Professional Documents
Culture Documents
Global Supply Chain Mgt. and Outsourced Mfg25
Global Supply Chain Mgt. and Outsourced Mfg25
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)
ALL RIGHTS RESERVED. No part of this work covered by the copyright here on may be reproduced or used in any form or by any means – graphic,
electronic or mechanical, including photocopying, recording, taping, web distribution or information storage and retrieval systems – without the written
permission of the publisher.
Contents
3
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
Chapter 1
Introduction and Background to Global
Supply Chain
Objectives
Structure
Procurement
1.7 Summary
4
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
5
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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.
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
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
8
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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.
10
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
11
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
12
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
13
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
14
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
15
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
16
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
The critical questions that business needs to address before going forward
for global procurement are as under-
b. Savings Generation: How much and when? Does you company has
right balance between short and long term savings.
17
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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
18
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
Supplier
identification Need higher level of supplier
Requires limited amount of
and selection and qualification
standardization
purchasing criteria
criteria
19
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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.
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
20
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
To build on these trends and cope with the changed requirements, supply
chains need to become much faster, more granular, and much more
precise.
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
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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.
22
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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.
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.
23
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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.
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:
24
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
comes to the worst, the issue will cause trouble in the assembly line
replenishment and operational problems.
25
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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 “
26
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
Physical Flow
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.
27
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
Performance Management
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
28
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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.
29
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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.
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
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
31
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
33
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
Whilst there has been a back seat over the last 12-18 months, it is
however these transformation mandates and their successful
implementation that are likely to determine an organization's success post-
pandemic. It is now more important than ever to ensure operations are as
flexible and resilient as possible, so it is vital that these projects are carried
out, keeping operations up to date and avoiding unnecessary added cost
and resource requirements that can be experienced if existing operations
are not modernized.
34
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
.........................................................................................................
........................................................................................................
.........................................................................................................
.........................................................................................................
.........................................................................................................
35
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
1.7 Summary
36
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
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?
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.
37
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
38
INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
39
COST MANAGEMENT IN GLOBAL PROCUREMENT
Chapter 2
Cost Management in Global Procurement
Objectives
The key learning objectives is to –
• 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
• Understand pandemic effect on cost
• Understand how to tackle higher logistic cost
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
2.7 The impact of cost due to Pandemic
2.8 How to India can tackle higher logistic cost
2.9 Activity for Students
2.10 Summary
2.11 Self Assessment Questions
2.12 Multiple Choice Questions
40
COST MANAGEMENT IN GLOBAL PROCUREMENT
41
COST MANAGEMENT IN GLOBAL PROCUREMENT
6 Testing cost + 10
7 End-user training + 20
8 Accessory cost + 30
11 Support/maintenance/management costs + 30
42
COST MANAGEMENT IN GLOBAL PROCUREMENT
1. Transportation
2. Inventory holding
3. Administration
4. Customs charges
5. Risk and damage
6. Handling and packaging
43
COST MANAGEMENT IN GLOBAL PROCUREMENT
44
COST MANAGEMENT IN GLOBAL PROCUREMENT
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.
45
COST MANAGEMENT IN GLOBAL PROCUREMENT
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
46
COST MANAGEMENT IN GLOBAL PROCUREMENT
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
• 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).
47
COST MANAGEMENT IN GLOBAL PROCUREMENT
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
48
COST MANAGEMENT IN GLOBAL PROCUREMENT
account for Value Added Tax on the value they have added, created at
that stage in the supply chain, as applicable.
49
COST MANAGEMENT IN GLOBAL PROCUREMENT
50
COST MANAGEMENT IN GLOBAL PROCUREMENT
51
COST MANAGEMENT IN GLOBAL PROCUREMENT
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.
52
COST MANAGEMENT IN GLOBAL PROCUREMENT
53
COST MANAGEMENT IN GLOBAL PROCUREMENT
Customs Duties
54
COST MANAGEMENT IN GLOBAL PROCUREMENT
Management of Incentives
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.
55
COST MANAGEMENT IN GLOBAL PROCUREMENT
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.
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.
56
COST MANAGEMENT IN GLOBAL PROCUREMENT
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.
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.
"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.
57
COST MANAGEMENT IN GLOBAL PROCUREMENT
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.
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,
58
COST MANAGEMENT IN GLOBAL PROCUREMENT
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%.
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.
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.”
59
COST MANAGEMENT IN GLOBAL PROCUREMENT
Without any dispute, all supply chain practitioners admit: between the
pandemic, shortage of containers, prolonged winter, the blockage of the
Suez Canal by a container ship, frequent logistics miseries, things have
been extremely challenging for the professionals to grip the operations
under control. These disturbances have already led to the current global
shortage of raw & packaging materials, petrochemicals, bulk chemicals,
basic suppliers, emergency medical equipment. The consequences of these
limitations on the supplies lead to production at a halt, price inflation, and
production. The impact has been multiform and across all industries both
backward and forward. The raw materials made from these are used for
food packaging, medical supplies, household appliances. The critical
challenges faced due to COVID 19 during and post pandemics are global
supply crisis at production site due to shortage of labor, container
constraints to ship goods at buyers and customer premises, shortage of
staff due to quarantines and medical safety and/or lower supply,
restrictions on transport and distribution operations to deliver goods or
services, under-staffed, under-supplied, and store closures. Lack of
consumers, unavailability of transport operation crews, lack of demand for
certain goods, and challenges to reach consumers for delivery restrictions.
The impacts are resulted due to production shortage, unfulfilled customer
orders, and spike of inventory, the uncertainty of raw material and other
input arrivals for production, slow shipments, and inconsistent delivery,
frequent delivery schedule failure, fewer products on the shelves,
diminished ability to serve the customers, delivery is inconsistent, a timing
model is faulty, and increased costs, avoid shipping, delayed delivery
timeline, and more volatile demand patterns. The economic slump due to
Covid-19 led to the dilemma of the sector. Be it the supply chain
disruption, the unavailability of shipping containers to high freight costs
over the years, many elements have collectively increased the troubles of
the SMBs across the globe. This will also impact the warehousing comes at
a greater cost.
60
COST MANAGEMENT IN GLOBAL PROCUREMENT
61
COST MANAGEMENT IN GLOBAL PROCUREMENT
62
COST MANAGEMENT IN GLOBAL PROCUREMENT
63
COST MANAGEMENT IN GLOBAL PROCUREMENT
1. Download the Annual Report of any publicly listed company from any
sector and analyses the purchase and other costs.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
64
COST MANAGEMENT IN GLOBAL PROCUREMENT
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. To tackle logistics cost, India needs to develop a
comprehensive strategy to increase the efficiency and competitiveness of
its logistics and transportation sector and to lower the cost of
transportation services in India.
65
COST MANAGEMENT IN GLOBAL PROCUREMENT
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?
66
COST MANAGEMENT IN GLOBAL PROCUREMENT
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
4. With the growing popularity of digital marketing, we can use digital tools
to reduce the time and money spent on ----------
(a) Internet Services
(b) Raw Material
(c) transportation services
(d) Man Power
67
COST MANAGEMENT IN GLOBAL PROCUREMENT
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
68
SOURCING METHODOLOGY AND PROCESS
Chapter 3
Sourcing Methodology and Process
Objectives
69
SOURCING METHODOLOGY AND PROCESS
Structure
Perspective
Outsourced Manufacturing
3.13 Summary
70
SOURCING METHODOLOGY AND PROCESS
6. Integration of suppliers
71
SOURCING METHODOLOGY AND PROCESS
ii. Analysis of the need for procurement is also an important steps. This
may include following key activities:
iii. Supplier market analysis is also a critical step in the process of global
procurement. The key activities include:
e. Check what insights are available into the value chain, suppliers’ cost
structures and pricing.
72
SOURCING METHODOLOGY AND PROCESS
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
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
73
SOURCING METHODOLOGY AND PROCESS
Fig. 3.1
74
SOURCING METHODOLOGY AND PROCESS
75
SOURCING METHODOLOGY AND PROCESS
Criteria Factors
Industry and Market Understand the depth of coverage of the supplier across
Coverage various Industries/product use
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.
76
SOURCING METHODOLOGY AND PROCESS
• 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.
77
SOURCING METHODOLOGY AND PROCESS
f. Thinking about the supplier’s objectives and consider the same in the
negotiation process.
6. Integrate Suppliers:
78
SOURCING METHODOLOGY AND PROCESS
79
SOURCING METHODOLOGY AND PROCESS
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.
80
SOURCING METHODOLOGY AND PROCESS
Global procurement process can be broken down into various stages. The
key stages are provided as under:
81
SOURCING METHODOLOGY AND PROCESS
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.
82
SOURCING METHODOLOGY AND PROCESS
83
SOURCING METHODOLOGY AND PROCESS
84
SOURCING METHODOLOGY AND PROCESS
Components Explanation
Steps and Timelines • Detailing of the key steps and outline of the
project timelines
• Defining key milestones is advisable
tender documents.
85
SOURCING METHODOLOGY AND PROCESS
Query Handling and • Contact and other details of the desk handling
Responses and responding to the queries related to
tendering 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:
86
SOURCING METHODOLOGY AND PROCESS
87
SOURCING METHODOLOGY AND PROCESS
Component Sub-criteria
Delivery
Cost
Organizational structure
Training
Quality planning
Quality assurance
Lead-time management
Up-to-date processes
Storage facilities
Price offered
88
SOURCING METHODOLOGY AND PROCESS
89
SOURCING METHODOLOGY AND PROCESS
90
SOURCING METHODOLOGY AND PROCESS
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.
91
SOURCING METHODOLOGY AND PROCESS
• 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.
92
SOURCING METHODOLOGY AND PROCESS
93
SOURCING METHODOLOGY AND PROCESS
94
SOURCING METHODOLOGY AND PROCESS
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.
95
SOURCING METHODOLOGY AND PROCESS
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.
96
SOURCING METHODOLOGY AND PROCESS
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.
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.
97
SOURCING METHODOLOGY AND PROCESS
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.
98
SOURCING METHODOLOGY AND PROCESS
99
SOURCING METHODOLOGY AND PROCESS
100
SOURCING METHODOLOGY AND PROCESS
3. Supply Chain Agility to Play a Major Role: Supply chain agility is going to
be vital to form flexible networks which will cater to dynamic customer
demand and ever-increasing uncertainty. It'll be important to proactively
identify ways to extend responsiveness through variable cost structures.
However, as there's no one-size-fits-all approach, organizations must
also foster continuously innovative cultures. The agile supply chains of
the longer term are those that can react quickly to changes, delays and
unexpected events to satisfy customer expectations, outpace the
competition and drive growth.
5. More focus on Last-Mile Delivery: Demand for last-mile delivery and its
market is soaring and is anticipated to grow by 78 per cent, globally by
2030, as per the Economic Forum. Since the COVID-19 pandemic, an
enormous inflow of home deliveries has resulted in businesses adding
more emphasis to their last-mile deliveries. With last-mile delivery costs
contributing to over 50 per cent of total shipping costs, the rising
expectations of in-home delivery increase the danger of encountering
inefficiencies. Many businesses have started to adopt last-mile delivery
technologies into their logistics operations and this trend will increase in
2022.
101
SOURCING METHODOLOGY AND PROCESS
and value. Hence, omnichannel retail will spike more innovation and
simplification of existing technology.
102
SOURCING METHODOLOGY AND PROCESS
103
SOURCING METHODOLOGY AND PROCESS
3.13 Summary
104
SOURCING METHODOLOGY AND PROCESS
105
SOURCING METHODOLOGY AND PROCESS
106
SOURCING METHODOLOGY AND PROCESS
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
107
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
108
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
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 Is COVID-19 a turning point in stopping global sourcing?
Differentiating between declining continental and increasing
transcontinental sourcing
4.11 INDIA: THE NEXT GLOBAL SOURCING DESTINATION?
4.12 Activity for Students
4.13 Summary
4.14 Self-Assessment Questions
4.15 Multiple Choice Questions
109
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
110
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
111
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
112
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
113
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
• Passive
• Independent
• Supportive
• Integrative
114
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
115
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
116
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
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
117
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
118
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
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.
119
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
120
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
121
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
122
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
123
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
124
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
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.
125
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
126
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
127
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
128
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
the COVID crisis have been added, which may make this sourcing strategy
appear less attractive. All these elaborations share the notion of just one
type of global sourcing, i.e. they neglect the difference between slightly
international and considerably global sourcing, such as buying from
suppliers located in the neighbouring country using the same currency or
from those in another continent and time zone. As the next section shows,
however, there seems to be a need to differentiate global sourcing further
into continental and transcontinental sourcing.
In the last two years, we have seen many disruptions in the global
economy, partly because of the pandemic and partly for the Ukraine war,
which has severely impacted the international supply chains. Due to supply
chain issues and political challenges, companies are looking for alternative
sourcing destinations to China (China plus one), and India is one of the
promising alternatives here.
129
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
The opportunities created by these changes in the global supply chain post-
COVID put India “on a pedestal” with great fanfare for the potentially
strong growth opportunities that come with the size of the economy and
the existing manufacturing and service industry base. As the global supply
chains are reshaping, this is providing a window of opportunity for India,
but at the same time, India faces strong competition from South-East
Asian as well as east European countries.
130
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
India ranks seventh in FDI. When compared with China’s FDI, it is 11% of
the total investment in China. Also, 80% of Indian FDI is from companies,
which are already in India. As such, there is a lack of new market entries.
In fact, India has a high GDP growth but also high inflation. 80% of the
labour force work is in the unorganised sector, skilled labour is hard to find,
and energy prices are high. Balanced with this is resilience: Indian
exporters did not just demonstrate COVID resilience but also posted robust
growth with increasing revenues in 2022 – a positive sign of exports
bouncing back.
131
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
• Get the best quotation: Each supplier is different. During the selection
stage, a structured way of evaluating the supplier is formed. This should
include both qualitative as well as quantitative factors. The buyer should
first select a supplier (with the help of the local advisor) who can supply
the required product. Once selected, the seller can then negotiate with
the buyer on price and terms.
• Ensure delivery schedules: This involves the buyer receiving goods from
the supplier and ensuring they are as mentioned. Factors such as the
quantity of the ordered goods and their quality are checked at this step.
A well-established purchase order process enables seamless movement
of raw materials and goods, helps maintain good relationships with
suppliers and – most importantly – results in big savings for
organisations.
132
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
Free trade agreements: There is a renewed focus on trade deals with the
US, the European Union and the UK, which are key markets for Indian
exporters and are keen to diversify their sourcing. FTAs are being touted
by policymakers as a gateway for extensive opportunities for companies in
India.
133
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
4.13 Summary
134
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
135
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
136
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
137
INTERNATIONAL PACKAGING
Chapter 5
International Packaging
Objectives
138
INTERNATIONAL PACKAGING
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 Packing after covid
5.9 Hygiene High on the List
5.10 Activity for Students
5.11 Summary
5.12 Self Assessment Questions
5.13 Multiple Choice Questions
5.9 Activity for Students
5.10 Summary
5.11 Self Assessment Questions
5.12 Multiple Choice Questions
139
INTERNATIONAL PACKAGING
140
INTERNATIONAL PACKAGING
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.
Air Freight
141
INTERNATIONAL PACKAGING
Sea Freight
142
INTERNATIONAL PACKAGING
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.
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.
143
INTERNATIONAL PACKAGING
Fig. 5.1
144
INTERNATIONAL PACKAGING
Fig. 5.4
145
INTERNATIONAL PACKAGING
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
• 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
146
INTERNATIONAL PACKAGING
The Global Sourcing Manager should follow the following important aspects
provided in the checklist.
147
INTERNATIONAL PACKAGING
148
INTERNATIONAL PACKAGING
149
INTERNATIONAL PACKAGING
150
INTERNATIONAL PACKAGING
151
INTERNATIONAL PACKAGING
The Covid-19 had a great impact & demand of packing in different sectors.
152
INTERNATIONAL PACKAGING
Ensure that the virus is minimally viable on the packaging surface. The
choice of substrate can affect the viability of the novel coronavirus, so
there could be plenty of room for enhanced packaging designs. For
example, a study published during the pandemic indicates that
coronavirus-survival rates vary from 24 to 72 hours, depending on the
packaging-material substrate.
153
INTERNATIONAL PACKAGING
Despite the economic damage it inflicted, the pandemic did not slow down
the pace of research and development in the packaging industry. If
anything, packaging technologists worked even harder to devise solutions
for a consumer marketplace reshaped by the experience of COVID-19. Two
examples of this ongoing innovation are digital printing for packaging
printing, and the digitalization of the packaging value chain. Because of its
high volumes, packaging used to be mostly off limits to short-run-oriented
digital printing systems. But, with changes in patterns of consumption that
predate COVID-19, digital presses have come into their own as solutions
for the kinds of quick-turnaround, short-run, highly versioned packaging
jobs that brands increasingly want their print service providers to deliver.
Supply chain disruptions caused by the pandemic frequently stepped up
demand for small batches of packaging and labels on short notice — for
instance, to support the emergency production of hand sanitizers and
cleaning supplies. As the pandemic recedes, brands will continue to
154
INTERNATIONAL PACKAGING
Another trend that needs to be taken seriously is the demand for hygiene
transparency— assurance that the package will protect both the contents
and the end-user of the contents from contamination of all kinds.
Understandably, this mindset gained considerable strength because of the
pandemic. In May 2020, a packaging trade magazine reported that two out
of three Americans said they were at least somewhat apprehensive about
contracting COVID-19 through food packaging. At the same time, 44% said
they were cleaning food packaging with a disinfectant. Worries about
packages as vectors for spreading the coronavirus have receded since
then, but hygiene and safety remain imperatives for producers of
packaging. Consumers will continue to prefer packages that uphold these
standards — for instance, by using substrates and surface treatments that
minimize the transmission of microbes and the diseases they cause. Even
as they stop having to think about everything in the context of COVID-19,
consumers are staying mindful about what they want to spend their money
on. Their benchmarks for products and packaging still include
sustainability, which has emerged from the pandemic with its mandates
intact.
155
INTERNATIONAL PACKAGING
156
INTERNATIONAL PACKAGING
The shift to e-commerce also means that people will opt for contact-free
deliveries. This is particularly true for food deliveries. The package is left
outside and the recipient is notified. Packaging design improvements can
make it easier to minimize contact between the delivery agent and the
recipient. Use of technologies like QR codes and digital engagement
through physical packages will become crucial. It’ll become necessary to
communicate with the end customer through infographics on the
packaging. Mobstac is a pioneer in this field working with players like
Nestle.
Innovation can also be looked at in items like the delivery bags. Since
most items are being delivered to homes, the delivery boxes / bags are
in a way the secondary / tertiary packaging of the product. For ex: UV
sanitisation in all delivery bags for sanitation, chill / ice friendly bags are
for fresh meat, vegetable and alcohol deliveries whereas heat insulated
bags are made for the likes of Swiggy.
157
INTERNATIONAL PACKAGING
158
INTERNATIONAL PACKAGING
5.12 Summary
159
INTERNATIONAL PACKAGING
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
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
160
INTERNATIONAL PACKAGING
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
161
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
Chapter 6
Role of International Logistics in Global
Procurement
Objectives
The key learning objectives is to –
• 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
• Understanding evolution of Logistics Sector in India
162
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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
6.13 Evolution of Logistics Sector in India
6.14 Activity for Students
6.15 Summary
6.16 Self-Assessment Questions
6.17 Multiple Choice Questions
163
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
1. Freight transportation
2. Warehousing
3. Material handling
4. Protective packaging
5. Cross-docking
6. Order processing
7. Documentations
164
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
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.
165
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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:
166
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
167
ROLE OF INTERNATIONAL LOGISTICS IN 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.
168
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
169
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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
170
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
171
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
where applicable.
The global sourcing manager should be well versed with the documentation
requirements applicable to Air Freight. The details of important documents
are provided as under:
172
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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
173
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
174
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
The participants in the overall sea freight and the flow of cargo (left to
right) is as follows:
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.
175
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
176
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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;
177
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
178
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
179
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
180
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
181
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
182
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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 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.
183
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
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.
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.
184
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
Machine Learning
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 means that all stakeholders (both internal and
external) are connected so they will be able to share data for better
collaboration, visibility, and transparency.
185
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
186
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
187
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
188
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
189
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
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.
190
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
191
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
Fig. 6.2
192
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
193
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
194
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
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.
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.
195
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
The logistics sector in India has always been about resilience, adapting to
new technologies and agility. It has had a tumultuous yet promising
journey over the last couple of decades, with continuously growing demand
for higher quality services. In the recent years, the Indian government has
had a renewed focus on investing into logistics infrastructure in the
country, while at the same time encouraging investments from the private
sector as well. This has led to much better rail connectivity & road
networks and increase in the number of ports, inland container depots, and
warehousing services throughout the country. With better infrastructure,
the Indian industry was able to plan its businesses in a more efficient
manner, moving India closer towards becoming a manufacturing hub for
the world. Manufacturers are now able to import raw materials with ease,
export higher than ever before due to their competitiveness with global
peers, while at the same time working on a low inventory model as the
quality of rail transportation in particular has improved with assured transit
times. Instead of relying on bulk transportation by road, manufacturers can
now use container based rail transportation to tap into the global shipping
networks with more ease and reliability, and reduced handling of cargo that
reduces damages and pilferages. World class warehousing facilities have
come up in a big way in the country, allowing for domestic distribution to
reach a multitude of touch points in smaller towns and cities apart from the
metros, as can be seen by the foray of eCommerce and express parcel
shipments to every corner with demanding delivery times being met.
196
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
During the lockdown’s most rigid stages, road transportation for large
movement of goods was fraught with challenges and difficult to manage,
however rail has been the only mode of transportation that worked without
limitations and hence essential businesses could transport goods and
commodities across the nation, as well as participate in global import and
export trade. This led to a surge in demand for customised logistics
solutions, especially for essential goods that were required to be
transported regardless of the lockdowns, and the entire logistics sector
managed to keep up with their commitments to customers in this difficult
period. In turn, the users recognised the value of efficient logistics services
and have remapped their supply chain even as the impact of pandemic
slowed down. As a result of this, in February 2021, for the first time since
the outset of the pandemic, the Indian Railways saw a year-on-year growth
in revenue, signifying the return of pre-covid levels of operation.
Post Pandemic: What does today look like for the Logistics Sector?
Today, the logistics sector is at its most dynamic embodiment and the
credit goes to the numerous developments happening at a faster pace.
Moreover, the cost of logistics is going down due to the shift to railways
since rail freight is more efficient for longer distance and a sustainable
method of transporting goods. The introduction of Dedicated Freight
Corridor (DFC) by the government has reduced transit times and it has
been a huge boon to the sector. DFC is a high speed and high capacity
railway corridor that is exclusively meant for the movement of freight, or in
other words, goods and commodities. It has two arms – Eastern DFC
connecting Ludhiana in Punjab to Dankuni in West Bengal and Western DFC
which connects NCR to Nhava Sheva, Mundra & Pipavav. The government
has recently introduced PM Gati Shakti– National Master Plan for Multi
Modal connectivity, which is a transformative approach for economic
growth and sustainable development in the logistics sector. The plan
focuses on seamless multimodal connectivity, planning-financing innovative
projects and the use of technology in the sector.
197
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
Highlighting the present and future of the sector will be incomplete without
throwing light on the benefits of deployment of high level of technology
which has played a big role in optimising operations, route planning
between hubs and spokes, and creating better supply chain visibility for
manufacturers while reducing time consuming documentation processes.
The utilisation of fleet and spare capacities across the country are better as
technology helps narrow the bridge between supply and demand. The
advanced tech based solutions has helped ease the challenges of
warehousing and last mile operations.
198
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
The government has initiated various steps to boost the logistics sector,
such as follows:
2. National Logistics Law: A national logistics law has been drafted and is
under consultation. Through a unified legal framework for the paradigm
of One Nation, One Contract, it would support the One Nation, One
Market objective and provide a flexible regulatory environment (single
bill of lading across modes). The law's provisions will make it possible to
assign a distinct logistics account number in place of cumbersome
registration processes.
199
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
200
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
1. Visit any sea port or cargo operations of an airline and understand the
important processes and activities involved in international logistics.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
201
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
6.15 Summary
202
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
203
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
204
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
205
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
Chapter 7
Measuring Performance In International
Procurement
Objectives
The key learning objectives is to –
• 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
• Understand Essential Procurement KPIs Businesses today want
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
7.6 Essential Procurement KPIs required in today’s Business
7.7 Activity for Students
7.8 Summary
7.9 Self Assessment Questions
7.10 Multiple Choice Questions
206
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
207
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
Let us explore, various sub-areas which can be measures within the above
broad five categories:
208
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
Periodic supplier audits are also effective means to evaluate the supplier
performance.
209
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
1. Foundation/Basic
2. Practitioner
3. Expert
4. Thought leader
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
210
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
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.
211
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
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.
The days sales outstanding (DSO) KPI measures how swiftly you are able
to collect or generate revenue from your customers.
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.
212
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
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.
213
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
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.
214
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
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:
215
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
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.
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
Customer-Order Capture
OTC is a process that illustrates clearly, how the supply chain comprises a
broader range of business functions than you might have thought.
216
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
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.
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.
217
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
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.
218
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
219
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
Metrics to note:
The ratio of disputed invoices to total invoices. The total difference between
the price paid and the price quoted
Supplier defect rate
Supplier defect rate is used to evaluate a supplier’s individual quality.
Measuring supplier defect rates and breaking it down based on the defect
type will offer actionable insights into a supplier’s trustworthiness. Supplier
defect rates are usually measured in defects per million.
Supplier defect rate= Number of substandard products/Total number of
units tested
PO accuracy
Low PO accuracy hikes up operating costs. Procurement KPIs are measured
across supply categories, buyer segments, and more. This metric will help
businesses ensure whether suppliers are delivering what was ordered and
if it was delivered at the right time.
Indicators to track:
The ratio of product/service delivered outside the pre-defined service
target
% of erroneous delivery over the total number of purchase orders in a
period of time
2. Delivery KPIs: Improve delivery
Rate of emergency purchases
Emergency purchases are those unplanned orders which are acquired to
prevent the shortage of products/services. This metric is measured with
the ratio of emergency purchases to the total number of purchases over a
fixed period of time.
By lowering the rate of emergency orders, organizations can:
• Save costs
• Improve procurement plan
• Reduce supply risks
• Ensure continuity
220
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
221
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
2. Conduct interviews with Supply Chain Managers, Heads and identify top
5 performance indicators for global procurement from their
organization.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
222
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
7.8 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. Businesses today want procurement teams to drive value beyond cost
savings. As a result, procurement leaders are constantly looking for ways
to improve their procurement process and make it more sustainable.
However, they don’t want to make any decisions without the right data.
And so, they track an array of purchasing metrics as KPIs.
223
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
224
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
225
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
Chapter 8
Ethics, CSR, Sustainability And Other
Considerations In Global Purchasing
Objectives
The key learning objectives is to –
• 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
• Ethical Supply Chain
226
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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
8.12 Ethical Supply Chain
8.13 Activity for Students
8.14 Summary
8.15 Self Assessment Questions
8.16 Multiple Choice Questions
227
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
228
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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)
229
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL 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.
230
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
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.
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.
231
‐
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
232
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
233
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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:
234
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
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.
235
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
236
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
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.
237
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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
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:
238
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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?
239
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
240
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
241
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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
242
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
243
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
what your payment terms are and the profile of the supply base,
currency fluctuations in today’s world can be a pretty significant risk.”
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.”
244
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
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.
245
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
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.
246
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
247
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
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.
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.
248
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
249
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
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:
250
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
251
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
252
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
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.
An ethical supply chain is a practice that focuses on the need for corporate
social responsibility, working to produce products and services in a way
that treats its workers and the environment ethically. Supporting an ethical
supply chain means that companies will incorporate social and human
rights and environmental considerations into how they do business across
the world.
253
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
Following are some questions that consumers are asking about brands and
their supply chains:
Do you trust your suppliers and supply chain partners? Do they keep their
word regarding ethics and morals, regardless of possible additional costs?
Does each link in the supply chain take care of its workers with fair pay,
sustainable work loads, and ethical work conduct?
254
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
8.14 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. There are many actions that need to be
taken in order to move towards an ethical supply chain, including
simplifying processes; efficient planning; visibility into supplier actions;
optimizing transportation routes to reduce fuel consumption; monitoring
environmental risks; and much more
255
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
256
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
257
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
Chapter 9
Role Of Information Technology In Global
Sourcing
Objectives
The key learning objectives is to –
• Gain an understanding of evolving role of information systems in global
sourcing
• The Impact of Information Technology on Procurement
• 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
258
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
Structure
9.1 Evolving Role of Information Systems in Global Sourcing – Emphasis
on E-Procurement
9.2 The Impact of Information Technology on Procurement and Purchasing
9.3 Key Drivers of E-Procurement for Buyer Organization
9.4 Measuring the Effectiveness of e-Procurement Process
9.5 E-Procurement Success Stories and Case Studies
9.6 Methods and Avenues for Global Sourcing through the Information
Technology Enabled Environment
9.7 Types of Auctions
9.8 Emergence of E-Markets
9.9 Tools in Purchasing through E-Marketplace
9.10 Issues and Challenges in E-Purchasing or E-Market Based
Procurement Models
9.11 Service Offerings by Global Sourcing Portals
9.12 Emerging Technology Trends in Global Sourcing
9.13 Activity for Students
9.14 Summary
9.15 Self Assessment Questions
9.16 Multiple Choice Questions
259
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
260
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
The following are the main benefits of using information technology in the
procurement and purchase process.
261
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
1. Data Collection
The procurement department faces many challenges in the procurement
process, and data collection is one of them.
2. Global Procurement
Global procurement is one of the most attractive features of E-procurement
applications. It compares the cost of goods purchased from local suppliers
with international suppliers.
Procurement officers can get global suppliers’ gross value, including freight
charges, customs charges, insurance, and any related cost.
262
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
Reduce Errors
It is also beneficial to reduce the risk of human errors while comparing past
orders.
263
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
264
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
265
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
266
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
B2B Hubs
267
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
268
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
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.
269
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
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.
270
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
271
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
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.
272
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
273
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
274
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
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.
275
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
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.
276
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
277
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
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.
278
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
Summary of Trend
9.14 Summary
279
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
280
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
281
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
282
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
Chapter 10
Risk Management in Global Supply Chain
Management and Sourcing
Objectives
The key learning objectives is to –
• 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
• Supply Chain Risk Management Post COVID-19
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
10.7 Global Supply Chain Risk Post Pandemic
10.8 Activity for Students
10.9 Summary
10.10 Self Assessment Questions
10.11 Multiple Choice Questions
283
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
284
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
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.
285
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
286
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND 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.
287
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
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
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.
288
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
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
b. Marine Cargo
289
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
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.
290
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
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.
Average Adjuster
Excess
1. Tonner is a policy setting out the global tonnage loss for a year.
4. These are the early forms of reinsurance and both are technically
unlawful.
291
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
Cargo Insurance
Normal Understanding
• Condition – If condition is breached, the whole contract ends.
• Warranty – Breach of warranty will not result into breach of entire
contract.
Salvage
3. Policy has “Sue and Labour” clause which covers reasonable costs
incurred by the ship-owner in avoiding great loss
292
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
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.
293
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
2. Placing the goods in a warehouse for storage other than during the
normal course of transportation will terminate the cover.
294
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
295
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
d. Trade facilitation
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.
296
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
Without any dispute, all supply chain practitioners admit: between the
pandemic, shortage of containers, prolonged winter, the blockage of the
Suez Canal by a container ship, frequent logistics miseries, things have
been extremely challenging for the professionals to grip the operations
under control. These disturbances have already led to the current global
shortage of raw & packaging materials, petrochemicals, bulk chemicals,
basic suppliers, emergency medical equipment. The consequences of these
limitations on the supplies lead to production at a halt, price inflation, and
production
While the initial shock of the COVID-19 pandemic has worn off in many
countries, its domino effect on the global supply chain has continued to
cause massive disruptions across industries and regions. The impact on
supply chains is twofold. For one, companies must again closely monitor
short-term and long-term demand and inventory to accommodate
production loss in the wake of factory closures and economic slowdown.
297
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
Events that have a very high impact on the market but have a very low
probability of materialization—otherwise known as “black swan events”—
make short-term and long-term consequences like panic buying, work
shortages or limited supply hard to measure definitively. However, there
are measures organizations can take that can help navigate risk when
black swan events occur—and as they unfold.
298
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
299
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
10.9 Summary
300
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
301
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
302
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
Chapter 11
Quality Management in Global Procurement
Objectives
The key learning objectives is to –
• 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
• Understand the Impact of Covid-19 on Quality Management
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
11.7 Impact of Covid-19 on Quality Management
11.8 Activity for Students
11.9 Summary
11.10 Self Assessment Questions
11.11 Multiple Choice Questions
303
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
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.
304
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
305
‐
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
306
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
ISO-9000 Series
307
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
ISO-14000 Series
308
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
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
309
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
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
310
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
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:
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.
311
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
312
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
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.
313
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
314
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
315
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
316
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
317
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
318
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
319
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
There are certain aspects of the business that need critical attention for
continued business operations and excellence. Those aspects include;
320
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
Quality control issues follow the rule of 10, explains Arshad Hafeez, Global
Expert for Supply Chain Management and Quality Control, SCM-Group
Function (GF) in an article for CIO Review. According to the rule of 10, the
cost to replace or repair an item increases by tenfold at each step of the
progression, resulting in significant costs for companies when quality issues
arise.
Companies that have greater control over not only their direct suppliers but
also their suppliers’ suppliers benefit from improved quality control.
Implementing standard minimum quality criteria, for instance, enables
direct suppliers to identify and partner with secondary suppliers that meet
those requirements. Likewise, process guidelines can help suppliers comply
with your company’s quality requirements. Some companies go beyond
simply providing criteria, conducting periodic audits or requesting
documentation verifying suppliers’ compliance steps. Hafeez recommends
implementing a Management Operating System for monitoring key
performance indicators including:
a. On-time delivery
b. Scrap rates, reworks and similar issues at suppliers
c. Final product quality (as received by end customers)
d. Time for complaint resolution
e. Findings from supplier quality assessments
321
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
322
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
11.9 Summary
2. What are the key steps which organization should follow to ensure that
the products/ services procured from various suppliers meet the quality
requirements?
323
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
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
324
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
325
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
Chapter 12
International Trade Payment Process In
Global Sourcing
Objectives
The key learning objectives is to –
• 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
• Understand change in global payments after pandemic
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
12.5 How COVID-19 is changing global payments
12.6 Activity for Students
12.7 Summary
12.8 Self Assessment Questions
12.9 Multiple Choice Questions
326
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
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
327
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
Cash in Advance
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
328
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
329
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
330
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
b. The advance payment details are printed in RED thereby being called
Red Clause L/C.
Open account
In an open account transaction, the buyer pays the seller after the goods
have arrived (typically 30-90 days later). This is advantageous to the buyer
but adds substantial risk for the seller, meaning that it is often used when
the relationship between the two parties is already strong. Open account
trade helps to increase competitiveness in export markets and buyers often
push for sellers to trade on open account terms. As a result, sellers are
more likely to seek trade finance to fund working capital while waiting for
the payment. Sellers can use trade credit insurance to reduce the risk of
commercial losses, which could result from the default, insolvency, or
bankruptcy of a buyer.
331
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
332
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
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.
333
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
The two examples above are among many in both recent and more
historical periods.
334
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
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.
The rise of cryptocurrencies and blockchain technology — is this
the solution?
335
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
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.
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.
336
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
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.
337
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
338
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
2. Unified commerce
More and more consumers expect to have one smooth brand experience
while shopping, regardless of whether they’re purchasing online or offline.
In a world of physical distancing, contact restrictions, and the simple
convenience of doing business online, making the online experience more
desirable and seamlessly integrated with offline is becoming an increasing
priority for merchants. A good example of this trend is the proliferation of
personalized virtual shopping, as merchants seek to close the gap between
online and offline experiences.
4. Focus on sustainability
During the past years, we’ve also seen consumers give more attention to
eco-friendly and sustainable products. A recent survey from EuroNews
showed that 62% of people were more concerned about how their
purchases affected the world because of the pandemic. New payment
options have emerged to help merchants fulfill this growing consumer
preference. For example, consumers can offset the carbon footprint from
their purchases or donate to charities during checkout.
339
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
340
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
12.7 Summary
1. What are the various options available at the disposal of the Global
Sourcing Manager for payments to international vendors?
341
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
342
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
343
OUTSOURCED MANUFACTURING
Chapter 13
Outsourced Manufacturing
Objectives
The key learning objectives is to –
• 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
• Understand outsourcing post covid
344
OUTSOURCED MANUFACTURING
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
13.14 Outsourcing relevancy in a post COVID-19 environment
13.15 Activity for Students
13.16 Summary
13.17 Self Assessment Questions
13.18 Multiple Choice Questions
345
OUTSOURCED MANUFACTURING
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.
346
OUTSOURCED 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.
347
OUTSOURCED MANUFACTURING
The survey also observed that cultural differences can become a major
limitation in achievement of the above objectives through outsourced
manufacturing.
348
OUTSOURCED MANUFACTURING
349
OUTSOURCED MANUFACTURING
Practice 1
Practice 2
Practice 3
350
OUTSOURCED MANUFACTURING
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.
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.
351
OUTSOURCED MANUFACTURING
352
OUTSOURCED MANUFACTURING
353
OUTSOURCED MANUFACTURING
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?
354
OUTSOURCED MANUFACTURING
355
OUTSOURCED MANUFACTURING
356
OUTSOURCED MANUFACTURING
357
OUTSOURCED MANUFACTURING
358
OUTSOURCED MANUFACTURING
359
OUTSOURCED MANUFACTURING
360
OUTSOURCED MANUFACTURING
(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
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?
361
OUTSOURCED MANUFACTURING
Solution
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:
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.
362
OUTSOURCED MANUFACTURING
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
363
OUTSOURCED MANUFACTURING
364
OUTSOURCED MANUFACTURING
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
365
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.
366
OUTSOURCED MANUFACTURING
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.
367
OUTSOURCED MANUFACTURING
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.
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
368
OUTSOURCED MANUFACTURING
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.
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.
369
OUTSOURCED MANUFACTURING
time and resources and keeps productivity high. Machines are simply more
reliable in Industry 4.0. This reduces maintenance costs and downtime.
370
OUTSOURCED MANUFACTURING
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.
371
OUTSOURCED MANUFACTURING
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
372
OUTSOURCED MANUFACTURING
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.
373
OUTSOURCED MANUFACTURING
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.
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.
374
OUTSOURCED MANUFACTURING
375
OUTSOURCED MANUFACTURING
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.
376
OUTSOURCED MANUFACTURING
The year 2020 has emerged as one of the most challenging years in recent
history, with the whole world responding and looking to recover from the
health and economic challenges posed by the COVID-19 pandemic.
COVID-19 has impacted every industry, causing businesses to revise
budgets, amongst many other operational matters, in order to manage the
effects of the pandemic. With the viability of several companies at risk as a
result, companies are striving to be in a position of financial stability by
focusing on revenue generation and outsourcing non-core functions.
377
OUTSOURCED MANUFACTURING
378
OUTSOURCED MANUFACTURING
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
13.16 Summary
379
OUTSOURCED MANUFACTURING
380
OUTSOURCED MANUFACTURING
381
OUTSOURCED MANUFACTURING
REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
382