International Purchasing & Global Sourcing

Levels:

Factors Driving Successful Global Sourcing

Programs:
A Research conducted on Global Sourcing with 167 companies and following are the general factors
observed for driving successful global sourcing programs:

• Centrally Coordinated / Led Decision Making

• Decentralized Operational Activities
• Real Time Communication Methods
• Information Sharing with Suppliers
• Critical Resources Available
• Sourcing and Contracting Systems
• International Purchasing Office Support
Total Cost Elements for World-wide Sourcing:
Cost Elements Explanation
Base Price • Ascertain quantity breaks, minimum buys for shipping efficiency, and any
surcharges.
• Determine price for rush shipments of smaller-than-planned quantities,
which are often more

Tooling • Ideally, the purchaser should own the tooling and pay for it only once.
• Consider shipping tooling from a domestic source if transferable

Packing • This is a hidden cost (may be expensive for long distances and multiple
handlings)
• Consult a packaging supplier or internal engineer for methods to minimize
cost on international shipments

Escalation • Determine quote validity and components of escalation

Transportation • Obtain assistance from logistics personnel who have expertise in

international transportation.
• Consider consolidation of shipments with other corporations from the same
geographical area.
• Use multinational carriers or freight brokers to manage shipments and cost
where required.
• Consult the foreign supplier as a source of information regarding freight
sources.

Customs Duty • Duty to be paid and whether any special rules / relaxation available while
importing

Insurance Premium • Don’t pay for extra coverage that your company may already carry for
international transactions.

Payment Terms • Be rational and consider collaborative or cooperative approach so that it is

win-win for both buyer and supplier

Additional Fees & • Ask supplier, customs broker, and transportation personnel if other costs
Commissions may be incurred, and who is responsible for these costs.
• If your shipment is held at the port of entry due to a lack of documentation
and customs officials place it in storage, a storage fee will be billed to the
customer. (Who will pay for this?)

Port Terminal & • Check if there be anything specific

Handling Fees
Customs Broker Fees • There is a flat charge per transaction.

Communication Cost • There will be higher phone, travelling, etc costs involved

Taxes • Consider any additional tax that may be paid.

Payment & Currency • Bank transfers, bill of exchange, hedging and forward contracts fees
Fees
Inventory Carrying Cost • Higher levels of inventory will have to be held because of longer lead times.
• Costs include the interest rate forgone by investing funds, insurance,
property taxes, storage and obsolescence (check with controller).

Global Sourcing Strategy

The movement toward significantly increased international trade has been facilitated by a number of key
factors like improved communication tools, readily available transportation, automated Customs
processing, lower labor rates coupled with technically proficient and well-educated workforce, etc.
outsourcing, by definition, is the transfer of a function traditionally performed internally by an
organization to an external supplier.

Although the most important reason for global sourcing is to lower costs, there is also significant
advantage in developing a broader supply base, increasing the number of possible suppliers from which
the buying firm can select. Increased competition will typically enable lower costs and provide
competitive pressure to suppliers that usually results in increased overall value. Overseas sources in some
industries are more advanced technology.

Companies that engage or intend to engage in international procurement need to develop a global
sourcing strategy and incorporate it into their strategic plan. The strategy should include a set of criteria
for making decisions to use international sources, the methods to be used in sourcing, contract formation
requirements and a plan for continued monitoring of performance – essentially, most of the important
elements in any sourcing strategy.

Let us examine key factors that govern global sourcing :

1. Strategic Plan Elements:

There is likely no need to develop a separate strategic plan for global sourcing, but there may be
some aspects that have not been specifically included earlier, are to be considered. Following are
key strategic plan elements :

• Organizational Objectives : Most important is to review your organization’s objectives

to ensure that your overseas activities will be in alignment with them.

Some key objectives, other than reduced cost, are access to new skills and technology,
access to additional capacity, increased competition and the opportunity to revamp
existing process. Also, longer lead time and additional transportation cost are to be
considered.

• Market Analysis: it has a significant role in creating a global sourcing strategy.

Beginning with an internal analysis of categories that show the likelihood of reduced cost
through offshore sourcing, along with a complete spending profile for that category, the
analysis should include and examine following aspects :

a) Identify key global suppliers, their markets and where their major customers are
located. Understand if and how they compete with one another.
 b) Match your company’s requirements to the capabilities of those suppliers to
determine if there is a potential fit in terms of technology and capacity.

c) Analyze supplier’s financial positions, both long and short terms. For gathering
date it may sometimes be required to engage a third party with expertise in that
market segment.

d) Examine market trends in those areas to provide a comparison with current

sources of supply.

e) Determine if cost profiles provide any opportunity for savings.

f) Ensure detailed specifications exists for the products you are considering
transferring.

g) Whether raw materials are available locally?

h) Establish transportation requirement to determine if they can be met.

i) Identify risk and uncertainty areas and find the ways to mitigate the risk.

• Low Cost Country Sourcing : Companies have been able to realize significant savings,
around up to 40%, in countries that are identified as low cost. Typically these countries
are in emerging regions where there may be some offsetting risk as supply chains are
developed. Some of the low cost producer countries are :

o Brazil
o Bulgaria
o China
o India
o Philippines
o Romania
o Thailand
o Ukraine
o Vietnam

• International Procurement Services : Many expert sourcing and supply management

services can be found in most areas where companies in developed nations are currently
trading. They can be used to provide a skilled and effective local sourcing team that has
access to the necessary resources for supplier qualification, quality management,
logistics management and engineering & design support. These firms can also assist with
communication and help to create strong, sustainable relationships with contracted
suppliers. They can also establish a "home office" facility. For casual or occasional
overseas purchases, sourcing team may want to simply use an online sourcing directory.
The service of Alibaba (www.alibaba.com) is one of the largest online catalog
aggregators and sourcing sites, Alibaba provides information on products and services
across the alphabet. Although the company is based in China, the service provides
information in all countries engaged in international trade.
Some other useful sites are :

B2Brazil (www.b2brazil.com/B2Brazil/principal)
B2B Manufacturers (www.manufacturers.com.tw)
China.cn (http://en.china.cn)
 DIY Trade (www.diytrade.com)
EC21(www.ec21.com)
ECVV (www.ecvv.com)
Global Sources (www.globalsources.com)
Hong Kong Trade Development Center (www.hktdc.com)
Ketera (www.ketera.com)
Trade India (www.tradeindia.com)
Trade Key (www.tradekey.com)

2. Additional Criteria for International Sourcing :

As part of operational planning and prior to engaging in offshore sourcing, it is important to
understand and incorporate those general supplier selection criteria that supplement your
standard selection criteria. For that a number of requirements that generally apply to
international sourcing has been outlined below :

• Market analysis : Market analysis is considerably more complex when potential sources
are spread over several nations. Financial data are often very difficult to gather, so one
may be forced to rely on consultants or external sourcing experts to help identify suitable
suppliers and local business trends. Key questions to answer: Does the supplier have the
expertise needed, the financial capability to perform, and the ability to ramp up
production if needed?

• Skills : Level of training vary widely from county to country. It is required to understand
how the potential suppliers' employees are trained and qualified and at what competency
level they operate compared to your current supplier.

• Key personnel : It is important to find out the turnover rate of key personnel. Are they
experienced or new to the industry or industry segment?

• Culture and language : Whether differences can be overcomed, it is wise to

understand it beforehand. At times quality concepts also differ in other cultures.

• Contracting and legal systems : Need to consider how you will deal with this
variation and enforce the terms of your contracts.

• Logistics : To check out available shipping methods and costs, along with the cost of
export and import tariffs.

• Currency : We are to choose the best currency for pricing in order to minimize currency
fluctuation risk. There can be three possible cases as following :

o If you consider price in the supplier's currency, the supplier is relieved of

currency risk.
o Floating currency strategy (where the currency value can vary with market
conditions) performs well with market driven products
o Pegged currency (one whose value is tied to another currency or currencies) can
be used with a cost-driven product. Countries with pegged currencies are
generally smaller ones, such as Taiwan, Thailand, Hong Kong, and Korea.

Hedging is a strategy that protects the dollar value of a future foreign

 currency cash flow. The buyer avoids the risk of adverse currency fluctuations by
using forward or futures contracts or via currency options.

• Payment terms : The selling firm usually requests Letters of Credit. An open billing
account settled by wire transfer is becoming increasingly common and can provide the
same terms as those provided domestically.
• Communication : Beyond the language barrier, you need to assess the frequency of
personal contact required and the time differences.

• Risks : For obvious reasons, risk can increase significantly with offshore sources. Apart
from operational risks, we may want to place extra emphasis on political and economic
Stability if we intend to engage in long-term operations.

• References : Check local and international references regarding past performance and
problems encountered and any official government blacklist.

• Intellectual property : Many cultures do not place the same emphasis on protecting
intellectual property as we do. For example, many in China view intellectual property as a
form of exploitation by Western countries; as a result, they believe they have a right to
that property.
RISK MANAGEMENT:
RISK DEFINITION:
A situation involving exposure to danger; the possibility that something unpleasant or unwelcome will
happen; expose (someone or something valued) to danger, harm, or loss’ (Oxford English Dictionary)
- OR -
‘Effect of uncertainty on objectives. Note: effect is a deviation from the expected; uncertainty is the state
of deficiency of information relate to, understanding or knowledge of an event, its consequence or
likelihood; objectives can apply at different levels and aspects’ (BS/ISO 31000)
- OR -
‘Combination of the probability of an event and its consequence’ (ISO/IEC Guide 73)

What is Risk?
Four elements to be considered:

the possible future event and its source(s)

the possible consequence(s) of the event

the probability of the event occurring, and its severity

The length of time vulnerable to the event and consequence

Risk is where the probability of an event occurring and its consequences can be calculated from historical
data

What is Uncertainty?
Uncertainty is ‘inadequate or incomplete knowledge about the subject at issue’
• From a risk analysis perspective the level of uncertainty is ‘bounded’ by a probability
• For analysis purposes, a probability is considered a measure of uncertainty

Uncertainty is where there is a lack of knowledge – about the probability of incidence due to the lack of
reliable data (known unknown), or about the threat or opportunity itself (unknown unknown)

Cognitive model of risk and uncertainty on projects:

Risk Management is a systematic process of identifying, analysing, responding, monitoring and
controlling risk involved in a job/ project to improve performance of said job/ project. It is also an
interactive process bounded by organizational mission and its basic intent is to make the approach to
manage risks more robust.

RISK MANAGEMENT PROCESS:

Risk Identification & Categorization:

It is a cognitive process where risks are to be identified in a systematic & structured process

Risks to be identified based on Judgement, knowledge, experience & historic data

Techniques involved:

Lists generation in group through brainstorming or through interview (like checklist, risk
registers, risk breakdown structures

Soft techniques (casual mapping, soft systems methodology)

Strategic techniques (scenario planning, future & horizon scanning)

Technical/ engineered system techniques (hazard & operability – HAZOP, failure mode
effects analysis)

Risk Analysis:

In this phase severity, probability & manageability of threats are ascertained

Richer picture of the risks and uncertainties can be established to support future decision making

Techniques involved (both qualitative & quantitative):

Probability / Impact Matrix – generally 3x3, 4x4 or 5x5 matrix using numeric or
descriptive scale such as 0-1, 0%-90%, 1-5, very low-very high probability & impact

Quantitative analysis – mathematical model developed based on number of inputs &
assumptions. Output needs to be interpreted with quality of inputs & parameter settings
in mind. Eg.: Sensitivity analysis, Monte Carlo analysis & Probability Trees
Risk Response Phase:

In this phase a number of managerial interventions are developed to reduce impact or probability
of event identified and analysed.

Approach involved:

Proactive approach – aims to reduce possibility of event occurring.
Might include : changes in design, scope, processes & procedures to avoid possibility of a
future event occurring;
deciding not to proceed with a project to remove the possibility of the event happening;
contractually transferring responsibility of the risk to another party; or sharing gain &
pain with another party specified in contractual clauses

Reactive approach – aims to reduce impact of event should it occur.

Might include : allocating contingencies; insuring against cost of any loss; flexibility
planning and provision to deal with residual risks; or mobilization of emergency response
services to reduce impact of the event should it occur.

Risk Monitoring & Control:

• It is an important phase but often overlooked. Monitoring involves continual review of risks &
their status. Controlling ensures that appropriate actions are taken based on outputs of response
phase
• The best way is to make risk owner/owners for each identified risk.
• During this phase, information is gathered on status, captured on the risk register and reported
via team meetings & risk reports across different management levels.

Risk Register:
Risk Probability / Impact / Manageability Matrix:

CASE STUDY ON RISK ANALYSIS & MITIGATION:

Subject:
A Global tender for contract manufacturing is being floated by an Indian multinational firm, ABC, for
outsourcing manufacturing of excavation related equipment (primarily used for mining industry). Total six
(6) numbers of machines are required to be manufactured by the contract manufacturer for the first
phase. This is one of the patented design of the multinational house which is a bit older version, but this
can be used for a specific low capacity mining production job and that capacity of machine exactly fits the
cost economics. Strategic decision has been taken the top management to outsource it completely and
also from a single contractor. Due to huge overhead cost and other operation related & strategic issues it
is not viable to manufacturer that old model in ABC’s own manufacturing facility and hence the decision
of outsourcing.

Background:
Company XYZ, an overseas manufacturer, is bidding for this tender and in the process of discussion with
ABC on commercial terms & conditions. While most of deviations shot by XYZ are being accepted or
mutually agreed by ABC, there are following areas which are now being relook by XYZ and hence to go in
for Risk Analysis by XYZ’s management.

Risks to be Evaluated:

A. The tender requires that the law of the contract be Indian and the jurisdiction over any dispute
be controlled by courts local to the purchaser. In the event of a dispute, it is unlikely therefore
that a local court would be deemed to be impartial.

B. Delivery: Customer (i.e. ABC) needs to have the first machine within 10 months from the date of
order and balance machines @2-3 months each. As per our present manufacturing schedule of,
the first machine may be rolled out some time during October’17. Considering the most optimistic
ordering by customer by October’16, XYZ is still two months long in committing 10 months
delivery. Moreover, offer may be liable to be considered as non responsive if the above
mentioned definite delivery is not offered. This involves the offer to pass through a likely
 occurrence of not meeting the delivery criteria with an extremely serious potential
consequences as the offer may be likely to be rejected.

C. The liquidated damage mentioned in the tender is 0.5% per week with a maximum LD of 10%.
Also customer will have the option to cancel the order or a portion thereof if required.

D. The tender requires that the machine will be guaranteed for minimum availability of 85% for 12
months from the date of commissioning. Considering the client in India and having less
professional approach on up-keeping the machine, this involves a risk area.

E. In Indian mines pit conditions and operator efficiencies are generally well below accepted
industry standards, the effect of which is a reduction in component life.

Risk Analysis Matrix

RISK ANALYSIS:

A – The tender requires that the law of the contract be Indian and the jurisdiction over any dispute be controlled by courts
local to the purchaser. In the event of a dispute, it is unlikely therefore that a local court would be deemed to be impartial.

POTENTIAL CONSEQUENCES
NOTABLE SIGNIFICANT HIGHLY SIGNIFICANT SERIOUS EXTREMELY SERIOUS CATASTROPHIC
LIKELIHOOD (1) (2) (3) (4) (5) (6)
ALMOST CERTAIN
LIKELY
UNLIKELY 14
VERY UNLIKELY
EXTREMELY
UNLIKELY
Risk Mitigation / Management Action Plan:

Whilst Indian law for the contract is acceptable to us (i.e. XYZ), in our submission we require that disputes arising from the
contract be settled under the rules of arbitration of the International Chamber of Commerce. Venue of the arbitration will be
Singapore and proceedings will be in English.
Hence after Mitigation risk score comes to be :

MANAGEABILITY
VERY EASY EASY MEDIUM DIFFICULT VERY DIFFICULT NON MANAGEABLE
LIKELIHOOD (1) (2) (3) (4) (5) (6)
ALMOST CERTAIN
LIKELY
UNLIKELY 5
VERY UNLIKELY
EXTREMELY
UNLIKELY
 RISK ANALYSIS:

B – Customer (i.e. ABC) needs to have the first machine within 10 months from the date of order and balance machines @2-
3 months each. As per our present manufacturing schedule of, the first machine may be rolled out some time during
October’17. Considering the most optimistic ordering by customer by October’16, XYZ is still two months long in committing
10 months delivery. Moreover, offer may be liable to be considered as non responsive if the above mentioned definite
delivery is not offered. This involves the offer to pass through a likely occurrence of not meeting the delivery criteria with
an extremely serious potential consequences as the offer may be likely to be rejected.

POTENTIAL CONSEQUENCES
NOTABLE SIGNIFICANT HIGHLY SIGNIFICANT SERIOUS EXTREMELY SERIOUS CATASTROPHIC
LIKELIHOOD (1) (2) (3) (4) (5) (6)
ALMOST CERTAIN
LIKELY 60
UNLIKELY
VERY UNLIKELY
EXTREMELY
UNLIKELY
Risk Mitigation / Management Action Plan:

In our submission we have judiciously considered the manufacturing schedule and offered a delivery of 12 months for the
first machine and the balance machines @2.5 months.
Hence after Mitigation risk score comes to be :

MANAGEBILITY
VERY EASY EASY MEDIUM DIFFICULT VERY DIFFICULT NON MANAGEABLE
LIKELIHOOD (1) (2) (3) (4) (5) (6)
ALMOST CERTAIN
LIKELY 12
UNLIKELY
VERY UNLIKELY
EXTREMELY
UNLIKELY
 RISK ANALYSIS:

C – The liquidated damage mentioned in the tender is 0.5% per week with a maximum LD of 10%. Also customer will have
the option to cancel the order or a portion thereof if required.

POTENTIAL CONSEQUENCES
NOTABLE SIGNIFICANT HIGHLY SIGNIFICANT SERIOUS EXTREMELY SERIOUS CATASTROPHIC
LIKELIHOOD (1) (2) (3) (4) (5) (6)
ALMOST CERTAIN
LIKELY 12
UNLIKELY
VERY UNLIKELY
EXTREMELY
UNLIKELY
Risk Mitigation / Management Action Plan:

We have countered and limited our liability to 10% through our comments against this clause. In no event will the total
aggregate of penalties and liabilities under this contract amount to more than 10% of the FOB machine value. Also we have
included our Limitation of Liability Clause to keep our overall limitation within the total contract value.
Hence after Mitigation risk score comes to be :

MANAGEBILITY
VERY EASY EASY MEDIUM DIFFICULT VERY DIFFICULT NON MANAGEABLE
LIKELIHOOD (1) (2) (3) (4) (5) (6)
ALMOST CERTAIN
LIKELY 12
UNLIKELY
VERY UNLIKELY
EXTREMELY
UNLIKELY

RISK ANALYSIS:

D – The NIT requires that the machine will be guaranteed for minimum availability of 85% for 12 months from the date of
commissioning. Considering the new manufacturing base in India, this involves a risk area.

POTENTIAL CONSEQUENCES
NOTABLE SIGNIFICANT HIGHLY SIGNIFICANT SERIOUS EXTREMELY SERIOUS CATASTROPHIC
LIKELIHOOD (1) (2) (3) (4) (5) (6)
ALMOST CERTAIN
LIKELY
UNLIKELY
VERY UNLIKELY 8
EXTREMELY
UNLIKELY
Risk Mitigation / Management Action Plan:

We are passing through continuous monitoring as far as the quality measures are concerned. This will bring down the
occurrence to be very unlikely. Hence it is considered to be in same position as in Mitigation matrix.
 RISK ANALYSIS:

E – In Indian mines pit conditions and operator efficiencies are generally well below accepted industry standards, the effect
of which is a reduction in component life.

POTENTIAL CONSEQUENCES
NOTABLE SIGNIFICANT HIGHLY SIGNIFICANT SERIOUS EXTREMELY SERIOUS CATASTROPHIC
LIKELIHOOD (1) (2) (3) (4) (5) (6)
ALMOST CERTAIN
LIKELY 12
UNLIKELY
VERY UNLIKELY
EXTREMELY
UNLIKELY
Risk Mitigation / Management Action Plan:

The NIT language only provided limited protection against poor operating practices and machine misuse and abuse. In our
submission we have re-written the whole section relating to machine and pit operating practices to provide us with adequate
protection.
Hence in Manageability Matrix risk position remains the same.