Worldwide Sourcing Chapter 10

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

Impact of Globalization  Cost savings opportunities on supply side  Opportunities for new markets on demand side  Issue of trade balances and currency fluctuations 3

U.S. Trading Partners (2009) 4

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 5

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

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 7

Barriers to Worldwide Sourcing Lack of skills Resistance to change Longer lead times Customs, language, and culture Currency fluctuations Increased supply risk 8

Lack of Knowledge and Skills  Ignorance of intricacies of global sourcing  How to identify potential sources of supply  Documentation issues 9

Documentation Requirements  Letters of credit  Multiple bills of lading  Dock receipts  Import licenses  Certificates of origin  Inspection certificates  Certificates of insurance coverage  Packing lists  Commercial invoices 10

Resistance to Change  Established, routine sourcing patterns  Shifting from longstanding suppliers  Domestic market nationalism 11

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 12

Other Barriers  Offshore business practices  Language  Culture  More difficult negotiations  Need to more closely manage delivery and engineering changes  More difficult interpersonal relationships 13

Currency Fluctuations  Daily or hourly fluctuations  Need to understand highly complicated financial options  How to price purchases 14

Increased Supply Risks  Need for critical assessment  Prior to sourcing  Look at more than just price  Types of risks vary between different countries 15

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? 16

Supplier Selection 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? 17 Supplier Qualification and Selection Issues

Supplier Selection 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? 18 Supplier Qualification and Selection Issues

Supplier Selection 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? 19 Supplier Qualification and Selection Issues

Understanding Cultural Issues  Culture is “sum of all understandings that govern human interaction in society”  Language  Religion  Values and attitudes  Customs  Social institutions  Education 20

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 21

Language Differences  Communicating purchase requirements clearly and effectively  Not everyone speaks and understands English the same way Americans do  Message speed  Level of content 22

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 23

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 24

Negotiation with United Kingdom 25  We can’t assume that the English and American businesses operate in the same manner.  English executives may appear polite and friendly, but they can be tough and ruthless when appropriate.

Germany Negotiation with Germany 26  Most of the executives you encounter will have attended a university, and 50 percent hold doctorates. The title “Dr.” commands instant respect. Germans tend to be specialists in one industry with multiple company experiences.  Due to technical expertise, German negotiators are extremely cautious. The opponent should be well prepared on technical details.

France Negotiation with France 27  When doing business in France, you will often go through an intermediary contact whose credentials are impeccable. Your choice of intermediary is important.  The best contacts are French people who have ties with the person you want to contact—through family status, money, or schooling.  Schooling is the most important aspect because the elite of French management are linked by having attended prestigious schools.

China Negotiation with China 28  China is now a major player in the world economy and accounts for more than 6 percent of world trade. This is remarkable for a developing economy. There has been strong import growth, both for processing trade and for domestic consumption.  The major problems when doing business in China are the language barrier, business practices, and a fluid and diverse legal system.  A well-specified procurement strategy is a basic requirement when buying from China.

Logistical Issues  Extended pipelines  Additional planning and management required  Shipping delays are to be expected  Often less capable transportation infrastructure  Role of INCOTERMS 29

Countertrade Requirements  Refers to all international trade where there is full or partial exchange of goods for goods  Purchasing is often responsible for negotiating and managing countertrade agreements 30

Reasons for Countertrade  Some countries lack hard currency  Countertrade provides 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 31

Types of Countertrade Barter Counter- purchase Offset Buy- back Switch trading 32

Barter  Straight exchange of goods for goods with no exchange of currency  Involves single contract  Usually relates to specific transaction and covers shorter period of time 33

Counterpurchase  Requires selling firm to purchase specified amount of goods from country that purchases its products  Generally percentage of original sale  Involves products unrelated to company’s primary business  Issue of disposition of goods 34

Offset  Closely related to counterpurchase  Generally percentage of original sale over specified period  Government or military items 35

Buy-Back  Sometimes called compensation trading  Occurs when …  Building a plant in third world country or  Providing services, equipment, or technology to support a plant  Building company agrees to buy back some or all of plant’s output as payment 36

Switch Trading  Occurs when selling company agrees to accept goods from buying country as partial payment  Company may decide to utilize third- party to sell or market goods 37

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 38

International Transaction Costs  Base price  Tooling  Packaging  Escalation  Transportation  Customs duty  Insurance premiums  Payment terms  Fees and commissions  Port terminal and handling fees  Customs brokers’ fees  Taxes  Communication costs  Payment and currency fees  Inventory carrying costs 39

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 40

Measures to Deal with Currency Risk  PPP(Purchasing Power Parity)  Purchase in U.S. dollars  Sharing currency fluctuation risk  Currency adjustment contract clauses  Currency hedging  Finance department expertise  Tracking currency movements 41

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 42