Chapter 4 1

Chapter 9

Worldwide Sourcing

2

A Clarification on Terms

• International Sourcing

(Opportunistic)

• Global Sourcing

Integration of Systems

Integration of locations Integration of functions

Worldwide Sourcing

3

Why Worldwide Sourcing?

Cost Differentials Quality Access to only source available Better Technology or Processes

The judgment that the best supplier is a foreign firm

4

Key Markets for Sourcing Abroad

Taiwan South Korea Philippines Malaysia China*

Romania Hungary

Mexico* Brazil*

India*

5

Barriers to Worldwide Sourcing Lack of knowledge about potential foreign sources Lack of understanding on procedures and documents Risks

Long lead times Uncertain outcomes Lack of control Communications Inventory Foreign Exchange Higher cost of doing business Political

Language, cultural, legal, and business practice barriers

6

Comments on certain barriers Cultural (values and behavior) Legal

UN’s Convention on the International Sale of Goods (CISG)

WTO members Business practice barriers

Dun and Bradstreet Country Analysis Reports Language

7

Language and communication issues Adjust your speaking style

Slow down Use extra presentation graphics Write down numbers Watch your language (profanity, jargon, acronyms) Vocabulary

Watch your body language Know when you reach an agreement

Document decisions in writing

8

Language and communication issues

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

9

A firm can approach worldwide sourcing in one of two ways . . .

Use trade intermediaries (specialists)Easiest, simplest, less risky, and potentially the

most cost effective Deal directly with foreign suppliers

Need a well-staffed worldwide sourcing organization

Avoid mark-up of intermediary, but …

10

Trade Intermediaries

Import Merchants Manufacturer’s representatives Import Brokers Trading Companies

They add administrative costs but lower the burden and the risks of unforeseen problems

11

Trade Intermediaries

Can eliminate some barriers to worldwide sourcing

Where to source How to source

Can manage or reduce other barriers Risks Language, legal, cultural, business practice barriers

12

Dealing directly with foreign sources

Eliminates mark-ups and fees Risky if firm doesn’t have a well-trained worldwide

sourcing staff IPO in country

Requires an investment in time and travel Trial orders are common to establish a performance

record Should only be pursued after careful consideration of

the intermediary option

13

Obtaining information about suppliers in other countries

Dun and Bradstreet “Supplier Management Services”

World Marketing Directory Marconi’s International Register United States Department of Commerce Major-city banks Foreign Trade Consulates U.S. Embassies overseas Internet: Foreign trade agents

14

The issue of Foreign Exchange Risk

Denominate the contract in dollars? Share the risk? Firm’s Finance Department should get

involved Track currency movements; trends and forecasts Engage in hedging

S’pose I denominate a contract with a firm in Mexico in Pesos:

Negotiated price = 10,000,000 Pesos

1. $1 = 10 Pesos $1,000,000

2. $1 = 9 Pesos $1,111,111 (A weakened dollars creates an 11.1% increase in cost for the buyer firm)

15

The issue of Countertrade

Countertrade is a marketing department issue

Purchasing is only one option to the dilemma

This issue arises when a foreign government requires you to buy (or trade) their exports for what you sell to them (not necessarily at 100%).

16

Global Sourcing: Moving toward a process

International purchasing

Global Sourcing

• Price focused, or

• No suitable domestic supplier exists

• Reactive and uncoordinated among buying units and functional areas

• A strategy for integrating full service foreign suppliers during new product development

• Integration of a firm’s locations, internal functional areas, and information and engineering systems with foreign suppliers

17

Concept of a Full Service Suppliers (FSS)

A Full Service Supplier will . . .

• Participate in the design and development of customer products

• Provide technical assistance to the customer

• Optimize delivery and logistics activities

• Offer flexibility and commitment to meet customer needs

• Stand behind his material or service in every way

The shift in responsibility to the supply base for partial responsibility for engineering, research, and development has been coined as Full Service Suppliers or FSS

18

Managing a global supply chain

10 11 12 1 2 3 4 5 6 7 8 9 10 11 Noon 1 2 3 4 5 6 7 8 9 10 Cincinnati (Program Headquarters)

8 5

Los Angeles Supplier

Brazil Supplier

8 5

Mexico Supplier

8 5

8 5

Taiwan Supplier8 5 Romania Supplier

8

England Supplier8

Australia Supplier8 5

PM AM

19

Benefits of Global Sourcing Global suppliers, global processes, and

global strategies are an integral part of a firm’s supply management efforts

Generates coordinated, worldwide design, development, procurement, production, and logistics activities

20

Let’s move on