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IPOWhitePaperEdited3[1]

IPOWhitePaperEdited3[1]

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International Procurement Operations (IPOs) are the nerve centers of decision-making for efficient global procurement operations. Expansion into low-cost countries brings within the fold of an extended enterprise a coalition of suppliers, buyers and logistics companies who can be more productive when they work in concert. IPOs forge a network, whose members are initially tenuously tied to each other by their transactions, into an interconnected global procurement network joined together by long-term relationships. The several poles of decision-making local to a department, business unit or geography are merged into a synchronized management process that spans the global procurement network.
International Procurement Operations (IPOs) are the nerve centers of decision-making for efficient global procurement operations. Expansion into low-cost countries brings within the fold of an extended enterprise a coalition of suppliers, buyers and logistics companies who can be more productive when they work in concert. IPOs forge a network, whose members are initially tenuously tied to each other by their transactions, into an interconnected global procurement network joined together by long-term relationships. The several poles of decision-making local to a department, business unit or geography are merged into a synchronized management process that spans the global procurement network.

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Published by: Kishore Jethanandani on Dec 29, 2010
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INTRODUCTION
International Procurement Operations (IPOs) are the nerve centers of decision-making for efficient globalprocurement operations. Expansion into low-cost countries brings within the fold of an extended enterprise acoalition of suppliers, buyers and logistics companies who can be more productive when they work inconcert. IPOs forge a network, whose members are initially tenuously tied to each other by their transactions, into an interconnected global procurement network joined together by long-term relationships.The several poles of decision-making local to a department, business unit or geography are merged into asynchronized management process that spans the global procurement network.The whole of a global procurement network is more valuable than the sum of its individual constituents.Global procurement networks are more valuable when multiple redundancies are eliminated, real timedecisions become possible with greater visibility and communication between partners is bridged to ensurethat unanticipated costs are not incurred. IPOs reap these latent efficiencies in a global supply chain. Thebusiness gains increase progressively as IPOs extend their initiatives from specific departments tobusinesses across borders and finally to the whole of the supply chain. IPOs steer partners to integratetechnology, processes and communication systems so that the constituent enterprises, groups anddepartments work as an intertwined extended enterprise. Their expertise in change management,performance management and compliance enables seamless integration of the supply chain network.Recent research by Accenture confirms a high rate of success achieved by IPOs; 70% of the companieswho have set them up report that they have met or exceeded their expectations
1
.The difference that IPOs make is illustrated by the example of management of risks in an integratedprocurement network. When partners exist as silos, McKinsey found in a survey of a sample of enterprisesthat two-thirds of them reported increased risks to their supply chains over the last five years. More thaneighty-percent of them are barely prepared to mitigate supply chain risks
2
. Experts agree that no individualenterprise has the incentive to mitigate supply chain risks and they all have a tendency to “pass the buck”
3
. This is despite the fact that many of them have installed enabling technologies to gain visibility into globalsupply chain networks. IPOs step in such a situation and make it clear that the “buck stops with them” andensure that action is taken to contain the damage from adverse events.
EVOLUTION OF IPOS
Enterprises, looking to benefit from international procurement, initially test the waters by outsourcingcommodity components that are not a part of their core business. The primary motivation for outsourcing, atthis stage, is labor 
arbitrage
. Gains from lower labor costs are partially offset by higher transaction costs of procurement from more distant sources and more so when several departments deal directly with suppliers.IPOs become the single conduit for all transactions, consolidate information and processes internally andnegotiate with suppliers to keep procurement costs under control. These objectives can be achieved with avirtual office with low overheads. Arm’s length transactional relationships with suppliers are adequate for commodity procurement.As they interact with suppliers overseas, IPOs learn more about their competencies. In time, they realizethat larger gains are possible from strategic sourcing including the core business of their clients. Entireassemblies and products are outsourced. As business flows between partners, spread across the globe,
1
“Global Sourcing and Logistics: A roadmap for high performance”, Accenture.
2
“Disaster-proofing the supply chain” by Andrew K Reese, Supply and Demand Chain, August 6, 2007
3
As above in footnote no 2.
 
increase in volume so does the need for them to work in tandem. IPOs see a role in providing an array of services to improve communication and collaboration among the members of the international procurementnetwork. Processes and technologies linking partners are streamlined for greater efficiencies. This is bestaccomplished by a separate office with a charter and a steward to manage the international procurementoperations and a local office. The goal of IPOs is to reduce costs of all kinds---response time, cost of riskand inventory costs.Eventually, enterprises see an advantage in locating overseas closer to their suppliers as the locus of manufacturing activity is centered overseas. Proximity brings with it informational gains such as a better understanding of suppliers’ capabilities, risks and opportunities in the local business environment as well asknowledge of local business practices. IPOs are incorporated as domestic companies to take advantage of tax benefits, subsidies and other promotional programs available to local companies. Buying companieshave greater confidence in the ability of their suppliers and they decide to outsource entire product lifecycles. The local arm of the IPO becomes a recognized member of the local business community throughsustained networking in the community.
Emerging IPOStrategic Service CenteLocal control center Strategy
Global PurchasingStrategic SourcingOperational Excellence
Goals
Reduce spendReduce Total CostsLeverage local presence
Structure
1.Virtual Office2. Centralized decisions.3.Rudimentary knowledge of trade4.Arm's length relationships1.An independent office2.Decisions coordinated withlocal control offices.3.In-depth knowledge of trade4. Strategic partnerships1. Physical location insupplying countries.Incorporated as a domesticcompany.2. Recognized in localbusiness community.3. Relationships leveragelocal competencies.
ExpectedBenefit
Lower SpendLower opportunity costsDomicile gains.
Challenges
Limited visibility internally.Control over global supplychain1.Internal communicationacross locations.2.Control of localsubsidiary and businessclimate.
ChangeManagement
1. Visibility into spend data.2. Aggregating internal data.3.Single interface with suppliers 1.Automation oprocesses andinformation acrossthe supply chain.2.Close-loopedprocesses3.Vendor ManagedInventoryProduct life cyclemanagement systems andprocesses
PerformanceManagement
Price and cost based metricsfor assessing performance of suppliers.Service Level Agreements:quantitative and qualitativemetrics.Financial performance of the local subsidiary.
Compliance
Use catalogue for buyingCompliance to globalprocesses.Compliance to corporatepolicy and product life cycleguidelines.
 
RealizedBenefits
Price paid for procurement andoverhead costs incurred onprocurement are reduced.1.Demand and supplymatches2.Resilient supply chain3.Lower response time1. Fiscal and other benefitsfor local companies.2. Management of localrisks.3. Leverage local skills
EMERGING IPO
 
Strategy
An emerging IPO seeks to lower the expenditure incurred, as operating costs or purchase price, onprocurement.
Challenges
In the absence of a single international procurement operations office, individual departments procuredirectly from suppliers overseas. When a company has several departments, each of them separatelyprocures goods from their preferred suppliers. The following are the consequences of this method of procurement
The aggregate amount spent on international procurement is hard to estimate becauseinformation is scattered in individual departments.
Multiple redundancies exist as the processes in individual departments, regions, IT systems,types of products, etc are implemented without a common design and contribute to thecomplexity of managing the supply chain
4
. 
Individual departments place smaller size orders instead of bulk orders.
The negotiating power of buyers is weakened when they act independently.
It is not possible to compare the performance of suppliers when they place orders individually.Altogether, the buyers don’t receive the most competitive prices and the operating costs of procurement arehigh.
Solutions
Internal issues of managing information and processes take priority when buyers are purchasingcommodities from overseas suppliers. The following initiatives are representative of the solutions to expect.
Change Management
:
Information
: A single catalogue
5
, with an approved list of suppliers and verified prices, ismade available to buyers. IPOs consolidate spend data available with all departments. Theyuse spend data to negotiate deals with their suppliers.
Processes
: are automated and a single platform is used for managing them internally; acommon B-to-B interface is created for interaction with suppliers.
Performance Management
: cost and price based metrics are used to measure performance.The availability of consolidated data as well as the catalogue helps to prepare benchmarks for assessing performance.
4
http://www.scmr.com/article/CA6406208.html
5
http://www.scmr.com/article/CA6406208.html

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