Chapter_10 Worldwide Sourcing

PURCHASING & SUPPLY CHAIN MANAGEMENT, 4e
Worldwide Sourcing
Chapter 10
CENGAGE LEARNING
Monczka – Handfield – Giunipero – Patterson
Chapter Overview
 Worldwide sourcing overview

 Progressing from domestic buying to
international purchasing
 Progressing from international
purchasing to global sourcing
Purchasing & Supply Chain Management, 4e

2
Impact of Globalization
 Interdependence
 Connectivity
 Integration of economies
 Social
 Technical
 Political

3
Impact of Globalization
 Outsourcing opportunities on the

supply side
 Opportunities for new markets on the
demand side
 Issue of trade balances

4
Global Sourcing Benefits
 Cost savings
 Availability
 Quality
 Innovation
 Entry to new markets

5
U.S. Trading Partners (2006)

6
Definitions
 International purchasing
 Relates to a commercial transaction
between an buyer and a supplier in
different countries
 Global sourcing
 Involves proactively integrating and
coordinating common items and materials,
processes, designs, technologies, and
suppliers across worldwide purchasing,
engineering, and operating locations
7
Why Source Worldwide?
 Cost/price benefits
 Access to product/process technology
 Quality
 Access to only source available
 Introduce competition to domestic
suppliers
 React to buying patterns of competitors
 Establish a presence in a foreign
market Purchasing & Supply Chain Management, 4e
8
Barriers to Worldwide Sourcing
 Lack of knowledge and skills

concerning global sourcing
 Resistance to change
 Longer lead times
 Different business customs, language,
and culture
 Currency fluctuations

9
Lack of Knowledge and Skills
 How to identify potential sources of

supply
 Documentation issues

10
Documentation Requirements
 Letters of credit  Certificates of

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

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
Cultural Issues
 Business practices
 Language
 Culture
 Need to more closely manage delivery
and engineering changes
 Different meeting and negotiation styles
 More difficult interpersonal relationships

14
Currency Fluctuations
 Often daily or hourly fluctuations

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

15
Overcoming Barriers
 Education and training

 Publicizing success stories
 Globally linked information systems
 Supplier providing U.S.-based support
personnel
 Measurement and reward systems
 Use of third-party intermediaries

16
From Domestic to International
 No suitable domestic suppliers

 Competitors are gaining competitive
advantage from overseas suppliers
 Triggering events in the supply market

17
 Information about worldwide sources

 Supplier selection issues
 Cultural understanding
 Language and communication
differences
 Logistical issues

18
 Legal issues
 Countertrade requirements
 Costs associate with international
purchasing
 Currency risk

19
Information about Worldwide Sources
 International industrial directories

 Trade shows
 Trading companies
 Third-party support
 Trade consulates

20
Supplier Selection Issues
 Does a significant total cost difference

exist between domestic and foreign
sources?
 Will the foreign supplier maintain price
differentials over time?
 What is the effect of longer material
pipelines and increased average
inventory levels?
21
 What are the foreign supplier’s

technical and quality capabilities?
 Can the supplier assist with new
designs?
 What is the supplier’s quality
performance?
 What kinds of quality systems does the
supplier have in place?
22
 Is the supplier capable of consistent

delivery schedules?
 How much lead time does the supplier
require?
 Can we develop a longer-term
relationship with this supplier?
 Are patents and proprietary technology
safe with this supplier?
23
 Is the supplier trustworthy?

 What legal system does the supplier
expect to follow?
 What are the supplier’s payment
terms?
 How does the supplier manage
currency exchange issues?

24
Cultural Understanding
 Culture is the sum of all understandings
that govern human interaction in a
society
 Language
 Religion
 Values and attitudes
 Customs
 Social institutions
 Education
25
Values vs. Behavior
 Values
 Shared beliefs or group norms that are
internalized; they affect the way people
think
 Behavior
 Based on values and attitudes; they affect
the way people act

26
Language Differences
 Communicating purchase requirements

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

27
Recommendations from An Expert
 If the supplier is using English as a

second language, the buyer should be
responsible for preventing
communication problems
 To aid in communication, speak slowly,
use more communication graphics, and
eliminate jargon, slang, and sports and
military metaphors
28
Recommendations from An Expert
 Bring in an interpreter to all but the

most formal meetings
 Allow an extra day to educate
interpreters on your issues and
vocabulary
 Document, in writing, the conclusions
and decisions made in a meeting
before adjourning
29
Logistical Issues
 Extended pipelines
 Additional planning and management
required
 Shipping delays are to be expected
 Often less capable transportation
infrastructure
 INCOTERMS

30
INCOTERMS 2000
Buyer takes title when taking delivery of the
EXW Ex Works goods at supplier’s facility. Buyer is
responsible for the shipment and duties.
Buyer takes possession and title at the
airport or truck terminal at the port of export
FCA Free Carrier
in the seller’s country after the goods clear
customs.
Buyer takes possession at the dock at the
Free Alongside
FAS port of export after the goods clear
Ship
customs.
Buyer takes responsibility and title for the
FOB Free of Board goods as they pass over the ship’s rail
during loading.
31
INCOTERMS 2000
Supplier arranges freight and pays as far as
CFR Cost and Freight the buyer’s port of entry. Title and risk of
loss remain with the buyer.
Supplier arranges freight and buys
insurance for the goods as part of the sales
Cost, Insurance,
CIF price. Title and risk transfer to the buyer
and Freight
once the goods clear a ship’s rail while
being loaded.
Title transfers to buyer when goods are
CPT Carriage Paid loaded into a container. Seller selects and
pays the carrier. Similar to CFR.
Carriage and Similar to CIF but applies to air or truck

CIP
Freight Paid to transport only.

32
INCOTERMS 2000
Goods are delivered to a border by truck or
Delivered at rail. Title transfers at the border after goods
DAF
Frontier are cleared for export but not yet cleared
through import customs.
Seller pays freight costs to a port of import,
Delivered Ex and title transfers on the ship at arrival.
DES
Ship Buyer is responsible for unloading the
freight and clearing customs.
Seller is responsible for having the ship
unloaded at the port of entry. Title transfers
Delivered Ex
DEQ when goods are unloaded from the ship,
Quay
either before or after customs. Term must
include “Duty Paid” or “Duty Unpaid”

33
INCOTERMS 2000
Seller delivers goods with duty unpaid to a
buyer’s specified location. This location,
Delivered Duty where the title transfers, is different from
DDU
Unpaid the port of import. These goods have not
cleared customs and require proper
customs supervision and bonding.
Seller delivers goods to the buyer with all

Delivered Duty
DDP duties paid. Title transfers at the buyer’s
Paid
designated receiving location.

34
INCOTERMS 2000
EXW FCA FAS FOB CFR CIF CPT CIP DAF DES DEQ
Warehouse
Storage
S S S S S S S S S S S
Warehouse
Labor
Export
Packaging
Loading
Charges
B S S S S S S S S S S
Inland
Freight
B B/S** S S S S S S S S S
Terminal
Charges
B B S S S S S S S S S
** May be 1 of 2 FCA Terms:

FCA Seller’s Premises Purchasing & Supply Chain Management, 4e
FCA Named Place (Int’l Carrier)
35
INCOTERMS 2000
EXW FCA FAS FOB CFR CIF CPT CIP DAF DES DEQ
Forwarder’s
Fees
B B B B S S S S S S S
Loading on
Vessel
B B B S S S S S S S S
Ocean/Air
Freight
B B B B S S S S S S S
Charges on
Arrival at B B B B B B S S B B S
Destination
Duty, Taxes,
& Customs
B B B B B B B B B B B
Delivery to
Destination
B B B B B B B B B B B

36
Legal Issues
 Common law vs. codified or civil law

 Different levels of protection for the
buyer
 Intellectual property issues
 U.N.’s Convention on Contracts for the
International Sale of Goods (CISG)
 World Trade Organization

37
U.S. Foreign Corrupt Practices Act
 Designed to prevent companies from

making questionable or illegal
payments to foreign officials to secure
or retain business
 Applies to U.S. citizens and their
agents
 Requires accurate recordkeeping and
adequate controls
38
U.S. Foreign Corrupt Practices Act
 Also applies to foreign nationals who

make such payments while in the U.S.
 No dollar threshold amount
 Enforcement focuses on intent

39
International Purchasing Offices
 Identify potential  Manage technical
suppliers and commercial
 Solicit quotes or concerns
proposals  Represent the
 Expedite and trace buying firm to
shipments suppliers
 Negotiate supply  Manage
contracts countertrade
 Obtain product requirements
samples  Perform site visits
40
Countertrade Requirements
 Full or partial exchange of goods for

goods
 Purchasing is often responsible for
negotiating and managing countertrade
agreements

41
Why Countertrade?
 Some countries lack hard currency

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

42
Types of Countertrade
 Barter
 Counterpurchase
 Offset
 Buy-back
 Switch trading

43
Barter
 Straight exchange of goods for goods

with no exchange of currency
 Involves a single contract
 Usually relate to a specific transaction
and cover a shorter period of time

44
Counterpurchase
 Requires a selling firm to purchase a

specified amount of goods from the
country that purchases its products
 Generally a percentage of the original
sale
 Involves products unrelated to the
company’s primary business
 Issue of disposition of the goods
45
Offset
 Closely related to counterpurchase

 Generally a percentage of the original
sale
 Allowed to offset its countertrade
requirements with any company or
industry – more flexible

46
Buy-Back
 Sometimes called compensation

trading
 Occurs when building a plant in a third
world country
 Building company agrees to buy back
some or all of the plant’s output as
payment

47
Switch Trading
 Occurs when a selling company agrees

to accept goods from the buying
country as partial payment
 Company may decide to utilize a third-
party to sell or market goods

48
Costs of International Purchasing
 Common costs
 Comparable to costs in domestic sourcing
 Purchase price
 Tooling charges
 Transportation from supplier to buyer
 International transaction costs
 Additional costs over and above domestic
sourcing

49
International Transaction Costs
 Base price
 Tooling
 Packaging
 Escalation
 Transportation
 Customs duties
 Insurance premiums
 Payment terms
50
International Transaction Costs
 Additional fees and commissions
 Port terminal and handling fees
 Customs broker fees
 Taxes
 Communication costs
 Payment and currency fees
 Inventory carrying costs

51
Letters of Credit
 Assure the seller that it will be paid for

the shipment
 Paid when accurate and appropriate
documents are presented to buyer’s
bank
 Revocable vs. irrevocable

52
Port Terminal and Handling Fees
 Unloading of cargo
 Administrative services of port
authority personnel
 General use of the port
 Temporary storage for goods awaiting
customs and/or documentation
clearance

53
Currency Risk
 Purchase in U.S. dollars

 Sharing currency fluctuation risk
 Currency adjustment contract clauses
 Delivery-triggered vs. time-triggered
 Currency hedging
 Finance/treasury department expertise
 Tracking currency movements
54
From International to Global
 Level I – engage in domestic sourcing
only
 Level II – engage in international
purchasing as needed
 Level III – international purchasing as part
of sourcing strategy
 Level IV – integration and coordination
across worldwide buying units
 Level V – integration and coordination
with other functional groups
55
Global Sourcing Success Factors

56
Benefits of Global Sourcing
 Lower purchase price/cost

 Greater access to product technology
 Improved supplier relationships
 Greater access to process technology
 Greater supplier responsiveness
 Greater appreciation of purchasing

57
Benefits of Global Sourcing
 Better management of supply chain

inventory
 Greater standardization of the sourcing
process
 Higher material, component, or service
quality
 Improved information sharing

58
Future Trends in Global Sourcing
 Development of higher level skill sets

 Need to reach agreement on global
performance measures
 Need to establish integrated systems
 Continued development and refinement
of global sourcing strategies
 Greater internal integration

59
Future Trends in Global Sourcing
 Seeking suppliers highly capable of

conducting global business
 Shift from component sourcing to
subsystems, systems, and services
sourcing
 Continued cost reduction pressures
 More suppliers in low-cost, emerging
markets
60

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PURCHASING & SUPPLY CHAIN MANAGEMENT, 4e

 Worldwide sourcing overview

Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e

 Outsourcing opportunities on the

Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e

 Lack of knowledge and skills

Purchasing & Supply Chain Management, 4e

 How to identify potential sources of

Purchasing & Supply Chain Management, 4e

 Letters of credit  Certificates of

Purchasing & Supply Chain Management, 4e

 Established, routine sourcing patterns

Purchasing & Supply Chain Management, 4e

 Extended material pipelines

Purchasing & Supply Chain Management, 4e

 Often daily or hourly fluctuations

Purchasing & Supply Chain Management, 4e

 Education and training

Purchasing & Supply Chain Management, 4e

 No suitable domestic suppliers

Purchasing & Supply Chain Management, 4e

 Information about worldwide sources

Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e

 International industrial directories

Purchasing & Supply Chain Management, 4e

 Does a significant total cost difference

 What are the foreign supplier’s

 Is the supplier capable of consistent

 Is the supplier trustworthy?

Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e

 Communicating purchase requirements

Purchasing & Supply Chain Management, 4e

 If the supplier is using English as a

 Bring in an interpreter to all but the

Purchasing & Supply Chain Management, 4e

Carriage and Similar to CIF but applies to air or truck

Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e

Seller delivers goods to the buyer with all

Purchasing & Supply Chain Management, 4e

** May be 1 of 2 FCA Terms:

Purchasing & Supply Chain Management, 4e

 Common law vs. codified or civil law

Purchasing & Supply Chain Management, 4e

 Designed to prevent companies from

 Also applies to foreign nationals who

Purchasing & Supply Chain Management, 4e

 Full or partial exchange of goods for

Purchasing & Supply Chain Management, 4e

 Some countries lack hard currency

Purchasing & Supply Chain Management, 4e

Purchasing & Supply Chain Management, 4e

 Straight exchange of goods for goods

Purchasing & Supply Chain Management, 4e

 Requires a selling firm to purchase a

 Closely related to counterpurchase

Purchasing & Supply Chain Management, 4e

 Sometimes called compensation

Purchasing & Supply Chain Management, 4e