Chapter 16

GLOBAL SUPPLY MANAGEMENT

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Quotes on Global Thought

I am not Athenian nor a Greek, but a Citizen of the world - Socrates Operating in an increasingly interconnected world, leading companies perceive competition as global and are moving to implement an integrated strategy worldwide learning to develop and manufacture products that can be introduced and marketed simultaneously in many countries ... they are sourcing technology, materials, and components from sites and suppliers located throughout the world.
Carl R. Frear, Lynn E. Metcalf, and Mary S. Alguire
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Global Supply Management

Supply Managers who strive for WCSM have chosen to pursue a global supply philosophy that unifies rather than divides humanity As such, a world-class supply manager chooses to pursue global supplier relationships that are based on fairness, honesty and trust, which result in lower total costs without exploitation

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Stages to Global SM
Stage One: International Purchasing
Importation

Stage Two: Global Sourcing

Collaboration with international suppliers

Stage Three: Global Supply Management

Integration of best-in-class suppliers globally

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The Transnational Corporation

The next/final stage in globalization of SM
1. 2. 3. 4. 5. 6. Instantaneous electronic communications capabilities Instantaneous electronic funds transfer Distributed, highly autonomous local operations Global real-time flow of intellectual property Highly differentiated products Worldwide flow of raw materials, and finished goods, highly insensitive to both national and corporate boundaries

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Reasons for Global Purchasing

Superior Quality Better Timeliness Lower Costs More Advanced Technology Broader Supply Base Expanded Customer Base

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Potential Problems

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Cultural Issues Long lead times Additional Inventories Quality (intransit pipelines) Social and Labor Problems Higher Costs of Doing Business High Opacity
http://www.opacity-index.com

Questions Before Going Global

Does it have a long life (two to three years)? Does it lend itself to repetitive manufacturing or assembly? Is demand for the product fairly stable? Are specifications and drawings clear and well defined? Is technology not available domestically at a competitive price and quality?
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Supply Network Evaluation

Does sufficient engineering support exist to efficiently facilitate ECOs when they occur? Will the buyer be able to allow sufficient time to phase out existing in the pipeline" inventory? Will the buying firm take the responsibility? Is the firm prepared to make a financial commitment for expensive trips to the supplier? Is management willing to change the approach of how business and transactions are conducted? Is the buyer aware of the environment?
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Supply Channels
After deciding to source globally, must decide what supply channels to use The lowest price method for direct procurement
May be infeasible due to costs & limited resources

Simplest way to source globally is through the use of an intermediary

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Global Trade Intermediaries

Import merchants
Easiest method Basically like buying from a domestic source

Commission houses
Act for exporters abroad Paid by the exporter They do selling, shipping and customs details

Agents or reps
Same as Commission House Except they work for the exporter
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Global Trade Intermediaries

Import brokers
Commission paid by sellers and buyers Charges fee for bringing parties together

Trading companies
Perform all of the above May work for both or one party Selling, shipping, customs details

Subsidiaries
Facilitate international sales Example: Hitachi America
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International Procurement Offices

IPOs Expands buyers supplier base Allows personal contact Better understanding of local conditions On-site support Staffed by ex-patriates in the past, but not necessarily true today
Expats or locals?
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Direct Suppliers
Eliminating Intermediaries Identifying Direct Suppliers Qualifying Direct Suppliers Preparing for Direct Relations The Initial Meeting

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Eliminating Intermediaries
Results in lowest purchase price
Requires extra cost beyond price

Requires knowledge
Requires involvement of the company in all aspects of the procurement

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Identifying Direct Suppliers

Identify and contact key players at the supplier Visit with the supplier's key personnel Use the meeting to provide performance feedback Explain your company's goals and values Take care not to appear to be unreasonable Consider the timing of your request If dealing with a new supplier, state your intention to deal directly right from the start Be prepared to give reasons for direct buying
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Qualifying Direct Suppliers

Country and regional analysis Financial condition Facility visit / inspection

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Preparing for Direct Relations

Cultural preparation Interpreters Technical and commercial analysis

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Prepare and review specifications and drawings Pack samples or photos of required materials if helpful Clearly prepare the quality requirements Identify specific scheduling requirements Determine what % of production can be placed offshore Determine requirements for special packaging Identify likely lead times Develop a clear idea of the price objective

Briefing on Your Firm for Supplier

Information on relevant product lines Actual and forecasted sales volume Customers Market share Unclassified corporate strategy information Annual reports An indication of why the buying firm is soliciting the potential global supplier's interest (quality? price?)

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The Initial Meeting

Provide a briefing on your firm Provide a tour of your facility
If the initial meeting is at the suppliers facility, then tour the suppliers facilities

Meet with critical personnel Describe how and when the suppliers firm would get paid Always remember that the potential supplier is judging your firm at the same time
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Currency and Payment Issues

Currency risk is inherent in transaction
Determine who (buyer or seller) better equipped to deal with currency risk Establish process for monitoring and managing changes in exchange rates

Determine method of payment

Letters of credit are common in global commerce Other options are available (discuss with bank)

Of particular importance are:

Exchange Rates Payments
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Dealing with Exchange Rates

Assume the buyer is a United States company Case 1: Contract is for payment in foreign currency, exchange rate moves against the dollar during performance of the contract Case 2: Contract is for payment in foreign currency and dollar strengthens Case 3: Contract is with a global supplier, with payment in dollars, and the dollar weakens Case 4: Contract is with a global supplier with payment in dollars, and the dollar strengthens
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Case 1
Contract was awarded for 1 million euros Rate of exchange was $1.00 = Eu 1.5 Eu l,000,000 Eu 1.5/$ = $666,666.66 However, dollar weakens to $1.00 = Eu 1 Eu l,000,000 Eu 1.0/$ = $1,000,000 (33% increase)
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Case 2
Contract is for payment in foreign currency and the exchange rate improves so $1 = Eu 2 Eu l,000,000 Eu 2/$ = $500,000 The buyer has reduced its costs from the initial likely amount of $666,666.66 to $500,000.00, a 25 percent saving
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Case 3
Contract is with a global supplier, with payment in dollars, and the dollar weakens Assume the rate of exchange was U.S. $1 = Eu 1.5 The cost of the item was Eu 1 million, or $666,666.66. Unfortunately for the supplier, the dollar has weakened so that $1 will buy only Eu 1 Now, when the supplier receives $666,666.66 and converts to euros, receiving only Eu 666,666.66
A 33 percent reduction from what it expected under the former exchange rate
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Case 4
Contract is with a global supplier with payment in dollars, and the dollar strengthens As with case 3, the contract called for a payment of $666,666.66 Assume rate of exchange changed so $1 = Eu 2 When the supplier receives its $666,666.66 and converts to euros it will receive 666,666.66 x 2 = Eu 1,333,333.32
A windfall gain of Eu 333,333.33
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Payments
Simplified when an intermediary or IPO used
But risk does not disappear just because you transfer it to someone else

Direct payments are more difficult

Letters of credit are usually used
Irrevocable or Revocable Confirmed or Unconfirmed Revolving or Non-revolving
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Countertrade
Refers to any transaction in which payment is made partially or fully with goods instead of money Countertrade links sale of a product into a foreign country and sale of goods out of that country
http://www.countertrade.org

Foreign governments may impose countertrade requirements

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Countertrade Definitions
Barter: Goods exchanged for goods (no money) Offset: The value of the sale is offset by purchases of items produced in the buying country
Types: direct offset and indirect offset

Counterpurchase: Unrelated goods are exchanged

Normally involves two separate contracts

Buy-Back/Compensation: Agreement by the seller of turnkey plants, machinery, or other capital equipment to accept as partial or full payment products produced in the plants and/or on the capital equipment
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Countertrade Advantages
Avoiding exchange controls Selling to countries with inconvertible currencies Marketing products in less-developed countries Reducing risks with unstable currency Goodwill with foreign countries Fuller use of plant capacity
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Countertrade Disadvantages
Lengthier negotiations Risk of dealing in unfamiliar products Complex negotiations Government involvement Higher transaction costs Technology transfer

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Example of Countertrade

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Political And Economic Alliances

European Union North American Free Trade Agreement MERCOSUR Association of Southeast Asian Nations Asia Pacific Economic Cooperation

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European Union (EU)

Common foreign policy Single currency Central bank ISO 9000:2000 Reduced red tape

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Advantages of the Euro

Greatly Reduced Transaction Costs Increased Competition Reduced Exchange Rate Risk Increased Trade and Capital Movement

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NAFTA
U.S., Canada, Mexico Original Goals of NAFTA

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Elimination of tariffs Remove agricultural barriers Remove manufacturing barriers Remove service trade barriers Remove investment restrictions Protect intellectual property rights Resolve environmental concerns

Future of Global SM
World financial markets are closely linked through 24-hour trading International business is no longer limited to large multinational corporations Fewer marketplace differences exist
Westernization of global consumer markets is occurring at a rapid rate

Manufacturing firms in developing countries have improved their capabilities Productivity and quality is dramatically improving worldwide
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CAPS Study
Global sourcing strategies will become a critically important source of competitive advantage The number of key suppliers to firms will be reduced to maximize leverage on a global basis
Suppliers regional and global capability expectations will increase

Strategic & tactical sourcing will be further separated Executive management expectations of supply management will increase
Due to cross-functional, cross-boundary emphasis and focus on alliances

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CAPS Study Continued

Supply management will be increasingly integrated with the strategic plans of the firm to maximize company-wide leverage Supply management performance measures will become further aligned with company-wide measurements Information systems/technology will be key to globalization and sourcing strategies enterprise wide New, more complex skills and focus will be required in supply management to operate in a globally complex and uncertain world

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Closing Remarks
With respect to global supply management, supply professionals must learn to:

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Develop a global supply management view Learn to deal with changing global environments Deal with diverse cultures effectively Work within distributed organizational structures Work with teams composed of global members Learn to communicate effectively with cultural beliefs and values different than their own

Appendix A

Currency Risk

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Currency Issues
Floating currency:
Currency not associated to the U.S. dollar Stability of the currency is more questionable

Pegged currency:
Currency associated to the U.S. dollar More stable than floating or unpegged currency

Cost driven product

Price based on supplier costs

Market driven product

Prices are set on the world market
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Hedging
Used to minimize market risk Requires organized commodity exchange
Marketplace where commodity is bought and sold in large quantities

Addresses risk of fluctuating foreign currency

Like insurance policy A little cost now to be sure later
May forfeit upside risk
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Hedging
Common types of hedging
Futures contracts
Give a fixed cost for foreign currency Effectively freezes the exchange rate

Currency options
Allows a buyer to take advantage of an increase in dollar value and protects against decreases

Length of hedging Choosing a strategy

Establish process as part of initial deal E.g., shared risk (up and down or one-way)
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Additional Slides

Common Terms in Global Supply Management

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Common Terms
Import duties (or rates)
ad valorem rate
Most common, a percentage of appraised value of the merchandise (such as 5%)

specific rate
Specified amount per unit, such as $1,000 for a fur coat

compound rate
Combination of the ad valorem and specific rates

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Common Terms
Dutiable or free of duty
GSP - Generalized System of Preferences
Basically means Duty Free Stuff you buy in duty free shop is NOT free for you

MFN - Most Favored Nation

Duty rates are lower than full rates (statutory rates).

Statutory Rates
Full rates for tariffs

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Common Terms
Assists
Used in aiding the production outside of the buying firms country and are provided by the buying firm
Components
Subassemblies or parts in imported goods

Special tooling
Tools, dies, molds, equipment

Design Information

Rulings on imports
With respect to duties, these occur after entry documents have been filed and the entry is liquidated
Also - there is no guarantee that subsequent shipments will receive the same tariff
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Common Terms
Customs brokers
Serve as the buying firms agent
Handle clearance of shipments through customs

Customs invoice
Used to clear merchandise through customs
Not often required (not same as commercial invoice which usually suffices for customs purposes) Supplied by U.S. Treasury Filled out by the supplier
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Common Terms
Pro forma invoice
Commercial invoice estimate used mainly for banking & permit needs Enables the firm to obtain an import or exchange permit

Packing list
More than one may be needed Movement order, contents, descriptions (weights, markings, measures)
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Common Terms
Bill of lading
Receipt issued by the carrier for merchandise
A contract for shipment of merchandise A receipt of merchandise Document of freight charges List of Handling Instructions May contain a title

Bill of Lading Types

Ocean bill of lading Air way bills
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Common Terms
Inspection certificate
Prepared by entity independent of the exporter Assures buyer shipment is as ordered

Certificate of origin
May be required by customs A product shipped from Hong Kong may not actually have been made there, so this is an effort to trace product origins
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