Professional Documents
Culture Documents
Chap 16
Chap 16
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Stages to Global SM
Stage One: International Purchasing
Importation
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Potential Problems
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Cultural Issues Long lead times Additional Inventories Quality (intransit pipelines) Social and Labor Problems Higher Costs of Doing Business High Opacity
http://www.opacity-index.com
Supply Channels
After deciding to source globally, must decide what supply channels to use The lowest price method for direct procurement
May be infeasible due to costs & limited resources
Commission houses
Act for exporters abroad Paid by the exporter They do selling, shipping and customs details
Agents or reps
Same as Commission House Except they work for the exporter
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Trading companies
Perform all of the above May work for both or one party Selling, shipping, customs details
Subsidiaries
Facilitate international sales Example: Hitachi America
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Direct Suppliers
Eliminating Intermediaries Identifying Direct Suppliers Qualifying Direct Suppliers Preparing for Direct Relations The Initial Meeting
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Eliminating Intermediaries
Results in lowest purchase price
Requires extra cost beyond price
Requires knowledge
Requires involvement of the company in all aspects of the procurement
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Prepare and review specifications and drawings Pack samples or photos of required materials if helpful Clearly prepare the quality requirements Identify specific scheduling requirements Determine what % of production can be placed offshore Determine requirements for special packaging Identify likely lead times Develop a clear idea of the price objective
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Meet with critical personnel Describe how and when the suppliers firm would get paid Always remember that the potential supplier is judging your firm at the same time
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Case 1
Contract was awarded for 1 million euros Rate of exchange was $1.00 = Eu 1.5 Eu l,000,000 Eu 1.5/$ = $666,666.66 However, dollar weakens to $1.00 = Eu 1 Eu l,000,000 Eu 1.0/$ = $1,000,000 (33% increase)
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Case 2
Contract is for payment in foreign currency and the exchange rate improves so $1 = Eu 2 Eu l,000,000 Eu 2/$ = $500,000 The buyer has reduced its costs from the initial likely amount of $666,666.66 to $500,000.00, a 25 percent saving
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Case 3
Contract is with a global supplier, with payment in dollars, and the dollar weakens Assume the rate of exchange was U.S. $1 = Eu 1.5 The cost of the item was Eu 1 million, or $666,666.66. Unfortunately for the supplier, the dollar has weakened so that $1 will buy only Eu 1 Now, when the supplier receives $666,666.66 and converts to euros, receiving only Eu 666,666.66
A 33 percent reduction from what it expected under the former exchange rate
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Case 4
Contract is with a global supplier with payment in dollars, and the dollar strengthens As with case 3, the contract called for a payment of $666,666.66 Assume rate of exchange changed so $1 = Eu 2 When the supplier receives its $666,666.66 and converts to euros it will receive 666,666.66 x 2 = Eu 1,333,333.32
A windfall gain of Eu 333,333.33
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Payments
Simplified when an intermediary or IPO used
But risk does not disappear just because you transfer it to someone else
Countertrade
Refers to any transaction in which payment is made partially or fully with goods instead of money Countertrade links sale of a product into a foreign country and sale of goods out of that country
http://www.countertrade.org
Countertrade Definitions
Barter: Goods exchanged for goods (no money) Offset: The value of the sale is offset by purchases of items produced in the buying country
Types: direct offset and indirect offset
Buy-Back/Compensation: Agreement by the seller of turnkey plants, machinery, or other capital equipment to accept as partial or full payment products produced in the plants and/or on the capital equipment
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Countertrade Advantages
Avoiding exchange controls Selling to countries with inconvertible currencies Marketing products in less-developed countries Reducing risks with unstable currency Goodwill with foreign countries Fuller use of plant capacity
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Countertrade Disadvantages
Lengthier negotiations Risk of dealing in unfamiliar products Complex negotiations Government involvement Higher transaction costs Technology transfer
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Example of Countertrade
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NAFTA
U.S., Canada, Mexico Original Goals of NAFTA
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Elimination of tariffs Remove agricultural barriers Remove manufacturing barriers Remove service trade barriers Remove investment restrictions Protect intellectual property rights Resolve environmental concerns
Future of Global SM
World financial markets are closely linked through 24-hour trading International business is no longer limited to large multinational corporations Fewer marketplace differences exist
Westernization of global consumer markets is occurring at a rapid rate
Manufacturing firms in developing countries have improved their capabilities Productivity and quality is dramatically improving worldwide
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CAPS Study
Global sourcing strategies will become a critically important source of competitive advantage The number of key suppliers to firms will be reduced to maximize leverage on a global basis
Suppliers regional and global capability expectations will increase
Strategic & tactical sourcing will be further separated Executive management expectations of supply management will increase
Due to cross-functional, cross-boundary emphasis and focus on alliances
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Closing Remarks
With respect to global supply management, supply professionals must learn to:
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Develop a global supply management view Learn to deal with changing global environments Deal with diverse cultures effectively Work within distributed organizational structures Work with teams composed of global members Learn to communicate effectively with cultural beliefs and values different than their own
Appendix A
Currency Risk
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Currency Issues
Floating currency:
Currency not associated to the U.S. dollar Stability of the currency is more questionable
Pegged currency:
Currency associated to the U.S. dollar More stable than floating or unpegged currency
Hedging
Used to minimize market risk Requires organized commodity exchange
Marketplace where commodity is bought and sold in large quantities
Hedging
Common types of hedging
Futures contracts
Give a fixed cost for foreign currency Effectively freezes the exchange rate
Currency options
Allows a buyer to take advantage of an increase in dollar value and protects against decreases
Additional Slides
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Common Terms
Import duties (or rates)
ad valorem rate
Most common, a percentage of appraised value of the merchandise (such as 5%)
specific rate
Specified amount per unit, such as $1,000 for a fur coat
compound rate
Combination of the ad valorem and specific rates
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Common Terms
Dutiable or free of duty
GSP - Generalized System of Preferences
Basically means Duty Free Stuff you buy in duty free shop is NOT free for you
Statutory Rates
Full rates for tariffs
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Common Terms
Assists
Used in aiding the production outside of the buying firms country and are provided by the buying firm
Components
Subassemblies or parts in imported goods
Special tooling
Tools, dies, molds, equipment
Design Information
Rulings on imports
With respect to duties, these occur after entry documents have been filed and the entry is liquidated
Also - there is no guarantee that subsequent shipments will receive the same tariff
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Common Terms
Customs brokers
Serve as the buying firms agent
Handle clearance of shipments through customs
Customs invoice
Used to clear merchandise through customs
Not often required (not same as commercial invoice which usually suffices for customs purposes) Supplied by U.S. Treasury Filled out by the supplier
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Common Terms
Pro forma invoice
Commercial invoice estimate used mainly for banking & permit needs Enables the firm to obtain an import or exchange permit
Packing list
More than one may be needed Movement order, contents, descriptions (weights, markings, measures)
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Common Terms
Bill of lading
Receipt issued by the carrier for merchandise
A contract for shipment of merchandise A receipt of merchandise Document of freight charges List of Handling Instructions May contain a title
Common Terms
Inspection certificate
Prepared by entity independent of the exporter Assures buyer shipment is as ordered
Certificate of origin
May be required by customs A product shipped from Hong Kong may not actually have been made there, so this is an effort to trace product origins
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