Introduction to International Purchasing notes

TOPIC 1

INTRODUCTION TO INTERNATIONAL PURCHASING

Definition 1: In a global economy, international procurement is a term used to describe the process of allowing firms around the world to bid on contracts for goods and services. The concept has gained popularity as shipping and transportation costs have decreased due to an influx of cheap, readily available fuel. The globalization of large corporations has allowed them to reap the benefits of lower labor and materials costs while still selling the same quality and quantity of products.

There are three primary benefits to international procurement: lower costs, stimulation of a global economy, and increased consumer base. The lower costs that can be achieved through purchasing services or goods from other counties are derived from currency valuation and the effects of product specialization. Both of which are core concepts in economics.

In international procurement, industrialized nations purchase goods from countries with a lower dollar, gaining in the currency exchange. This rate varies over time, but the multiplying factor remains fairly static. The ability to purchase more with a dollar in another nation is one of the primary driving factors behind the appeal of this type of procurement.

 

Global sourcing:

Definition 2: Global sourcing refers to the integration and co-ordination of procurement requirements across the worldwide business units of a single firm. It also implies that a particular organisation has adopted a single sourcing strategy for its worldwide business units and that this strategy is aimed at providing a competitive advantage to business units on a global scale. In order to be competitive most firms across the globe participate in global sourcing. Additional attributes in global sourcing include quality improvements, time-to-market reductions, availability improvements and synergy creation of company resources and global partnership.

It is worthwhile to underscore the fact that the bottom line as far as global sourcing is concerned is to meet or exceed product expectations while driving down production costs and streamlining the supply chain. The proliferation of technology to some extent has boosted this approach since transactions in the contemporary business environment are done just a click of a computers button.

 

Reasons for sourcing internationally:

  1. Competitiveness of overseas sources e.g. lower prices, improved deliveries, better quality etc
  2. Need for manufacturing flexibility
  3. Stringent quality standards
  4. Ever changing technology
  5. The buyer may prefer to buy from foreign source which offers products which have features which are not available domestically.
  6. Insufficient domestic capacity to meet demand to ensure continuity of suppliers owing to shortages or strikes
  7. Reciprocal trading and counter trade owing to policy reasons

 

Successful elements in sourcing abroad:

  1. Top management support
  2. Development of efficient communication skills and
  3. Information Communication system
  4. Establishment of long term relationships with overseas suppliers
  5. Vast knowledge of international opportunities
  6. Good understanding of international rules under INCOTERMS

 

DIFFICULTIES IN BUYING ABROAD:

  1. Currency difficulties is experienced- fluctuations
  2. Legal difficulties incase of a dispute
  3. Delays in delivery
  4. Time required for negotiation is greatly increased
  5. Too much documentation e.g. bills of lading, certificate of origin customs entry form etc
  6. Import duties, procedures and insurance
  7. Communication problems

 

Benefits of international/global sourcing:

  1. Better prices
  2. Higher world class quality
  3. Counter-trade
  4. Improved customer service
  5. Improved competition position
  6. Increased availability of suitable suppliers

 

Factors to consider when planning international procurement:

The following factors generally hamper planning for international purchasing:

  • International risks: These risks relate to:
  • Financial factors such as currency uncertainty, financial policy uncertainty and financial effect of economic performance
  • Economic factors such as performers of economic indicators etc
  • Political factors such as radical changes in government composition or policies
  • Operational environmental factors such as the legal structure of the country of export, the rules and procedures governing international trade.
  • Logistical barriers: Long distances mean increased transport costs and long delivery times, hampering the supplier in rendering a service
  • Customs regulations and duties: Import duties can disrupt prepared cost estimates at very short notice, political motives in the importing country can hamper purchases on specific foreign markets etc
  • Nationalism: Local source preference is a factor that influences the development of an international purchasing policy and strategy.

 

Sources of information about overseas suppliers:

  • Professional contacts: Professional contact of the purchasing staff can facilitate an evaluation of specific suppliers capability
  • Trade journals: Trade journals are published regularly different industries in various countries and provide vital information on suppliers
  • Directories: Directories are good sources of information and are often printed an organised industry in a particular country
  • Trading companies: Japan frequently uses this marketing channel which provides advantages of convenience, efficiency and assurance of supply to international buyers.
  • Import brokers: They offer a buying and forwarding service in exporting country and often become very knowledgeable about the products
  • Internet: This is global system of inter connected computer networks that use the standard internet protocol suite (TCP/IP) to serve billions of users worldwide. They enable business people to search relevant suppliers across the globe.
  • Online marketing and mobile marketing

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In a global economy, international procurement is a term used to describe the process of allowing firms around the world to bid on contracts for goods and services. The concept has gained popularity as shipping and transportation costs have decreased due to an influx of cheap, readily available fuel. The globalization of large corporations has allowed them to reap the benefits of lower labor and materials costs while still selling the same quality and quantity of products.

 

There are three primary benefits to international procurement: lower costs, stimulation of a global economy, and increased consumer base. The lower costs that can be achieved through purchasing services or goods from other counties are derived from currency valuation and the effects of product specialization. Both of which are core concepts in economics.

In international procurement, industrialized nations purchase goods from countries with a lower dollar, gaining in the currency exchange. This rate varies over time, but the multiplying factor remains fairly static. The ability to purchase more with a dollar in another nation is one of the primary driving factors behind the appeal of this type of procurement.

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Differences between global sourcing and international purchasing

Difference #1: Firms that engage in global sourcing are larger and are more likely to have competitors that are multi-regional or global compared with firms that engage in international purchasing.
While this finding should come as no surprise, firms that pursue global sourcing initiatives are clearly larger (average $3 billion in annual sales) compared with firms that engage in international purchasing (average $900 million in annual sales). Larger firms are more Likely to have worldwide production facilities, design centers, and marketing and sales activities. It should be expected that the pursuit of global sourcing opportunities becomes a fundamental extension of a larger firm’s sourcing philosophy given its worldwide scope in other areas.

The level of competition that a firm faces can also affect its sourcing response. The global sourcing segment faces greater competition from companies that are multiregional or global compared with firms in the international purchasing segment.

Difference #2: Firms that engage in global sourcing perceive their strategy implementation progress to be further along compared with firms that engage in international purchasing.
Both segments recognize they have a long way to progress before they have a fully developed global sourcing process in place, although Level IV and V firms know they have made greater progress compared with Level II and III firms. The international purchasing segment appears to understand that many sourcing opportunities are possible beyond what it is currently pursuing.

Difference #3: Firms that engage in global sourcing perceive that performance improvement and cost reduction opportunities are more widely available from theft sourcing efforts compared with firms that engage in international purchasing.

An example from the field research provides another explanation for the difference between the segments. One company that is rapidly gaining global sourcing experience has found that local or site-based participants usually have a performance improvement expectation that is formed (and limited) what can be attained local or regional practices. Site personnel may perceive that a 5 percent price reduction is quite significant. The potential cost improvements available from global sourcing far exceed what these participants are willing to commit to or believe are available. However, participants begin to recognize the difference between international purchasing and global sourcing outcomes once they become involved with global projects. The international purchasing segment, on the other hand, has yet to appreciate the dynamics of operating within a global context, which limits its perception regarding potential performance improvement and cost reduction opportunities.

Difference #4: Firms that engage in global sourcing indicate that the development of global strategies is more important to their executive management compared with firms that engage in international purchasing.

After considering the differences between international purchasing and global sourcing presented in an earlier section, one can easily conclude that international purchasing is best described as a functional activity while global sourcing represents a strategic direction and organizational process. Executive support and leadership are critical to a process as organizationally complex and important as global sourcing.

Field research reveals that executive managers who stress the importance of global sourcing back that belief with direct commitment–commitment that is not as necessary or as visible with international purchasing. Examples of executive commitment include funding the development of a global sourcing process, participating on an executive steering committee that oversees global activities, and providing budget and staff to support global project teams. Executive managers may also work to secure site- and plant-level buy-in to global processes and agreements. Executive managers who recognize the importance of global sourcing must be willing to support global initiatives, something that is not critical with international purchasing.

Difference #5: Firms that engage in global sourcing indicate they face more rapid changes to product and process technology compared with firms that engage in international purchasing.
Survey respondents assessed the annual rate of change they face across seven competitive factors: quality improvement, product and process technology development, price/cost reduction, new product development cycle times, responsiveness to customer improvement requirements, on-time delivery improvement, and overall customer service improvement requirements. The two segments rate each competitive factor, statistically the same except for the rate of product and process technology. International purchasing firms indicate their rate of product and process technology change is stable to moderate while global sourcing firms indicate their rate of change is moderate to dynamic. Furthermore, the global sourcing segment indicates it faces greater competitive and customer pressure to improve continuously in the introduction of new product and process technology. While cost improvement will remain a primary driver behind worldwide sourcing activities, the need for new sources of technology will drive some firms to pursue higher sourcing levels.

Difference #6: Firms that engage in global sourcing realize greater and varied benefits compared with firms that engage in international purchasing.
Perhaps one of the most revealing and interesting differences between the international purchasing and global sourcing segments is the perception each has regarding the benefits it realizes from its sourcing efforts. Table I presents these benefits sorted the difference between the averages for the two segments. Firms that engage in global sourcing indicate they realize all 16 benefits at a statistically higher level than firms that engage in international purchasing. In fact, the overall average across all benefit areas is 30 percent higher for global sourcing firms compared with the overall average for international purchasing firms.

One benefit that both segments rate highly is the ability to achieve a lower purchase price or cost through worldwide sourcing. It is concluded that the initial benefits from international purchasing are price focused and are often available from basic international purchasing activities. However, many non-price benefits are only realized once a firm has taken steps to integrate its sourcing activities. In particular, this includes greater access to product and process technology, an outcome that is particularly critical given the more dynamic technology changes that global sourcing firms face. Also, better management of supply chain inventory is a benefit that global sourcing firms enjoy at higher levels. This is critical given the emphasis that many firms place on managing costs and inventory investment across the supply chain.

Difference #7: Firms that engage in global sourcing rely on a wider array of communication tools to support their efforts compared with firms that engage in international purchasing.
Global participants will presumably take advantage of evolving Web-based communication tools in the future.

Examples of other communication and coordination approaches identified during the field research include regular strategy review meetings between locations and joint training sessions involving worldwide team members. Project updates reported through an intranet, negotiation planning sessions, and collocation of functional personnel to facilitate face-to-face interaction were also identified as effective approaches.

Difference #8: Firms that engage in global sourcing have in place more organizational features to support their sourcing efforts compared with firms that engage in international purchasing.
Consider several items that show the highest difference between the segments and why these differences are important. Global sourcing firms conduct regular strategy review and coordination sessions with worldwide procurement and other functional managers on a regular basis, a feature showing the largest average difference between the groups. Review sessions promote consistency creating a common sourcing language and approaches coordinated at higher organizational levels.

Another differentiating feature is the greater likelihood that firms pursuing global sourcing will have access to the services provided international purchasing offices (IPOs). These offices help identify potential suppliers, solicit quotations, support negotiations, obtain product samples, conduct supplier site visits, and manage technical and commercial concerns. These offices also support many of the operational issues that are part of global sourcing.

Difference #9: Firms that engage in global sourcing rate key aspects of their sourcing process as more similar across geographic locations and buying units compared with finns that engage in international purchasing.

Survey respondents rated the degree of similarity or difference across their geographic locations and buying units for twenty items. Eleven of the 20 items were rated as statistically more similar across locations the global sourcing segment, which Table III reports. The remaining nine items demonstrated no statistical differences in their average rating between the two segments. Items such as business culture, operating standards and procedures, language, and social culture and laws received similar ratings in terms of similarity.

In the longer term, one of the most important outcomes from global sourcing may be the sourcing consistency created this process–a consistency that most firms now lack. Firms engaged in international purchasing, which is typically an uncoordinated activity across buying units or sites, are unlikely to ever achieve the sourcing consistency that global sourcing firms achieve. Most of the items in Table III relate to sourcing approaches, practices, and beliefs consistency, which in the final analysis may be the most powerful benefit that firms realize from global integration.

Difference #10: Firms that engage in global sourcing rate certain factors as more critical to their sourcing efforts compared with firms that engage in international purchasing.

An executive mandate or commitment to source globally along with the right organizational structure that features central coordination, cross-functional teams, and plant-level participation all show significant differences between the segments. The availability of required information and data and the ability to identify common requirements, also differentiating factors, reveals the importance of information as a success factor.

 

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