World Wide Sourcing

PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e
Worldwide Sourcing
Chapter 10
© 2012 Cengage Learning. All rights reserved. May

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Chapter Overview
 Worldwide sourcing overview

 Developing a worldwide sourcing
program
 Moving to a global sourcing philosophy

2
a publically accessible website, in whole or in part. Purchasing & Supply Chain Management, 5e
Impact of Globalization
 Interdependence
 Connectivity
 Integration of economies
 Social
 Technical
 Political

3
Impact of Globalization
 Cost savings opportunities on supply

side
 Opportunities for new markets on
demand side
 Issue of trade balances and currency
fluctuations

4
U.S. Trading Partners (2009)
Billions of U.S. Dollars
Canada
China
Mexico
Japan
Germany
U.K.
S. Korea
France
Netherlands
Taiwan
0 50 100 150 200 250 300 350 400 450 500
5
Definitions
 International purchasing
 Commercial purchase transaction between
buyer and supplier in different countries
 Global sourcing
 Proactively integrating and coordinating
common items and materials, processes,
designs, technologies, and suppliers
across worldwide purchasing,
engineering, and operating locations

6
Why Source Worldwide?
Cost/Price
benefits
Presence in
Access to
foreign
technology
markets
Meet
competitors’
buying Quality
patterns
Competition
to domestic Availability
suppliers

7
Cost/Price Benefits
 Lower labor rates

 Different productivity levels
 Possible willingness to accept lower
profit margin
 Exchange rate differences
 Lower-cost materials and inputs
 Government subsidies

8
Barriers to Worldwide Sourcing
Lack of
skills
In ce
su crea ta n
pp se
ly e sis nge
ri s d R cha
k to
Lo
n cy s ng
u
e
rr tion timer le
C tua es ad
c
flu
Customs,
language,
and
culture

9
Lack of Knowledge and Skills
 Ignorance of intricacies of global

sourcing
 How to identify potential sources of
supply
 Documentation issues

10
Documentation Requirements
 Letters of credit  Inspection

 Multiple bills of certificates
lading  Certificates of
 Dock receipts insurance coverage
 Import licenses  Packing lists
 Certificates of origin  Commercial
invoices

11
Resistance to Change
 Established, routine sourcing patterns

 Shifting from longstanding suppliers
 Domestic market nationalism

12
Longer Lead Times
 Extended material pipelines

 Forecasting over longer time horizons
 Need to more closely manage delivery
dates
 Possibility of transit and/or customs
delays
 Greater logistical, political, and
financial risks
13
Other Barriers
 Offshore business practices

 Language
 Culture
 More difficult negotiations
 Need to more closely manage delivery
and engineering changes
 More difficult interpersonal
relationships
14
Currency Fluctuations
 Daily or hourly fluctuations

 Need to understand highly complicated
financial options
 How to price purchases

15
Increased Supply Risks
 Need for critical assessment

 Prior to sourcing
 Look at more than just price
 Types of risks vary between different
countries

16
Overcoming Barriers to Worldwide
Sourcing
 Education and training
 Publicizing success stories
 Globally linked technologies
 Supplier providing U.S.-based support
personnel
 Measurement and reward systems
 Third-party intermediaries or agents
 Top management support
17
Developing a Worldwide Sourcing
Program
 No suitable domestic supplier exists
 Competitors are gaining competitive
advantage from overseas suppliers
 Triggering events in supply markets

18
Developing a Worldwide Sourcing
Program
 Information about worldwide sources
 Supplier qualification and selection
issues
 Understanding cultural issues
 Language and communication
differences
 Logistical issues

19
Developing a Worldwide
From Domestic Sourcing
to International
Program
 Legal systems
 Countertrade requirements
 Costs associate with international
purchasing
 Managing currency risks

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

21
Information about Worldwide Sources
 Worldwide sourcing directories

 Trade shows
 Intermediaries and organizations
 Trading companies
 Third-party support
 Trade consulates
 Foreign nationals
 International purchasing offices (IPOs)
22
Supplier Qualification
and Selection Issues
 Does significant total cost difference
exist between domestic and foreign
sources?
 Will foreign supplier maintain price
differentials over time?
 What is effect of longer material
pipelines and increased average
inventory levels?
23
SupplierSelection
Issues
 What are supplier’s technical and
quality capabilities?
 Can supplier assist with new designs?
 What is supplier’s quality
performance?
 What types of quality systems does
supplier have in place?

24
SupplierSelection
Issues
 Is supplier capable of consistent
delivery schedules?
 How much lead time does supplier
require?
 Can we develop longer-term
relationship with this supplier?
 Are patents and proprietary technology
safe with supplier?
25
SupplierSelection
Issues
 Is supplier trustworthy?
 What legal system does supplier expect
to follow?
 What are supplier’s payment terms?
 How does supplier manage currency
exchange issues?

26
Understanding Cultural Issues
 Culture is “sum of all understandings
that govern human interaction in
society”
 Language
 Religion
 Values and attitudes
 Customs
 Social institutions
 Education
27
Values vs. Behavior
 Values
 Shared beliefs or group norms that are
internalized
 Affect the way people think
 Behavior
 Based on values and attitudes
 Affect the way people act

28
Language Differences
 Communicating purchase requirements

clearly and effectively
 Not everyone speaks and understands
English the same way Americans do
 Message speed
 Level of content

29
Recommendations from An Expert
 If supplier is using English as second
language, buyer should be responsible
for preventing communication
problems
 To aid in communication
 Speak slowly
 Use more communication graphics
 Eliminate jargon, slang, and sports and
military metaphors
30
Recommendations from An Expert
 Bring interpreter to all but the most

informal meetings
 Allow extra day to educate interpreters
on your issues and vocabulary
 Document, in writing, conclusions and
decisions made in a meeting before
adjourning

31
Costs Associated with
International Purchasing
 Comparable costs
 Similar to costs in domestic sourcing
 Purchase price
 Tooling charges
 Transportation from supplier to buyer
 International transaction costs
 Additional costs over and above domestic
sourcing

32
International Transaction Costs
 Base price  Port terminal and
 Tooling handling fees
 Packaging  Customs brokers’
fees
 Escalation
 Taxes
 Transportation
 Communication costs
 Customs duty
 Payment and
 Insurance premiums
currency fees
 Payment terms
 Inventory carrying
 Fees and commissions costs
33
Letters of Credit
 Assure supplier that it will be paid for

shipment
 Issued by the buyer’s bank to supplier’s
bank when LOC terms are fulfilled
 Paid when accurate and appropriate
documents are presented to buyer’s bank
 Revocable vs. irrevocable

34
Measures to Deal with Currency Risk
 Purchase in U.S. dollars

 Sharing currency fluctuation risk
 Currency adjustment contract clauses
 Delivery-triggered vs. time-triggered
 Currency hedging
 Finance department expertise
 Tracking currency movements

35
Currency Hedging
 Form of risk insurance that can protect

both parties
 Seeks risk aversion, not monetary gain
 Option
 Buy or sell foreign currency at certain
future rate
 Forward exchange contract
 Agreement to pay pre-established rate for
currency in future
36

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PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e

© 2012 Cengage Learning. All rights reserved. May