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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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International Purchasing

Why do we source internationally?

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International Purchasing

What makes international purchasing more complex than domestic purchasing?

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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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Culture

A system of shared beliefs (the way things are done around here)

Values (the way people think) Behavior (the way people act) Major complaint about Americans is their ignorance

of other cultures

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Culture

Differences in manners are usually not problems unless taboos are violated

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

Value Differences harmony Buyer-Seller rank Orientation toward guilt or shame use of first-names

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Language and Communication

If a supplier is using English as a second language, the buyer should be responsible for preventing communication problems

Adjust your speaking style 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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Language and Communication

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

High-context communication assumes the receiver already understands a great deal of background information

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Language and Communication

Bring an interpreter to all but the most informal meetings. Allow an extra day to educate interpreters on your issues and vocabulary

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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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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Organization

International purchasing offices Worldwide commodity teams Third-party support Worldwide strategy review and

coordination sessions Executive steering committee

support and guidance Lead buyers or site experts Global matrix structures Information technology

systems

Organizational Support Mechanisms

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Organization

What do International Purchasing Offices (IPOs) do to support international purchasing?

Identify foreign suppliers Solicit quotes Expedite and trace shipments Negotiate supply contracts Obtain product samples Manage technical problems Represent the buying firm to the suppliers Manage countertrade Perform site visits

International Purchasing Offices

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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

Currency Risk Management

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Currency Risk Management

Two major types of adjustment or renegotiation clauses: Delivery-triggered adjustment clause Time-triggered adjustment clause

Currency Adjustment Clauses

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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

Hedging involves the purchase and sale of currency contracts

Motivation for hedging is risk aversion and not monetary gain

Two primary kinds of hedging Futures exchange contracts

Trade on currency spot market exchanges Forward exchange contracts

Issued by banks and traded among institutions

Currency Hedging

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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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Countertrade

Countertrade refers to international trade where buyer and seller have at least a partial exchange of goods for goods

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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Countertrade

Forms of countertrade...

Barter

Counterpurchase

Offset

Buy-Back

Switch Trading

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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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Key Differentiates of A Successful Global Sourcing Progarm

Develop a well defined process Involve the “right” individuals as participants

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Major Problems in Global Sourcing Progarm

Lack of qualified people to support the program Lengthened lead times Cultural Differences Transportation Evaluation of the participants