Chapter 1

Introduction and
Background to Global
Supply Chain
Chapter 1 – Introduction to Global Supply Chain 1
Learning Objective

 Understand the basics of global procurement

 Understand the need for global procurement
 Understand the important features of global
procurement
 Understand important differences between
domestic purchasing and global procurement

Chapter 1 – Introduction to Global Supply Chain 2

Introduction to Global Procurement

• Procurement as an activity is of strategic importance

to the management of any organisation.

• The procurement function is an important driver of

cost and responsible for spending the allocated
budget, be it a regular operational expenditure e.g.
raw material, consumables, services or a one-time
capital expenditure e.g. projects, plant and
machinery.

• Traditionally organisations have been depending

primarily on local vendors for their purchasing needs.
Chapter 1 – Introduction to Global Supply Chain 3
Introduction to Global Procurement

• It is thus a business process which involves

• Identification,
• Evaluation,
• Negotiation
• Design of supply chain across multiple locations
• Review of Suppliers and geographies around the
globe.

Chapter 1 – Introduction to Global Supply Chain 4

Key Drivers of Global Procurement

• Political influences

• Infrastructure in respective geographies

• Currency

• Climate changes and shifts

• Culture

Chapter 1 – Introduction to Global Supply Chain 5

Objectives of Global Procurement

• Low landed cost of materials

• Scout of new vendors so that the landed cost is
low
• Evaluate vendors for more than one geography

• Elimination of inefficiencies in procurement and

control over costs
• Cost savings has become of prime importance
• Generation of value for the organisation through
constant improvement

Chapter 1 – Introduction to Global Supply Chain 6

Objectives of Global Procurement

• Evaluation of own manufacturing and outsourcing

decisions
• Evaluates opportunities where the non-core
activities can be outsourced to a significant extent
• Outsourcing framework leads to saving of
organisation’s limited resources
• Help the management to deploy on sharpening the
core competence

Chapter 1 – Introduction to Global Supply Chain 7

Objectives of Global Procurement

• Reducing risks to the business through managing

supplier concentration
• One of the important aim of global procurement is
also to develop a resilient supplier network
• An alternate supplier network, could have
mitigated the risk of dependency of single supplier
or sourcing materials from suppliers concentrated
in a single location

Chapter 1 – Introduction to Global Supply Chain 8

Objectives of Global Procurement

• Embedding global best practices in the procurement

process
• the best practices of respective geography, over a
period of time are consciously embedded in the
procurement process
• The global best practices foster innovation and
continuous improvement in the overall purchasing
process

Chapter 1 – Introduction to Global Supply Chain 9

Objectives of Global Procurement

• Result based purchasing and reduced learning curve

• Enable business achieve faster results and by-
pass the learning curve
• Initiatives which enable achievement of this
objective is engaging a global sourcing partner,
promotion of multi-vendor scenario with clear
business allocation inter alia

Chapter 1 – Introduction to Global Supply Chain 10

Objectives of Global Procurement

• Innovation led purchasing

• Innovation is an important challenge for the
business
• key objective of global procurement is to inculcate
an innovation culture in the purchasing function

Chapter 1 – Introduction to Global Supply Chain 11

Objectives of Global Procurement

• Develop new technology and capacity

• Domestic supplier lacks capacity to significant
extent for want of investments
• Dependence of domestic sources may lead the
business not being able to keep up with the global
competitive forces
• One of the key deliverable of global procurement is
to enable superior quality product and service
sourcing

Chapter 1 – Introduction to Global Supply Chain 12

Features of Global Procurement

• Promotes procurement of near shore countries as a

part of global sourcing strategy
• Multinational organisation prefer procurement from
countries like Mexico, Brazil and Argentina as a
part of their global sourcing strategy
• Companies also have focus on development of
new suppliers across the near shore countries to
mitigate the supplier concentration risk

Chapter 1 – Introduction to Global Supply Chain 13

Features of Global Procurement

• Requires a trade-off between low cost procurement

vis a vis investment in inventory and increased
transportation cost
• Supply chain needs to be constantly innovated
• Organisations often use, Total Cost of Ownership
(TCO) approach to factor in the various costs and
benefits before taking the procurement decision

Chapter 1 – Introduction to Global Supply Chain 14

Features of Global Procurement

• Endeavours to move beyond just the cost advantage

• Organisation often focus on engaging in mutually
rewarding business partnerships, alliances,
develop skills and expertise in the sourcing
• Experience of sourcing for multiple geographies
enables the Management to understand the DNA
of business at respective geographies

Chapter 1 – Introduction to Global Supply Chain 15

Features of Global Procurement

• Requires set up of a Local Procurement Office at

respective geography
• Organisations with global sourcing at the core to
their business strategy often set up Representative
Office (RO) or Local Procurement Office (LPOs),
for the respective supplier country / region

Chapter 1 – Introduction to Global Supply Chain 16

Key activities of the LPO
• Market research for identification of new suppliers
• Evaluate suppliers for necessary qualification on a
basis of defined criteria
• Perform inspections to get assurance that suppliers
will be able to meet the quality expectation of the
organisation
• Study the Logistics planning and execution of
procurement operations

Chapter 1 – Introduction to Global Supply Chain 17

Key activities of the LPO
• Evaluate the Local and Global regulations impacting
the procurement
• Develop a qualified supplier database for future
procurement purpose
• Explore opportunities to integrate the procurement
process into the organisation

Chapter 1 – Introduction to Global Supply Chain 18

Features of Global Procurement

• Management of extra-territorial regulations

• Organisation with global sourcing strategy often
need to comply with country specific as well as
international / extra-territorial regulations
• e.g. Recent enforcement of Foreign Account and
Tax Compliance Act (FATCA)

Chapter 1 – Introduction to Global Supply Chain 19

Features of Global Procurement

• Category Management
• Multi National Corporation thus define Category
Management as a sub-function within the
Purchasing Department
• Corporations have IT procurement as a separate
category

Chapter 1 – Introduction to Global Supply Chain 20

Features of Global Procurement – Exposure
to Global Risks
• Increased level of supply lead times,
• Increased transportation and logistics costs
• Delivery concerns from supplier end
• Variation in the quality of material
• High level of dependence on supplier’s intellectual
property in certain cases
• Cultural and language barriers.

Chapter 1 – Introduction to Global Supply Chain 21

Features of Global Procurement

• Use of advanced demand planning and forecasting

methods
• It is very crucial that the organisation plans the
requirements well in advance to eliminate the last
moment surprises
• Organisations globally deploy advance demand
planning and forecasting tools to formulate a
robust purchasing plan

Chapter 1 – Introduction to Global Supply Chain 22

Features of Global Procurement

• Involves engagement of global sourcing

representatives
• Certain organisation establish tie ups with
overseas sourcing agents for countries where
setting up of Local Procurement Office may not
seem feasible

Chapter 1 – Introduction to Global Supply Chain 23

Benefits of Setting up Local Procurement
Office
• Reduced search and response period
• No overhead costs as the agent works primarily on a
commission basis
• Overseas representatives are aware of the reputation
and delivery capabilities of the supplier
• Ability to find small and medium suppliers with quality
deliverable which lead to substantial reduction in cost

Chapter 1 – Introduction to Global Supply Chain 24

Benefits of Setting up Local Procurement
Office
• Higher level of awareness and understanding of local
customs and culture
• Improved negotiation opportunities
• Facilitates performance of onsite supplier inspections
• Faster communication and expediting the supply
chain

Chapter 1 – Introduction to Global Supply Chain 25

Key services provided by Overseas
Sourcing Agent (OSA)
• Understanding the purchaser’s requirements in detail.
• Finding and qualifying potential suppliers that meet
the purchaser’s requirements
• Helping potential suppliers understand requirements
and ensure they provide all information necessary to
the buyer
• Obtaining Quotes and details of rates / commercials
• Negotiations with suppliers in the best interest of the
buyer

Chapter 1 – Introduction to Global Supply Chain 26

Key services provided by Overseas
Sourcing Agent (OSA)
• Arranging for evaluation visits by purchaser. Certain
products may require the buyer to visit the premises
of the purchaser
• Escorting purchasers while in country / at the
sourcing location
• Ensure that the orders are entered and placed
• Resolve any issues or differences between buyer and
seller

Chapter 1 – Introduction to Global Supply Chain 27

Key services provided by Overseas
Sourcing Agent (OSA)
• Facilitate timely communication with the stake-
holders
• Expedite for delivery as per the provided timelines of
the buyer
• Resolve any quality issues and initiate resolution /
corrective steps
• Orders can be placed on OSA who will place the
same on the end supplier

Chapter 1 – Introduction to Global Supply Chain 28

Key services provided by Overseas
Sourcing Agent (OSA)
• OSA can arrange for make payment to supplier and
obtaining the settlement of the purchase contract
• With sufficient delegation of authority by the
purchaser, the OSA can perform inspection of the
products, supplier site etc as required
• Often the OSA can assume full responsibility for the
quality and meeting other requirements of the
purchaser

Chapter 1 – Introduction to Global Supply Chain 29

Advantages of engaging an Overseas
Sourcing Agent (OSA)
• The search & response period is significantly reduced
• The OSA generally works on commission basis,
which is of assistance to the buyer as significant
payments are to be made only on success
• OSAs are aware of the reputations of the suppliers
overseas and they share this understanding and
knowledge with the Buyer entity
• OSAs have an ability to locate and discover very
small and obscure suppliers.

Chapter 1 – Introduction to Global Supply Chain 30

Advantages of engaging an Overseas
Sourcing Agent (OSA)
• OSAs are well aware of the customs & culture
• OSAs are able to act as in country escorts for the
buyer
• The buyer has chance of improve negotiations with
the supplier through engagement of the OSAs
• OSAs can perform the necessary inspections and
provide report to the buyer
• OSAs play an important role in expediting &providing
communication assistance to the buyer

Chapter 1 – Introduction to Global Supply Chain 31

Dis-advantages of engaging an Overseas
Sourcing Agent (OSA)
• Engaging an Overseas Sourcing Agent may lead to
additional costs to the direct material which can range
from 5% to 20% at times
• May limit number of potential suppliers as the OSA
could be aware of few suppliers
• Buyer may face difficulties in terms of identification of
right OSA
• Successful OSA model works in the relationship is
continued for long term

Chapter 1 – Introduction to Global Supply Chain 32

Dis-advantages of engaging an Overseas
Sourcing Agent (OSA)
• There could be conflict of interest if the OSAs are
also paid by suppliers.
• It is very difficult to remove OSA from
supplier/purchaser relationship over a longer horizon

Chapter 1 – Introduction to Global Supply Chain 33

Features of Global Procurement

• Requires significant change in the structure of

Purchasing Function
• Global sourcing calls for higher level of cross-
functional and cross-location coordination within
the organisation
• Use of ERP or advanced procurement / sourcing
software platforms could be an important enabler
to facilitate such coordination

Chapter 1 – Introduction to Global Supply Chain 34

Key Strategic Initiatives in Global
Procurement
• Understanding and identification of need for global
procurement
• Development the management expertise and talent
for effective administration of procurement process
• Defining the procurement strategy for the Group and
different Business Units
• Evaluation of opportunities for sourcing across the
globe

Chapter 1 – Introduction to Global Supply Chain 35

Key Strategic Initiatives in Global
Procurement
• Bringing in standardisation in the global procurement
process
• Prioritisation of opportunities and identifying the focus
areas
• Develop Global, Regional and Local (Country)
sourcing teams
• Communication and development of implementation
road map of global sourcing strategies
• Establishment of business processes, technology
support and performance measures
• Setting up a performance evaluation mechanism for
the Global sourcing Function
Chapter 1 – Introduction to Global Supply Chain 36
Difference between Domestic Procurement
and International Procurement
Particulars Domestic Sourcing International
Sourcing
Purchasing Acquisition of resources Purchasing activity
Area is restricted to one extends to sourcing
country / region from multiple
countries
Supplier Risk Entails limited risks for Large scale and
the purchasing magnitude of
organisation purchasing
transaction exposes
the organisation to
higher level of risks

Chapter 1 – Introduction to Global Supply Chain 37

Difference between Domestic Procurement
and International Procurement
Particulars Domestic Sourcing International
Sourcing
Regulations Subject to local country Subject to
regulations International / extra-
territorial regulations
Supplier Requires limited Need higher level of
identification amount of supplier selection and
and standardisation qualification criteria
purchasing
criteria

Chapter 1 – Introduction to Global Supply Chain 38

Difference between Domestic Procurement
and International Procurement
Particulars Domestic Sourcing International
Sourcing
Quality Quality of products and Quality of products
services aligned to local and services is
standards comparable with the
International
standards
Level of Purchasing Purchasing
purchasing management perceived organisation
management to be an operational formulates global
activity sourcing as a
business strategy

Chapter 1 – Introduction to Global Supply Chain 39

Summary
• Organisation across the world are compelled to
rethink their sourcing strategy and global
procurement has solutions to address most of the
following challenges –

• Increased costs of transportation and logistics,

• Local labour and contractors issues,
• Domestic regulations,
• Sub-optimal quality and
• Globalisation

Chapter 1 – Introduction to Global Supply Chain 40

Summary
• Global procurement strategy focuses on supplies
from vendors across the globe instead of limiting
options only to sourcing from domestic vendors

• Companies have been forced by increasing global

competition to formulate and pursue international
purchasing strategies that have a primary focus on
• Reduction in the cost of procurement
• Optimisation of product and service quality

Chapter 1 – Introduction to Global Supply Chain 41