Purchasing and Supply Chain Management
Worldwide Sourcing
Chapter
Chapter 10
10
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Chapter Overview
™Globalization offers the best opportunity to
achieve major performance gains.
™This chapter discusses why companies
source worldwide.
™The challenges of international sourcing are
presented in relation to domestic sourcing.
™The final section discusses the progression
from international purchasing to global
sourcing.
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An Overview of
Worldwide Sourcing
Dramatic increase in foreign purchasing by
U.S. companies over past several decades.
•
Percentage of companies sourcing worldwide:
– 1973 --- 1975
• Increased from 21% to 45%
– 1975 --- 1982
• Increased from 45% to 56%
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An Overview of
Worldwide Sourcing
Dramatic increase in worldwide sourcing by
U.S. companies over past several decades.
•
Percentage of companies sourcing worldwide:
– 1982 --- 1987
• Increased from 56% to 71%
– 1987 --- Present
• Accelerated growth of worldwide sourcing
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Why Source Worldwide
•
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•
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Cost/Price Benefits
Access to 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
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Barriers to Worldwide Sourcing
• Lack of understanding of International
procedures
• Lack of knowledge of documentation
• Resistance to change
• Domestic market nationalism
• Longer leadtimes and material pipelines
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Barriers to Worldwide Sourcing
• Logistical, political, financial risks
• Lack of knowledge of foreign business
practices
• Language and cultural differences
• Negotiations can be difficult
• Engineering changes, changes in general
difficult
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Overcoming Barriers
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Education and training
Publicizing success stories
Globally linked CAD systems
Globally linked information systems
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Overcoming Barriers
• Foreign suppliers with U.S.-based support
personnel
• Measurement and Reward systems that
encourage worldwide sourcing
• Use of third-party agents or
intermediaries
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Progressing to Worldwide
Sourcing
• Obtaining information about worldwide
sources - Where do you look for sources?
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International Industrial Directories
Trade shows
Trading companies
Third-party support
Trade consulates
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Progressing to Worldwide
Sourcing
• Supplier selection issues – Don’t assume
the foreign supplier can meet your
requirements.
– Evaluate foreign companies as you would
domestic organizations.
– Trial orders may help establish a performance
record.
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Progressing to Worldwide
Sourcing
• Cultural understanding
• Culture is the sum of the understandings that
govern human interaction in a society. These
understandings result in two broad areas of
differences across countries:
– Values (the way people think)
– Behavior (the way people act) Example--our view on
lateness compared with other cultures)
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Progressing to Worldwide
Sourcing
• Cultural understanding
• Knowing where and how cultural differences will
appear improves a buyer’s comfort and
effectiveness
• Major complaint about Americans is our
ignorance of other cultures
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Progressing to Worldwide
Sourcing
• Cultural understanding - Differences in
manners are usually not problems unless taboos
are violated
– Taboos are very deeply held prescriptions
• Example: It is totally incorrect to hand something
using your left hand in the Middle East
• Example: Wearing a white shirt signifies death and
mourning in the Philippines
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Progressing to Worldwide
Sourcing
• Language and communication differences
If a supplier is using English as a second
language, the buyer should be responsible
for preventing communication problems.
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Progressing to Worldwide
Sourcing
• Language and communication differences
• Adjust your speaking style
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Slow down
Use extra presentation graphics
Write down big numbers
Watch your language (profanity, jargon, acronyms)
Watch your grammar
Watch your body language
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Progressing to Worldwide
Sourcing
• Language and communication differences
• The two largest differences in communication
styles across countries are message speed and
level of content
– Americans generally give fast messages with the
conclusions expressed first. This style is inappropriate
in many countries, particularly Europe
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Progressing to Worldwide
Sourcing
• Language and communication differences
• The two largest differences in communication
styles across countries are message speed and
level of content (cont’d).
– High-context communication assumes the receiver
already understands a great deal of background
information
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Progressing to Worldwide
Sourcing
• Language and communication differences
-Bring an interpreter to all but the most informal
meetings. Allow an extra day to educate
interpreters on your issues and vocabulary
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Progressing to Worldwide
Sourcing
• Language and communication differences
-Document, in writing, the conclusions and
decisions made in a meeting prior to leaving
-Remember that many words do not translate
well
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Progressing to Worldwide
Sourcing
• Logistical issues - Don’t underestimate the
effects of an extended pipeline.
• Many foreign countries have less developed
infrastructures than the U.S.
• This can result in a higher total landed cost
for foreign goods.
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Progressing to Worldwide
Sourcing
• Legal issues
– The U.S. uses common or case law, which leads
to lengthier and more detailed contracts than
are found in countries that use code or civil
law.
– Many foreign countries do not like to deal with
U.S. law and long contracts.
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Progressing to Worldwide
Sourcing
• Legal issues
– Bribery (facilitating payments) and
reciprocity, while illegal in the U.S., are often
not illegal oversees.
– Have a written and signed document that
describes the expectations of the buyer and
seller. It does not have to look like a U.S.
contract.
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Progressing to Worldwide
Sourcing
• Legal issues
– Advanced, industrial countries have legal
systems that can be trusted to treat foreign
companies fairly. Developing countries may
not.
– There is no effective legal protection in many
countries against intellectual property piracy.
Perform a thorough reference check of
prospective suppliers.
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Progressing to Worldwide
Sourcing
• Legal issues
– True international contracts exist if they follow
the Convention on the International Sale of
Goods (CISG). The U.S. has signed this
convention .
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Progressing to Worldwide Sourcing
•Organizational Issues
Organizational
Support Mechanisms
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International purchasing offices
Worldwide commodity teams
Third-party support
Worldwide strategy review and
coordination sessions
Executive steering committee
support and guidance
Lead buyers as worldwide
experts
Global matrix structures
Information technology systems
Finished goods trading
companies
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Progressing to Worldwide
Sourcing
• Organizational Issues - What do International
Purchasing Offices (IPOs) do to support
international purchasing?
– Identify foreign suppliers
– Solicit quotes
– Expedite and trace shipments
– Negotiate supply contracts
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Progressing to Worldwide
Sourcing
• Organizational Issues - What do International
Purchasing Offices (IPOs) do to support
international purchasing?
– Obtain product samples
– Manage technical problems
– Represent the buying firm to the suppliers
– Manage countertrade
– Perform site visits
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Progressing to Worldwide
Sourcing
• Countertrade Requirements
• Countertrade refers to international trade where
buyer and seller have at least a partial exchange
of goods for goods
• Reasons countertrade evolves:
– Lack of hard currency to purchase imported goods
– Provides a means to sell products in markets in which
a country may have otherwise lacked access.
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Progressing to Worldwide
Sourcing
• Countertrade Requirements
• U.S. government now takes a more pragmatic
view of countertrade
• More common with military or high dollar
contracts
• Purchasing is often a reactive part of
countertrade (to support marketing and sales)
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Types of Countertrade
• Barter –goods for goods
• Counterpurchase – counterpurchase of % of
amount of original sale in another industry
• Offset – similar to above but in same industry
• Buy-Back – portion of output for payment of
services
• Switch Trading – brokering the goods or credits
for the goods through a third party.
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Progressing to Worldwide
Sourcing
• Costs associated with worldwide sourcing
• Total cost in international purchasing is also
called landed cost
• International purchasing may include many
additional cost components compared with
domestic purchasing…
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Unit price
Tooling
Packaging
Transportation
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Progressing to Worldwide
Sourcing
• Costs associated with worldwide sourcing
• International purchasing may include many
additional cost components compared with
domestic purchasing (cont’d)…
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Duties/Tariffs
Insurance premiums
Payment terms
Fees and commissions
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Progressing to Worldwide
Sourcing
• Costs associated with worldwide sourcing
• International purchasing may include many
additional cost components compared with domestic
purchasing (cont’d)…
– Port terminal and handling fees
– Customs broker fees
– Taxes
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Progressing to Worldwide
Sourcing
• Costs associated with worldwide sourcing
• International purchasing may include many
additional cost components compared with
domestic purchasing (cont’d)…
– Communication costs
– Payment and currency fees
– Inventory carrying costs
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Progressing to Worldwide
Sourcing
• Managing international currency risk
• U.S. company purchased machine from Canada
in June:
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$100,000 Canadian for payment in November
Exchange rate in June $1U.S. = $1 Canadian
Exchange rate in November $1U.S = $.90 Canadian
Now $100,000 U.S. = $90,000 Canadian
At .9 exchange rate $100,000 U.S. = $111,111 U.S.
Cost of machine additional $11,111U.S.
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Progressing to Worldwide
Sourcing
Currency Risk Management
• Approaches for managing
currency risk…
– Purchase in U.S. dollars
– Sharing currency risk
– Currency renegotiation or
adjustment clauses
– Currency hedging
– Finance department
expertise
– Currency forecasting
– Escape clauses
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Currency Risk Management
Currency Adjustment Clauses
• Two major types of adjustment or
renegotiation clauses:
– Delivery-triggered adjustment clause
– Time-triggered adjustment clause
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Currency Risk Management
Delivery-Triggered Adjustment Clauses
A contract for 3000 castings with Nippon Steel is issued on June 1, with delivery
of 1000 castings on June 30, July, 30 and August 30. A currency adjustment
clause is written in the contract establishing a base exchange rate of 100 yen per
dollar +/- 4%.
Upper Boundary
104 Yen/$
100 Yen/$ base
Lower Boundary
Currency Range
96 Yen/$
June 30: Yen appreciates to 90 yen per dollar. What should happen?
July 30: Yen is 97 yen per dollar. What should happen?
August 30: Yen moves to 100 yen per dollar. What should happen?
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Currency Risk Management
Time-Triggered Adjustment Clauses
An annual contract for castings is agreed to with Nippon Steel. A time
triggered currency clause is agreed to with reviews made quarterly. The
base exchange rate is 100 yen per dollar +/- 4%. Adjustment review dates
are April 1, July 1, and October 1.
Upper Boundary
104 Yen/$
100 Yen/$ Base
Lower Boundary
Currency Range
96 Yen/$
April 1: Yen appreciates to to 95 yen per dollar. What should happen?
July 1: Yen moves to 99 yen per dollar. What should happen?
July 30: Yen depreciates to 106 yen per dollar. What should happen?
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Currency Risk Management
Currency Hedging
• Hedging involves the purchase and sale of
currency contracts
• Motivation for hedging is risk aversion
and not monetary gain
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Currency Risk Management
Currency Hedging
• Two primary kinds of hedging
– Futures exchange contracts
• Trade on currency spot market exchanges
– Forward exchange contracts
• Issued by banks and traded among
institutions
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Currency Risk Management
Currency Hedging - Forward Exchange Contract
A buying firm purchases 300,000 French motors on September 1 at a cost
of 4 francs each. Delivery and payment will occur on December 1. Total
contract requires payment of 1,200,000 francs
Buyer takes no steps to protect contract from currency fluctuation
-Exchange rate on September 1: 1 franc = $.1530
-Expected total cost of contract on September 1 = (300,000 x 4 x .1530) =
$183,600
-Exchange rate on December 1: 1 franc = $.1820
-Expected total cost of contract on December 1 = (300,000 x 4 x .1680) =
$201,600
-Contract price increased 10% due to currency changes
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Currency Risk Management
Currency Hedging - Forward Exchange Contract
A buying firm purchases 300,000 French motors on
September 1 at a cost of 4 francs each. Delivery and payment
will occur on December 1. Total contract requires payment of
1,200,000 francs
Buyer purchases a 90 day forward exchange contract
-Exchange rate on September 1: 1 franc = $.1530
-90 day forward rate is 1 franc = $ .1545
-Expected total cost of contract with 90-day forward rate lockin: (300,000 x 4 x .1545) = $185,400 plus bank fees
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International Purchasing Benefits
Low er purchase price/cost
5.04
Greater access to product technology
3.49
Im proved supplier relationships
3.46
Greater access to process technology
3.46
Greater appreciation of purchasing
3.44
Higher user satsifaction w ith purchasing
3.36
Higher m aterial, com ponent, or service quality
3.25
Greater supplier responsiveness
3.08
Im proved sharing of inform ation w ith suppliers
3.04
Im proved delivery reliability
3.04
1
2
3
4
5
6
7
1= not realized, 4 = moderately realized, 7 = extremely realized
Average across 16 benefits = 3.2
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N = 83
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Global Sourcing Benefits
Lower purchase price/cost
5.98
Greater access to product technology
4.69
Improved supplier relationships
4.61
Greater access to process technology
4.54
Greater supplier responsiveness
4.47
Greater appreciation of purchasing
4.25
Better management of supply chain inventory
4.25
Greater standardization of the sourcing process
4.25
Higher material, component, or service quality
4.16
Improved sharing of information with suppliers
4.1
1
2
3
4
5
6
7
1= not realized, 4 = moderately realized, 7 = extremely realized
Average across 16 benefits = 4.23
Purchasing and Supply Chain Management, 3e Monczka/Trent/Handfield
N = 55
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Global Sourcing Future Directions
• Continued refinement/development of the global
sourcing process
• Develop or obtain human resources with higherlevel skills and a willingness to view the supply
network from a worldwide perspective
• Develop global performance measures
• Establish integrated systems between worldwide
units and with suppliers
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Global Sourcing Future Directions
• Increased emphasis on doing business with
suppliers that have global capabilities
• Global sourcing focus will shift from part
sourcing to subsystem and system sourcing
• Cost reduction pressures will encourage an
increased emphasis on emerging supply markets
during the development of global agreements
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