Chapter 14

Global Supply

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Growth in World Trade

• Total value of world merchandise exports in 1999 was $5.47 trillion

• World commercial services exports in 1999 was $1.35 trillion

The WTO estimates that total trade in 1997

was 14 times the level of 1950

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U.S. Imports and Exports and Merchandise Trade Balance 1950-1999

Year Imports

($ millions)

Exports

($ millions)

Surplus or Deficit

($ millions)

1950 $ 8,984 $ 10,282 $ 1,298

1960 15,075 20,612 5,537

1970 39,756 42,590 2,834

1980 256,984 220,786 (36,198)

1990 495,300 393,600 (101,700)

1995 743,543 584,742 (158,801)

1996 795,289 625,075 (170,214)

1997 869,704 689,182 (180,522)

1998 911,896 682,138 (229,758)

1999 1,024,618 695,797 (328,821)

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U.S. Imports and Exports by Country for 1999

Year Imports

($ millions)

Percent of

Total Imports

Exports

($ millions)

Canada $ 198,711 19.4 $ 166,600

Japan 130,864 12.8 57,466

Mexico 109,720 10.7 86,909

China 81,788 8.0 13,111

Germany 55,228 5.4 26,800

United Kingdom 39,237 3.8 38,407

Taiwan 35,204 3.4 19,131

South Korea 31,179 3.0 22,958

France 25,708 2.5 18,877

Italy 22,357 2.2 10,091

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U.S. Imports by Selected Commodity

Commodity $ Millions Percent

Agriculture commodities $ 36,681 3.7

Television, VRC, etc. 50,936 5.1

Clothing 56,412 5.7

Chemicals 63,825 6.4

Mineral fuels 75,803 7.6

ADP equipment, office machinery 84,430 8.5

Electrical machinery 88,620 8.9

Machinery 91,396 9.2

Vehicles 145,927 14.7

Other manufactured goods 300,467 30.2

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Reasons for Global Purchasing

• Price/cost- labor costs, exchange rates, equipment and processes,

product and pricing focus• Government/marketing pressures• Quality• Unavailability of items domestically• Faster delivery and continuity of supply• Better technical service• Technology• Marketing tool• Tie-in with offshore subsidiaries• Competitive clout

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Potential Problem Areas in Global Purchasing

• Source location and evaluation• Lead/delivery time• Expediting• Political and labor problems• Hidden costs• Currency fluctuations• Payment methods• Quality• Warranties and claims

• Tariffs and duties • Paperwork costs• Legal problems• Logistics and transportation• Language• Communications• Cultural and social customs• Ethics

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Potential Hidden Costs

• Commissions to customs brokers• Financing charges, letter of credit

fees, exchange rate differentials• Foreign taxes imposed• Extra inventory and carrying costs• Extra paperwork/documentation• Inventory obsolescence,

deterioration, spoilage, pilferage• Travel

• Packaging

• Fees for consultants, inspectors

• Marine insurance

• Import tariffs

• Transportation

• Freight forwarder

• Warehousing

• Port handling

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General Guidelines for Dealing withInternational Suppliers

• Even if English is spoken, speak slowly, use more communication graphics and avoid use or metaphors and jargon

• Bring an interpreter to all by the more informal meetings- Allow extra time to educate interpreters on issues

• Document in writing the main conclusions and decisions• Learn about the country’s history and taboos• Do not use first names unless invited to• Get cultural advice from professional or your own company employees, not

from supplier representatives in the U.S.• Expect negotiations to last longer with some cultures

- Suppliers must learn to accept you and your company as a customer

Source: Dick Locke, Global Supply Management, New York: McGraw-Hill, 1996

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Organizational Considerations

• Assignment within the Purchasing Department- Organized by commodity or geographic region

• Subsidiary - Subsidiary supply organization responsible for local suppliers

• International Purchasing Office (IPO)- Separate purchasing organization usually reporting to head office

purchasing department

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Intermediaries

• Import brokers and agents- For a fee will assist in locating suppliers and handling the

paperwork

• Import merchants- Buys the product, takes title and delivers it to buyer

• Supplier’s subsidiary• Sales representatives• Trading companies

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Countertrade

• Countertrade is the practice of a company promising to buy material, products or services from a country in return for the privilege of selling there

• The supply function may be called to:- 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

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Foreign Trade Zones (FTZ)

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

• Main purpose for using FTZ’s are to avoid, postpone, or reduce the tariff on imported goods

• FTZ’s differ depending on their major functions.- transshipments, storage, exhibition and display, manufacturing