The Importance of Global Supply

The Importance of Global Supply

 

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.  While trading patterns and partners shift depending on a number of economic factors, the clear trend is toward more trade globally.

 

  • Reasons for Global Purchasing – reasons may vary with the specific requirement.  However, the underlying summary reason for using an offshore supplier is that better value is perceived to be available from that source than from a domestic one.  There are at least ten specific reasons that may cause an offshore supplier to be selected as the preferred source:

 

    • Unavailability of Items Domestically – unavailability is the first and oldest reason.  As comparative economic advantage shifts, the location of manufactured products shifts.  Intermediate unfinished goods often cross borders several times before final assembly.  Because of this global supply has become a necessity.
    • Price and Total Cost – Most studies show that the ability of an offshore supplier to deliver product in the United States or Canada at a lower overall cost than domestic suppliers is a key reason to buy globally.  While it may seem surprising that an offshore supplier can produce and ship an item several thousand miles at a lower cost, there are several reasons why this may be the case for specific commodity:
      • The labor costs for manufacturing offshore may be substantially lower than domestically.  The included labor costs for services as well.  Many manufacturers have either set up manufacturing facilities in lower-cost countries or outsourced to contract manufacturers.
      • The exchange rate may favor buying offshore.  A strong dollar reduces the selling price of products bought from offshore suppliers, making them more attractive than domestic products.  By contrast, a weak dollar makes imports more expensive and less attractive.
      • The equipment and processes used by the international supplier may be more efficient than those used by domestic suppliers.
      • The international supplier may be concentrating on certain products, and pricing exports products at particularly attractive levels to gain volume.
    • Government Pressures and Trade Regulations – Many executives accept the social responsibility to help develop the economies of the countries in which they operate.  Many nations insist as a condition of sale of a major product that the seller agree to buy a specified value of goods in that country.  These types of arrangements are called offset agreements.  Trade incentives and/or restrictions may influence decisions about source location.  Decision makers must consider various combinations of sourcing locations and destinations for inputs (goods and services) and products in relation to bilateral trade agreements to identify savings opportunities.
    • Quality – While the quality level of the offshore sources is generally no higher than from domestic suppliers, on some items it is more consistent.  Also, some firms buy globally to round out their product line, with domestic suppliers furnishing “top-of-the-line” items and international suppliers filling in some of the “low-end” holes.
    • Faster Delivery and Continuity of Supply – In some instances, offshore suppliers can deliver faster than the domestic supplier because of limited domestic capacity.  In addition, some countries have made investments in infrastructure (roads, ports, and power) that support strong supply lines.  Cycle times are compressed by automating compliance processes.  Also a Global Trade Management (GTM) IT system enables a virtual network of partners including suppliers and government agencies which help to speed compliance requirements, enable faster information gathering and more data transparency.
    • Better Technical Service – If the offshore supplier has a well-organized distribution network in North America, better supply of parts, warranty service, and technical advice may be available than from domestic suppliers.
    • Technology – In some cases, offshore product suppliers may be more advanced technologically than their North American counterparts.  For services communications technology advancements and the availability of technologically sophisticated workers at lower wage rates than their domestic counterparts make offshoring attractive for software development, engineering, and accounting services, technical support, customer support center operations, and some legal and medical services.
    • Marketing Tool – To sell domestically-made products in certain countries, it may be necessary to agree to purchase specified dollar amounts from suppliers in those countries (countertrade).
    • Tie-in with Offshore Subsidiaries – many firms operate manufacturing, distribution, or natural resource-based companies in other countries.  A conscious decision may be made (especially in emerging markets) to support the local economy by purchasing there for export to the home country.
    • Competitive Clout – Competition tends to pressure the domestic supplier to become more efficient, to the long-term benefit of both that supplier and the buyer.  Purchasers use imports or the threat of imports as a lever to pressure concessions from domestic suppliers.  Partnering with an offshore supplier may also improve competitiveness of both when neither nation is able to dominate both invention and low-cost manufacturing.
  • Potential Problem Areas – There seventeen potential problem areas which could present problems in off-shoring.  The astute buyer will recognize that he/she must consider the total cost of ownership, not just the initial purchase price, when evaluating an offshore source.
    • Source Location and Evaluation – Selecting suppliers offshore can expensive and difficult due to obtain relevant evaluation data.  The methods for obtaining data on offshore suppliers is about the same as for domestic suppliers.  One needs to also get information from consultants and third-party purchasing organizations as well as from on site visits.
    • Lead Time and Delivery – Improvements in transportation and communications have reduced the lead time for off-shore purchases.  Four areas could cause a buyer to have additional lead time:
      • Establishing credit for a first time international buyer
      • Delays due to carriers in the foreign country
      • Delays in domestic customs
      • Time at the port for inbound and outbound shipments

Selecting the of transport is an important decision in international sourcing because of lead times as required by the customer, safety of the cargo, packaging requirements, compliance issues with certain modes, and final landed cost.  The selection of faster mode versus a slower mode can the freight to the location faster, but the cost may be too high for the buyer and their cost structure.  Selection of mode is a very important part of any negotiation.

    • Expediting – Distance makes an offshore supplier’s production/shipment more difficult due to increased costs.
    • Political, Labor, and Security Problems – The risk of supply disruption due to governmental problems and changes in government or trade disputes can be quite high.  The heightened risk of supply chain disruptions from terrorist acts, counterfeit goods, or unsafe products increases the time and cost of offshore sourcing.  Every importer and exporter must have the knowledge and records about its products, were they were sourced, and how they were transported, because governments continue to increase their requirements for safety standards and compliance reporting.
    • Hidden Costs – The buyer must compare the total cost of ownership before opting for an international supplier.  One should process map all of the possible cost points, assign a cost to them, and incorporate the management decision regarding the costs,
    • Currency Fluctuations – Market risks are prevalent with currency exchange, especially given that exchange rates can go up down from the time a contract is made until its is paid out.  Firms must incorporate the cost of mitigating currency exchange risk in its total cost of ownership.
    • Payment methods – Payment methods differ international sourcing versus domestic sourcing.  Risks must be delineated and incorporated in the total cost of ownership.
    • Quality – There must be a clear understanding between the buyer and seller on the quality specifications of a product or service.  A clear and unambiguous statement of work (SOW) is the foundation of quality services.
    • Warranties and Claims – Firms must incorporate procedures for rework and rejections and how they will be incorporated in a contract given the long distance with international sourcing.
    • Tariffs and Duties – The cost of non-compliance with import regulations can be staggering.  Firms must ensure to incorporate appropriate tariffs, taxes and duties into the total cost of ownership.
    • Administration costs – global supply requires additional documentation, mainly for duty and customs, logistics activities, payment, and financial transactions.  Even with developments such as electronic funds transfers and Internet-based communications systems, the administrative costs in international buying pose a major problem.
    • Legal Issues – Legal issues are several times greater in international buying versus domestic buying due to the different laws governing nations and international commerce.  Litigation is time consuming and expensive; therefore, it is increasingly common to agree to settle international trade disputes by international arbitration.
      • UCC & CISG – Firms must understand the differences in legal requirements regarding the Uniform Commercial Code (UCC) and The U.N. Convention on Contracts for the International Sale of Goods (CISG).
        • Under the UCC, the terms of a contract may vary in the acceptance from the proposed contract, and a contract still may exist.  Under the CISG, no contract is created if the terms of acceptance differ from the proposed terms.
        • Under the UCC, the statute of fraud requires a written agreement if the value of the goods exceeds $5,000 (although no U.S. State has adopted this revision from the previous $500 level).  Under the CISG there is no dollar limit.
        • Under the UCC, there are implicit warranties, such as warranty of merchantability, and a warranty of fitness for purpose.  Under the CISG, there are additional warranties.

Because of the difference in laws, purchasers should consider carefully the laws under which an international contract is governed.

      • Rotterdam Rules – also known as the United Nations Convention on Contracts for the International Carriage of Goods Wholly or Partly at Sea.  The rules establish a uniform and modern global legal regime governing the rights and door-to-door carriage.
      • Services – There is no international common law of contracts for services.  The choice of law will depend on the countries represented in the deal.  Parties may use the laws in the country of the supplier, or the CISG or U.S. State or Federal law as examples.
    • Logistics and Transportation – presents some of the biggest problems for buyers involved in international sourcing.  Many firms outsource to third party logistics providers.
    • Language – Because of foreign language difficulties, some firms insist that a supply manager who is going to have repeated dealings with suppliers whose native language is different from theirs be multilingual or take and language course.
    • Communications – Global supply can involve problems with communication.  This relates to time zone differences and overall problems with the communication network.
    • Cultural and Social Norms – Because customs vary in different parts of the world, buyers need to have cross-cultural skills and must be able to adjust to their supplier’ customs if they are to be effective in communicating and negotiating with suppliers.
    • Ethics and Social Responsibility – Congress passed the Foreign Corrupt Practices Act (FCPA) in 1977 that prohibits U.S. firms from providing or offering payments to officials of foreign governments to obtain special advantages.  The FCPA distinguishes between transaction bribes and “variance” or “outright” bribes.  Companies are very sensitive to the regulatory and reputation risk involved regarding ethics and responsibility.