as
under:
a. Ocean/Sea Freight: Liners/shipping companies across the globe

offer a regular and scheduled passage on established world routes.
Based on the volume and nature of the cargo, the organization may
need to use bulk shipping or standard containerized transportation.
Sea freight is used extensively for the transport of heavy, bulky, or
non-perishable products, including crude oil, steel, commodities and
automobiles. Over the years, shipping rates have been falling as a
result of a price war among shipping lines and continuous addition of
the shipping capacities by the liners. For example, an average rate
for shipping a 20-foot container from Asia to the United States fell
from $4,000 in 1992 to as low as $1,680 by 2009. Certain
organizations like Honda, Hyundai and other large players in the
automotive space, have their own fleets for management of the
global procurement.
b. Air Freight: There has been significant increase in the air traffic and
thus the air cargo across the globe in last three decades has grown to
significant extent. In terms of volume, it still constitutes
approximately 2% to 3%. However, it constitutes now more than
20% of the value of goods shipped in international commerce. The
global procurement manager needs to carefully evaluate the nature
of the products and accordingly explore option for the air freight.
Some of the products include semi-conductor chips, LCD screens, and
diamonds, perishable products. Currently, the jumbo jet has a
capacity to carry more than 30 MTs of the cargo.
c. Multi- or Inter-modal Transportation: Global imports and exports

require transportation across different sections of the country. Most
of the country require transportation of sea, road, rail and air and
other modes of transportation. Managing inter-modal transportation
is more challenging than single mode of transportation. Inter-modal
transportation requires managing loading and unloading across mode
of transportation. The global procurement manager should ensure
that when different modes of transportation are involved, or even
when shipments are transferred from one truck or transportation
153
vehicle to another at the national border, state border, port,

warehouse, it is important to make sure that cargo space is utilize at
full load so that the per-unit transportation cost is minimize.
6.4 Important performance indicators for global logistics
It is very crucial that the global procurement manager needs to understand

the important performance indicators for global logistics. The indicators
directly affect the cost of procurement. Some of the important indicators
1. Quantity of each item available for delivery within the customer-
specified delivery window
2. Picking with correct quantities of the correct items
3. Right packaging with customer-designated packaging and labelling
4. Shipping of products without damage
5. Delivery in customer-designated time window and to the customer-
designated location
6. Timely communication with order status report available at the set
intervals as per the expectation of the customer
7. Accurate billing
8. Right documentation with customer-specified documentation means,
including paper, fax, Electronic Data Interchange, and/or Internet
6.5 E-Commerce, Global Procurement and Logistics
Any discussion in the 21st century on the logistics and procurement cannot
be said to have completed, unless it also covers an important emerging
aspect, i.e., E-Commerce and evolving platform has in a way and about to
completely change the way global procurement activity is being carried
out. The internet opened the gates for companies to sell easily directly to
consumers across national boundaries. The internet and the Intranet
facilitate on-time inventory and distribution coordination without constraint
of geographical boundaries.
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6.6 Choosing right mode of transportation

1. Sea freight is the most commonly utilized and relatively cheapest mode
of transportation, moving to the extent of 90% of world cargo.
2. Air freight is relatively expensive in comparison to other modes due to
low capacity of aircrafts and high operating costs and overheads.
3. Shippers are increasingly shifting the historic air freight capacity into
sea-freight to save on costs and managing the supply chain.
4. Surface transportation continues dominated by truck, as rail
infrastructure is not present in all regions across the globe. Where it is
present, the end-to-end haulage facilities are not available.
5. Each mode of transportation has a distinctive value proposition,
different market conditions and business models.
6.7 Role of Air Freight in Global Procurement and Logistics
The international air freight industry is estimated to be at $40 billion per

annum and it is expected by 2019, the world will have more than 2500
freighter planes. Air Freight has an important role in the global sourcing
process. The key components relevant from the buyer’s perspective are as
follows:
Segment Players
Shipper/Forwarder • Supplier/Vendor
• Shipper
• Forwarder
• Interline Connecting Logistics Player
Airline • Air Consolidation Agent
• Air Freight Forward
• Airline
Consignee • Customer
• Customer’s Representation
Table 6.1
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Expectation and Role Played by Each Participant in the Air Freight
1. Shipper: Expectation of the shipper is to send the commodity at the

desired destination. Time is the essence in the Air Freight Industry.
Shipper often undertakes activities which include making the booking
for air freight, negotiating the best rates, preparation of the documents
required for clearance and customs, seeking insurance, tracking
shipments, accept billings and make payments to forwarders, place
claims and repair charges where applicable, ensure speed of delivery
and reliability in the transportation.
2. Forwarder: The forwarder acts as a middleman between the airline and

the shipper. Often the forwarder earns his booking commission from the
airline. All of the shipper’s responsibilities are often delegated to the
freight forwarder as a negotiated fee. Additional responsibilities of the
freight forwarder is to accept bookings, bid for space allotments,
distribution of the cargo, warehousing where applicable, interaction with
multi-modal carriers, consolidation of shipments if the freight forwarder
is also a consolidator.
3. Integrator/Consolidator: Since air parcels tend to be of smaller size,

Integrator offers an end-to-end service to the shipper and forwarder.
Integrator often takes care of the bulk bookings, optimize the freight
costs (wholesale) and manages the last mile delivery.
4. Airline Operations: The key role of the airline operations is to receive,

store, pack (where applicable), transfer, load, track, and unload the
shipment. The operations team is also responsible for assignment and
management of the airline cargo capacity. The key responsibilities of
airline operations include scheduling cargo flights, plan for the cargo
routes, initialize and open booking of flights, negotiate rates, publish
prices and rates, provide distribution channels, forecast cargo capacity,
segment and forecast cargo demand, plan for no-shows, manage
cancellations, manage overbookings, set up the bid process for space
allotments, accept or reject shipments, provide information related to
dimension of the cargo, maximize revenue, improve the load factors for
the airline, track shipments, resource management of terminal staff,
controls of dangerous/hazardous goods, validation of packaging,
prioritization of the shipments, unloading of the cargo, load balancing,
warehousing, flight manifest, ensure reliability of service and re-route
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where applicable.
5. Consignee: Consignee received the shipments, check for any

deviations and confirms to the shipper and forwarder. Consignee is also
required to track shipments by seeking periodic information from the
forwarder, accept and make the billing payments where applicable and
place and claim repair charges.
Fig. 6.1 Moving Cargo Globally – World Customs Organization Study
Documentation Requirements in Air Freight
The global sourcing manager should be well versed with the documentation
requirements applicable to Air Freight. The details of important documents
157
Documents Relevance
Consignment • Document used to establish security status of the
Security Declaration cargo.
• Helps to ensure that regulated agents, consignors,
and aircraft operators are held accountable regarding
application of the security controls throughout the
supply chain.
Air Cargo Manifest • Document issued by aircraft operator/liner containing
the details of the consignments loaded on the
aircraft.
• Nature of goods, weight, number of pieces are also
specified in the manifest.
Airway Bill • Airway Bill – Issued by the liner/airline operator.
• Master Airway Bill – Issued by the consolidation
service provider.
• House Airway Bill – Issued by freight forwarder for
individual shipment for separate consignee under the
overall consolidation.
Certificate of Origin • Local/Domestic authority like Chambers of Commerce
issues the certificate of origin.
Customs Release • Document demonstrating the release of goods under
Document control by the customs authority.
Declaration of • Documents issued by consignor or shipper that
Dangerous Goods dangerous goods have been transported, packaged
and labelled appropriately.
Export Cargo • Providing declaration for exports/imports customs
Declaration/Import clearance
Cargo Declaration
Invoice • Document for commercial purpose and also for
determining the valuation of the cargo by the
customs authorities.
Packing List • Documents providing details of which goods are in
each package.
Table 6.2
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Developments to Watch for in Air Freight Industry – Sourcing

Manager’s Perspective
1. Air traffic volume is increasing at a rapid pace. China alone is expecting
the volume growth three times by 2025.
2. The industry will look for more of inter-continental long range cargo
movement.
3. Instead of end-to-end destinations, increasingly the volume may
increase for hub-to-hub, e.g., Singapore to Frankfurt. Number of hubs
developing across the globe are also increasing. This will result into
reduced rates of cargo on account of benefit of economies of scale.
4. Small freighter aircrafts are being replaced by new freighters.
6.8 Role of Sea Freight in Global Procurement and

Logistics
Sea freight has a high cost efficiency because the large capacity and the
freedom to choose route. It is also the most preferred route for bulk
transportation. The transported goods have to carry a small amount of
variable costs such as cost of the bunker fuel per container and terminal
cost relative to the large fixed costs of the ship investment and the bunker
fuel consumption independent of the goods weight. Transportation cost
often becomes as low as less than 6% of the product cost for capital goods
of high value. However, on low worthy goods, the transportation cost
component is approximately 30% of the product cost.
When it comes to the service frequency, smaller unit capacities allow more
frequent departures while larger units allow carriers to benefit from
economies of scale. Secondly, the fleet size, vessel size and fleet mix. The
optimal vessel size depends on the cargo available, shippers’ requirements
on transit time and other service elements for the trade lane. The biggest
vessels are often deployed on the longest routes and carriers also need to
secure enough vessels to guarantee the desired frequency. Thirdly, the
number of port calls. By limiting the number of port calls, the voyage time
is shortened and can therefore increase the number of round trips per year
and minimize the required number of vessels on a specific trade lane.
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The participants in the overall sea freight and the flow of cargo (left to
right) is as follows:
Shipper Inland Customs Terminal Carrier/ Terminal Customs Inland Consign

Logistics at Origin Operatio Liner Operatio at Logistic ee
Port ns ns Destinati s at the
on Port Destina
tion
Table 6.3
Key Aspects of Sea Freight which the Global Sourcing Management

should be Aware
Sea freight accounts for the main share of global volume in world trade,
mainly due to its lower price and huge capacity advantage over other
means of transport. Sea freight market is growing in line with growth of
world trade, but over a period of time, the trade landscape is shifting
towards emerging markets. Imbalanced trade flows lead to biased trade
lanes; while capacity utilization on especially Asia Pacific export routes is
higher, import routes have lower load factors.
The sea freight market has near oligopolistic structure with strong position
of carriers limiting the negotiation power of forwarders and shippers at
times. However, over a period of time on account of the extensive built-up
of the freight capacities in the shipping industry, the freight rate have been
lower, despite of the increase in crude prices few years back.
160
Market Trends to Watch for in Sea Freight Business

a. Shipping companies/liners are continuously expanding their fleet which
leads to significant seasonal over capacities and impact the freight rates
often in favour of the shipper.
b. Overcapacity, volatility in crude prices and world trade fluctuations
result into increasingly volatile freight rates and of course shipping lines
are facing increasing cost pressure.
c. Digitization and developments in information technology is bringing new
business models to the industry, as e-commerce platforms emerge in
the sea freight value chain.
d. Volatility of sea-freight rates is affected by two main parameters:
1. Capacity utilization respectively demanded volume
2. Bunker price (fuel).
e. Demanded volumes are highly sensitive to economic developments and
fluctuates around cyclical events such as vacation, Christmas, Chinese
New Year, etc.
f. Sea freight carriers’ profitability dropped significantly since the
beginning of the financial crises.
g. Carriers did not expect the economic downturn – huge investments
made in vessels that are now either under or fully unutilized on delivery
resulting in low profitability.
h. There exists an intense competition in the sea freight industry.
The global sourcing manager needs to be aware of the emerging trends in
the process of planning his procurement and logistics activity.
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Impact of Technology Development in Sea Freight
• Digitalization is a relatively new phenomenon in sea freight industry and

the liners are still on their way finding its direction and use.
• Expected efficiency increase (through electronic data interchange)
focusing on shipping info (shipping instructions, booking requests and
master data) as well as invoicing and documents (customs, etc.).
• Enabling IT-driven solutions (e.g., track and tracing of the shipments).
• Expected emergence of shipping e-commerce platforms, enabling real-
time bookings and rate comparisons.
6.9 Pre- and Post-Shipment Activities to be followed
In the global sourcing especially imports, the sourcing manager needs to

be very vigilant and need to ensure that every step in the sourcing is
followed. Some of the important activities to be followed pre- and post-
shipment from the supplier’s location are listed as under:
Prior to Shipment
1. E-mail request for current status to the supplier;
2. Advise internal personnel in the procurement function of current status;
3. Review shipping and payment terms and ensuring that those are
understood by the supplier;
4. Confirm with the supplier whether he needs to include any assistance/
other charges in shipment value;
5. It is advisable to confirm that supplier will use buyer supplied customs
harmonized number in shipping description as applicable to the trade;
6. Buyer should specify to supplier required/preferred transportation
method;
7. Confirm the consignee, notify party, port and markings and ensure that
that buyer will receive copy of shipping papers;
8. Specify details of the forwarder and broker if not included in purchase
order issued earlier;
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9. Confirm that supplier or forwarder has a clear routing of the shipment;

10.Confirm with the supplier that necessary transportation has been
arranged;
11.Confirm with the supplier that the freight rates used in original landed
cost estimates are only being used;
12.Ensure that the certificate of origin is complete and available with the
supplier;
13.Where required, ensure that an inspection certificate is available prior to
the shipment;
14.Ensure that supplier confirms special packaging arrangements;
15.Ensure that hazardous cargo compliance is completed by the supplier as
applicable;
16.Buyer should ensure that the supplier consider strikes or any other
significant international events that may cause delay during the
shipment;
17.In the interest and protecting loss, the buyer should confirm that
procedure for transportation insurance coverage is being followed by the
supplier.
Activities after the Shipment Leaves the Supplier Premises

i. Confirm that Freight Forwarder has freight and that booking was made.
Buyer can insists for booking advice/shipping instructions;
ii. Confirm with the supplier that shipment is on intended vessel/flight;
iii. Ensure that the supplier has obtained the necessary pre-clearance as
applicable as per the customs authorities;
iv. Buyer needs to ensure that the documents received to insure correct
consignee, notify party and destination;
v. Confirmation is required that the freight forwarder has sent copies of
documents to buyer and their broker;
vi. Confirm that the broker has all necessary documents;
vii.Ensure that necessary preparation is done to ensure special clearances,
e.g., Fumigation certification, clearance from the Food and Drug
Administration, etc.;
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viii.Confirm arrival of the shipment with broker in a timely manner;

ix. Confirm and ensure timely custom clearance with broker;
x. Obtain details of the shipment, trailer number, name and phone number
of inland carrier;
xi. Buyer should ensure that necessary confirmation of inland delivery with
inland carrier should be obtained.
6.10 International Commercial Terms (INCO Terms) and

Its relevance for Global Sourcing
INCO Terms
a. INCO Terms are accepted rules and definitions in International Trade
b. Defines obligation of all parties involved in a trade
c. One can know who will bear costs and what components of cost
d. Know risks involved and who bears the risk – Buyer, Seller,
Intermediary, Transporter, etc.
e. Just use of INCO terms does not constitute a contract
f. Cannot override local country regulations (wherever applicable)
g. Cannot override terms of the sales contract
h. Does not cover other aspects of international trade like currency, credit
terms, price payable, etc.
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Some of the Important INCO Terms
INCO Term Features/Specifics

FCA/Free Carrier 1. Seller delivers goods to location (of carrier) specified by
(Place) the buyer
2. Seller bears the risk till the goods are handed over to
buyer chosen carrier
3. Cost and risks of transportation is limited for seller
4. FCA arrangements allow the seller to resell the goods to
someone else while the goods are still in transit
Ex-works 1. Seller makes the goods available at seller’s premises
(Place), e.g., Ex- 2. Buyer’s responsibility to collect the goods and arrange
works –Plant A, for transportation
Bangalore 3. Buyer bears the cost and risk of transportation of goods
to destination location
4. Ex-works translates into the arrangement carrying the
minimum obligation and risk for the seller and the
maximum obligation and risk assumption for the buyer
FAS – Free 1. Seller must transport the goods all the way to the dock,
Alongside Ship close enough to be reached by the crane of the ship it
(Place) will be transported in
2. The place name indicates the port where the goods are
to be delivered on the quay beside the carrier ship
3. FAS is instead usually used for goods sold as bulk cargo,
such as petroleum products or grain. For containerized
transportation, FAS is generally not applied
FOB – Free on 1. Seller delivers goods to port and loads on ship (loaded
Board (Port) onto the ship nominated by the buyer)
2. Seller clears the goods for exports
3. Cost and risks of transportation is relatively expanded
for seller
4. From port, the buyer bears the costs and risk of
transportation to destination
CFR – Cost and 1. Seller’s responsibility to transport goods from its plant to
Freight destination port
2. Seller covers all the costs (except Insurance)
3. Large MNCs have global marine insurance policies, hence
they opt for CFR while importing
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CIF – Cost, 1. Seller’s responsibility to transport goods from its plant to

Insurance and destination port
Freight 2. Seller covers all the costs (including insurance)
3. Suitable where buyer does not have its marine insurance
policies
DDP – Delivered 1. Seller delivers goods to destination port
Duty Paid 2. Costs and risks are very high for the seller (includes
(Place) import duties and taxes in the destination country)
3. If the clearing responsibility is on Buyer’s Freight
Forwarder, then the term used will be DDU (unpaid)
4. Minimum obligations for the buyer
5. At times, DDP is extended to buyer’s plant location
Table 6.4
Key Aspects to be Taken Care in Applying INCO Terms – A Global

Sourcing Manager’s Perspective
1. INCO terms are location-specific. Carefully read the term and
understand the risks of seller and buyer.
2. While seller may pay the freight for transportation of cargo, in number
of cases, buyer is responsible for the loss/damage to the cargo.
3. Insurance obtained by the seller mostly is bare minimum and most of
the times does not suit the buyers risk mitigation requirements.
4. Carefully understand who is responsible for the risks of loading and
unloading (maximum probability of cargo being damaged).
5. While seller has responsibility for delivery to destination port, there is no
responsibility to provide updates related to transit (unless specifically
agreed between seller and buyer).
6. Responsibility for Custom entry declarations/Importer Security Filings
(required by US) is with the seller under DDP.
7. Important to understand as to who is keeping the track of entire
transportation chain/end-to-end supply chain.
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6.11 Technology Trend in Global Logistics
Adoption of Big Data and Analytics
Big data has been the buzzword of the last few years.The truth is that any
logistics firm that wants to survive or want to lead the game needs to rely
on big data. 98 percent of third-party logistics companies (3PLs) and 93
percent of shippers believed data-driven decision-making was essential to
supply chain activities. This means that logistics providers have realized
that big data has an enormous value that if they utilize well they will be
able to transform the way they operate and become more competitive in
the long run.
The use of Big Data and Data Analytics in the logistics industry is allowing
several stakeholders involved in the business to make informed purchase
decisions. Companies are now using big data to anticipate busy periods,
potential future supply shortage and other insights for making strategic
decisions to improve their market positions and offer a significant
competitive advantage over other counterparts. Furthermore, as per the
Council of Supply Chain Management Professionals, over 90% of shippers
and third-party logistics firms predict that data-driven decision-making is
extremely crucial to supply chain activities as the big data improves quality
and performance by offering effective supply and demand forecast,
inventory management, route optimization, and efficient labour
management, in turn, boosting the growth of the global third-party
logistics market during the predicted period.
While big data is an opportunity, it states challenges for the logistics

industry. First of all, the industry needs to overcome its legacy mentalities,
like manual paper-based processes, lack of collaboration and lack of
visibility into operations, as well as they need to find ways to overcome the
roadblocks of legacy technologies (without changing them entirely).
Change management will be crucial and appointing a Chief Digitization
Officer could be beneficial for any enterprises that want to compete with
the Amazons of the industry. A few other concerns regarding better
utilization of big data are the data silos and the lack of connectivity among
stakeholders, the low quality data, the lack of data integration and data
analytics experts, as well as security concerns.
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Supply Chain Analytics Platforms
Recently, our sales and marketing teams have been going to a lot of supply
chain and logistics related events. While you get to meet there a lot of
logistics providers (and hear their inspiring speeches on how digital
transformation is impacting their operations or what challenges they are
currently facing), there are a lot of supply chain analytics vendors
exhibiting and competing for the attention of logistics providers.
These firms all understood that data is like gold for logistics: those that
don’t invest in analytics will go extinct. No one will want to cooperate with
a company that does not understand its processes and incompetent in
optimizing its processing for efficiency.
It would be impossible to list all the best supply chain analytics providers
as part of this post. Simply, there are just so many of them satisfying the
different data analytics needs of different companies or even different
transportation modes.
For example, Transmetrics provides inland transportation providers with

data for better optimization. For ocean shipping, there are analytics
providers like Xenetaor Cargo-X. While Youredi does not define itself as a
supply chain analytics providers, we have been supplying one of the largest
retailers with data regarding their air cargo shipments, so our customer
can further improve its supply chain to ensure that deliveries are always
just in time.
Logistics Automation and Internet of Things (IoT)
For the last few years, the internet of things (IoT) has been a hot topic in
logistics. The vision has been very clear; put an IoT device on all your
containers, shipments, packages and get real-time data so you will able to
supply your customers with better updates and you’ll also gather
information that you can use for optimization in the future. Besides simply
just tracking shipments (that RFIDs and bar codes can be used for too),
IoT can do much more; it is like a tiny computer that can follow for
example the temperature or the humidity of the air to prevent goods from
spoiling.
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The adoption has been perhaps a lot slower than many have hoped for, but
since the prices of IoT devices and sensors are falling, many more will start
using it in the future. Also, the lifespan of the devices has increased,
meaning that it is a safe and sound investment for those that are planning
for the future.
To exploit the full potential of IoT devices, integration solutions need to be

imposed to ensure that the right data will be in the right place at the right
time. This is crucial for utilizing the information that you gather from IoT
for analytics.
Automation has been gaining traction in the logistics industry as well with
the continuous adoption of Internet of Things (IoT). The inception of
logistics 4.0 is one of the key logistics trends transforming the global
supply chain market. Shortcomings including transportation delays,
operator errors, poor monitoring of cargo, outdated IT failures, and thefts
are being overcome by the integration of IoT in the logistics industry.
Furthermore, this next generation of successful supply chain management
is expected to leverage IoT and edge computing for yielding real-time
automated insights. For instance, US-based Union Pacific has introduced an
IoT-based system to predict equipment failures and reduce derailment risks
by using visual and acoustic sensors on tracks. Such rising adoption of
logistics automation and IoT has boosted the emergence of connected
logistics.
Artificial Intelligence (AI)
Everyone is talking about Artificial Intelligence (AI), but how correctly can
it be used in logistics to reinvent the backend, as well as the operations
and activities affecting the customers and the customer experience?
Logistics is still extremely old-fashioned. Little has changed during the last
few decades. Processes are manual and inefficient, and improvements
haven’t been happening at the same pace as in other industries. When the
industry adopts AI, a lot will change; processes can be more efficient as
companies will be able to remove a lot of manual work that will
consequently result in better quality of work as well as the speedier
execution of processes. When customers live in an ‘I want it now’ world,
these improvements can be extremely meaningful.
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To utilize AI, collecting, aggregating, and harmonizing accurate data (from

many different sources – from legacy systems, cloud-based applications,
and IoT devices and sensors) will be vital so that it can be processed for
realizing trends and insights. The data works as the fuel for AI; the more
information you have available, the better, the smarter you can use AI.
Machine Learning
Artificial intelligence and machine learning often go hand in hand, as

machine learning is a subset of AI (and deep learning is a subset of
machine learning). To put it simply, without machine learning, AI cannot be
developed, and machine learning is like a blood vessel for AI. The concept
is not new – moreover, we are exposed daily to AI and machine learning.
Just think about the last time you used Netflix and you binge-watched a
season of a show that was right down your alley. Based on your history,
the system has learned a lot about your preferences and taste, and now it
can provide you with recommendations that can be a 100% correct.There
are a lot of other real-life experiences that you as a supply chain or digital
change leader can learn of and can make you think of how you could use
AI and machine learning to transform your logistics and provide
exceptional value to your ecosystem.
You could perhaps use it for detecting fraudulent invoices or to predict the
future, like delays in air freight or demand for goods so you can plan
supply accordingly, it can be used for managing risks (for example material
shortages) or to improve route optimization.
Supply Chain Integration
Supply chain integration means that all stakeholders (both internal and
external) are connected so they will be able to share data for better
collaboration, visibility, and transparency.
B2B supply chain integration has strategic importance for enterprises, as

the efficiency can result in serious cost savings, so gross margins can be
significantly reduced that will improve profitability. Additionally, it will
enhance one’s relationship with its trading partners and can have a positive
mark on the customer experience as well.
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For many reasons, supply chain integration has been a challenge.

Integration's have been traditionally expensive, thus it could just mean
another cost for firms that kept lowering their margins. Even worse that
while the invoices were extremely high, most of the integration projects
failed. Many tried to do the integration's themselves, but without adequate
tools developing integration's can be time-consuming (especially that there
is a lack of integration architects as well). Nevertheless, the most
significant barrier is probably the fact that enterprises use a large variety
of systems. Many of them still operate on on-premise legacy systems built
decades ago, while others have started to use the cloud or use SaaS
applications. The data for matmess is also something that integration's
need to tackle; in Europe, companies use EDIFACT, while in the US and
Asia ANSI ASC X12is more common, there are newer formats such as
XML,JSON, but many uses in-house proprietary data formats that often
poorly documented. The integration solutions need to tackle these
challenges, and you need the right tool for that.
iPaaS
These supply chain challenges a few lines above are the reason while
adoption of integration platform as a service (iPaaS) has been skyrocketing
in the last few years. Modern cloud-based integration platforms can be the
savior of logistics firms. An iPaaS is extremely versatile; it can be used for
system integration, data integration,B2B integration, IoT integration, SaaS
integration, API Management, as well as Enterprise Integration Platform as
a Service (EiPaaS) vendors can work as a hybrid integration platform (HIP)
to overcome the on-premise and cloud connectivity challenge.
There are a lot of iPaaS vendors on the market. Some offer services for
citizen integrators to connect cloud-based applications with just a few
clicks. Others provide an integration platform that your IT team can utilize
for building, deploying, and maintaining your integrations (this is
something enterprises often do themselves), or you can invest in a fully
managed iPaaS solution, so the vendor will not only provide you with the
iPaaS (the toolbox), but “build the house for you”, meaning that all your
integration solutions will be developed, deployed, and maintained by the
integration experts of the iPaaS provider.
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iPaaS can simplify how you connect with your stakeholders and how you
share information with them. Whichever of the trends mentioned above
you want to apply for your operations or supply chain, an iPaaS can have a
significant impact on the implementation.
Block Chain
At last, but not the least, we need to mention the block chain. Without a
doubt, there is a lot of discussion going on about block chain these days on
logistics forums, and perhaps this is the current hot topic of the industry.
Block chain is an emergent technology concept that enables the
decentralized and immutable storage of verified data.
All members keep their local copy of the ledger. It is verified because the
members sign the transactions using public-private-key cryptography
before sharing them with the network. Therefore, only the owner of the
private key can initiate them. However, the members can stay anonymous
because the keys are not linked to real-world identities. A distributed
system, like a Block chain, holds benefits over centralized architectures as
it provides the same, verified information to all network members. It
creates trust between the parties by eliminating the need for trust. Block
chain can record the transfer of assets between two parties, without the
need of a trusted intermediary.
It has emerged as Fintech companies have started to look at it as a tool for

securely improving payment handling. For logistics and supply chain, the
block chain could bring more transparency that many are looking to
improve over the years to come. Massive logistics enterprises have started
to look into use cases to utilize block chain, like verifying the origin of fuel
in ocean shipping, identifying counterfeit products, or tracking the source
of goods. It’ll be interesting to see what other block chain use cases
companies will come up with and how it can revolutionize logistics
processes.
Whichever of these technologies you decide to use to improve, transform,

or even revolutionize your logistics, one thing is sure; 2019 will be the year
for digital transformation. Digital change management must be on your
agenda and you’ll have to look for technology providers that can help you
to execute your logistics strategy. However, before investing a lot of money
in all the fancy technologies, you must get right one thing; integrations can
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make or break your logistics operations. Make sure to have an integration

strategy in place that considers all those above-mentioned technologies
and trends that you want to use in the future. Then you and your
integration team or integration vendor can come up with the best approach
to use integrations for implementing these cool game-changing
technologies, so you can be sure that you’ll benefit from them on the long
term.
The emergence of block chain technology has enabled logistic companies to

fail safe digital contracts. The use of this upcoming technology allows the
different stakeholders of the logistics industry such as manufacturers,
suppliers, customers, auditors, warehouse managers, and others to create
a transparent and efficient system for recording transactions, tracking
assets, and managing all documents involved in the logistics process. The
implementation of the block chain technology is one of the most prominent
logistics trends gaining traction in the global block chain technology market
in transportation and logistics industry as it can increase the efficiency and
transparency of supply chains and is expected to impact everything from
warehousing to delivery top payment positively during the next few years.
End to End Digitization of Supply Chain
With digitalization shaping almost all the industries across the globe,
logistics industry is no exception. Rising digital literacy and consumer
awareness about the usage of different online platforms for making
customized purchasing decisions, the digitalization of the logistics industry
has emerged as the key trend gaining utmost traction. The use of
digitization in the logistics industry is further expected to bring about
significant reduction in procurement and supply chain costs while giving a
considerable boost to the overall revenues. The integration of digital
channels in the logistics industry is another critical logistics trends further
allowing the logistics service providers to lend transparency to the
customers while optimizing solutions for increased safety and efficiency.
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Emergence of 3PL and 5PL
The proliferation of third-party logistics (3PL) and fifth-party logistics (5PL)

is expected to accelerate the global logistics market during the predicted
period. During 2017, the 3PL was able to contribute the highest to the
global logistics market share. 3PL is responsible for encompassing a broad
range of end-to-end transport and logistics needs including transporting
goods, maintaining inventory logs and travel insurance, and offering a
shield against property loss. Furthermore, according to Technavio’s express
delivery market in Brazil, 3PL is one of those advancements in supply chain
outsourcing, which provides decreased procurement expenses as well as
reduced delivery times. The rising complexities in the global supply chain
market are further ensuring the adoption of 5PL, wherein, providers of 5PL
solutions often link e-businesses to achieve minimum cost targets.
Efficient Last Mile Delivery Mechanism and Structure
With the continuously increasing proliferation of e-commerce companies,

the provision of efficient last mile deliveries is witnessing a major upswing
to become one of the most critical aspect of creating differentiation of
services among the competitors. Furthermore, getting a package within the
same day of delivery is almost common in the present days, resulting in
the growth of the same-day delivery market in the US. Businesses are also
witnessing a greater emphasis on including same day delivery options
across industries including pharmaceuticals and food and beverages.
Furthermore, along with the same day delivery, the consumers are also
expecting a higher level of services while encouraging large retailers
including Walmart and Amazon to add DIY last mile delivery divisions in
their own companies instead of outsourcing. Consequently, the continuous
efforts of logistics companies to offer efficient last mile deliveries is another
logistics trends expected to offer promising logistics market’s growth
during the predicted period. The need for getting the orders not just right
but perfect will also allow companies to offer ultimate customer
satisfaction.
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Integration of Drone and Smart Glasses
The rising integration of drones and smart glasses in the logistics industry
has improved the flexibility and speed of delivery, in turn, impacting the
growth of last mile logistics market during the predicted period. Self-
driving vehicles, autonomous vehicles and trucks have been able to
maintain high reliability and same day delivery in both urban and rural
areas. Furthermore, integration with smart glasses backed by augmented
reality will make deliveries in the transportation and logistics industry much
easier by hands-free route searches, face recognition for error-free
deliveries and personalized deliveries. The adoption of AI integrated smart
glasses will increase the operational efficiency of first and last mile logistics
along with flexibility and speed of delivery.
Logistics Safety is of Paramount Importance
With greater connectivity to the internet, there have been rising concerns
among the companies pertaining the cyber security and logistics safety.
Furthermore, the protection of consumers’ private data is another key
concern making the safety of logistics solutions as one of the topmost
priorities. Continuous hacks into the websites of e-commerce companies
including Amazon, Walmart and others have revealed potential cyber
security threats. This has further encouraged logistics providers to focus
more on offering secure logistics solutions. According to Technavio’s global
secure logistics market, various logistics companies including FedEx and
International Post Corporation are using technologies like automatic
identification and data capture (AIDC) for keeping a track of the shipments
in real-time, in turn, resulting the market to register a CAGR close to 7%
by 2022.
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Elasticity and Flexibility in Logistics
Elastic logistics is expected to emerge as the latest conceptual buzzword in

the logistics and supply chain industry. It basically refers to the flexibility of
expanding and shrinking capabilities for aligning with the demands within
the supply chain during a time frame. The use of elastic logistics is one the
latest logistics trends that can help companies across the globe by
enhancing customer experience, providing agility and scalability, adding
real-time visibility, and connecting all business processes. The changing
demand and fluctuations in orders are being handled by the 3PL companies
by making their operations much elastic for planning the capacity according
to the requirement.
Deployment of Chat Bots and Collaborative Robots (Cobots)
According to the Logistics Bureau, the use of voice-controlled chatbots for

interacting with users to perform specific actions at several purchase points
in a supply chain including shopping, ordering, picking and others are
expected to trend continuously in the global logistics market. Furthermore,
robotics is also set to revolutionize the logistics industry with e-commerce
giants including Amazon engaging in the increased development of logistics
robots for several functions in warehouses including packaging, storing,
and picking. In addition, various players in the market are leveraging the
inception of collaborative robots or cobots which will be used for effective
order fulfillment warehousing and delivery operations. Consequently, the
rise of Robots-as-a-Service (RaaS) subscription business model will allow
retailers, third-party logistics firms, and e-commerce sites to use robots for
addressing their fulfillment needs, in turn, resulting the global logistics
robots market to witness significant growth throughout the predicted
period.
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6.12 Other Key Trends in Global Logistics
Global Logistics is poised for substantial development in the next 5 years.

The industry is undergoing multiple transformations. Following picture
depicts the key areas of transformation. [PWC Logistics Trend book 2019]
Fig. 6.2
1. Production is Being Brought Closer to the End User

One clear trend is the uptick of near shoring, especially from China to
Eastern Europe. Increasing amounts of production are being brought closer
to the end user as a result of increased labour and transportation costs in
Asia. More European producers realize that they can maintain the same low
costs and high level of quality, regardless of whether their production
plants are located offshore in Asia or near shore in Europe. Bringing the
production closer to the end user results in fewer transportation's, shorter
lead times and easier planning of logistics flows as well as making
corrections to shipping plans.
2.Overcapacity in the Container Segment Due to Investments in

Larger Vessels
More shipping companies invest in larger container vessels to reduce
operational costs. In general, the larger the vessel the lower the cost per
container unit. Many shipping companies using even larger vessels, leads
to an overcapacity; the increase in volume does not match the increase in
demand. Overcapacity is expected to keep freight rates low until there is a
balance between supply and demand.
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3. Continued Focus on Sustainability and Compliance in the

Transport Industry
There is an ongoing trend in the society, in general, where we are more
aware of our planet and committed to taking care of it. As the transport
industry is to blame for much of the emissions of carbon and nitrogen
dioxide, taking responsibility within this line of business is extra important.
In the transport industry, there is a continued focus on sustainability and
compliance, especially environmental issues and CSR. All parties of the
logistics chain are keen to work with companies that offer sustainable
transport solutions and good working conditions. This is reflected by
stricter compliance laws and regulations on a global level. For example,
countries such as the USA, UK and Germany are working.
4. Continued investments in IT solutions for logistics

Having full control over the entire logistics chain requires reliable IT
solutions, and the transport sector continues to invest in new smart
technology. As the supply chain becomes more complex and dynamic,
shipping companies, as well as their clients realize the value of visibility,
traceability and transparency. Providing clients with a fully integrated view
of real-time information across the supply chain facilitates the response
time for shipping companies and improves customer satisfaction.
5. Major Acquisitions in the Global Logistics Industry

Lately, we have seen many large acquisitions in the logistics and transport
industry. From a European perspective, the economic climate has not been
very favorable in recent years, but in Asia and North America the trend is
accelerating. The postal service in Japan is one example of a company that
has made great investments in the industry. This is most likely a result of
the prevailing low-interest rates, making the conditions right to expand
into fast-growing regions. Also, many actors in the logistics and transport
industry see the opportunities of acquisition as it benefits the industry as a
whole, including themselves.
6. Green Transport Solutions win over Air Freight

The Trans-Siberian Railway has recently been given a boost, as more
players want to invest in eco-friendly transport solutions to and from Asia.
The trend is to leave air freight and move towards railway transportation.
There is a significant increase specifically in high-value goods, transported
by rail. Air freight is the fastest shipping method, no doubt about it, but
looking at the entire logistics chain from Asia to Europe, the railway is
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extremely competitive – for both environmental and economic reasons. As

a consequence of environmental thinking, companies are reducing large
parts of their transportation costs by choosing rail instead of air freight,
while the planet remains the big winner.
7. Growing e-Commerce affects the Supply Chain

More consumers are buying stuff online instead of visiting the physical
stores. As the e-commerce is growing, so are the home deliveries. For the
postal services, the volumes of letters are constantly falling, while the
package deliveries increase. This affects the supply chain, meaning that
logistics companies need to optimize their supply chains and find new ways
of providing last mile delivery services, i.e., transporting the goods to
private persons or distribution points nearby. This is a completely new type
of logistics chain than what we are historically used to.
8. Economic Growth will come from New Geographies

Traditionally, China has had a rapid economic growth and the country has
been a tremendous engine for increasing global trade. Now, we are starting
to see that growth will be coming from new regions. Africa is expected to
become the next big market, bringing new challenges to the table such as
poor infrastructure, ageing roads and seaports and underdeveloped
transportation systems. Tapping into the continent’s tremendous growth
opportunities and figuring out how to overcome these challenges, is of
great interest for all players in the logistics chain. As for the African
countries, they need to investigate how they can maintain growth and
continue to have a positive development.
9. Globalization
Emerging, mature and international markets are now part of the growth
strategy of a vast number of companies. It is now the standard to go
international, and logistic solution providers have a role to play in enabling
this trend through a transportation network.
10.Technologically Savvy workforce

Mobile technology has made people comfortable with technology since they
are familiar with it. The current generation expects to have equipment in
the workplace that can provide the same engagement using technology
that they enjoy on their smart phones and cars.
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The millennials, those born in the 80s and 90s, are coming into the
workforce and bringing traits that are bound to influence how technology is
used. They are confident, able to multi-task, tech savvy and expect instant
gratification. It is these factors that must be considered in with regards to
this group and how you present information to them. With such a
workforce, the next 10 years will experience changes that will prove
disruptive.
In America today, 76% of the teenagers are on social media, 78% carry a
cell phone, and 93% can access a computer at home. They spend most of
their time engaging in computer games, and by the time they turn 21, they
will have spent an average of ten thousand hours gaming. This is now
becoming a global trend. Equipment in the work place as well as
management techniques will need to adapt to these workers.
11. Uberisation of Trucking Business

Ride sharing has worked really well in the taxi business and some trucking
companies are hoping to see the same happen in the trucking industry. To
this end, they are offering uber-like services as well as apps. The idea is to
give clients more control of transportation and inventory since they are
looking for more visibility. Some of the apps being used currently include
Cargomatic, DashHaul, LaneHoney and Transfix. They allow shippers to see
which trucks are close to their location and then book directly in just one
click without having to use a broker. The driver of the truck will need to use
his or her truck scale/weighing system to ensure that there is space for the
client’s goods. It is therefore imperative that the truck scale receives
regular cleaning, inspections and calibration for accuracy.
12.Transportation through Electric Vehicles

The electric vehicle market is expected to be valued at $570b by the year
2025. EVs are energy-efficient, cost-effective and have lower maintenance
costs as compared to internal combustion engines.
There are three main ways in which EVs will enter the logistics industry:
traditional manufacturers will either produce these EVs themselves, will
invest in batteries for EVs or will invest in start-ups that produce such EVs.
The government has allocated INR 10,000 crore for the faster adoption of
these vehicles, however, it also needs to provide charging stations across
the country to promote long-distance shipments. One thing is certain, EVs
are here to change the world of logistics.
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13. Computer Vision Enabled Classification

Computer vision is an advanced algorithm through which the computer is
given the power to see the real world on the basis of the data has been fed
into it. This allows the computer to make decisions just like humans would.
In logistics, if the cargo undergoes damage during transit, the customer
has to accept it if it is under permissible limits. However, if it is not under
permissible limits, the cargo needs to undergo a predefined process. This
involves a lot of decision gaps as approval is required on multiple levels.
Computer vision can be used to deal with cargo damage classification in a

more efficient manner. Labelled data can be fed into the computer, on the
basis of which it can tell if the damage is within feasible limits or not. This
will eliminate the need to take multiple approvals from different parties and
will make the delivery process faster.
1. Visit any sea port or cargo operations of an airline and understand the
important processes and activities involved in international logistics.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
2. Study Purchase Orders, Sales Invoices of sample organization and

review the INCO terms used. Compare the INCO terms with payment
and credit terms.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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6.14 Summary
Any discussion on international procurement will not be completed unless

we discuss an important component, i.e., global logistics. Logistics is an
integral part rather an engine of the entire global supply chain. The global
sourcing manager needs to be aware of all the logistics options available so
that the organization’s objectives can be met in the most competitive
manner. The logistics options range from a simple surface transportation,
to air freight, sea freight, multi-modal transportation and engagement of
players like 3PL and 4PL. There are key challenges in international logistics
which include managing and coverage of geographical distance, dealing
with foreign exchange fluctuation, engagement of foreign intermediaries,
ensuring compliance with all regulations, ensuring security of the shipment
and more important selecting the most appropriate mode of transportation.
The global sourcing manager also needs to establish right performance
indicators for measurement of the effectiveness and efficiency of the global
supply chain. The global sourcing manager is also expected to have a
sound understanding of the INCO terms for appropriately structuring the
contract with supplier and logistics service provider. A major change that
industry is expected to witness in International Logistics is on account of
evolution of technology especially related to AI, ML, IOT, Analytics,
Uberisation, Connected Logistics inter alia.

1. Exploring the role and importance of logistics in international
procurement.
2. Highlight the important issues and challenges in managing procurement
and global logistics.
3. Highlight and explain some of the important performance indicators for
global logistics.
4. Write a short note on the factors influencing the choice of selecting right
mode of transportation.
5. Explain the role of Air Freight, Sea Freight and Surface Transportation in
global procurement and logistics.
6. What are the pre- and post-shipment activities that the global sourcing
Manager should be aware of?
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7. Explain atleast 3 INCO terms and its implications on cost and risks to
the buyer.
8. ABC Limited has quoted Ex-works Price (ABC’s Chennai Plant) to you.
The goods are very costly and you would like to ensure that ABC Limited
bears the risks of damage to goods during loading of cargo on the truck
arranged by you. What are your options as an Operations Procurement
Manager? What inputs you would like to provide to your Purchase
Department?
9. CHN Limited, Chennai has shipped the goods from its plant to JNPT
(port in coastal Maharashtra) and the term agreed with buyer is FOB
(JNPT). Way to JNPT was very congested and ABC Limited’s transporter
could reach JNPT only after the vessel (as arranged by buyer’s freight
forwarder) left for sailing to destination. What is the liability of CHN
Limited? What alternatives are available to CHN Limited?
10.KAN Limited has ordered for import of a very costly and complex
equipment from Germany. The equipment is custom-made (one of its
kind) for KAN limited by a German company. Operations/Procurement
team is negotiating with German company for the price. Which of the
INCO terms will be most suitable for KAN Limited? Why?
11.Explain the impact of Connected Logistics and advent of innovative
technologies on Global Supply Chain. Support your answer with industry
illustrations or case study.
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1. Which of the INCO term requires the buyer to take responsibility to

collect the goods and arrange for transportation from the seller’s
premises?
(a) Ex-works
(b) FCA
(c) FOB
(d) DDP
2. Which of the following document is issued by Chamber of Commerce or

Industry association certifying the place of manufacture of the product
to be shipped?
(a) Custom release document
(b) Declaration of dangerous goods
(c) Certificate of origin
(d) Export cargo declaration
3. Which of the following is least expensive mode of transportation in an

international trade?
(a) Air Freight
(b) Sea Freight
(c) Surface Transportation
(d) Chartered Plane
Answers: 1. (a), 2. (c), 3. (b).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
185
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
Chapter 7
Measuring Performance In International
Procurement
Objectives
• Understand the process adopted for measurement of the performance of
supply chain and logistics
• Understand what needs to be measured in International procurement
• Understand some of the important performance indicators
Structure
7.1 Introduction to Measuring Performance of International Procurement
7.2 Important Performance Measures and Aspects to Measure
7.3 Illustration of Global Procurement Sourcing KPIs Matrix of a
Multinational Company
7.4 Emerging Key Performance Indicators
7.5 Hierarchy of KPIs and Cross Functionality in Supply Chain
7.7 Summary
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7.1 Introduction to Measuring performance of international

procurement
For cost-effective and time efficient international procurement, the Global

procurement Manager is required to set up performance measures and
metrics. Objective, holistic Key Performance Indicator (KPI) measurement
and reporting helps Global Procurement Function monitor progress against
strategy execution, expected deliverables, organizational maturity and
demonstrate credibility to stakeholders.
Measurable goals and reporting engages teams to improve performance

and enables sharing successes within companies. The KPI’s address
procurement value, stakeholder satisfaction, supplier performance
management, employees and process efficiencies.
Supply chain metrics are defined by establishing specific parameters which

are used in quantifying and defining supply chain performance. The metrics
can be utilized in the inventory accuracy and turnover metrics, to the
inventory-to-sales ratio.
Concerning the continual growth, evolution, development, and success of

your company’s supply, fulfillment, and delivery efforts, supply chain
performance metrics are the most invaluable tools available at your
fingertips. By collecting, curating, and analyzing key supply chain metrics
you will be able to spot inefficiencies within your ecosystem while
capitalizing on your current strengths and establish goals that will help
your supply chain scale with the success of your company.
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7.2 Important performance measures and aspects to

measure
Well-defined KPIs should address all areas of procurement activity

holistically and globally. Some of the indicative areas are as follows:
1. Procurement Value
2. Stakeholders
3. Operational Excellence or Process Efficiency
4. Supplier Performance Management
5. Employees
Let us explore, various sub-areas which can be measures within the above
broad five categories:
a. Procurement Value: The objective of KPIs is to define the value added

by the procurement function to the organization. Some of the metrics
which can be covered are:
1. Sourcing Return on Investment (ROI)
2. Spend per employee
3. Savings generated during the given period across procurement
categories
4. Procurement strategy maturity
5. Sourcing rigor applied/proactive engagement with suppliers
6. Savings per employee
7. Procurement leverage applied/managed spend
One of the important objective and deliverable for global procurement is to

reduce the cost of procurement on a continuous basis. The approach
adopted by the organization to measure this objective is through the
following comparisons:
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(i) Last year’s price vs. current year price

(ii) First bid compared to last bid
(iii) Average of bids vs. the lowest
(iv) Inflation and currency fluctuation adjustments
(v) Previous year’s market basket cost vs. current year cost
(vi) Improvement in spend through contracts
b. Stakeholders: It is very crucial for the Procurement Manager to ensure

satisfaction of its customers, i.e., the User functions. Procurement
function can conduct user department survey. The surveys can be done
either electronically or in focus groups quarterly or bi-annually.
c. Operational Excellence: Organization focus of Purchase to Pay (P2P)

process to get efficiencies in sourcing. Some of the KPIs that can be
considered under the operational excellence is:
○ Use of sourcing through internet
○ Evaluation of Cost per Purchase order/line item
○ Compliance to contracts/catalogue/preferred suppliers
d. Supplier Performance Management: Global Procurement manager

should engage with the suppliers across the globe. The supplier
performance can be evaluated on the basis of the following important
criteria:
(i) Quality of the products
(ii) On-time delivery of the products
(iii) Supplier rating score including stakeholder feedback and inputs
(iv) Supplier innovation
(v) Compliance with the contract terms and conditions
Periodic supplier audits are also effective means to evaluate the supplier
performance.
e. Employees: Evaluation of employee’s skills is the foundation and

important aspect of the Global procurement function. Purchasing from
suppliers across borders requires a special skill. The levels of the skills
can be broadly classified into the following key categories according to
the role played and contribution made to the procurement function.
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1. Foundation/Basic
2. Practitioner
3. Expert
4. Thought leader
The essential skills and competencies will include:

i. Ability to identify and focus on business needs;
ii. Building propositions with clearly defined value expectations from the
suppliers;
iii. Ability to develop and establishing strategic relationships;
iv. Integrated working across various function through involvement;
v. Technical and domain skills;
vi. Leadership skills;
vii. Effective negotiation skills.
7.3 Illustration of Global Procurement Sourcing KPIs

Matrix of a multinational company
Key Performance
Indicator Measurement
Indicators (KPIs)
Procurement leverage % of addressable spend
applied/managed spend
Strategic sourcing applied % of addressable spend
Spend per employee Spend/count of sourcing professionals
Procurement Return on Minimum % to be defined by the management
Investment
Savings Absolute amount or % of the addressable spend
Savings per employee/per Annualized savings/count of sourcing
annum professionals
Spend concentration Spend value with top 20-25 suppliers
E-Sourcing Value of sourcing through electronic mode as a
% of total spend
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Competencies Average number of competencies per sourcing

employee
Table 7.1
Establishment and measurement of procurement Key Performance

Indicators (KPIs) are an effective way to drive and measure organizational
performance and execution towards agreed strategy and goals.
Procurement organization need to focus on essential KPIs, present data on
a proactive manner and also take stakeholders needs into consideration
when designing an evaluation and measurement framework.
7.4 Emerging Key Performance Indicators
1. Cash-to-cash Time Cycle
This priceless supply chain metric will help you calculate the length of time
required to transform your resources into bonafide cash flows. Working
with three core ratios – the days of inventory (DOI), the days of payable
(DOP), and the days of receivables (DOR) – the cash-to-cash time cycle
KPI visualizes the period required between the moment a business pays
cash to its suppliers and the moment it receives cash from its customers.
The shorter the conversion cycle the better, and this invaluable supply
chain metric will help you take the right measures to ensure that you can
run your business with less money tied up in operations.
2. Freight Bill Accuracy
Shipping and freighting your items from supplier to warehouse or

warehouse to the consumer is vital to the success of your entire operation,
and any issue or error can prove harmful with time and investments being
wasted.
Billing accuracy is critical to profitability as well as customer satisfaction, so

tracking this particular metric will help you spot detrimental trends,
improve your overall shipping accuracy, and ultimately, help your business
grow.
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3. Perfect Order Rate
This particular insight is one of the most critical supply chain KPIs for
businesses operating in a multitude of sectors. The perfect order rate
measures the success of your ability to deliver orders incident-free, which
will ultimately help you iron out issues such as inaccuracies, damages,
delays, and inventory losses. The higher the perfect order rate, the better,
because this KPI has a direct impact on your customer retention and
loyalty levels.
4. Days Sales Outstanding (DSO)
The days sales outstanding (DSO) KPI measures how swiftly you are able
to collect or generate revenue from your customers.
Essentially, a low, or healthy, DSO number means that it takes a business

fewer days to collect its accounts receivable. A higher DSO level
demonstrates that a company is selling its product to customers on credit
and taking longer to collect revenue in a tangible sense, which can stunt
cash flow and minimize profits in the grand scheme of things. By
calculating this often, you’ll be able to collect revenue faster and more
efficiently, which will help boost your bottom line in the long run.
5. Inventory Turnover
One of the most superbly helpful supply chain KPI available today focuses
on logistics KPIs and helps a business understand the number of times its
entire inventory has been sold over a certain time frame: an incredible
indicator of efficient production planning, process strategy, fulfillment
abilities, and marketing and sales management. By calculating your on-
time shipping rate and comparing it to other competitors within your
industry, you will be able to create a clear management reporting practice,
see where you stand and take the appropriate action to improve it over
time – this will result in a boost in brand authority as well as an increased
bottom line – so it’s important.
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6. Gross Margin Return on Investment (GMROI)
Every business, regardless of service, product, or sector strives to achieve

the best return on investment (ROI) for each and every commercial activity
it undertakes. Maintaining a consistently solid ROI is the bread and butter
of ongoing e-Commerce success.
In supply chain metrics, the GMROI offers a clear representation of the

gross profit gained for every AED (or $, £, €, ₺) of the average investment
made in your inventory; a calculation achieved by dividing the gross profit
by the average inventory investment. By tracking this KPI on a monthly
basis, you’ll quickly gain an insight into which items in your inventory are
poor performers and which are worth investing in more – gold dust in
terms of business-based information.
7. On-time Shipping
An excellent indicator of how long you may need to ship a particular type
of order to a client, customer, or partner, this KPI will allow you to set a
benchmark shipping time relative to each product which, in turn, will allow
you to optimize your shipping and delivery processes, reducing turnover
time, and boosting customer satisfaction levels.
8. Return Reason
The return reason supply chain metric offers an astute insight into the
various motives causing your customers and clients to return their orders –
an information that is priceless to the ongoing success of an eCommerce
business. Presented in a digestible pie chart-style format with a key
showcasing the primary reasons for return, you will be able to assess your
areas of weakness, analyze the quality of critical areas of your supply chain
process, and make the kind of improvements that will enhance not only
your reputation but your overall level of service significantly. By gaining
this level of insight, you stand an excellent chance at decreasing returns,
boosting profits, and improving cash flow as a result.
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9. Inventory Velocity (IV)
A pivotal supply chain KPI, the inventory velocity, or IV, provides a visual
snapshot of the percentage of inventory that’s projected for consumption
within the next period or quarter.
Calculated by dividing the opening stock by the sales forecast for the
following period, the IV is a KPI that will help you optimize your inventory
levels, give you a greater chance of meeting consumer demand, and
prevent you from wasting money on excess levels of stock.
10. Inventory Days of Supply
While this may not be the most panoramic or all-encompassing of supply

chain metrics, inventory days of supply is particularly useful as it will give
you a fairly accurate calculation of the number of days it would take you to
run out of stock if it wasn’t replenished.
By tracking, analyzing, and understanding this stream data on a regular

basis, you will be able to prepare for, and avoid, any stock-based calamities
in an emergency situation, saving your reputation and cash flow in the
process.
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7.5 Hierarchy of KPIs and Cross Functionality in Supply

Chain
If you wish to keep things as simple as possible, you should find that two
levels, or tiers, of logistics KPIs, are sufficient. You might call the highest
level the “primary tier” and the second level the “secondary tier”. The first-
tier KPIs would be the ones monitored at an executive level in your
company, and would perhaps include metrics like:
a. Logistics costs as a percentage of sales
b. Inventory turns
c. Total inventory days
d. Source-to-deliver cycle time (the time from sourcing raw materials to
delivery of finished goods)
DIFOT
At the secondary level, you would have KPIs that provide more granularity
and highlight the causes of fluctuations in tier 1 metrics. Examples of these
secondary KPIs could include:
1. Warehouse costs as % of sales

2. Transportation costs as % of sales
3. Finished goods inventory turns
4. Raw materials inventory turns
5. Inventory obsolescence
6. Work in progress days
7. Finished goods days
8. Raw material days
9. Inbound delivery in full
10. Inbound delivery on time
11. Outbound delivery in full
12. Outbound delivery on time
13. Manufacturing cycle time
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The Three-Level Hierarchy
A three-tier KPI solution is a little more involved, with the top two tiers
comprising end-to-end supply chain metrics with Tier 2 being more
granular than Tier 1. Meanwhile, the third tier can include KPIs that show
performance at a functional level, and highlight how each function’s
primary activities are contributing to end-to-end performance.
Cross-Functional and Functional KPIs: How to Apply the Right Ones
Functional KPIs offer value of course, but when you combine and integrate
them to offer an end-to-end view of performance trends, you can magnify
that value considerably. It can be helpful, therefore, to identify the
processes involved in your supply chain before deciding upon the
functional-specific measures that collectively, will show how these
processes are performing.
You can identify and categorize your company’s processes in any way that
suits you, but it’s worth briefly discussing, as an example, one of the
process cycles commonly used when monitoring supply chain performance.
That cycle typically goes under the heading of order-to-cash.
Order to Cash
Order to Cash (OTC) is the end-to-end process involved in capturing and

fulfilling a customer’s order, and can be measured using a carefully
coordinated range of functional KPIs. The OTC cycle loosely comprises the
following sub-processes:
Customer-Order Capture
• Order picking and packing

• Dispatching, shipping, and delivering the order
• Billing the customer
• Receiving and recording the customer’s payment
OTC is a process that illustrates clearly, how the supply chain comprises a
broader range of business functions than you might have thought.
196
For example, the sales function is not typically seen as part of the supply
chain, but if your sales team captures orders from your customers, the first
step in the supply chain is very much sales-related.
Similarly, it’s easy to forget that a supply chain comprises the flow of
information and money, as well as goods. That necessarily implies a need
for financial functions to be measured if you want a full picture of end-to-
end supply chain performance.
Who’s Involved in Order to Cash Measurement?
When you measure the order-to-cash cycle, you will need to set
appropriate KPIs for your sales department, warehousing and
transportation functions, and for some areas of finance, such as accounts
receivable. To illustrate how much this matters, consider the possible
consequences of any failure or delay in recording a customer’s payment.
Let’s assume a system or process issue that results in the delayed posting
of the customer’s payment. If the customer makes frequent purchases,
receipt of payment for the previous delivery might not be recorded before
the customer places a fresh order.
Because there is no record of payment, the customer’s account might be

put on hold in your ERP system, and the whole process of supplying that
customer stops until somebody spots the problem and resolves it. That’s a
supply chain performance issue, just as much as if your warehouse team
fails to pick the order.
Functional KPIs in OTC
If you’re beginning to think that order-to-cash cycle measurement sounds

incredibly complicated, you can relax a little, because it need not be that
hard. For one thing, a made-to-measure (see what I did there?) KPI exists
that’s relevant to pretty much any type of supply chain operation. It’s a
composite KPI called perfect order, and it incorporates functional
measurements for all stages of the OTC process.
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You can use the perfect order KPI to track OTC performance, by breaking it
into its components and applying the metrics as relevant to the different
functions in your supply chain. The breakdown should look something like
this:
1. Sales function: Percentage of orders captured accurately (reliant on
customer feedback)
2. Warehouse function: Percentage of orders picked in full
3. Transport function: Percentage of orders delivered in full; Percentage of
on-time deliveries
4. Finance function: Percentage of orders billed correctly
5. All functions: Percentage of orders with correct and accurate
documentation
The functional KPIs mentioned above are the highest level of metrics that
you will use. They will likely need breaking down further to maximize
identification of performance issues and aid in solution planning—always
remembering to keep things simple by only holding people responsible for
the KPIs they can directly affect.
For instance, in the warehouse, the percentage of orders picked in full

might be broken down into…
• Percentage of orders picked with errors – incorrect quantity

• Percentage of orders picked with errors – incorrect product
• Percentage of order lines picked with errors – incorrect quantity
• Percentage of order lines picked with errors – incorrect product
At this level of granularity, the picking-performance measurement will allow

you to see trends and patterns in picking accuracy. You might notice for
example, that a significant number of orders are picked with minor errors,
or that a small number of orders contains many errors.
Furthermore, by applying codes to highlight the exact nature of each error,

you will gain an even higher level of visibility. You might notice, for
instance, that a particular product is affected more than others by picking
errors, and then determine if the problem lies with that product’s
markings, labels, storage location, or proximity to a similar product in the
slotting plan.
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What Makes an Effective KPI Suite? - The Golden Rules

1. Make sure you align all KPIs with the overall business objectives of your
company.
2. Ensure that each KPI has an “owner”, whether that is an individual or a
group of people.
3. Design each KPI as a leading metric, able to assist with the prediction of
performance issues.
4. KPIs should be actionable, providing timely, accurate data that owners
can interpret and utilize.
5. Each KPI should be easy for its owners to understand.
6. Each KPI should reinforce and/or balance others.
7. No KPI should contradict or undermine the others.
8. Each KPI should have a target or threshold indicating a minimum-
acceptable level of performance.
9. As each KPI is proved stable and effective, it should be reinforced by
incentives or compensation.
10.Each KPI should be updateable, as they will lose relevance over time.
1. Review the Management Discussion and Analysis section in the Annual

Report of any large publicly listed conglomerate and identify the key
procurement related measures.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
2. Conduct interviews with Supply Chain Managers, Heads and identify top
5 performance indicators for global procurement from their
organization.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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7.7 Summary
What gets measured gets done? This is also applicable to the global
procurement function. While the performance measures will largely defer
from organization to organization, the key inputs need to be drawn from
the overall business strategy of the organization and its key objectives.
Some of the important measures include the quantum of cost reduction
achieved, spread concentration, development of competencies,
procurement return on investment, savings per employee per annum inter
alia.
1. Highlight and explain the important areas to be considered while

defining performance measures for international procurement in a
multinational organization.
2. Write a short note of Key Performance Indicators for global sourcing

function.
1. Which of the following is least likely to be a performance indicator for

global procurement function?
(a) Savings on material procurement
(b) Production quantity
(c) Turnaround time for purchase order to good receiving
(d) Discount availed on payments to vendors
2. Which of the following is not expected to be an essential competency of

a procurement professional?
(a) Technical and domain Skills
(b) Sound understanding of commercial terms
(c) Effective negotiation skills
(d) Marketing and selling skills
Answers: 1. (b), 2. (d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
201
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
Chapter 8
Ethics, CSR, Sustainability And Other
Considerations In Global Purchasing
Objectives
• Understand the role of Ethics in Global Purchasing
• Understand the role and sense of social responsibility in global sourcing
• Understand the importance of sustainability in global sourcing
• Gain an understanding of Ethics and Compliance issues from Supplier
and Buyer perspective
• Understand the initiatives taken by buyer for ensuring responsible
supplier behaviour
• Gain an understanding of role of global sourcing manager in ethical
procurement
• Understand the checklist for practical implementation of ethics in global
procurement
• Understand the factors involved in evaluating the performance of
suppliers on procurement ethics
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Structure:
8.1 Introduction and Understanding Role of Ethics in Global Sourcing
8.2 Role of Social Responsibility in Purchasing
8.3 Sustainability in Global Sourcing
8.4 Example of Code of Conduct of a Large MNC Engaged in Fast Moving
Consumer Goods (FMCGs) Segment
8.5 Ethics Issues from Supplier and Buyer Perspective in Global Sourcing
8.6 Examples of initiatives taken by Buyers for Ensuring Responsible
Supplier Behaviour in the Global Sourcing Arena
8.7 Role of Global Sourcing Manager in Ethical Procurement
8.8 Checklist and Questionnaire for Practical Implementation of Global
Sourcing Process and Ensuring Ethical Procurement
8.9 Evaluating Procurement Ethics and Compliance Levels
8.10 Introduction to Supply Chain Risk Management
8.11 Supply Chain Resiliency
8.13 Summary
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8.1 Introduction and understanding role of Ethics in global

sourcing
Ethics can be defined as the basic principles of correct behaviour, with

reference to a specific person, profession or activity. When most people
think of ethics in global sourcing, generally the thoughts represent bribes
and gift-giving from suppliers to purchasers, but there are several other
issues that need to be considered when discussing ethical issues connected
to a company’s sourcing strategy. When it comes to a company’s ethical
responsibility regarding its purchases, it is mainly the requirements on its
suppliers and how the company acts to assure that the suppliers act ethical
in its operations that comes into focus.
Requirements that a company could put on their suppliers involves

demands on legal requirements, restrictions on use of child labour, respect
to workers’ rights, regulatory compliant wages and working hours, factory
conditions and safety, environment, but also requirements that the
products not shall affect the users’ health negatively. The key requirements
are often consolidated in a single document referred as the Ethical
Purchasing Guidelines/Code of Conduct.
Pre-globalization era, companies did most of their purchases locally and

they were mostly working in the same business cultures as their suppliers.
Nowadays, as an effect of globalization, buyer in an organization work with
multiple suppliers across the globe for meeting various objectives one of
which is that advantage of lower labour costs in developing countries.
However, varied cultures across the globe also give rise to a confusion
among the purchases about the ethics in purchasing. Something that is
ethical right at one market might be unethical at other markets. This
confusion can at the end result in an unethical behaviour. Thus, companies
across the globe now put a higher focus on their purchasing activities so
they can avoid an unethical behaviour.
As a common perception, bribery is the largest ethical problem within the

purchasing function and Bribery, gift-giving and entertainment are used to
make the purchasers favour specific suppliers during the supplier selection
instead of only base it entirely on price, quality and delivery. Bribery is in
most of the parts of the world regarded as illegal and also unmoral, while it
in other parts of the world is seen as a part of the business culture. This
has resulted into a larger focus on ethical issues within the companies’
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purchasing departments since the companies want their purchasers to be

absolutely clear on how the purchases shall be made. They do not want to
risk that their company should be associated with an unethical behaviour
as bribery, as it can significantly damage the reputation of the
organization.
Companies now-a-days are developing policies and strategies that are

adapted to the new trends and the new situation that the purchasers meet
at the global market. The companies want both to create a business
environment that encourage ethical purchasing but also create a
framework that the suppliers must follow if they shall be allowed to supply
goods and services to the companies. This framework is often called
“Codes of Conduct” or often referred as “Ethical Purchasing Standards”.
The key components of the Codes of Conduct that can go beyond

prevention of bribery and corruption are follows:
1. Clear definition of working hours
2. Defining working days per week
3. Guaranteed minimum wage as per the regulation applicable in
the supplier country
4. Overtime compensation as per the regulatory requirements
5. Health and safety education to staff
6. Physical examinations of the personnel involved
7. Restriction on use of child labour
8. Authorized employments
9. Provision of adequate accident and pension insurance
Some of the nations and so the suppliers are also exposed to slavery and
exploitation of the workforce. The risks levels get enhanced at:
(a) Places where workers have fewer protections
(b) Places where there are high levels of poverty
(c) Places where there is widespread use of migrant workers
(d) Some specific high risk industries (typically industries involving
raw materials)
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(e) Labour-intensive stages of supply chains where the end product

is cheap (match box, fire cracker, etc.)
8.2 Role of Social Responsibility in Purchasing
Social responsibility implies that companies need to take into account the
impact company decisions have on society in general. It reaches beyond
the usual objectives of economical, legal and technical requirements of a
company. As the purchasing organization to a large extent decides which
suppliers to use, they have a great impact on the Corporate Social
Responsibility performance of a company. Being the most crucial link
between the internal functions and external stakeholders, the people
managing the purchasing activities in a company have large effect on
socially responsible activities.
The key responsibilities of a purchasing organization is to ensure:
1. Adequate Diversity: Companies achieve the objective of diversity

through some of the following initiatives:
a. Allocation of share of business among the large enterprises and also
Micro, Small and Medium Enterprises (MSMEs)
b. Encouragement to start ups and minority owned enterprises
c. Engagement of women entrepreneurs
2. Protection and Respect towards Human Rights: Companies must

respect the law of the land and promote being human in all aspects of
the business. The sourcing can be made from the suppliers who respect
the human rights.
3. Safety of Business Operations and Products: In addition to global

standards and industry specific standards on safety and security of the
products/services, the buyer company may impose certain additional
practices/process changes on the supplier operations for safety of the
product, e.g., restriction on use of lead for manufacturing toys.
4. Inclination towards Philanthropy: Organization may support and

purchasing from companies that focus on a philanthropic business,
creating training and employment opportunities for groups of people in
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need of this. These suppliers are chosen for their support to society and
not only on the basis of having the lowest price and best service,
although they very well may have this.
8.3 Sustainability in Global sourcing
The growing awareness of the consequences for polluting the environment

has led to a larger focus on green purchasing.
The increased concern for the environment in the society of today has led
to a greater awareness of the consumers, and they keep track on
companies making sure they are performing in an environmentally friendly
manner. In addition, no matter how good a company performs, if the
suppliers don’t comply with the environmental standards the customer will
soon hold the company responsible. Purchasing environmentally is equal to
procuring reusable and recyclable goods, taking part and supporting the
development of environmental friendly items, and take actions to reduce
the utilized resources.
Green Purchasing/Environmentally Preferable Purchasing
Organization globally are inclined towards implementing Environmentally

Preferable Purchasing (EPP), commonly called Green Purchasing, is defined
as an environmentally-conscious purchasing practice that reduces sources
of waste and promotes recycling and reclamation of purchased materials
without adversely affecting performance requirements of such materials. It
is important to consider that it covers both, products and services, and
they have to successfully minimize negative environmental impacts
throughout the Supply Chain until the disposal of such materials.
EPP can be used either for internal or external purchasing from supplier.
The elements are different in each of them but the aim is the same when
reflecting on acting in an environmental friendly manner. Meeting internal
customer requirements in a green, costly and time-effective manner is as
significant as in the relationships with external suppliers.
Emerging markets for green products, technologies and services mean

promising chances for international EPP from suppliers across the globe. It
is easier to carry out an EPP due to the consciousness encountered in the
young consumers – and the consumers in general – about the
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environmental aspects. This is a situation that could push the companies to

be interested in applying EPP using the marketing of green products and
services directed specifically to the sectors that consider environmental
features as one of their key points to perform a purchasing.
Why Environmentally Sustainable Purchasing Policy will be

Relevant to Business and Buyers across the Globe?
Some of the key factors that have increased the relevance of the
sustainable way of purchasing are as under:
1. Fear of liability litigation and fines, reputational damage and subsequent
negative publicity of the buyer company;
2. Civil and criminal penalties against pollutants, action by the pollution
control boards/state agencies;
3. Federal and state environmental regulations non-compliances;
4. Potential liability and cost for disposal of hazardous materials and penal
actions;
5. Supplier’s advances in developing environmentally friendly goods and
providing environmental friendly packages;
6. Environmental partnership with suppliers;
7. Buying firm’s environmental policy.
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8.4 Example of Code of Conduct of a large MNC engaged

in Fast Moving Consumer Goods (FMCGs) segment
Component of the Code Details

• All suppliers must follow the national laws in the
countries they operate.
Legal Requirements • Additionally, the suppliers also need to comply
with some of the guidelines made applicable by
the buyer.
• Company does not accept child labour.
Child Labour • Their policy is based on the United Nations
Convention on The Rights of the Child.
• Company require from their suppliers that the
workers’ safety should be prioritized and no
Safety hazardous equipment or unsafe buildings are
accepted.
• First aid equipment must be available.
1. No bonded workers, prisoners or illegal works
are allowed in the production.
2. No punishment is allowed.
3. No discrimination regarding race, gender or
Workers’ Rights
religion is allowed.
4. Every employee shall get an employment
contract.
5. Minimum wages and maximum working hours.
• Maintain the factory conditions in a most
Factory Conditions
conducive manner.
Housing Conditions • Better living conditions for employees.
• Compliance to environmental regulations.
Environment • Maintenance of air, water and soil pollution control
mechanism.
• Company expects all its suppliers to respect the
Monitoring and
above Code of Conduct and to actively do their
Enforcement
utmost to achieve company laid standards.
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8.5 Ethics issues from Supplier and Buyer perspective in

global sourcing
While sourcing from emerging economies has the advantage of lower

operating and labour costs. In the past, sourcing executives would trade-
off such savings with other factors such as lead times, customs,
disruptions, and inventory. However, in recent years, risks of supplier non-
compliance with environmental and labour standards have been heightened
to new levels and this issues are increasingly affecting the global
procurement manager’s decision.
According to a recent SCM World survey of chief supply chain officers and
executives (2012), while supply shortages, logistics disruptions, and
supplier financial failures remained high on the list of supply chain risks,
more than half of the respondents were now concerned with risks of
supplier responsibility problems. Recent fatal incidents across the globe
including factory fire and building collapse in Bangladesh have prompted
global companies to call for even greater efforts to manage risks associated
with unethical practices on the part of their suppliers. In summary, ethical
and responsible supply sourcing has become increasingly important for
supply chain executives and global sourcing managers. To ensure that the
issues and challenges related to ethical sourcing are mitigated, the global
procurement managers need to take the following actions:
1. Investment in better sourcing strategies that would use tighter

screening and scrutiny of potential suppliers, so that the organization
sources from suppliers that are deemed to be less risky, coupled with
contracts that align incentives of the suppliers to reduce the risk of non-
compliance.
2. Further on an ongoing basis, adopt direct control and monitoring of the

supplier operations. Direct control and monitoring requires the global
sourcing manager to have visibility of conditions of the supply chain and
to take prompt action when things are found to be out of control.
3. Screening should include thorough evaluation of suppliers, and often

may involve having a third party to certify suppliers to be in good
standing in terms of compliance to social and environmental standards.
The organization may require the supplier to obtain external certification
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as a process. The sourcing manager thus can source only from the
certified suppliers.
4. The global sourcing manager should also work out inventive process
which aims to induce the suppliers to manage their risks better and act
more responsibly. The sourcing manager should encourage responsible
behaviour, companies can provide suppliers with rewards such as
premier supplier status and investments in supplier development.
5. In a counter mode, the sourcing manager should forfeit payments or

reduce business volume to discourage unethical behaviour.
For example, let us assume a short term relationship between a buyer and
supplier. The supplier is located in one of the emerging economies in Asia
and the buyer is at developed market. The emerging economy has
enormous amount of cost pressure and induces the supplier to engage into
cost reduction activities which are unethical. The supplier may tend to cut
corners in such situation. Similar issues were faced by IKEA, a global
furniture retailer and it cost millions of dollars to the buyer. The option
available for the big retailer is to conduct training, awareness, inspection,
periodic audits and developmental activities at the supplier location.
Ethics Issues from the Buyer Perspective
Supplier often finds one challenge difficult to address is the delayed

payments from the buyer’s end. Especially, in an open account payment
arrangement the suppliers have to finance it totally and the buyer delays
all payments until the production is done and shipped to the buyers
location. It is quite common in practice for buyers to withhold payments,
through adequate retention, to suppliers for potential physical quality
problems.
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8.6 Examples of initiatives taken by buyers for ensuring

responsible supplier behaviour in the global sourcing arena
1. Increased Level of Inspection Efforts: The supplier responsibility

risk can be mitigated by either increasing public discovery efforts
through inspection or increasing preventive monitoring. Nike and Apple
has greatly increased their supplier inspection programmes. It is
reported that in the year 2012 Apple has increased the suppliers
inspection efforts by 80%.
2. Tighter Regulatory Control: In many of the developed economies,

discovery of unethical activities can result in the supplier being put out
of business. Supplier factories are most likely to comply with global
labour standards when they are located in states that have highly
protective labour regulation and high levels of press freedom which
enforces the higher levels of compliances. On the other side, developing
economies are likely to have more lax regulatory enforcement and the
sanction cost is much smaller compared with that in the developed
economies. As a result, the supplier responsibility risk in the developing
economies becomes much higher from the buyer’s perspective than that
in the developed economies.
3. Enhancing Supplier Education: The buyer can also invest in

educating the supplier to a great extent and expect a responsible
behaviour. The buyer can ensure that the supplier is more aware of the
magnitude of penalty cost. Many multinational organizations are known
to have set up an academy for suppliers to train and improve their
environmental and social practices.
4. Improvement in the Supplier Production Efficiency: Nike helps the

suppliers to better schedule the work and improve quality and efficiency
of the production process. The buyer helped the suppliers to mature
their business processes to lean mechanism thereby substantially
reducing the operations costs, improving visibility across the supply
chain and reducing the non-compliances by the supplier.
5. Penalty/incentive Mechanism Embedded In the Contract: Some of

the multinational companies have structure a dual payment mechanism
for promoting supplier responsibility. The first part being fixed payment,
the second part is contingent upon whether the supplier breaches any of
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the conduct guidelines for ethical business. Letter of credit is used less
and more number of buyers prefer to have the payment done through
open account to promote supplier responsibility, as in the case of open
account the payments can be delayed to the extent of 100% of the
invoice.
8.7 Role of Global Sourcing Manager in ethical

procurement
The global sourcing manager has a very wide and important role in
ensuring that the organization is not exposed to any risk of unethical
practices of suppliers overseas in international procurement. Some of the
important actions points are provided as under:
1. The sourcing manager should ensure that system is developed to
facilitate collection and provision to all parties with the information they
need to plan more effectively (e.g., share supplier/vendor audit
reports).
2. The sourcing manager should also work towards building efficient
communications and formalized, streamlined buying and production
processes.
3. The organization needs to empower the procurement professionals to
select and reward good practice and leadership of suppliers.
4. Establish a robust risk management mechanism to identify and prevent
the buyer organization from the supplier’s unethical practices.
5. The organization needs to encourage buyers and suppliers to collaborate
with organizations who have expertise in addressing systematic
problems within the supply chain and ensure that the buyer
organizations is well protected from such issues.
6. Establish mechanism to identify and address unacceptable practices like
fraud, bribery and modern slavery.
7. Identify and explore opportunities to enable the buyer to collaborate,
where possible, with other buyers who are purchasing from the same
supplier.
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Some of the important practices which have been adopted by large MNCs
like Adidas, Carrefour, H&M, Inditex, Nike and brands like Tesco are
provided as follows:
a. Publically committed to International Labour Organization (ILO)
b. Participation in the industry/multi stakeholder approach in the area of
global sourcing
c. Provision of factory/manufacturing training
d. Disclosure of the audit results
e. Surprise and unannounced audits of the supplier premises and
workers’ interviews
f. Evaluation of the purchasing practices
g. Tackling and addressing more difficult challenges related to labour
standard, living wages, union rights at the supplier region
8.8 Checklist and Questionnaire for practical

implementation of Global Sourcing process and ensuring
Ethical Procurement
The global sourcing manager needs to carefully evaluate each step and
activity primarily when it is related to international procurement. Some of
the key questions which a sourcing manager should be exploring answers
tat at each and every step in global sourcing is provided as under:
Initial Procurement Planning

1. Evaluate known vulnerabilities to modern slavery where migrant
workers are used.
2. Are any key contracts coming up for renewal?
3. Are lower risk alternatives available?
4. Do staff members have specific expertise or knowledge?
5. Can external experts be engaged to assist in innovation and
improvements?
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Engaging Suppliers
a. Are there suppliers which meet the organization’s desired standards?
b. Should the buyer ask suppliers to progress towards these standards?
c. What are examples of good practice amongst current or potential
suppliers?
d. What issues have suppliers identified?
e. What expertise can they bring to a discussion about improvements?
f. Which suppliers have the awareness and skills needed to improve?
g. Do suppliers understand what the buyer considers to be high priority or
high risk areas?
Supplier Market Assessment

i. Does the labour earn a living wage or are they trapped in cycles of
debt?
ii. Are they able to influence their terms of employment?
iii. Have they paid a fee or bribe to get that job?
iv. Have they borrowed money for travel and recruitment fees?
v. How does this impact on the risk of forced labour?
vi. Are laws updated and enforced?
vii. Are there relevant national or sectoral initiatives to improve worksites?
viii. What standards or codes of conduct are currently in use in the supplier
market?
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Pre-qualifying the Suppliers
During the pre-qualification of suppliers stage, following questions may be

enquired:
1. How is the supplier’s attitude?
2. What standards a supplier is working to?
3. What is the current situation, if the supplier submits previously
completed audit reports?
4. Whether the supplier will be willing to meet the buyer’s ethical and
sustainability standards?
5. Is there any evidence of leadership by the supplier to improve
workplace conditions, the local environment or address community
needs?
6. Does workers’ pay equal or exceed the income needed to meet their
living costs?
7. What are the labour hire practices of the supplier?
8. Are there recruitment intermediaries engaged by the suppliers?
9. Does the supplier employ migrant workers?
10.What is the legal status of such workers, if at all such migrant workers
are engaged?
11.Do the workers have effective protections?
12.Has the supplier company ever detected bribery or corruption and what
was the response?
13.Does the supplier has any fraud control measures are in place?
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8.9 Evaluating procurement Ethics and Compliance levels
Some of the key metrics used for evaluation of procurement practices on

the ethics and compliance levels can be as follows:
a. Percentage of business through suppliers who demonstrate commitment
and action to improve working conditions.
b. Percentage of suppliers who have acknowledged issues and made
improvements in the manufacturing process and operations.
c. Percentage of suppliers making no progress who have been delisted.
d. Number of deviations from the desired path.
e. Number of late changes in the orders.
f. Number of contracts with ethical criteria for supplier selection and
evaluation.
g. Staff turnover at production sites.
h. Good human resource management systems.
i. Good labour standards audit results.
j. Sharing good practice with other suppliers.
k. Quality of business relationship between brand/retailer and supplier,
gauged by 360-degree feedback.
8.10 Introduction to Supply Chain Risk Management
Risk is a constant in every aspect of life, and there are inherent risks with
every decision a business makes. Supply chain involves number of risks
that included disruptions, technology, and commodity inter alia. The first
category includes taxes, tariffs, geopolitical issues, natural disasters and
other events that fall outside of most companies’ spheres of influence. In
other words, they can’t prevent the events from happening, but they can
prepare in advance for them. Tactical issues include problems with the
supply base, a customer going out of business, and so forth. The final
category includes day-to-day issues like a lack of labour, business process
problems or failing internal systems. Any single risk event can wreak havoc
on a company’s operations, and a combination of multiple issues can bring
an organization to its knees.
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1. Fires or Explosions: Calling these “manmade black swan events,”

Schlegel says plant or facility explosions and fires can significantly affect
a company’s operational capabilities, as well as its employees and
customers. Depending on the severity of the event, there may also be
legal, media and/or brand issues to deal with. “They happen more often
than you’d think,” says Schlegel, who tells warehouse and logistics
managers to do frequent facility walk-arounds and hazard inspections.
“Identify and assess the risks, and then prioritize them by dollar value
in descending order,” says Schlegel. “Pick, choose and develop risk
response plans.” If fire is a potential top risk, for example, and if $200
million in inventory is at risk, then it’s probably time for a better fire
alarm system, new sprinklers and/or a more comprehensive hazard
insurance policy.
2. Natural Disasters: Hurricanes, tornadoes, wildfires, tsunamis and

earthquakes can create major supply chain disruptions. Last year was
the fourth costliest year since 1980 in terms of insured losses, primarily
due to an accumulation of severe and costly events in the second half of
the year, the Munich Re NatCat SERVICE reports. It registered 850
events worldwide in 2018, with geophysical events such as earthquakes,
tsunamis and volcanic eruptions accounting for 5% of the total. Storms
made up 42%, floods, flash floods and landslides 46%, while 7% fell
into the categories of heat, cold and wildfire. The continents most
affected were Asia (43%), North America (20%), Europe (14%) and
Africa (13%). Though complete avoidance may be impossible, having
backup sources of supply, using good data backup strategies, obtaining
the right insurance coverage and having a disaster recovery plan in
place can all help companies stay in business during and after the
event. “Twenty percent of all companies that experience a moderate to
severe ‘natural cat’ event in their regions go out of business 15 to 18
months after the event,” says Schlegel, “and another 15% go out of
business in two years to three years. It’s impactful.”
3. Cyberthreats: At press time, Capital One was the latest posterchild for
poor cybersecurity practices. Using an Amazon Web Services loophole, a
hacker obtained data on 106 million of the credit card company’s
applicants, 140,000 of whom had their Social Security numbers swiped.
This is just one of many examples of how cyberthreats can affect a
company’s operations, customers—and even suppliers. “These are
strategic events that are fairly low in frequency, but when they do
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happen, they’re huge,” says Schlegel. “On average, a cybersecurity

breach will cost a manufacturer $6 million to $7 million to fix.” There
could also be lawsuits, compliance issues and other costly matters to
settle before the problem fades. Pointing out that 80% of all
cybersecurity breaches involve supply chain, Schlegel tells companies to
conduct cyber risk assessments that include both supplier and
customers, all in the name of mitigating the impact of a successful
attack. “Add consequences to your customer and supplier contracts,” he
advises, “stating that if you don’t do these assessments once or twice a
year, you may not be our supplier going into the next fiscal horizon.”
4. Transportation Disruptions: Port strikes, driver shortages and

international regulations like IMO 2020 are going to happen—it’s simple
a matter of when they happen and how much impact they have on
individual shippers. Knowing this, Bill Hurles, executive director of the
Global Supply Chain Resiliency Council, says that there are steps
companies can take to reduce their exposure. Take port strikes and
closures; Using cluster analysis, he says organizations can look at which
ports they use most and determine whether those locations are too
“clustered” in certain geographies, thus presenting higher risk. For
example, an importer that relies mostly on the ports of Los Angeles and
Long Beach would do well to diversify into another geographic region
because those ports are located so close to one another there is a
greater possibility of both being affected by a disruption. “Once you’ve
done the cluster analysis, you can use supply chain mapping to find out
where everything is coming from—even the goods that you don’t buy
directly,” says Hurles, “and get a big picture of what’s happening in the
world.” Combine that intelligence with real-time alerts, he says, and
you’ll be able to better prepare for potential transportation risk events.
5. Government Intervention: Brexit, tariffs, currency fluctuations, trade

wars and border controls are just a handful of the government-centric
issues that are affecting the world’s supply chains right now. “There’s a
lot more government impact on the supply base than there has
historically been,” says Hurles, who sees tariffs as the top issue right
now in terms of supplier risk. “It’s not exactly a ‘disruption,’ but it can
have a significant impact on a company’s cost of doing business.”
Currency fluctuations also fall into this bucket. “We’re seeing a lot more
variation in currencies, and particularly the British Pound, the Euro and
the Chinese Yuan versus the U.S. dollar,” says Hurles. “Depending on
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what your payment terms are and the profile of the supply base,
currency fluctuations in today’s world can be a pretty significant risk.”
6. Demographic Shifts: They may not wreak havoc on a physical

distribution facility or negatively affect millions of credit card applicants
in one fell swoop, but that doesn’t mean demographic changes aren’t
introducing new risks into the supply chain. The logistics industry as a
whole—the trucking industry, in particular—face new challenges
recruiting younger workers as Baby Boomers retire in droves. According
to the ATA, in 2018, the trucking industry was short roughly 60,800
drivers, which was up nearly 20% from 2017’s figure of 50,700. If
current trends hold, the shortage could swell to over 160,000 by 2028.
This could present high hurdles not only for the carriers that employ
drivers, but also for the shippers who depend on those carriers. “We’re
just not seeing as many young people go into that profession,” says Bob
Trent, a professor of management at Lehigh University. “That’s creating
big risks for companies, and one of several demographic and cultural
changes that’s causing some serious supply chain and corporate risks.”
The Collective Good
Regardless of the specific risk event, Hurles says companies should think
about analyzing, assessing and addressing risk collectively as an industry
versus as a single entity. Learn from one another, pay attention to what’s
going on in the world and take the necessary steps to shore up your supply
chain in a way that addresses both past disruptions and potential future
risks, he says. And, simply putting a risk compliance officer in place isn’t
enough, he adds, it must be backed up with strong risk management
strategies that evolve as the company expands its global presence. “The
most risk-averse companies are looking at their tiered suppliers, they’re
looking at capacity and they’re using best practices to establish standards
around risk,” says Hurles. “They’re also gathering and sharing data in a
common manner and then using it to develop industry-wide standards
around supply chain risk.”
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8.11 Supply Chain Resiliency
Supply Chain resiliency can be achieved by building a robust Supplier

Development Systems Approach.
Supply chains are the lifeblood of any company. Yet disruptions are an
inevitable part of doing business globally. Whether it’s a devastating
natural disaster such as 2018’s Hurricane Michael, or political events such
as the recent trade wars, it’s a question of when, not if, the next
interruption is going to occur.
As the saying goes, we live in a global economy. Global supply chains have
extended pipelines and greater complexity, and are therefore more
susceptible to disruptions such as natural disasters, supplier issues, and
economic and political instability. The larger the footprint of a supply chain,
the greater the odds it will face one or more of these adverse events.
The Japanese tsunami of 2011 forced General Motors to close plants in the
U.S. due to part shortages from suppliers in Japan. The company had
made the costly mistake of not having a good handle on the identity and
location of lower-tier suppliers. The cost to GM was reported to be in the
millions of dollars. It has since implemented countermeasures, but the
event served as a valuable lesson about the importance of taking a holistic
approach to supply-chain risk management.
With cyberattacks at an all-time high and terrorism a constant threat,

supply-chain risk management is attracting attention not only from global
giants, but also from small and mid-sized businesses (SMBs), many of
which operate primarily domestic supply chains.
Most companies respond to disruptions by reacting after the fact. Very little
offense is deployed. Yet the old adage that “the best defense is a good
offense” is a smart approach to effective risk mitigation.
Choosing the best strategy can mean the difference between success and
failure. Make no mistake: risk management must begin at the strategic
level. It can allow organizations to gain a competitive advantage over less-
adept rivals, by increasing market share when a supply-chain disruption
occurs.
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That is why many leading organizations are making supply-chain agility a

strategic priority. The Supply Chain Operations Reference (SCOR) model is
the world’s leading supply-chain framework, linking business processes,
performance metrics, practices and people skills into a unified structure. It
defines supply-chain agility “as the ability to respond to external
influences, [and] the ability to respond to marketplace changes to gain or
maintain competitive advantage.”
Agility is one of five SCOR attributes used to prioritize and align supply
chain performance with business strategy. Just as one would describe a
bank account using standard characteristics such as type of account,
balance, and interest rate, a supply chain requires standard identifying
characteristics. SCOR uses reliability, responsiveness, agility, cost and
asset-management performance attributes to describe a supply-chain
strategy.
Apple and Honda are two examples of successful companies with agile
supply chains. Automotive insiders credit Honda’s design of factories to
produce a variety of models, versus competitors’ approach of dedicating
plants to a specific model, with enabling the company to ride out the 2008
recession relatively unscathed.
Imagine participating in Olympic rowing. If just one rower is out of sync, it

will adversely impact the entire boat. While supply-chain management isn’t
an Olympic event, leading companies such as Amazon, Apple, McDonald’s
and Procter & Gamble are successfully using it to gain a competitive
advantage.
Supply chains that are out of sync strategically will be misaligned tactically
as well. They have a challenging road ahead when it comes to
implementing effective risk-management programs. For example, a
corporate customer might choose to make agility its top competitive
priority for a particular product family. But if key suppliers are competing
based primarily on cost, then this mismatch will lead to sub-optimal
decisions. Suppliers will most likely prioritize their resources and
investment decisions in favour of projects that move the needle on cost
reduction rather than risk reduction.
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Conversely, an aligned supply chain offers significant opportunity to gain

competitive advantage for the supply chain as a whole. Everyone is on the
same page, and the end-to-end supply chain is tuned to achieve superior
performance in agility. In this scenario, key trading partners collaborate
and share information such as performance measures and metrics. Risk
management becomes an ongoing agenda item throughout the supply-
chain network, with appropriate key performance indicators that are
measured, monitored and continuously improved.
This strategic-alignment approach is most applicable to key suppliers,

including strategic partners. For commodity-type suppliers, with
undifferentiated products such as standard fasteners or corrugated boxes,
competing primarily on price is a logical choice, regardless of the corporate
customer’s supply-chain strategy.
Many suppliers fall into the SMB category, which is typically characterized
by thin management, little or no industrial engineering talent, tight
budgets, and a tendency to focus on firefighting. Consequently, SMBs lack
the necessary horsepower to independently pursue performance-excellence
initiatives such as a supply-chain risk management program.
Introducing suppliers to tools, techniques and strategies of which they

would otherwise be unaware and unable to maximize on their own is a win-
win for both customers and suppliers. First, suppliers learn to become
more efficient, which leads to improved bottom-line results. Second, as
suppliers build capability, the opportunity to grow the business and prosper
increases. Third, working with capable suppliers whose strategies are
aligned with the customer reduces supply-chain risk and boosts resiliency.
The bottom line is that a great supply chain is a resilient supply chain, one
that can smoothly handle sudden unexpected disruptions. This occurs when
supply-chain strategies are in sync.
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Case Study – Supply Chain Risk Management in Food Industry
The supply chain for food and beverage companies has grown to be truly
global and interconnected. To offer customers exciting new flavors,
products, and ingredients, many businesses have expanded their
geographic reach of sourcing ingredients and materials.
Entering into this vast network of different suppliers means companies

could be opening themselves up to more risks. The U.S. Food and Drug
Administration (FDA) recognized these complexities and possible problems
in the supply chain when developing the Food Safety Modernization Act
(FSMA). As a result, regulators are now requiring companies to take
increased measures to ensure the safety of their food.
However, food and beverage businesses still must control costs to stay
competitive, making maintaining the efficiency and performance of their
supply chain also crucial. The entire end-to-end process must be
strategically planned and systematically managed with an acute emphasis
on mitigating any risks from suppliers. The following are some best
practices food and beverage companies can use to better protect
themselves from any food safety and quality incidents.
Identifying Supply Chain Risks
Companies must start with evaluating their current processes to manage

supply chain risks. For instance, are audits relied upon to verify their
suppliers have appropriate food safety practices in place or are second- or
third-party audits conducted?
Is the testing program in-house? Are certificates of analysis (COAs) relied

upon? Where and how is that information collected and tracked? What
departments and staff are in charge of the supply chain—R&D, finance,
operations, QA, etc.?
Taking a critical look at supply chain management will not only allow risks
to be identified but will also unlock the ability to differentiate which risks
have the greatest potential impact. Oftentimes, food and beverage
companies wonder whether they should devote more resources to
managing high-risks areas than low-risk areas, and the answer is yes.
Nearly everything food companies do today must be risk based.
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FSMA and Supply Chain Control
Because FDA recognized that supply chain control is critical in terms of

managing food safety risks, it developed two key rules under FSMA to
address this area—the Preventive Controls rule and the Foreign Supplier
Verification Program (FSVP).
Food and beverage manufacturers subject to the Preventive Controls rule

must assess supply chain risks and then verify that the risks are being
controlled. If it is determined that the supplier is responsible for controlling
the risk, the purchasing company must be able to verify that the supplier is
doing so effectively.
FSMA’s FSVP is very similar to the Preventive Controls rule, with the
exception that it shifts the burden of ensuring safe food to importers. It is
therefore FDA’s expectation that importers will have assessed risks in the
supply chain and subsequently have verified that risks are being controlled.
While these rules are conceptually simple, many companies still face
confusion around their implementation. Here are some steps that will help
ensure companies are compliant with the regulations:
1. Perform a Hazard Analysis: Look at hazards presented by the
materials sourced in all three areas: ingredients, products, and
packaging.
2. Evaluate the Risks: Identify the types of risks posed, including
whether they are microbiological, chemical, or physical. The next step is
to identify who is responsible for controlling the risk: the supplier, the
processor, or the end customer. FSMA requires a letter of assurance
from any customer assuming responsibility for controlling the risk.
3. Supplier Verification: If it has been determined that the supplier is
controlling the risk, this will need to be verified.
4. Use of Approved Suppliers: FDA can request to see companies’ lists
of approved suppliers and the method used to select and approve
suppliers.
5. Corrective Actions: If there is a problem with a supplier, corrective
actions must be carried out appropriately and thoroughly documented.
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6. Build a Program and Keep Records: Detailed record-keeping is a

common theme across many aspects of FSMA, so confirm that records
are updated regularly and are well organized.
Developing a FSMA Approach to Risk Management
When beginning a practical implementation of a FSMA approach to supply

chain risk management, create a list of all ingredients used as well as
products and primary packaging. Next, perform a Hazard Analysis and
document the results in records that can be presented to FDA. Finally,
assign responsibility to who will control the risks identified.
To begin a supplier verification program, compile a list of all suppliers and

their manufacturing sites. For all Class 1 risks being controlled by the
supplier, an onsite audit will be needed from each site sourced. Many
companies rely on third-party audits to satisfy this requirement, but proper
documentation should be put in place.
Because Global Food Safety Institute (GFSI) standards are well-aligned

with FSMA, GFSI certification appears to satisfy FDA requirements. If an
onsite audit for Class 1 risks is not able to be conducted, documentation
will be needed of the explanation for this as well as how the risk will be
controlled through an alternative method, such as a testing program.
Some companies use COAs to control other risks from their suppliers, but
accurate understanding of each COA is necessary. If an ingredient poses a
high risk, make sure the COA is strong and reliable. For instance, is the
testing method an approved one? Does it test adequate amounts of the
product? Is the lab that is being used an accredited one? While it is not
necessary to look at COAs quite this closely for every ingredient, be sure to
do so for those deemed most important.
Assessing Existing Suppliers
Not all suppliers present equal risks. How, then, should these risks be
evaluated? Companies must first determine which risks are most significant
and then dedicate the most resources on the areas of greatest risk. There
are multiple factors that can impact risks, which can be categorized into
three main areas:
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1. Ingredient Risk: This refers to the inherent risks posed by the

ingredient itself, including a recurring history of problems, country of
origin, and so forth.
2. Supplier Risk: Supplier behaviour, including the degree to which they

control risks, should be factored into the risk assessment.
3. Use of the Ingredient: Ingredients used in all products versus a select

few pose a higher risk. Likewise, the ingredients used in high-profile
products—or most associated with a company’s brand—should also be
considered a greater risk.
Next, companies should begin to rank supplier risks by collecting

information about their qualifications and certificates, onsite audit results,
any prior history of problems with the supplier, and regulatory actions.
Then, understand how and where an ingredient is used in the product

production process. How many products are affected by this ingredient?
Are these flagship products or strongly linked to a brand identity? What is
the financial impact of a recall? All this information will help define the risk-
based strategy of a food and beverage company.
This ranked risk approach allows companies to not only protect

themselves, but optimize resources. The same amount of resources can’t
be used to prevent risks for every supplier and ingredient. However,
identifying which entities pose the greatest threats will help ensure risk
management dollars are truly being spent based on an accurate and
thorough risk assessment.
Working with Suppliers
To some extent, the effectiveness of your supply chain management lies in

the ability to collaborate seamlessly both externally with the supplier as
well as internally. When new products are in development, make sure that
all teams involved are collaborating to ensure that potential risks are
identified proactively—not reactively. This may mean that in addition to
R&D, procurement, and supply chain personnel, a food safety manager
might also need to be involved in the early phases of product development.
The company must understand both the ingredient risk and the supplier
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risk. If it is deemed that the ingredient poses a high risk, it may require a
change or a new process for controlling risks.
One area in which many companies fall short is tracking the performance
of existing suppliers. The emphasis is typically on innovation—which is why
new suppliers are so thoroughly vetted—but to ensure safety at every level
of the supply chain, companies must also monitor current suppliers.
Develop a process to track and trend performance data, which could

include timeliness of deliveries, how well specs are being met, COAs,
corrective actions, and so forth. Keep thorough records and analyze them
frequently to look for warning signs that a supplier’s performance needs to
be addressed.
While transitioning supply chain management activities towards a more

risk-based approach may require an initial investment of time and effort, it
will help companies take a more proactive stance on food safety. As a
result, it could be the very activity that helps a brand succeed even in the
face of increasing supply chain complexity
Some of the Top Supply Chain Risks for Manufacturing Companies

Globally
The rapid globalization of businesses has made it imperative for executives

and risk managers to reassess the risks facing their organizational
processes and their supply chain activities. Effective supply chain risk
management in manufacturing companies is often hindered by factors such
as supplier failure and other non-traditional risks. Furthermore, supply
chain vulnerability is also increasing due to risks including supplier
relationships, manufacturing process, and shipment of finished goods.
Disruptions in Distribution: When a key supplier moves their operations

to another country, it can have a significant impact on the cost of
production and raw materials for a manufacturer. Supply chain risk
managers must ensure that regular communication and the presence of
strong contract between value parties to prevent such unforeseen
contingencies.
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Laws and Regulations: The changes in laws and regulations can greatly
affect the degree of supply chain risk faced by manufacturing companies.
For instance, if the wage laws and overtime regulations in a particular
region changes, it would eventually result in more costs and rising
overheads for the company.
Market Competition: There’s a growing concern with mergers and

acquisitions (M&A) of big companies across industries. These M&As have
the potential to create monopolies, allowing organizations to eliminate
competition and make it harder for smaller companies to survive in the
market. Competitors are also continuously changing and innovating their
strategies.
Labour Issues: When a workplace is unionized, it becomes difficult to

adjust employee contracts as and when required. For example, laying off
employees may prove to be tough during periods of low customer demand
or relocation of assets. Adequate training must be given to employees in
order to maximize productivity and reduce risks.
1. Visit website of large multinational companies and review the code of

conduct and standard for ethical purchasing. Understand important
aspects and its linkage with the procurement process.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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8.13 Summary
Ethics in global sourcing is not just a buzz word but over a period of time
has become a living reality for several organization worldwide. Considering
the Global Sourcing Function routes the highest amount of spend of the
organization for various purposes, ensuring that the money spent is for
approved purpose and the process is carried out in ethical manner is of
paramount importance. Organization globally formulate code of conducts
and framework for compliance with the ethics. Regulations like anti-bribery
have a far-reaching impact on the way organization engages in
procurement activity. Both buyers and the suppliers need to take adequate
initiatives to ensure compliance with the highest standards of ethics.
Additionally, the buyer organization may consider setting up an appropriate
system for periodic measurement of the compliance with the ethics
guidelines by all the parties involved in a sourcing transaction. In addition
to ethics, the buyers and suppliers also need to pay attention to social and
environmental responsibilities.
1. Highlight and explain the role and importance of ethics in global

sourcing.
2. Write a short note on the following:

(a) Green Purchasing
(b) Sustainability in Global Sourcing
(c) Buyer and Supplier Initiatives to Ensure Compliance with Ethics
in Purchasing
3. Explain the role of global sourcing manager in ethical purchasing.
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1. Which of the following is least likely to be an appropriate step for raising

the ethics compliance levels of the suppliers?
(a) Pay higher price for products to be purchased
(b) Proper contracting procedures
(c) Periodic training and awareness to the suppliers
(d) Audit of the transactions with suppliers
2. Which of the following is least likely to be component of code of conduct

for ensuring ethical purchasing?
(a) Compliance with the national regulations
(b) Transparency and disclosure in dealings
(c) Acceptance of child labour for manufacturing
(d) Ensuring compliance with the environmental regulations
Answers: 1. (a), 2. (c).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
232
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
Chapter 9
Role Of Information Technology In Global
Sourcing
Objectives
• Gain an understanding of evolving role of information systems in global
sourcing
• Understand the key drivers of E-procurement for buyer organisation
• Understanding the process of measuring the effectiveness of E-
procurement
• Gain understanding of E-procurement success stories and case studies
• Gain understanding of various methods and avenues for global sourcing
through the information technology enabled environment
• Understand various types of auctions
• Understand various tools in purchasing through E-marketplace
• Understand the issues and challenges involved in procurement through
E-purchasing or E-market based models
• Understand the services offered by global sourcing E-portals
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Structure
9.1 Evolving Role of Information Systems in Global Sourcing – Emphasis
on E-Procurement
9.2 Key Drivers of E-Procurement for Buyer Organization
9.3 Measuring the Effectiveness of e-Procurement Process
9.4 E-Procurement Success Stories and Case Studies
9.5 Methods and Avenues for Global Sourcing through the Information
Technology Enabled Environment
9.6 Types of Auctions
9.7 Emergence of E-Markets
9.8 Tools in Purchasing through E-Marketplace
9.9 Issues and Challenges in E-Purchasing or E-Market Based
Procurement Models
9.10 Service Offerings by Global Sourcing Portals
9.11 Emerging Technology Trends in Global Sourcing
9.13 Summary
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9.1 Evolving role of Information Systems in global

sourcing – Emphasis on E-Procurement
Information Technology has a far reaching in the arena of global sourcing

and procurement. The regular transactional activities involved in the
sourcing process can be performed with higher efficiency and better
precision. Information Technology has a shrinking effect of the globe and
improves access to the information. This goes long way to reduce the
transaction costs, make the one-stop shopping possible, reduction in the
transaction costs, promoting the paperless transaction. Technology brings
in multiple buyer and sells together. Following are some of the additional
benefits that the purchasing and selling organizations can derive from use
of information technology in global sourcing:
1. Reduction in the number of traditional middlemen across the globe.
2. Lower inventory and shorter inventory cycles throughout the supply
chain.
3. Tighter relationships between seller and buyer in varied business
transactions.
4. Power shifts from producer and retailers to the customer in an IT
enabled purchasing environment.
5. Lower prices and greater variety for consumers across products and
services.
6. Greater responsiveness to the customer needs from the supplier’s end.
9.2 Key drivers of E-Procurement for Buyer organization
Several factors have exerted pressure on the buyer organization to solicit

for e-Procurement as a viable option in the process of global sourcing.
Some of the important drivers are:
1. Increasing cost pressures and management expectation to reduce the

cost of procurement.
2. Compliance related issues like reducing or preventing leakage of
information, a better spend visibility as per the organizations policies,
prevention of corruption/anti-bribery related law have forced the
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management to built-up a very transparent process while sourcing

material and services. E-Procurement has a great potential to facilitate a
transparent process.
3. Need for end-to-end procurement management process. E-Procurement
service providers in the market provide IT enabled tool for managing
the procurement from requisitioning stage to supplier development and
evaluation initiatives. The integrated approach reduces cost, cycle time
and make the procurement process more efficient.
4. Exponential expansion of supplier hub, network has led to emergence of
e-Procurement as a feasible way to tap the network.
5. Evolving pricing models are also driving the businesses to reorient their
procurement processes. E-Procurement enables the businesses to adopt
the new pricing models,
e.g., on-demand pricing.
9.3 Measuring the effectiveness of E-Procurement Process
Organizations should ensure that adequate measurement systems are

implemented to measure the effectiveness of the e-Procurement process.
Some of the important measures can be as follows:
a. Percentage of spend managed by the e-Procurement system compared

to the aggregate spend of the organization;
b. Breadth and scope of automation deployment in the organization;
c. Reductions in transaction costs and other costs translated into rupee/
dollar terms;
d. Process cycle turnaround time reduced and cost efficiencies gained
through implementation of e-Procurement;
e. Enhancements in compliance, budgeting and risk mitigation;
f. Alignment and integration of the e-Procurement initiative with broader
supply chain management and business operations of the company.
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9.4 E-procurement Success Stories and Case Studies
Glaxo Smith Kline (GSK) is a research-based pharmaceutical company with

100,000 employees worldwide. The company operates 80 manufacturing
sites in 37 countries and 24 research and development centers globally.
Annual revenues total $37.2 billion, and annual corporate spend exceeds
$13 billion. Research scientists spend millions each year on lab supplies.
Prior to implementing e-Procurement, GSK scientists relied on paper
catalogue and phone communication to order the supplies they needed.
Not only did these processes waste valuable time scientists could otherwise
devote to research, the archaic buying process created situations in which
GSK was not getting the benefit of negotiated deals with suppliers. GSK
needed a way to make the most of their global sourcing group
management process.
A cross-functional team was formed consisting of representatives from

procurement, finance, research and development, and information
technology to review available tools and recommended a solution. GSK
realized that gaining significant cost savings from an e-Procurement tool
required the delivery of accurate and up-to-date content to end-users. The
GSK team evaluated a number of e-Procurement tools that would provide a
large amount of lab supply content to researchers.
GSK implemented its e-Procurement solution as a pilot in 2001. Time from

pilot stage to implementation was about eight months. The application was
rolled out to US and UK business units in 2002 and 2003. The e-
Procurement system, called “eSP,” includes requisition creation, approval,
distribution and receipt-creation functionality. More than 3,500 buyers use
the system each month. Currently, GSK has about 200 U.S. suppliers
enabled on the company’s US and UK e-Procurement platform. Of that,
160 suppliers are enabled through the Spend Director solution. The GSK
site in Italy is currently piloting the Spend Director application and has
enabled 30 suppliers through the tool. The Spend Director solution is
externally hosted by SciQuest, and the SciQuest tool is integrated with
Ariba Buyer. For other category areas, GSK uses a mix of supplier
enablement and content management approaches, including punch-out,
aggregated solutions, and internally managed content.
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Today, the e-Procurement system manages about 50% of GSK’s indirect

spend. Spend categories covered by the e-Procurement application include
lab supplies and equipment; office supplies; maintenance, repair, and
operating (MRO) supplies; computer hardware and software; print
purchasing; facilities services; marketing research; capital goods and
construction services; and training and instruction services.
Results Achieved by GSK
Contract compliance has improved more than 20% overall. Just as

importantly, the higher compliance rate has been sustained. In addition,
implementing supplier content directly through SciQuest allowed GSK to
halt the practice of using a wholesaler, saving more than $500,000 a year.
The e-Procurement system has also streamlined GSK’s procurement
process, allowing the company to capture more detailed spend information,
enhancing spend analysis. Manual purchase orders have been eliminated,
allowing GSK to reduce headcount or reassign resources.
Objectives of the Organizations to Engage in Information

Technology based Purchasing Organization
Organization deploy the information technology in the Purchasing to Pay

process (commonly referred as P2P process) to meet the following
objectives:
1. Have their purchasing cycle and activities organized and controls
enhances drop manual communication, all redundant work, and their
inevitable errors
2. Achieve effectiveness of company guidelines on all purchases
3. Identification of purchasing bottlenecks
4. Obtain a comprehensive database of suppliers, and suitable tools to
evaluate them on standardized parameters
5. Increase the purchasing visibility for managers
6. Enhance the collaboration between purchasing and other/user function
departments
7. Standardize the documentation
8. Reduction in the total purchasing costs
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9. Significant reduction in the transaction costs

10.Improvement of procurement process efficiency
11.Increased level of contract compliance
e-Procurement can shift transaction processing to the end users who

actually use the purchased goods or services, freeing up supply
management personnel for strategic value-creation work.
9.5 Methods and Avenues for global sourcing through the

Information Technology enabled environment
Emergence of internet has led to new avenues of procurement which

includes internet buying, e-Commerce, development of B2B hubs, company
websites, e-Procurement systems, web services, etc. Let us evaluate each
of the avenues.
B2B Hubs
One of the emerging electronic methods for selling/purchasing goods and

services among firms is B2B (Business-to-business) e-Hub. These hubs,
just like network hubs, work as third party intermediaries that enable
electronic exhibition, search, data interchange and transaction activities
such as negotiation and signing contracts.
Users of e-Hubs can take advantage of single-point purchase, as well as

enhanced product search based on the desired criteria and broader range
of options. The purchasing processes handled by this method also result in
higher marketplace liquidity and quality of purchasing services with lower
total transaction costs. The procurement can be administered as a Private
Marketplace or Public marketplace. The key differences between Private
and Public Marketplace are as follows:
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Component Private Marketplace Public Marketplace

Owner A single buyer Independent owner or a group of
companies from the same
industry
Objectives • Share proprietary data • Buying and selling
including product design, commodities by focusing on
demand forecast and price
production plans • Finding new suppliers
• Allow for logistics and • Buying and selling excess
supply chain collaboration inventory and capacity
Participants • Selected group of suppliers • Open market
Buyer cost • Building and maintaining • Subscription fee
the site/internet • Licensing fee
• Transaction fee
Supplier • No Fee • Transaction fee
cost • Subscription fee
Main issues • Initial investments • Recent collapse of many
and • Data normalization and marketplaces
challenges Uploading • Objections by referred
suppliers because of price
focus
• Sharing of proprietary
information
• Data normalization and
uploading
Table 9.1
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9.6 Types of Auctions
Various types of auction as dealt with are:

• Standard Auction
• Reverse Auctions
• Multidimensional Auctions
• Closed Auction
Standard Auctions
a. Auctions are a market mechanism where the buyer and seller agree
upon the item and the purchase price.
b. Auction can be seen as a one-time transaction since the bidding process
can select difference winner each time.
c. There are several types of auctions but the most common are the
progressive or standard auctions where the bids are freely placed and
the auction stops when there is no purchaser that wants to place a
higher bid.
Reverse Auctions
a. In reverse auctions, it is the purchaser that sells a contract of a
predefined item.
b. The objective in reverse auctions is to place the lowest bid in order to
get the contract.
c. One of the conditions of the reverse auctions is that the seller is
unknown for the buyer until the bidding is over.
d. This makes it important that the description needed to describe the item
is low in order to decrease the risk of the process, e.g., that a supplier
get the bid but is not capable to supply the specific item.
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Multidimensional Auction
1. Multidimensional auction is relatively more complex type of auction.
2. Several aspects are considered in the bidding, e.g., the price and the
quantity could be used in a two-dimensional auction.
3. Other dimension such as the price and delivery could be used in order to
secure demand in peak seasons.
4. Multidimensional auctions might be good to use in order to match the
buyers’ need with the sellers’ availability and capacity to produce.
Closed Auction
• In a closed auction, the transaction is prepared in the way that the
suppliers are pre-qualified.
• Since the closed auction requires that the transaction is prepared with
detailed descriptions and to write a contract the auctioneer have to be
more active than in a standard auction.
• Closed auctions are typically carried out for the purpose of reversed
auctions, and it is also suitable for more complex items due to the
preparation of the auction.
Issues and Challenges with Auctions
Some of the key challenges and problems with auctions in a global

purchasing environment are as follows:
1. Often views as one time transaction by the suppliers participating in the

auction.
2. There is a risk of sub-optimal relationship between the buyer and the
seller as the benefits of auction are mostly inclined to the buyer side.
3. Buyer in standard auctions and the supplier in the reverse auctions may
get stressed when they have to place a bid as the time is a constraint.
4. Most of the auctions are suitable for items or services of a commodity
nature. Auctions tend to be complex exercise in case of highly technical
requirements and needs of very specialized nature.
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9.7 Emergence of E-Markets
Globalization and developments in the technology space has led to

emergence of an electronic marketplace. There are many great features
and advantages of the availability of an e-Marketplace. Some of those are
mentioned below:
1. Electronic purchasing assistance is an e-Market mechanism that helps

the company to find the best supplier with the lowest price points. It
helps the buyer organization to discover the price more efficiently.
2. The e-Marketplaces uses a set of software that, e.g., use different set-
ups of matrices in order to detect items that are overpriced or have a
better alternative.
3. The e-Marketplace assistances includes electronic catalogues,
recommendations agents and price search engines available on the
internet
4. One of the issue with the e-Marketplace is that the use of internet mode
could be time consuming since the buyer has to compare his decision
with the decision aid and evaluate the outcome.
5. Sourcing through e-Marketplace also requires that high level of detail
and standardization in order to provide a desired result.
6. E-Markets also have led to emergence of platforms like Flipkart,
Snapdeal, IndiaTrade, etc. Such platforms perform an activity of
electronic agents. Electronic agents perform business with all possible
suppliers and buyers and the transaction occurs as one time.
7. Analysis of purchasing data and activities can be performed through use
of e-Commerce. The analysis reveals cost bill amount and purchase
price variances. Such analysis if useful for optimizing the procurement
decision.
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9.8 Tools in purchasing through e-marketplace
1. Lead time analysis: It provides an assistance to group of purchasing

and production managers reduce total product lead times by pointing
out the most influential steps of purchasing and production on lead
time. For example, consolidation of the purchase orders provide
effective tool to supply chain managers to plan its purchasing and
production activity
2. Vendor related tools: Such tools provide purchasing managers an

ability to track quality and delivery related to each member of the
supplier base and evaluates terms of their services.
3. Advanced analysis: Large amount of available data for analysis in the

e-marketplace. The organization should develop its own set of key
indicators for performing a meaningful analysis of the data.
9.9 Issues and Challenges in e-purchasing or e-market

based procurement models
a. High level of dependence of Information Systems: The

organization may find itself highly dependent on the generation of
requisitions, quantity to be purchased through system based purchasing
alerts. While the IT based purchasing could be very useful from regular
products/materials, often for purchase of high value products or capital
goods, application of global purchasing manager’s judgement is very
crucial.
b. Issues by related to lead times and lot size: At times, issues are
faced on account of inflated lead times or impracticable lot size provided
by the information systems.
c. Privacy and confidentiality risks: As the Information Systems

contains the information about the budgets, quantities required, current
suppliers, terms and conditions, pricing history. The quantum of
information is compromised turns out to be a great risk for an
organization.
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Exxon Mobil Case Study – Procurement to Pay Operations (P2P)
Exxon Mobil has one of the largest procurement organization comprising of

more than 2600 professionals across 37 countries. The group oversees
global procurement, materials supply chain management, and accounts
payable, managing US$55 billion in annual spend and US$528 billion in
disbursements. The organization implemented Ariba software tool for
procurement to pay operations. The organization has the following
objectives before the implementation of the software:
1. Eliminate carbon-paper forms for generating purchase orders (PO)
2. Increase global supplier connectivity for full Purchase Orders and invoice
collaboration
3. Simplify the generation and tracking of orders throughout the process
across the globe
4. Provide visibility into the work flow for accounts payable across multiple
systems on a global basis
5. Accelerate invoice processing to receive any early payment discounts so
that the cost of purchase is reduced
The benefits accrued to the organization on implementation of the Ariba

Software tool are as follows:
a. Lower order management and invoice processing costs
b. Faster procure-to-pay cycle and improved visibility across the process
c. Fewer invoice errors and exceptions
d. Increase in the capture rate for early payment discounts
Statistics on the Benefits

• 3.2 million electronic invoices processed annually
• 1,400 suppliers on the Ariba Network in the United States
• 98% of invoices processed through the Ariba Network that automatically
post for payment
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9.10 Service offerings by Global Sourcing Portals
Number of software and information technology companies have launched

global sourcing portals. Some of the important functionalities which could
be of immense use to global sourcing managers are as follows:
1. Supplier relationship management enabled: The portals are
capable of providing easy access to wide range of data/information at
one place which may include supplier specific information, categories
and items supplied, requests, quotes, enquiries, e-mail integration, ERP
integration inter alia.
2. Supplier registration and products items management: The
portals allow the supplier to auto register and upload the products/
items/services offered.
3. Planning on Tender: The portal is capable of sending the service
requests to identified suppliers for participation in the tender ad
submission of the quotes/proposal.
4. Supplies quotes: The portal also has capability to arrange all the
supplier quotes and perform comparison.
5. Customs Duty Management: The portals facilitating the global
sourcing is generally integrated with the customs duty rates, customs
gateways of various countries. This enables the global sourcing manager
to quickly compute the duties and enable timely payment with
completion of the necessary formalities.
6. Tracking and Tracing of Shipments: The procurement portals are
capable of providing information related to each order as the portal is
integrated with the systems of various logistics service providers.
7. Business Intelligence and Analytics: With high value and volume of
data available at the portal, the global sourcing manager can perform
business analytics and come out with meaningful strategies to add value
to the procurement function and the overall business.
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9.11. Emerging Technology Trends in Global Sourcing
The world of procurement has undergone tremendous changes from the

past couple of years. It is now time to look at what 2019 has in store. The
New Year seems to be shaping up the procurement trends which were
already started in 2018 or earlier and are expected to gain maturity in the
coming year. Here is the list of top 7 procurement trends that we need to
look out in 2019 –
Procurement Trend 1- having a ‘Digital Strategy’ in Place
For long, the rise of digital technologies and its positive impact on
procurement has been projected as a procurement trend. In 2018, we saw
organizations finally moving to adapt to cognitive procurement
technologies such as Big Data Analytics, Machine Learning, Natural
Language Processing, Artificial Intelligence, and Robotic Process
Automation. The year 2019 will further enhance the usage of these
technologies. From automating redundant procurement tasks to
empowering C-Suite in decision making, from better market visibility
through product innovation to increased profitability, the benefits of digital
technologies are enormous. As per a Hackett report, which surveyed 180
large companies, merely 32% of executives have implemented a digital
strategy. This is in stark contrast to the fact that nearly 85% of them
believe that digital transformation will fundamentally change the way they
deliver services over the next 3-5 years. Though organizations realize the
importance of digital procurement, the question of the hour is ‘Have they
been working towards it in the right direction?’ Hence, to realize the
maximum value, organizations have to take the leap from manual to digital
transformation with a proper strategy in place. They need to invest in the
right infrastructure, processes, and resources with a vision that aligns with
the organization’s objectives in the long term.
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Procurement Trend 2 – Building Talent Pool to Embrace Digital

Technologies
The procurement function has to move from delivering cost savings to

providing a strategic edge to the organization. To build a holistic supply
chain and to drive enterprise-wide cost reductions, procurement has to
utilize the maximum value out of digital technologies. The Deloitte CPO
Survey 2018 shows that procurement leaders remain hesitant to deploy
new technologies like AI, Robotic Automation, and Block-chain in their day-
to-day work. As per the survey, 51% of the procurement leaders believe
their teams do not have sufficient capabilities to deliver on the digital
procurement strategy. Hence, in 2019, the organizations, especially the
procurement functions, is going to focus on finding the right talent and at
the same time grooming the in-house resources through specially designed
training and skill development programs. Procurement professionals would
need to acquire the critical skills to succeed in a digital world and to remain
relevant in the market.
Procurement Trend 3 – Thinking Suppliers Beyond the Price
Collaboration with suppliers remains a critical approach for all these years.
With advanced technology and the changing landscape of supplier
management, the procurement function has shown the tremendous scope
of improving the relationship with suppliers. Now, buyers cannot afford to
communicate with suppliers just over the price. They need to involve them
in more strategic decisions right at the initial planning phase. Suppliers
thus become an integral part of any supply chain and can play a pivot role
in making/breaking the backbone of the procurement. In 2019, more focus
would be given in improving work synergies with suppliers. Suppliers will
have visibility of all the steps in the procurement cycle to help in getting
the best pricing and reducing the risk quotient. This transparency will not
only support the suppliers to feel empowered but will also promote healthy
competition between all the suppliers eventually benefiting the
organization.
248
With the empowerment of Suppliers, it also becomes necessary to have a

reliable supplier performance evaluation plan in place. This plan stands for
a focused, smart and effective method of measuring, analyzing and
improving supplier performance and thereby reducing costs, increasing
efficiency, enhancing vendor relations, enhancing business performance,
preventing product issues and driving improvements in the supply chain.
Procurement Trend 4 – Risk Management – Preparing for the

Unexpected
From Brexit to trade wars (the US imposing tariff sanctions on China) to
fluctuating oil prices, major world economies are continuously thriving to
be prepared for the unexpected. With these uncertainties, the procurement
function would be at the forefront of an organization for risk minimization.
Procurement in 2019 will have to remain at the top when it comes to
minimizing the supply chain costs. It will require bringing in innovation and
technology interference to save costs wherever necessary.
Moreover, organizations are always struggling with internal risks arising

due to lack of transparency. Being compliant with legal standards is just
not enough these days. With social media and word of mouth being the
biggest influencers in today’s times, organizations have to be extra careful
when it comes to ethics and compliance. As per the whitepaper by Zycus,
“Ensuring Efficient Supplier Risk Management with Supply Chain
Transparency,” only 65% of the procurement leaders have little or no
visibility in their supply chain. A transparent system not only reduces
exposure to risk but also reduces the information gap that helps in
managing risks more effectively.
Procurement Trend 5 – Increasing Focus on Indirect Spending
Focus on indirect spending has always been on the radar of procurement

function though recently, more and more organizations are readily putting
efforts to control it. Indirect spending or tail spending follows the 80/20
rule, i.e., it constitutes 20% of the organization spent and involves 80% of
the suppliers. Due to the involvement of a large supplier base, processes
under indirect spending need to follow a holistic governance process to
avoid leakages, various contract terms, paperwork, and dealing with a big
chunk of suppliers’ information. The whole process becomes so
cumbersome that an organization eventually loses out on opportunities
such as dynamic discounting, budget accuracy, and supply chain visibility.
249
As a result, in 2019, more organizations would look out for automated

financial solutions, including Procure-to-pay (P2P) solutions that would be
integrated with the organization’s Accounts Payable (AP) processes. The
solution will minimize the maverick spending by negotiating the critical
contract terms well in advance suppliers and streamline the complete
contracting process.
Procurement Trend 6 – Rising Artificial Intelligence (ai) Systems
AI will not remain just a procurement trend in 2019 with more and more
organizations going to adopt in their processes. Procurement teams will
design and deliver intelligent bots to complete most run-of-the-mill
procurement tasks with minimal human intervention. From managing
large-volume of orders to running repetitive sourcing events, from
negotiating with suppliers for low-value items to updating inventory lists,
AI will undertake all these activities, thus putting mundane tasks on auto-
pilot mode. Products like Zycus’ Merlin A.I. Studio can quickly scale up the
procurement process, using multiple pre-packaged procurement bots as
well as an easy-to-create bot store.
Procurement Trend 7 – Moving to Effective Change Management
Procurement leaders have time and again agreed change management

being the biggest roadblocks in achieving the outlined procurement goals.
With the advent of digital technologies, the transactional work in a
procurement function is becoming automated. As a result, the extra time
available due to automation can be deployed by resources in more
strategic activities that a business needs. But the transition to change
management is not easy, as it brings a sense of insecurity about the end
state and hence resistance to undertake new initiatives. In 2019, more
organizations will focus on a smooth change management plan through
increased focus on regular communication with the employees; engage
them through the process and by providing adequate training and support.
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Summary of Trend
As procurement is gaining more strategic importance within an

organization, the expectations from this function are also increasing. This
year, the procurement function will continue to deliver on traditional cost
savings while focusing heavily on digital technologies and supplier
synergies. Overall, 2019 seems like a promising year full of challenges and
opportunities for procurement to undertake.
1. Browse through various e-Procurement portals, e.g., Trade India, B2B

Marketplace, Business Bazaar and Ariba Sourcing and identify the
features and services offered by the e-Portals.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
9.13 Summary
Like any other business function, Technology has also contributed to

significant level of evolution of Global Sourcing Functions. The interaction
with suppliers, access to newer markets has phenomenally increased with
emergence of e-Procurement models and tools at the disposal of the global
sourcing Manager. The e-Procurement also generate large volume of data
which can be analyzed by the Global sourcing manager and use the
insights to build competitive advantage for the organization. There are
number of challenges the organization may face while implementing the e-
Procurement models. Some of the facilities offered by the e-Procurement
portals include supplier discovery, supplier registration, planning of tender,
management of duties and taxes, facilitating auctions, and tracking and
tracing of shipments among other things.
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1. Explain the role and importance of technology enabled supply chains in
global sourcing.
2. What are the key drivers for e-Procurement in a buyer organization?
3. Write a short note of indicators for measurement of effectiveness of e-
Procurement process.
4. What are the key objectives of implementation of e-Procurement
process in an organization?
5. What are the various methods and avenues available to organizations
globally for sourcing through information technology enabled
procurement process?
6. Explain various types of auctions.
7. What are various issues and challenges with auctions in an e-
Procurement model?
8. Highlight and explain the benefits of various service offered by e-
Sourcing portal to the buyer organization.
1. Which of the following is not a type of auction?

(a) Standard Auction
(b) Special Auction
(c) Reverse Auction
(d) Closed Auction
2. Which of the following is not likely to be an important issue or challenge

of sourcing through e-Procurement model?
(a) Access to large number of suppliers
(b) High level of dependence on information system
(c) Non-standard lot size
(d) Increased lead time
Answers: 1. (b), 2. (a).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
253
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
Chapter 10
Risk Management in Global Supply Chain
Management and Sourcing
Objectives
• Understand the various risks involved in global sourcing
• Gain an understanding of role of insurance in global sourcing
• Understand in detail the importance, coverage and benefit of Marine
Insurance
• Understand the probable reasons for damage to cargo
• Understand the role and responsibilities of Global Sourcing Manager in
Insurance
• Gain an overview of key international regulations
Structure
10.1 Risks Involved and Importance of Risk Management in Global
Sourcing
10.2 Role of Insurance in Global Sourcing
10.3 Marine Insurance
10.4 Probable Reasons for Damage to the Cargo
10.5 Responsibility of the Cargo Owner in Marine Insurance
10.6 International Regulations Covering the Global Sourcing and
International Supply Chain
10.8 Summary
254
10.1 Risks involved and importance of Risk Management in

Global Sourcing
Risk Management in the global supply chain is an essential component of

the activities. The risk emanates across all activities of the supply chain.
Some of the emerging issues related to the supply chain are as follows:
1. Leaner supply chains: Over a period of time, organisations have

invested significant resources in making the supply chains leaner. While
leaner supply chain reduces the costs across the supply chain, it also
results into number of issues in case of emergency. For example, some
of the past events such as strike at the dock of California, typhoon in
Taiwan, tsunami in Asia, hurricane in New Orleans, and oil explosion
have impacted to maximum extent the leaner supply chains. At times,
too much of leanness and meanness can severely hurt companies in the
time of severe distress.
2. Security risks: Low cost global sourcing destination is also subject to

political uncertainty or even internal political turmoil. This can lead to
huge risk in the event of global sourcing. That risk needs to be assessed
in terms of whether your offshore/ overseas supplier will be able to
provide the products successfully with minimal environmental risks. For
example, ABC Limited decided to set up a Thermal power plant on the
basis of availability of coal through imports from Indonesia. The project
viability was based on agreed price with the Indonesian supplier. Going
one step further, the buyer company also acquired stake in the vendor.
However, a prices of coal started moving upwards across the globe,
Indonesia decided to restrict the export of coal from their country.
Further, the exports became very costly on account of high export
duties. This posed a great risk to the power project and the project work
has to be shelved off. The project became completely unviable
considering the increase in the coal prices in the international market.
To survive, the buyer company made number of technological changes
to the power plant and made it capable to process coal available
domestically.
255
3. Hidden costs: The differences in culture, time zone, and other

regulatory issues, it is possible that the there are some hidden costs in
the area of global sourcing. Some of the hidden costs applicable for the
global sourcing are as follows:
a. Loss/damage or loss of control of cargo during the transportation and
logistics activity
b. Excessive custom duties and those are subject to change as per the
country’s regulations
c. Warehousing risks, cargo theft, contamination
d. Risk of currency fluctuation eating up all the savings generated
through global sourcing models
e. Regulatory compliance management/standards may get compromised
f. Costs related to correction of quality defects
g. Increased levels of inventory and working capital requirements
h. Additional costs related to vendor performance monitoring
i. Cost of compliance with extra-territorial standards
j. Stock outs – affecting the lean supply chains
k. Information systems related risks
4. Quality risks: Certain low cost countries may not pay adequate
attention to the quality standards. This can result into damage to the
company’s brand and high reputational damage.
5. Compromise on the intellectual property: The buyer owned or

proprietary knowledge of design, process, engineering, may get leaked
and exposed to sharing to outsourced partner. In the event of adverse
business situation, it can result into significant loss of competitive
advantage for the buyer company.
6. Risks related to compromise on business ethics: Some of the

geographies in the emerging markets rated very high on corruption
index and unethical business practices. Dealing with vendors in such
geographies can significantly pose the business to number of allied
risks.
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10.1: View on Emerging Supply Chain Risks
257
10.2 Role of Insurance in Global Sourcing
Securing the stock in transit across the supply chain is prime objective in
risk management. Global sourcing manager should be aware of various
policies available at its disposable. The various insurances available are
packaged into a programme termed as Marine Insurance. While the term
used is Marine Insurance, it also cover cargo in other modes of
transportation, i.e., air, surface, storage etc.
Key expectation from Supply Chain Insurance are as under:

1. Supply chain insurance reacts to an insured event that is not limited to
physical loss or damage.
2. Supply chain insurance is primary for non-physical damage events and
resultant business interruption.
3. Coverage is for business interruption as a result of disruption or delay in
the receipt of products, components, or services from a named supplier
or supply.
4. Depending on the insurance product selected, types of covered non-
physical damage events could include pandemic; strike, civil, or military
action; regulatory action; political risk; or other significant delays in
supply (i.e., from natural disasters such as an earthquake, flood, or
volcanic eruption).
5. Coverage for physical damage perils, such as fire and natural
catastrophes, is typically excess of the client’s current contingent time
element coverage, which will increase the client’s current level of
coverage.
6. Definition for the disruption/delay is structured on either an agreed
value basis or actual loss sustained, providing protection for both total
and partial interruption of service operations.
7. Measure of loss could be in gross earnings expected or in number of
units from the production or service operation.
8. Multiple supplies or suppliers can be included.
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10.3 Marine Insurance
Origin of Marine Insurance

a. World Trade started with discovery of land by traders.
b. Trader used to carry cargo along with them in large ships/vessels.
c. There was a need to protect the cargo against losses on account of
various risks.
d. On the basis of law of large numbers, the Marine Insurance started with
contribution from participants.
e. The participants where mariners/traders/financiers to the trade.
f. Friendly guilds/association started offering insurances.
g. England pioneered the concept of Maritime Insurance and Llyod’s was
formed.
h. Oldest type of Insurance.
i. Also called as Marine, Aviation and Transit, commonly known as MAT.
Types of Marine Insurance
1. Import Transit
2. Export Transit
3. Inland Transit
4. Marine Hull
While the word used in Marine, it covers Cargo Transported and Store from
anywhere to anywhere including Air, Railway, Surface Transport and
Warehousing Storage
Coverage in Marine Insurance
One of the major risks that international traders (Exporters and Importers)
face is the risk of damage or loss during the transportation process.
‘Marine Insurance’ is, thus, the term used to describe the Insurance taken
out to cover the risks involved in all forms of transportation, for example,
sea, road, rail and air, from the point where the goods are loaded onto
their first form of transport until they arrive at their final destination.
259
1. Physical Damage Coverage

(a) Guards Motor, Boat and Equipment
(b) Risks covered include Fire, Theft, Vandalism
(c) The value of policy can be Actual Value or Agreed Value
2.Liability Coverage
(a) Insured or passenger causes injury to another passenger’s
property
(b) Vessel accidently collides with another vessel or dock area
(c) Coverage protects passengers and property
(d) Liability caused to other property is covered under this
Insurance
3. Medical Coverage
(a) In event of boat accident, provides medical coverage to the
Insured Personnel and the Guests
(b) Protection against hospital bills of high value
4. Extensive Coverage
(a) Damage to Ship
(b) Cargo
(c) Damage to Terminals
(d) Interim movement of cargo between two modes of
transportation
Important Features of Marine Insurance Policy
1. Standard terminology used across the Globe
2. Liability of underwriters in Several and NOT Joint…
3. If one underwriter of the policy defaults, other underwriters/Insurers

are not liable to pay his portion of claim
4. Marine Insurance – Split into two parts
a. Marine Hull and Machinery
b. Marine Cargo
5. Coverage can be on Total Loss Basis – which means Insurance claim is

payable only on Total Loss. No insurance claim is payable in case of
partial loss, e.g., similar to Death Policy without any accidental loss with
respect to an individual.
260
6. Cover can be on the basis of
a. Time – Cover a period, generally one year
b. Voyage – from Port A to Port B
Protection and Indemnity (P&I)
1. Marine policy covers only 1/3rd of the actual liabilities.
2. To cover the rest Ship-owners started a club popularly known and P&I
Club.
3. Some of the risks which P&I Club covers include Nuclear, Oil Pollution,
etc.
4. Club collect “Calls” – similar to premiums and build up sufficient

reserves. The fund is used to obtain reinsurance.
Concept of Actual Total Loss and Constructive Total Loss
1. Actual Loss – Where the vessel and cargo is totally lost.
2. Constructive Loss – The vessel and cargo are in such a damaged

conditions, that reconstructing is not economical. The same needs to be
written off.
Average Clause – First Type Particular Average

a. In case of storm, ship has to be protected/repaired.
b. Certain cargo is to be jettisoned – thrown away from ship.
c. Cargo owners whose cargo is safeguarded/protected need to
compensate the cargo owners whose cargo is jettisoned.
d. Particular average is, thus, applicable.
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Average Clause – Second Type – Under-Insurance
Applicable when the insured has taken less coverage than the actual value
of the vessel/ cargo, e.g.,
a. If the insured has taken insurance of only ` 75 crores against the actual
value of ` 100 crores of the property, this is a case of Under Insurance.
b. In the event of loss say of ` 80 crores, the insurance company will be

paying only 75% of the loss, i.e., ` 60 crores and NOT total ` 80 crores.
Average Adjuster
1. For the claims where Average Clause is applied, an expert is involved.
2. The expert is called as Average Adjuster.
3. A specialist responsible for adjusting and providing general average

statement.
4. Appointed by Ship-owner or the Insurer.
Excess
a. Excess is the amount payable by the INSURED in the event of loss.
b. Excess is used to discourage Moral Hazard or remove small claims.
c. In normal parlance, Excess means Deductible, i.e., the portion/

percentage of loss the Insured has accepted to bear.
d. It is also called as Retention.
Tonners and Chinamen
1. Tonner is a policy setting out the global tonnage loss for a year.
2. If this loss is reached or exceeded, the policy is paid out.
3. Chinamen is a policy which is exactly reverse. If the limit of loss of

tonnage is not reached, then the policy is paid out.
4. These are the early forms of reinsurance and both are technically
unlawful.
262
Cargo Insurance
a. Insurance is offered under Institute Clause on various A, B and C basis.
b. A category is of widest coverage.
c. C is the most restricted.
d. A valuable cargo is called as specie.
Warranties and Conditions
Normal Understanding
• Condition – If condition is breached, the whole contract ends.
• Warranty – Breach of warranty will not result into breach of entire
contract.
Under insurance law, the meaning of above terms is reversed.

• Implied warranties exists – e.g., the vessel is seaworthy and fit for
sailing.
Salvage
1. Means practice of rendering assistance/aid to a vessel under distress
2. Sailors honour bound to render assistance where required
3. Policy has “Sue and Labour” clause which covers reasonable costs
incurred by the ship-owner in avoiding great loss
263
10.4 Probable Reasons for Damage to the Cargo
Following are some of the reasons tabulated which the global sourcing
manager should be aware of while seeking appropriate insurance. Some of
the losses are also responsibility of the shipper or the logistics partner.
• Lack of export packaging • Wrongly declared cargo

• Increased use of weak retail • Temperature notations misleading/
packaging unachievable
• Inadequate ventilation • Lack of reefer points
• Wrong choice of container • Organized crime
• Poor condition of container • Heavy containers stowed on light
• Lack of effective container • Stack weights exceeded
interchange inspection
• Heat sensitive cargoes stowed on/
• Ineffective sealing arrangements adjacent to heated bunker tanks or
in direct sunlight
• Lack of clear carriage instructions
• Fragile cargoes stowed in areas of
• Ineffective internal cleaning
high motion
• Contaminated floors (taint)
• Damaged, worn, mixed securing
• Wrong temperature settings equipment
• Condensation • Poor monitoring of temperatures
• Overloading • Wrong use of temperature controls
• Poor distribution of cargo weight
• Wrong air flow settings
Table 10.1
264
Important Aspects to Remember in Marine Insurance – Global

Sourcing Manager’s Perspective
1. Declare Second Hand Goods – Utmost good faith.
2. Placing the goods in a warehouse for storage other than during the
normal course of transportation will terminate the cover.
3. Unless the assured notifies the insurance company of the additional

storage requirements and he would have to pay an additional premium
for such extended cover.
4. Policies automatically terminate ―

a. When the cargo has been received at the place of delivery (the
warehouse)
b. Sixty days after the completion of discharging the goods from a
vessel
c. Thirty days after the completion of discharging the goods from an
aircraft
5. Marine Insurance cover is available in three options these are:

a. Institute Cargo Clauses (A): These clauses provide cover against
the most comprehensive set of risks and to equate with what was
formerly known as the “all risks” clauses.
b. Institute Cargo Clauses (B): These are restricted so that they
cover losses or damage arising from certain nominated risks only.
c. Institute Cargo Clauses (C): These are substantially restricted
both in relation to the risks covered and the nature of the events
from which those risks arise.
6. General Average: General average losses are losses, damage and

expenses, which occur as a result of voluntary action taken by the ship's
master/captain in a time of genuine peril when the entire voyage is in
danger. Ensure that this is always covered in the Insurance Policy.
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10.5 Responsibility of the Cargo Owner in Marine

Insurance
1. Responsibility to mitigate the extent of damage, taking all reasonable
measures to minimize and prevent further loss or damage where
possible.
2. Various modes of transportation carry strict limitations on the time in
which you must notify the carrier of loss or damage. Failure to report on
time may lead to loss of claim.
3. Know the deductibles, exclusions and other important clauses.
4. On cargo arrival at the destination:
a. Count, weigh, tally, and examine the cargo before you sign for it
b. On sealed shipments, examine and record the seal number. Retain
the seal in all cases (where possible)
c. Under no circumstances should you sign a clean delivery receipt for
damaged or short shipments
d. If the carrier refuses to deliver the goods unless a clean receipt is
issued, immediately file a written protest with the head office or local
office of the carrier
e. Contact all carriers and parties who handled the shipment, advising
them of the loss or damage and invite their inspection
f. Keep copies of all correspondence with the carriers and all other
parties
5. DO NOT:
a. Do not sign a clean delivery receipt for damaged or short shipments.
b. Do not destroy or dispose of damaged property or packing material
until survey has been completed.
c. Do not accept offers of settlement from carriers without insurers’
approval.
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10.6 International Regulations covering the Global

Sourcing and International Supply Chain
1. US Shipping Act – 1984
2. US Federal Maritime Commission
3. IATA – Air Freight
4. Harmonized System (HS): International Product Nomenclature

system adopted by 190 countries
5. WTO Agreement on Methods for Determining Customs valuation:

For assessment of duty
6. Revised Kyoto Convention – Simplification and harmonization of

methods and procedures of national customs authorities
7. The Arusha Declaration on Customs Integrity, revised in 2003, is the

reference point for addressing issues of corruption in customs
administrations
8. The WCO Framework of Standards to Secure and Facilitate Global Trade

(SAFE) Program contains 17 standards that promote the security and
facilitation of the international supply chain:
a. Electronic manifest information
b. Common risk management methods and approach
c. Inspection of high risk cargo at the origin
d. Trade facilitation
9. Uniform Customs and Practice for Documentary Credits
10.FONASBA Federation of National Associations of Ship Brokers

and Agents: Body regulating the profession of Ship Brokers and
Shipping Agents in the global supply chain
11.Trade Agreements
12.Trade agreements are of the preferential and free trade types are
concluded in order to reduce (or eliminate) tariffs, quotas and other
trade restrictions on items traded between the signatories.
267
13.Agreements can be Bilateral or Multilateral
14.Most Favoured Nations (MFN)
15.Green Channel Facility: Major importers are being given Green

Channel Facility by various countries for speedy clearance of cargo.
There is no physical inspection of the goods
16.WCO World Customs Organization (WCO): Intergovernmental

organization comprising of 174 member states and deals with 98% of
international trade.
1. Download an Annual Report of any publicly listed company and review

through the Risk Management Section. Identify the important supply
chain risks.
…………………………………………………………………………………………………………………………
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…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
2. Review a Marine Insurance Policy of any organization engaged in Import

and Export business and identify the key features, coverage and
exclusions.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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10.8 Summary
Global Supply Chain is increasingly becoming susceptible to number of

business risks which include physical, financial and operational risks. The
risks have emerged because of number of causes some of which are leaner
supply chains, security incidents, exposure to piracy, exposure to various
hidden costs and quality issues with the suppliers. Insurance has a very
important role to play in the global sourcing. The critical policy is Marine
Insurance, which is very crucial to manage the logistics risks. Global
Sourcing Manager should be aware of all the important aspects of various
insurance programme to provide a financial protection to the global
sourcing model and the supply chain. The Global Sourcing Manager is also
expected to be aware of various International regulations involved in the
global sourcing process. Innovative products like Supply Chain Insurance,
Credit Insurance, Distribution Chain Insurance will help the supply chain
managers to address the risks issues and challenges in a better manner.

1. Highlight and explain the important factors leading to various risks in
the global sourcing models.
2. Explain the role of insurance in securing the global supply chain.
3. Write a short note on Marine Insurance.
4. Provide an overview of key regulations governing the International

Sourcing and supply chain.
269
1. Which of the following is least likely to be an important risks to the

global supply chain?
(a) Cargo damage
(b) Supplier financial bankruptcy
(c) Adequate discounts over the price
(d) Cargo theft
2. Which of the following is not the type of Marine Insurance?

(a) Import Transit
(b) Export Transit
(c) Inland Transit
(d) Outland Transit
Answers: 1. (c), 2.(d).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
271
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
Chapter 11
Quality Management in Global Procurement
Objectives
• Understand the role and importance of quality management standards in
global procurement
• Gain an understanding as to how the supplier should meet the buyer
expectations with respect to quality
• Understand the ISO standards
• Understand the benefits of ISO Implementation
• Understand the importance of quality management in contract
manufacturing
Structure
11.1 Importance of Quality Standards
11.2 Meeting Quality Expectations of Buyer – Key Steps
11.3 ISO Standards – Framework for Quality Management
11.4 Benefits of Implementations of ISO Standards
11.5 Quality Management in Contract Manufacturing
11.6 Global Procurement Best Practices
11.8 Summary
272
11.1 Importance of Quality Standards
It is very crucial to select the supplier with focus on quality of the products
and services. The important dimension of quality in supplier’s performance
will include:
1. Performance of the product and services: The product’s primary
operating characteristics relevant for the buyer firm.
2. Features of the product: It includes attributes that supplement the
product’s primary operating characteristics.
3. Reliability: The probability of a product failing within a specified time
period needs to be lowest.
4. Conformance: The extent to which a product’s design and operating
characteristics meet predetermined standards as defined by the buyer’s
organization.
5. Durability: The amount of use a product offers a consumer before the
product deteriorates. The buyer expects a long-term durability of the
product and its performance with an objective to reduce to total cost of
ownership.
6. Serviceability: Buyer organization prefers products covered by long-
term warranty. How fast, how easily, and with what degree of courtesy
and competence repairs are performed.
7. Aesthetics: It is also very important to ensure that the product is
aesthetically appealing. Aesthetics determines how the product appeals
to the five senses.
8. Perceived Quality: Number of features of the product determine the
quality of the product. Reputation, image, or other inferences regarding
the attributes of a product.
Without ensuring the adequate quality level of a supplier’s delivery of

goods or services, supplier development efforts will not be successful and
activities like involving suppliers in product development will be
problematic. Quality has also been proven to correlate with productivity
and an increased quality loads to an increased productivity. This in turn
ensures effective and efficient purchasing for the buyer organization.
273
11.2 Meeting quality expectations of Buyer – Key Steps
Organization need to implement multiple steps to ensure that the supplier’s

product and services are of good quality and acceptable standards. Some
of the important steps to ensure this objective is as follows:
1. Optimization of the supplier base to a manageable level: Pursuing

value-added activities with less than 250 suppliers is much possible in
comparison to managing the quality issues with more than 5000
suppliers. The organisation should be on its path to eliminate
incompetent or in-feasible suppliers over a period of time as an initial
step.
2. Continuous measurement of supplier quality performance:
Continuous, dynamic and in some cases even mutual measurement of
suppliers’ quality performance is vital. It can be done in align with other
measurement and evaluation systems such as overall supplier
evaluation.
3. Establish aggressive supplier improvement targets and
periodically monitor the same: This activity is related to the
competition between the buying firm and its suppliers. This method is
based on that the suppliers need to increase their quality performance
level faster than their competitors; otherwise they will lose out in the
market and also their business. It is very demanding approach, from the
supplier’s point of view, but if the method can be managed actively
great positive benefits can be gained by the buyer organisation.
4. Reward superior supplier performance and improvement: Reward
is always a tempting offer to motivate suppliers to improve their quality
levels on a continuous basis. The rewards may include sharing of the
benefits, resulting from supplier-initiated improvements, by offer the
improved supplier a greater share of a buyer’s total volume.
5. Certify supplier processes and methods: Certification ensures that
the supplier has adopted minimum standards required for quality
product manufacturing and service delivery. Certification helps to assure
that the supplier’s processes and operating methods are in control. That
often limits the need for inspections of incoming supplier material and
components. It should be a challenging to get a certificate and the
decision about approving a supplier should be taken mutually by cross-
functional teams and perhaps with help of external consultancy at times
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where required. When the supplier is approved and has received the
certificate, the buyer will be in a position to eliminate unnecessary
quality securing processes, such as eliminating inspections of incoming
material and components for every receipt.
6. Commit the necessary resources and time for supplier
development: Commitment of necessary resources and time for
supplier development should only be be performed after a
rationalization process of the supplier base. For example, Honda
commits to supplier quality development 40 full-time Engineers in the
Purchasing Department. These Engineers work with improving the
supplier’s productivity and quality. The suppliers receive technical
support in form of a Honda “quality up” programme, which aim is to
work directly verses the executive management team at a poorly
performing supplier’s production site.
7. Involve suppliers early in product and process development: This
initiative is to maximize the benefit received from a supplier’s
engineering, design, testing, manufacturing and tooling resources.
Qualified suppliers, which take part directly in a cross-functional product
development team as the buyer, can provide early insight into the
production processes. Furthermore, by involving and inviting a supplier
to take part in these types of R&D projects can lead to better design
solutions regarding quality and the need of production resources which
often lead to both better quality and a lower purchasing prices. This is a
crucial step of supplier quality development although it improves both
the suppliers and the buying organization’s quality.
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11.3 ISO Standards – Framework for Quality Management
ISO-9000 Series
The ISO-9000 series was issued by the International Organization of

Standards (ISO), a nongovernmental organization established to promote
the development of standardization, in 1987. It has since then become an
international recognized quality standard. The standard is revised in
regular intervals. There was a big revision in 2000 transferring it from an
object-oriented approach to a process-oriented approach. The ISO-9000
series consists of four parts: ISO-9000, ISO-9001, ISO-9004 and
ISO-90011. ISO-9000 covers the basics of quality management systems
and also contains the definitions of concepts and terms for the ISO-9000
series. ISO-9001 contains the requirements in the standard for a quality
management system. ISO-9004 provides the guidelines for implementation
of a quality management system as well as processes for continuous
improvements and work towards customer satisfaction. ISO-90011
provides guidelines for carrying out audits related to quality and
environmental issues.
ISO-9000 is based upon eight quality management principles that

companies implementing ISO-9000 should follow:
1. Customer focus: Number of organizations look towards customer
delight through focus on customers and strive to meet and exceed
customer expectations and requirements.
2. Leadership: The management should establish a unity of purpose and
direction in the whole organization and create an environment that
encourages people to be involved. Without a competent leadership, in
number of organizations fail in achieving the quality products.
3. Involvement of people: All personnel should be involved and use their
full abilities for the company’s benefit to meet the customer needs.
4. Process approach: All activities and resources should be managed as
a process. While people’s involvement is important, the approach
adopted by the organization should be process based and not too much
dependent on the people.
5. System approach to management: The management should have a
holistic view of the company to reach its goals effective and efficient.
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6. Continual improvements: Continuous improvements should be a

permanent objective of an organization.
7. Factual approach to decision-making: Base all decisions of facts and
analysis of data.
8. Mutually beneficial supplier relationship: The company should have
a mutually beneficial relationship with its suppliers.
ISO-14000 Series
The ISO-14000 series was developed by ISO in 1996 and is a standard to

improve environmental performance. ISO-14000 builds on the same
principles as ISO-9000. The ISO-14000 environmental standards specify
the structure of information technology, in the form of an environmental
management system that an organization must have in place if it seeks to
obtain ISO certification. The ISO-14000 standards describe the basic
elements of an effective environmental management system. These
elements include creating an environmental policy, setting objectives and
targets, implementing a programme to achieve those objectives,
monitoring and measuring its effectiveness, correcting problems, and
reviewing the system to improve it and overall environmental performance.
It is common that a company’s management systems related to quality and
environment, e.g., ISO-9000 and ISO-14000, are integrated into one
system.
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11.4 Benefits of implementations of ISO Standards

1. It helps the organization to create new opportunities for improvement
across many competitive dimensions.
2. Improvement in the company’s operations as well as customer
relationship.
3. ISO certified companies conform to quality standards and are poised to
deliver better quality of products and better delivery precision.
4. More flexible and adaptable to the customer requests and needs.
5. Improvement of productivity with effective implementation of the
process.
6. Improvement of financial performance and specific improvements in the
return on assets.
7. ISO certification process forces the company to examine all its
processes in detail and in this processes new opportunities to reduce
waste or cut costs often turn up. Certified companies go through a
process of organizational learning that has a positive effect waste
reduction.
The specific areas which a buyer should look forward while selecting the
suppliers with focus on quality management systems around the following
important components:
(a) Quality of product and services
(b) Efficiency of process
(c) Cost-effective service delivery
(d) Productivity of business operations
(e) Continuous improvements across the business process
(f) Flexibility and adaptability of the delivery processes to respond
to customer requirements
(g) Waste reduction
(h) Focus on customer satisfaction – an important priority
(i) Precision of the delivery
(j) Innovation in the manufacturing, processes and customer
relationship management
A table summarizing the linkage of Quality Management Systems on

supplier selection and evaluation is provided as under:
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Eight
Management Effects of Effects of
Key Factors of Key Factors
Principles of Implementati Implementati
Supplier for Supplier
Quality on of ISO on of ISO
Evaluation Performance
Management 9000 14000
Systems
• Leadership • Quality • Quality • Quality • Conformance
• Involvement • Delivery • Cost • Delivery to standards
• Process precision • Waste precision as defined by
Approach • Cost • Environmental • Price the buyer
• Holistic view • Continuous Performance • Continuous • Immediate
• Continuous improvement • Company improvement response to
improvement • Customer image • Customer buyers needs
• Customer satisfaction • Innovation service • Implementati
focus • Flexibility • Flexibility on of quality
• Factual • Efficiency management
approach • Innovation policies
• Mutually • Documentatio
beneficial n of the
relationships policies
• Participation
• Process
control
• Quality
control and
assurance
Table 11.1
11.5 Quality Management in Contract Manufacturing
The Owner/Buyer generally enters into a Quality Agreement with the

contract manufacturer. A Quality Agreement is a comprehensive written
agreement that defines and establishes the obligations and responsibilities
of the quality units of each of the parties, i.e., Supplier, Purchaser and any
other entity involved in the contract manufacturing. The key elements of
quality agreement are as follows:
1. Purpose/scope of the contract arrangement and quality
2. Terms including effective date and termination clause
3. Dispute resolution
4. Responsibilities, including communication mechanisms and contacts
5. Change control and revisions
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The purpose and scope of the quality agreement between the buyer and
the contract manufacturer will largely depend on the nature of contractual
services being sought or provided under the agreement. Consensus of the
buyer and the contract manufacturer on precise meaning of terms used in
the Quality Agreement is an important step in drafting. Owners may
consider adopting the terms and procedures used by contracted facilities in
order to reduce the likelihood of misinterpretation and personnel error
during actual manufacturing. The parties to a Quality Agreement should
include a communication plan that explains how manufacturing deviations
will be relayed to the owner by the contracted facility, and how such
deviations will be investigated, documented, and resolved. Dispute
resolution provisions should also be included as an important feature of the
quality agreement.
Some of the important aspects which the global sourcing manager should
be aware of while entering into a quality agreement with the contract
manufacturer as stated as below:
a. Owners/Buyers and the Contract manufacturers should clearly define

and precisely mention the scope, role and responsibilities of each of the
parties to the contract.
b. Often the owner organization, e.g., in the pharmaceutical industry are

subject to various regulations like Good Manufacturing Practices and
FDA Guidelines. While in the quality agreement, the owners may assign
a particular responsibility to the contract manufacturing unit, however, it
will not absolve any party from the responsibility to comply with the
requirements.
c. Quality Agreement should identify the specific site/locations at which

manufacturing operations will be performed along with addresses and
the particular services to be provided.
d. The Agreement should clearly specify and indicate who is responsible for
setting specifications for raw materials; auditing, reviewing, qualifying,
and monitoring suppliers of those materials; and conducting required
sampling and testing and certifications, if any as applicable.
e. Product specific terms should be appropriately incorporated as a part of

the quality agreement.
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f. Where the contracted manufacturing facility or the owner entity is

subject to laboratory controls, the same needs to be specified in the
quality agreement.
While Quality Agreement is a great feature in the area of contract

manufacturing, the owner/ buyer needs to periodically perform checks
through various modes such as audits, inspections, surprise visits to
ensure that the manufacturing facilities at the contracted facility are in full
alignment with the Owner’s and Regulator’s expectations.
Case Study Demonstrating the importance of Quality Agreement
FDA inspection of a Contracted Facility of one of the leading manufacturer

in the pharmaceutical industry that manufactures injectable product for the
product owner revealed significant objectionable conditions at the
Contracted Facility. A Warning Letter is issued to the Contracted Facility by
the FDA initially. The key issue are that most of the conditions observed
are related to deficient maintenance of the facilities and equipment used to
manufacture the injectable product, such as defective or partially broken
equipment, visibly tarnished piping, leaking seals, etc.
In addition, facility design was inadequate to prevent contamination which

may pose a wide array of risks to the consumer of the injectable. This
Contracted Facility had a Quality Agreement with all conditions and terms
specifying the product owner’s responsibility for upgrades and maintenance
of the facilities and equipment. The owner company failed to provide the
requisite resources or carry out the necessary upgrades and maintenance,
but and the Contracted Facility continued to manufacture the product under
non-CGMP conditions (non-compliant with Good Manufacturing Practices)
that could result in product contamination. The FDA warned the owner and
issued orders to ensure necessary compliances prior to continuation of any
manufacturing.
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11.6. Global Procurement-Compendium of Best Practices1
1. Audits: There are three primary audit types: compliance, financial, and
performance. Preparation for an audit through regularly conducted self-
assessments ensures that procurement professionals can readily provide
up-to-date documents and data that may be requested by an auditor.
Participating in an audit helps an agency’s procurement staff maintain a
professional approach that promotes effective stewardship of public
funds and best value for the constituents served by the agency.
2. Cooperative Contracts for Public Procurement: Cooperative

Procurement is a term that refers to the combining of requirements of
two or more public procurement entities to leverage the benefits of
volume purchases, delivery and supply chain advantages, best
practices, and the reduction of administrative time and expenses.
Cooperative procurement efforts may result in contracts that other
entities may “piggyback”.
3. Developing Evaluation Criteria: Before issuing the solicitation,

procurement professionals and applicable stake-holders must establish
the criteria by which the resulting bids or proposals will be evaluated.
Once the appropriate procurement method is selected, criteria should be
established to evaluate bids or proposals for the most economically
advantageous offer for the contracting authority, or for the lowest price.
4. Developing a Procurement Policy Manual: A policy is a governing

set of principles which establish the general parameters for an
organization to follow in carrying out its responsibilities.
5. Distinguishing Between Scope of Work and Statement of Work:

Historically, the terms scope of work and statement of work have been
used interchangeably, inconsistently, or in contradictory ways. Some
entities have specifically defined these terms for their own usage. As a
result, definitions that form the basis for discussions and clear, more
universal guidance must be established. This practice provides those
definitions, distinguishes between the two terms, and sets a standard
for how these terms are used in the professional language of public
procurement.
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6. Ethical Procurement: Ethical procurement prohibits breach of the

public’s trust by discouraging a public employee from attempting to
realize personal gain through conduct inconsistent with the proper
discharge of the employee’s duties.
7. Evaluation Process: The receipt, opening, and evaluation of requested

documentation from potential suppliers must be carried out by a
competent evaluation panel and in accordance with all applicable laws,
as well as the principles of impartiality and transparency. Those involved
in the process must maintain integrity and professionalism in all aspects
of evaluation. All submissions received must be kept secure during the
evaluation process. The confidentiality of the submitted documents must
also be maintained subject only to applicable freedom of information or
public records legislation.
8. Invitation For Bids: An Invitation for Bids (IFB) procurement method

may be chosen when requirements are known and the award is based
primarily on price, which can include total cost of ownership. This
expansion of low price only to consideration of the total life cycle in
determining the best price is noteworthy in terms of future trends in
sourcing. The ABA Model Procurement Code calls the IFB method of
source selection “Competitive Sealed Bidding.” This practice document
differentiates between an IFB, which is the solicitation document, and
the competitive sealed bid (referred to as a “bid”), which is the response
to the IFB. To be eligible for recommendation of award, a bid must be
“responsive” and the bidder must be “responsible.” For procurements
that fit the criteria for use of an IFB, adherence to the practice guidance
supports the procurement professional in navigating a successful IFB
process and the achievement of desired outcomes.
9. Information Technology (It) Procurement Series - No. 1:

Procuring IT requires “the involvement of all key stakeholders at an
early stage (procurement, legal, budget/finance, security, IT, and
business leadership).” (Kelly et al., 2015). Knowledge of the specific IT
area for the commodity being procured, including terminology and
attributes, is essential. Procurement must also be familiar with laws
and entity policies, processes, and procedures that guide the
procurement.
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10.Information Technology (It) Procurement Series ―No. 2: The

first practice on IT Procurement provided an overview of the four
commodity types of software, hardware, services, and support and
maintenance. This practice, number two in the series, takes a closer
look at IT software procurement and its unique considerations such as
licensing, source code, and data ownership.
11.Information Technology (It) Procurement Series ―No. 3

Hardware (New): Procurement should use solicitation templates
specifically developed for the procurement of IT hardware. The
procurement professional must take the highly technical information
inherent in IT procurements and communicate it clearly and effectively
in solicitations, negotiations, contracts, and during implementation.
12.Lease Purchase Decision: Lease-Purchase Decision is a decision

based on the results of a cost/benefit analysis of the costs to own, costs
to lease, and the advantages and disadvantages of any relevant
qualitative factors. (ISM, 2000).
13.Outsourcing: An informed decision by an organization to contract

outside of the organization for a product, service or business process
that had previously been provided internally (in-house).
14.Performance Based Contracting: Performance Based Contracting is a

results-oriented contracting method that focuses on the outputs, quality,
or outcomes that may tie at least a portion of a contractor’s payment,
contract extensions, or contract renewals to the achievement of specific,
measurable performance standards and requirements. These contracts
may include both monetary and non-monetary incentives and
disincentives.
15.Performance Management: Performance management is an ongoing,

systematic approach to improving results through evidence-based
decision making, continuous organizational learning, and a focus on
accountability for performance. Performance management is integrated
into all aspects of an organization’s management and policy-making
processes, aligning an organization’s practices so it is focused on
achieving improved results for the public.
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16.Performance Measurement: Performance measurement is the

process by which procurement establishes criteria, based on strategic
planning goals, for determining the results and quality of its activities. It
involves creating a simple, effective system for determining whether
procurement is meeting its objectives.
17.Performance Metrics: Performance Metrics is the term given to the

measurement of performance. An analytical application of
measurements that allows comparison of performance standards.
18.Protests: A protest is defined as a written objection by an interested

party to a solicitation or an award of a contract with the intention of
receiving a remedial result. Procurement must ensure that a protest
policy is established and documented for the entity. Understanding the
context and motivation for the filing of a protest may be as important as
the specific protest issue. The procurement professional should ensure
that the legal department or legal counsel is aware of and may advise
on action regarding protests. Throughout the solicitation process,
procurement and stakeholders should employ procurement best
practices that promote transparency, accountability, and maximize
competition. Conducting a protest closeout assessment after a protest
has been resolved supports continual improvement in the procurement
process.
19.Public-Private Partnership (P3); Facilities and Infrastructure: P3s

are procurements that combine design and build components under one
contract between the public sector and the private sector. This practice
provides guidance to the public procurement professional who is
considering a Public-Private Partnership (P3) as an appropriate solution
to a stated need or requirement. It defines P3s in the context of the
construction of public facilities and infrastructure and is intended as a
reference, to be shared with elected public officials, government
executives, and private sector executives on the use of and
procurement through P3 contracts.
20.Qualifications-Based Selection for Architectural and Engineering

Services: Qualifications-Based Selection (QBS) is a procurement
process for the competitive selection of architectural and engineering
services under which the most appropriate professional or firm is
selected based on qualifications such as knowledge, skill, experience,
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and other project-specific factors, rather than on fees. Fair and

reasonable fees are negotiated with the top-ranked firm for an agreed-
upon scope of services.
21.Risk Management: Risk management is a process including the

identification and analysis of risk; and the decision to either accept or
mitigate the exposure to such risk when compared to the potential
impact on the achievement of the organization’s objectives.
22.Selecting the Appropriate Construction Project Delivery Method:

Selection of a construction project delivery method will depend on which
delivery methods are permitted by legislation and will be determined
through a business analysis of the project characteristics. Project
characteristics may include price, complexity of scope, risk, and
qualifications, experience, capability, and capacity of the contractor. The
attributes of each project characteristic and the priorities of the entity
will also help determine which method is selected.
23.Specifications: Specifications define precise requirements of

commodities (i.e., goods and services) sought through a solicitation
process. To understand the context in which the commodity will be used
and with clear knowledge of statutes, regulations, policies, market
availability, budget, and the strategic plan of the entity, procurement
professionals collaborate with end users to translate a particular need
into detailed requirements. Written with an intent to maximize
competition, specifications should use language that is relevant to and
understood by potential offerors.
24.Spend Analysis: Spend Analysis is the process of collecting, cleansing,

classifying and analyzing expenditure data from all sources within the
organization (i.e. purchasing card, e procurement systems, etc.). The
process analyzes the current, past and forecasted expenditures to allow
visibility of data by supplier, by commodity or service, and by
department within the organization. Spend analysis can be used to
make future management decisions by providing answers to such
questions as: what was bought; when was it bought; where was it
purchased; how many suppliers were used and how much was spent
with each; how much was paid for the item.
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25.Strategic Procurement Planning: Strategic planning is the process of

creating alignment and consistency of action that results in documents
that establish the long-range objectives and overall strategy or course
of action by which an organization fulfills its mission. Strategic
Procurement Planning (SP2) is the transformation of an organization’s
mission, goals, and objectives into measurable activities to be used to
plan, budget, and manage the procurement function within the
organization. The ultimate goal is to bring about positive change in
organizational culture, systems, and operational processes.
26.Supplier Relationship Management (SRM): Supplier Relationship

Management (also called Vendor Relationship Management) is a set of
principles, processes, and tools that can assist organizations to
maximize relationship value with suppliers and minimize risk and
management of overhead through the entire supplier relationship life
cycle. Supplier Relationship Management has two aspects, which are:
clear commitment between the supplier and the buyer, and the objective
of understanding, agreeing, and whenever possible, codifying the
interactions between them.
27.Sustainable Procurement Practice: Sustainable procurement is a

purchasing and investment process that takes into account the
economic, environmental and social impacts of the entity’s spending.
Sustainable procurement allows organizations to meet their needs for
goods, services, construction works and utilities in a way that achieves
value for money on a whole-life basis in terms of generating benefits
not only to the organization, but also to society and the economy, while
remaining within the carrying capacity of the environment.
28.The Place of Public Procurement within the Entity: The placement

of procurement should be operationally distinct from other departments
and divisions. The 'Place of Procurement' refers to positioning
procurement within the entity to optimize the influence and impact of
procurement on internal and external stakeholders. This best practice
builds a case for the strategic placement of the procurement function.
This placement maximizes the effectiveness of procurement within the
entity and is critical for the entity to fully benefit from procurement
operations.
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29.Technology: Procurement Technology helps accelerate business

improvements. It allows for the making, modification, usage, and
knowledge of tools, machines, techniques, crafts, systems, or methods
of organization, to solve a problem, improve a pre-existing solution,
achieve a goal, or perform a specific function in relation to procurement
and the procurement process.
30.Transparency in Public Procurement: Transparency can be defined

as timely, easily understood access to information. Transparency assists
in ensuring that any deviations from fair and equal treatment are
detected very early, and makes such deviations less likely to occur. It
protects the integrity of the process and the interest of the organization,
stakeholders, and the public.
1. Review of the Quality Policy and Quality Manual of any large

organization and document the important aspects.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
2. Conduct interview or discussion with Head of Quality Management and

gain a wider perspective of quality management process followed in the
sourcing function.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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11.8 Summary
One of the important parameter in addition to the commercials of the

product is quality. The Global Sourcing Managers needs to have a sound
understanding of the quality requirements so that the details can be
communicated to suppliers and the desired product or service can be
obtained. Organization implement various types of quality standards which
include ISO-9000 and ISO-14000 series. It is very crucial for an
organization and especially the Global Sourcing Manager to communicate
the importance and benefits of quality management to the suppliers. The
Global Sourcing Manager also need to ensure an appropriate quality
management process for the contract manufacturing activities.
1. Highlight the importance of quality standards in global procurement.
2. What are the key steps which organization should follow to ensure that
the products/ services procured from various suppliers meet the quality
requirements?
3. Write a short note on:

(a) ISO-9000 standard
(b) ISO-14000 standard
4. Highlight and explain the benefits that will arise to an organization by

implementing the quality management standards in global sourcing.
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1. Which of the following is least likely benefit that may arise from
implementation of quality management standard?
(a) Increased cost of quality
(b) Reduction in defects
(c) Better supplier relationship
(d) Compliance with quality requirements
2. Which of the following is least likely to be a consideration for a buyer

while evaluating the supplier on various quality parameters?
(a) Production process
(b) Quantum of discounts in price
(c) Efficiency and effectiveness of the process
(d) Efforts for defects reduction
Answers: 1. (a), 2. (b).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
291
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
Chapter 12
International Trade Payment Process In
Global Sourcing
Objectives
• Understand the International Trade Finance and payment process is
Global Sourcing
• Understand various payments modes available at the disposal of Global
Sourcing Manager
• Understand common discrepancies in documents which may lead to issue
in the payment process
Structure
12.1 International Trade Finance and Payments
12.2 Payments Modes in Global Sourcing
12.3 Common Discrepancies in Letter of Credit Which Should be Avoided
12.4 Case Study in Global Payments
12.6 Summary
292
12.1 International Trade Finance and Payments
International Trade poses wide range of risks (geographical distance

between buyer and seller, Jurisdiction, intermediaries). Basically, there are
five types of the payments:
(a) Cash in advance

(b) Letter of Credit
(c) Documentary Collections
(d) Open Accounts
(e) Consignment basis
Commercial Banks provide the following facilities for trade financing:
1. Non-fund Based
(i) Letters of Credit
(ii) Bank Guarantees
2. Fund Based
(i) Pre-shipment Finance
(ii) Post-shipment Finance
(iii) Project Finance
Limits are fixed by the banks for these facilities.
12.2 Payments Modes in Global Sourcing
Cash in Advance
1. Credit Risk completely eliminated for the exporter
2. Payment made through:
a. Wire Transfers (receiving bank’s details, SWIFT code (international

counterpart of IFSC code), seller’s name and address, bank account
details to be shared with the buyer)
b. Credit Cards
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3. International Check/Cheque –
a. This method is less prevalent now. However, still continues to areas
with limited banking facilities
b. Risk of insufficient funds in buyers account or stop payment exists
4. Importer is a new customer and/or has a less-established operating
history
5. The importer’s creditworthiness is doubtful, unsatisfactory, and
unverifiable
6. The political and commercial risks of the Importer’s home country are
very high
7. The Exporter’s product is unique, not available elsewhere, or in heavy
demand.
Escrow Service
Escrow Services – Money is allocated to specific account and on submission

of export documents, the amount is transferred to exporter’s bank account.
a. Importers send the agreed amount to Escrow service provider (normally

a bank).
b. After payment is verified, exporter ships the cargo.
c. Importer has pre-determined time to inspect the goods and accept the
goods.
d. Once goods accepted, payment is released to exporter.
e. Similar to pre-authorization of the credit card.
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Letter of Credit (At Sight/Usance)

1. Most secure instruments available to international traders.
2. Commitment by a bank on behalf of the buyer that payment will be
made to the Exporter.
3. Terms and Conditions of the Letter of Credit has to be met.
4. The compliance is verified after presentation of all the documents.
5. The buyer establishes credit and pays his or her bank to render this
service.
6. L/C is most useful when reliable credit information about a foreign buyer
is difficult to obtain.
7. However, the Exporter should have reasonable confidence on the
Foreign Bank.
8. L/C also protects the Importer since the documents required to trigger
payment provide evidence that goods have been shipped as agreed.
9. Any discrepancy in Letter of Credit will lead to negation of the payment.
10.The issuing bank will typically use intermediary banks to facilitate the
transaction and makes payment to the Exporter.
11.Banks are not concerned with the quality of the underlying goods or
whether each party fulfils the terms of the sales contract.
12.The bank’s obligation to pay is solely conditioned upon the seller’s
compliance with the terms and conditions of the L/C.
13.Unless the conditions of the L/C state otherwise, it is always
irrevocable, which means the document may not be changed or
canceled unless the importer, banks, and exporter agree.
14.Revolving L/C
• With a revolving L/C, the issuing bank restores the credit to its original
amount each time it is drawn down.
15. Confirmed L/C
• L/C issued by Foreign Bank (bank of the Importer) is confirmed by
exporter’s bank or other bank from the country of the Exporter.
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16. Standby L/C

• Similarly, standby L/Cs are often posted by Exporters in favour of an
importer to pay invoices when due
• Standby L/Cs are often posted by exporters in favor of importers
because they can serve as bid bonds, performance bonds, and advance
payment guarantees.
• Standby L/Cs are often used as counter guarantees against the
provision of down payments and progress payments on the part of
foreign buyers.
17. Transferable L/C
a. In Transferable L/C, the buyer can transfer a part of the value of L/C
or the full value of L/C in favour of one or more beneficiaries.
b. Transfer-ability should be expressed specifically in the L/C.
c. Since the buyer relies on the integrity of beneficiary, transfer-ability
in favour of someone unknown has risks.
18. Back-to-back L/C
a. In back-to-back L/Cs, Beneficiary's banks open several L/Cs within
the value of the mother L/C.
b. This is also known as countervailing L/Cs.
c. The terms and conditions of the second L/C are exactly the same as
that of the first L/C.
d. The second L/C may be a Domestic L/C.
e. Any change in the second L/C is possible only when the opener of the
original L/C agrees to such a change in the mother L/C.
19.Red Clause L/C
a. In Red Clause L/C, advance payment is provided against the supply
of certain documents like drawings and manufacturing schedule as
mobilization advance for manufacture of capital goods whose
manufacturing cycle time is high.
b. The advance payment details are printed in RED thereby being called
Red Clause L/C.
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20.Green Clause L/C

• In this type of L/C, advance is provided against goods, which are
manufactured and kept in a warehouse for a buyer against warehouse
receipt, before the same is shipped.
12.3 Common discrepancies in Letter of Credit which

should be avoided
1. Letter of Credit expired – documents presented after expiration date
of the letter of credit
2. Late shipment of goods
3. Merchandise description not strictly as per L/C term
4. Inconsistent spelling of parties’ names in documents
5. Late presentation of documents
6. Terms of sale not complied with
7. Ocean Bill of Lading issued by forwarding agent unacceptable
8. Partial shipment or trans-shipment effected despite L/C terms
9. Insurance does not cover risks stipulated in L/C
10.Foreign language documents must be exactly as per L/C
11.Documents are not consistent with one another
12.Bills of Lading not clean
13.Insurance issued after shipment date
14.Bills of Lading not properly endorsed
15.Late shipment--shipment made after latest allowable shipping date
16.Late presentation – documents presented more than 21 days after
shipment (or as specified in the L/C)
17.Letter of Credit overdrawn – amount of drawing exceeds amount
available under the letter of credit
18.Short shipment
19.Bill of exchanges (draft) drawn on incorrect party
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20.Bill of exchanges (draft) payable on an indeterminable date

21.Merchandise description in invoice differs from that in the credit
22.“On-board” notation on bill of lading not dated
23.Bill of lading showing incorrect consignee
24.Bill of lading shows port of loading and/or discharge other than ports
specified in
25.Bill of lading does not indicate whether freight is prepaid or payable
at destination/collect
26.Documents inconsistent with each other
27.Bill of lading, insurance certificate/policy and/or bill of exchange
(draft) are not properly endorsed
28.Absence of signature, where required, on documents presented
29.Shipping terms (ex-factory, FAS, FOB, C&I, C&F and CIF) on invoices
differ from those specified in the letter of credit
30.Set of documents presented under Letter of Credit incomplete
31.Bill of exchange (draft) drawn with incorrect tenor
32.Corrections on bill of lading or Insurance certificate/policy not
initialized.
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12.4 Case Study in Global Payments-Global Payments:

How They Shape the World We Live in Today and What
They Might Look like ‘Tomorrow’
Traditional methods of performing transactions: The conventional

way of moving money across borders is to use financial intermediaries. To
secure the process of transactions, most financial institutions use the
Society for Worldwide Inter bank Financial Telecommunication (SWIFT)
system. The SWIFT system is a messaging system used by financial
intermediaries to perform a transaction.
It is usually paired with the International Banking Account Number (IBAN),

which allows financial institutions to identify which counterpart the
transaction is being made to and from. This payment system is a
complicated and expensive process, where many financial intermediaries
take part in verification. The average cost of transferring money across
borders within G7 countries for ordinary households averages 2%. These
fees rise when moving money to or between countries outside of the G7
categorization, resulting in remittances averaging 7% fees.
The SWIFT system was never intended to be political but has succumbed to
playing a geopolitical role. Most recently, Donald Trump has threatened to
issue sanctions against any financial intermediary using SWIFT that does
not ban transactions with Iran. Moreover, the SWIFT system allows for US
Intelligence agencies unrestricted access to information about European
companies, causing the current German Foreign Minister, Heiko Maas, to
state his disagreement publicly (Nasdaq, 2018).
At the center of the SWIFT system lies the banks and other financial
intermediaries, and the SWIFT system only works when financial
institutions uphold specific standards required of them. However, this is not
always the case.
Recent examples of financial fraud : In 2006, Danske Bank bought

Finnish Sampo Bank. Apart from Sampo Bank being the third-largest bank
in Finland, its presence in high-growth areas such as Lithuania and Estonia
were deemed lucrative. From the period 2007 to 2015, suspicious
transactions from non-resident clients, connected to corruption and tax
evasion, passed through the Estonian branch. Despite several internal
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whistle blower reports, the transactions were not further investigated.

Following an official investigation, the former CEO of Danske Bank, Thomas
Borgen, resigned. This is mainly due to his responsibility for international
banking from 2009 to 2012, before being appointed CEO, which included
responsibility for the Estonian branch. The transactions in this money-
laundering scandal amount to an estimated $200 billion (Financial Times,
2018).
A well-known jeweler, Nirav Modi, and others were alleged to have

defrauded the Punjab National Bank (PNB) in India for $43 million by
conspiring with employees of the bank. The conspiracy with the bank
employees involved fraudulently obtaining Letters of Undertaking (LoUs)
from PNB, which act as a guarantee by the issuing bank, often used in
international banking transactions. The LoUs were issued using the SWIFT
system without proper authorization, and the transactions were not stated
in the records of PNB. The Central Bureau of Investigation (CBI) found that
the estimated money lost was closer to $2 billion. Nirav Modi fled the
country and is still currently a fugitive, while the bank employees were
arrested and tried (Fraud Magazine, 2018).
The two examples above are among many in both recent and more
historical periods.
As previously mentioned, using financial intermediaries to perform

transactions is a complicated and expensive process. Each financial
intermediary takes a small fee for verifying the transaction. Besides,
performing operations through traditional ways of financial intermediaries
poses several risks, including corruption and money laundering, as well as
specific and systemic risk factors. Systemic risk factors are seen in the
fractional reserve banking model by many commercial banks. For example,
European banks are required to hold a percentage of the bank’s funds as a
reserve within the European Central Bank. In Europe, this reserve amount
was lowered to 1% of the banks current account in January 2012 (ECB,
2016).
The fractional banking model enables the banks to issue deposits of one
client to be distributed amongst other clients, often leading to additional
risk. Most recently, during the financial crisis in 2009, we have seen that
this banking model poses severe threats to economic and political
landscapes as well as the socioeconomic welfare of citizens worldwide.
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The rise of cryptocurrencies and blockchain technology — is this

the solution?
To accommodate the rising dissatisfaction with financial intermediaries we

have, in recent years, seen the rise of cryptocurrencies. The independent
and privately-owned digital cash entities, sometimes seen as an uproar to
the traditional banking methods, create a decentralized framework with
limited public intervention and immediate fiscal policy changes. Retail
banks have also considered the use of digital cash. The aim for the retail
banks is to reduce the amount of fiat money circulating the economy,
which is the primary source of financing for purchases on the black market,
terror funding, and other disruptive agents.
Cryptocurrencies and Blockchain Technology: The main goal of

cryptocurrencies is to alleviate the issue of double-spending between
users. In traditional banking methods, the accounts, balances, and
transactions are controlled by a centralized server. When creating a
decentralized authority, this server is, of course, not present. If users
disagree on any element of a transaction, the whole payment network
breaks down, and there is, therefore, need for consensus and transparency
among users without a central authority.
Users perform transactions, which must be confirmed by the so-called

“miners.” Once the transaction is verified, it cannot be reversed or forged,
and the transaction is broadcasted among the user network. In other
words, the transaction is recorded in the blockchain (Blockchain
Technologies, 2019).
If we take Bitcoin as an example, then these miners create bitcoins by

solving a cryptographic puzzle or “hash,” which connects the new block
with its predecessor. Once the hash is found, the miner can build a block
and add it to the block chain while being rewarded in a certain number of
bitcoins. The consensus-process is therefore not nested in people or a
trust, but cryptography (ibid.).
Block chain systems like Bit coin, for example, makes the use of monetary
policy, such as inflation and deflation, obsolete. These were the reasons for
the popularity of cryptocurrencies.
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The drawbacks of these cryptocurrencies are that they are relatively

volatile and are susceptible to cyber-hacks and black-market purchases.
Bitcoin prices were roughly $800 in start-December of 2016. The following
year in December 2017, Bitcoin prices reached an all-time high of
approximately $17,000. While in December of 2018, the price of Bitcoin fell
to roughly $3,300.
Concerning Central Banks, they have considered using Central Bank-issued

Digital Currencies (CBDC) based on distributed ledger and block chain
technologies. Arguably, this initiative enables the central banks to take the
role of a retail bank and therefore, does not mitigate the issues of
monetary and fiscal policy.
A solution between the two?
The complexity, cost, and susceptibility to risk of the traditional financial

system have paved the way for the rise of the cryptocurrencies and block
chain technology. Although, volatility and illegal payments, as well as
monetary and fiscal policy changes, are somewhat of a concern when
dealing with independent cryptocurrencies and CBDC, respectively.
However, one could argue that the current transaction systems have similar
concerns. There needs to be a balance between legacy financial systems
and modern technology. Companies like ARYZE are seeking to bring the
global payments systems into the digital age with an improved method for
transferring ownership of value. They do so by utilizing regulated and
stable cryptocurrencies.
These stable cryptocurrencies are commonly referred to as stablecoins. By

using distributed ledger technology, which reduces the reliance on financial
intermediaries in a cost-efficient manner, digital representations of fiat
currencies can live on the block chain. A stablecoin is a digital asset with a
market value pegged to the value of a fiat currency, like USD or EUR, or to
a basket of underlying assets. The upside of using stablecoins is that users
receive the benefits of block chain technology, namely programmability,
while maintaining familiarity to the current fiat currencies that are used in
financial systems across the globe.
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We have begun to see a number of tech companies and financial

institutions make investments into building stablecoins for a variety of
purposes. Perhaps the most famous of these, Facebook’s Libra, highlights
the fact that even social media giants, with a history of privacy breaches,
could enter the race for a global reserve currency. A scary thought, to be
sure.
However, deciding not to replace current dominant currencies, but instead

innovating upon the format in which they are transferred, may be a valid
argument for stable digital currencies. ARYZE has chosen to approach this
issue by creating an accurate and stable digital representation of sovereign
cash. Digital Cash, as it is referred to in their white paper, is a series of
stablecoins that have the same value as cash notes would have, as issued
by central banks.
The deposited money is stored in a low-risk ecosystem, and the aim is to

stabilize the volatility by placing user deposits back into the central banks
which issued the relevant currency to begin with. In order to do this, and
control risks associated with KYC/AML, ARYZE will acquire infrastructure to
create a full-reserve banking model for user deposits. It gets a bit technical
at that point. However, by following this model, ARYZE can facilitate
transactions at near zero cost.
Given that the deposit is stored in central bank, the volatility caused by the
implementation of decentralized authorities, as previously exemplified with
Bitcoin, is significantly reduced. This is portrayed by allowing the use of
monetary and fiscal policies from central banks as well as using the global
reserve currency, and later other dominant currencies, as the stabilizer.
The plan is to gradually increase the degree of decentralization of the
system towards a Decentralized Autonomous Organization. This DAO will
have automated processes for solvency and auditing, becoming an ultimate
network of trusted payments.
The way forward in Global Payments: We have noted the severe

challenges the traditional banking system and current block chain
technologies face. The examples given are a few of many but should
illustrate the challenges of financial fraud, corruption, and funding for
disruptive agents, and a solution to dissuade them. Today, households and
businesses face volatile, expensive, complicated, and insecure payments
systems. Stablecoins, given that the model takes credit-risk and regulation
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into consideration, are likely to have an enormous and innovative role to

play in the future. Combining security, trust, and programmability on the
block chain to improve the way we pay will be necessary for the next
generation of financial technology improvements.
1. Obtain a copy of Letter of Credit (sample) and review the important

sections. Relate the sections to specific process in the global sourcing.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
12.6 Summary
Security of the payment is the biggest concern of the supplier, be it

domestic or international. Payment after ensuring the compliance with the
terms and condition of the vendor contract is one of the key responsibilities
of the Global Sourcing Manager. The Global Sourcing Manager has to
appropriately choose between the various products and services available
for ensuring smooth payment to the vendor, contract manufacturer. One of
the caution which the global sourcing function needs to be aware of, is to
prevent any discrepancy in the payment related documents, e.g., letter of
credit.
1. What are the various options available at the disposal of the Global
Sourcing Manager for payments to international vendors?
2. Highlight various potential discrepancies that can exists in letter of

credit.
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1. Which of the following payment mechanism is in the best interest of the

supplier?
(a) Cash in advance
(b) Letter of Credit
(c) Payments against documents
(d) International cheque
2. Which of the following is not a type of letter of credit?

(a) Red clause L/C
(b) White Clause L/C
(c) Transferable L/C
(d) Back-to-back L/C
3. Which of the following is least likely to be an important discrepancy in

the letter of credit?
(a) Full shipment delivery
(b) Issuance of Insurance after the shipment date
(c) Inconsistency in documents
(d) Late shipment
Answers: 1. (a), 2. (b), 3. (a).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
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Chapter 13
Outsourced Manufacturing
Objectives
• Understand the fundamentals of outsourced manufacturing
• Gain an understanding as to how to determine the contract
manufacturing needs
• Understand the benefits that may accrue to the buyer organization from
outsourced manufacturing
• Gain understanding of various outsourced manufacturing practices
• Understand how to evaluate the outsourcing rationale
• Gain an understanding of step by step approach for outsourcing decisions
• Understand the risk and challenges in outsourcing decisions
• Understand specific of engaging into contract with the outsourced
manufacturer
• Understand various operating models in outsourced manufacturing
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Structure
13.1 Introduction to Outsourced Manufacturing
13.2 Determining Contract Manufacturing/Outsourcing Needs by Global
Sourcing Manager
13.3 Benefits that may Accrue to Buyer Organization from Contract
Manufacturing/Outsourcing
13.4 Outsource Manufacturing Practices
13.5 Evaluating Outsourcing Rationale
13.6 Step by Step Approach for Outsourcing Decisions
13.7 Risk and Challenges in Outsourcing Decisions
13.8 Formulating Agreement with Contract Manufacturer
13.9 Operating Model of Contract Manufacturing Business
13.10 Impact of Industry 4.0 n Outsourced Manufacturing
13.11 Study of Global Outsourced Manufacturing Trends – Select
Industries Review
13.12 How Various Industries Benefit from Outsourced Manufacturing?
13.13 Emerging Trend and Outlook in Outsourced Manufacturing
13.15 Summary
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13.1 Introduction to Outsourced Manufacturing
Outsourced manufacturing, also referred as “Collaborative manufacturing”

or “Contract manufacturing” or “Subcontracting of manufacturing” in some
industries, is rapidly evolving as a feasible business strategy across the
globe. Traditionally, global manufacturers have outsourced their
manufacturing functions to reduce costs, gain the advantage of low cost
labour, avail taxation arbitrage, optimize the logistics costs and improve
margins among other reasons. Recently, number of organizations globally
have adopted this approach to also offer their products and services in
emerging markets (BRIC), such as Brazil, Russia, India, and China. For
service outsourcing the preferred locations in addition to India and China
are Philippines as well. Transferring the responsibility of in-house
manufacturing has allowed brand owners and Original Equipment
Manufacturers (OEMs) to concentrate more on their core competencies like
brand building, research and development, product innovation, customer
service, strategic mergers and acquisitions and sales and marketing.
The results of outsourced manufacturing have been very good. Some of the
benefits accrued to the manufacturers globally include reduced costs,
shorter cycle times, enhanced ability to deal with demand and price
pressures, broader product portfolios, greater global market share and,
increased margins that significantly influence a company’s bottom line and
enables rapid growth.
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13.2 Determining contract manufacturing/outsourcing

needs by Global Sourcing Manager
The need for contract manufacturing needs to be carefully evaluated by

business organizations. Some of the factors that drive the need are as
follows:
1. Unavailability of specialized manufacturing capabilities with the

buyer firm: Certain products may require evolved processes or latest
technology, the investment of which may not be feasible for the buyer
firm in the short term.
2. Product development: The existing facilities of the buyer organization

may get largely occupied for completion of orders of existing customers.
The organization may not have any spare capacity for carrying out trials
or research activities. Contract manufacturing offers opportunity for
buyer firm to undertake R&D or product development activities at a
relatively lesser capital investment.
3. Product establishment waiting period: There could be a

requirement to establish the market potential of a new product is
required before investing in specialized capabilities in-house.
4. Unavailability of facility on account of optimum/over occupancy:

There could be situations where current facility and the manufacturing
schedule may not be able to accommodate the small research, clinic, or
commercial batches. In such scenarios, the buyer organization may
need to shift to outsourcing which may include contract manufacturing.
Companies are finding many reasons why they should be outsourcing their
production to other companies, especially in low cost countries. However,
production outside of the company does come with many risks attached.
Companies must first identify their core competencies before deciding
about contract manufacture. A company’s core competencies are what
make them competitive in the marketplace. If a company allows another
company to take control of them, it loses that advantage. For example, in
the Telecommunication equipment, one of the leading brand outsourced its
operations to another entity. The outsourced manufacturer now has
emerged as one of the equally large and tough competitor for the buyer
organization.
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A survey conducted for Outsourcing – Directions and Decisions by

Outsourcing Trends – CIO revealed the following major reasons for global
procurement through the outsourcing:
1. Desire to reduce the costs

2. Focus on core competencies
3. Access to special expertise
4. Increase in revenue and profitability
5. Speed up delivery
6. Relieve the constraints on resources
7. Access to new technologies
8. Elimination of problem area for the organization
9. Augmentation of the existing staff and resources available
The survey also observed that cultural differences can become a major
limitation in achievement of the above objectives through outsourced
manufacturing.
13.3 Benefits that may accrue to buyer organization from

contract manufacturing/outsourcing
Number of key benefits accrue to a global sourcing manager out of the

outsourcing decision. Some of the key decisions include:
1. Significant Cost Savings: Companies save on their cost of capital

investment because they do not have to pay for a facility and the
equipment needed for production. They can also save on number of
recurring costs like labour costs such as wages, training and benefits.
Some companies may look to contract manufacture in low-cost
countries, such as China, to benefit from the low cost of labour. The
outsourcing of manufacturing also reduces the need for carrying
inventory and has a positive impact on the need for working capital.
Some of the companies like Hindustan Unilever Limited which are
extensively engaged in contract manufacturing, have a negative working
capital.
2. Mutual Benefit to Contract Site Availability: A contract between the

manufacturer and the producing company may last several years. The
manufacturer will know that it will have a steady flow of business.
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3. Access to Advanced Manufacturing and Process Skills: Companies

can take advantage of skills that they may not possess, but the contract
manufacturer does have.
4. Ensuring Quality Product: Buyer Company should provide inputs to

contract manufacturers of the processes and necessary controls to
ensure quality output. Contract Manufacturers are likely to have their
own methods of quality control in place that helps them to detect
counterfeit or damaged materials early and accordingly initiate
necessary action.
5. Focus on Core Competencies: With outsourcing of non-core

operations, the buyer company can focus on core operations and
continue to develop the core competencies.
6. Realization of Benefits of Economics of Scale: Contract

manufacturers serves many customers that they produce for. Because
they are servicing more than one customers, they can offer reduced
costs in acquiring raw materials by benefiting from economies of scale.
The more units there are in one order, the less expensive the price per
unit will be for the buyer organization.
7. Other General Benefits: Some of the other benefits include the

following:
a. the rapid use of technology and other advancements in the industry
b. gain a global manufacturing presence and competitive edge
c. Improved asset utilization and operational efficiencies
d. Gain a window on a new technology and better methods of
operations
e. Freedom to the buyer organization to concentrate on core functions
f. Faster time to market and innovation
g. Greater reach and access to market, etc.
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13.4 Outsource Manufacturing Practices
Practice 1
An Original Equipment Manufacturer (OEM) completely outsources

manufacturing to a partner: The customer places an order on an
Original Equipment Manufacturer (or a brand owner, product owner) for
supply of an assembly. The OEM in turn, outsources the complete
manufacturing of the assembly to a manufacturing partner by raising a
purchase order for supply of the assembly. Upon completion, the
Manufacturing Partner ships the assembly to the OEM. The OEM receives
the assembly and ships it to the customer. It is also possible that the OEM
may ask the manufacturing partner to directly ship the product to the
ultimate customer (consignee and bill to address will be different in the
invoice). This practice is most prevalent in the FMCG and Automotive
sector.
Practice 2
Partial outsourcing of the manufacturing by the Original Equipment

Manufacturer: In this case, the Original Equipment Manufacturer handles
a part (often the most critical part, e.g., Assembly and finishing or
mounting of the engine, inspection and testing, etc.) of its manufacturing
operations by itself and outsources the rest to either a single or multiple
manufacturing partners. This method is also called as “Outside Processing”
where the manufacturing partner generally gets paid for the value-added
services/processing jobs.
Practice 3
Outsourced Manufacturer supplies components: In this case, the

outsourced manufacturer is primarily acts like a vendor. The manufacturing
partner manufactures components as per the requirements and customized
design.
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Practice 4
Partial supply of components: In this case, the OEM fully controls the
supplies of critical components and the assembly. The manufacturing
partner manufactures non-critical components and supplies to OEM. In
certain case, the manufacturing partner also assembles the final product.
In that scenario, the OEM supplies the critical components for the assembly
process.
Practice 5
Ownership of components.
1. In certain cases, the Original Equipment Manufacturer owns and

manages component inventory at the outsourced partner’s facility and
periodically replenishes stock based on consumption.
2. In certain cases, the OEM ships the components that are used to build
the assembly at the outsourced partner’s facility and registers a sale of
the components to the outsourced partner by raising an invoice. The
outsourced partner pays against the invoiced amount resulting in a
complete transfer of ownership of the components.
3. There is also another type of chargeable outsourcing (also called as

SHIKYU in Japan). In this kind of arrangement, the product owner ships
and makes a provisional sale of components used to build the assembly
at the outsourced partner’s facility. The ownership of the components
still lies with the main manufacturer and the inventory is reported under
main manufacturer’s inventory valuation. When the assemblies are
completed and returned to the main manufacturer, the outsourced
partner invoices the Original Equipment Manufacturer for the full or
gross price of the assembly. The main manufacturer periodically nets/
adjusts payable and receivable invoices and makes payment to the
outsourced partner only for the value addition done by the outsourced
partner on the components supplied by the OEM. The payables and
receivable invoices used in this type of outsourcing serves as
documentary evidence related to transactions with the outsourced
partners and are maintained to comply with the local regulatory norms
in Japan (SHITAUKE Law).
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13.5 Evaluating Outsourcing Rationale

Key questions which the global sourcing managers should ask themselves
before taking decision about the outsourcing activity are:
1. Why do organization outsource?

2. What drives the initiative?
The various reasons which drives an organization to consider the

outsourcing decision can be broken down and analyzed into several
dimensions. Let us explore the various dimensions as stated in the table
below:
Driving Factors Particulars

Organizationally • Enhance effectiveness by focusing on what you do best
driven reasons and the organization’s core competence.
• Increase flexibility to meet changing business conditions,
demand for products and services and technologies as the
organization is relieved from number of standard
operations.
• Transform the organization and its business processes.
• Increases product and service value, customer
satisfaction, and shareholder value over a long term.
Improvement • Improve operating performance of the organization or
driven reasons business unit.
• Obtain expertise, skills, and technologies that would not
otherwise be available to the organization. Certain
contract manufacturers have developed a special
expertise over a period of time, which helps the owner/
buyer entity to gain immense knowledge and improve the
business process as a key intangible benefit.
• Improve management and control of the operations.
• Improve risk management as most of the risks (not
responsibilities) related to the manufacturing activities
are transferred to the contract manufacturer.
• Acquire innovative ideas through exchange of knowledge.
• Improve credibility and image by associating with
superior providers thereby providing the end customer a
great level of confidence.
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Financially • Reduce investments in assets and free up these resources

driven reasons for other purposes which can be effectively used by the
organizations.
• Generate cash by transferring assets to the provider
which can be deployed for more capital/operational
investments for developmental activities of the
organization.
Revenue driven • Gain market access and business opportunities through
reasons the provider’s network which can assist the organization
to explore more options.
• Accelerate expansion by tapping into the provider’s
developed capacity, processes, and systems and launch
operations in other regions across the globe.
• Expand sales and production capacity during periods
when such expansion which could not be solely financed
by the owner or buyer entity.
Cost driven • Optimize costs through superior provider performance
reasons and the provider’s lower cost structure which will help to
improve the bottom line of the buyer/owner company.
• Turn fixed costs into variable costs and reduce the burden
of fixed costs on the organizations operations.
Employee driven • Give employees a stronger career path as the
reasons organization is focused on new developmental activities.
• Increased commitment and energy in non-core areas
where organization can explore options for innovation and
breakthroughs.
Table 13.1
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13.6 Step by Step approach for Outsourcing Decisions
Outsourcing is an important strategic decision taken by the organization.

The Global sourcing manager needs to have an answer to number of
questions before counting on the outsourced/ contract manufacturer to
meet the requirements of the company. Following table lists down the
important steps and the key questions to be enquired by the global
sourcing manager before concluding on outsourcing as a profitable
arrangement.
Key Aspects of
Outsourcing Important Questions
Decisions
Requirements • What are the key objectives of the organization?
Analysis and • What is the organization’s business strategy?
formulating • What are the company’s key strengths and weaknesses?
outsourcing • What are the important opportunities and the threats that
strategy the organization may encounter in future?
• What are the products that can be excluded from the
portfolio and from which of the markets?
• Is the organization’s supply chain based on cost, on
business cycles or on innovation?
• What are the emerging and growing markets for the
organization?
• Is the current business strategy of the company need any
significant changes considering ever dynamic business
environment?
Outsourcing • What are the semi-finished, intermediate and final products
Processes, that the organization manufactures?
Products, • What are the key in-house processes?
Business • What are the key competencies (knowledge and skills) of
the organization?
• Which production processes or parts of them that can be
considered or evaluated for outsourcing?
• What are the non-financial advantages that may accrue to
the organization from outsourcing?
• What are the drawbacks or limitations of outsourcing?
• Whether outsourcing is going to be long term decision for
the organization?
• How the relationship with the supplier will be managed?
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Selection of • Whether the potential sub-contractors have been identified

Sub- appropriately?
contractor/ • Whether the prospective contract manufacturer has their
Contract quality management process certified?
manufacturer • Does the contract manufacturer a professional in his
approach?
• Does the contract manufacturer consider your organization
as an important client?
• What is the reliability levels of the sub-contractor?
• How the contractor is managing the business?
• Is the sub-contractor financially well managed and solvent?
Quotation and • Request for quotation from the sub-contractor?
Review • Evaluate the quotations on multiple parameters?
• Whether the comparison of costs for in-house
manufacturing and outsourcing has been evaluated
appropriately?
• Is there any risks perceived with the financial as well as
Non-financial advantages?
Ordering and • Is the contract documentation formalities completed?
Testing • Has the test order given to the subcontractor successfully
completed?
• Has the results of test order evaluated comprehensively?
Table 13.2
13.7 Risk and Challenges in Outsourcing Decisions
While outsourcing does offer number of benefits to an organization, it also

brings in its own set of challenges and risks. Some of the key risks and
challenges worth mentioning are as follows:
1. Inadequate control over the outsourced arrangements: As the

buyer company enters into a contract allowing another company to
produce their product, the buyer company loses a significant amount of
control over that product. The buyer company is in a position to suggest
strategies to the contract manufacturer, however the force them to
implement them cannot be exercised at times.
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2. Conflict in relationships: The outsourced partner may also have other

customers in the buyer industry in absence of an exclusive
arrangement. Hence, it is imperative that the buyer organization forms
a good relationship with its contract manufacturer. The company must
keep in mind that the manufacturer has other customers and the
arrangement may not be exclusive. They cannot force them to produce
their product before a competitor’s and reschedule the production
priorities. Most companies mitigate this risk by working cohesively with
the manufacturer and awarding good performance with additional
business and incentives/rewards as an ongoing exercise.
3. Concerns over quality of the product: When entering into an

outsourcing arrangement and contract, the buyer companies must make
sure that the manufacturer’s standards are in perfect alignment with
their own. They should evaluate the process and approach in which they
test the products to make sure they are of good quality and acceptable
standards. The buyer has to rely on the contract manufacturer for
having good suppliers that also meet these standards as per the defined
norms and acceptable to the buyer.
4. Loss of intellectual property of the buyer firm: In the process of

entering into an outsourcing arrangement, the buyer company is
sharing their formulas or technologies. This is why it is important that a
buyer organization should not give out any of its core competencies to
contract manufacturers, e.g., Bill of materials, chemical formulae and
production recipe to the contract manufacturer.
5. Inherent risks of outsourcing in a global environment: While

outsourcing to low-cost countries is a lucrative opportunity for the buyer
firm, it does bring along risks such as language barriers, cultural
differences, long lead times and variations in the raw materials,
production processes, etc.
6. Capacity constraints at the contract manufacturer: If a buyer

organization does not constitute a large portion of the contract
manufacturer’s business, they may find that they are deprioritized over
other customers of contract manufacturer during high production
periods or periods of peak demand. Thus, the buyer company may not
obtain the product during need or emergency situations.
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7. Parting with flexibility and responsiveness: The buyer company

does not have direct control the manufacturing facility of the contract
manufacturer. Thus, the buyer organization will lose some of its ability
to respond to disruptions in the supply chain. It may affect ability to
respond to demand fluctuations, risking customer service levels of the
buyer organization.
8. Other risks: Some of the other important risks include following:

a. Challenges in monitoring the supplier performance
b. Often there is a need for change in the mind-set of the buyer
company
c. Loss of critical skill and tacit knowledge to the contract manufacturer
d. Absence of shared vision of the contract manufacturer with that of
the buyer company
e. Cultural differences adversely affecting the delivery of product/
services
f. Increased dependency and concentration risks on the supplier
g. Issues related to planning and managing inventory throughout the
supply chain of the company
h. Issues related to product ingredients and the quality aspect
i. Loss of key intellectual property and intangible assets
j. Management of the variability and uncertainty related to the third
party
k. Enforcing and ensuring regulatory compliances
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13.8 Formulating agreement with contract manufacturer

The buyer organization while formulating an agreement with the contract
manufacturer should pay attention to various important components of the
arrangement. Some of the key components will include the following
aspects:
1. Duration and term of the contract
2. Testing procedures
3. Specifications required by the buyer
4. Lot quantities expected and the standard size
5. Yield expectations and treatment of normal losses
6. Acceptable tolerance and deviations
7. Price components and important deductions/adjustments
8. Incentives
9. Payment terms agreed
10.Inclination of the buyer firm for capital expenditures
11.Expectations of the buyer firm from the contract manufacturer with
respect to capital investments
12.Minimum quantity of supply and maximum level of business
requirement
13.Procedures to handle lot rejections
14.Situations leading to termination including expiry of the contract
period
15.Review period, frequency and the key parameters
16.Forecast and purchase orders, inspections
17.Raw material purchase and vendor qualifications criteria
18.Technical transfer/knowledge transfer
19.Process changes and continuous improvement
20.Dispute resolution process
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Outsourcing through Contract Manufacturing
Contract manufacturing is one of the oldest form of outsourcing of the

manufacturing process especially by companies engaged in fast moving
consumer goods, pharmaceuticals, agro-chemicals and other consumer
businesses. It involves production of goods by firm, under the label or
brand of another firm, often referred as white labeling of products.
Contract manufacturers provide such service to several firms based on
their own or consumers’ designs, formulas, and or specifications. For
example, the pharmaceutical industry is having major share in contract
manufacturing. The reason is that buying equipment for mass production
of certain chemicals is very costly, and some companies can’t do it. So,
they enter into a contract with a manufacturer to produce certain chemicals
for them so they can combine those chemicals with what they have to
produce the end result.
When making the decision on whether or not a company should contract

manufacture, the company should consider the benefits and risks
associated with contract manufacturing decision. Contract manufacturing is
beneficial if the company gets involved with the right company, which is
able to manufacture quality product and consistently meet the quality
requirements of the buyer organization.
Essential Features of Contract Manufacturing
A. It is a process of establishing a working agreement between two

companies.
B. In the agreement, one company assumes responsibility for custom

made products for another customer entity.
C. The client/customer does not have to maintain manufacturing facilities,

purchase raw materials, or hire labour in order to produce the finished
goods.
D. Offers opportunities to brand owners for improving their bottom lines

through the conversion of fixed costs to variable costs.
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Contract manufacturing is also could be of two major categories:
1. Supplier Vendor: Supplies manufacturer’s material for inventory.

Supplier in this category is sells products from its inventory to one or
more companies for their use or disposition. This type of contractor
manufacturer is sometimes known as an “original equipment
manufacturer”, commonly referred as OEM.
2. Toll vendor: The key activities of the tolling party/toll manufactures is

as follows:
a. Receive a raw material from another company,
b. Convert that material into another form,
c. Return the converted material to the contracting company for its use
or further disposition.
13.9 Operating model of contract manufacturing business

In a contract manufacturing operating business model, the hiring firm
approaches the contract manufacturer with a design or formula. The
contract manufacturer quote the parts based on processes, labour, tooling,
and material costs. Typically, a buyer firm will request quotes from multiple
Contract manufacturers. After the bidding process is complete, the buyer
organization will select a source, and then, for the agreed-upon price, the
CM acts as the buyer firm’s factory, producing and shipping units of the
design on behalf of the buyer firm. Job production is, in essence,
manufacturing on a contract basis, and thus it forms a subset of the larger
field of contract manufacturing. But the latter field also includes, in addition
to jobbing, a higher level of outsourcing in which a product-line-owning
company entrusts its entire production to a contractor, rather than just
outsourcing parts of it.
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Make or Buy Analysis
Before taking any decision related to outsourced manufacturing, the

organization needs to thoroughly evaluate various factors. It needs to
assess whether it is feasible to procure from outsourced vendor or
manufacture the product in-house. Following factors need to be evaluated
properly:
(i) Cost
(ii) Risks involved in the outsourcing
(iii) Availability or limitation on the in-house skills
(iv) Knowledge and experience of the outsourced partner
(v) Sharing of confidential information and other matter with the
outsourced partner
Sometime, it is possible for the organization that in spite of capability in-

house, for want of capacity, the organization has to outsource some of the
work load. This can happen during the peak business scenario.
Illustration of Make vs. Buy Decision
ABC Ltd., an Italian shoe manufacturer, has a production unit at Milan. ABC
Ltd.’s total cost to produce a pair of shoe is $50 (variable cost $35 and
fixed cost $15). Some of the Asian manufacturers have approached ABC
Ltd. to supply shoe of equivalent quality in unlimited quantity for $45.
1. Should ABC Ltd. consider the offer to procure its annual requirement of
5,000 units?
2. What would you suggest if the company can cut down its fixed cost to
$5 and earn rental revenue of $10,000 p.a. on outsourcing?
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Solution
Case 1: Assuming the fixed costs are not avoidable,
1. ABC Ltd.’s relevant cost = $35

2. Procurement cost from Asian suppliers = $45
3. ABC Ltd. should manufacture the shoes in-house as it is cheaper by
$10/unit
Case 2: Part of the fixed cost is avoidable
A. ABC Ltd.’s relevant cost = Variable cost + Avoidable fixed cost +

Opportunity cost if any
= $35 + $10 + ($10,000/5,000 units)
= $47
B. Procurement cost from Asian suppliers = $45
C. ABC Ltd. should outsource the manufacturing to Asian suppliers as it is

cheaper by $2/unit
Illustration for Service Outsourcing
XYZ Ltd. runs a cafeteria for its staff. The management of the company is
contemplating outsourcing cafeteria’s O&M to a catering agency. Current
cost structure for XYZ is:
1. Food and other ingredients: $50,000

2. Labour cost: $20,000
3. Overheads: $15,000
The overhead is 40% fixed and 60% variable. The fixed overheads also
include the salary of the cafeteria supervisor. The remainder of the fixed
overhead has been allocated from total company overhead. Assuming the
cafeteria supervisor will continue as it is, at what cost should XYZ consider
outsourcing the cafeteria operations.
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Solution
(a) Total operating cost excluding unavoidable costs for XYZ is:
(b) Food and other ingredients: $50,000
(c) Labour cost: $20,000
(d) Overheads @ 60%: $15,000 x 60% = $9,000
(e) Total avoidable cost of operation = $79,000
Hence, XYZ’s management can consider outsourcing if quoted costs =<

$79,000. In case company plans to let go the supervisor on outsourcing of
operations, the avoidable cost will increase by supervisor’s salary amount.
Illustrative Overview of Contract Manufacturing in Pharmaceutical

Industry
Service offered by contract manufacturer to its end customer:
• Primary manufacturing: involves the synthesis of the bulk active

ingredients
• Secondary manufacturing: formulation of bulk drug substances into

the final drug products
The pharmaceutical market uses outsourcing services from providers in the

form of contract research organizations (CROs) and contract manufacturing
organizations (CMOs). Of late, the concept of a comprehensive single-
source provider from drug development through commercial manufacture
has emerged. This concept has been implemented by providers known
today as contract research and manufacturing services (CRAMS) or
contract development and manufacturing organizations (CDMO). CMOs are
a response to the competitive international nature of the pharmaceutical
market as well as the increasing demand for outsourced services.
The best-positioned service providers focus on a specific technology or

dosage form and promote end-to-end continuity and efficiency for their
outsourcing clients. With lower cost international manufacturers capturing
an increasing percentage of the contract manufacturing market,
specialization may be an effective hedge against loss of market share.
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Having realized that manufacturing cost reduction is a key to participating

in the critical generics space; global pharma firms have been exploring
various means to achieve their objective. Key initiatives that can be
explored to reduce manufacturing cost to up to 15% can include
innovation, process redesign and consolidation; however the option with
the best cost and quality advantage at lower capital investments is contract
manufacturing. India has the largest number of USFDA approved pharma
plants worldwide, after the US – a total of 75 plants. This is three times
more than the number of plants in China which have FDA approval. This
not only reflects the quality of the Indian pharma industry but also the
depth of expertise that exists industry-wide.
Over a period of time, the contract manufacturing in the pharmaceuticals

industry has evolved. The activities performed include formulation, fill and
finish, chemical synthesis, cell culture and fermentation, analytical testing
and other laboratory services and packaging and labeling processes.
Ethical Issues in Global Outsourced Manufacturing
In the area of global outsourced manufacturing, it is always an issue faced

by multinational corporations to manage various issues on the ethical
related to vendor management. There have been several incidents which
unfavourably indicate the issues related to global outsourcing. Some of the
issues and incidents are provided as follows:
• Labour working in unsafe working conditions – garment factory collapse

in Bangladesh in 2004 which resulted in loss of lives of several labour
• Locations where labour is perceived to be cheap, generally, it is observed

that the regulations and environmental related to safety, health and
other rules are more lax. For example, a decade back Nike, the leading
US footwear company, has several subcontractors in Taiwan, South
Korea, and Indonesia, which run more than twelve factories in Indonesia,
producing 70 million pairs of Nike sneakers a year. Today, Nike’s
contractor network involves some 800,000 workers. Like any other
footwear factories every where in Asia, work conditions are tough, with
mandatory overtime work and constant exhaustion. Although these
factories may be modern, those have vast sheds housing row upon row
of mostly young women working many hours. The basic daily wage in
Indonesia for these workers is a mere $2-3 a day. There a pair of
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Pegasus running shoes costs about $18 to put together, and retails for
$75 once shipped to the United States. The condition is similar in
Vietnam, where 35,000 workers producing Nike shoes at five plants put
in 12 hours a day to earn $1.60—less than the $2 or so it costs to buy
three meals a day.
Service Outsourcing
Service sector contributes to higher share of India’s GDP in comparison to

core manufacturing. The growth of the service sector is also enabled by
business process outsourcing (BPO) and Knowledge Process Outsourcing
(KPO) by large multinational corporations to countries like India, China,
Philippines, Thailand inter alia. The following are some of the important
features of service outsourcing which the Global Sourcing Manager should
be well versed with:
1. Fosters efficiencies in process and innovation: Sourcing initiatives

generally focus on eliminating inefficiencies and controlling costs. But
the benefits do not halt at increased efficiency alone. New value through
innovation and transformation are also created in the service
outsourcing.
2. Models like Insource, Outsource, Captive and Offshore:

Outsourcing decisions are also impacted by regulations. For global
corporations with large captives (own shared service centers) of their
own in low cost and/or high-talent locations, there is the added
complexity of whether to increase the operations in the captives or
outsource. Often business needs are overridden by legislation and social
needs in the geography of the buyer organization. It might become
crucial to recruit locally in the head office geography to meet job growth
requirements, while offshoring is actively discouraged. Reconciling these
needs in the short term without adversely affecting long term growth
and resilience is a priority for all global sourcing decision makers. For
example, in the post bail-out business scenario in America banks like
Bank of America are not even hiring fresh non-US MBAs due to
government restrictions, and where the hiring of H1Bs is reduced, the
decision on whether to outsource is not driven by business needs alone.
The regulations also play a very crucial role.
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3. Maximum savings with low risk: According to leading research firm,

Gartner, results or outcome based pricing, aided by platform based
delivery models and cloud computing applications, are becoming more
the norm and will soon overtake traditional T&M and fixed price
commercial constructs. Thus, the service sourcing initiatives are not just
driven by a need to save costs, but also by a desire to minimize risks.
4. Transitioning to the outsourced model with minimum disruption

to the business: The global sourcing manager should ensure that in
case the outsourcing decision is taken, the transition should happen
with minimum disruption to the business. For example, ABN Amro
awarded its entire applications portfolio for maintenance to Infosys and
TCS. The entire transition period was extended to well over a year.
5. Achieve accelerated results and avoid any pitfalls: Business needs

are very dynamic in nature and it is the endeavour of the global
sourcing manager to achieve the accelerated results through service
outsourcing and protect business from any likely pitfall.
13.10 Impact of Industry 4.0 on Outsourced Manufacturing
Broad Overview: Industry 4.0, the new industrial revolution, uses new
technologies that change the way machines collect and interpret data.
Machines not only require far less human intervention, but they also can
communicate between each other for higher productivity levels. The new,
smart factory will revolutionize manufacturing, changing the industry
completely.
The new era is called Industry 4.0 because it is the fourth industrial
revolution. The first industrial revolution came at the end of the 1700s with
the introduction of water-and-steam-powered mechanical manufacturing.
The second revolution began at the beginning of the 1900s with
electrically-powered mass production facilities. Next, the third industrial
revolution came around the 1970s with the use of electronics and IT to
begin the automation of manufacturing. And now we enter the fourth
industrial revolution based on cyber-physical systems.
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What Industry 4.0 consists of?
For a factory or system to be considered Industry 4.0, it must include the

following:
Interconnection: The ability of machines, devices, sensors, and people to

connect and communicate with each other via the Internet of Things (IoT)
or the Internet of People (IoP).
Information Transparency: The transparency afforded by Industry 4.0

technology provides operators with vast amounts of useful information
needed to make appropriate decisions. Inter-connectivity allows operators
to collect immense amounts of data and information from all points in the
manufacturing process, thus aiding functionality and identifying key areas
that can benefit from innovation and improvement.
Technical Assistance: First, the ability of assistance systems to support

humans by aggregating and visualizing information comprehensively for
making informed decisions and solving urgent problems on short notice.
Second, the ability of cyber-physical systems to physically support humans
by conducting a range of tasks that are unpleasant, too exhausting, or
unsafe for their human co-workers.
Decentralized Decisions: The ability of cyber-physical systems to make

decisions on their own and to perform their tasks as autonomously as
possible. Only in the case of exceptions, interferences, or conflicting goals,
are tasks delegated to a higher level.
Big data clearly plays an important role in Industry 4.0, and the use of big
data enables technologies such as predictive analytics, IoT, AI, and
machine learning. These technologies are the driving force behind
manufacturing changes.
Technologies Driving Industry 4.0: The adoption of Industry 4.0 is

upon us, and as technologies advance so will smart factories. There are
specific technologies that are advancing implementation: big data and
analytics, IoT, and AI/machine learning are among the most trans-
formative.
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Big data and analytics in smart factories: The influx of data has
enabled much of the technological upgrades in manufacturing. Companies
are collecting more and more data, dubbed “big data.” They can then
aggregate and analyze this data to help machines configure and self-
diagnose. Big data lends itself to predictive maintenance.
Predictive maintenance is the process of using historical and current data

to forecast the condition of a piece of equipment. Essentially,
manufacturing parts can monitor themselves and alert a human when a
part may be faulty or break down. Smart factories are using predictive
maintenance because machines can detect errors that humans cannot see.
Big data allows manufacturers to move away from preventative

maintenance, which solves the problem after a malfunction occurs, to
predictive maintenance. The data captured enables the implementation of
predictive analytics. This means less downtime and a safer workplace.
Example of Predictive Analytics, Food Manufacturing: Halts in the

production line are frustrating for any manufacturer. However, halts in a
food production line can be dangerous. If a part breaks, pieces of the
equipment could get into the food. Also, if the production is down for too
long, food can spoil. There have been many recalls around the world
because of spoiled food originating from manufacturing errors.
Predictive analytics keeps the manufacturing process safer. If a part seems

likely to break, it will send an alert to a human that can replace it. This
means less downtime and fewer chances of food spoiling. Predictive
analytics also helps the environment because it means less food waste and
less energy use, as machines do not have to complete the same job twice.
Big data and predictive analytics are just a part of smart factories. Another
innovative technology moving this revolution along is the Internet of Things
(IoT).
IOT IN SMART FACTORIES: IoT sensors are crucial for smart factories.
These sensors, either infrared thermal sensors or vibration sensors, render
actions into signals. The signals are then digitally transmitted, and they
can then determine the functionality of the equipment in the assembly line.
For example, an infrared thermal sensor can measure temperature. If
equipment is becoming too hot, it can send a signal to halt production to
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inspect what is wrong. Vibration sensors can monitor vibrations and

frequencies, which can inspect parts such as motors.
The IoT is also essential for supply chain management. IoT can manage
and refill stock, track expenses, and even forecast prices of equipment. IoT
can also help manage energy expenses, which are quite high for
manufacturers. IoT can track low-performing equipment that uses a lot of
unnecessary energy so managers can either replace or fix that part.
Working hand-in-hand with IoT in manufacturing is artificial intelligence

(AI) and machine learning.
AI and machine learning in smart factories: AI can help smart

factories in many ways. One such way growing in popularity is quality
control. The human eye can easily err during the inspection. Therefore,
manufacturers are introducing AI capabilities during the in-process
inspection. Cameras powered by computer vision algorithms can detect
defects immediately and figure out the cause of each problem. Anomaly
detection happens in seconds, rather than hours, using AI.
Generative design also relies on AI technology. Manufacturing designers

and engineers work together to input design goals into a generative design
software. These goals include cost elements, manufacturing methods, and
specific parameters for all materials. The AI-based software then explores
all solutions, which would be impossible for humans to do on their own.
The software creates design alternatives and uses machine learning to
figure out which iteration would work best. There are numerous benefits to
all of these technologies and Industry 4.0, which help manufacturers run
safer, more productive, and even cheaper plants.
The Benefits of Industry 4.0: With new technology comes new benefits.
Industry 4.0 results in increased productivity, safer work environments,
and reduced costs.
Better maintenance and reduced costs: Poor maintenance can reduce a

manufacturing plant’s productivity from 5-20%. And, downtime costs U.S.
manufacturers roughly $50 billion USD each year. It’s no wonder plant
owners are eager to adopt this new technology. The technology is
becoming more affordable. Bandwidth fees, storage, and network costs are
all coming down. The ability to predict when a part will malfunction saves
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time and resources and keeps productivity high. Machines are simply more
reliable in Industry 4.0. This reduces maintenance costs and downtime.
Data-driven Decisions: Manufacturing plants can rely on data instead of

human instinct. Decisions can arise from looking at pure facts. Executives
can make data-driven decisions on the manufacturing process, ushering in
a new way of doing business. Now that the benefits of Industry 4.0 are
clear, it’s time to understand where outsourcing fits in this new revolution.
Role of Outsourcing in Industry 4.0: Outsourcing will likely play a

significant role in Industry 4.0. The skills gap and talent shortage,
combined with the benefits of software development outsourcing, prove
this to be true.
Talent shortage for Industry 4.0: The global engineering services

outsourcing market will grow at a CAGR of 25.68% from 2016 to 2020.
Engineers are crucial to the development of Industry 4.0. There is a global
talent shortage of engineers qualified to help with this growth. The solution
is outsourcing engineering services to firms and individuals who can meet
these skills demand.
Software development outsourcing benefits: Outsourcing is on the

rise mainly because of the numerous benefits it provides. Companies
invested in Industry 4.0 can drastically reduce logistics costs. Outsourcing
provides a cost-effective way to create Industry 4.0 technology.
Industry 4.0 is an innovative revolution. Outsourcing provides new, unique

talent that can improve upon existing technology. Skilled developers can
provide the insight necessary to fulfill manufacturing requests.
Qualified developers are now worldwide, thanks to globalization.

Companies that work in Industry 4.0 should be sure to look outside of the
United States for talent. Thanks to outsourcing hubs across Latin America,
geographical boundaries are no longer an issue. Companies can work with
developers in the same time zone, efficiently communicating their needs.
Given these benefits, it’s clear that outsourcing will play a big role in the
advancement of Industry 4.0
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Investing in Industry 4.0: An Accenture report claims Industry 4.0 could

add $14.2 trillion to the world economy over the next 15 years.
Furthermore, Markets and Markets say manufacturers will spend $74.8
billion per year on smart factory technology by 2020. And McKinsey
estimates that the total economic impact of smart factories could
potentially reach $3.7 trillion per year by 2025.
Smart factories rely on smart technology. And smart technology relies on

talented engineers. Outsourcing will play a crucial role due to its benefits.
Thinking further into the future, experts are already forecasting Industry
5.0, which relies on personalization. Industry 5.0 will allow customers to
customize what they want. While we are not quite there, it’s worth thinking
about the role technology will play. Both Industry 4.0 and Industry 5.0 will
require qualified engineers. This talent is now worldwide, and outsourcing
firms lead the way in discovering this talent.
The benefits of Industry 4.0 are clear. Businesses are now investing heavily
in these technologies to stay ahead of the competition and get to market
faster. Big data, IoT, and AI will have a revolutionary impact on the
manufacturing industry, making it clear why companies around the globe
are scrambling to innovate in this industry.
13.11 Study of Global Outsourced Manufacturing Trends –

Select Industries Review
Fast Moving Consumer Goods in India: Indian FMCG’s consider

outsourcing as an option when they are faced with cut-throat competition
and over demanding customers. This worked in favour of outsourcing
companies as it compelled FMCG’s to overview their business strategies
and operational procedures. Contrary to businesses abroad manpower
resources or cost are not what compel Indian FMCG’s to outsource. Indian
FMCG’s consider outsourcing options when confronted with factors such as
core competencies, augmenting overall productivity, scalability, downsizing
time taken to market and other assorted factors.
The key drivers of Outsourced Manufacturing strategy for Indian FMCG

companies are as under-
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1. Save cost
2. Free resources & focus on strategies
3. Make growth process run smoothly
4. Maintain core competency
5. Start new projects quickly
6. Gain access to world class capabilities
7. Reduce operational risks
8. Avail resources not available internally
Why India is still considered as preferred outsourcing destination

for many companies?
Market for global business in consumer goods is spurred by the existence

of a vastly affluent middle class public. India’s competitiveness in the
global economy is driven by the existence of a well-structured legal
system, transparent banking sector etc. All these factors combined
together have established India as one of the rapidly developing economies
in the global arena. This lends credence to the fact that India will not just
be incorporated into the universal economy but also stands to play a major
role in it. Dynamics that drive foreign direct investment in India are:-
1. Indian economy is witnessing a volatile and continued growth.
2. Organizations looking forward to invest in India can refer to case studies
pertaining to success stories of companies from existing sectors before
they make an investment.
3. Foreign institutional investors have been attracted to India considering
the performance of Indian public equity market.
4. Availability of easy exit strategy for investors through mergers and
acquisitions.
5. Highly skilled and knowledgeable Indian workforce displays a proclivity
for delivering ground-breaking solutions and top of the notch R&D
services.
6. India’s reputation to offer world class products and services combined
with an enriched procedural methodology and exceedingly superior
quality control.
7. The time zone advantage facilitates organizations to get their work done
when they are closed for business.
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13.12How various industries benefit from outsourced

manufacturing?
Outsource manufacturing is a top strategy for U.S. businesses in the 21st

century. Outsourcing has made it possible for even small, local businesses
to create consumer products at a reasonable cost without having to build
the manufacturing and distribution infrastructure themselves. When
deciding whether to outsource your product’s manufacturing, you must
consider the opportunity cost and if your business has the communications
and distribution infrastructure to handle overseas production. Most of any
business’ operational tasks can be outsourced; however, in some
industries, the practice is more commonplace than others.
Software and Hi-Tech: The U.S. is the leading producer of consumer

technologies, software and tech products. However, manufacturing these
products in the U.S. would come at such a high cost to consumers (due to
the lack of industrial labour and high cost of raw materials) that it is not
feasible to do so domestically. Therefore, most of the tech products sold in
the Western world are actually manufactured in China and India.
Apple, Inc. who takes the third spot in America’s Fortune 500, has a long-
standing relationship with Foxconn, one of China’s largest contract
manufacturing companies for electronics. Foxconn is the largest contract
manufacturer of electronics, and China’s leading private employer, with
over 1 million employees currently. Apple is not Foxconn’s only major U.S.
customer; they are also the primary manufacturer for Dell, Google,
Microsoft, Sony, and HP, among others.
Pharmaceuticals: Pharmaceutical manufacturing is also a major American

industry that relies on overseas manufacturing to make products affordable
to consumers. Pharmaceutical companies typically divide their efforts into
two areas: drug discovery and manufacturing. Drug discovery, the
formulation and testing of new pharmaceuticals, is commonly outsourced
to countries with lower labour and raw material costs, and manufacturing
outsourced to lower the cost of both new and generic drugs.
Outsourcing in this industry is expected to become a $43.7 billion dollar

industry by 2026. America’s top pharmaceutical producer, Johnson &
Johnson, is not shy to advocate for outsource manufacturing, as both a
business advantage and a benefit to consumers. Julia Santos, a
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representative of global business optimization for Johnson & Johnson,

explains, “One-hundred percent of Johnson & Johnson products employ
outsourcing in one way or another… It enables Johnson & Johnson to focus
on its core competencies and maintain its cost competitiveness, and benefit
from the latest advancements in technology throughout its product cycles.”
Retail: While retailers are considered the end of the distribution chain,
rather than a producer of goods, they can gain benefits from outsource
manufacturing just as much as other companies. Retailers with their own
brand of consumer goods often outsource manufacturing to create cheaper
alternatives to the products they stock. This is both a cost benefit to
consumers and a money-making tool to boost profit margins for the stores.
Walmart is a great example of outsource manufacturing success for retail.

Sam’s Club and Walmart-brand (the “Great Value” brand) products are
primarily outsourced to China where they can be made at much lower costs
than other brands. This cost savings helps the company’s bottom line, and
some of the savings is passed onto the consumer who can buy essentials
for less at Walmart stores. Walmart has over a thousand manufacturing
plants and contract manufacturers overseas that make this possible.
Any product that can be formulated in the U.S. can likely be manufactured
overseas for a fraction of the cost. Most products found in retail stores are
manufactured overseas with cost savings benefits for both producer,
retailer and consumer. Outsource manufacturing can reduce your operating
costs, improve your bottom line, and help you bring products to market
faster.
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13.13 Emerging Trend and Outlook in Outsourced

Manufacturing
Manufacturers see various benefits from outsourcing to reliable

manufacturing and logistics partners, including cost and asset reductions,
access to skilled labour, third-party design, and manufacturing expertise,
along with the ability to quickly scale production up or down. An
outsourcing strategy also allows brand owners to focus on their core
competencies of design, brand management, and sales, while relying on
partners to manage manufacturing and distribution. But has the promise of
outsourcing truly been fulfilled over the past two decades?
Supply Chain Visibility as an Equalizer: Outsourcing is by no means a

large company phenomenon. Technology advances have leveled the playing
field, bringing benefits to small, mid market, and large companies alike.
The major drivers of outsourced manufacturing for smaller firms include
access to expertise, while mid market companies typically benefit from
increased margins. For companies of all sizes, and across all industries,
outsourced manufacturing works best when brand owners/original
equipment manufacturers (OEM) have broad visibility into and the ability to
share forecasts, orders, and inventory across partners in the entire supply
chain. With this visibility, companies can ensure continuity of supply, jointly
resolve disruptions when problems occur, and gain access to expanded
revenue opportunities. Improved visibility also enables better risk
management of inventory liability and a host of opportunities for process
improvement and cost reduction.
In assessing today’s typical manufacturing environment, business-to-

business (B2B) information sharing remains largely manual point-to-point
communication of important information such as forecast and inventory
positions. This serial communication approach often leads to poor visibility
for shipments and material stock and in turn prevents manufacturers from
realizing the full benefits of their outsourced strategy. By leveraging
outsourced manufacturing and complementing it with visibility platforms,
companies can increase the productivity of their partners’ external
operations by more effectively negotiating, working, and collaborating with
their business partners. With partner visibility and collaboration working in
unison, additional benefits include faster time-to-market of new products
with higher quality.
338
The main benefits gained from outsourcing their production tasks include
decreased manufacturing costs and associated costs of goods sold, and the
ability to leverage core competencies from companies who have more
knowledge and experience with manufacturing and logistics processes.
The promise of outsourced manufacturing: saving money; reducing

manual, error-filled communication; and improving visibility and control in
the supply chain is showing results. But there exists a real opportunity to
unlock even greater efficiencies and effectiveness with:
1. Extended visibility across multiple tiers of suppliers.

2. Till untapped upside responsiveness between brand owner and
suppliers.
3. Mutually beneficial approaches to reducing overall inventory liability.
Applicable for companies of all sizes, outsourcing works most efficiently

when brand owners/ OEMs have complete end-to-end visibility of their
supply chains—something many have not yet achieved. To meet this goal,
moving supply chain networks onto an integrated, collaborative platform
can empower brand owners and their partners to see, share, and act on
the best possible information in real-time—a single source of truth—when
plan deviations can still be turned into cost savings or revenue
opportunities. This degree of collaborative planning and execution enables
brand owners, suppliers, distributors, and customers to leverage the
collective brainpower of their trading partner communities to manage end
to-end supply chain processes and to respond intelligently to continuous
change in supply, demand, products, and partners.
1. Study contract manufacturing models of companies in various sectors

e.g. Pharmaceutical, Fast Moving Consumer Goods (FMCG), and
Automotive and identify the basic feature of such models.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
339
13.15 Summary
While outsourced manufacturing is not a new phenomenon, the scale and

complexity of the outsourced manufacturing model has undergone a sea
change in terms of geography, scale and complexity. It is very crucial for
the Global Sourcing Manager to understand the pros and cons of
outsourced manufacturing. It is also important to have an understanding of
the various models and practices. The global outsourcing industry is also
subject to regulations like transfer pricing, legal issues and other taxation
related aspects. The organization should also pay attention to the probable
ethics issues in outsourced manufacturing. The organization should also
evaluate the options, benefits and challenges involved in service
outsourcing.

1. Explain the need and importance of outsourced manufacturing for the
buyer organization.
2. What are the various factors that the Global Sourcing Manager should
consider to determine the need for outsourced manufacturing?
3. What are the key benefits that are likely to accrue to the buyer
organization through outsource manufacturing contract?
4. Write a short note on Outsourced Manufacturing practices and models.
5. Explain the steps to be adopted by the Global Sourcing Manager while
taking the outsourcing decision.
6. What the risk and challenges are of outsourced or contract
manufacturing?
340
1. Which of the following is least likely to be an important reasons for

Global Sourcing Manager resorting to outsourcing decision?
(a) Limitation on capacity
(b) Internal quality Issues
(c) Cost arbitrage
(d) Customer request
2. Which of the following is least likely to be benefit of the contract

manufacturing to the buyer?
(a) Quality of product improves
(b) Low cost of manufacturing
(c) Higher price of product and increased defects
(d) Locational advantage of the contract manufacturer
3. Which of the following is most likely to be a key risk for organization

evaluating a contract manufacturing?
(a) Loss of cost advantage
(b) Exposure of intellectual property
(c) Reduction in quality of product
(d) Tax disadvantages
Answers: 1. (d), 2. (c), 3. (b).
341
REFERENCE MATERIAL
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342

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GLOBAL SUPPLY

CHAIN MANAGEMENT AND

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Prof. B.N. Chatterjee

Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Prof. B.N. Chatterjee Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Mr. Anuj Pandey

Prof. Dr. Swapna Pradhan Course Editor

Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Mr. P.M. Bendre Course Coordinators

Mr. Ajay Prabhu Ms. Kirti Sampat

Mr. A.S. Pillai Mr. Kishor Tamhankar

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition, July 2020

Chapter Chapter Name Page No.

1 Introduction and Background to Global Supply Chain 4-36

The key learning objectives is to –

1.1 Introduction to Global Procurement

1.2 Objectives, Features and Key Activities of Global Procurement

1.3 Important Differences between Domestic Sourcing and Global

1.4 Introduction to Supply Chain 4.0

1.5 Activity for Students

1.8 Multiple Choice Questions

1.1 Introduction to Global Procurement

Procurement as an activity is of strategic importance to the management of

There is also a significant gap in terms of understanding of the scope and

While, Global supply chain by definition consists of everybody involved in

1.2 EVOLUTION, Objectives, Features and key activities of

4. In the fourth step, we had the theme “Cross- Functional Purchasing,”

While the global procurement activity can commence as a purely

Objectives of Global Procurement

1. Low Landed Cost of Materials: Purchasing managers often compare

2. Elimination of Inefficiencies in Procurement and Control Over

3. Evaluation of Own Manufacturing and Outsourcing Decisions: The

4. Reducing Risks to the Business through Managing Supplier

5. Embedding Global Best Practices in the Procurement Process: As

a period of time are consciously embedded in the procurement process.

6. Result Based Purchasing and Reduced Learning Curve: As the

7. Innovation Led Purchasing: With the advent of technology and

Strategic Importance of Global Procurement

To gain efficiencies and achieve cost reductions, businesses globally are

Corporations need to consider the following key inputs while formulating a

1. It is crucial to understand the technical capabilities of the supplier and

2. Ensure that your prospective supplier has sustainable Technical

4. Over a period of time, safety and environmental compliance is emerging

5. In global sourcing, it is important to select a right location and many

6. It is also important to critically evaluate the decision of setting up of

7. It is also crucial to understand the impact of compromising intellectual

Features of Global Procurement

Key features of Global procurement are provided as under:

1. Promotes Procurement of Near Shore Countries as a part of

2. Requires a Trade-off Between Low Cost Procurement Vis-à-Vis

3. Endeavors to Move Beyond Just the Cost Advantage: Organization

4. Requires Set Up of a Local Procurement Office at Respective

a. Market research for identification of new suppliers

b. Evaluate suppliers for necessary qualification on a basis of defined

c. Perform inspections to get assurance that suppliers will be able to

d. Study the logistics planning and execution of procurement operations

e. Evaluate the local and global regulations impacting the procurement