Current Event Assignments 2

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Chapter 14

Global Supply Management

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Key Questions Addressed in Chapter 14

How do we select and manage offshore suppliers?

How do we assure value from our global supply network?

World Trade

Total value of world merchandise trade imports in 2016: $15.8 trillion; value of exports: $15.5 trillion

The worldwide value of world merchandise trade imports and exports more than doubled between 2003 and 2016.

Top five merchandise exporters represented approximately 40 percent of world exports: China (13.6 percent), the United States (9.4 percent), Germany (8.7 percent), Japan (4.2 percent), and the Netherlands (3.7 percent)

Reasons for Global Purchasing

Unavailability of items domestically

Price and total cost

labor costs, exchange rates, equipment and processes, product and pricing focus

Government pressures and trade regulations

Quality

Faster delivery and continuity of supply

Better technical service

Technology

Marketing tool

Tie-In with offshore subsidiaries

Competitive clout or leverage

Potential Problem Areas in Global Supply Management

Source location and evaluation

Lead time and delivery

Expediting

Political, labor, and security problems

Hidden costs

Currency fluctuations

Payment methods

Quality

Warranties and claims

Tariffs and duties

Administration costs

Legal issues

Logistics and transportation

Language

Communications

Cultural and social customs

Ethics and sustainability

Potential Hidden Costs

Currency exchange premiums

Commissions to customs brokers

Terms of payment costs and finance charges

Foreign taxes imposed

Import tariffs

Extra safety stock/buffer and transit inventory; 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 fees, and warehouse costs

Additional security measures

Global Sourcing Organizations

Regional purchasing offices

Organized geographic regions

Global commodity management organization

Large number of common requirements across facilities or business units and the supply base is not always located in the same geographical area as the buying company’s operations

Local supply managers can focus on identifying capable, local suppliers

International purchasing office (IPO)

Separate purchasing organization usually reporting to corporate/head office purchasing department

Intermediaries

Import brokers and agents

Assist in locating suppliers and handling paperwork

Import merchants

Buy the product, take title and deliver it to buyer

Supplier’s subsidiary

Sales representatives

Trading company

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 in major cities worldwide

Supply organizations at other companies

Supply chain partners

Supplier locator directories

Thomas Register, Dun & Bradstreet

Importers and foreign trade brokers

Other sources; suppliers, banks

Incoterms

Developed by the International Chamber of Commerce

Updated: Incoterms 2010

Internationally recognized standard definitions; describe the responsibilities of a buyer and seller in a transaction

May vary across regions and among carriers

11 standard Incoterms in 2 groups:

Rules for Any Form of Transport

Rules for Sea and Inland Waterway Transport Only

Each term must be followed by a geographic location, such as a port or city

Incoterms: Any Form of Transport

EXW – Ex Works (named place of delivery)	The buyer takes possession of the goods at the point of origin and bears all costs and risks associated with transporting the goods to the destination. Regarded as the most open-ended and simplest terms for exporters because of the minimal responsibilities for the seller.
FCA – Free Carrier (named place of delivery)	The seller delivers the goods, cleared for export, to the carrier designated by the buyer at a named location. The seller is responsible for loading the goods onto the buyer’s carrier. More practical than EXW because it includes loading the goods, this is commonly expected, and clearing for export so to avoid export violations.
CPT – Carrier paid to (named place of destination)	The seller pays for carriage to the named place of destination and risk is assumed by the buyer when the goods are transferred to the first carrier.
CIP – Carriage insurance paid (named place of destination)	The seller pays for carriage and insurance to the named place of destination and risk is assumed by the buyer when the goods are transferred to the first carrier
DAT – Delivered at terminal (named place of destination)	The seller is responsible for carriage to the terminal and assumes risks prior to unloading. The buyer is responsible for import clearance and further carriage to final destination.
DAP – Delivered at place (named place of destination)	The seller is responsible for delivery of the goods to the named place (usually the buyer’s facility or other location that is not a terminal) and assumes all risks prior to unloading. The buyer is responsible for import clearance.
DDP – Delivered duty paid (named place of destination)	The seller is responsible for delivering the goods to a named place of destination in the country of the buyer, including clearing import customs, and pays all costs to get the goods to the destination including import duties and taxes. This term places maximum responsibility on the seller.

Incoterms: Sea and Inland Waterway Transport Only

FAS – Free alongside ship (named port of shipment)	The seller is responsible for placing the goods alongside the ship at the named port. The buyer assumes subsequent costs and responsibilities, including clearing customs at country of export. Suitable for heavy-lift or bulk cargo.
FOB – Free on board (named port of shipment)	The seller is responsible for delivery of the goods to the port, loading the goods aboard the vessel and clearing customs at the country of export. The buyer accepts the risk when the goods pass over the ship’s rail. FOB is sometimes referred to as “freight on board.”
CFR – Cost and freight (named port of destination)	The seller is responsible for arranging freight and paying for the costs of shipping the goods to the port of destination and for clearing the goods for export. The goods are considered delivered once loaded on the ship and the buyer assumes the risks from that point, including insurance.
CIF – Cost, insurance and freight (named port of destination)	The seller is responsible for clearing the goods for export and the costs and freight to deliver the goods to the port of destination. Although the goods are considered delivered once loaded on the ship, the seller is responsible for obtaining marine insurance against the buyer’s risk of lost or damage during transit. CIF is identical to CRF except the seller pays for insurance.

Countertrade

When a company promises to buy material, products or services from a country in return for the privilege of selling in the country

Supply function may:

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

Types of Countertrade: Barter/Swaps

Barter: the exchange of goods instead of cash

a country short of hard currency may agree to exchange its product for another country’s product

exchanging equivalent dollar values

Swap: if goods of the same kind and are exchanged to save transportation costs

for example: agricultural items or chemicals

Types of Countertrade: Offsets

Part of the countertrade must be used to purchase government and/or military-related exports

The selling company agrees to purchase a given percentage of the sales price in the customer country

Types of Countertrade: Counterpurchase

Requires the initial exporter to buy (or to find a buyer for) a specified value of goods (often stated as a percentage of the value of the original export) from the original importer during a specified time period

Types of Countertrade: Buyback/Compensation

The selling firm agrees to set up a producing plant in the buying country or to sell the country capital equipment and/or technology

The original seller agrees to buy back a specified amount of what is produced by the plant, equipment, or technology.

Buyback agreements can span 10 or more years

Types of Countertrade: Switch Trade

A third party applies its “credits” to a bilateral clearing arrangement

The credits are used to buy goods and/or services from the company or country in deficit

Usually handled by a broker or trading house

Foreign Trade Zones (FTZ)

An isolated, enclosed area in or adjacent to a port of entry, used to import, process, and reship products to foreign markets

Purpose: avoid, postpone, or reduce tariff on imports

FTZ’s differ depending on their major functions

transshipments, storage, exhibition and display, manufacturing

Mexico’s maquiladoras and special economic zones of China (SEZs)are examples a FTZ

Bonded Warehouses

Used to store goods until duties are paid or goods are otherwise properly released

To exempt the importer from paying duty on foreign commerce that will be re-exported

To delay payment of duties until the owner moves the merchandise into the host country

Temporary Importation Bond (TIB) and Duty Drawback

TIB: Permits certain classes of merchandise to be imported into the United States

Net effect: no duty paid on merchandise if re-exported

Duty drawback: permits a refund of duties paid on imported materials that are exported later

Buyer enters a duty drawback contract with the U.S. government, imports for manufacture/pays duty

Duty drawback obtained once re-exported according to timing rules

Regional Trade Agreements

Efforts to eliminate trade barriers result in bilateral, regional, and global trade agreements

Implications for supply managers:

know the major trading partners with their countries

know what trade agreements are in place

know what opportunities exist in emerging markets

Data on trading patterns of countries and regional trading blocks available from the World Trade Organization (wto.org)

Examples of Regional Trade Agreements

North American Free Trade Agreement (NAFTA)

Canada, United States, and Mexico

The European Union (EU)

2013 the EU included 28 member states

Association of South East Asian Nations (ASEAN)

10 South East Asian countries

Mercosur (El Mercado Común del Sur)

Argentina, Brazil, Paraguay, and Uruguay, plus associate members

China has China had 16 trade agreements, including ASEAN, Australia, South Korea, and New Zealand.

Emerging Markets

Countries that are progressing to becoming more advanced by undergoing a high economic growth, economic and trade liberalization, and the establishment of sound economic and government policies

Emerging markets by region:

The Americas (Brazil, Chile, Columbia, Mexico, and Peru)

Europe, the Middle East, and Africa (Czech Republic, Egypt, Greece, Hungary, Poland, Russia, South Africa, Qatar, Turkey, and the United Arab Emirates)

Asia (China, India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Taiwan, and Thailand)

MSCI Emerging Markets Index (msci.com)