The “Medley” Presentation
From Chapters 11-14
IDIS 424
Spring 2004
1
Chapter 11
Worldwide Sourcing
IDIS 424
Spring 2004
2
International versus Global Sourcing
What is the difference between international
purchasing and global sourcing?
International purchasing is the process of
buying goods and services from suppliers outside
your firm or business unit’s country of operation
Global sourcing refers to the proactive
integration and coordination of material and
service requirements across worldwide business
units, looking at common items, processes,
technologies, designs, sourcing practices, and
suppliers
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Key International Purchasing Issues
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International purchasing
topics…
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Culture
Language and
communication
Law
Total or landed cost
Organization
Risk management, including
currency risk management
Countertrade
Sources of international
information
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Law
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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
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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Law
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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
True international contracts exists if they follow the
Convention on the International Sale of Goods (CISG).
The U.S. has signed this convention
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Total Cost
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Total cost in international purchasing is also called
landed cost
International purchasing may include many additional
cost components compared with domestic
purchasing…
 Unit price
 Tooling
 Packaging
 Transportation
 Duties/tariffs
 Insurance premiums
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Total Cost

International purchasing may include many
additional cost components compared with
domestic purchasing…
 Payment terms
 Fees and commissions
 Port terminal and handling fees
 Customs broker fees
 Taxes
 Communication costs
 Payment and currency fees
 Inventory carrying costs
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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 to be on June 30, July, 30 and August 30. A currency adjustment clause
is written into 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 to be 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 - 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 lock-in: (300,000 x 4 x
.1545) = $185,400 plus bank fees
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Sources of Information
Where do we find information about worldwide suppliers?
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International industrial directories
Trade shows
Trading companies
Internet
External agents
Trade consulates
Internal sources
Sales brochures and catalogs
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Global Sourcing Benefits
Purchase Price
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Total Cost of Ownership
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Purchase price decreased 15%
on average
87.6% of firms report that
purchase price declined
9.9% report no change
2.5% report that purchase price
increased
Total cost of ownership
improved 11% on average
72.7% of firms report that total
cost of ownership declined
24% report no change
3.3% report that total cost of
ownership increased
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Global Sourcing Benefits
Supplier Quality
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Delivery Cycle Time
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Supplier quality improved 6%
on average
42.6% of firms report that
supplier quality improved
54.1% report no change
3.3% report that supplier quality
decreased
Delivery cycle time lengthened
5% on average
23.3% report that delivery cycle
time shortened
34.2% report no change
42.5% report that delivery cycle
time lengthened
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Global Sourcing Benefits
On-Time Delivery Performance
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On-time delivery performance
improved 3% on average
32.3% of firms report that ontime delivery performance
improved
46.7% report no change
21% report that delivery
performance worsened
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Chapter 12
Purchasing Tools and
Techniques
IDIS 424
Spring 2004
17
Standard ANSI
Process Flow Chart Symbols
Operation
Decision
Transport
Inspection/
Approval
Storage
Delay
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ANSI Process Flow Chart:
Stores Requisition Process
User
Completes
Requisition
Clerk
Enters
Order
Wait in
Internal Mail
Deliver to
Stores
Wait in
Stores In-Box
Pick
Order
Deliver to
User
File
Requisition
Check
Order
Y
In
Stock?
N
Notify
User
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Process Flow Charting - Considerations
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Document the process as it IS, not as it’s
supposed to be
Scope - how much of the process do you
want to look at?
Detail - how finely do you want to break down
the process?
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Process Flow Charting - Considerations

Additional dimensions may be included in a
flow chart:
 Information flows
 Time element
 Operations, inspections, delays, transports
 Average and range (or maximum)
 Distance moved
 Resources required
 Capacity
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Process Flow Charting - Benefits
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Gain a clear understanding of how the
process actually works
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Capacities
Cycle times
Highlight potential improvement opportunities
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Unnecessary steps
Redundant steps
Inefficient sequencing of steps
Identification of bottlenecks
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Value Analysis
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What is value analysis?
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The organized and systematic study of every element
of cost in a part, material, process, or service to make
certain it fulfills its function for the customer at the
lowest total cost. It employs techniques which identify
the functionality the user wants from the part, material,
process or service
Value = Function/Cost
Function is what a part, material, process, or service
does (noun and a verb)
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Value Analysis
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What is value analysis?
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VA is a continuous improvement technique--it is not
product or service cheapening!!
VA workshops and the VA process are a combination
of group problem solving, project management,
process redesign, and continuous improvement efforts
Applies to manufacturing and non manufacturing
organizations
Value analysis requires inter and intra organizational
integration!!
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Value Analysis
Value Analysis Workshop Steps
Information
Phase
Speculative
Phase
Analytical
Phase
Execution
Phase
Conclusion
Phase
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Chapter 13
Strategic Cost Management
IDIS 424
Spring 2004
26
Cost-related Concepts
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A cost driver is any factor that affects costs. A
change in the cost driver will cause a change
in the total cost
Cost management are actions that managers
take to satisfy customers while continuously
reducing and controlling costs
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Cost Behavior
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Cost behavior refers to the way costs change
with respect to a change in an activity level or
cost driver
Typical cost behavior patterns include:
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Fixed costs
Variable costs
Mixed costs
Semifixed costs
Semivariable costs
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Cost Behavior Patterns
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Fixed costs are costs that do not change with
changes of a cost driver
Variable costs are costs that increase directly
and proportionately with changes of a cost
driver
Mixed costs are costs that have both a fixed
and a variable component
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Framework for Cost Management
High
“Unique Products”
“Critical Products”
“Generics”
“Commodities”
Risk
Low
Low
High
Value (Cost, Service, Administration)
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Generics
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Low Value, Low Risk
Strategies
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Critical Factors
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Standardize / consolidate
Reduce cost of acquisition
Metrics:
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Total Delivered Cost Reduction
Percent of CGS Improvement
Transportation cost reduction
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Commodities
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High Value, Low Risk
Strategies
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Critical Factors
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Leverage preferred suppliers
Reduce cost of materials
Metrics
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Price change improvement to market
index
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Unique Products
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High Risk, Low Value
Strategies
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Critical Factors:
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Preferred suppliers
High costs when cost/quality problems occur
Metrics
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Unit price cost reduction - Actual to actual prices for same
items
Target prices achieved, “Should cost” $
Total Delivered Cost Reduction
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Critical Products
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High Risk, High Value
Strategies
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Critical Factors
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Strategic supplier partnerships
High costs when cost/quality problems occur
Metrics
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Target prices achieved
Unit price cost reduction - Actual to actual prices for same
items
Joint cost savings sharing
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Chapter 14
Negotiation
IDIS 424
Spring 2004
35
Purchase Negotiation
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Negotiation Overview-
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Negotiation is a process of formal communication,
either face to face or via electronic means, where two
or more people come together to seek mutual
agreement about an issue or issues
The process involves the management of time,
information, and power
It is a time-consuming process that requires extensive
planning and a commitment of resources--90% of the
negotiation process involves preparation, not execution
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Purchase Negotiation
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Negotiation Overview-
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Negotiation involves relationships between people, not
just organizations
The primary objective of a purchase negotiation is to
reach an agreement that satisfies both parties
Negotiation is an opportunity to create value within the
supply chain
Good negotiators are not born--they develop their skills
through practice
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Negotiation Framework
Identify or Anticipate
a Purchase
Requirement
Determine if
Purchase negotiation
Negotiation is
involves a five-step process Required
Plan for the
Negotiation
Conduct the
Negotiation
Execute the
Agreement
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Negotiating Tactics
Examples of Tactics
Honesty/Openness
Planned
concessions
Price Increase
Best and Final Offer
Silence
Scarcity
Strong Initial Offer
Use of power
Low Ball
High Ball
Phantom Quotes
or Offers
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Win-Win Negotiation
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Characteristics of win-lose
negotiation- Rigid negotiating
positions
 Argument over a fixed
amount of value
 Strict use of power by
one party over another
 Adversarial competition
played out at the
negotiating table
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Characteristics of win-win
negotiation- Parties try and
understand each other’s
needs and wants
 Parties build on common
ground and work
together to develop
creative solutions that
provide additional value
 Primary use of power is
to focus on common
rather than personal
interests
 Likely to engage in open
sharing of information
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Win-Win Negotiation
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Win-win negotiation applies only to certain
situations-
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Strategically important items or services
Trust between parties exists
Both parties endorse a win-win approach
Discussion Question: How does a
negotiator know when his or her counterpart is
taking a win-win approach?
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Negotiation Conclusions
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Successful purchasing negotiators share
some common attributes-
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They realize that training, planning, and
practice are required to become an effective
negotiator
They have higher negotiating goals and
aspirations than their counterparts
They are destined to be among an
organization’s most valued professionals
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