Global Global Sourcing Sourcing

©Copyright 2001, Honeywell Inc.
All Rights Reserved
Bidding Processes
Global
Keeping it
in Order
Considerations
Sourcing Need
Internet
Locating
Final Edition “Rev B”
Supply Chain Education & Training Program 1

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Introduction
• Global sourcing is the reexamination of

procurement strategies for the majority of
a company’s purchased material cost base
to determine whether the sourcing should
change in light of global supply economics
and a global supply base.
• The goal is to seek out premier

suppliers worldwide on the basis of
price, quality, technology, flexibility
and delivery reliability.
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Course Objectives
• To provide all participants with a basic knowledge of

global sourcing and how to apply the proper techniques in
dealing with Supply Chain Management issues.
• This course is designed for all employees in the supply

chain organization with a particular emphasis on the
functions of Planner Buyers, Commodity Team Leaders
and Members, and all Strategic Sourcing personnel.
• The course emphasizes that the supply chain and our

sourcing strategies have impacts on both customers and
suppliers.
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Learning Objectives
• Understand the need for global sourcing

• Identify the groundwork required for global sourcing
• Describe the process for deciding on whether to use
global sourcing and how to select global regions
• Describe the process for locating new sources of supply
• Identify important cost considerations for global sourcing
decisions
• Describe how to maintain effective global sourcing
processes and practices
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Global Sourcing Course

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Modules
1. The Need for Global Sourcing
2. Considerations for Global Sourcing
3. Locating New Global Sources of Supply
4. Legal, Export Control and Logistics Issues
5. Use of the Internet for Global Sourcing
6. Hedging
7. The Bottom Line
8. Course Summary
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6
Class Individual Exercise

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(20 minutes)
• Spend 5 minutes and decide why you think

you should or should not take this class
• Give class a 30 second report of your thoughts
• Instructor to lead a general discussion of
findings
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Pre-Assessment
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Global Sourcing Module
ɐ 1. The Need for Global Sourcing

ɐ 2. Considerations for Global Sourcing
ɐ 3. Locating New Global Sources of Supply
ɐ 4. Legal, Export Control and Logistics Issues
ɐ 5. Use of the Internet for Global Sourcing
ɐ 6. Hedging
ɐ 7. The Bottom Line
ɐ 8. Course Summary
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The Need
The Need for
for
Global Sourcing
Global Sourcing
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Why Global Sourcing?

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Perceived Benefits
• Cost/Price benefits
• Increase exposure to worldwide product and process
technology
• Introduce competition to the domestic supply base
• Improve quality
• Increase the number of potential sources
• Establish a presence in foreign markets
• Satisfy offset requirements
• Improved delivery and reliability
More …
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Why Global Sourcing?
• Lowering logistics costs because of

vendor’s location to a company’s offshore
manufacturing site
• More consistent supply because of
seasonality in the domestic market
• Supplier equipment compatibility
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The Decision to Source

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Globally
While there are a number of reasons to

source globally, in the vast majority of the
cases, the main reason is to obtain lower
acquisition costs.
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Savings & Benefits From

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Going Global
• Reduced product costs
• Reduced defects and improved customer
satisfaction through higher quality
• Improved delivery time to customers through
more responsive suppliers
• Increased sales over competition
• Shorten new product development time
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Increasing Supplier
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Productivity
Global sourcing is critical to an aggressive approach
to increasing supplier productivity
Establishing significantly
High higher supplier
Performance expectations Aggressive
Approaches
Consolidation of
worldwide purchase
volume with
market testing
Steady
Worldwide Approaches
co-ordination of Shift
purchase strategy Electronic data
Interchange
Early and continuous
supplier design Long-term contracting
Involvement and With co-operative efforts
selection
Supplier councils
Supply base
Low rationalization
Current Pete Machuga, VP, Honeywell Future

Corporate Strategic Procurement 1/13/99
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Coordination of
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Procurement Requirements
Coordination will close the performance gap
Coordination of Global
High Procurement Requirements:
Strategy 5
Performance Gap
Assign Designs, Build, and

Sourcing to a specific Business
Unit: Strategy 4 Establish IPO: Strategy 3
Use of Subsidiaries: Strategy 2
Begin International Purchasing by Buyer: Strategy 1

Low
Time/Degree of Support
Pete Machuga, VP, Honeywell
Corporate Strategic Procurement 1/13/99
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What is Required
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for Global Sourcing?
• Accessibility to foreign suppliers

• Suppliers willing to collaborate for
joint business opportunities
• Suppliers with compatible core competencies
for outsourced products and processes
• Collaborative approach to making decisions
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When is Global Sourcing

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Required?
• When material, cost, quality, delivery, flexibility, value, and
service requirements cannot be adequately satisfied
domestically
• When new technologies are not available domestically
• When innovative approaches to product and process
development are desired
– Also, remember that Global Sourcing parameters include parts with
significant labor content, non-strategic components, minimal
technology requirements
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Strategic Global Sourcing

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Risks
• Selecting and qualifying suppliers

• Material requirements forecasting
• Currency fluctuations
• Meeting deadlines
• Varying standards of quality
• Lack of logistical information
• Poor inventory management
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Global Sourcing Risks
• Communications
• Currency
• Language
• Culture
• Logistics
• Legal issues
• Ethics
• Customs forms and documentation
• Customs duties and trade wars
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Quality Risks
• Quality levels of international sources in

general are no higher than from domestic
suppliers
• Quality benefits however, may be obtained for
some items in terms of consistency—for
example, steel pipe for the petroleum industry.
– May be due to better quality control systems, better
capital equipment, or more quality motivated
employees.
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Global Sourcing Issues

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That Need to be Resolved

• Identifying country and supplier sources
• Language barriers
Potential Tactical Risks
• Time differences
• Quality problems
• Inflexible quantity requirements
• Long or excessive leadtimes
• Shipping costs
• Complex logistics
• Currency exchange risks
• Political instability
• Import duties
• Cultural Differences
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Class Group Exercise

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(15 minutes)
• Break up into groups

• Assume you have a complicated
mechanical part that you want to
outsource
• Determine how you would select and evaluate
a global supplier’s capabilities to design, build,
and deliver a quantity of 100 of the part at the
required quality, price, and delivery lead time.
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Desired Elements of Global

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Supplier Relationships
• Long-term, cooperative relationships
• Increased volume of business per supplier
through reduction in the supplier base
• Use of latest communication technologies
including EDI, Extranets, XML, etc.
• Agreements on a schedule of price reductions
by suppliers
• Early supplier involvement in new product
development
• Joint performance metrics development
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Five Types of
Supplier Relationships
1. Buy-the-market (lowest landed cost)
2. On-going relationship
Broader interaction with key suppliers
Long Term Contracts/Long Term Agreements
3. Partnerships/Risk Sharing Partnerships (RSP)

Share information extensively
Joint product development
4. Strategic alliances
Work to achieve lowest total system cost while adding value
5. Joint Venture
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Drivers for Supplier

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Relationships
• Strategic importance of the buy item

• Number of suppliers able to provide the
material or service
• Complexity of the part’s interface to its
product and its logistics
• Uncertainty on cost, quality, delivery, service
and flexibility
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Global Supplier Management
• Identify supplier relationships as long-term

strategic or routine buyer-seller relationships.
• A long-term strategic example is a company
that commits to a special integrated circuit
design.
• Raw material suppliers can also be strategic
if they control their market.
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Global Supplier Management
• Routine relationships occur with commodity

products having multiple supplier possibilities.
• Long-term and routine relationships should

be managed differently by buyers.
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Who Needs Global

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Sourcing?
• Production
– Need low-cost, high quality, on-time delivery,
and flexibility in meeting schedule changes
– Uninterrupted sources of supply
• Engineering and R&D
– Innovative technologies and ideas
– Suppliers qualified for joint product
development
• MRO buyers
– Need lowest price
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Engineering Involvement in
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Global Sourcing
• Design Engineering
• Evaluate supplier technologies/products
• Collaborate on new product development
• Provide supplier support as needed
• Others?
• Manufacturing Engineering
• Evaluate supplier process and quality
capabilities
• Provide supplier support as needed
• Others?
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Supply Base Optimization –

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Effect on Global Sourcing

• Reduced supply base means a larger
percentage of business is offered to remaining
suppliers
• Reductions have become incentives for
suppliers to agree to long term relationships
• Results in higher volume shipments at lower
transportation rates due to full load container
• Rationalization follows development of
commodity plans shown on the next slide.
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Commodity Planning
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Process
Identify Strategic Significance
1 Use commodity teams
of the Commodity
Identify Commodity Market Research data from domestic

2 Trends and Key suppliers and global sources
Determine Commodity Select suppliers and

3 Strategy commodity strategy
Negotiate commodity
4 Implement Strategy
procurement
Monitor metrics Discuss

5 Monitor Performance
results with suppliers
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Commodity Strategies
• Optimize size of the supply base

• Require supplier Quality reporting
• Source globally
• Set high supplier performance standards
• Develop long term relationships with suppliers
• Utilze cross-functional teams
• Involve suppliers in product design
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Global or Commodity Sourcing

Strategy
• Purchasing develops a
“commodity procurement
strategy” covering:
– Company’s needs for a part family
– The nature of the supply market
– Expected supply base over the next few
years
– Supplier management strategies
company will use
More …
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Global or Commodity Sourcing

Strategy
• Strategy should include a section on
a global supply base including:
– Countries producing the product
– Names of potential suppliers
– Plans for future activities to investigate and
develop new sources
• Strategy should look at least five
years into the future.
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Part Family Optimization

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and Global Sourcing
• Optimization of part families by standardization

helps to integrate the resources of various
countries into a global sourcing strategy
• Standardization can improve a firm’s economies
of scale
• Competitive advantages can be attained as a
result of lower costs through a standardization
program
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Supplier Technology
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Contributions
• U.S. is no longer the undisputed world

product and process technology leader
• Other countries have passed the U.S.,
especially in the area of electronics, cell
phones for example.
• Companies wishing to gain access to the
latest technologies have no choice but to
pursue global sourcing
More …
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Supplier Technology
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Contributions
• A supplier’s ability to keep up with both

product and process technologies is
important to evaluate
• Supplier’s technologies capabilities reflects
its ability to maintain complimentary core
competencies and to support customer’s
current and future quality requirements
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Cost Savings Analysis
• Cost reduction – an actual reduction in the

cost of an item from that paid previously
– ROI: A calculation based on cost reduction
obtained and the cost expended to obtain the
reduction (a factor on large procurements)
• Cost avoidance – the difference between the
price paid and a potentially higher price which a
buyer was able to avoid through some specific
action
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Cost Savings Strategies
• Methods used to obtain cost reductions

are important
• Cost reductions by mutual cooperation is
not the same as cost reduction by heavy-
handed pressure on a supplier
• Cooperation may reduce costs through
joint improvements while heavy-handed
cost pressure might force supplier to cut
corners, resulting in poor quality
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Maintaining Cost Pressures
• Price changes should be measured in

both foreign and U.S. currencies to
better understand variation.
• Suppliers should be informed that
they are in a worldwide competition
for your business and may have to
find their own low cost suppliers.
• Suppliers should be responsible for
keeping their price dropping.
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Elements of Global
Acquisition Costs
• Product or item cost
• Tooling costs
• Qualification costs
• Logistics costs
– Warehousing/consolidation awaiting export
– Overseas transportation (ocean, air)
– Import duties/inspection/port fees/customs
processing fees
– Domestic warehousing/de-consolidation
– Inland transportation from port of entry to domestic
plant/distribution center (line haul and drayage)
More … 42
Hidden Global
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Acquisition Costs
• Potential Risks in “Hidden” Costs
– Increased inventory costs due to a longer supply
chain having to carry more inventory
– Extra packaging and a higher level of damage
costs
– Increased risk and cost of production disruption
due to out of stock conditions
– Extra time and costs associated with returns to
the supplier
– Increased information systems, communications
and personnel costs
– Currency and political risks
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Advantages
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of Global Sourcing
• Primary advantages
– Lower overall, landed acquisition cost
– Improved item or product quality
– Develop new sources of supply (May also be only source
available)
– Access to latest technologies
• Secondary advantages
– Introduce competition in the domestic supply base
– Satisfy countertrade requirements
– React to the sourcing patterns of competitors
– Establish a presence in a foreign market
– Increase supplier responsiveness
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ɐ 6. Hedging
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Considerations for
Considerations for
Global Sourcing
Global Sourcing
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Determining the Need

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for Global Sourcing

• Domestic competitive situation
• Extent of global competition
• Customer demands and expectations
• Location of high quality, low cost suppliers
• Location of latest technologies
• Sole-source situations
• Supplier service flexibility
More …
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Determining the Need

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for Global Sourcing
• If a company competes in regional markets

against other regional producers, it may not
need to source globally
• Firms with a single design and a single
manufacturing facility may not need to source
globally
• Source globally only if one or more
advantages can be obtained
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Supplier Sourcing
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Regions
• Supplier sourcing regions for

evaluation
– Domestic
• Local, domestic regions, nationwide
– Neighboring countries
• Canada and Mexico
– International
• Europe, Latin America, Far East, etc.
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Global
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Regionalization
• Three major global trading regions

– Europe,The Americas, Pacific Rim & Asia
– Each has relatively equal population and
economic conditions
• Country formed trade treaties
– North American Free Trade Agreement (NAFTA)
Canada, US, Mexico
– European Community (EC) 12 countries
– Others
• By duty-free program areas (Next slide)
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Major Supplier Sourcing

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Areas
• United States and Canada

• Latin America
• Eastern Europe
• Russia
• The Far East
• China
• Australia and New Zealand
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Supplier Sourcing
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Steps
• After locating potential sources, determine
supplier evaluation criteria i.e., cost, lead
time, quality, etc.
• Request a quotation for a typical order from
each supplier
• Compare the results from the different
suppliers and make a selection
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Barriers to Global
Sourcing
• Firms with no global experience face

many barriers
– Understanding of international purchasing procedures
– Company resistance to change
– Need to accommodate longer lead times and material
delivery distances
– Knowledge of foreign business practices, languages,
and cultural differences
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Type of Market Structure
• Pure competitive marketplace

– Standardized or identical products offered by many
suppliers
– Minimal barriers for new suppliers to enter

the market
– Price determined solely by supply and demand
– No single seller or producer controls enough of a

market to affect the market price
• Evaluating products in a pure competitive

marketplace can be performed using price
analysis
More …
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• Monopolistic competition environment

– Characterized by many producers selling similar but very
differentiated products
– Many firms produce so many different items that a individual

seller has no or limited market impact
– A buyer can influence a seller based on the size of its order
– Monopolistic competition is not the same as a monopoly

which is a single supplier
– Evaluate products using price analysis

More …
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• Oligopoly competitive environment

– An industry in which a few large firms compete
– The pricing strategy of one firm can influence other firms
– Examples include steel, automotive, appliances, and large-scale

computers
– Price competition can exist
– Buyers benefit from suppliers economies of scale
– Buyer’s ability to influence price decreases the larger the supplier is

compared to the buyer
– Perform cost/price analysis as appropriate
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Buying From Local Versus

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Global Suppliers
• All factors being equal, buyers prefer local
procurements
– Implies better service, faster and more accurate
deliveries, especially in JIT situations, lower
transportation costs, and shorter lead times.
• Advantages of buying globally

– May be the only source
– Suppliers may have larger production capacities
– Technical assistance may be more readily available
if supplier is larger than local supplier
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Supplier Benchmarking and

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Scorecard Process
• Characteristics of an effective supplier
evaluation audit:
– Flexible: can be used on different purchases
– Comprehensive: considers important categories
– Objective: employs quantitative scoring system
– Mathematically straightforward: easy to
calculate
– Reliable: measures well understood by trained
auditors
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Supplier Evaluation and

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Selection Process
Identify Key Supplier Evaluation Categories
Weight Each Evaluation Criteria

Develop
Survey
Identify and Weight Sub items Within Each Category
Define Scoring Metrics
Evaluate Suppliers Directly Supplier

Audit and
Selection
Review Evaluation Results and Make Selection
Continuous
Continuous Review of Supplier Performance
Review
Purchasing & Supply Chain Management, Monczka/Trent/Handfield
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Supplier Scorecard
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Process
CATEGORY WEIGHT SUB- SCORE WEIGHTED TOTAL
WEIGHT 0-5 SCORE 0-100
1. Quality Systems 20
1. Process control system 5 4 4.0
2. Total quality commitment 8 4 6.4
3. PPM defect performance 7 5 7.0
17.4
• Management Capability 10
• Management/labor relations 5 4 4.0
• Management capability 5 4 4.0
08.0
• Financial condition 10
• Debt structure 5 3 3.0
• Turnover ratios 5 4 4.0
07.0
• Cost Structure 15
• Costs relative to industry 5 5 5.0
• Understanding of costs 5 4 4.0
• Cost control/reduction efforts 5 5 5.0
14.0
• Delivery Performance 15
• Performance to promise 5 3 3.0
• Lead time requirements 5 3 3.0
• Responsiveness 5 3 3.0
09.0
• Technical/Process Capability 15
• Product innovation 5 4 4.0
• Process innovation 5 5 5.0
• R&D 5 5 5.0
14.0
Continue with more categories
Purchasing & Supply Chain Management, Monczka/Trent/Handfield 60
Ongoing Supplier
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Improvement Plan
Optimize Supply Base
Evaluate Supplier Capabilities
Determine Improvement Opportunities
Identify Support Requirements
Develop Supplier Improvement Plan
Implement Plan and Monitor Progress

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Supplier Support
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Options
• Education and training for suppliers
– Class room, hands-on training, or both
• Supplier location
• Company location
• Product/process technology transfer to

suppliers
• Provide supplier personnel with direct support
– On-call
– On loan –short/long-term assignments
• Provide progress payments to suppliers
• Other financial support
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Buyer Competencies for

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Global Sourcing
• Understanding and working with personnel from

different cultures
• Managing and negotiating with international carriers
• Keeping up with international laws that govern
procurement activities
• Tracking foreign currencies in those markets
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Supplier-Management
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Skills Required
• Acquire skills that can minimize problems that
resulting from distance, language, and
cultural misunderstandings
• Know how to shop the world for the best
suppliers
• Understand culture, currency, and legal
differences
• Develop a working vocabulary of foreign
business partners
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Communication Styles
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Differences
• Communications styles differ between

countries
– Message speed
• People in different countries use different amounts of
time to receive information and process it
– Response time capability
• Varies from country to country
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Message Context
• Context: The situation or background

relevant to a particular situation.
• High context communications assumes
the listener has the required background
information.
• Low context communications assumes
everything relative to a negotiation has to
be explained.
More …
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Message Context
• Buyers must know if the countries they are

dealing with are high or low context types in
order to present the right amount of
information.
• In low context situations, buyers must allow
suppliers sufficient time to understand what is
being discussed.
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Communication Skills
• Message speed and message content

differentiates U.S. from foreign
communication styles.
• Americans provide fast messages that
are preceded by summaries. This is not
appropriate in many countries.
• Suppliers using high context messages
depend on informal communications to
provide background information.
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Additional Differences
• Space: The distance people stand from

each other varies by country.
• Touching: Some cultures allow more
touching than is common in the U.S.
• Privacy: In some counties it is rude to ask
about a person’s wife and family.
• Business and personal time: Working
after hours may not be acceptable.
Socializing may be considered work.
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Time Zone Considerations
• World consists of 24 time zones, or

longitudinal regions, each occupying 15
degrees and having a solar time one hour
greater than that of the neighboring
regions to the west.
• The greater the number of time zones
between buyer and seller, the greater the
amount of time required to deliver orders.
• Phone communications also become
difficult as available business hours
between two parties differ
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Time Zone Affect
On Communications
• The greater the number of time zones between

buyer and seller, the less time is available to
communicate during the typical U.S. work day.
• U.S. buyers usually provide foreign suppliers
with their after-hour phone numbers so
communications can take place
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Business Support
• A real effort in the area of technical and

business support is required both in-country
as well at the home site to make global
sourcing a reality.
• We need to plan more support than is even
required for domestic transitions.
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ɐ 6. Hedging
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Locating New
New Global
Source of
Source of Supply
Supply
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Re-Visit
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Global Sourcing Objectives

• Price
• Quality
• Capacity
• Technology
• Strategic
• Country presence
• What company hopes to accomplish
75
Factors in Developing
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Foreign Suppliers
• Estimated dollar volume of procurements

• Product characteristics
• Potential purchasing cost reductions
• Global purchasing experience level
• Available company resources
• Logistics issues
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Ongoing Searches for

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New Sources Will

• Assure you are getting the best price,
delivery, quality and service
• Convince management that the firm is buying
competitively
• Identify if better ways exist to obtain goods
and services
• Identify new products and technologies
• Assure buyers they are effective
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Ongoing Searches for

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New Sources
• Always looking for new or better sourcing is

part of every buyer’s job for finding the best
cost suppliers for his/her organization
• Having current long-term agreements does
not mean to stop looking for new sources
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Information Search for

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Potential Sources of Supply
• The amount of time and money required to search for

potential sources of supply should not exceed the benefits
that are desired.
• Must weigh the following:
Strategic
Capability of
Importance/Technical
Existing Supply
Complexity
Base to Satisfy
Of Purchase Requirement
Cost, Delivery,
And Service
Requirements
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Global Sourcing
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Preparation Work
• Start by developing a commodity status report
• Current status: Include description of the
commodity, its usage, requirements, suppliers,
price, terms, annual expenditures, mode of
transport, current contracts.
• Production process: Include how the item is
made, the materials used, the supply/price status of
these materials, labor required, current/future labor
situation, alternative production processes.
• Use of the item: Include primary and secondary
uses, possible substitutes, and economics of
substitution. MORE …
80
International Sourcing
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Preparation Work
• Develop a commodity status report: Continued:
• Demand: Include current/future requirements,
inventory status, sources of forecast information and
lead times.
• Supply: Include current producers, total supply
situation, external factors such as import issues,
government regulations, etc.
• Price: Include price history and future forecast,
factors determining price, cost to produce, and
deliver, tariff and import regulations, estimated profit
margins of each supplier, price objectives of
suppliers, and potential rock-bottom price
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Selecting Countries
• Identifying countries that produce the

items you need is the first task.
• U.S. industrial magazines on your
products will have information.
• Subscribing to foreign magazines on
your products is a better choice.
• Foreign trade development offices in
the U.S. can identify magazines from
their country written in English.
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Selecting Countries
• U.S. Department of Commerce keeps statistics

on imports. The data base is the National Trade
Data Bank (NTDB).
• NTDB shows imports by country.
• This list can be used to find out who exports the
items you are looking for.
• Export volumes vary over time. The list should
be reviewed for updates yearly.
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Locating Suppliers Within

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Selected Countries
• Approaches to use if decision is to search
direct instead of using third parties:
– Trade promotion offices
– Fairs and trade shows
– Country or region directories
– Major city yellow pages
– U.S. banking branches – overseas
– The Internet
– Company overseas selling office
– U.S. Department of Commerce
– IPOs of friendly U.S. companies
– Trade journals
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Selecting Suppliers
• Objective at this point should be to develop a

list of potential suppliers.
• Expect to make at least one trip to check out
potential suppliers.
• Do not assume that you will find the best
supplier for your needs at first due to
complexities of the search.
• Finding suppliers includes looking at
intermediaries
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Visiting Suppliers
• Visits to suppliers are necessary to

develop business relationships.
• U.S. travelers should first read up on
the country’s cultures and taboos.
• Always take sufficient information on
your company with you.
• Decide if you need business cards printed
in different foreign languages.
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Using Surveys
• Take a survey with you. Surveys are useful for collecting
information in areas not previously covered.
• Surveys provide information on
– How the supplier produces the products
– How quality is maintained
– How shipments on time will be assured
– Whether there are any discernable problems
• Are there subcontracted items?
• Levels of work-in-process, as an indication of lead time variation
• Production cost trends and control
• Supplier lead-time control
• Supplier management techniques
• ISO 9000 certified?
• Quality planning and control
• Taking a survey will most likely require medical requirement

(shots, pills, etc.)
• Allow extra travel time to overseas Suppliers. It generally takes
at least one full day to acclimate to the new time zone. 87
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Following the Survey
• Based on evaluating the survey data, reduce

potential suppliers to 3-4.
• Next, perform cost analysis for each supplier
using purchased item costs, duties, currencies
and exchange rates, shipping charges and
inventory carrying costs.
• Basis for analysis should be total landed cost.
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Price Quotations
• Request quotations in which buyer takes title at

supplier’s facility and will handle shipping and
duties.
• If the supplier country’s currency is floating, the
quotation should be in the currency of the foreign
country to assure lowest price.
• Add cost of freight and duty to arrive at a total
“landed in the U.S. cost.”
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Price Quotations
• Request a freight quote to the U.S. point of

entry (with duty unpaid) if your company is not
able to handle freight.
• Suppliers should be asked to quote on
realistic quantities.
• Obtaining quotations may require repeated
efforts. This can help evaluate supplier
responsiveness.
90
Primary Global Sourcing

All Rights Reserved
Approaches
• U.S. sales contact of foreign suppliers

• U.S. global sourcing company
• American Export Register
• Thomas Register of European Manufacturers
91
All Rights Reserved
Intermediary Suppliers
• Import Merchants
– Merchants that buy and sell products for their own profit.
– Essentially, Importers
– Import merchants handle all logistical details (customs, currency
exchange, transportation, etc.
– The buyer handles a purchase as any other domestic purchase
• Subsidiaries of Foreign Companies

– Organizations owned by foreign companies that are set up in
another country, as in the U.S., to conduct business.
– Services can be similar to that provided by Importers.
– Does not usually have direct contact with the supplier’s
manufacturing operations. This can result in delays on orders,
changes, or possibly warranty claims.
MORE … 92
All Rights Reserved
• Trading Companies
• Companies that operate like import merchants on
a world-wide scale. Have existed for hundreds of
years, East India Company for example.
• Commission Houses
• Usually agents for foreign exporters
• Paid on a commission basis for what they sell
• Do not buy the goods themselves but handle
customs and shipping details
MORE …
93
All Rights Reserved
• Agents
• Organizations/individuals who represent sellers.
• Paid on a commission basis.
• Do not take title to the goods or handle any financial
responsibilities.
• Handle customs and shipping details only.
• Import Brokers
• Bring buyers and sellers together.
• Broker’s commission is paid by the seller if it locates buyers
and by the buyer if it finds sources of supply.
• Custom’s Brokers
• They can clear parts, clear paperwork, and and report on
parts availability at the airports plus a lot more.
94
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Pro’s and Con’s
Source Intermediaries Advantages Disadvantages
or “Middlemen”
Distributors Handle cultural, commercial, and Among the most costly sources:
Buy and sell goods. Accept orders technical problems. If delivery in buyer pays both manufacturer’s
and payment. Assume warranty U.S., payment in dollars, standard and distributor’s profit and
responsibility. May offer customer terms. Simple handling of product overhead. Probably foreign
training. defects. currency and L/C (letters of credit)
Manufacturer’s Representatives Handle cultural, commercial, and Payment in foreign currency. L/C
Accepts orders on behalf of a technical problems. Generally less terms if a foreign rep. company.
source, paid commission for the expensive to use than a distributor. Bears no warranty liability, little use
service. May provide technical and in dealing with defects.
commercial support.
Brokers Least expensive intermediary. Least responsible for source or

Bring parties to a transaction Wide range of services possible. product performance, warranty.
together for a fee. Services vary May have wide contacts in the Probably little technical support.
widely. industry. Most negotiable. Foreign currency, L/C terms
probable.
MORE …
95
All Rights Reserved
Pro’s and Con’s
or “Middlemen”
Trading Companies Worldwide contacts, broadest Generally a costly alternative. Most
Broad scope of activities from scope of sources. Experience and prefer to trade in existing markets,
brokering, representation, capability. Few cultural or language or make a market for new product,
distribution, program management. problems. not to deal in isolated inquiries.
Because of their scale of
production, most buyers have little
leverage.
Large Multinationals Undisputed capability, possible Because of scale, few buyers have
The majority of International benefits of economies of scale. negotiating leverage. No benefit in
business. May prefer new Good support, training, warranty purchasing through U.S.
customers to buy through and performance. Few cultural or subsidiary.
distribution or U.S. subsidiaries, language impediments.
which cannot be considered an
offshore source.
Midsize Manufacturers Low costs at acceptable levels of Some cultural and language
The vast majority of source risk. Opportunities for close, long- barriers to overcome. Foreign
opportunities. Public or private. term relationships. currency, letter of credit (L/C).
Most already exporting. May have
a U.S. presence in a liaison office.
MORE …
Global Purchasing, Hickman & Hickman Jr. 96
All Rights Reserved
Pro’s and Con’s

or “Middlemen”
Small Specialty Firms Lowest cost. Probably most Most likely to present cultural,
Usually individually or privately personalized, attentive service. language problems. Buyer
owned. Limited capability; usually responsible for freight, duty of
one process or service. transaction. Foreign currency, letter
of credit.
Captives If accessible, may be very Normally unwilling or precluded

Wholly owned subsidiaries or inexpensive and accustomed to from accepting direct orders. Extra
subcontractors controlled by larger quality, on-time performance. cost if accessible through the
firms through investment or dominant company.
predatory purchasing.
Global Purchasing, Hickman & Hickman Jr. 97

Using Third Party

All Rights Reserved
Sourcing Companies
• Advantages
– Speeds up the global sourcing process
– Improves potential for success
– Reduces internal resources requirements
– Most of search cost is born by the 3rd party
– Eliminates need to develop internal global sourcing
capabilities
– If savings are insufficient, buyer has no further
exposure since third party activities can be
cancelled
More …
98
Using Third Party

All Rights Reserved
Sourcing Companies
• Disadvantages
– Increased prices (7% to 20%)
– Reduced control of sourcing
– Buyer has minimal contact with supplier
– Not developing internal capabilities may limit
ability to be competitive
– 3rd party may lack sourcing capabilities in other
countries thus requiring more 3rd parties
99
International Procurement
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Offices
• Advantages
– Shortens search and response time
– Usually knows reputation of suppliers
– Can find small, obscure suppliers
– Knows the customs and cultures
– Improve negotiations
– Perform inspections
– Not operated by a foreign supplier for the benefit of its
customers
– Makes in-country escorts and visits more productive
More … 100
International Procurement
All Rights Reserved
Office
• Disadvantages
– Costly to operate
– Adds to headcount
– Favors country it is in
– Must have volume business to justify
– Must have import capabilities
– May prevent development of internal
Global Sourcing capabilities
101
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Primary Sources
• Direct purchase from a primary source is less

expensive than using an intermediary.
• Although buyer and seller assume greater
responsibilities, benefits outweigh efforts.
– Communications delays in multiparty transactions
are eliminated, making scheduling easier.
– Changes are more easily communicated.
• Primary sources should always be the target

of an offshore product search.
102
Identifying Global OEM

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Suppliers
• Finding global OEMs is similar to
finding domestic OEMs – it just take
more time.
• Contact the embassy or trade office of
the countries you are interested in
doing business with for contacts.
• Embassies also have Web sites that
can provide contact information.
More …
103
Identifying Global OEM

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Sources
• Can also use trade associations or

trade journals to find foreign OEM
suppliers
– Directories exist for the European Union,
Pacific Rim, etc.
– Contact N.A.P.M. and ask for information
on global sourcing
104
Direct/OEM Purchasing
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From Global Suppliers
• Avoiding the intermediary or IPO and dealing

directly with a foreign supplier may net the
lowest delivered cost (including customs,
transportation, duties, etc., costs)
• May not be the lowest cost however when
travel, communications, and other costs are
factored in. Company must do a cost
comparison of direct versus using an
intermediary to determine best way to go.
More …
105
Direct/OEM Purchasing
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From Global Suppliers
• Experienced buyers recommend that firms

use intermediaries at first to develop an
awareness of market conditions and the
social, political, and economic trends of the
country before buying direct from companies.
• Essentially, determine supplier’s ability to
perform before buying direct.
106
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ɐ 6. Hedging
107
All Rights Reserved
Legal, Export
Legal, Export Control
Control
& Logistics
& Logistics Issues
Issues
108
All Rights Reserved
Business Values
Honeywell’s
Code of Business Conduct
– Customers: Our first priority is to satisfy our
customers.
– Integrity: We are committed to the highest level
of ethical conduct wherever we operate. We
obey all laws, produce safe products, protect the
environment, practice equal employment, and
are socially responsible.
109
All Rights Reserved
Legal Considerations
• Legal issues
– Laws and regulations of different countries
– Legal priorities
– Foreign Corrupt Practices Act
– Unions
110
All Rights Reserved
The CISG
• The CISSG currently has 59 countries that

have signed up for the Convention
Argentina 19 Jul 1983 a Georgia 16 Aug 1994 a Poland 28 Sep 1981 19 May 1995
Australia 17 Mar 1988 a Germany4, 5, 6 26 May 1981 21 Dec 1989 Republic of Moldova 13 Oct 1994 a
Austria 11 Apr 1980 29 Dec 1987 Ghana 11 Apr 1980 Romania 22 May 1991 a
Belarus 9 Oct 1989 a Greece 12 Jan 1998 a Russian Federation 16 Aug 1990 a
Belgium 31 Oct 1996 a Guinea 23 Jan 1991 a Singapore 11 Apr 1980 16 Feb 1995
Bosnia and Herzegovina 12 Jan 1994 d Hungary 11 Apr 1980 16 Jun 1983 Slovakia3 28 May 1993 d
Bulgaria 9 Jul 1990 a Iraq 5 Mar 1990 a Slovenia 7 Jan 1994 d
Burundi 4 Sept 1998 a Italy 30 Sep 1981 11 Dec 1986 Spain 24 Jul 1990 a
Canada 23 Apr 1991 a Kyrgyzstan 11 May 1999 a Sweden 26 May 1981 15 Dec 1987
Chile 11 Apr 1980 7 Feb 1990 Latvia 31 Jul 1997 a Switzerland 21 Feb 1990 a
China 30 Sep 1981 11 Dec 1986 AA Lesotho 18 Jun 1981 18 Jun 1981 Syrian Arab Republic 19 Oct 1982 a
Croatia 8 June 1998 d Lithuania 18 Jan 1995 a Uganda 12 Feb 1992 a
Cuba 2 Nov 1994 a Luxembourg 30 Jan 1997 a Ukraine 3 Jan 1990 a
Czech Republic3 30 Sep 1993 d Mauritania 20 Aug 1999 a United States of America 31 Aug 1981 11 Dec 1986
Denmark 26 May 1981 14 Feb 1989 Mexico 29 Dec 1987 a Uruguay 25 Jan 1999 a
Ecuador 27 Jan 1992 a Mongolia 31 Dec 1997 a Uzbekistan 27 Nov 1996 a
Egypt 6 Dec 1982 a Netherlands6, 7 29 May 1981 13 Dec 1990 A Venezuela 28 Sep 1981
Estonia 20 Sep 1993 a New Zealand8 22 Sep 1994 a Yugoslavia 11 Apr 1980 27 Mar 1985
Finland 26 May 1981 15 Dec 1987 Norway 26 May 1981 20 Jul 1988 Zambia 6 Jun 1986 a
http://www.jura.uni-freiburg.de/ipr1/cisg/ (as of 8/22/01)

111
U.S. Antitrust Laws

All Rights Reserved
Prohibit:
Privileged &
Confidential
• Agreements that unreasonably restrain

trade
– Certain types of agreements are always
unreasonable and per se, unlawful
- Price Fixing - Horizontal Allocation of
Markets (Products and
- Bid Rigging
Territories)
- Resale Price
- Horizontal Allocation of
Maintenance
Customers
(Vertical Price
Fixing) - Certain Group Boycotts
and Tying Arrangements
112
U.S. Antitrust Laws

All Rights Reserved
Prohibit:
Privileged &
Confidential
– Other agreements are judged under a

“Rule of Reason”
• Vertical non-price restrictions
• Most intellectual property licensing

agreements
• Joint purchasing agreements
• Research and production joint ventures
113
U.S. Antitrust Laws

All Rights Reserved
Prohibit:
Privileged &
Confidential
• Monopolization, attempts to monopolize and

conspiracies to monopolize
– But not monopolies fairly won
• Mergers and acquisitions that may lessen

competition
– Hart-Scott-Rodino (HSR) premerger notification
process applies to most acquisitions of assets or
voting securities in excess of $15 million
114
U.S. Antitrust Laws

All Rights Reserved
Prohibit:
Privileged &
Confidential
• Discrimination in sale of commodities (goods,

not services) “of like grade and quality” to
different purchasers
– Prohibition applies to discrimination in pricing and
in promotional allowances
– Complicated application
• Must show injury to competition
• Meeting competition and cost justification defenses
115
Employee
All Rights Reserved
Responsibilities
Privileged &
Confidential
• Understand and comply with the antitrust

or competition laws of the United States
and all jurisdictions in which one competes
• Ask questions when
you are not sure
116
Employee
All Rights Reserved
Responsibilities
Privileged &
Confidential
• Follow Honeywell’s Antitrust Guidelines to avoid

improper conduct
– Communications with competitors
– Gathering competitive information
– Ongoing business relationships
– Pricing
117
Employee
All Rights Reserved
Responsibilities
Privileged &
Confidential
Report any improper conduct to your supervisor,

your Compliance Officer, a member of the
Compliance Council or Leadership Committee, a
Honeywell Officer, the Law department or ACCESS
118
Honeywell Products
All Rights Reserved
Control Categories
AT - Antiterrorism NP - Nuclear
Proliferation
NS - National CB - Chemical and

Security biological
weapons
MT - Missile
Technology
119
Reasons For Control of

All Rights Reserved
Exports
AT Anti-terrorism
CB Chemical and biological weapons
CC Crime control
Mt Missile technology
NS National security
NP Nuclear proliferation
RS Regional stability
SS Short supply
XP Computers
120
All Rights Reserved
Honeywell Products
Most Honeywell products are in 3 categories:
Category 1: Category 7: Category 9:

Materials & Navigation & Propulsion Systems,
Chemicals Avionics Space Vehicles &
Related Equipment
121
Government Import
All Rights Reserved
Restrictions
• A license or permit from a responsible

Government agency may be
necessary to Import:
– Certain drugs
– Firearms and ammunitions
– Petroleum and petroleum products
– Etc.
122
All Rights Reserved
Foreign Government
Restrictions
• Understand foreign government restrictions to

assure compliance.
Example:
– Czech Republic ACT No. 21/1997: This act stipulates
conditions under which it is possible to export from or import
to the Czech Republic goods and technologies subject to
international regimes, and defines the authority of state
administration bodies in this area.
123
All Rights Reserved
Czech Republic
Example
• General Obligations of Exporters, Importers, and Users. Exporters of
controlled goods shall be obliged to:
– a) Arrange for the issuance of a certificate of end use for the controlled goods
and for compliance with potential conditions specified in the export license.
– b) Upon request by the Ministry of Industry and Trade, submit, after

conclusion of the export transaction, a delivery verification document
evidencing the delivery of the controlled goods in the approved county of
destination, issued by the relevant authority of that country.
– c) For at least five years from the end of the calendar year in which the
controlled goods were exported, keep records containing the fundamental
data necessary for identification of the goods.
– d) Upon export of controlled gods previously imported, comply with the terms
and conditions stipulated in the export license issued by the foreign supplier.
Etc.
124
Honeywell International
All Rights Reserved
Trade Compliance Policy 110
• Honeywell’s International Trade

Compliance Policy sets fourth guidelines
to ensure compliance of all applicable
United States and Foreign export-import
control laws.
More …
125
All Rights Reserved
• Key policy elements are:

– Compliance leadership for corporate, SBU
and sites
– Identification of applicable laws and
regulations
More …
126
All Rights Reserved
– Implementation procedures
– Foreign nationals hiring and assignment issues
– Procedures for compliance with regulations on
imports
– Procedures for management of foreign sales reps
– Ban on sales to prohibited countries
More … 127
All Rights Reserved
Honeywell Export Controls

& Compliance Office
– Corporate office located in Washington
– Office supports all Honeywell facilities in obtaining

export and import licenses from Government agencies.
– Provides guidance and interpretation of U.S.

Regulations to Honeywell personnel worldwide.
More …
128
All Rights Reserved
Honeywell Export Controls

& Compliance Office
• Ensures compliance of U.S. laws by

conducting training seminars and
compliance procedure
reviews at facilities
worldwide
• Assists facilities in resolving

problems with U.S. Customs
relative to exports and imports
129
All Rights Reserved
Technical Data
• Information which is required for the design,

development, production, manufacture,
assembly, operation, repair, testing,
maintenance or modification of.
• Defense articles.
130
All Rights Reserved
Technical Data
• Classified information relating

to defense articles and services.
• Software related to defense articles.
• Information covered by an invention

secrecy order.
131
Exporting
All Rights Reserved
of Technical Data
• Transmit or transfer out of the U.S.
• Take it overseas and release it there
• Release in written form or oral exchange
• Transfer on disk, electronic or other

media
More …
132
Exporting
All Rights Reserved
of Technical Data
• Allow visual inspection by foreign nationals
• Send e-mails to foreign parties.
• Permit foreign persons to access the U.S. data

bases, even if they are Honeywell employees,
regardless of their position.
133
All Rights Reserved
Offshore Procurement
• Export of build-to-print technical data

– Build-to-print is based on the assumption that the
capability exists to replicate an item from drawings
and specifications alone. Release of supporting
documentation is permissible.
• Technical data furnished to foreign suppliers

can include drawings and specifications. No
technical assistance or manufacturing details
are included
134
All Rights Reserved
Statement Requirement
• Export of technical data in support of

offshore procurement activity shall not be
made until:
– A signed statement is obtained from the
supplier confirming that the data will not be
retransferred to any unauthorized parties or
to a third country without the prior written
U.S. Government approval.
135
Offshore Procurement
All Rights Reserved
Limitations
• Defense articles procured under offshore
procurement license can only be delivered to
Honeywell of an agency of the U.S. Government
• Upon completion of contract, foreign supplier and

subcontractors shall destroy or return all technical
data received by them.
• Offshore procurement technical data license must

be renewed upon its expiration if the arrangement
is to continue.
136
All Rights Reserved
Honeywell’s Intranet
• Public Domain refers to information which is

published and generally accessible or available
to the public.
• Only public domain data should be on

Honeywell’s Intranet. Reason - export of data
that does not require licenses must still be
marked properly and records of exports must be
maintained.
137
Honeywell Policy on Hand

All Rights Reserved
Carried Equipment/Data
– Unclassified technical data under the

ITAR permitted with proper export
documentation.
– Contact Export Control Coordinator for

support
138
Honeywell Policy on Hand

All Rights Reserved
Carried Equipment/Data
– Unclassified technical data under the

ITAR permitted with proper export
documentation.
– Contact Export Control Coordinator for

support
139
All Rights Reserved
Ethics in Global Sourcing
• Know the culture of the country you are dealing

with and abide by it
• Maintain high ethical standards in dealing with
all global suppliers
• Treat all competitive suppliers equally
• Management of global suppliers can be as
easy as managing domestic suppliers when
performed ethically
140
Global Logistics
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Considerations
• Who should handle logistics?
• Who determines inbound freight flow?
• Support organizations
• Air versus ocean freight
• International logistics and JIT
– Weighing the buying decision when going
global
• Advantages/disadvantages air vs. ocean freight
141
International Logistics
All Rights Reserved
and JIT
• International JIT programs are difficult due to
logistics system coordination requirements
• Some success achieved through:
– Weekly delivery from stocking location near the
plant
– Building special storage facilities in-house
– Establishing limited windows of supply opportunity
– Setting precise dates of delivery
– Long-term contracts with overnight delivery firm
142
All Rights Reserved
Air Freight
Versus Water Carrier
Transportation Advantages Disadvantages

Mode
Air Freight • Quick and reliable • Very high cost
• Good for light/small, high value • Location of large airports
shipments (e.g., electronics) limits shipping points
• Good for expediting/ • Cannot be used for large,
emergency situations bulky shipments
Water Carrier • Good for bulk commodities • Limited flexibility

(heavy, large items) • Seasonal availability
internationally • Very long lead times
• Can handle any type of freight • Poor reliability (may
• Low cost encounter delays at ports,
etc.)
143
Air Transportation
All Rights Reserved
Times
• Most goods can be picked up from a supplier

and put on a plane the same or the next day.
• Goods from Europe typically arrive in the U.S.
the same day.
• They normally clear customs the next day and
are ready for pickup. There is transit time in
the U.S. from the port of entry
to the customer.
144
All Rights Reserved
Ocean Transit Times
• Transit times examples:

– Japan to Oakland: 12 days
– Singapore to Oakland: 20 days
– Northern Europe to Boston: 15 days
– Northern Europe to Oakland: 24 days
• Newer high-speed container ships take 8 days

from Japan to California.
145
Document
All Rights Reserved
Responsibilities
• The freight forwarder prepares

freight waybills and packing lists.
• The supplier, or IPO (International
Procurement Office, if company
has one) prepares the invoices.
• The customs broker prepares the
customs entry manifest.
146
All Rights Reserved
Having Brokers
• There is no requirement for a company

to have custom brokers.
• However, brokers are recommended if
companies are receiving goods at a number
of ports of entry.
• Otherwise, the companies will have to have
employees stationed at every port to receive
the goods.
147
All Rights Reserved
Broker Charges
• Brokers charge a negotiated fee for each

entry into the United States.
• Air shipment waybills are called “House Air
Waybills: or HAWB.
• HAWB have a higher charge for the first item
on the waybill and lower charges for
remaining items.
• Example would be $75 for the first item and
$25 for each additional item.
148
All Rights Reserved
Goods Entering the U.S.
• All goods are subject to inspection by the

U.S. Customs Service.
• Customs usually does not physically
inspect goods if the importers are known
to follow the laws/regulations.
• Duties can be reduced by knowing all the
duty exemption and reduction
possibilities.
149
All Rights Reserved
Customs Service Charges
• Customs charges a fee based on the value of

the shipped goods.
– Currently 0.19%
– Minimum charge is $21 and max is $400
– Goods from Canada and Mexico have reduced or
no fee because of the NAFTA.
• For ocean freight, there is a harbor

maintenance fee of 0.125% of the value of the
goods.
150
Reducing Duties on
All Rights Reserved
Imports
• Check eligibility for the Generalized System
of Preferences (GSP) when buying from a
less-developed country.
• Purchased products that have a U.S. content
(unmodified) do not require duties on that
content.
• Imported items that are then exported can
recover 99% of original import duties. Called
duty drawback.
151
U.S. Duty Free

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Programs
The U.S. has duty-free programs for some countries as
described by:
A: Generalized System of Preferences (GSP)
E: Caribbean Basin Initiative (CBI)
IL: U.S.- Israel Free Trade Agreement
C: Civil Aviation Pact
J: Andean Pact
K: Agreement on Trade in Pharmaceutical Products
L: Uruguay Round Concessions on Intermediate
Chemicals for Dyes
CA: NAFTA for Canada
MX: NAFTA for Mexico
152
All Rights Reserved
Participating Countries
• Generalized System of Preferences (GSP)

helps approximately 200 developing countries
by permitting duty-free imports.
• Most important countries include Russia,
India, Philippines, Malaysia, Indonesia, and
Thailand.
• To obtain duty-free status, products must
have a minimum of 35% country content.
153
All Rights Reserved
NAFTA
• The North America Free Trade Act,

(NAFTA), ratified in 1993, removed
all duties and quotas for products
traded between Canada, the U.S.
and Mexico.
• Some duties were removed initially,
others are scheduled to be removed
over a 5-, 10- or 15-year timetable.
154
General Agreement on
All Rights Reserved
Tariffs and Trade (GATT)

• Latest GATT revision signed by U.S. and 122
countries, effective 7/1/95.
– Some provisions will be phased in over next 10
years
• Purpose of GATT is to create a secure and

predictable international trading field in which
to transact business.
• Tariffs on thousands of items are being
significantly reduced.
More …
155
All Rights Reserved
GATT
• Service industries are included for the first time

• Intellectual property rights now protected worldwide
• GATT administration was replaced with the World
Trade Organization (WTO)
• In theory, new sources of supply will become
available to the buyer that will create new
competition which will improve product innovation,
quality, delivery and customer satisfaction.
• Increased predictability of international
marketplaces is also predicted.
156
All Rights Reserved
Focusing Imports
• If you are the importer, some things that can

be done to make it easier include:
– Limit the number of ports of entry you use. This
will make you better known to the Customs
Service and to brokers.
– Choose custom brokers with intent to get them
familiar with your business so they can suggest
duty-saving ideas.
157
All Rights Reserved

ɐ 6. Hedging
158
All Rights Reserved
Use of
Use of the
the Internet
Internet for
for
Global sourcing
Global sourcing
159
Internets, Intranets, and

All Rights Reserved
Extranets
• Internet: Access is global and public, and

information fragmented and widespread.
• Intranet: Access is private, users are members
of a specific firm or institution, and
information is proprietary and closely held.
• Extranet: Access is semi-private, users are

groups of closely related companies, and
information is shared within the group. Can be
globally applied.
160
Class Exercise
All Rights Reserved
(10-15 Minutes)
• Break up into groups
• Determine how a Honeywell developed

extranet would best serve Honeywell in
Phoenix. Remember, an extranet is a
controlled Internet system between company,
customers, and suppliers.
161
Use of the Internet in

All Rights Reserved
Global Sourcing
• The Internet increases the visibility and

accessibility of foreign suppliers
• Reduces communications problems
globally
• Provides transaction speed, low
transaction cost, new supplier options,
and improved productivity
More …
162
Use of the Internet in

All Rights Reserved
Global Sourcing
• Allows employees to tap into:

– Supplier catalogues
– Supplier quality and capacity
information
– Designs and technical data
– General price and delivery information
– Corporate purchasing policies and
procedures
163
Developing an Internet
All Rights Reserved
Strategy
Integrated Automated
Number of Purchasing Tasks
Transactional Approach
Enterprise
Savings are realized by
High
E-purchasing is part of a
placing small dollar orders
total networked business
on the Internet
model in the supply chain
Phase 2
Phase 4
Search-and-Find Approach Cost-Driver Approach

Uses the Internet as a tool Internet used in conjunction
Low
to locate suppliers and with intranets and extranets

check financials, inventory, to lower purchase costs and
lines carried, etc. to distribute information
Phase 1 Phase 3
Low High
Use of Internet Technology
E-Purchasing Plus, Giunipero & Sawchuk
164
Procurement Benefits of
All Rights Reserved
Using the Internet

• Using the Internet, company buyers have noted
the following:
– Easy to find new sources of supply
– Sourcing time saved
– Lower prices paid
– Optimized supply base
– Ability to easily comparison shop
– Lower overall operating costs
– More control over spending and inventory
– More efficient use of purchasing personnel
165
Guidelines For Internet

All Rights Reserved
Sourcing
• The Internet can be used to search for desired items a
number of ways
– Thomas Register free online service
• 168,000 companies in the U.S. and Canada
• 7,782 catalogs included
• 400,000 plus products
• Secure message transmission when ordering products from
companies
– Viewing known company catalogues
– Using global trading exchanges
– General Internet search
– Reverse auctions is an internet tool which foreign
suppliers need to be comfortable with
166
All Rights Reserved

ɐ 6. Hedging
167
All Rights Reserved
Hedging
168
All Rights Reserved
Currency Hedging
• Hedging refers to the process used to

protect the value of an asset, liability,
or a future cash flow.
• The purpose of hedging the foreign
currency value of a sales order is to lock
in the dollar value of the order.
• In hedging, protection is specific to one
cash flow and the amount needed to
protect it.
169
All Rights Reserved
Currency Hedging
• Hedging, or trying to avoid or lessen

loss by making counterbalancing
investments, etc.), is not risk free.
• Risks comes from purchase volume
forecasts that do no come true.
• Because of the risk potential,
companies maintain policies and
control on hedging practices.
170
All Rights Reserved
Hedging Example
Cash Activities Futures Market Activities
Jan 15: Cash market purchase of 100,000 Jan 15: Sells a March futures contract for
pounds of raw cocoa at $0.26/pound = 100,000 pounds of raw cocoa at
100,000 x $0.26 = $26,000 $0.275/pound =
100,000 x $0.275 = $27,500
Jan 15 to Feb 15: Purchaser incurs

manufacturing costs of $0.43/pound =
100,000 x $0.43 = $43,000.
Feb 15: Sells refined chocolate to customer Feb 15: Buys a March futures contract for
at $0.64/pound = 100,000 x $0.64 = 100,000 pounds of raw cocoa at
$64,000 $0.225/pound =
100,000 x $0.225 = $22,500
Net gain on manufacturing activity = Net gain on activity in March futures cocoa
$64,000 – ($26,000 + 43,000) = - $5,000 market =
$27,500 – 22,500 = + $5,000
Purchasing & Materials Management, Dobler, Burt & Lee

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ɐ 6. Hedging
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The Bottom
Line
173
Sourcing Decisions Versus

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the Bottom Line

• A number of possible changes in procurement
can reduce costs and improve the bottom line
– Tune specification of purchased inputs to meet needs
more precisely
– Select appropriate suppliers and manage their costs
• Select suppliers which are most efficient or those that offer the
least costly product to use considering the firm’s value chain
Competitive Advantage – Michael Porter

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the Bottom Line

• Enhance bargaining leverage through
purchasing policies
– Keep the number of sources sufficient to ensure
competition,but small enough to be an important buyer to
each service
– Select suppliers who are competitive with each other,

and divide purchases among them
– Vary the proportion of business awarded to suppliers

over time to ensure that they do not view it as an
entitlement
More …
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the Bottom Line

– Solicit occasional proposals from new suppliers,
both to test market prices and gather technological
intelligence
– Enhance the leverage of purchasing scale through
contracting based on annual volume with phased
deliveries, instead of making frequent smaller
purchases
– Seek out opportunities to combine purchases with
sister business units

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Capturing ROI
• Steps in improving purchasing ROI:

– Identify the appropriate value chain and assign costs and
assets to it
– Diagnose the cost drivers of each value activity and how
they interact
– Identify competitor value chains, and determine the relative cost
of competitors and the sources of cost differences
– Develop a strategy to lower relative cost position through
controlling cost drivers or reconfiguring the value chain and/or
downstream value
– Ensure that cost reduction efforts do not erode differentiation,
or make a conscious choice to do so.
– Test the cost reduction strategy for sustainability

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ɐ 6. Hedging
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Summary
Constant Evaluation of
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Best Buy Analysis
• Always looking for a better source or price is

part of every buyer’s job of finding the best cost
suppliers.
• Not looking for improvements can result in a
company becoming non-competitive
• Best buys are not necessarily price driven, but
instead, value driven
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Constant Evaluations
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Result in Benefits
• Best price, delivery, quality and service –

adding value
• Being able to buy competitively
• Finding better ways or methods of obtaining
materials and services
• Finding out about new techniques,
technologies, processes, and products
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Getting Started
• Choose one of your three most

strategic purchased products
• If there is no product procurement
strategy for the strategic product,
start to write one
• If you have a strategy, but it is weak,
start to correct it
More …
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Getting Started
• If there is a strategy and a worldwide analysis

already, but you are dealing with remote
suppliers through their U.S. subsidiaries and
representatives, start by taking better control of
the order and communication channels.
• Start to develop a relationship with the key
people at the supplier’s headquarters.
• Consider direct ordering and establish the
capability of your logistics and customs
departments.
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Key “Gotta—Do’s!”
• Know how to “shop the world” for the world’s best suppliers.
• Do not let differences in culture, law, or currency stand in your way
to success.
• Do not treat distance as a significant factor, except as it affects
transit time.
• Develop a working vocabulary and the ability to work with experts in
logistics and customs.
• Take charge of your orders and communication cannels. Reduce
dependence on intermediaries that do not work for you
• Use the same supplier-management techniques on remote
suppliers that you use on local suppliers, with some minor
modifications.
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Key “Gotta—Do Summary”
• Do it Smart
• Use Knowledge and Fact
• Do it for a Reason, not Because
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Post-Assessment
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187

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Final Edition “Rev B”

Supply Chain Education & Training Program 1

• Global sourcing is the reexamination of

• The goal is to seek out premier

• To provide all participants with a basic knowledge of

• This course is designed for all employees in the supply

• The course emphasizes that the supply chain and our

• Understand the need for global sourcing

Global Sourcing Course

Global Sourcing Course

Class Individual Exercise

• Spend 5 minutes and decide why you think

Global Sourcing Module

ɐ 1. The Need for Global Sourcing

Why Global Sourcing?

Why Global Sourcing?

• Lowering logistics costs because of

The Decision to Source

While there are a number of reasons to

Savings & Benefits From

Current Pete Machuga, VP, Honeywell Future

Assign Designs, Build, and

Use of Subsidiaries: Strategy 2

Begin International Purchasing by Buyer: Strategy 1

for Global Sourcing?

• Accessibility to foreign suppliers

When is Global Sourcing

Strategic Global Sourcing

• Selecting and qualifying suppliers

Global Sourcing Risks

• Quality levels of international sources in

Global Sourcing Issues

That Need to be Resolved

Class Group Exercise

• Break up into groups

Desired Elements of Global

3. Partnerships/Risk Sharing Partnerships (RSP)

Drivers for Supplier

• Strategic importance of the buy item

Global Supplier Management

• Identify supplier relationships as long-term

Global Supplier Management

• Routine relationships occur with commodity

• Long-term and routine relationships should

Who Needs Global

Supply Base Optimization –

Effect on Global Sourcing

Identify Commodity Market Research data from domestic

Determine Commodity Select suppliers and

Monitor metrics Discuss

• Optimize size of the supply base

Global or Commodity Sourcing

Global or Commodity Sourcing

Part Family Optimization

and Global Sourcing

• Optimization of part families by standardization

• U.S. is no longer the undisputed world

• A supplier’s ability to keep up with both

Cost Savings Analysis

• Cost reduction – an actual reduction in the