KNEC- Sourcing Strategies in International Purchasing

Sourcing Strategies in International Purchasing

Sourcing strategies used in international purchasing
Effects of globalization in international purchasing

SOURCING STRATEGIES

Definition: sourcing is a process of identifying, selecting and developing suppliers.
Tactical sourcing/ operational sourcing is concerned with low-level procurement decisions that may relate to low risk, non-critical items and services. Short term adaptive decision as to how and from where specific requirements are to be met.

Strategic sourcing is an interactive process in which a number of distinct stages of maturity are identified. Level of maturity ranges from short term tactical plans to long term sourcing strategies. It is concerned with top level, longer term decisions relating to high profit, high supply bottleneck products and services.

REASONS FOR SUPPLIER EVALUATION

Improve supplier performance. Properly done supplier performance management can provide answers to questions such as the following: who are the highest quality suppliers, how relationship can be enhanced with best suppliers etc.
Evaluation assists decision making regarding when a supplier is retained or removed from approved list.
Evaluation assists in deciding with which suppliers a specific purchase order should be placed
Evaluation provide suppliers with an incentive for continuous improvement and prevents performance slippage
Evaluation can assist in decision regarding how to distribute the spend for an item among several suppliers to better manage risk.

The seven c’s for effective supplier evaluation.

Competency of the supplier to undertake the tasks required.
Capacity of the supplier to meet the purchasers total needs
commitment of the supplier to the customer in terms of quality, cost driving and service
Control systems in relation to inventory, costs, budgets, people and information
Cash resources and financial stability ensuring that the selected supplier is financially sound and is able to continue in business into the foreseen future
Cost commensurate with quality and service
Consistency the ability of the supplier to deliver consistently, and, where possible, improve levels of quality and service.

SINGLE SOURCING

This is placing all the firms’ business requirement with one supplier. It is where one supplier is preferred by the buyer company not because of monopoly conditions but because of the various advantages which accrue to the buyer.

Major argument for single sourcing:

In times of shortage this supplier will give priority to the need of a special customer. Other arguments include

Better pricing results from a much higher volume of purchase due to economies of scale.
Quality considerations despite the good prices.
The buyer obtains more influence with the supplier.
Lower costs are incurred to source suppliers to process orders to expedite and inspection of goods
The quality control and coordination required with JIT manufacturing requires a single source.

Single sourcing is favoured when:

Significantly lower freight cost may result
Special tooling is required and the use of one supplier is impractical or excessively costly
Total system of inventory will be reduced
Improved commitment of suppliers results
Improved interdependency and risk sharing results
The time to market is critical and therefore easy to resolve issues.

DISADVANTAGES OF SINGLE SOURCING

Lack of security of supply where all the eggs are put in one basket.
Their reduction of competitive pressures to the disadvantage of the buyer.
Possible loss of access to information about new product market, current prices due to lack of regular contact with other suppliers.
Overpayment possibility due to lack of ready ability to place one supplier against another.
Exposure to suppliers problems eg. Lack of products should the supplier suffer a strike or other misfortune
Vulnerability to suppliers opportunism manifested in such way as missed delivery dates, efficient quality, unfulfilled promises and price increases.
Single international sourcing can be expensive
Just in time delivery may mean delayed production when the wrong order is delivered.

MULTIPLE SOURCING

This is sourcing from two or more suppliers. It is found appropriate if:

To protect the buyer during the time of shortages, strikes and other emergencies.
To maintain competition and provide a back source. This is an incentive to supplier to maintain high level of performance.
Economies of scale may be obtained from bigger suppliers provide competition.
Misbehaviour by big supplier may lead to reduction of business share which is given to the smaller suppliers.
To meet local components requirements for international manufacturing locations.
To meet customer’s volume requirements this cannot be satisfied by one supplier.
To avoid lethargy or complacency on the part of a single source supplier.
When the technology is uncertain in areas where suppliers tend to leap frog each other technologically.

ADVANTAGES OF MULTIPLE SOURCING

Increased security of supplies.
Contact with several suppliers enables buyer to compare performance and keep in touch with development in more than one supplier.
Competitive pressures can be increased by varying the contacted suppliers.
The reward of long term contracts even on a multiple sourcing basis brings certainty and increase supplier responsiveness.
Long term contracts can be used to reward desirable behaviour and performance.
The long term nature of an agreement may be more significant in encouraging a progressive relationship than in adopting a single sourcing approach.
There is a chance to enjoy good prices and better terms of trade because of competition.

Disadvantages of multiple sourcing

Loss of economies of scale because of lower volume of business received by supplier e.g. extra administrative cost due to many orders.
Suppliers have increased uncertainty regarding expected levels of business thus making their planning more difficult.
Suppliers may be less willing to communicate about their developments for fear of information being passed on to other competitors.
Some suppliers may be cautious or unwilling of working on same products as their competitors they may not be willing to take up the challenge of competing with joint supplier.
The relationship is short lived and may not mature into a partnership at any one time.
Lack of collaboration among the competing suppliers which may develop into rivalry.

PARTNERSHIP SOURCING/PARTNERSHIP PURCHASING

It is a commitment to both customers and suppliers regardless of size, to a long term relationship based on clear mutually agreed objectives to strive to world class capability and competitiveness.

It is a comparative relationship between a buyer and a seller which recognizes some degree of interdependence and cooperation on a specific project or for a specific purchase agreement. The partnership calls for sharing of forecasted demand and cost data and must contain an element of trust and respect between the parties.

NB: The term supply partnership implies neither the presence nor the absence of a single source relationship.ie the buying firm may have one, two or three partners of the items although the trend is towards single sourcing. Long term partnering agreement encourage suppliers to invest in research and development inorder to propose technologically , current, cost effective and high quality solutions to the buying needs of the firm.

Properly priced product agreements encourage suppliers to invest in the equipment, training and appropriate management systems required to be efficient.

The buyer benefits from such agreements in many ways eg low total cost, a dependable source of supply and a partner familiar with his/her needs.

OBJECTIVES OF PARTNERSHIPS

Griffins states that reasons for security partnership can include improvements in

Deign
Quality
Delivery and completion time
Production costs
Operating costs
Stock levels
Cash flow
Skills and resources available

The CIPS has identified the following key drivers for establishing partnership relations

The drive for lower acquisition cost
Reduced supplier base
Shorter product life cycle
Concentration on co-business
Pressure towards lean supplier

For the partnership to work effectively the buyer must

Must be open about his or her true needs e.g. technology, quantities and schedules
Must agree to protect the supplier partner from sudden changes which might leave the supplier with unusable raw materials on finished goods.
Trust must be developed and possible reform action enhanced.
A different set of supplies management skills must be developed and applied.
Partnership departs from a more traditional short term adversarial relationship to a long term mutual relationship.

TYPES OF SUPPLIER RELATIONSHIP SUITABLE FOR PARTNERSHIP SOURCING

• The high speed items
• The high risk
• The high hustle
• Fast changing
• New services
• Restricted markets
• Technically complex

ADVANTAGES OF PARTNERING: TO THE PURCHASER TO THE SUPPLIER

a. Purchasing advantage resulting

a) marketing advantage resulting from

From quality assurance, reduced suitability due to long term
Supplier base, assured supplies agreement to larger share of orders
Due to long term agreements placed .ability to pplan ahead and
Ability to plan long term improvement invest , ability to work with key
Rather than negotiating for shorter customers on products or services
Delivery on time scope to increase sales without
Improved quality increasing procurement overhead.

b. Lower costs

Resulting from

Problems/challenges of partnership sourcing

Termination of the relationship. The aim should be to part amicably preferably over a period of time thought on agreed separation plan.
Business shares i.e. possible domination by the customer because of supplier’s overdependence on the customer. This issues need to be explored by joint consultation.
Confidentiality. Where perspective partners are also suppliers to competitors their might be a problem in maintaining confidentiality.
Complacency. Partnering can lead to complacency ie be taken advantage of by one party. Avoidance of this requires regular review of competitiveness through regular meetings of a multifunctional buying team.
Attitudes. Traditionally adversarial buyer and seller persons will require retraining to adjust the new philosophy and commitment.
Public sector. The CIPS points out that it is less easy to establish partnership relations in the public sector due to government procurement directives and rules. In general, partnership relation in public sectors should not exceed 3-5 years after which retendering should be required.

Why partnerships fail

Poor communication
Lack of trust
Lack of total quality commitment by supplier
Poor up front planning
Lack of top management support
Lack of distinctive supplier value added benefits
Lack of strategic direction to the relationship
Lack of shared goals
Ineffective mechanism for cost revision
Lack of benefit/risk sharing
Lack of partners firms top management support
Changes in the market
Corporate culture differences
Top management differences
Lack of central coordination of purchasing
Low status of customers purchasing function
Distance variance

RECIPROCITY

This is defined as mutual or respondent concession of advantages or privileges as forming a basis for commercial relations.

Reciprocity is often referred to as selling through the order.

When a policy is adopted to give preference to the suppliers who are also customers of the buying undertakings. However, a potential of a two way pointout the need to be analysed to access the cost and benefits arising from such a pattern or relation. In case of foreign trade, complication of hard currency has led to development of reciprocity. From a purchasing and supply point of view the main difficulty with reciprocity is that freedom of choice in selected supplier might be constrained by sales and marketing wishes to win sales contract tied to reciprocal purchasing deals.

TYPES OF RECIPROCITY

External: suppliers have no relationship to the undertaking.
Internal: supplier and buyer are both of the same group of companies eg subsidiaryof the other or associated companies.
Two- way reciprocity: this is where two companies buy on condition and the other does the same. E.g A a tyre manufacturer agrees to buy forklift trucks from B on condition that B buys tyres from A.
Multi- reciprocity. This involves more than two parties e. g X is a larger company seeking to sell iron castings to Y a manufacturer of mechanical handling system. Y agrees to buy from X on condition that later buys sand from Z a mining and querying company which is a substantial customer of Y.

ADVANTAGES OF RECIPROCITY

Both supplier and buyer may benefit from exchange of order.
Both supplier and buyer may obtain a greater understanding of mutual problems thus increasing good will between the two parties.
More direct communication between suppliers and buyers may eliminate or reduce the need for intermediaries and the cost of marketing and/ or procurement operations.
Where price delivery and quality are at least equivalent to that offer by other suppliers then it is common to the buyer to give preference to customers of his undertaking.
The companies are likely to develop each other through partnering relationship.

DISADVANTAGES OF RECIPROCITY

Cost may increase due to reduced competitive position of the buyer without compensating benefits.
Sales must increase substantially to provide an equivalent savings on purchases.
Disputes may arise where the respective values of purchases and sales becomes substantially different.
Selling through the order book uses purchasing to perform a marketing function credit. Credit may however accrue to marketing department while the performance of purchasing department may be adversely affected.
Marketing effort may become weak.
The opportunity to buy cheaper, better quality alternatives may be denied to the buyer who is tied with a reciprocal agreement.
Business may be taken away from satisfactory suppliers and this may strain the buyer- seller relations within the market.
Difficulties may arise in finding alternative suppliers in times of emergency.
In practice is often difficult to terminate reciprocal relationships without friction.
The morale of buying staff may be adversely affected.

COUNTER TRADE

It is a form of international reciprocal trading in which an order is placed by purchaserwith a supplier in another country on condition that goods of a specified value are sold an opposite direction. Products usually counter traded are aeroplane parts and products, industrial equipment, communications and electronic product, transportation/ navigation machines and chemicals.

Counter trade refers to any transaction in which payment is made partially or fully with goods instead of money. Counter trade normally links to normally and unrelated transactions. The sale of product in a foreign country and the sale of goods out of that country. Counter trade requirements are normally imposed by foreign government in an effort to gain foreign exchange or/foreign technology.

FORMS OF BARTER TRADE.

BARTER OR SWAPS. This is simultaneous exchange of goods or services with no money involved. It is the simplest form of barter trade. If goods are exchanged to save on transportation cost the arrangement is known as a swap.
Counter purchase. This occurs when a company in country X sells to a foreign country Y in condition or understanding that a percentage of the sales will be spend on importing goods purchased in country Y. both parties agree to their obligations within a given period and to pay for the major part of respective purchases in cash.
BUY BACK/ COMPENSATION. It occurs when the exporter agrees to accept as full or partial payment products manufactured by the original exported product, e. g an agreement by the seller of plants and machinery on other capital agreement to accept as partial or full payment produced in the plant and / or on the capital equipment.
OFF- SET. This is similar to counter purchase except that the supplier can fulfil the undertakings obligations to import goods or services of certain percentage value by dealing with any company in the country to which the original goods were supplied. Direct off set involves close technological files between the items sold and purchased. Indirect offset involves the purchase or facilitation of sales of commodities unrelated to the purchasing country.
SWITCH TRADING. It refers to the transfer of unused or unusable trading balances in one country to overcome imbalance of money by trading partner in a country. E. g country X sells goods of a certain value to country Y. country Y credits country X with value of goods that country X can use to buy goods from Y. country X however does not wish to buy from Y. country X therefore sells the credit to a third party that is a trading house at a discount. The trading house then locates a country or company willing from Y. in return for a small profit the trading house sells the credit to the country wishing to buy from Y.

ADVANTAGES OF COUNTER TRADE

Company involved in counter trade frequently have enjoyed a variety of marketing, financial and manufacturing advantages that have resulted in increased sales, increased employment and enhanced company competitiveness.
By accepting goods and / or services as payment instead of cash, counterpart traders participants have been effective in:
- Avoiding exchange controls
- Selling to countries with convertible currencies.
- Marketing products in less developed countries which are cash stripped and did not meet such purchases otherwise.
- Reducing some of the risks associated with unstable currency values.
In overcoming these financial obstacles above counter trading firms have been able to enter new or formerly closed markets expanding business contracts and sales volume and dampen the impact foreign protectionism on foreign businesses.
It has also promoted good will within foreign government concerned about their trade balances and have currency accounts
Counter trade has enabled participants to
• Make use of plant capacity
• Have longer production plans
• Reduce unit expenses due to greater sales volume.
• Find valuable outlets for declining products

DISADVANTAGES OF COUNTER TRADE

Counter trade negotiations tend to be longer and more complicated than conventional sales negotiations and must sometimes be conducted with powerful government procurement agencies.
Additional expenses such as broker fees and other transaction costs reduce the profitability of the counter trade.
There may be difficulties with the quality availability and disposal of goods taken.
Counter trade may give rise to pricing problems associated with the assignment of value to products/ commodities received in exchange
Offset customers can later become competitors.
Commodity prices can vary widely during the length of counter trade negotiations and delivery.

RISKS OF COUNTER TRADE

Exchanged goods may find way back to the market at discount prices.
Counter trade can entail long and complicated negotiation with less than successful outcomes.
Goods received can be lacking in quality packed attractively and difficult to sell goods or service.
Counter trade can be used to offload products that cannot be sold elsewhere
Products received may be unrelated to normal products and not fit easily into normal distribution channel.

PURCHASING CONTRIBUTIONS TO COUNTER TRADE

Identifying low cost sources of supply that may be exploited on a counter trade basis.
Providing negotiating expertise when discussing arrangements with prospective overseas suppliers
Ensuring payment in kind products are properly inspected before the counter trade agreement is signed, thus guarding the receipt of poor quality products.
Advising that raw materials are taken in comparison. Raw materials are often graded, making comparison have greater flexibility in terms of use.
Developing long term counter trade partnerships.
Recognising that properly used, counter trade can:
• A major source of low cost quality materials
• A means of preserving hard currency
• A means of upgrading manufacturing capabilities.

GLOBALIZATION

Globalization refers to the interaction of one economy with all the other economies of the world. This interaction can be in terms of financial transactions, trade, politics,education, production etc. Globalization picked up steam with the invention of newer and newer technologies in the world of transportation and communication. Thus, it can be seen that though globalization is traced back to ancient times by historians, it truly began at the end of the 19th and beginning of the 20th century. The term Globalization, in its newest form, has four major parameters:

Free flow of goods and services between countries due to the reduction in trade barriers.
Creation of an environment for flow of capital and investment among countries.
Free flow of technology from one country to another.
Free movement of labor among countries.

True globalization is attainable only if all four components are present. However, globalization has some advantages and some disadvantages. Some of these advantages and disadvantages are:

Advantages:

Increase in employment opportunities: As globalization increases, more and more companies are setting up businesses in other countries. This in turn increases the employment opportunities that people atone place have. People can get better jobs without having to move to other countries in search of better jobs. Today, many multinational companies such as Microsoft, Google and Toyota etc. have their offices in India and many Indians work for these companies in India. Without globalization, Indian people would not have had the opportunity to work for such companies in India.
Education: With the increase in globalization, it has become easier for people to move across borders to different parts of the world to acquire better education. This has resulted in an integration of cultures. People from underdeveloped and developing countries often move to developed countries to get better education. More and more Indian students are traveling to countries like the UK or the USA to pursue higher education. This has also opened their cultures towards the Indian culture to some extent.
Increase in free trade: An increase in free trade has opened doors for investors in developed countries to invest their money in developing countries. Big companies from developed countries have the freedom to operate in developing countries. In the 2000s, Japanese and European companies such as Kawasaki and Siemens started producing high-speed trains in China. This helped Chinese firms in gaining knowledge about the production process and now Chinese companies such as China South Locomotive & Rolling Stock Corp. are producing high-speed trains on their own.
Faster flow of Information: Information flows from one part of the world to the other immediately, resulting in the world being tied together. Vital information can be shared between individuals and corporations at a very fast rate. It has also facilitated in increasing the ease of transporting people and goods.
Increase in quality of goods and services: As a result of globalization, people have access to the best quality of goods and services throughout the world. Companies have to strive to provide better quality goods and services to the consumer and the consumer has the liberty of choosing whichever product he thinks is best suited for his needs. This allows a person in America to wear clothes made in India and Mexico while watching a football match taking place in England on a TV made in China.
Decrease in prices of goods and services: As the competition in the market has increased due to rapid globalization, producers have to price their products competitively in order to remain in the market. This has become a boon for the consumer as he can get better quality products at cheaper prices. An example is that of the car Ambassador in India. It was the only car available in India along with the Fiat before the liberalization of the Indian Economy. These cars were inefficient and expensive. Once the Indian economy was opened, other car companies started selling their cars in India at cheaper prices. This was a major benefit for the Indian consumer.
Reduction in cultural barriers: As people move from one country to another, barriers between various cultures tend to decrease.This has resulted in tolerance and openness towards other cultures. This has also facilitated communication between different cultures and hence, nations. It has also led to a reduction in wars as we are today living in one of the most peaceful periods in the history of mankind.

Disadvantages:

Environmental degradation: Developed countries can take advantage of underdeveloped countries’ weak regulatory laws in terms of environmental protection.
Unfair working conditions: Many multinationals have been accused of social injustice by exploiting labor in underdeveloped countries in order to cut costs. Laborare provided unhealthy working conditions leading to health hazards. Many large companies have also been accused of using child labor in their factories in underdeveloped countries. Nike’s much publicized use of child labor along with poor working conditions and low wages in its factories in Indonesia is a well-documented example.
Fall in employment growth rate: Though the promotion of the idea that the advances in technology and increase in productivity would create more jobs has been a cornerstone of globalization, it has been seen that in the past few years, such advances have led to a decrease in the employment growth rate in some developing economies. This can also be attributed to the fact that companies move their production facilities from one place to another in search of cheaper labor once the workers in the previous country start demanding better wages.
Growing disparity among the rich and the poor: 86% of the world’s resources are said to be consumed by the richest 20% of the world population. This means that the poorer 80% only gets to consume 14% of the world’s resources. This is a direct result of globalization according to some activists who believe that globalization only serves the rich whereas the poor have to face its disadvantages.
Small scale industries face extinction: Small scale industries which are indigenous to a particular place face extinction as they do not have the resources or the power that the multinational companies have. As a result, these small industries are unable to compete with bigger companies and go out of business. An example is the bamboo furniture making industry in India. The manufacturers work out of their homes and work hard to make furniture out of bamboo. These workers cannot compete with large companies selling cheap plastic furniture and as a result, their industry faces extinction.
Rapid spread of deadly diseases: Deadly diseases such as AIDS or other communicable diseases can spread at very fast pace via travelers or due to other means as a direct consequence of globalization.

MARKET STRUCTURE

a. PERFECT COMPETITION

The item dealt with must be homogenous so that a buyer is in different regarding the seller from whom he makes his purchase. E. g absence of trade or brand propriately.
The item must be easily transportable from one place to another
Many buyers and sellers so that the former cant restrict demand on the later.
Absence of preferential treatment or discrimination against any buyer or seller.
Easy communication must exist between buyers and sellers so that they are immediately aware of what is happening anywhere in the market.

Under perfect competition there is only one price where the entire quantity available can be sold.
The theory of equilibrium price operates in a perfect market.

b. IMPERFECT COMPETITION

No single selling price for an item
May take several form according to the number of suppliers in the ease at which additional may enter the market.

The most common forms are:

Monopoly- one supplier and the entry of supplier in the market is restricted
Oligopoly- two or few suppliers
Monopolistic competition – many buyers and sellers

WHY IS THE ANALYSIS OF MARKET CONDITIONS IMPORTANT TO SOURCING/ BUYING DECISIONS

Helps in focusing the long term demand of the product of which the bought out items, components, assemblies are packed. It has therefore on identify of interest with market research.
Helps in focusing the price trends of bought out items and how material cost are likely to affect production cost and selling prices eg the need for cheaper prices may influence sourcing decisions.
The analysis indicate what alternative goods and supply sources are available it might be economical to source abroad other than domestically.
Gives guidance on the security of supply sources, this particularly important with sensitive commodities sourced abroad.
Helps in make or buy decisions and other issues such as volume, insurance, vendor selection, product standardization.

Ways in which perfect market assist in forecasting commodity prices.

Availability of many suppliers stabilizes supply and hence the price too.
Homogeneity of products makes price variations minimal.
Free flow of information in the market facilities access to pricing information.
Availability of buyers in the market also stabilizes prices.

Share through

Share to Download