OSCM Ch 8, 9,and 10
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chapter_10_worldwide_sourcing.pptxWorldwide Sourcing
Chapter 10
OSCM 3660:002 Strategic Sourcing
Spring 2016
Sandeep Jagani
PURCHASING & SUPPLY CHAIN MANAGEMENT, 5e
© 2012 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publically accessible website, in whole or in part.
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Chapter Overview
Worldwide sourcing overview
Developing a worldwide sourcing program
Moving to a global sourcing philosophy
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Impact of Globalization
Interdependence
Connectivity
Integration of economies
Social
Technical
Political
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Impact of Globalization
Cost savings opportunities on supply side
Opportunities for new markets on demand side
Issue of trade balances and currency fluctuations
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U.S. Trading Partners (2009)
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Billions of U.S. Dollars
Column1 Taiwan Netherlands France S. Korea U.K. Germany Japan Mexico China Canada 46 47 61 68 93 115 147 306 366 430
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
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Why Source Worldwide?
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Cost/Price benefits
Access to technology
Quality
Availability
Competition to domestic suppliers
Meet competitors’ buying patterns
Presence in foreign markets
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
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Barriers to Worldwide Sourcing
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Lack of skills
Resistance
to change
Longer lead times
Customs, language, and culture
Currency fluctuations
Increased supply risk
Lack of Knowledge and Skills
Ignorance of intricacies of global sourcing
How to identify potential sources of supply
Documentation issues
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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
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Resistance to Change
Established, routine sourcing patterns
Shifting from longstanding suppliers
Domestic market nationalism
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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
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Other Barriers
Offshore business practices
Language
Culture
More difficult negotiations
Need to more closely manage delivery and engineering changes
More difficult interpersonal relationships
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Currency Fluctuations
Daily or hourly fluctuations
Need to understand highly complicated financial options
How to price purchases
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Increased Supply Risks
Need for critical assessment
Prior to sourcing
Look at more than just price
Types of risks vary between different countries
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Overcoming Barriers to Worldwide Sourcing
Education and training
Publicizing success stories
Globally linked technologies
Supplier providing U.S.-based support personnel
Measurement and reward systems
Third-party intermediaries or agents
Top management support
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Developing a Worldwide Sourcing Program
No suitable domestic supplier exists
Competitors are gaining competitive advantage from overseas suppliers
Triggering events in supply markets
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Information about worldwide sources
Supplier qualification and selection issues
Understanding cultural issues
Language and communication differences
Logistical issues
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Developing a Worldwide Sourcing Program
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From Domestic to International
Legal systems
Countertrade requirements
Costs associate with international purchasing
Managing currency risks
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Developing a Worldwide Sourcing Program
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Triggering Events
Supply disruption
Rapidly changing currency exchange rates
Declining domestic supply base
Inflation within home market
Sudden emergence of worldwide competitors
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Information about Worldwide Sources
Worldwide sourcing directories
Trade shows
Intermediaries and organizations
Trading companies
Third-party support
Trade consulates
Foreign nationals
International purchasing offices (IPOs)
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Role of IPOs
Identify potential suppliers
Solicit quotes or proposals
Expedite and trace shipments
Negotiate supply contracts
Obtain product samples
Manage technical and commercial concerns
Represent the buyer to suppliers
Manage counter-trade requirements
Perform supplier site visits
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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?
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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?
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Supplier Qualification
and Selection Issues
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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?
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Supplier Qualification
and Selection Issues
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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?
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Supplier Qualification
and Selection Issues
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Understanding Cultural Issues
Culture is “sum of all understandings that govern human interaction in society”
Language
Religion
Values and attitudes
Customs
Social institutions
Education
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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
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Language Differences
Communicating purchase requirements clearly and effectively
Not everyone speaks and understands English the same way Americans do
Message speed
Level of content
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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
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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
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Logistical Issues
Extended pipelines
Additional planning and management required
Shipping delays are to be expected
Often less capable transportation infrastructure
Role of INCOTERMS
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INCOTERMS 2010
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| Location Freight Responsibility | Seller Premise | Export Formalities | Named Place or Terminal | Loading Port of Shipment | On Board Ship/Rail/ Plane | Discharge Port of Arrival | Named Place or Terminal | Import Formalities | Buyer Premise |
| Ex Works (EXW) | Seller *** | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| Free Carrier (FCA)1 | Seller *** | Seller | Seller *** | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| Free Alongside Ship (FAS) | Seller | Seller | Seller | Seller *** | Buyer | Buyer | Buyer | Buyer | Buyer |
| Free on Board (FOB) | Seller | Seller | Seller | Seller | Buyer *** | Buyer | Buyer | Buyer | Buyer |
| Cost & Freight (CFR) | Seller | Seller | Seller | Seller | Buyer *** | Buyer | Buyer | Buyer | Buyer |
| Cost, Insurance,& Freight (CIF) | Seller | Seller | Seller | Seller | Buyer *** | Buyer | Buyer | Buyer | Buyer |
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INCOTERMS 2010
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| Location Freight Responsibility | Seller Premise | Export Formalities | Named Place or Terminal | Loading Port of Shipment | On Board Ship/Rail/ Plane | Discharge Port of Arrival | Named Place or Terminal | Import Formalities | Buyer Premise |
| Carriage Paid to (CPT)2 | Seller *** | Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| Carriage & Insurance to (CIP)2 | Seller *** | Seller | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer | Buyer |
| Delivered at Terminal (DAT) | Seller | Seller | Seller | Seller | Seller | Seller *** | Buyer | Buyer | Buyer |
| Delivered at Place DAP) | Seller | Seller | Seller | Seller | Seller | Seller | Seller *** | Buyer | Buyer |
| Delivered Duty Paid (DDP) | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller | Seller *** |
Notes:
*** Where risk passes
1 Delivery can occur at seller premise or place of departure
2 Risk passes from seller to buyer when the goods are delivered to the first carrier
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Legal Issues
Common law vs. codified or civil law
Different levels of protection for the buyer
Role of trust and personal relations
Intellectual property issues
U.N.’s Convention on Contracts for the International Sale of Goods (CISG)
World Trade Organization (WTO)
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U.S. Foreign Corrupt Practices Act
Designed to prevent companies from making questionable or illegal payments to foreign officials, politicians, and political parties to secure or retain business
Applies to U.S. citizens and their agents
Requires accurate recordkeeping and adequate controls
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U.S. Foreign Corrupt Practices Act
Also applies to foreign nationals who make such payments while in U.S.
No dollar threshold amount
Enforcement focuses on intent
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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
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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
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Types of Countertrade
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Barter
Counter-purchase
Offset
Buy-back
Switch trading
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
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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
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Offset
Closely related to counterpurchase
Generally percentage of original sale over specified period
Allowed to offset its countertrade requirements with any company or industry – more flexible
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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
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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
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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
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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
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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
Revocable vs. irrevocable
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Port Terminal and Handling Fees
Unloading of cargo
Administrative services of port authority personnel
General use of port
Temporary storage for goods awaiting customs and/or documentation clearance
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Measures to Deal with Currency Risk
Purchase in U.S. dollars
Sharing currency fluctuation risk
Currency adjustment contract clauses
Delivery-triggered vs. time-triggered
Currency hedging
Finance department expertise
Tracking currency movements
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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
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Moving to a Global Sourcing Philosophy
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Purchasing & Supply Chain Management, 5e
Domestic purchasing
Level I – no foreign purchases
International purchasing
Level II – foreign purchases as needed
Level III – part of strategic sourcing
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Moving to a Global Sourcing Philosophy
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Purchasing & Supply Chain Management, 5e
Global sourcing
Level IV – integration and coordination of global sourcing strategies across worldwide business units
Level V – integration and coordination of global sourcing strategies with other functional groups
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Global Sourcing Success Factors
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Defined process to support global sourcing
Site-based and decentralized control of operational activities
Information sharing with suppliers
Availability of critical resources
Sourcing and contracting systems
Centrally coordinated and centrally led decision making
Real-time communication tools
International purchasing office support
Future Trends in Global Sourcing
Development of higher level skill sets
Need to reach agreement on global performance measures
Need to establish integrated systems
Continued development and refinement of global sourcing strategies
Greater internal integration
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Future Trends in Global Sourcing
Seeking suppliers highly capable of conducting global business
Shift from component sourcing to subsystems, systems, and services sourcing
Continued cost reduction pressures
More suppliers in low-cost, emerging markets
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