The world has grown a good deal smaller, figuratively, in the last 50 years, with the increased speed of transportation and communication. The internet has accelerated the trend to global supply, making it easier for source selection and reducing communication problems. International agreements aimed at relaxing trade barriers and promoting free trade have also provided opportunities for firms to expand their supply bases to participate in global sourcing.
Why source worldwide?
Firms expand their supply base to include foreign suppliers for many reasons. However, the primary reason for using an international supplier is that better value is perceived to be available from that source than from a domestic supplier.
The specific factor that makes the international buy look attractive will vary. Let us explore some of these reasons that may cause an international supplier to be selected as the preferred source.
1. Unavailability of items domestically: The first and oldest reason for international trade has been that domestic sources were not available.
2. Cost/price benefits: The ability of an offshore supplier to deliver product or service at a lower overall cost than domestic suppliers. Cost differentials between countries arise possibly because of lower labour rates, different productivity levels, willingness to accept a lower profit margin, exchange rate differences, lower-cost inputs for materials and government subsidies.
3. Government pressures: It makes good economic and political sense to consider the alternatives of buying from suppliers in customer countries. Many multinational firms also accept that they have a social responsibility to buy products from suppliers in nations in which they operate plants, as a means of developing those nations. Additionally, many nations insist as a condition of sale of a major product to their country that the seller must agree to buy a specified value of goods in that country.
4. Quality: While the quality level of the international sources generally is no higher than from domestic suppliers, on some items it is more consistent. This is due to several factors, such as newer, better capital equipment; better quality control systems; and perhaps the offshore supplier’s success in motivating its workforce to accept responsibility for doing it right the first time (the zero-defects concept).
5. Access to product and process technology: Gaining access to the most current technology leaves many companies with little choice except to pursue worldwide sourcing.
6. Access to the only source available: Economic recessions, mergers and government environmental regulations often result in suppliers exiting certain lines of business due to higher costs, loss of business volume, or both. A loss of supplier capability and availability often leave domestic buyers with no viable supply alternative except international sources.
7. React to buying patterns of competitors: This is probably the least mentioned reason for worldwide sourcing because most firms do not want to admit that they are reacting to the practices of competitors. Imitating the action of competitors is the ‘fashion and fear’ motive. A buyer may try to duplicate the factors that provide an advantage to a competitor, which may mean sourcing from the same suppliers or regions of the world that a competitor uses.
In order to gain access to the lowest costs, cutting-edge technology and best capabilities, organisations must scan the global landscape in search of the best suppliers. By aligning technology roadmaps with leading-edge suppliers, designers can ensure that their products and services will truly be world class, not just the best in the region. Although the exact reasons each firm sources internationally will vary, they surely include some of those discussed here. Without access to worldwide sources of supply, firms may not remain competitive. A domestic firm that buys a portion of its material requirements worldwide is better than a domestic firm that is no longer in business as a result of its inability to meet global competition.
Potential challenges for worldwide sourcing
Global supply for many firms is a competitive necessity. However, managing international supply networks presents a number of challenges and firms with little or no international experience often face obstacles or barriers when beginning global sourcing. The potential problem areas include:
1. Source location and evaluation: The key to effective supply is selecting responsive and responsible suppliers. Internationally, this is sometimes difficult as obtaining relevant evaluation data is both expensive and time-consuming.
2. Lead-time and delivery: Improvements in transportation and communications have reduced the lead-time for international procurement. However, there are four areas where the buyer should anticipate additional lead time:
a. Establishing credit for first-time international buyers often involves obtaining a letter of credit.
b. Even with improvements in transportation, the buyer may still experience delays, particularly with inland carriers in the foreign country.
c. Delays in customs are also possible.
d. The time goods are in port, for both outbound and arriving, also depends on the number of ships in line for unloading and hours of port operations.
3. Expediting: Because of distance, expediting an offshore firm’s production/shipment is more difficult.
4. Political and labour problems: Depending on the country in which the supplier is located, the risk of supply interruption due to governmental problems, e.g., change in government or trade disputes — may be quite high.
5. Hidden costs: When comparing an offshore with a domestic source, it is easy to ignore some of the costs in the offshore procurement. Examples include foreign exchange premiums, finance charges, foreign taxes, import tariffs, extra safety stock due to longer lead times, business travel, marine insurance, customs documentation charges, needs for translator, etc. The buyers must compare total cost of ownership before opting for an international supplier.
6. Currency fluctuations: Most significant world exchange rates float freely and sometimes change rather rapidly due to economic, political and psychological factors, making the prices significantly higher or lower than at the time the agreement was originally signed.
7. Payment methods: The method of payment often differs substantially in international buying than in domestic buying.
8. Quality: Misunderstandings in the quality specifications and interpretations of drawings and specifications can be quite costly due to distances and lead times involved.
9. Warranties and claims: In the event of rejection for quality reasons, return and replacement of items is complex and time-consuming due to distances and transportation costs.
10. Tariffs and duties: The buyer must know which tariff schedule(s) applies and how the duties are computed. The cost of non-compliance with import regulations can be staggering.
11. Administration costs: Global supply requires additional documentation, mainly for duty and customs, logistics activities, payment and financial charges.
12. Legal issues: If potential legal problems are a risk in domestic buying, they are several times greater in international buying. Buyers must also consider carefully the laws under which an international contract is governed.
13. Logistics and transportation: The trend towards integrated logistics on the domestic side is mirrored by a similar move in global supply. Global buyers must deal with more complex shipping terms than domestic buyers with respect to shipping costs, risks and responsibilities of buyer, seller and shipper.
14. Language: Different language, dialects or terminology may result in miscommunication. Words mean different thing in different cultures. Difficulties arise in connection with interpretation with domestic contracts is much increased in international contracts.
15. Communications: Global supply can involve problems with communication. These relate to time zone differences, working days and problems with the communication network itself.
16. Cultural and social customs: The nature and customs of individuals and business organisations from different cultures can raise a surprising number of obstacles to successful business relations. Problems caused by cultural misunderstandings can lead to higher supply chain costs, e.g., pace of negotiation, relationship, time orientation, values and decision-making style.
17. Ethics: Are transaction bribes or facilitating payments allowed in the foreign countries? What is considered ethical in one culture may not be ethical in another. The intention of filling commitments, the implications of giftgiving and even the legal systems differ widely. Ethical issues also include those of buying from overseas suppliers that operate sweatshops, employing child labour and offering barely subsistence-level pay.
Finally, resistance to change from an established, routine procedure or shifting from a long-standing supplier, are also major barriers. Buyers are sometimes reluctant to shift business from domestic sources to unknown foreign sources. Home market nationalism can still be an issue.
|Please read about ‘global sourcing and international procurement’ on pages 310 – 319 from your textbook Procurement Principles and Management, 10th edn, England: Prentice-Hall, Pearson Education Limited by Baily, P, Farmer, D, Crocker, B, Jessop, D and Jones, D (2008).|
|Question to activity 3.8
||Suggested answer to activity 3.8