2. Chapter 14 Global Supply

3. 14 - 3 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Growth in World Trade Total value of world merchandise exports in 1999 was $5.47 trillion World commercial services exports in 1999 was $1.35 trillion The WTO estimates that total trade in 1997 was 14 times the level of 1950

4. 14 - 4 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. U.S. Imports and Exports and Merchandise Trade Balance 1950-1999 YearImports ($ millions) Exports ($ millions) Surplus or Deficit ($ millions) 1950 $8,984 $10,282 $1,298 196015,07520,6125,537 197039,75642,5902,834 1980256,984220,786(36,198) 1990495,300393,600(101,700) 1995743,543584,742(158,801) 1996795,289625,075(170,214) 1997869,704689,182(180,522) 1998911,896682,138(229,758) 19991,024,618695,797(328,821)

5. 14 - 5 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. U.S. Imports and Exports by Country for 1999 YearImports ($ millions) Percent of Total Imports Exports ($ millions) Canada $198,71119.4 $166,600 Japan130,86412.857,466 Mexico109,72010.786,909 China81,7888.013,111 Germany55,2285.426,800 United Kingdom39,2373.838,407 Taiwan35,2043.419,131 South Korea31,1793.022,958 France25,7082.518,877 Italy22,3572.210,091

6. 14 - 6 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. U.S. Imports by Selected Commodity Commodity$ MillionsPercent Agriculture commodities $36,6813.7 Television, VRC, etc.50,9365.1 Clothing56,4125.7 Chemicals63,8256.4 Mineral fuels75,8037.6 ADP equipment, office machinery84,4308.5 Electrical machinery88,6208.9 Machinery91,3969.2 Vehicles145,92714.7 Other manufactured goods300,46730.2

7. 14 - 7 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for Global Purchasing Price/cost -labor costs, exchange rates, equipment and processes, product and pricing focus Government/marketing pressures Quality Unavailability of items domestically Faster delivery and continuity of supply Better technical service Technology Marketing tool Tie-in with offshore subsidiaries Competitive clout

8. 14 - 8 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Potential Problem Areas in Global Purchasing Source location and evaluation Lead/delivery time Expediting Political and labor problems Hidden costs Currency fluctuations Payment methods Quality Warranties and claims Tariffs and duties Paperwork costs Legal problems Logistics and transportation Language Communications Cultural and social customs Ethics

9. 14 - 9 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Potential Hidden Costs Commissions to customs brokers Financing charges, letter of credit fees, exchange rate differentials Foreign taxes imposed Extra inventory and carrying costs Extra paperwork/documentation Inventory obsolescence, deterioration, spoilage, pilferage Travel Packaging Fees for consultants, inspectors Marine insurance Import tariffs Transportation Freight forwarder Warehousing Port handling

10. 14 - 10 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. General Guidelines for Dealing with International Suppliers Even if English is spoken, speak slowly, use more communication graphics and avoid use or metaphors and jargon Bring an interpreter to all by the more informal meetings -Allow extra time to educate interpreters on issues Document in writing the main conclusions and decisions Learn about the country’s history and taboos Do not use first names unless invited to Get cultural advice from professional or your own company employees, not from supplier representatives in the U.S. Expect negotiations to last longer with some cultures -Suppliers must learn to accept you and your company as a customer Source: Dick Locke, Global Supply Management, New York: McGraw-Hill, 1996

11. 14 - 11 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Organizational Considerations Assignment within the Purchasing Department -Organized by commodity or geographic region Subsidiary -Subsidiary supply organization responsible for local suppliers International Purchasing Office (IPO) -Separate purchasing organization usually reporting to head office purchasing department

12. 14 - 12 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Intermediaries Import brokers and agents -For a fee will assist in locating suppliers and handling the paperwork Import merchants -Buys the product, takes title and delivers it to buyer Supplier’s subsidiary Sales representatives Trading companies

13. 14 - 13 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Countertrade Countertrade is the practice of a company promising to buy material, products or services from a country in return for the privilege of selling there The supply function may be called to: -Use material acquired through a barter/swap -Identify cost-effective sourcing alternatives to fulfill offset agreements -Identify goods and services to fulfill counter purchase agreements

14. 14 - 14 McGraw-Hill/Irwin Purchasing and Supply Management, 13/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Foreign Trade Zones (FTZ) FTZ: isolated, enclosed area in or adjacent to a port of entry, used to used to import, process, and reship products to foreign markets. Main purpose for using FTZ’s are to avoid, postpone, or reduce the tariff on imported goods FTZ’s differ depending on their major functions. -transshipments, storage, exhibition and display, manufacturing