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The “Medley” Presentation From Chapters 11-14

IDIS 424

Spring 2004

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Worldwide Sourcing

IDIS 424Spring 2004

Chapter 11

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International versus Global Sourcing

What is the difference between international purchasing and global sourcing?

International purchasingInternational purchasing is the process of buying goods and services from suppliers outside your firm or business unit’s country of operation

Global sourcingGlobal 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

International purchasing topics… 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

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

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

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

Lower Boundary

104 Yen/$

96 Yen/$

Currency Range

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?

100 Yen/$ base

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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

Lower Boundary

104 Yen/$

96 Yen/$

Currency Range

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?

100 Yen/$ Base

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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

International industrial directories Trade shows Trading companies Internet External agents Trade consulates Internal sources Sales brochures and catalogs

Where do we find information about worldwide suppliers?

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Global Sourcing Benefits

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

Purchase Price

Total Cost of Ownership

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Global Sourcing Benefits

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

Supplier Quality

Delivery Cycle Time

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Global Sourcing Benefits

On-time delivery performance improved 3% on average

32.3% of firms report that on-time delivery performance improved

46.7% report no change 21% report that delivery

performance worsened

On-Time Delivery Performance

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Chapter 12

Purchasing Tools and Techniques

IDIS 424

Spring 2004

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Standard ANSI Process Flow Chart Symbols

Operation

Transport

Storage

Decision

Inspection/Approval

Delay

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ANSI Process Flow Chart:Stores Requisition Process

UserCompletesRequisition

Wait inInternal Mail

Deliver toStores

Wait inStores In-Box

ClerkEntersOrder

InStock?

NotifyUser

N

YPickOrder

FileRequisition

CheckOrder

Deliver toUser

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Process Flow Charting - Considerations

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

Gain a clear understanding of how the process actually works Capacities Cycle times

Highlight potential improvement opportunities Unnecessary steps Redundant steps Inefficient sequencing of steps Identification of bottlenecks

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Value Analysis

What is value analysis? 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

What is value analysis? 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

InformationPhase

InformationPhase

SpeculativePhase

SpeculativePhase

Analytical Phase

Analytical Phase

Execution Phase

Execution Phase

ConclusionPhase

ConclusionPhase

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Chapter 13

Strategic Cost Management

IDIS 424

Spring 2004

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Cost-related Concepts

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

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: Fixed costs Variable costs Mixed costs Semifixed costs Semivariable costs

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Cost Behavior Patterns

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

“Unique Products” “Critical Products”

“Generics” “Commodities”

Low High

Value (Cost, Service, Administration)

High

Risk

Low

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Generics

Low Value, Low Risk Strategies

Standardize / consolidate Critical Factors

Reduce cost of acquisition Metrics:

Total Delivered Cost Reduction Percent of CGS Improvement Transportation cost reduction

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Commodities

High Value, Low Risk Strategies

Leverage preferred suppliers Critical Factors

Reduce cost of materials Metrics

Price change improvement to market index

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Unique Products

High Risk, Low Value Strategies

Preferred suppliers Critical Factors:

High costs when cost/quality problems occur Metrics

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

High Risk, High ValueStrategies

Strategic supplier partnerships Critical Factors

High costs when cost/quality problems occur Metrics

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

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Purchase Negotiation

Negotiation Overview-- 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

Negotiation Overview-- 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

Purchase negotiation involves a five-step process

Identify or Anticipatea Purchase

Requirement

Identify or Anticipatea Purchase

Requirement

Determine ifNegotiation is

Required

Determine ifNegotiation is

Required

Plan for theNegotiation

Plan for theNegotiation

Conduct the Negotiation

Conduct the Negotiation

Execute theAgreement

Execute theAgreement

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Negotiating Tactics

Examples of Tactics

Low BallLow Ball Honesty/OpennessHonesty/Openness

Price IncreasePrice Increase

ScarcityScarcity

Best and Final OfferBest and Final Offer SilenceSilence

High BallHigh Ball

Strong Initial OfferStrong Initial Offer

Phantom Quotesor Offers

Phantom Quotesor Offers

Plannedconcessions

Plannedconcessions

Use of powerUse of power

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Win-Win Negotiation

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

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

Win-win negotiation applies only to certain situations-- 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

Successful purchasing negotiators share some common attributes-- 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