McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 14 Global Supply Management

Reasons for Global Purchasing Unavailability of items domestically Price/cost labor costs, exchange rates, equipment and processes, product and pricing focus Government/marketing pressures Quality Faster delivery and continuity of supply Better technical service Technology Marketing tool Tie-in with offshore subsidiaries Competitive clout

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 ●Administration costs ●Legal problems ●Logistics and transportation ●Language ●Communications ●Cultural and social customs ●Ethics and social responsibility

Potential Hidden Costs Foreign exchange premiums Commissions to customs brokers Terms of payment costs and finance charges: letter of credit fee, translation costs, exchange rate differentials Foreign taxes imposed Import tariffs Extra safety stock/buffer and transit inventory, plus inventory carrying costs due to longer lead times Extra labor for special handling Obsolescence, deterioration, pilferage, and spoilage Additional administrative expenses Packaging and container costs Business travel Fees for freight forwarders, consultants, or inspectors Marine insurance premium. Customs documentation charges Transportation costs, including from manufacturer to port, ocean freight, from port to company plant, freight forwarder’s charges, port handling charges, warehouse costs

Organizational Considerations Regional purchasing offices Organized geographic regions Global Commodity Management Organization When there are a large number of common requirements across facilities or business units and the supply base is not always located in the same geographic area as the buying company’s operations International Purchasing Office (IPO) Separate purchasing organization usually reporting to head office purchasing department

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 Potential advantages: convenience; efficiency; potentially lower costs, due to volume; reduced lead times; and greater assurance of the product meeting quality specifications

Information Sources The Internet Government sources Chambers of commerce located in major cities in the United States, Canada and around the world Supply organizations at other companies Supplier locator directories Kelly’s Directory, Thomas Register, Dun & Bradstreet Importers and foreign trade brokers Other sources e.g., Suppliers, banks

Incoterms Developed by the International Chamber of Commerce Updated: Incoterms 2000 Internationally recognized standard definitions that describe the responsibilities of a buyer and seller in a transaction Variations across regions and among carriers possible so make sure to specify conditions 13 standard Incoterms Each term must be followed by a geographic location, such as a port or city

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 in the country 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 Set-up buyback agreements Negotiate switch trade agreements with a broker or trading house

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