GlobalSCM and Outsourced MFG 475 v1 PDF

Global Supply Chain
Management and Outsourced

Manufacturing
Sub Code - 475
Developed by
Prof. Smitesh Bhosale
On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
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Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)
Board Members
1. Prof. Dr. Uday Salunkhe  2. Dr. B.P. Sabale  3. Prof. Dr. Vijay Khole  4. Prof. Anuradha Deshmukh 
Group Director  Chancellor, D.Y. Patil University, Former Vice-Chancellor  Former Director 
Welingkar Institute of Navi Mumbai  (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)
Program Design and Advisory Team
Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant
Prof. Kanu Doshi Prof. B.N. Chatterjee

Dean – Finance Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai
Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Dean – Management Development Programs Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ
Prof. B.N. Chatterjee Prof. Vineel Bhurke

Dean – Marketing Faculty – Rural Management
Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.
Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.
Prof. Sandeep Kelkar Mr. Anuj Pandey

Faculty – IT Publisher
Welingkar Institute of Management, Mumbai Management Books Publishing, Mumbai
Prof. Dr. Swapna Pradhan Course Editor

Faculty – Retail Prof. Dr. P.S. Rao
Welingkar Institute of Management, Mumbai Dean – Quality Systems
Welingkar Institute of Management, Mumbai
Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Dean – Banking Dean – Marketing
Mr. P.M. Bendre Course Coordinators

Faculty – Operations Prof. Dr. Rajesh Aparnath
Former Quality Chief – Bosch Ltd. Head – PGDM (HB)
Welingkar Institute of Management, Mumbai
Mr. Ajay Prabhu Ms. Kirti Sampat

Faculty – International Business Assistant Manager – PGDM (HB)
Corporate Consultant Welingkar Institute of Management, Mumbai
Mr. A.S. Pillai Mr. Kishor Tamhankar

Faculty – Services Excellence Manager (Diploma Division)
Ex Senior V.P. (Sify) Welingkar Institute of Management, Mumbai
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1st Edition (July-2015)
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CONTENTS
Contents
Chapter No. Chapter Name Page No.
1 Introduction and Background to Global Supply Chain 3-16

2 Cost Management in Global Procurement 17-35
3 Sourcing Methodology and Process 36-65
4 Changing Role of Procurement Function and the 66-88
Emergence of Global Sourcing Manager
5 International Packaging 89-104

6 Role of International Logistics in Global Procurement 105-128
7 Measuring Performance in International Procurement 129-136
8 Ethics, CSR, Sustainability and other Considerations 137-153
in Global Purchasing
9 Role of Information Technology in Global Sourcing 154-170

10 Risk Management in Global Supply Chain 171-185
Management and Sourcing
11 Quality Management in Global Procurement 186-198

12 International Trade Payment Process in Global 199-208
Sourcing
13 Outsourced Manufacturing 209-231
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INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN
Chapter 1
Introduction and Background to Global
Supply Chain
Objectives
The key learning objectives is to –
• 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
Structure:
1.1 Introduction to Global Procurement

1.2 Objectives, Features and Key Activities of Global Procurement
1.3 Important Differences between Domestic Sourcing and Global
Procurement
1.4 Activity for Students
1.5 Summary
1.6 Self Assessment Questions
1.7 Multiple Choice Questions  
! !4
1.1 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. With the advent of technology, development of
international trade, increased level of awareness about potential sources of
procurement, increased pressure on profitability and continual cost
optimisation initiatives often has led to unique challenges and well as
opportunities for Purchasing Function. The need of the hour is to ensure
least cost and best quality purchasing from a vendor wherever it may be
located. This need has also resulted into evolution of Global Procurement
Function and Global Procurement Companies in the business structure of
large number of multinational corporations. It is, thus, a business process
which involves identification, evaluation, negotiation and design of supply
chain across multiple locations, suppliers and geographies around the
globe. It has also led to emergence of a new role – “Global Procurement
Manager”. Depending on the level of global activities, e.g., manufacturing,
exports and distribution, organisations develop a sourcing strategy based
on the integration and coordination of suppliers across worldwide
purchasing, engineering, and operating locations with regard to materials,
processes, designs, technologies, services among other things. Global
sourcing is, thus, defined as a centralised procurement strategy for a
multinational company, wherein a central buying organisation seeks
economies of scale through corporate-wide standardisation and
benchmarking.
The key drivers which are shaping up the global sourcing are as follows:
• Political influences
• Infrastructure in respective geographies
• Currency
• Climate changes and shifts
• Culture
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1.2 Objectives, Features and key activities of Global

Procurement
While the overall objective is to ensure procurement at least cost and best
quality, over a period of time, innovation, efficiency, transparency, ethics
and compliances have also become equally important.
Objectives of Global Procurement
1. Low landed cost of materials: Purchasing managers often compare

various options while carrying out the procurement activity. One of the
important objective of a global purchasing manager is to scout of new
vendors so that the landed cost, i.e., total cost of procuring the material
at the consumption location, is the least. In this endeavour, the
purchasing manager may need to evaluate vendors for more than one
geography.
2. Elimination of inefficiencies in procurement and control over

costs: Considering the current economic situation, cost savings has
become of prime importance. However, as the businesses become
increasing complex, there is a need for constantly innovating and
seeking every opportunity to eliminate the inefficiencies. Generation of
value for the organisation through constant improvement is imperative.
3. Evaluation of own manufacturing and outsourcing decisions: The

organisation constantly evaluates opportunities where the non-core
activities can be outsourced to a significant extent. The outsourcing
framework leads to saving of organisation’s limited resources and help
the management to deploy on sharpening the core competence.
4. 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. In the recent Tsunami in Japan,
number of organisations dependent on Japanese supplier faced a high
level risk of business disruption. An alternate supplier network, could
have mitigated the risk of dependency of single supplier or sourcing
materials from suppliers concentrated in a single location.
5. Embedding global best practices in the procurement process: As

the organisations actively mature their process from local procurement
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to global procurement, 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.
6. Result based purchasing and reduced learning curve: As the

businesses become more complex and technology advances, the
business needs become more critical and expect a faster response. One
of the important objective of the global procurement is also to enable
business achieve faster results and by-pass the learning curve. Some of
the initiatives which enable achievement of this objective is engaging a
global sourcing partner, promotion of multi-vendor scenario with clear
business allocation inter alia.
7. Innovation led purchasing: With the advent of technology and

political lines fading away, e.g., formation of Brazil, Russia, India and
China (BRIC) as group of emerging economies, constant innovation is
an important challenge for the business. One of the key objective of
global procurement is to inculcate an innovation culture in the
purchasing function.
8. Develop new technology and capacity: More often than not, the
domestic supplier lacks capacity to significant extent for want of
investments. The technology advances also occur at a relatively slow
pace. Thus, 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.
Features of Global Procurement
Key features of Global procurement are provided as under:
1. 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. Corporations in Germany look forward
for sourcing of supply across the European Union. Asian Multinational
Corporation’s focus of procurement from countries like China for
majority of the material based needs. There is also a focus on
! !7
development of new suppliers across the near shore countries to

mitigate the supplier concentration risk.
2. Requires a trade-off between low cost procurement vis-à-vis

investment in inventory and increased transportation cost: One
of the unique feature of global sourcing is that the supply chain needs to
be constantly innovated to ensure that the benefit of low cost sourcing
is not lost because of increased investment in inventory and the
transportation cost. Organisations often use Total Cost of Ownership
(TCO) approach to factor in the various costs and benefits before taking
the procurement decision.
3. 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, and enhance
transparency in the purchasing in addition to just achieving the
objective of realising cost advantage through global sourcing. Over a
period of time, global sourcing becomes an essential core of the
business strategy. Experience of sourcing for multiple geographies
enables the management to understand the DNA of business at
respective geographies. This understanding also helps the organisation
to explore additional business opportunities on the sales, business
development, and marketing and distribution side of the organisation.
4. 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.
The key activities of the LPO is to perform as follows:
a. Market research for identification of new suppliers
b. Evaluate suppliers for necessary qualification on a basis of defined

criteria
c. Perform inspections to get assurance that suppliers will be able to

meet the quality expectation of the organisation
d. Study the logistics planning and execution of procurement operations
! !8
e. Evaluate the local and global regulations impacting the procurement
f. Develop a qualified supplier database for future procurement purpose
g. Explore opportunities to integrate the procurement process into the

organisation
The additional key activities undertaken by the LPO post establishment

includes execution of bidding process, establish and provision of Logistics
Management services, facilitation of procurement transactions, contract
and project management and administration of invoicing and payments
5. Management of extra-territorial regulations: Organisation with

global sourcing strategy often need to comply with country specific as
well as international/extra-territorial regulations. For example, recent
enforcement of Foreign Account and Tax Compliance Act (FATCA) by
United States requiring information of payments made to US-based
vendors/ citizens by non-US financial institutions.
6. Category management: Global sourcing requires high level of

expertise in specific areas of procurement. Multinational Corporation,
thus, define Category Management as a sub-function within the
Purchasing Department. For example, information technology
purchasing which may include hardware, software, IT services, requires
special technical expertise and domain knowledge. Corporations have IT
procurement as a separate category.
7. Subject to global risks: Global procurement is subject to additional

risks in comparison to domestic procurement. Some of the important
risks include:
a. Increased level of supply lead times

b. Increased transportation and logistics costs
c. Delivery concerns from supplier end
d. Variation in the quality of material
e. High level of dependence on supplier’s intellectual property in certain
cases
f. Cultural and language barriers.
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8. Use of advanced demand planning and forecasting methods: On

account of significant lead time and country specific challenges, 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.
9. Involves engagement of global sourcing representatives: As

coordinating with suppliers for multiple geographies can become
increasing complex, certain organisation establish tie-ups with overseas
sourcing agents for countries where setting up of Local Procurement
Office may not seem feasible. The important benefits gained by
purchasing companies include:
a. Reduced search and response period
b. No overhead costs as the agent works primarily on a commission

basis
c. Overseas representatives are aware of the reputation and delivery

capabilities of the supplier
d. Ability to find small and medium suppliers with quality deliverable

which lead to substantial reduction in cost
e. Higher level of awareness and understanding of local customs and

culture
f. Improved negotiation opportunities
g. Facilitates performance of onsite supplier inspections
h. Faster communication and expediting the supply chain
Some of the key services provided by Overseas Sourcing Agent (OSA) are
as follows:
• Understanding the purchaser’s requirements in detail
! !10
• 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
• 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
• Facilitate timely communication with the stakeholders
• 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
• 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
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Significant Advantages of Engaging an Overseas Sourcing Agent

(OSA)
• The search and 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.
• OSAs are well aware of the customs and 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 and providing communication

assistance to the buyer.
Limitations or Disadvantages of Using 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.
! !12
• 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.
10.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.
Key Strategic Initiatives in Global Procurement
Key strategic initiatives of a global procurement functions with

multinational corporations are listed as under:
1. Understanding and identification of need for global procurement
2. Development the management expertise and talent for effective

administration of procurement process
3. Defining the procurement strategy for the Group and different Business
Units
4. Evaluation of opportunities for sourcing across the globe
5. Bringing in standardisation in the global procurement process
6. Prioritisation of opportunities and identifying the focus areas
7. Develop Global, Regional and Local (Country) sourcing teams
8. Communication and development of implementation road map of global

sourcing strategies
9. Establishment of business processes, technology support and

performance measures
10.Setting up a performance evaluation mechanism for the global sourcing

function
! !13
1.3 Important differences between Domestic Sourcing and

Global Procurement
Following table indicates some of the key differences between domestic

sourcing and global procurement
Particulars Domestic Sourcing Global Sourcing
Purchasing Area Acquisition of resources is Purchasing activity

restricted to one country/ extends to sourcing from
region multiple countries
Supplier Risk Entails limited risks for the Large scale and
purchasing organisation magnitude of purchasing
transaction exposes the
organisation to higher
level of risks
Regulations Subject to local country Subject to International/

regulations extra-territorial
regulations
Supplier Requires limited amount of Need higher level of

identification and standardisation supplier selection and
purchasing criteria qualification criteria
Quality Quality of products and Quality of products and

services aligned to local services is comparable
standards with the International
standards
Level of purchasing Purchasing management Purchasing organisation

management perceived to be an formulates global
operational activity sourcing as a business
strategy
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1. Explore any multinational company’s website and seek information

about the global sourcing process.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
1.5 Summary
On account of increased costs of transportation and logistics, local labour

and contractors issues, domestic regulations, sub-optimal quality and
globalisation, organisation across the world are compelled to rethink their
sourcing strategy and global procurement has solutions to address most of
these challenges. 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 and
optimisation of product and service quality. Such global procurement
strategy focusses on supplies from vendors across the globe instead of
limiting options only to sourcing from domestic vendors.
1. Identify and explain the factors that have compelled the organisation to
switch over to global procurement instead of depending of local sources
of supply.
2. Explain the important objectives of global procurement.
3. What are the features of global procurement?
4. Highlight important differences between domestic sourcing and global

procurement.
! !15
1.7 Multiple Choice Questions
1. Which of the following is least likely to be an important factor driving

organisation globally to pursue global sourcing strategies?
a. Low cost and best quality material availability in domestic market

b. Increased level of global competition
c. Globalisation
d. Changing consumer preferences
2. Which of the following is not likely to be an important advantage of

global sourcing?
a. Increased quality levels

b. International supplier follow higher standards of production
c. Exposure to increased lead times
d. Optimal cost
3. Which of the following is not likely to be an important feature of

domestic sourcing?
a. Entails limited risks for the purchasing organisation

b. Subject to local country regulations
c. Need higher level of supplier selection and qualification criteria
d. Requires limited amount of standardisation
Answers:
1. (a), 2. (c), 3. (c).
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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter
Summary
PPT
MCQ
Video Lecture - Part 1
Video Lecture - Part 2 
! !17
COST MANAGEMENT IN GLOBAL PROCUREMENT
Chapter 2
Cost Management in Global Procurement
Objectives
• Understand the Total Cost of Ownership (TCO) Concept in Procurement

• Understand implications of the Logistics Costs
• Understand the role of Taxation, Incentives and Other Credits in global
sourcing
• Understand how global sourcing manager should implement practices for
effective tax, incentives and credits management
Structure:
2.1 Total Cost of Ownership (TCO) Concept in Cost Management

2.2 Impact of Logistics Costs
2.3 Role of Taxation Costs, Taxation Incentives and Other Credits in
Global Sourcing
2.4 Implementation Aspects for Global Sourcing Manager for Effective Tax
and Incentives Management
2.5 Best Practices for Effective Tax and Incentives Management – A
Global Sourcing Manager Guide
2.7 Summary
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2.1 Total cost of Ownership (TCO) Concept in Cost

Management
The global sourcing manager is expected to have a detailed understanding

of all costs associated with the procurement of any product, be it capital
expenditure or operational expenditure. The TCO concept considers
lifecycle costs of the equipment, goods and services. The costs perspective
the expected cash outgo reduced by any benefits over the lifetime of the
goods/asset purchased. The costs include money spent or costs involved
right from the requisition stage to the disposal of the asset. It considers full
costs instead of only focus on purchase price. For example, if any
organisation decides for technology procurement, the global sourcing
manager will have to consider the costs as indicated below:
Computer and Operation Expenses Other Long-term

Hardware Programs Expenses
• Network hardware and • Infrastructure (floor space • Replacement costs
software costs occupied by the equipment)
• Future upgrade or
• Server hardware and • Electricity (for related scalability expenses
software costs and other equipment, cooling, backup
associated costs power, etc.) • Decommissioning
• Workstation hardware • Testing costs of the • Disposal costs

set-up and software equipment and software
installation costs
• Downtime, outage and failure
• Installation and expenses related
integration of hardware
and software costs • Diminished performance and
related costs for maintaining
• Purchasing research costs the equipment
• Warranties and licenses • Security (including breaches,

associated with the loss of reputation, recovery
equipment and prevention)
• License tracking – • Backup and recovery process

compliance costs of the software
• Migration expenses, if any • Technology training to the

employees/operators
! !19
• Risk management costs • Audit (internal and external)

associated with costs
susceptibility to
vulnerabilities, availability • Insurance premium for the
of upgrades, patches and lifetime of the equipment
future licensing policies
related to the equipment • Information technology
personnel deployment costs
• Corporate management time
If the TCO concept is to be applied to the procurement of transportation

equipment, the lifecycle costs to be consider will be as follows:
• Purchase Price
• Tax Benefit on Depreciation (reduction)
• Insurance Costs
• Fuel Costs
• Financing Costs
• Repairs Costs
• Fees and Taxes applicable to the transportation equipment
• Costs of Maintenance
• Opportunity Costs
• Downtime Costs associated with the transportation equipment
Provided herewith the following illustration for computation of Total Cost of

Ownership on procurement of Computers:
Sr.No. Cost Source +/– $

1 Purchase price/fixed price of the laptop + 100
2 Cost of warranty or maintenance + 50

3 Cost of delivery of the laptop + 10
4 Disposal of delivery packaging + 5

5 Set-up and installation costs + 5
6 Testing cost + 10
7 End-user training + 20
8 Accessory cost + 30
! !20
9 Energy consumption (over lifetime) + 60
10 Purchase of energy saving devices + 15
11 Support/maintenance/management costs + 30
12 Repairs and lost productivity (based on probability) + 20
13 Recycling and disposal of laptop + 20
14 Value added tax + 15
15 Input credit on value added tax – 10

16 Tax benefit on depreciation – 25
Total Cost of Ownership (over Lifetime) 355
2.2 Impact of Logistics Costs
Logistics costs are an important component of the landed cost of

procurement. In addition to quality and other standards related to products
and services, logistics costs is the key driver of global procurement
decisions. The common concerns that many MNCs engaged in global
sourcing have is the selection of the most cost-effective transportation
mode and the total amount spent on sourcing from foreign/supplier
countries. It is generally agreed that manufacturing cost is significantly
lower in developing countries, however, the extended distance, the
coordination between the partners, and numerous other problems related
to international trade often complicate the profit picture. Certain locations
can lead to significant level of additional costs. The logistics costs can be
broadly classified into following categories:
1. Transportation
2. Inventory holding
3. Administration
4. Customs charges
5. Risk and damage
6. Handling and packaging
Let us have a look at each of the category.
1. Transportation Costs: Transportation costs is further segregated into

various categories.
! !21
(a) Freight charge: Cost incurred during delivery using various

transportation modes
(b) Consolidation: The fee for combining small shipments to form larger
shipments
(c) Transfer fee: Cost incurred during the transfer of goods between
different modes of transportation
(d) Pick-up and delivery: Transportation charges incurred between

shipper’s warehouse and air, rail consolidator’s terminal
2. Inventory Holding: The key inventory holding costs depends on the

quantity and the location of the inventory.
(a) Pipeline holding: Holding cost during the transfer
(b) Safety stock: Holding cost of safety stock
3. Administration: Administration consists of order processing,

communication and other overheads.
(a) Order processing: Salaries of employees responsible for purchasing

and order management
(b) Communication expenses: Telephone, fax and information transfer

related costs associated with international logistics
(c) Overheads: Rent paid by the international logistics group
4. Expenses related to customs and clearance procedure are significant

component of the logistics costs in case of imports and exports.
(a) Customs clearance expenses: Fee imposed by local customs to clear

goods
(b) Brokerage fee: Charge levied by an agent acting on behalf of the

shipper or the receiver depending on the delivery terms
(c) Allocation fee: Allocation fee is charged per house bill
! !22
5. There is also a risk of damage to cargo and expenses are also incurred
for protecting the cargo in international logistics.
(a) Damage/loss/delay: Percentage of the value of each unit shipped

that will be lost, damaged or delayed
(b) Insurance: generally charged as a percentage of the value of goods

insured
6. Significant costs in global procurement is also on handling and

packaging of the material. The key expenses incurred are as follows:
(a) Terminal handling: Material handling fee charged by the

transportation company
(b) Material handling: Cost of labour and equipment used to move goods
within the shipper’s or receiver’s warehouse
(c) In/out handling: Material handling charge levied by the freight

forwarder for use of its facilities
(d) Disposal charge: Fee for taking away an empty container from the
receiver’s warehouse
(e) Packaging/supplies of materials: Cost of preparing goods for

shipment
(f) Storage: Rental fee of the warehouse space
2.3 Role of Taxation Costs, Taxation Incentives and Other

Credits in Global Sourcing
Globalisation is changing how we do business in every industry, business,

region, product line and in every part of the world. Global companies are
rapidly transforming their supply chains and sourcing practices and
procedures to go wherever necessary to reduce costs, launch products and
enter lucrative new markets. Operating in this volatile, uncertain, complex
and ambiguous global environment presents a range of challenges for
indirect taxes such as value added tax (VAT), goods and services tax
(GST), customs and excise duties, environmental duties, grants and
! !23
incentives. Addressing those challenges and finding effective solutions will

continue to be crucial as the business landscape continues to change in the
global environment.
Taxation laws and regulations have a very broad impact on the way goods
and services are procured in International market. The developments have
profound effects on global supply chains and the sourcing process
effectively changing how and where materials and products are sourced,
manufactured, distributed and sold.
Indirect taxes are based on transactions, flow of goods and services and
not on the income or profits. This taxes are completely linked to the supply
chain activities. Changes in the tax regulations can impact the following
areas:
• Where the supply chain and sourcing activities are carried out
• The cost of finished products and delivery routes and timing
• Grants and incentives like export benefits, tax rebates, etc.
• Costs and risks of doing business internationally
The key indirect taxation challenges that may arise, which the global
sourcing manager should be aware of, throughout the supply chain
includes:
• Procurement of services from many countries

• Selling in, from and to many countries
• Ownership of goods in many countries
• Transacting in goods on consignment basis
• Movement of goods across the borders for storage
• Storage of goods as multiple geographies
• Movement of goods across various geographies for process and repair
• Provision of services in many countries
• Ownership of raw material, semi-finished products and finished products
throughout the global supply chain
• Maintaining title of ownership of the goods till last leg of the supply chain
! !24
Each time the goods cross the border, the goods are subject to many taxes
and compliance obligations. Some of those are provided as under:
• Import and Export licensing

• Value Added Tax and Goods and Service Tax Reporting and
Documentation
• Customs and excise duty reporting and compliance documentation
• Excise duties on importation (countervailing duties)
• Import and Export compliance obligations
Some of the important factors which need to be considered to evaluate the

impact of taxation on supply chain and global procurement are as follows:
• Shift in the trade pattern across the globe: In 1990, the world trade
was dominated by developed nations. However, in the last few decades
as the new markets are opening up, companies are exporting to more
countries than ever before and trade routes are changing. People’s
Republic of China is now the biggest trading partner for countries like
Australia, Japan, South Korea, India, Russia and South Africa and China
is increasing its share of trade with Europe and the United States as well.
As the current emerging economies (such as Brazil, Russia, India and
China, commonly referred as BRIC) grow, evolve and mature, new
developing economies are likely to emerge (such as Vietnam and
Cambodia, Indonesia among others).
• Ever changing and transforming supply chains: With changing

patterns and shift in global trade, companies are increasingly
transforming their supply chains to go across the world as necessary to
support growth, reduce costs and minimise the risks of doing business.
For number of organisations, supply chain activities, e.g., product
engineering, sourcing, manufacturing and logistics are spread across and
widely dispersed around the world. As increasingly the activities are
outsourced to emerging markets, centralised through set up of a
procurement company and streamlined to gain efficiencies and maximise
utilisation of the scarce resources, corporate structures and functions are
also being transformed. Number of organisations has set up a structure
called as Global Procurement Company established to carry out global
sourcing activities for the parent and fellow subsidiaries across the globe.
! !25
For example, Vodafone, the largest telecom player group across the
globe has set up a Vodafone Procurement Company, with head office in
Luxembourg. The company is established as strategic purchasing centre
for the Group and now serves third parties as well. This company
manages approximately Euro 10 billion of procurement in a year.
• Shift in the taxation regime across the globe: Governments around

the world are primarily focussing on indirect taxes to increase revenues
and provide funding to the tax reforms. Global Sourcing Manager needs
to be aware of the main trends and changing pattern in indirect taxation
and its impact not only on supply chain evolution or change but also on
the existing supply chains. Broadly, most of the recent changes across
the globe include increasing tax rates for Value Added Tax (VAT), Goods
and Services Tax (GST), Excise duties and Customs duties. Emerging
market like India has also recently introduced the common indirect
taxed, i.e., GST Regime. The GST regime in India is expected to counter
double taxation of goods. The average rate of tax is expected to be
approximately 27% as against the global average of 16.5%. 
 
VAT and GST regime is now applicable in more than 150 countries across
the globe. For example, an increasing number of emerging markets are
adopting Value Added Tax and Goods and Service Tax regime in
preference to single-stage sales taxes or a range of local sales taxes. In
January 2012, China launched a Value Added Tax pilot scheme in
Shanghai with a view of eventually replacing its Business Tax (BT) and
VAT with a broad-based VAT throughout the whole country. India is also
undergoing reform in this area. The country has recently finalised its
“negative list” for excluded supplies and bringing the introduction of a
new, centralised GST one step closer. 
 
Value Added Tax (VAT) and Goods and Service Tax (GST) is generally
borne by the final consumer, but the tax is collected and remitted by
business entities that supply taxable goods and services. The indirect tax
is charged on transactions at each stage of the supply chain and it is very
crucial that the global sourcing manager is completely aware of all the
incidences of the indirect taxation. The taxation generally applies to
imports of goods. Businesses are treated as VAT taxpayers who collect
and remit the tax. VAT taxpayers charge VAT/GST on their sales (output
Value Added Tax) and recover Value Added Tax paid on their business
purchases and overheads (input VAT). Organisations also get input credit
! !26
for the input VAT paid to the vendors. Therefore, businesses effectively
account for Value Added Tax on the value they have added, created at
that stage in the supply chain, as applicable.
• Trade Agreements, bans, action against dumping of the products:

Number of emerging geographies like India have trade agreements with
other nations. The trade agreement’s objective is to promote
international trade between participating nations in specified
commodities and services. Further, certain products are also subject to
anti-dumping duties under a protective taxation regime. For example, in
March 2015, to protect the domestic manufacturers of industrial grade
stainless steel, Indian trade ministry recommended anti-dumping duties
ranging from $180 to $306 per tonne for some industrial-grade stainless
steel imported from China, Malaysia and South Korea. The Ministry’s
report depicts that China’s annual stainless steel surplus is more than 4
million tonnes, compared with India's annual demand of about 2.6 million
tonnes and which leads to cheap supplies coming in from China and
hence to protect the domestic industry, it is important for introduction of
anti-dumping duty.
• Tax and Other Incentives of the Business: The Global sourcing

manager should be aware of the various incentives across the globe for
various transactions. These incentives go a long way to reduce the cost
of strategic as well as transaction sourcing. Indicative list of the
incentives is provided as under:
Type of Utility for the Particulars

Incentives Global Sourcing
Manager
Tax Incentives Reduced cost of • Sales/use tax exemptions/refunds

sourcing across the • Deferment of the tax payments (VAT)
globe • Additional input credit on capital
purchases
• Export Zone credits
• Research and development credits
• Capital investment tax credits
• Credit for alternative energy
• New markets tax credit
! !27
Hiring Outsourcing/  • Wage rebates

Incentives Co-sourcing • Grants for job creation
Decisions • Employment related tax incentives
• Hiring and employee screening
incentives in some geography
Research and Useful for sourcing • Federal Government/State R&D credits

Development managers of R&D • Tax incentives for investments in
Incentives driven Research and Development Labs and
pharmaceutical expenditure
companies • R&D cash grants
• Additional/increased deduction for
Research and Development spend in
Corporate Tax
Property Tax Useful for set up of • Exemption of property or establishment

Relief overseas supplier tax for setting up manufacturing/service
establishment as centre in certain locations
subsidiary company • Favourable property tax treatment for
certain industries
Green Selection of right • Carbon credits

Incentives suppliers/ • Greenhouse Gas (GHG) reductions
outsourcing and co- • Incentives for LEED certified premises
sourcing decisions • R&D and manufacturing incentives for
green products
Training Outsourcing, • Incentives of training spends

Benefits overseas • Supplier development programs and
manufacturing hub incentives (especially for small and
medium businesses)
• Tax credits on training spend
Other Useful for reducing • Infrastructure grant and set-up

Incentives the total cost of assistance
ownership • Low cost financing for capital
expenditures
• Discounts on sourcing various utilities
• Waiver of permit/license fees
• Discounted land
! !28
2.4 Implementation aspects for Global Sourcing Manager

for effective tax and incentives management
The global sourcing manager is expected to perform the following action

points to effectively manage the tax issues in global sourcing:
• Identification and quantification of the indirect taxes and incentives that

the organisation is currently pays and receives
• Identification and quantification of the areas of current and future risks

and opportunity, including the costs of related to tax compliance
obligations
• Assignment of clear role and responsibilities for managing company’s

indirect tax performance and incentives
• Ensure that the team across various functions has understanding of

implications of taxes
• Ensure that standardised processes are implemented and leading

practices are encouraged throughout the organisation for effective tax
management
• Outsourced and co-sourced partners of the organisation ensure

compliance with the tax laws and periodic submission of the report to
global sourcing manager
• Establishment and measurement of the indirect taxes and incentives by

adopting key performance indicators (KPIs) related to organisation’s
supply chain and procurement goals
Implications of Taxation on Global Sourcing Models – Case Study of

a Large Multinational Company
ABC Global Group manufactures and distributes a wide range of consumer

products across many geographies. In recent years, the Group undertook
several transformation projects to streamline production and distribution
centres. The first project, carried out across three continents, i.e., Europe,
the Americas and Asia. The Global Head of Transfer Pricing (International
Taxation) discusses how the Group’s attitude to indirect taxes has evolved
! !29
from dealing with VAT and customs compliance resulting from these
transformations to basing decisions about where to carry out production, at
various sites across the globe, based on indirect tax considerations.
The Head of Transfer Pricing observed difference in the importance of

indirect taxes on the projects on a regional basis (across three continents).
The Group noted that in Europe the biggest challenge in general has been
making sure that the ERP systems process, the indirect tax aspects of
various supply chain transactions in such a way that there is less manual
activity, that the invoices are all prepared accurately and that the electronic
invoicing systems operate effectively. Harmonisation of Value Added Tax
and customs processes in the European Union has significantly helped the
group.
In Latin America, indirect tax was one of the key focus areas of the Group,
both on the legal entities set-up and for the transaction flows. Further in
deciding where to build or set up a manufacturing unit, in Asia and
customs and free trade agreements and other indirect taxes and indirect
tax incentives were key decision drivers.
2.5 Best Practices for Effective tax and Incentives

Management – A Global Sourcing Manager Guide
Global Sourcing Manager needs to formulate proper strategies to

effectively manage the taxes, reduce the overall cost of purchasing and
also avail various incentives available. Some of the best practices which
can be adopted by the global sourcing manager with respect to various
taxes is provided as under:
Valued Added Tax/Good and Service Tax
• Reduce the burden of VAT/GST, in terms of absolute costs and in terms of

negative cash flow
• Maximisation of positive VAT/GST cash flow on sales and procurement
• Reducing the costs of compliance and the risk of incurring penalties
! !30
• Adopting an effective and efficient VAT/GST management framework for

identification, quantification and management of transactions and cross-
border movements of goods, throughout the end-to-end supply chain
• Mapping out VAT/GST transaction flows to business processes and

against costs to identify opportunities to eliminate or reduce VAT/GST
costs and improve the cash flow
• Standardisation and automation of end-to-end processes (especially

Accounts Receivable and Accounts Payable processes)
• Centralising Indirect Tax compliance in global or regional shared services

centres
• Routing cross-border movements of goods to make best use of import

valued added tax and GST deferments, free trade zones, reverse charge
accounting, and other aspects to improve cash flow and avoid
irrecoverable (without input credit or refund) VAT/GST
Customs Duties
• Ensure compliance to all activities and process involved in customs
• Adopt effective customs duty management framework throughout the

supply chain covering end-to-end activities
• Use of economic customs procedures and customs planning tools, e.g.,

harmonised system of classification where available
• Routing cross-border movement through Free Trade Zones and other

locations to make best use of the free trade agreements
• Optimising purchasing through imports of goods to maximise the use of

customs procedures and duty benefits, e.g., avoiding procurement from
origin which is subject to anti-dumping duty
• Using accreditations of various organisations (SAARC) to transit goods

more quickly through international borders without any hassle
! !31
• Linking the use of special customs regimes in the end-to-end supply

chain for optimising the custom duty incidence
Excise and Other Duties
• Avoid sourcing goods on which the excise duty is irrecoverable unless

absolutely necessary and if there is no other alternative
• Use the manufacturing locational advantage for availing certain excise

duty related benefits
Management of Incentives
• Adopting an effective management incentive identification, quantification

and management framework to gain maximum benefit out of the
incentives structure
• The global sourcing manager can look forward to centralise the activities
related to management of grants and incentives to improve controls,
improve decision-making and maximise the benefit
• Periodically evaluate the benefits available compared with the compliance

conditions and costs, as on account of dynamic business environment the
decision may become unviable, e.g., issuance of new policy, withdrawal
of incentives, expiry of incentives, etc.
• Identifying potential investment destinations (industrial policy,

investment policy, state benefits) and negotiating investment packages
that are tailored to the company’s needs to maximise benefits and cost
reductions
• Combining grants or credits for new investment, employment and R&D,

etc. to minimise input costs throughout the end-to-end supply chain
activity
! !32
1. Download the Annual Report of any publicly listed company from any
sector and analyse the purchase and other costs.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
2. Perform research on various factors affecting Total Cost of Ownership

and its impact on procurement decision of an organisation.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
3. Evaluate the impact of implementation of Goods and Services Tax (GST)

in India on the sourcing or outsourcing strategy of multinational
companies.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
2.7 Summary
Over a period of time, there has been a shift in the way organisation take
the procurement decisions. The traditional methods directs towards
purchase price and so selection of the supplier with least quotes seems to
be most practical solution. However, the traditional approach completely
ignores the costs associated with the ownership of the asset, material over
its lifetime. To address this lacuna in the traditional approach and provide a
holistic perspective to taking procurement decisions, especially in a global
environment, Total Cost of Ownership (TCO) provides an appropriate
method to have end-to-end look of the costs. The TCO considers costs
which not only includes the initial purchase price but also considers the
costs of operations, utility, maintenance and disposal at the end of
economic life of the product. Some of the other cost components like
Transportation and Logistics, Taxation also contribute to the cost built up.
In global sourcing environment, consideration of the logistics costs,
! !33
incidence of various direct and indirect taxes and also availing benefit of
various tax incentives become very important, especially while spending on
capital equipment, incurring research and development expenses,
development of an outsourced vendor, evaluating offshore outsourcing/
service centre set-up and such many decisions. The global sourcing
manager should adopt various practices to identify, assess, quantify and
optimise processes so that the incidence of tax is reduced and the
organisation is positioned to maximise the utilisation of various benefits.
1. Explain the concept of Total Cost of Ownership? Provide suitable

illustration.
2. What are the various categories of transportation and logistics costs

which the Global Sourcing Manager should consider while evaluating a
capital asset procurement decision?
3. What role does taxation plan play in global sourcing?
4. What are the various practices that can be adopted by Global Sourcing
Manager to reduce the incidence of taxation and increase utilisation of
tax incentives?
! !34
1. Which of the following statement is least likely to be true about the Total
Cost of Ownership (TCO) methods of evaluation in global sourcing?
a. Warranties costs are included

b. Focus on end-to-end lifecycle cost
c. Ignore the tax incentives
d. Considers the incidence of non-refundable taxes
2. Which of the following is not likely to be part of the lifecycle cost of the
product to be purchased?
a. Operations and maintenance costs

b. Purchase price
c. Warranty costs
d. None of the above
3. Which of the following is least likely to be tax incentive?
a. Non-refundable taxes
b. Valued added tax with inputs credit
c. Additional depreciation on capital equipment
d. Reduced tax liability on research and development expenses
Answers:
1. (c), 2. (d), 3. (a). 
! !35
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !36
SOURCING METHODOLOGY AND PROCESS
Chapter 3
Sourcing Methodology and Process
Objectives
• Understand the strategic global sourcing process

• Understand the Global Procurement Cycle
• Understand various procurement methods – focus on procurement
through tendering process
• Understand the supplier selection and evaluation process
• Understand methods of supplier development in global procurement
• Understand the methods to enter into a formal contract with the
suppliers – a global sourcing perspective
• Understand various Global Sourcing Models
• Understand the use of Free Trade Zones (FTZs) in Global Sourcing
Structure:
3.1 Introduction to Strategic Global Sourcing Process

3.2 Global Procurement Cycle
3.3 Procurement Methods – Special Focus on Project Procurement and
Purchasing through Tendering Process
3.4 Supplier Selection and Evaluation Process
3.5 Supplier Evaluation Criteria
3.6 Supplier Development in Global Procurement
3.7 Entering into a Formal Contract with Supplier – a Global Sourcing
Perspective
3.8 Global Sourcing Models
3.9 Use of Free Trade Zones (FTZs) in Global Sourcing
3.11 Summary
3.13 Multiple Choice Questions 
! !37
3.1 Introduction to Strategic Sourcing Process
Strategic purchasing is the process of planning, implementing, evaluating,

and controlling strategic and operating purchasing decisions for directing all
activities of the purchasing function towards opportunities consistent with
the firm's capabilities to achieve its long-term goals. The key steps adopted
by large number of organisations in the strategic sourcing process may
vary significantly with respect to the business profile of the organisation,
nature of the product, region and other factors. Broadly, the process can
be classified in following seven activities:
1. Developing the profile of category/nature of purchases required

2. Define appropriate sourcing strategy for each of the type of product/
service category
3. Generation of supplier portfolio
4. Select appropriate implementation path
5. Negotiations and selections of suppliers/vendors
6. Integration of suppliers
7. Benchmarking supplier market and periodic review
The important sub-steps are provided as under
1. Developing profile of category/nature of purchases: At this stage,

it is important for organisation to understand the nature of products/
services to be procured. Ordinarily, a category consists of a number of
products from similar vendors that can be grouped together in a
competitive sourcing exercise. For example, an automotive company
might purchase different tyres for different vehicles from different
manufacturers. It may make sense to group the total spent on tyres
together into one category in order to identify the savings potentials.
Carrying out a vendor segmentation analysis is one way to position the
product in relation to others purchased by the organisation.
Analysis of the spend is an important step for understanding the need of

the organisation. This activity may consists of following important sub-
steps:
➡ Information related to the total spending of vendor can be sought from

the accounts payable department.
! !38
➡ Existing contracts with the vendors needs to be reviewed to estimate
the spend in terms of dollar amounts, locations, number of users and
volume of usage, pricing, terms and conditions and which sources are
used most heavily.
Analysis of the need for procurement is also an important steps. This may
include following key activities:
➡ Interview key current users to develop a thorough understanding of

their needs.
➡ Seek user’s views on supplier’s performance, and any enhancements
that they would like to see in the product/services.
Supplier market analysis is also a critical step in the process of global

procurement. The key activities include:
➡ Understand the external supply market in which the supplier operates

and the market pressures the supplier faces.
➡ Evaluate what is the current competitive situation? Are the providers
under cost pressures, competitive pressures, technology pressures?
➡ Understand what other suppliers could supply either the same product/
services or nearly so?
➡ Assess what are the trends in the relevant product/service industry?
➡ Check what insights are available into the value chain, suppliers’ cost
structures and pricing.
➡ At times, it is also advisable to adopt the Porter’s five forces model in
analysing the supplier portfolio. The analysis includes:
a. Evaluate bargaining power of the suppliers

b. Understand the threat of new entrants
c. Understand the bargaining power of buyer purchasing organisation
d. Evaluate the threat of substitute products
e. Evaluate the implications of rivalry among the existing supplier
firms on the procurement cost
➡ It is very important to carefully evaluate and understand the vendor

pricing structures.
! !39
2. Selection of appropriate sourcing strategy: Organisation here

needs consider how the product you are sourcing aligns with company’s
overall strategy. Where to place the product the company is sourcing
within a category positioning matrix. The product can be, thus, broadly
classified into four broad category positions
(a) Leverage
(b) Strategic
(c) Non-critical
(d) Bottleneck
The details of each category is provided in the Category positioning matrix

as under:
Leverage Characteristics Strategic Characteristics

➡ Competitive market ➡ No true substitutes; usually
➡ High expenditure levels single source
➡ Commodity type items ➡ High-product differentiation
High Approach
➡ Key to core business
Approach
➡ Use competitive marketplace to  
reduce total cost ➡ Ensure availability of supply
➡ Consolidate volume as ➡ Focus on relationship building,
negotiation tool process integration & innovation
Non-critical Characteristics Bottleneck Characteristics

Busi
ness
➡ Low expenditure levels ➡ No true substitutes; usually
Imp ➡ Small % of expenses single source
act ➡ Not key to core business; ➡ Not core to business
commodity ➡ Lack of availability will cause
problems
Approach
Approach
➡ Simplify and streamline
purchasing process ➡ Search for alternatives
Low ➡ Reduce number of suppliers and ➡ Strengthen relationships
simplify ordering
Low Supply market Complexity High
! !40
The sourcing strategies depend on the objectives the organisation which it

wants to achieve. The following strategies need to be deployed-
➡ Volume concentration: This step involves consolidation of the

suppliers
• Consolidate number of suppliers

• Aggregate volume across units
• Re-distribute volume among suppliers
➡ Best Price Evaluation: In this strategy, the focus of the organisation is

to achieve best possible pricing for the desired product/service.
• Compare “total” costs

• Model “should-costs”
• Renegotiate prices
• Unbundle pricing
• Hold an online auction
➡ Global Sourcing: Organisation needs to explore multiple sources of

procurement
• Expand geographic supply base

• Develop new suppliers
• Exploit global supply/demand imbalances
➡ Improvement of specification of the product: Organisations need to

improve the products over a period of time. This objective is an
important for evolution of the sourcing strategy.
• Conduct product value analysis

• Optimise lifecycle costs
• Rationalise/standardise specification
• Substitute materials
➡ Joint Process Improvement: Number of organisations across the

world engage with the suppliers for improvement of the process.
• Re-engineer joint processes

• Support supplier operations improvement
! !41
• Share productivity gains

• Develop integrated supply chain
➡ Relationship Restructuring: Engaging into strategic partnership with

supplier assist the organisation in a big way to evaluate the strategic
decision of direct procurement or outsourcing.
• Establish/develop key suppliers

• Employ strategic alliances/partnering
• Examine strategic “make versus buy”
3. Generate the Supplier Portfolio: It is very crucial for all organisations

to develop a robust portfolio or database of suppliers. While
organisation may not purchase from all the suppliers, it is important to
understand the availability of robust database will assist organisation to
send enquiries and seek quotations from multiple suppliers in the
process of procurement. Some of the important questions that the
organisation should ask in the process of supplier selection is as follows:
Criteria Factors
Geographic • Details of geography which supplier is covering

Coverage • Interiors and key locations across the geographies of
coverage
Industry and • Understand the depth of coverage of the supplier across

Market Coverage various Industries/product use
Product Content • Availability of the material about the product/services
Pricing • Pricing structure of the supplier

• Combinations of prices – fixed per unit, discounts,
payment terms
Billing • Frequency of the billing
KPIs • Suppliers past performance on some of the important

key performance indicators that matter to the
organisation, e.g., product delivery time, periodic
reports to customers, representations and warranties
At this stage, the organisation should not discard any of the suppliers. It is
possible that Even if some of the suppliers are smaller or newer suppliers
! !42
with whom the organisation may not be familiar, those small/new suppliers
may offer more favourable contract terms than some of the large suppliers.
4. Selection of the appropriate implementation path: From the

portfolio of suppliers, the organisation may need to shortlist some of the
suppliers for sending enquiries and calling for negotiations. Many
different routes are adopted by organisations to achieve this objective.
One of the traditional method adopted by buyers across the globe is to
conduct a Request for Proposal (RFP). In the RFP, the buyer states his
requirements and asks suppliers to set forth the specifics of their
proposed offer including pricing. Requiring the vendors to complete a
standard pricing matrix will allows the buyers to compare their offers on
an equal basis. A set of criteria and weightings for evaluating the
completed RFPs must then be developed. The use of an electronic RFP
tool can be a real asset in making sure that all potential suppliers
respond in a consistent manner, speeding up the entire process and
simplifying the analysis of responses.  
 
It is worthwhile to discuss the role of internet based negotiations in the
RFP process. Some of the important activities involved in internet
negotiations are as follows:
➡ Suppliers that have successfully got through the RFP process will
then be invited to number of negotiations rounds.
➡ Negotiations may be conducted either face-to-face or, depending on

the situation, by Internet negotiations (sometimes called reverse
auctions or e-auctions).
➡ The advantage of using an Internet negotiation is that it compresses

the time to arrive at the suppliers’ “best offer” from days or weeks
to a matter of hours.
➡ Even with the use of an Internet negotiation, however, there will still
be a final contract negotiations process with the successful bidder.
➡ Internet negotiations work best when there are at least three or

more suppliers whose products are broadly similar in the structure,
size and nature of the organisation.
! !43
➡ If a large organisation has relatively high spend on any product or
service with a number of suppliers, internet negotiations would be a
technique worth considering
In a situation where there is only one viable supplier to consider, the

best approach is to negotiate directly with them instead of routing
through an RFP route.
5. Negotiation and Selection of Suppliers: Negotiating is very crucial

step in the process of global procurement. Important aspect here is
availability of information and development of the negotiation strategy.
Following are some of the important activities involved in the
negotiation and selection of suppliers:
a. Setting up of the negotiation team – the team may comprise of

technical experts, finance and accounts, senior authority, observer,
user function and procurement manager.
b. Understanding the bargaining position of the organisation and

determine most desired outcome (MDO), least acceptable agreement
(LAA) and best alternative to a negotiated agreement (BATNA).
c. Identification of negotiation drivers.
d. Identification of concessions the organisation is willing to give.
e. Organisation should never concede anything without getting

something from the supplier in return.
f. Thinking about the supplier’s objectives and consider the same in the
negotiation process.
g. Understanding the supplier’s negotiating position.
h. The negotiations process may require several meetings with each of

organisation’s potential suppliers before the buyer comes to an
agreement.
The organisation needs to remember that everything is negotiable. The

organisation can enter into various types of contracts as follows:
! !44
➡ Fixed Price Contracts: Most favoured contract method as the price is
set and there is no room for further increase in the prices. Any cost
increases affects adversely the profitability of the vendor and not
that of the buyer.
➡ Cost Plus Contracts: In the “Cost Plus” arrangement type of

contracts, all allowable costs are reimbursed to the supplier.
Additional fixed amount or a percentage based fixed fee is paid as a
contribution towards the profit of the supplier.
➡ Time and Materials based: Hybrid form of contracts. Contains

aspects of both reimbursable model, i.e., cost plus contract as well
as fixed price contracts.
6. Integrate Suppliers: If organisation decides to work with a new

supplier and/or to discontinue an old one, organisation will need to:
a. Identify any transition issues

b. Consider the organisational implications and any required changes
c. Create new processes and procedures, if necessary
d. Create a transition/implementation plan
e. Communicate the changes to organisation’s user function
7. Monitoring of Supplier Market and Supplier Performance: Once

the organisation execute the new agreement with suppliers, it is also
important to plan ahead and stay abreast of supply market conditions,
so that next time when the contract is up for renewal organisation’s
team is already done part of the groundwork. The new contract/
agreement with the supplier it is important to define state performance
metrics like joint process improvements, quarterly meetings, turn
around time, delivery times, monthly/quarterly/ annual reports. It is
also important to put in place to monitor supplier performance on a
regular basis, and how will the organisation develop relationship with
the supplier so that organisation has a foundation to work from next
time.
Common Action Points in Sourcing
Some of the important action points are as follows:
! !45
• Planning for the sourcing exercise at least 2 months in advance to

provide adequate time for the procurement activity.
• The new contract should be executed and signed at least 2 weeks before
the existing contract expires.
• Active engagement of the procurement function right at the planning

stage is very crucial.
• Involvement of an experienced negotiator will add value to the

procurement process.
• Prior knowledge of the pricing structure across the industry is very vital.
• Seeking legal advice is appropriate to understand the implications of

important terms and conditions of the contract.
• In the process of negotiation with a single supplier, demand management

is the key.
Fiat Global Procurement Model – A Case Study
Objectives of Global Sourcing
The company defined the following key objectives in the process of setting
up a global procurement function:
• Extreme standardisation of models across the globe to facilitate same

level of design, contents, quality levels, robustness and compliance with
the European regulations
• Clear identification of internal and external supply chain, i.e.,

components manufactured in-house and components sourced globally/
through outsourced manufacturing
• Ensure stable group of supplier throughout the globe
• To guarantee cross-plant and cross-market component uniformity and

worldwide efficiency in sourcing worldwide information transparency on
prices, quality and service
! !46
• Decrease level of vertical integration
• Simplification of production arrangements
• Reduction of investments in fixed and non-fixed assets
• Enhance company’s focus on core activities and development of

distinctive capabilities streamline their purchasing structure and continue
to put strong pressure on suppliers to systematically reduce costs
High Level Implementation Steps to Achieve the Above Objectives
• Define a family of new models – to facilitate the aggregation of the

models and its component requirements
• Creation of worldwide supply chain to manufacture, in different places of

the world. This also reduces the supplier concentration risk
• Explore and engage into right composition and mix of sourcing and take
advantage of the cost differentials
• Establishment of the organisational learning process
• Development of a global supply chain flexibly and efficiently using the

production capacity and the supplier base available in different countries
• Development of a world material flow and world information flow
3.2 Global Procurement Cycle
Global procurement process can be broken down into various stages. The
key stages are provided as under:
1. Plan for the procurement: Involves identification of need for goods,

services or works. Develop procurement plan.
2. Formulate the budget: Ensure availability of the funds for purchase.
3. Requirement specification: Provide clear and accurate specification.
! !47
4. Commitments of funds available from the budget: Organise

approval of treasury for allocation of funds.
5. Tender: Ensure the preparation of tender and release of tender

documents.
6. Contract establishment: Evaluate bids and award of the contract to

the eligible supplier.
7. Contract management: Once the contract is awarded to an eligible

supplier, entire activity of receipt of goods, services, inspection, review
of quality, review of performance, monitoring and reporting of the
contract execution
8. Handover of the contract management: Once the contract

management reaches a maturity level, handover of the management to
regular operations. Periodic review of the supplier performance and
annual supplier evaluation.
3.3 Procurement Methods – Special focus on Project

Procurement and Purchasing through Tendering process
In global procurement, various methods can be deployed for optimising the

process. Some of the important methods applicable to the tendering
process is provided as under:
1. Request for Quotation (RFQ): The most standard process across the
globe in RFQ. The RFQ process involves requesting and obtaining three
(generally procurement department across corporates require 3
quotations) written quotes should be used for purchases worth less than
the value defined by the management.
2. Public Tender Process: Public tendering process is followed by most

of the government entities for procurement of goods/services beyond a
particular limit defined by the management.
3. Tender by Pre-qualification: A standard process of limited tender by

pre-qualification can be used when the technical complexity or the high
value involved require a prior assessment of the financial, commercial
and technical capacities of the bidders or suppliers. The pre-qualification
! !48
process can take place at any time on application by a potential supplier

or business. Where a pre-qualified list of bidders or suppliers has been
made, limited tenders are invited from one or more suppliers using a
quotation process.
4. Restricted Tenders: It is a process of restricted tender can be used

when the time and costs necessary to examine and assess a large
number of bids are much higher than the small amount of goods,
services or works to be procured. It is generally directed to registered
suppliers who are already known to have the capacity needed.
5. Procurement only by Negotiation: In exceptional circumstances, the

entity of the organisations may need to directly shift to negotiation,
especially of urgent/emergency purchases.
6. Agreement of Standing Offer: This process of standing offer

agreement entails approaching a pre-qualified/pre-registered supplier
listed on the supplier’s registry and inviting them to provide an offer in
response to a prospective supply requirement. The supplier would
commit to make their offer valid for a specified time period. Such offer
is also referred to as standing offer agreement. It is at the option of the
procurement function to avail the standing offer as per the requirement
of the organisation.
Use of Exemptions from the Normal Procurement Process
In the process of global procurement, organisation define a detailed

procurement policy and standard operating procedure manual. At times,
procurement department is under business pressure to purchase and
without complying the operating procedure requirements. Some of the
exceptions are provided as under:
• Matters of urgency, matters considering the health and safety or
concerning life
• Absence of competition in the materials and services required by the

organisation
• Unavailability of reasonable alternative or substitute goods or services
• Trial procurement, research and development related procurement
! !49
Often, the exceptions require approval of the management of different

levels.
Important Rules and Conditions for the Tender Process in the

Procurement Activity
The rules governing the procurement of the tender needs to be

documented and followed by the organisation. Some of the important rules
are provided as under:
• Document restrictions on the eligibility of parties to bid against the

tender issued
• Objectives for the tendering process to be defined
• Scope, content and format required of bids, should be formulated
• Essential requirements of bids or bidders, for instance any skills or

experience, technical requirements which the bidder must have to
participate in the tendering process needs to be defined
• Desirable requirements of bids or bidders which would be advantageous

for the procurement process and the organisation
• Defined and documented the criteria against which bids are to be
evaluated
• Deadline for the submission of bids, and the location for lodging them
• Adequate procedures for managing late submissions by the bidders
• Defining what can constitute as non-conforming bids and procedures for

managing such bids
• Formulating procedures for handling day-to-day contacts procurement

team (managing the bids) and bidders
• Definition of other procedures governing the provision of information to

bidders, including any confidentiality arrangements, procedures for
variation in bids before execution
• Developing procedures for maintaining the confidence of bidders that a

decision to terminate a process will be taken with due care.
! !50
Checklist for Procurement through Tendering Process
Components Explanation
General Information • User function representation

• Responsible and Accountable staff from
the procurement team
Procurement Requirement Title • Brief requirement and title of the project,

e.g., maintenance of equipment, turnkey
project, installation of machinery, etc.
Background of the Project • Brief background of the procurement

requirement
• Some information for the bidders
Objectives • Outline the key objectives of the project
Steps and Timelines • Detailing of the key steps and outline of

the project timelines
• Defining key milestones is advisable
Procurement Team • Name, title and role of the procurement

team from the buyer organisation
• The procurement team may consists of
Project Manager, Team member,
Commercial Adviser, Legal Adviser,
technical expert of the panel, etc.
Responsibilities of the Tender • Identification and definition of

Evaluation Team responsibilities of the tender evaluation
team. The key responsibilities may include
the following aspects:
➡ Evaluation of the procurement
responses according to the tender
evaluation criteria
➡ Testing and verification of the claims
made by the suppliers/service
providers participating in the tendering
process
➡ Preparation of the initial documents
➡ Proposing any variations in the initial
tender documents
! !51
Key Requirements/Compliances • Defining how the effective competition will

to be Ensured be achieved
• Methods that will be adopted for the
tendering process, e.g., RFP, Standing
offer agreement, etc.
• Methods adopted to achieve consistency
and transparency in the process
Costs of Tendering • Defined costs for the potential tender

participants
Query Handling and Responses • Contact and other details of the desk
handling and responding to the queries
related to tendering process
Briefing Meetings • Dates and other details of the supplier

meetings
Security and Confidentiality • Process for receipt of tender

• Date of opening the tender and procedure
to be followed for ensuring adequate
security and confidentiality
Managing Conflicts • Process to identify and declare areas of

potential conflict for the suppliers
responding to the tender
Notifications • Notification for shortlisting and its

timelines
• Notification of unsuccessful tenders
3.4 Supplier Selection and Evaluation Process
Evaluation and selection of supplier is the most crucial event in the entire
global purchasing cycle. The manufacturing or user function needs to have
a supplier who is reliable and keeps promises in order to maintain an
efficient production. Some of the important steps involved in supplier
selection are as follows:
a) Screening: Screening of the suppliers starts with a sourcing request

from the organisation that initiates a finding process in order to find
potential suppliers. The sourcing request could contain finding a supplier
that could provide the sourcing company with material in order to
! !52
produce a special product. Another initiator could be that the

manufacturer is dissatisfied with the current supplier and needs to find
another one to cover the needs. The screening process can be further
broken down into the following sub-steps:
➡ General and preliminary screening: This step consists of evaluation

of supplier on the basis of financial statements and other factors
which may include the past performance of supplier with similar
customers, environmental issues, compliances, etc. In this stage,
the objective of the buyer is to evaluate whether the potential
supplier will be suitable or no. If supplier fails at this stage of
evaluation, no further assessment is conducted and supplier may be
outright rejected.
➡ Further screening: Once the supplier passes the initial screening

process, the additional evaluation can be performed. In order to do
this, the material manufactured by the supplier is being tested and
evaluated in order to find out if the physical product is suitable for
the production or not at the buyer organisation.
➡ Specific screening: In the last step of the screening, the supplier is

evaluated on specific aspects related to material or services
required by the organisation. The potential supplier will be
evaluated in more detail and will be given scores on the basis of a
pre-determined criteria. Post the screening process, the supplier
with the best overall scores will be selected and will supply the
sourcing company as per the need of the buyer.
3.5 Supplier evaluation criteria
The buyer organisation can evaluate the supplier on various parameters.

Some of the important parameters can be as follows:
Component Sub-criteria
Performance Assessment • Shipment

• Delivery
• Cost
! !53
Human Resources • Number of employees

• Organisational structure
• Training
• Number of technical staff
Quality Management Systems • Management commitment to quality

• Inspection and control
• Quality planning
• Quality assurance
Manufacturing Expertise and • Production capacity

Capability • Maintenance process and upkeep
• Lead-time management
• Up-to-date processes
• Storage facilities
• Product research and development
Business Specific Criteria • Reputation of the supplier

• Location of the supplier
• Price offered
• Patents and products available
• Technical capabilities of the supplier
Information Technology • Connected to Internet across locations

• Information technological compatibility
3.6 Supplier Development in Global procurement
In global sourcing, it is very crucial for the buyer organisation to focus on

supplier development activities. Development of suppliers can be defined
as follows:
• Supplier development is defined as any set of activities undertaken by a

buying firm to identify, measure and improve supplier performance and
facilitate the continuous improvement of the overall value of goods and
services supplied to the buying company’s business unit
• Supplier development is as any activity that a buyer undertakes to

improve a supplier’s performance and/or capabilities to meet the buyer’s
short-term or long-term supply need
! !54
• Supplier development is a procedure by a company to help improve its

suppliers’ capabilities. More specifically, it may be interpreted as a firm’s
attempt to transfer (or replicate) some aspects of its in-house
organisational capability across firm boundaries
Supplier development generally refers to efforts made by procuring firms

to improve their suppliers’ performance and capabilities, which focus on the
strategies and activities the procuring firms adopt. The starting point will
be reviewing suppliers’ performance in order to identify which ones need to
be improved, and to ensure that the investment and efforts are worthwhile.
Supplier Developmental Activities
Supplier developmental activities are dependent on the buyer firm’s

objectives. Some of the initiatives through the suppliers can be developed
are as follows:
• Considerable time and financial investments in supplier’s manufacturing

capacities
• Trainings
• Supplier assessment and incentive program
Number of initiatives can be further segregated into following main

category of initiatives:
• Direct involvement of the firm,

• Providing incentives, and
• Ensuring enforced competition.
Let us evaluate the above categories in further detail.
Direct Involvement of the Firm is a kind of relationship where a buying

firm is actively involved in its suppliers’ development processes, which
entail investments and affords in order to achieve improvements. Some of
the sub-activities involved in this category are as follows:
• Buyer creates specific developmental plan for the suppliers based on its
procurement plan and the potential of the suppliers
! !55
• Supplier site visit by purchasing firm premises help supplier to improve

its performance, when viewing the process and estimating its advantages
and disadvantages
• Inviting supplier personnel to the company’s site to increase its

awareness of how its product is used
• Motivational development can be achieved through consideration of the

recognition of suppliers performance and providing appropriate incentives
• Use of supplier certification programs in order to certify supplier’s quality,

making incoming inspection unnecessary is implemented by many buying
firms
• Buyer firm can contribute to its supplier’ development by providing

trainings and education
Thus, direct firm involvement activities include formal supplier evaluation,

feedbacks, supplier site visit, inviting supplier personnel, certification
programs, award programs, supplier verbal or written request, top
management involvement, trainings and education programs.
Provision of Incentives to Suppliers
In this type of supplier development programs, following could be some of

the features:
• Supplier and a procuring firm agree upon particular current and future
benefits, which they both expect from being involved in these
relationships.
• Buying firm commits only if a supplier improves, motivating supplier to

improve performance.
• To encourage suppliers to develop, the firm may give such promises as to

purchase of large volumes from particular suppliers.
• Preference treatment to suppliers, when other suppliers provide with the

same kind of product.
! !56
• Proactive consideration of some of the suppliers for future business

activities, etc.
However, it is very important to understand that in such relationships the

buyer firm is committed to give particular benefits to the suppliers only if
they improve their performance and deliver as per the expectations of the
buyer.
Enforced Competition Process
In this kind of association with the supplier, importance is not given to

trust, continual commitment, proactive support and sharing of risks. The
key feature of such relationship is to motivate suppliers through the
competition.
• Some of the features of enforced competition process are as follows:
• Choosing the right suppliers is very crucial through competition to

prevent serious quality defects
• No commitment with the suppliers and a purchasing firm is not directly

involved in the supplier’s efforts to improve their performance
• In such kind of process, when a buying firm is not satisfied with the
supplier, regarding its price, location, delivery timelines, quality of the
product, behaviour, it may switch the supplier.
Collaboration with Suppliers in Global Sourcing
Collaboration in buyer-supplier relationships has a far-reaching impact on

the purchasing performance. It is one of the crucial area in the global
sourcing arena. Over a period of time, it has generated interest for
redefining the buyer-supplier relationships. Collaboration is the key.
Some of the important benefits that are likely to be realised in a

collaborative buyer-supplier collaborative relationships are as follows:
• Short-term benefits: Reduction of inventory risks and costs as well as

warehousing, distribution and transportation costs.
! !57
• Long-term benefits: Cost reduction through increased productivity as

well as streamlined business processes in procurement and purchasing,
timely order fulfilment, prudent management of receivable and payable
accounts and greater level of confidence in exception management.
Measuring the Benefits of Collaboration
The buyer-supplier collaboration should reflect in the top-line (revenue)

and the bottom-line (profitability) of both the entities over a period of time.
Some of the measures can be as follows:
• Enhanced focus on innovation: As a success factor in terms of

reduced R&D expenses in combination with the product and process
improvement level.
• Purchasing cost reduction and benefits realised in total cost of

ownership: As a success factor containing communication,
transportation and ordering costs.
• Financial performance: As a success factor including the return on

assets and the return on sales for the collaborators
3.7 Entering into a formal contract with supplier – a

global Sourcing perspective
Documenting the key terms and conditions through a formal contractual

arrangement is an important process in the global sourcing space. The
following are the key terms that should be included in the contract or
purchase order with the supplier:
• Rights and obligations of both the parties

• Process of invoicing and payments
• Applicability of audits, if any
• Delivery terms
• Scenarios that may lead to cancellation of purchase order/contract
• Quantity and quality conditions
• Transfer of title
• Incidence of loss in case of goods in transit
• Insurance and claim process
• Applicability of various taxes – Local, Regional, Export and Import
! !58
• Representations and warranties

• Indemnification by the supplier
• Limitation of liability of the vendor/customer
• Use of copyrights and trademarks
• Confidentiality of information
• Conditions and scenarios of force majeure
• Compliance with respective laws and regulations
• Governing law and jurisdiction
• Resolution of disputes
• Escalation matrix and process applicable
• Compliance to the ethical purchasing guidelines of the buyer
Models of International Sourcing
Broadly, six reasons which drive the organisations to source internationally.

These are:
• Increasing level of competition and pressure on prices

• Constant pressure on the business to reduce the costs
• Businesses need to be very flexible in term of manufacturing capacity
• There is need to further reduce the product development cycles
• Customer need and emphasise very stringent quality standards
• Technological advancements across the globe can make some of the
• products technologically obsolete in certain geographies. There is a need
• for exploring newer technologies.
Case Study on International Sourcing – Toyota Global Sourcing

Operations
Toyota’s global sourcing operations is a classic case of true implementation

of global sourcing strategy. To begin with, the Japanese car manufacture is
equipping its operations in the United States, Europe, and Southeast Asia,
i.e., across the three continents with integrated capabilities for creating
and marketing automobiles. The company gives the global sourcing
managers at those operations ample authority to accommodate local
circumstances and values without diluting the benefit of integrated global
operations. This also ensures that the local understanding and the
knowledge of the global procurement manager is effectively utilised.
! !59
Thus, in the United States, Calty Design Research, a Toyota subsidiary in

California, designs the bodies and interiors of new Toyota models with
constant focus on Research and Development. The company also has
technical centres in the United States and in Brussels to adapt engine and
vehicle specifications to local needs. This also ensures that the company
considers the local requirements and accordingly suitably performs the
modifications to the production process.
Toyota operations centre that make automobiles in South-East Asia supply

each other with key components to foster increased economies of scale and
standardisation in those components—gasoline engines manufacturing in
Indonesia, production of steering components in Malaysia, manufacturing
of transmissions in the Philippines, and production of diesel engines in
Thailand. In this process, Toyota has ensured that local expertise of
respective geographies is fully leveraged. The procurement strategy has
gone a long way to ensure that it procures the best of the components
from external or internal vendors through creation of group companies
across the world and provides best value to the end consumer.
Toyota has also started developing vehicles in Australia and Thailand since
2003 which also demonstrates that the corporation. These new bases
develop passenger cars and trucks for production and sale only in the Asia-
Pacific region. The Australian base is engaged mainly in designing cars,
whereas the Thailand facility is responsible for testing those cars.
3.8 Global Sourcing Models
From a contracting perspective, firms may follow different sourcing models.

Some of the models which the companies follow are as follows:
• Parent to subsidiary – intra-firm or intra-group procurement

model: The intra-firm procurement can be further segregated into
domestic and international. In domestic in-house sourcing, a
company procures major components in house by producing them
domestically. In offshore subsidiary sourcing, a company procures major
components from its foreign subsidiary.
• Sourcing from independent suppliers – Outsourcing: The

outsourcing can also be broken down into the primary two segments
which include engaging into domestic purchasing agreement where a
! !60
company buys major components from independent suppliers at home.

Offshore outsourcing where company buys major components from
independent suppliers overseas. For example, Apple, Dell, and Gateway
outsource 100 percent of their Laptop computers from Quanta Computer
Inc., a Taiwanese company and the world’s largest maker of Laptop
computers. Dell Computer alone accounts for half of Quanta’s sales.
3.9 Use of Free Trade Zones (FTZs) in Global Sourcing
A Free Trade Zone (FTZ) is an area located within a nation (say, India) but
is considered outside of the customs territory of the nation. The use of
FTZs has become an integral part of global sourcing strategy as they offer
various tax benefits and marketing flexibility on a global basis. Many
geographies/countries also have FTZs. For example, in the United States, a
free trade zone is officially called a Foreign Trade Zone. FTZs are licensed
by the Foreign Trade Zone (FTZs) Board and operated under the
supervision of the Customs Service. The level of demand for FTZ
procedures has followed the overall growth trend in global trade and
investment. Presently, some 700 FTZs are in operation and, as part of their
activity, about 540 manufacturing plants are operating with subzone
status. Subzones are adjuncts to the main zones when the main site
cannot serve the needed purpose and are usually found at manufacturing
plants.
Annexure – Limitation of Liability Related Regulations in United

States
Limitation of vendor/contractor’s liability is also governed by laws in

respective country. The United States alone has different laws across
various states.
Following table highlights the differences.
State Rule Applicable for Limitation of Liability in Contracts
Alaska The contractor’s liability for damages to the state for any
cause shall be limited to the greater of $100,000 or the
purchase price of the specified equipment which caused the
damage or that is the subject matter of, or is directly related
to, the cause of action
! !61
Arkansas Cannot indemnify any party for liability or damages
California The contractor’s liability for damages to the state for any
cause whatsoever, and regardless of the form of action,
whether in contract or in tort, shall be limited to two times
the purchase price
District of There is not a standard limitation on liability, but the District

Columbia of Columbia does grant limitations on liability to vendors on a
case-by-case basis
Illinois Case-by-case basis, usually 100% of contract value
Iowa No more than 150% of contract maximum
Montana The contractor’s liability for contract damages is limited to

direct damages and further to no more than twice the
contract amount. The contractor shall not be liable for special,
incidental, consequential, punitive, or indirect damages
New Jersey New Jersey does have limitations on liability and the terms
start at 500% and have been negotiated down to 200% at
times. This is on a case-by-case basis
West Virginia West Virginia is unaware of any liability limitations for IT

contracts
Wyoming Wyoming does not have limitations on liability included in the

boilerplate contracts
1. Select any large automotive company or Fast Moving Consumer Goods

(FMCG) company and analyse their global sourcing model.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
2. Select an emerging economy or geography, e.g., China, Philippines and

India and understand the factors impacting development of suppliers in
those geography.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
! !62
3.11 Summary
Global Sourcing Process is one of the important strategic component of the

business. The process commences from development of the supplier profile
based on various criteria and at the close, it focusses on the periodic
evaluation of the suppliers. The organisation needs to understand global
procurement cycle which starts with planning and over a period of time
ensure supplier empowerment to become an integral part of the business.
While selecting various methods of procurement, most common is
tendering and auction. The methods results into high level of competition
among the competent suppliers and generates a best possible value
addition for the buyer organisation. It is also crucial that organisation
adopt a robust supplier selection and evaluation technique and process.
Further, the organisation also needs to identify suppliers who have
potential to become a strategic business partner in the long run. Such
suppliers should be segregated from the transactional suppliers and right
investment of supplier development should be done. It is also crucial for
organisation to enter into a formal agreement or contract with the
suppliers. One of the important clause which the organisation should be
paying attention is the limitation of liability of the suppliers. This clause
defers from geography to geography and in times of distress, it is possible
that organisation may find itself at risk and may have to suffer the loss of
supply chain disruption without any fallback option.
! !63
1. Explain, in detail, the key steps involved in the strategic sourcing

process.
2. ABC Limited is keen to develop a robust supplier portfolio. You are

required to highlight and explain the important factors which the
management of ABC Limited should consider while developing the
supplier portfolio.
3. Write a short note on Global Procurement Cycle.
4. Highlight the important methods which can be adopted by organisations

for sourcing through tendering approach.
5. Explain the criteria to be adopted for selection and evaluation of

suppliers.
6. Highlight the important benefits of collaborating with suppliers as a part

of global sourcing strategy.
7. Write a short note on important models of global sourcing followed by

MNCs.
8. Explain the importance of limitation of liability clause and its

implications on the buyer in global sourcing.
! !64
1. Which of the following clause is most important to be evaluated by

global sourcing manager in the process of entering into contract with
the supplier?
a. Rights and obligations of both the parties

b. Billing timelines
c. Applicability of audits
d. Order processing TAT
2. Which of the following is least likely to be a benefit of providing

incentives to suppliers for better performance?
a. Preferential treatment to buyer

b. Increased Total Cost of Ownership
c. Deterioration in quality
d. Higher involvement of the suppliers
3. Which of the following is not a supplier development initiative?
a. Training to supplier
b. Offering higher price
c. Supplier incentive program
d. Engagement on technical process
Answers:
1. (a), 2. (c), 3. (b). 
! !65
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !66
CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER
Chapter 4
Changing Role of Procurement Function and
the Emergence of Global Sourcing Manager
Objectives
• Understand the global developments and evolving role of the Global

Sourcing Manager
• Role and responsibilities of the sourcing manager
• Gain a high level view of the procurement function
• Understand the various levels of maturity of a global sourcing function
• Understand the emergence of a CXO Role – Chief Procurement Officer
(CPO)
• Understand how the supply chain analytics can be deployed by the global
sourcing manager
• Understand the process of performing health check of the procurement
function
• Identify and understand the factors to be considered by Global Sourcing
Manager while pursuing the procurement
• Understand the key difference between the traditional role and the
emerging new role of the global sourcing manager
Structure:
4.1 Evolving Role of Global Sourcing Manager

4.2 Emergence of New Role and Responsibilities – Key Positions in Global
Sourcing Organisation
4.3 High Level View of the Procurement Function
4.4 Levels of Global Procurement Function Maturity
4.5 Emerging CXO Role in MNCs – Chief Procurement Officer (CPO)
4.6 Supply Chain and Global Sourcing – Analytics
! !67
4.7 Health Check of Global Sourcing/Supply Chain Function

4.8 Factors Which a Global Sourcing Manager Should be Aware While
Pursuing International Procurement
4.9 Managing Specific Aspects and Expectations in International
Procurement – Traditional vs. New Strategic Role
4.11 Summary
! !68
4.1 Evolving role of global sourcing manager
The Global Sourcing Manager has multi-dimensional role to play in an

organisation. His has duties towards the internal aspects of the
organisation as well as external aspects. The internal duties of a
purchasing manager are:
• Collaboration with the internal network

• Making operating purchasing decisions
• Definition of purchasing strategies
• Formulate and organise the boundary interaction
The external duties of a purchasing manager includes:
• Ensure collaboration with the external network

• Effective management of supplier relationships
• Coordination of joint activities
• Periodically monitor, evaluate and develop suppliers
The trends in global sourcing affecting the evolution of role of global

sourcing manager are:
• Increasing strategic role of purchasing in corporate policy across number

of multinational organisations
• Shift towards more centralised control and establishment of global

procurement companies/business set-ups
• Continual effort towards decreasing number of suppliers
• Focus over entering into long-term contracts instead of transaction based

procurement
• Use of category management/functional management in the process of

global procurement - buying groups organised around end items rather
than commodities
! !69
4.2 Emergence of new role and responsibilities – Key

Positions in global sourcing organisation
Corporate • Responsible for development of corporate purchasing

Procurement strategies, systems and reporting
Officer (CPO) • Provides overall guidance to various buyers
Corporate Buyer • Manages Strategic commodities – large volumes, high

investment projects and services
• Responsible for developing sourcing strategy for key
commodities
• Focus on long range planning horizon
Purchasing • Explores new materials and components

Engineer/ • Identifies and supports development of new suppliers
Technical Expert • Discusses and evolves new specifications
• Performs market research, assists in selection of suppliers
and negotiations.
• Often work on a decentralised level
• Important single point of contact of liaison between
purchasing and R&D function
Project • The Project Buyer holds similar responsibilities except that

Purchaser/ Buyer the key focus of buying is on equipment and capital goods
Material • Role involves materials planning and ordering

Management/ • Order handling – ensuring material supply, calling off
Planner materials against annual agreements
• Vendor rating – monitor and control suppliers quality and
delivery performance
4.3 High Level view of the Procurement Function
Procurement Function increasingly is considered to be enabler of business

strategy. It also drives sustainable methods of continual cost reduction
exercises. What can be expected from the ever evolving global
procurement function? The important expectations of the Top Management
and the Board of Directors is provided as under:
• Spend map and its visibility: The procurement function is expected to

have a detailed spend map across entire organisation and preferably the
same needs to be updated quarterly or other periodic intervals defined
! !70
by the management. Mapping spend and periodically updating the map

will provide the procurement function invaluable insights. Some of the
important insights can be as follows:
➡ Knowing the total quantum and what total spend of the organisation is
➡ Knowing who is spending and on what activities/purposes
➡ Identification of vendors supply multiple business units
➡ Identification of business units that buy the same or similar goods and
services across the globe
➡ Knowing what portion of organisation’s spend is with the core

suppliers (e.g., top 10 suppliers)
➡ Having information about the total number of one-off and small value
transactions suppliers
➡ How many transactions organisation processes and what is the

associated administrative cost of such transactions.
• Driver of savings: Procurement function is seen to be a driver of

sustainable savings (proving perspective of when, where,why and how)
across the organisation.
• Cost reduction across value chain: The function is expected to be

engaged with the wider organisation to understand how procurement can
reduce costs across the value chain in the organisation globally. The
necessary factors which should be considered here are:
➡ Eliminating demand where applicable and opportunity exists

➡ Reviewing volume requirements of the organisation
➡ Achieving reduction in the demand frequency
➡ Evaluating alternatives to filling need
➡ Encouraging reuse
➡ Simplifying and/or standardising the product/service specification and
➡ Reducing portfolio range and complexity.
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• Realisation of value: The procurement function should ensure that the

value is realised through robust contract management and supplier
relationship management frameworks which are operationalised across
the organisation.
• Optimising commercial and technical capability: The global

procurement function is expected to deliver procurement within an
operating model that connects commercial and technical capability to
drive optimal client outcomes.
• Formulation and implementation of robust contract and supplier

relationship management framework: Over a period of time, the
Procurement Function is expected to build a robust contract and supplier
management framework. Number of times, large organisations fail in
implementation of a good contract and supplier management framework.
Some of the key reasons for failure include:
➡ Excessive focus and time spent in managing transactional suppliers

and inadequate attention to suppliers of strategic importance
➡ Issue based management for key suppliers and informal mechanism
➡ Late involvement of legal team. Only after an legal issue arises
➡ Lack of continuous improvement program as a part of supplier

management framework
➡ Lack of periodic conversations with strategic suppliers on various

aspects related to procurement
➡ Inability to identify supplier and assess on various aspects like

financial stability, performance on ethics, quality control standards,
technical capabilities and experience in the business value chain.
4.4 Levels of Global Procurement Function Maturity
The Global Sourcing/Procurement Function can evolve over a period of time

from just being passive, to an independent function and further maturing
to supportive to the business and reaching highest level of maturity of
integrative function. Thus, the four stages are:
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• Passive
• Independent
• Supportive
• Integrative
The characteristics of the procurement function is provided as under:
Passive Procurement Function
• Lack of strategic direction

• Function as a reaction to the requests of other departments
• Time spent on quick fix, routine, trivial and transaction oriented
operations
• Selection of supplier is purely based on price and material/service
availability
• More focussed on efficiency and timely purchasing

• Very limited amount of inter-functional communication
• Very low visibility of the procurement function in an organisation.
Independent Procurement Function
• The Procurement Function deploys latest purchasing techniques and

practices.
• Strategic direction is, however, independent of the firm’s competitive

business strategy.
• Performance of the function is largely evaluated on the basis of cost

reduction achieved and efficiencies gained.
• Good level of coordination links exist between purchasing and technical

departments.
• Top management of the organisation fully aware and recognises the

importance of professional development and opportunities that exist in
the procurement function which contribute to the profitability of the
organisation.
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Procurement as Supportive Function
• The procurement departments provide active support to the

organisation’s competitive strategy by implementing innovative
purchasing techniques and practices.
• The actions of procurement function strengthen the competitive

positioning of the organisation.
• Representatives from the purchasing team often are part of the sales/
proposal teams.
• Suppliers/vendors are looked at from the perspective as a business

resource/partner. Those vendors are carefully selected and continually
motivated to excel.
• The procurement function continuously monitors the markets, products,

vendors and other clues from the business.
Procurement as an Integrative Function
• The Procurement Function is completely integrated into the organisation’s

competitive strategy.
• The Procurement Function is one of the key contributor to the strategy

development process.
• Permanent lines of communication exist between other key functions and

the Procurement Function.
• Performance of the Procurement Function is clearly linked to the strategic

outcome and contributing factor to the organisation’s success.
4.5 Emerging CXO role in MNCs – Chief Procurement

Officer (CPO)
Considering the strategic importance of the procurement functions,

organisations globally has seen an emergence of a CXO role, often
designated as Chief Procurement Officer and responsible for number of
! !74
strategic and policy matters related to global sourcing. Some of the

important responsibilities a CPO is expected to deliver are:
• Achieving financial objectives through cost reduction, purchase price

variance, sourcing from low cost markets
• Re-engineering business process and supply chain to increase efficiency

and effectiveness
• Satisfying business needs in delivery time and quality thereby meeting

the business objectives
• Managing outsourcing activity and delivering contracts, identify and

develop new avenues for sourcing
• Managing and enhancing the purchasing system, organisation and policy,

promote deployment of technology
• Guaranteeing quality of purchase at all times
CPO need to have competencies across diverse areas of management.

Some of the key competencies will include:
• Information Management and Technology Enablement
➡ Focus on innovation
➡ Ensure seamless integration with business processes
➡ Managing complexity of business
• Task and Process management
➡ Organising skills
➡ General business management skills
• Interpersonal skills
➡ Networking
➡ Developing relationship and engagement
➡ Influencing skills
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• People management
➡ Motivating and driving the performance

➡ Directing the team to achieve the business objectives
The Chief Procurement Officer (CPO) should essentially have the following
traits:
• Trading skills and street smartness

• High level of logical thinking capability
• Attention to details
• Thought leadership
• Ability to share and socialise ideas
• Self confidence
• Charismatic personality
• Ability to look at leverage, often useful for negotiations
• Extrovert
• Appreciation of simplicity and common sense
4.6 Supply Chain and Global Sourcing – Analytics
The Global Sourcing Manager or Chief Procurement Officer needs to be well

versed with supply chain and procurement analytics. Some of the areas
where analytics are very important are:
• Spend Analytics: The CPO can have the data from the procurement
system/ERP pulled out and perform analysis. There is need to be able to
interpret it, understand what it means, and determine the right potential
opportunities and courses of action arising. The analysis of data can
provide inputs for drawing out a good and implementable procurement
strategy.
• Market Analysis: Availability of big data is providing ample opportunity

to CPO for performing analysis of the market and come out with
meaningful analysis.
• Negotiation: Availability of information and performing analysis for

input to negotiation and seeking the best price and terms available in the
market.
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• Selection of supplier and sourcing: Analytics can be used for

designing evaluation methodologies, determining evaluation criteria and
weights, scoring systems, or balancing cost and qualitative factors.
• Informed market sourcing: The most crucial and complex task in

sourcing is increasingly addressed using market-informed or collaborative
sourcing tools and techniques. Organisations have been investing in
analysis of the market and taking very informed decisions.
• Contract management and supplier performance evaluation:

Availability of the detailed information related to delivery timelines,
quality results, outcome of inspections, rejections, discounts, etc. is in a
way assisting the CPO to perform a meaningful analysis of the supplier
service and periodically evaluate. The parameters used for analysis of the
supplier quality have gone beyond the material quality and price, but the
focus is on multiple factors such as innovation, pro-activeness, customer
centricity, etc.
• Procurement/supply chain risk management: Analysis is a very

important input risk management. The CPO should analyse the data to
assess the price risk, supplier concentration, unavailability of material,
quality, etc. on the basis of available information. CPO should also use
analytics for basic risk analysis including review of expected risk events,
their probability and impact.
Types of Analysis
The global procurement manager can perform some of the following key
analysis and assist the organisation to achieve the business objectives:
• Category analysis: This analysis is performed by the global sourcing

manager to answer the question whether the organisation is buying the
same/similar goods and services from different vendors or too many
vendors. Generally, organisations follow three categories based approach
that reflect the business and industry. The categories can be Super
category, Main Category and Subcategory. The category analysis allows
the organisation to identify spend leakage issues such as fragmented
purchasing across vendors and across the organisation for specific
categories, rogue spend, etc.
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• Analysis of Items procured: Item analysis is performed to know

whether the organisation is buying the same item from different vendors,
in different geographies or business units at different prices. The item
analysis allows the organisation to focus on fragmented purchasing in the
business and identify spend leakage issues such as purchasing from non-
preferred vendors, fragmented purchasing across the organisation and
rogue spending patterns.
• Analysis of Payments: This analysis is performed to understand

whether the organisation is leveraging all possible discounts or interest
from the invoice payment process. The analysis of vendor assists the
organisation in analysing the payment practices and terms within the
organisation’s procure to payment processes to identify issues such as
unrealised discounts through late payments of invoices or unrealised
interest/cash discounts from early payments of invoices.
• Analysis of Vendors: Vendor analysis allows the organisations to create

different spend profile of the vendors. Vendor profiling will allow the
organisation to assess vendor spend by category, organisation structure,
item, payment, contracts (where applicable) and historic spend over
time. Analysis of vendors help procurement function to provide a single
view of total organisation engagement with a single vendor.
• Contract Analysis: Contract analysis provides a good perspective to the

procurement function of the compliance levels with the existing
negotiated contract terms. Where contract data is available and used in
organisation’s finance system, the analysis will help identify spend
leakage through contract over spend and/or contract non-compliance.
4.7 Health Check of Global Sourcing/Supply Chain

Function
For evolution of a successful and performance driven global sourcing

function, it is crucial to periodically perform the health check of the
function. The health check of global sourcing function can be various
aspects which may include:
• Capturing voice of internal customer and external supplier
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• Evaluating the financial and non-financial benefits accruing to the

organisation
• Ensuring that the procurement function is operationally effective and

efficient
• Ensuring right data and information is available for procurement

decisions
• Risk management and robust compliance framework
Sample global sourcing health check questionnaire provided in the table

below.
Area Particulars Key Questions
Spend map Understanding how • How much is the organisation spending?

and on what the
• On what activities, services, and
organisation products is the organisation spending?
spends
• Is per unit cost varying significantly?
• How much is the spend associated with
strategic suppliers or top 10 suppliers?
• How many suppliers does the
organisation have who supply same or
similar products/services?
Savings Short-term and • Does the organisation evaluate the

long-term saving short-term and long-term saving? Is the
generated by the organisation striking a right balance
procurement between the savings?
function • Are potential savings part of the
planning, budgeting and forecasting
cycle?
• How effective is the procurement
activity?
• How the organisation is tracking the
realised and unrealised benefits/savings
in the procurement function?
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Procurement End to end • Focus of the initiatives just on saving

Value Chain management of costs or saving on total cost of
procurement ownership?
activity including
• Segregating between desirable or good to
demand,
have and what is necessary for the
inventory and not
organisation?
just costs
• Approach towards the suppliers – whether
collaborative or just a vendor?
Contract and Realisation to the • Generating the benefits as promised by

Supplier full potential of the suppliers?
Relationship the value of
• Whether the integration of strategic
Management supplier
supplier with the long-term planning,
relationship
budgeting and forecasting achieved?
• Whether the organisation is occupied in
addressing the transactional issues or
looking at business partnering with
suppliers?
Procurement Building of the • Is the vision, mission and objectives of

Model procurement the procurement documented?
model on the
• Does the organisation have all necessary
basis of strength,
team with technical and commercial
skills and
expertise?
expertise
• Does procurement function command
credibility in the organisation?
4.8 Factors which a Global Sourcing Manager should be

aware while pursuing international procurement
Sourcing internationally, especially to China and other low cost countries

(LCCs) involves a carefully evaluated strategy and more than just
managing the concept of ‘purchasing’. Global sourcing involves all aspects
related to helping make the product ‘happen’ on time, on budget, and with
quality standards good companies have come to expect.
By signing international sourcing agreements, executives put their name

(and their company) on the line. Decisions to manufacture company
! !80
products half way across the globe should be made very carefully. When
sourcing offshore or overseas, more often than not, supplier and buyer
management can be comprised of significantly different cultural
backgrounds. Additionally, foreign management may also have quite
different business objectives and, sometimes, may even employ business
ethics that could be deemed questionable. These factors make the role of
purchasing manager challenging. Some of the important aspects which
purchasing manager/buyer should be aware are as follows:
1. Familiarise oneself with local social and business cultures:

Inadequacy of familiarity with foreign social and business cultures and,
communication issues that surface based on differences, are some of
the important reasons for failure of international sourcing activities fail,
especially in the Asian region.
2. Establish clear communication channels with functional

departments and management levels: The purchasing manager
must be in a position to be able to address and deal with issues within
the company at the corporate level while developing a cooperative team
to address offshore or outsourcing issues that may arise. If top
management support is not available for any reason, the job of
purchasing manager may become more difficult.
3. Source from within organisation’s geographic region, first, if

internal prototype and pilot production capabilities do not exist:
Before moving production to low cost regions (like China or other low
cost countries, it is very crucial to understand basic technical aspects of
items and products to be sourced. The key activities which include
supplier qualification (including design, quality, production, and financial
capabilities) visit to potential suppliers at their factory sites (not supplier
corporate offices). This may also involve verification of relative ISO and
other international standard certifications. Additionally, the process
should include potential supplier qualification for subcontractors (e.g.,
plastics, metal, and critical components not manufactured or produced
by organisation’s direct product supplier).
4. Develop a working knowledge of contracts: The global purchase

manager should be able to negotiate not only price but also payment
terms, return or repair compensation, and safety or buffer consignment
inventories, to mention a few items key to good supplier contracts. The
! !81
purchase manager should be well aware of the factory ‘sales’ tour. Many
low cost countries suppliers provide predetermined, well-tuned
customer tours of their facility. Make an effort to get off the beaten path
to see additional areas; other buildings or, out back — where scrap is
sorted — to find out what’s really happening. Some suppliers try to
present only the latest high tech portions of their factories that may
have nothing to do with manufacturing processes required by
organisation’s products.
5. Informed about the phases involved in the supplier selection:

The global procurement manager should work closely with suppliers
from prototype and new product introduction (NPI) through first article
unit inspection and production volume increases. Develop a working
knowledge of product test yields (focus on first pass yield) and
reasonable rates for product field returns. Product export documentation
requirements; Freight consolidation, and other aspects of supply chain
management through product end of life (EOL) are also each equally
important to understand. It is a well-known attribute that good suppliers
anticipate problems. For example, from general experience, Japanese
and South Koreans companies are typically good at anticipating
problems. However, many mainland Chinese suppliers may not
anticipate the problems and may act only after the problems is noted at
its peak surface.
6. Engaging services of Local Sourcing Agents: The global

procurement Manager should be aware of local sourcing agents
practices and the tricks of the trade. Employ caution if the decision is
made to use local sourcing agents. Perhaps not surprising, companies
paying the best commissions typically get the best service since
sourcing agents rarely work with one client. Some of the local sourcing
agents in Low Cost Countries may earn a 3% FOB value fee from their
clients and an additional 5% kickback from the actual supplier. Beware
of such practices, as such activities may unreasonably increase the total
cost of purchase.
7. Getting right the quality aspects of the product intended to be

purchased: Inconsistent quality can sometimes be an issue because
documented procedures can be ‘forgotten’ in order to get a shipment
out. If shipping by sea, organisation could find itself in a situation with
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one to two months’ worth of sub-optimal product quality already on the

high seas en route to buyer’s location.
8. Use of offshore sourcing office: It may become at a point of time,

when it makes sense, to significantly reduce traveling back and forth to
the low cost country/another sourcing location. An offshore sourcing
office staffed with trained managers and staff for purchasing; quality
control, production control, product engineering, export documentation
and other functional areas can be appropriate to the solution. This
location may also provide capable product design activity. There is a
practical limit as to what can be managed effectively and efficiently
throughout the world. While offshore sourcing offices could appear to
help reduce total cost of ownership (TCO), they can also create
challenges for organisation.
9. Deep understanding of the international sourcing: International

sourcing is not just purchasing. The sourcing Managers must understand
the social and business cultural differences of the LCC, the sourcing
office General Manager on the ground in the LCC must understand
culture and business practices, especially those specific to his/her
organisation company. Global sourcing managers must have a broad
background across several functional disciplines; have access to
corporate resources, and employ a great deal of common understanding
of the international purchasing practices.
International Procurement – Changing Role as a Management

Service
Procurement today is a complex management service, intended to support

the strategic aims of the organisation. The global procurement department
has three broad functions:
• Managing the internal transactions for ordering goods and services. The
function is also responsible to manage the procurement data. The
function here is expected to bring maximum efficiency in the end to end
transaction flow and reporting.
• Supporting the vendor contracting and management process. The key

activities include identification of vendor, negotiation. Most of the
activities can be tactical and transaction focussed.
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• Value based procurement to ensure addition of significant savings and

improvement of the profitability of the organisation.
The advent of internet has created significant level of opportunities to gain

efficiencies in the end to end procurement to payment (P2P) process.
Some of the areas could be as follows:
• Automating ordering process

• Online bid management systems
The new role which procurement function is expected to manage in the

new age is:
• Assume increased responsibility for buying non-traditional services, e.g.,

consultancy, legal, audit, training and development
• Challenging the requirements assessment of the user functions to better

plan and negotiation with the suppliers/service providers. Also add value
to the business through innovation
• Contribution to the strategy of buying goods and services with high

transaction volumes
• Leading and supporting the outsourcing projects
4.9 Managing specific aspects and expectations in

International Procurement – Traditional vs. New Strategic
Role
1. Price discovery vs. value addition: In international procurement,

more than the price, other aspects like quality, business specification,
lead time, compliances matter. Internal customers often appreciate the
involvement of the global procurement function with the business
verticals.
2. Providing market based solutions: In international procurement, the

aim is to formalise the requirements, remove subjectivity, and bring the
service similar to commodity. Main aim in the international procurement
and also the challenge for the procurement manager is to commoditise
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all goods and services. However, the user function may explore
relationship with the vendor who they feel to be quite comfortable with.
The decision making model followed by the user function could be
completely different and off the line in comparison to the usual
screening and evaluation model followed by the procurement function.
3. Managing explicit vs. implicit contracts: While explicit contracts are

well written and formal, the implicit contracts are created during the
work relationship and based on trust. However, procurement function
unique challenge here is to prevent any circumvention of the formal
buying process by the user function and prevent any emergence of
implicit conditions. For example, vendor, in anticipation from the user
function and his discussions, may invest a significant money in the
production capacity and may request for premium from the buyer. He
may eventually find that the contract now has been awarded to the
lowest bidder. In such cases, the procurement function may win a war
on price ground. However, the user function may lose the relationships.
4. Conducting strategic discussions: In the process of international

procurement, the procurement team is required to get involved with the
business function earlier and more strategically. The objective being to
drive efficiencies and cost avoidance during the planning stages of
procurement.
5. Setting up appropriate measurement for cost savings: Depending

only on transaction based evaluations can create serious issues in
measurement of cost saving in the procurement activity. Some of the
benefits/savings which the procurement team can measure may
include:
a. Difference between two supplier quotes

b. Comparison of procurement value/price against the external
benchmarks
c. Internal savings/reductions (e.g., reduction in jobs)
d. Production efficiencies gained
e. Reduction in wastage across key processes
f. Reduction in working capital requirements
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1. Conduct a brief interview of Heads of Procurement Function of any

multinational company and understand the factors leading to change in
the role.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
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4.11 Summary
As globalisation is compelling, the various geographies to ignore the

geographical boundaries and new economic boundaries are being drawn.
The Free Trade Agreements, emergence of internet and increase in global
trade has led to evolution of a new role, the Global Sourcing Manager and
Global Procurement Function. Over a period of time, the expectation of the
management has also undergone a sea change. Procurement Functions
across the globe are evolving from just being a passive observers to
provide support to the business processes. In some of the organisations,
the role has further evolved to being integral part of the business and not
just a passive, independent or supportive function. Role such as Chief
Procurement Officer (CPO) is finding its way to the C-Suite and the
Boardroom. The function is also increasingly deploying supply chain
analytics to facilitate procurement decisions. There are number of
differences between the traditional and evolved role of global sourcing
manager some of which includes increase focus on business partnering,
providing dynamic procurement solutions, driving cost reductions among
other things.
! !86
1. Explain the factors affecting the evolving role of Global Procurement

Manager.
2. Highlight and explain the important expectations of the top

management from Global Procurement Function.
3. Write a short note on various levels of maturity of the Global Sourcing

Function.
4. Explain the emerging role and responsibilities of Chief Procurement

Officer (CPO).
5. Highlight the importance of supply chain analytics as an important tool

for Global Sourcing Manager.
6. Anand, an experienced professional in a supply chain, is assuming

leadership position of ABC Incorporated’s Global Sourcing Function.
Which of the factors he should be aware of while discharging his duties
in executing International Procurement?
7. Distinguish between the Traditional and Emerging Role of Global

Sourcing Manager.
! !87
1. Which of the following is least likely to be part of internal duties of a

global sourcing manager?
a. Collaboration with the internal network

b. Effective management of supplier relationships
c. Making operating purchasing decisions
d. Definition of purchasing strategies
2. Which of the following is not likely to be an important expectation of

management from the global procurement function?
a. Enabler of savings
b. Cost reduction across value chain
c. Deterioration of supplier relationship management
d. Providing spend map and visibility to management
3. Which of following is not a stage of evolution of global procurement

function’s maturity level?
a. Passive
b. Responsive
c. Integrative
d. Supportive
Answers:
1. (b), 2. (c), 3. (b). 
! !88
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !89
INTERNATIONAL PACKAGING
Chapter 5
International Packaging
Objectives
• Understand the need and importance of international packaging

• Understand the types of packaging standards
• Understand the various factors which determine the type of packaging
• Understand the various International Standards in packaging
• Understand the advantages and disadvantages of various methods of
international packaging methods
• Understand the checklist to be adopted by the global sourcing manager
• Gain understanding of various recommendations by International
Logistics Providers for packaging needs
Structure:
5.1 Introduction and Key Aspects of Proper Packaging

5.2 Types of Packaging
5.3 Factors Affecting the Type of Packing
5.4 Packaging Standards in International Sourcing
5.5 Advantages and Disadvantages of the International Packing Methods
5.6 Checklist for Global Sourcing Manager for the Packaging
Requirements
5.7 Illustrative General Guidelines on Packaging – FedEX Express Broad
Guidelines
5.9 Summary
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5.1 Introduction and Key aspects of proper packaging
• Reduction in the product to market time

• Reduction in the damages and product losses
• Balancing distribution and transportation costs with product packaging
costs
• Meant towards enhancing the customer satisfaction
5.2 Types of Packaging

• Primary Packaging: Constitutes the first level of packaging of the
product.
• Secondary Packaging: Secondary level consists of intermediate levels.
It is very essential to have it labelled for the recipient giving information
about the contents. A label must be affixed either to the top and/or front
surface of the secondary packages. It should indicate the type/nature of
the product, the name of the manufacturer, batch number, date of
manufacture, date of expiry, quantity, storage conditions and information
required from regulatory perspective.
• Tertiary packaging: Third level of packaging which can be the outer
box or shipping container that contains the secondary packages. It must
be clearly labelled for international transport with the final address and
other details. Generally, labels on tertiary packaging must be attached to
all four sides.
5.3 Factors affecting the type of packing
• Dimensions, weight, centre of gravity of the product

• Sensitivity of the cargo to external conditions
• Base surface area of the product
• Kind of transport and storage period required for the cargo
• Intended transit method and storage requirements
The global sourcing manager can use modern logistics and packaging
software and input the above factors. With the assistance of the software,
the procurement function will be able to optimise the construction of the
packages, calculate the loading volume, and optimise the positioning of the
packages on the transport vehicle and issuance of the detailed packing lists
per order.
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5.4 Packaging Standards in International Sourcing
Air Freight
Packing standards are defined by International Air Transport Association

(IATA). The packaging guidelines provide prescription related to the
primary, secondary and rigid outer packaging.
Primary receptacles must be packed in secondary packaging in such a way

that, under normal conditions of transport, they cannot break, be
punctured or leak their contents into the secondary packaging.
Secondary packaging must be secured in outer packaging with suitable

cushioning material. Any leakage of the contents must not compromise the
integrity of the cushioning material or of the outer packaging.
The general requirements include the packaging must be of good quality,

strong enough to withstand the shocks and loadings normally encountered
during transport, including trans-shipment between transport units and
between transport units and warehouses as well as any removal from a
pallet or over-pack for subsequent manual or mechanical handling.
Packaging must be constructed and closed so as to prevent any loss of

contents that might be caused under normal conditions of transport, by
vibration, or by changes in temperature, humidity or pressure.
Sea Freight
The packaging structure in sea freight is governed by various regulations

like International Maritime Dangerous Goods (IMDG) Code, Guidelines by
International Chamber of Shipping, World Shipping Council, Global
Shipper’s Forum and similar bodies.
The packaging guidelines of World Shipping Council have been produced to

minimise the dangers to containerships, their crews, and all personnel
involved with containers throughout the transport chain, and were
developed by an expert industry working group, meeting in London and
Washington DC during 2008.
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Some of the key requirements of the guidelines are provided as under:
• Subject to booking request, select the most suitable container type to

accommodate the cargo.
• Prepare a pre-stow plan before commencing stuffing so that weight/

volume considerations are covered and point loading limits are observed.
• Never load by weight above the payload limits of the container, i.e., the
cargo and container net weight must not exceed the container’s gross
safe working load.
• Never load by weight above the road regulations applicable on the

transit.
• Distribute the weight of the cargo evenly over the floor of the container.
• Never stow heavy items in one section and light items in another.
• The weight of the cargo should not exceed 60% within half the length
rule.
• Do not stow heavy goods on top of light goods.
• Stow and secure all cargo tightly.
• Observe all the handling instructions on cargo such as “Do not drop” or
“This side up”.
• Stow goods with sharp corners separate from other softer merchandise.
• Use dividers and separating material as appropriate.
• Where possible with mixed loads, place packages containing liquid cargo
on the bottom tiers with dry cargo on top.
• Use cargo liners for obnoxious cargo such as hides and carbon black.
• Do not use clamps or other loading devices unless the goods can
withstand them.
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• When loading Dangerous Goods, ensure that the IMDG Code packaging
requirements are always observed.
• Do not load goods in a container with damaged packaging.
• Do not stow wet and damp goods with dry goods.
• Do not use dunnage or packaging which is incompatible with the cargo.
Road/Surface Transportation/Other Inland Transportation
The road/surface transportation seek guidance from various regulations

across the globe. The important basic guidance on packaging is provided
by IMO for cargo transport units, Inland Transport committee inter alia.
The packaging in road transportation should be able to address the
breaking forces acting forward, turning forces acting sideways, speed
increase forces acting backwards, and shunting forces acting front and
backwards. Following key aspects need to be followed in the packaging and
transportation.
• Outer and inner inspection should be performed over the cargo prior to
deciding the packaging requirements.
• The cargo should be clearly marked with terms like Protect from frost,
this way up, maximum stacking height.
• Compliance should be ensured with the ISO requirements.
• Some of the important rules applicable for inland transportation and

packaging need to be adhered. Those will include:
• European Agreement concerning the International Carriage of

Dangerous Goods by Road (ADR)
• Regulations concerning the International Carriage of Dangerous

Goods by Rail (RID)
• Regulations for the Carriage of Dangerous Substances on the Rhine

(ADNR) based on the provisions contained in the European
Agreement concerning the International Carriage of Dangerous Goods
by Inland Waterways (ADN)
! !94
Some of the Packaging Type Used for Standard and Homogenous

Products in International Procurement.
1. Standard package – The packaging is of traditional fibreboard cartons as

well as plastic, wooden or cylindrical containers
2. Small packages consists of products where the volume is less than

13000 cm3, longest dimension is 350 mm, weight in 4.5 kg.
3. Flat Packaged Products – mainly consists of packaged product where the

shortest dimension is 200 mm, longest dimension is more or more times
large than the shortest dimension, volume is 13000 cm3.
4. Elongated Packaged Products – In case of elongated packages, the

longest dimension is 900 mm or greater. Other dimensions are each
20% or less than that of the longest dimension. 
! !95
5.5 Advantages and Disadvantages of the International

Packing methods
Based on the International Guidelines for Packing, provided herewith the

basic advantages and disadvantages of different types of packing.
Type of Advantages Limitations/Disadvantages

Packing
Packing on • This method of packing • Provides limited protections

Pallets tends to be less expensive against manual mishandling,
• Significant reduction in the corrosion damages
packing time • Multiple transportation may
lead to excessive time as the
loading and unloading has to
be carefully handled
Packing in • Protection levels are good • Being non-returnable and

Non- • Ease in handling standard, the packing can
returnable • Outdoor storage of the tend to be expensive
Cases package is possible
• This packing helps the
transporter to optimally
utilise the capacity as it fits
under various volume
dimensions
! !96
Packing in • Higher level of protection • Expenses on the logistics for

Returnable against mechanical damages return of the containers/
Cases • Ease of handling cases can increase
• Economical
• Environmentally friendly as
there is a possibility of reuse
Container • Safe protection against • Outdoor storage span is

Packing various kinds of mechanical limited as the containers
damages need to be returned to the
• Tends to be less expensive shipping company
• This limitation can be
overcome by procuring own
containers in which the
packaging can be maintained
for outdoor storage purpose
5.6 Checklist for global sourcing manager for the

packaging requirements
The Global Sourcing Manager should follow the following important aspects
provided in the checklist.
Key Aspects of Checklist Points

Packaging
Understanding • Evaluate potential injuries to personnel and environment

consequence of • Understand implications of potential damage to the
badly packed transport vehicle
cargo • Understand the issues and challenges with the cargo
• Evaluate economic consequences related to the cargo
damage
Understanding of • Different parties involved in cargo transport. The

liabilities packaging role and responsibility of each party can be
different
• The sourcing manager needs to be aware of the legal
responsibility involved
• Goodwill responsibility
• Quality assurance
! !97
Principles of • Packaging should ensure prevention from sliding

cargo packing • The packaging should prevent from tipping
and • Packaging process should consider the influence of friction
transportation
Packaging • Awareness of the regulations for the transport of

dangerous cargo dangerous cargoes
• Understand various Definitions and Packing regulations
• Packing, separation and securing, labelling and placarding
• Information transfer when transporting dangerous cargoes
and understand the liabilities
5.7 Illustrative General Guidelines on packaging – FedEX

Express Broad Guidelines
• Use of corrugated boxes for gift articles, e.g., shoes, gift boxes, etc.
• Using double wall packaging for heavier items.
• Position bottles that contain liquids upright. Use an inner seal and
perforated breakaway cap. The inner packaging must be able to contain
leaks.
• Place items that might be damaged by normal handling, such as soiling,

marking, or application of adhesive labels, in a protective outer box.
• For odd- or irregular-shaped items, at a minimum you should wrap and

tape all sharp edges or protrusions.
• Enclose an extra label, business card, or letterhead with the shipper’s

address and phone number and the recipient’s address and phone
number inside the package before sealing it.
• Remove all old address labels from reused boxes before shipping, and
make sure there are no holes, tears, or corner dents in the outer box.
! !98
General Packing Methods
Single Box Packing Method
• Ship non-fragile products like soft goods inside a sturdy outer box.
• Use fillers like crumpled newspaper, loosefill peanuts, or air-cellular

cushioning material such as bubble.
• Wrap to fill void spaces and prevent movement of goods inside the box
during shipping.
• Place goods that might be affected by dirt, water, or wet conditions inside
a plastic bag.
• Consolidate small parts or spillable granular products in a strong sealed

container, such as a burlap or siftproof plastic bag, then package in a
sturdy outer box.
• Use the H taping method for sealing your package.
! !99
Single Box Packing – Illustration
Box-in-box Packing Method
• Wrap product(s) individually with at least 2" thickness of air-cellular

cushioning or foam material to fit snugly inside a corrugated box.
• Restrict product movement inside the box using filler like crumpled
newspaper, loosefill peanuts, or other cushioning material.
• Close and tape the inner box using the H taping method. This will help
prevent accidental opening.
• Use a second box that is at least 6" longer, wider, and deeper than the
inner box.
• Choose the wrap or fill method to cushion the inner box inside the larger
sturdy outer box.
• Ship fragile products individually, wrapping them in a minimum 3"

thickness of air-cellular cushioning material.
! !100
• Wrap the inner box with 3" thickness of air-cellular cushioning material or
use at least 3" of loosefill peanuts or other cushioning material to fill
the spaces between the inner box and outer box on the top, bottom, and
all sides.
• Fill any void spaces with more cushioning material.
• Use the H taping method for sealing your package.
! !101
Illustration of Box-in-box Packing Method
1. Visit manufacturing sites, warehouses in your vicinity and observe the

various types of packaging methods deployed by organisations.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
! !102
2. Study guidelines for packaging of global Air Freight, Sea Freight

operators and identify common aspects as well as distinguishing
features.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
5.9 Summary
The product is as good as its packaging and looks. In the international

trade and logistics, packaging assume very high importance as it not only
safeguards the product but also depicts the brand of the organisation. Any
lapse in packing will not only damage the product but also lead to high
level of revenue loss to the shipper. Bad packaging can also lead to loss of
utility of the cargo for the purchaser. Organisations deploy packing and
packaging as per the recommended standards of global logistics
association and freight service providers. Inaccuracies and gaps in
packaging may also lead to loss of right over insurance claim in the event
of damage to cargo on account of packaging defects. It is expected that
the global sourcing manager should enforce the compliance of the
packaging standards with the suppliers.
1. Explain the need and importance of packaging of products in

international logistics.
2. Write a short note of various types of packaging methods.
3. Highlight and explain advantages and limitations of various methods of

packaging.
4. Amit, a global sourcing manager seeking you advice for formulating a

robust checklist to be deployed for implementation of packaging
standards in the international procurement. You are required to
highlight the points to be considered by Amit.
! !103
1. Which of the following type of packaging constitutes the basic and first
level of packaging the product?
a. Primary
b. Secondary
c. Tertiary
d. All of the above
2. Which of the following factors is least likely to impact the type of

packaging?
a. Dimension of the product

b. Colour of the primary packaging
c. Base surface area of the goods
d. Intended transit method
3. Which of the following standards are least likely to govern the type of
packaging to be adopted for international logistics?
a. World Shipping Council

b. Global Shipper’s Forum
c. Internal Adhoc Standards of the Shipper
d. International Maritime Dangerous Goods Code
Answers:
1. (a), 2. (b), 3. (c). 
! !104
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !105
ROLE OF INTERNATIONAL LOGISTICS IN GLOBAL PROCUREMENT
Chapter 6
Role of International Logistics in Global
Procurement
Objectives
• Understand the role of international logistics in global procurement

• Understand the evolution of logistics activity and its impact on global
procurement
• Gain an insight into various issues and challenges in managing
procurement in global logistics
• Understand the important performance indicators for global logistics
• Understand emergence of e-commerce and its impact on logistics
• Understand factors in considering right mode of transportation
• Understand the contribution of air freight in international procurement
• Understand the role of sea freight in international procurement
• Understand the role of surface transportation in international
procurement
• Gain a detailed understanding of pre- and post-shipment activities
• Gain an understanding of International Commercial (INCO) terms and its
implications on global sourcing
Structure:
6.1 Introduction to Role of Global Logistics in International Procurement

6.2 Evolution of Logistics and its Implications on Global Procurement
6.3 Issues and Challenges in Managing Procurement and Global Logistics
6.4 Important Performance Indicators for Global Logistics
6.5 E-Commerce, Global Procurement and Logistics
6.6 Choosing Right Mode of Transportation
6.7 Role of Air Freight in Global Procurement and Logistics
! !106
6.8 Role of Sea Freight in Global Procurement and Logistics

6.9 Pre- and Post-shipment Activities to be Followed
6.10 International Commercial Terms (INCO Terms) and its Relevance for
Global Sourcing
6.12 Summary
! !107
6.1 Introduction to role of global Logistics in International

Procurement
Any discussion on International Procurement will not be completed without

detailed review of the role of logistics. It is worthwhile, to look at Global
Logistics now. International Purchasing Manager need to have a good
understanding of global logistics to effectively and efficiently execute their
duties and deliver value add to the organisation. Global logistics is more
complex than the domestic logistics, consisting of multiple services like
multi-modal transportation, cross-docking, storage, and customs clearance.
Globalisation and the increasing outsourcing of manufacturing and sourcing

operations to the low cost countries have resulted in advanced and
complex logistics services. Consider an example of the hi-tech electronics
manufacturer in Hong Kong, who wants to ship its products to Bangalore in
India. The preferred route is via Singapore (transhipment hub) and
Chennai (port of entry). The products/cargo is transported by ships till
Chennai and then by trucks to Bangalore. It is composed of several
services like trade documentation, customs clearance at various points,
cross-docking, and multi-modal transportation. Some services like the
customs clearance and cross-docking at Singapore can naturally be
bundled and provided by a single 2PL or 3PL. On the other hand, shipping
from Singapore to Chennai and from Chennai to Bangalore, can possibly be
provided by a single provider or by two different providers.
Logistics is concerned with the broad range of activities which includes

effective and efficient movement of semi-finished or finished goods from
one business to another and from manufacturers/ distributors/retailers to
the end consumers. This includes:
• Freight transportation,
• Warehousing,
• Material handling,
• Protective packaging,
• Cross-docking,
• Order processing, and
• Documentations
Logistics costs often constitutes 10-15% of every product produced.
! !108
6.2 Evolution of Logistics and its implications on global

procurement
Traditionally, manufacturers/suppliers and buyers handled all logistics

functions including trucking and warehousing through own logistics
departments. As a first step, the trucking and warehousing were then
procured from first party logistics (1PL) providers, who were individual
owners of trucks and warehouses. Large-scale transportation lead to
procuring service from second party logistics (2PL) providers like a
transportation company that owns a fleet of vehicles.
In the recent past, logistics services were outsourced to third party

logistics (3PL) providers. The 3PLs are non-asset based providers, who
manage the end-to-end process by procuring the transportation and other
services from 2PLs and 1PLs.
New players, 4PL also emerged, who is an integrator that assembles the
resources, capabilities, and technology of its own organisation and other
organisations to design, build and run comprehensive supply chain
solutions. Use of technology here is very crucial for effective management
of 4PL activities.
The emergence of 1PL to 4PLs led to various procurement scenarios, which

the global procurement manager should have a deeper understanding. To
assist effective execution of the role of global procurement manager, the
logistics services are classified under two categories – Basic and Advanced.
Basic Services: Basic services are the single services like transport from A
to B with tangible service definitions. The transaction is one-time for the
current demand, with no contractual agreements for future requirements.
Such services can be purchased on the Internet from freight exchanges.
Advanced Services: Advanced services comprises of multiple and bundled

services with intangible outcome requirements. This refers to purchasing of
3PL services with contractual agreements to transport goods in future for a
specified period of time.
International trade and procurement, thus, by its very nature involves

multi-modal transportation and customs clearances across international
borders. Cross-docking at transhipment hubs is a significant milestone. A
! !109
global logistics service is, thus, composed of many logistics services like
multi-modal freight transfer, packaging, cross-docking, warehousing and
other supporting services like customs clearance, trade documentation,
exception notification, exception handling, etc.
6.3 Issues and Challenges in Managing procurement and

global logistics
The global sourcing manager should be conversant with the issues and
challenges of global logistics in taking the procurement decisions. Some of
the important factors are:
• Geographical distance: The first basic and fundamental difference in

comparing the domestic and international logistics is the distance. Global
logistics frequently require the transportation of parts, accessories,
essentials, supplies, and finished goods over much longer distances than
is the norm domestically. A longer distance will lead to increased level of
costs of transportation, storage and insurance for damages,
deterioration, and pilferage in transit and higher indirect costs of
warehousing and inventory. Selection of appropriate mode for
transportation is also very important.
• Foreign exchange fluctuation: The second most important difference

pertains to currency variations in international logistics. While the
procurement manager may become extremely successful in negotiating
the purchase rates downwards along with the most favourable terms and
conditions in imports/global sourcing, the CPO need to take care of the
foreign exchange fluctuation risk. A slight increase in the forex rates,
e.g., depreciation of rupee by 5-10% may lead to increased costs and
may wipe out the price benefits completely.
• Engagement of foreign intermediaries: Number of intermediaries

participate in the global logistics process because of an important need to
negotiate border regulations of countries and deal with local government
officials and distributors. A connect with all relevant stakeholders is very
crucial for efficient and effective global sourcing. At times, home country
import/export agents, brokers, and import/export merchants and dealers
work as intermediaries providing an exporting service for manufacturing
firms, those home-based intermediaries do not necessarily have
sufficient knowledge about the foreign countries’ market conditions or
! !110
sufficient connections with local government officials and distributors. For

example, in Asian countries such as Japan, Korea, and China, personal
network, connections and rapport of who knows whom frequently seem
to outweigh the Western economic principle of profit maximisation or
cost minimisation in conducting business. Therefore, working with local
procurement agents/partners has proved very important in building initial
connections with the local business community as well as local
government regulators.
• Understanding of regulations: Large quantum of international trade is

handled by ocean shipping. Because the United States is the world’s
largest single trading country in both exports and imports, and most of
its trading partners are located across the Pacific and the Atlantic
Oceans, US regulations on ocean transport services directly affect foreign
exporters to the United States. Further, in Sub-Saharan African region for
transit from one land locked country to another locked country and then
to the port is very costly and can contribute to more than 30% of the
product costs itself. It will be very crucial for the CPO to understand the
intricacies of the regulations and its impact on the logistics turn around
time as well as cost.
• Security of cargo: In the ocean route, patches like Somalia are infested
by pirates. Such routes can pose a significant risk to the cargo security
and also significantly increase the cost of insurance. In certain countries,
government-imposed user fees or carrier surcharges are too high or
come without sufficient advance notice, some importers could even lose
economies of sourcing from overseas location due to increased shipping
costs and insurance premiums, as applicable and terms negotiated with
the suppliers.
• Selecting right mode of transportation: Important factors while

selecting the right mode of transportation include value-to-volume ratio
is determined by how much value is added to the materials used in the
product. Perishability of the product refers to the quality degradation
over time and/or product obsolescence. The cost of transportation is
affected on account of the volume and the perishability of the product.
For example, certain kinds of vaccines in the pharmaceuticals needs a
very robust and complex storage methods and transportation conditions.
The broad factors affecting the selection of the right mode of
transportation with respect to various modes available is provided as
under:
! !111
๏ Ocean/Sea Freight: Liners/shipping companies across the globe

offer a regular and scheduled passage on established world routes.
Based on the volume and nature of the cargo, the organisation may
need to use bulk shipping or standard containerised transportation.
Sea freight is used extensively for the transport of heavy, bulky, or
non-perishable products, including crude oil, steel, commodities and
automobiles. Over the years, shipping rates have been falling as a
result of a price war among shipping lines and continuous addition of
the shipping capacities by the liners. For example, an average rate
for shipping a 20-foot container from Asia to the United States fell
from $4,000 in 1992 to as low as $1,680 by 2009. Certain
organisations like Honda, Hyundai and other large players in the
automotive space, have their own fleets for management of the
global procurement.
๏ Air Freight: There has been significant increase in the air traffic and
thus the air cargo across the globe in last three decades has grown
to significant extent. In terms of volume, it still constitutes
approximately 2% to 3%. However, it constitutes now more than
20% of the value of goods shipped in international commerce. The
global procurement manager needs to carefully evaluate the nature
of the products and accordingly explore option for the air freight.
Some of the products include semi-conductor chips, LCD screens,
and diamonds, perishable products. Currently, the jumbo jet has a
capacity to carry more than 30 MTs of the cargo.
๏ Multi- or Inter-modal Transportation: Global imports and

exports require transportation across different sections of the
country. Most of the country require transportation of sea, road, rail
and air and other modes of transportation. Managing inter-modal
transportation is more challenging than single mode of
transportation. Inter-modal transportation requires managing loading
and unloading across mode of transportation. The global
procurement manager should ensure that when different modes of
transportation are involved, or even when shipments are transferred
from one truck or transportation vehicle to another at the national
border, state border, port, warehouse, it is important to make sure
that cargo space is utilised at full load so that the per-unit
transportation cost is minimised.
! !112
6.4 Important performance indicators for global logistics
It is very crucial that the global procurement manager needs to understand

the important performance indicators for global logistics. The indicators
directly affect the cost of procurement. Some of the important indicators
• Quantity of each item available for delivery within the customer-specified

delivery window
• Picking with correct quantities of the correct items
• Right packaging with customer-designated packaging and labelling
• Shipping of products without damage
• Delivery in customer-designated time window and to the customer-

designated location
• Timely communication with order status report available at the set

intervals as per the expectation of the customer
• Accurate billing
• Right documentation with customer-specified documentation means,

including paper, fax, Electronic Data Interchange, and/or Internet
6.5 E-Commerce, Global Procurement and Logistics
Any discussion in the 21st century on the logistics and procurement cannot
be said to have completed, unless it also covers an important emerging
aspect, i.e., E-Commerce and evolving platform has in a way and about to
completely change the way global procurement activity is being carried
out. The internet opened the gates for companies to sell easily directly to
consumers across national boundaries. The internet and the Intranet
facilitate on-time inventory and distribution coordination without constraint
of geographical boundaries.
! !113
6.6 Choosing right mode of transportation
• Sea freight is the most commonly utilised and relatively cheapest mode
of transportation, moving to the extent of 90% of world cargo.
• Air freight is relatively expensive in comparison to other modes due to

low capacity of aircrafts and high operating costs and overheads.
• Shippers are increasingly shifting the historic air freight capacity into
sea-freight to save on costs and managing the supply chain.
• Surface transportation continues dominated by truck, as rail

infrastructure is not present in all regions across the globe. Where it is
present, the end-to-end haulage facilities are not available.
• Each mode of transportation has a distinctive value proposition, different

market conditions and business models.
6.7 Role of Air Freight in Global Procurement and Logistics
The international air freight industry is estimated to be at $40 billion per

annum and it is expected by 2019, the world will have more than 2500
freighter planes. Air Freight has an important role in the global sourcing
process. The key components relevant from the buyer’s perspective are as
follows:
Segment Players
Shipper/Forwarder • Supplier/Vendor
• Shipper
• Forwarder
• Interline Connecting Logistics Player
Airline • Air Consolidation Agent

• Air Freight Forward
• Airline
Consignee • Customer
• Customer’s Representation
! !114
Expectation and Role Played by Each Participant in the Air Freight
• Shipper: Expectation of the shipper is to send the commodity at the

desired destination. Time is the essence in the Air Freight Industry.
Shipper often undertakes activities which include making the booking for
air freight, negotiating the best rates, preparation of the documents
required for clearance and customs, seeking insurance, tracking
shipments, accept billings and make payments to forwarders, place
claims and repair charges where applicable, ensure speed of delivery and
reliability in the transportation.
• Forwarder: The forwarder acts as a middleman between the airline and

the shipper. Often the forwarder earns his booking commission from the
airline. All of the shipper’s responsibilities are often delegated to the
freight forwarder as a negotiated fee. Additional responsibilities of the
freight forwarder is to accept bookings, bid for space allotments,
distribution of the cargo, warehousing where applicable, interaction with
multi-modal carriers, consolidation of shipments if the freight forwarder
is also a consolidator.
• Integrator/Consolidator: Since air parcels tend to be of smaller size,

Integrator offers an end-to-end service to the shipper and forwarder.
Integrator often takes care of the bulk bookings, optimise the freight
costs (wholesale) and manages the last mile delivery.
• Airline Operations: The key role of the airline operations is to receive,

store, pack (where applicable), transfer, load, track, and unload the
shipment. The operations team is also responsible for assignment and
management of the airline cargo capacity. The key responsibilities of
airline operations include scheduling cargo flights, plan for the cargo
routes, initialise and open booking of flights, negotiate rates, publish
prices and rates, provide distribution channels, forecast cargo capacity,
segment and forecast cargo demand, plan for no-shows, manage
cancellations, manage overbookings, set up the bid process for space
allotments, accept or reject shipments, provide information related to
dimension of the cargo, maximise revenue, improve the load factors for
the airline, track shipments, resource management of terminal staff,
controls of dangerous/hazardous goods, validation of packaging,
prioritisation of the shipments, unloading of the cargo, load balancing,
! !115
warehousing, flight manifest, ensure reliability of service and re-route

where applicable.
• Consignee: Consignee received the shipments, check for any deviations

and confirms to the shipper and forwarder. Consignee is also required to
track shipments by seeking periodic information from the forwarder,
accept and make the billing payments where applicable and place and
claim repair charges.
Moving Cargo Globally – World Customs Organisation Study
Documentation Requirements in Air Freight
The global sourcing manager should be well versed with the documentation
requirements applicable to Air Freight. The details of important documents
! !116
Documents Relevance
Consignment • Document used to establish security status of the

Security Declaration cargo
• Helps to ensure that regulated agents, consignors, and
aircraft operators are held accountable regarding
application of the security controls throughout the
supply chain
Air Cargo Manifest • Document issued by aircraft operator/liner containing

the details of the consignments loaded on the aircraft
• Nature of goods, weight, number of pieces are also
specified in the manifest
Airway Bill • Airway Bill – Issued by the liner/airline operator

• Master Airway Bill – Issued by the consolidation service
provider
• House Airway Bill – Issued by freight forwarder for
individual shipment for separate consignee under the
overall consolidation
Certificate of Origin • Local/Domestic authority like Chambers of Commerce

issues the certificate of origin
Customs Release • Document demonstrating the release of goods under

Document control by the customs authority
Declaration of • Documents issued by consignor or shipper that

Dangerous Goods dangerous goods have been transported, packaged and
labelled appropriately
Export Cargo • Providing declaration for exports/imports customs

Declaration/Import clearance
Cargo Declaration
Invoice • Document for commercial purpose and also for

determining the valuation of the cargo by the customs
authorities
Packing List • Documents providing details of which goods are in

each package
! !117
Developments to Watch for in Air Freight Industry – Sourcing

Manager’s Perspective
• Air traffic volume is increasing at a rapid pace. China alone is expecting

the volume growth 3 times by 2025.
• The industry will look for more of inter-continental long range cargo
movement.
• Instead of end-to-end destinations, increasingly the volume may increase

for hub-to-hub, e.g., Singapore to Frankfurt. Number of hubs developing
across the globe are also increasing. This will result into reduced rates of
cargo on account of benefit of economies of scale.
• Small freighter aircrafts are being replaced by new freighters.
6.8 Role of Sea Freight in Global Procurement and

Logistics
Sea freight has a high cost efficiency because the large capacity and the
freedom to choose route. It is also the most preferred route for bulk
transportation. The transported goods have to carry a small amount of
variable costs such as cost of the bunker fuel per container and terminal
cost relative to the large fixed costs of the ship investment and the bunker
fuel consumption independent of the goods weight. Transportation cost
often becomes as low as less than 6% of the product cost for capital goods
of high value. However, on low worthy goods, the transportation cost
component is approximately 30% of the product cost.
When it comes to the service frequency, smaller unit capacities allow more
frequent departures while larger units allow carriers to benefit from
economies of scale. Secondly, the fleet size, vessel size and fleet mix. The
optimal vessel size depends on the cargo available, shippers’ requirements
on transit time and other service elements for the trade lane. The biggest
vessels are often deployed on the longest routes and carriers also need to
secure enough vessels to guarantee the desired frequency. Thirdly, the
number of port calls. By limiting the number of port calls, the voyage time
is shortened and can therefore increase the number of round trips per year
and minimise the required number of vessels on a specific trade lane.
! !118
The participants in the overall sea freight and the flow of cargo (left to
right) is as follows:
Shipper Inland Customs Terminal Carrier/ Terminal Customs Inland Consignee

Logistics at Operation Liner Operations at Logistics
Origin Destinatio at
Port n Port Destinati
on
Key Aspects of Sea Freight Which the Global Sourcing Management

Should be Aware
Sea freight accounts for the main share of global volume in world trade,
mainly due to its lower price and huge capacity advantage over other
means of transport. Sea freight market is growing in line with growth of
world trade, but over a period of time, the trade landscape is shifting
towards emerging markets. Imbalanced trade flows lead to biased trade
lanes; while capacity utilisation on especially Asia Pacific export routes is
higher, import routes have lower load factors.
The sea freight market has near oligopolistic structure with strong position
of carriers limiting the negotiation power of forwarders and shippers at
times. However, over a period of time on account of the extensive built-up
of the freight capacities in the shipping industry, the freight rate have been
lower, despite of the increase in crude prices few years back.
Market Trends to Watch for in Sea Freight Business
• Shipping companies/liners are continuously expanding their fleet which

leads to significant seasonal over capacities and impact the freight rates
often in favour of the shipper.
• Overcapacity, volatility in crude prices and world trade fluctuations result

into increasingly volatile freight rates and of course shipping lines are
facing increasing cost pressure.
• Digitalisation and developments in information technology is bringing

new business models to the industry, as e-commerce platforms emerge
in the sea freight value chain.
• Volatility of sea-freight rates is affected by two main parameters:
! !119
๏ Capacity utilisation respectively demanded volume

๏ Bunker price (fuel).
• Demanded volumes are highly sensitive to economic developments and

fluctuates around cyclical events such as vacation, Christmas, Chinese
New Year, etc.
• Sea freight carriers’ profitability dropped significantly since the beginning

of the financial crises.
• Carriers did not expect the economic downturn – huge investments made
in vessels that are now either under or fully unutilised on delivery
resulting in low profitability.
• There exists an intense competition in the sea freight industry.
The global sourcing manager needs to be aware of the emerging trends in

the process of planning his procurement and logistics activity.
Impact of Technology Development in Sea Freight
• Digitalisation is a relatively new phenomenon in sea freight industry and

the liners are still on their way finding its direction and use.
• Expected efficiency increase (through electronic data interchange)

focusing on shipping info (shipping instructions, booking requests and
master data) as well as invoicing and documents (customs, etc.).
• Enabling IT-driven solutions (e.g., track and tracing of the shipments).
• Expected emergence of shipping e-commerce platforms, enabling real-

time bookings and rate comparisons.
6.9 Pre- and Post-Shipment Activities to be followed
In the global sourcing especially imports, the sourcing manager needs to

be very vigilant and need to ensure that every step in the sourcing is
followed. Some of the important activities to be followed pre- and post-
shipment from the supplier’s location are listed as under:
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Prior to Shipment
• E-mail request for current status to the supplier
• Advise internal personnel in the procurement function of current status
• Review shipping and payment terms and ensuring that those are
understood by the supplier
• Confirm with the supplier whether he needs to include any assistance/

other charges in shipment value
• It is advisable to confirm that supplier will use buyer supplied customs

harmonised number in shipping description as applicable to the trade
• Buyer should specify to supplier required/preferred transportation

method
• Confirm the consignee, notify party, port and markings and ensure that
that buyer will receive copy of shipping papers
• Specify details of the forwarder and broker if not included in purchase

order issued earlier
• Confirm that supplier or forwarder has a clear routing of the shipment
• Confirm with the supplier that necessary transportation has been

arranged
• Confirm with the supplier that the freight rates used in original landed
cost estimates are only being used
• Ensure that the certificate of origin is complete and available with the
supplier
• Where required, ensure that an inspection certificate is available prior to

the shipment
• Ensure that supplier confirms special packaging arrangements
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• Ensure that hazardous cargo compliance is completed by the supplier as

applicable
• Buyer should ensure that the supplier consider strikes or any other
significant international events that may cause delay during the shipment
• In the interest and protecting loss, the buyer should confirm that
procedure for transportation insurance coverage is being followed by the
supplier
Activities After the Shipment Leaves the Supplier Premises
• Confirm that Freight Forwarder has freight and that booking was made.
Buyer can insists for booking advice/shipping instructions
• Confirm with the supplier that shipment is on intended vessel/flight
• Ensure that the supplier has obtained the necessary pre-clearance as

applicable as per the customs authorities
• Buyer needs to ensure that the documents received to insure correct

consignee, notify party and destination
• Confirmation is required that the freight forwarder has sent copies of

documents to buyer and their broker
• Confirm that the broker has all necessary documents
• Ensure that necessary preparation is done to ensure special clearances,

e.g., Fumigation certification, clearance from the Food and Drug
Administration, etc.
• Confirm arrival of the shipment with broker in a timely manner
• Confirm and ensure timely custom clearance with broker
• Obtain details of the shipment, trailer number, name and phone number
of inland carrier
• Buyer should ensure that necessary confirmation of inland delivery with

inland carrier should be obtained
! !122
6.10 International Commercial Terms (INCO Terms) and

Its relevance for Global Sourcing
INCO Terms
• INCO Terms are accepted rules and definitions in International Trade

• Defines obligation of all parties involved in a trade
• One can know who will bear costs and what components of cost
• Know risks involved and who bears the risk – Buyer, Seller, Intermediary,
Transporter, etc.
• Just use of INCO terms does not constitute a contract
• Cannot override local country regulations (wherever applicable)

• Cannot override terms of the sales contract
• Does not cover other aspects of international trade like currency, credit
terms, price payable, etc.
Some of the Important INCO Terms
INCO Term Features/Specifics
FCA/Free Carrier • Seller delivers goods to location (of carrier) specified by

(Place) the buyer
• Seller bears the risk till the goods are handed over to
buyer chosen carrier
• Cost and risks of transportation is limited for seller
• FCA arrangements allow the seller to resell the goods to
someone else while the goods are still in transit
Ex-works (Place), • Seller makes the goods available at seller’s premises

e.g., Ex-works – • Buyer’s responsibility to collect the goods and arrange
Plant A, Bangalore for transportation
• Buyer bears the cost and risk of transportation of goods
to destination location
• Ex-works translates into the arrangement carrying the
minimum obligation and risk for the seller and the
maximum obligation and risk assumption for the buyer
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FAS – Free • Seller must transport the goods all the way to the dock,
Alongside Ship close enough to be reached by the crane of the ship it
(Place) will be transported in
• The place name indicates the port where the goods are
to be delivered on the quay beside the carrier ship
• FAS is instead usually used for goods sold as bulk
cargo, such as petroleum products or grain. For
containerised transportation, FAS is generally not
applied
FOB – Free on • Seller delivers goods to port and loads on ship (loaded
Board (Port) onto the ship nominated by the buyer)
• Seller clears the goods for exports
• Cost and risks of transportation is relatively expanded
for seller
• From port, the buyer bears the costs and risk of
transportation to destination
CFR – Cost and • Seller’s responsibility to transport goods from its plant
Freight to destination port
• Seller covers all the costs (except Insurance)
• Large MNCs have global marine insurance policies,
hence they opt for CFR while importing
CIF – Cost, • Seller’s responsibility to transport goods from its plant

Insurance and to destination port
Freight • Seller covers all the costs (including insurance)
• Suitable where buyer does not have its marine
insurance policies
DDP – Delivered • Seller delivers goods to destination port

Duty Paid (Place) • Costs and risks are very high for the seller (includes
import duties and taxes in the destination country)
• If the clearing responsibility is on Buyer’s Freight
Forwarder, then the term used will be DDU (unpaid)
• Minimum obligations for the buyer
• At times, DDP is extended to buyer’s plant location
Key Aspects to be Taken Care in Applying INCO Terms – A Global

Sourcing Manager’s Perspective
• INCO terms are location-specific. Carefully read the term and understand
the risks of seller and buyer.
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• While seller may pay the freight for transportation of cargo, in number of
cases, buyer is responsible for the loss/damage to the cargo.
• Insurance obtained by the seller mostly is bare minimum and most of the
times does not suit the buyers risk mitigation requirements.
• Carefully understand who is responsible for the risks of loading and

unloading (maximum probability of cargo being damaged).
• While seller has responsibility for delivery to destination port, there is no

responsibility to provide updates related to transit (unless specifically
agreed between seller and buyer).
• Responsibility for Custom entry declarations/Importer Security Filings

(required by US) is with the seller under DDP.
• Important to understand as to who is keeping the track of entire

transportation chain/end-to-end supply chain.
1. Visit any sea port or cargo operations of an airline and understand the
important processes and activities involved in international logistics.
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2. Study Purchase Orders, Sales Invoices of sample organisation and

review the INCO terms used. Compare the INCO terms with payment
and credit terms.
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6.12 Summary
Any discussion on international procurement will not be completed unless

we discuss an important component, i.e., global logistics. Logistics is an
integral part rather an engine of the entire global supply chain. The global
sourcing manager needs to be aware of all the logistics options available so
that the organisation’s objectives can be met in the most competitive
manner. The logistics options range from a simple surface transportation,
to air freight, sea freight, multi-modal transportation and engagement of
players like 3PL and 4PL. There are key challenges in international logistics
which include managing and coverage of geographical distance, dealing
with foreign exchange fluctuation, engagement of foreign intermediaries,
ensuring compliance with all regulations, ensuring security of the shipment
and more important selecting the most appropriate mode of transportation.
The global sourcing manager also needs to establish right performance
indicators for measurement of the effectiveness and efficiency of the global
supply chain. The global sourcing manager is also expected to have a
sound understanding of the INCO terms for appropriately structuring the
contract with supplier and logistics service provider.
! !126
1. Exploring the role and importance of logistics in international

procurement.
2. Highlight the important issues and challenges in managing procurement

and global logistics.
3. Highlight and explain some of the important performance indicators for

global logistics.
4. Write a short note on the factors influencing the choice of selecting right
mode of transportation.
5. Explain the role of Air Freight, Sea Freight and Surface Transportation in
global procurement and logistics.
6. What are the pre- and post-shipment activities that the global sourcing
Manager should be aware of?
7. Explain at least 3 INCO terms and its implications on cost and risks to
the buyer.
8. ABC Limited has quoted Ex-works Price (ABC’s Chennai Plant) to you.
The goods are very costly and you would like to ensure that ABC Limited
bears the risks of damage to goods during loading of cargo on the truck
arranged by you. What are your options as an Operations Procurement
Manager? What inputs you would like to provide to your Purchase
Department?
9. CHN Limited, Chennai has shipped the goods from its plant to JNPT
(port in coastal Maharashtra) and the term agreed with buyer is FOB
(JNPT). Way to JNPT was very congested and ABC Limited’s transporter
could reach JNPT only after the vessel (as arranged by buyer’s freight
forwarder) left for sailing to destination. What is the liability of CHN
Limited? What alternatives are available to CHN Limited?
10.KAN Limited has ordered for import of a very costly and complex
equipment from Germany. The equipment is custom-made (one of its
kind) for KAN limited by a German company. Operations/Procurement
team is negotiating with German company for the price. Which of the
INCO terms will be most suitable for KAN Limited? Why?
! !127
1. Which of the INCO term requires the buyer to take responsibility to

collect the goods and arrange for transportation from the seller’s
premises?
a. Ex-works
b. FCA
c. FOB
d. DDP
2. Which of the following document is issued by Chamber of Commerce or

Industry association certifying the place of manufacture of the product
to be shipped?
a. Custom release document

b. Declaration of dangerous goods
c. Certificate of origin
d. Export cargo declaration
3. Which of the following is least expensive mode of transportation in an

international trade?
a. Air Freight
b. Sea Freight
c. Surface Transportation
d. Chartered Plane
Answers:
1. (a), 2. (c), 3. (b).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !129
MEASURING PERFORMANCE IN INTERNATIONAL PROCUREMENT
Chapter 7
Measuring performance in International
procurement
Objectives
• Understand the process adopted for measurement of the performance of

supply chain and logistics
• Understand what needs to be measured in International procurement
• Understand some of the important performance indicators
Structure:
7.1 Introduction to Measuring Performance of International Procurement

7.2 Important Performance Measures and Aspects to Measure
7.3 Illustration of Global Procurement Sourcing KPIs Matrix of a
Multinational Company
7.5 Summary
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7.1 Introduction to Measuring performance of international

procurement
For cost-effective and time efficient international procurement, the Global

procurement Manager is required to set up performance measures and
metrics. Objective, holistic Key Performance Indicator (KPI) measurement
and reporting helps Global Procurement Function monitor progress against
strategy execution, expected deliverables, organisational maturity and
demonstrate credibility to stakeholders.
Measurable goals and reporting engages teams to improve performance

and enables sharing successes within companies. The KPI’s address
procurement value, stakeholder satisfaction, supplier performance
management, employees and process efficiencies.
7.2 Important performance measures and aspects to

measure
Well-defined KPIs should address all areas of procurement activity

holistically and globally. Some of the indicative areas are as follows:
• Procurement Value,
• Stakeholders,
• Operational Excellence or Process Efficiency,
• Supplier Performance Management and
• Employees.
Let us explore, various sub-areas which can be measures within the above
broad five categories:
• Procurement Value: The objective of KPIs is to define the value added

by the procurement function to the organisation. Some of the metrics
which can be covered are:
๏ Sourcing Return on Investment (ROI)

๏ Spend per employee
๏ Savings generated during the given period across procurement
categories
๏ Procurement strategy maturity
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๏ Sourcing rigor applied/proactive engagement with suppliers
๏ Savings per employee
๏ Procurement leverage applied/managed spend
One of the important objective and deliverable for global procurement is

to reduce the cost of procurement on a continuous basis. The approach
adopted by the organisation to measure this objective is through the
following comparisons:
๏ Last year’s price vs. current year price

๏ First bid compared to last bid
๏ Average of bids vs. the lowest
๏ Inflation and currency fluctuation adjustments
๏ Previous year’s market basket cost vs. current year cost
๏ Improvement in spend through contracts
• Stakeholders: It is very crucial for the procurement Manager to ensure

satisfaction of its customers, i.e., the User functions. Procurement
function can conduct user department survey. The surveys can be done
either electronically or in focus groups quarterly or bi-annually.
• Operational Excellence: Organisation focus of Purchase to Pay (P2P)

process to get efficiencies in sourcing. Some of the KPIs that can be
considered under the operational excellence is:
๏ Use of sourcing through internet

๏ Evaluation of Cost per Purchase order/line item
๏ Compliance to contracts/catalogues/preferred suppliers
• Supplier Performance Management: Global Procurement manager

should engage with the suppliers across the globe. The supplier
performance can be evaluated on the basis of the following important
criteria:
๏ Quality of the products

๏ On-time delivery of the products
๏ Supplier rating score including stakeholder feedback and inputs
๏ Supplier innovation
๏ Compliance with the contract terms and conditions
! !132
Periodic supplier audits are also effective means to evaluate the supplier
performance.
• Employees: Evaluation of employee’s skills is the foundation and

important aspect of the Global procurement function. Purchasing from
suppliers across borders requires a special skill. The levels of the skills
can be broadly classified into the following key categories according to
the role played and contribution made to the procurement function.
๏ Foundation/Basic
๏ Practitioner
๏ Expert
๏ Thought leader
The essential skills and competencies will include:
๏ Ability to identify and focus on business needs,

๏ Building propositions with clearly defined value expectations from
the suppliers,
๏ Ability to develop and establishing strategic relationships,
๏ Integrated working across various function through involvement,
๏ Technical and domain skills,
๏ Leadership skills, and
๏ Effective negotiation skills.
7.3 Illustration of Global Procurement Sourcing KPIs

Matrix of a multinational company
Key Performance Indicators (KPIs) Indicator Measurement
Procurement leverage applied/ % of addressable spend

managed spend
Strategic sourcing applied % of addressable spend
Spend per employee Spend/count of sourcing professionals
Procurement Return on Investment Minimum % to be defined by the

management
Savings Absolute amount or % of the

addressable spend
! !133
Savings per employee/per annum Annualised savings/count of sourcing

professionals
Spend concentration Spend value with top 20-25 suppliers
E-Sourcing Value of sourcing through electronic

mode as a % of total spend
Competencies Average number of competencies per

sourcing employee
Establishment and measurement of procurement Key Performance

Indicators (KPIs) are an effective way to drive and measure organisational
performance and execution towards agreed strategy and goals.
Procurement organisations need to focus on essential KPIs, present data
on a proactive manner and also take stakeholders needs into consideration
when designing an evaluation and measurement framework.
1. Review the Management Discussion and Analysis section in the Annual

Report of any large publicly listed conglomerate and identify the key
procurement related measures.
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2. Conduct interviews with Supply Chain Managers, Heads and identify top
5 performance indicators for global procurement from their
organisation.
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! !134
7.5 Summary
What gets measured gets done. This is also applicable to the global
procurement function. While the performance measures will largely defer
from organisation to organisation, the key inputs need to be drawn from
the overall business strategy of the organisation and its key objectives.
Some of the important measures include the quantum of cost reduction
achieved, spread concentration, development of competencies,
procurement return on investment, savings per employee per annum inter
alia.
1. Highlight and explain the important areas to be considered while

defining performance measures for international procurement in a
multinational organisation.
2. Write a short note of Key Performance Indicators for global sourcing

function.
! !135
1. Which of the following is least likely to be a performance indicator for

global procurement function?
a. Savings on material procurement

b. Production quantity
c. Turnaround time for purchase order to good receiving
d. Discount availed on payments to vendors
2. Which of the following is not expected to be an essential competency of

a procurement professional?
a. Technical and domain Skills

b. Sound understanding of commercial terms
c. Effective negotiation skills
d. Marketing and selling skills
Answers:
1. (b), 2. (d).
! !136
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !137
ETHICS, CSR, SUSTAINABILITY AND OTHER CONSIDERATIONS IN GLOBAL PURCHASING
Chapter 8
Ethics, CSR, Sustainability and Other
Considerations in Global Purchasing
Objectives
• Understand the role of Ethics in Global Purchasing

• Understand the role and sense of social responsibility in global sourcing
• Understand the importance of sustainability in global sourcing
• Gain an understanding of Ethics and Compliance issues from Supplier
and Buyer perspective
• Understand the initiatives taken by buyer for ensuring responsible
supplier behaviour
• Gain an understanding of role of global sourcing manager in ethical
procurement
• Understand the checklist for practical implementation of ethics in global
procurement
• Understand the factors involved in evaluating the performance of
suppliers on procurement ethics
Structure:
8.1 Introduction and Understanding Role of Ethics in Global Sourcing

8.2 Role of Social Responsibility in Purchasing
8.3 Sustainability in Global Sourcing
8.4 Example of Code of Conduct of a Large MNC Engaged in Fast Moving
Consumer Goods (FMCGs) Segment
8.5 Ethics Issues from Supplier and Buyer Perspective in Global Sourcing
8.6 Examples of initiatives taken by Buyers for Ensuring Responsible
Supplier Behaviour in the Global Sourcing Arena
8.7 Role of Global Sourcing Manager in Ethical Procurement
8.8 Checklist and Questionnaire for Practical Implementation of Global
Sourcing Process and Ensuring Ethical Procurement
8.9 Evaluating Procurement Ethics and Compliance Levels
8.11 Summary
! !138
8.1 Introduction and understanding role of Ethics in global

sourcing
Ethics can be defined as the basic principles of correct behaviour, with

reference to a specific person, profession or activity. When most people
think of ethics in global sourcing, generally the thoughts represent bribes
and gift-giving from suppliers to purchasers, but there are several other
issues that need to be considered when discussing ethical issues connected
to a company’s sourcing strategy. When it comes to a company’s ethical
responsibility regarding its purchases, it is mainly the requirements on its
suppliers and how the company acts to assure that the suppliers act ethical
in its operations that comes into focus.
Requirements that a company could put on their suppliers involves

demands on legal requirements, restrictions on use of child labour, respect
to workers’ rights, regulatory compliant wages and working hours, factory
conditions and safety, environment, but also requirements that the
products not shall affect the users’ health negatively. The key requirements
are often consolidated in a single document referred as the Ethical
Purchasing Guidelines/Code of Conduct.
Pre-globalisation era, companies did most of their purchases locally and

they were mostly working in the same business cultures as their suppliers.
Nowadays, as an effect of globalisation, buyer in an organisation work with
multiple suppliers across the globe for meeting various objectives one of
which is that advantage of lower labour costs in developing countries.
However, varied cultures across the globe also give rise to a confusion
among the purchases about the ethics in purchasing. Something that is
ethical right at one market might be unethical at other markets. This
confusion can at the end result in an unethical behaviour. Thus, companies
across the globe now put a higher focus on their purchasing activities so
they can avoid an unethical behaviour.
As a common perception, bribery is the largest ethical problem within the

purchasing function and Bribery, gift-giving and entertainment are used to
make the purchasers favour specific suppliers during the supplier selection
instead of only base it entirely on price, quality and delivery. Bribery is in
most of the parts of the world regarded as illegal and also unmoral, while it
in other parts of the world is seen as a part of the business culture. This
has resulted into a larger focus on ethical issues within the companies’
! !139
purchasing departments since the companies want their purchasers to be

absolutely clear on how the purchases shall be made. They do not want to
risk that their company should be associated with an unethical behaviour
as bribery, as it can significantly damage the reputation of the
organisation.
Companies nowadays are developing policies and strategies that are

adapted to the new trends and the new situation that the purchasers meet
at the global market. The companies want both to create a business
environment that encourage ethical purchasing but also create a
framework that the suppliers must follow if they shall be allowed to supply
goods and services to the companies. This framework is often called
“Codes of Conduct” or often referred as “Ethical Purchasing Standards”.
The key components of the Codes of Conduct that can go beyond

prevention of bribery and corruption are follows:
• Clear definition of working hours

• Defining working days per week
• Guaranteed minimum wage as per the regulation applicable in the
supplier country
• Overtime compensation as per the regulatory requirements
• Health and safety education to staff
• Physical examinations of the personnel involved
• Restriction on use of child labour
• Authorised employments
• Provision of adequate accident and pension insurance
Some of the nations and so the suppliers are also exposed to slavery and
exploitation of the workforce. The risks levels get enhanced at:
• places where workers have fewer protections

• places where there are high levels of poverty
• places where there is widespread use of migrant workers
• some specific high risk industries (typically industries involving raw
materials)
• labour-intensive stages of supply chains where the end product is cheap
(match box, fire cracker, etc.)
! !140
8.2 Role of Social Responsibility in Purchasing
Social responsibility implies that companies need to take into account the
impact company decisions have on society in general. It reaches beyond
the usual objectives of economical, legal and technical requirements of a
company. As the purchasing organisation to a large extent decides which
suppliers to use, they have a great impact on the Corporate Social
Responsibility performance of a company. Being the most crucial link
between the internal functions and external stakeholders, the people
managing the purchasing activities in a company have large effect on
socially responsible activities.
The key responsibilities of a purchasing organisation is to ensure:
• Adequate diversity: Companies achieve the objective of diversity

through some of the following initiatives:
๏ Allocation of share of business among the large enterprises and also

Micro, Small and Medium Enterprises (MSMEs)
๏ Encouragement to start ups and minority owned enterprises
๏ Engagement of women entrepreneurs
• Protection and respect towards human rights: Companies must

respect the law of the land and promote being human in all aspects of
the business. The sourcing can be made from the suppliers who respect
the human rights.
• Safety of business operations and products: In addition to global

standards and industry specific standards on safety and security of the
products/services, the buyer company may impose certain additional
practices/process changes on the supplier operations for safety of the
product, e.g., restriction on use of lead for manufacturing toys.
• Inclination towards philanthropy: Organisation may support and

purchasing from companies that focus on a philanthropic business,
creating training and employment opportunities for groups of people in
need of this. These suppliers are chosen for their support to society and
not only on the basis of having the lowest price and best service,
although they very well may have this.
! !141
8.3 Sustainability in Global sourcing
The growing awareness of the consequences for polluting the environment

has lead to a larger focus on green purchasing.
The increased concern for the environment in the society of today has lead
to a greater awareness of the consumers, and they keep track on
companies making sure they are performing in an environmentally friendly
manner. In addition, no matter how good a company performs, if the
suppliers don’t comply with the environmental standards the customer will
soon hold the company responsible. Purchasing environmentally is equal to
procuring reusable and recyclable goods, taking part and supporting the
development of environmental friendly items, and take actions to reduce
the utilised resources.
Green Purchasing/Environmentally Preferable Purchasing
Organisations globally are inclined towards implementing Environmentally

Preferable Purchasing (EPP), commonly called Green Purchasing, is defined
as an environmentally-conscious purchasing practice that reduces sources
of waste and promotes recycling and reclamation of purchased materials
without adversely affecting performance requirements of such materials. It
is important to consider that it covers both, products and services, and
they have to successfully minimise negative environmental impacts
throughout the Supply Chain until the disposal of such materials.
EPP can be used either for internal or external purchasing from supplier.
The elements are different in each of them but the aim is the same when
reflecting on acting in an environmental friendly manner. Meeting internal
customer requirements in a green, costly and time-effective manner is as
significant as in the relationships with external suppliers.
Emerging markets for green products, technologies and services mean

promising chances for international EPP from suppliers across the globe. It
is easier to carry out an EPP due to the consciousness encountered in the
young consumers – and the consumers in general – about the
environmental aspects. This is a situation that could push the companies to
be interested in applying EPP using the marketing of green products and
services directed specifically to the sectors that consider environmental
features as one of their key points to perform a purchasing.
! !142
Why Environmentally Sustainable Purchasing Policy will be

Relevant to Business and Buyers across the Globe?
Some of the key factors that have increased the relevance of the
sustainable way of purchasing are as under:
• Fear of liability litigation and fines, reputational damage and subsequent

negative publicity of the buyer company
• Civil and criminal penalties against pollutants, action by the pollution

control boards/state agencies
• Federal and state environmental regulations non-compliances
• Potential liability and cost for disposal of hazardous materials and penal
actions
• Supplier’s advances in developing environmentally friendly goods and

providing environmental friendly packages
• Environmental partnership with suppliers
• Buying firm’s environmental policy
8.4 Example of Code of Conduct of a large MNC engaged

in Fast Moving Consumer Goods (FMCGs) segment
Component of the Details

Code
Legal Requirements • All suppliers must follow the national laws in the
countries they operate
• Additionally, the suppliers also need to comply with
some of the guidelines made applicable by the buyer
Child Labour • Company does not accept child labour

• Their policy is based on the United Nations
Convention on The Rights of the Child
! !143
Safety • Company require from their suppliers that the

workers’ safety should be prioritised and no
hazardous equipment or unsafe buildings are
accepted
• First aid equipment must be available
Workers’ Rights • No bonded workers, prisoners or illegal works are
allowed in the production
• No punishment is allowed
• No discrimination regarding race, gender or religion
is allowed
• Every employee shall get an employment contract
• Minimum wages and maximum working hours
Factory Conditions • Maintain the factory conditions in a most conducive
manner
Housing Conditions • Better living conditions for employees

Environment • Compliance to environmental regulations
• Maintenance of air, water and soil pollution control
mechanism
Monitoring and • Company expects all its suppliers to respect the

Enforcement above Code of Conduct and to actively do their
utmost to achieve company laid standards
8.5 Ethics issues from Supplier and Buyer perspective in

global sourcing
While sourcing from emerging economies has the advantage of lower

operating and labour costs. In the past, sourcing executives would trade-
off such savings with other factors such as lead times, customs,
disruptions, and inventory. However, in recent years, risks of supplier non-
compliance with environmental and labour standards have been heightened
to new levels and this issues are increasingly affecting the global
procurement manager’s decision.
According to a recent SCM World survey of chief supply chain officers and
executives (2012), while supply shortages, logistics disruptions, and
supplier financial failures remained high on the list of supply chain risks,
more than half of the respondents were now concerned with risks of
! !144
supplier responsibility problems. Recent fatal incidents across the globe

including factory fire and building collapse in Bangladesh have prompted
global companies to call for even greater efforts to manage risks associated
with unethical practices on the part of their suppliers. In summary, ethical
and responsible supply sourcing has become increasingly important for
supply chain executives and global sourcing managers. To ensure that the
issues and challenges related to ethical sourcing are mitigated, the global
procurement managers need to take the following actions:
• Investment in better sourcing strategies that would use tighter screening

and scrutiny of potential suppliers, so that the organisation sources from
suppliers that are deemed to be less risky, coupled with contracts that
align incentives of the suppliers to reduce the risk of non-compliance.
• Further on an ongoing basis, adopt direct control and monitoring of the

supplier operations. Direct control and monitoring requires the global
sourcing manager to have visibility of conditions of the supply chain and
to take prompt action when things are found to be out of control.
• Screening should include thorough evaluation of suppliers, and often may

involve having a third party to certify suppliers to be in good standing in
terms of compliance to social and environmental standards. The
organisation may require the supplier to obtain external certification as a
process. The sourcing manager thus can source only from the certified
suppliers.
• The global sourcing manager should also work out inventive process
which aims to induce the suppliers to manage their risks better and act
more responsibly. The sourcing manager should encourage responsible
behaviour, companies can provide suppliers with rewards such as premier
supplier status and investments in supplier development.
• In a counter mode, the sourcing manager should forfeit payments or

reduce business volume to discourage unethical behaviour.
For example, let us assume a short term relationship between a buyer and
supplier. The supplier is located in one of the emerging economies in Asia
and the buyer is at developed market. The emerging economy has
enormous amount of cost pressure and induces the supplier to engage into
cost reduction activities which are unethical. The supplier may tend to cut
! !145
corners in such situation. Similar issues were faced by IKEA, a global

furniture retailer and it cost millions of dollars to the buyer. The option
available for the big retailer is to conduct training, awareness, inspection,
periodic audits and developmental activities at the supplier location.
Ethics Issues from the Buyer Perspective
Supplier often finds one challenge difficult to address is the delayed

payments from the buyer’s end. Especially, in an open account payment
arrangement the suppliers have to finance it totally and the buyer delays
all payments until the production is done and shipped to the buyers
location. It is quite common in practice for buyers to withhold payments,
through adequate retention, to suppliers for potential physical quality
problems.
8.6 Examples of initiatives taken by buyers for ensuring

responsible supplier behaviour in the global sourcing arena
• Increased level of inspection efforts: The supplier responsibility risk

can be mitigated by either increasing public discovery efforts through
inspection and increasing preventive monitoring. Nike and Apple has
greatly increased their supplier inspection programmes. It is reported
that in the year 2012 Apple has increased the suppliers inspection efforts
by 80%.
• Tighter regulatory control: In many of the developed economies,

discovery of unethical activities can result in the supplier being put out of
business. Supplier factories are most likely to comply with global labour
standards when they are located in states that have highly protective
labour regulation and high levels of press freedom which enforces the
higher levels of compliances. On the other side, developing economies
are likely to have more lax regulatory enforcement and the sanction cost
is much smaller compared with that in the developed economies. As a
result, the supplier responsibility risk in the developing economies
becomes much higher from the buyer’s perspective than that in the
developed economies.
• Enhancing supplier education: The buyer can also invest in educating

the supplier to a great extent and expect a responsible behaviour. The
buyer can ensure that the supplier is more aware of the magnitude of
! !146
penalty cost. Many multinational organisations are known to have set up

an academy for suppliers to train and improve their environmental and
social practices.
• Improvement in the supplier production efficiency: Nike helps the

suppliers to better schedule the work and improve quality and efficiency
of the production process. The buyer helped the suppliers to mature their
business processes to lean mechanism thereby substantially reducing the
operations costs, improving visibility across the supply chain and
reducing the non-compliances by the supplier.
• Penalty/incentive mechanism embedded in the contract: Some of

the multinational companies have structure a dual payment mechanism
for promoting supplier responsibility. The first part being fixed payment,
the second part is contingent upon whether the supplier breaches any of
the conduct guidelines for ethical business. Letter of credit is used less
and more number of buyers prefer to have the payment done through
open account to promote supplier responsibility, as in the case of open
account the payments can be delayed to the extent of 100% of the
invoice.
8.7 R o l e o f G l o b a l S o u r c i n g M a n a g e r i n e t h i c a l
procurement
The global sourcing manager has a very wide and important role in
ensuring that the organisation is not exposed to any risk of unethical
practices of suppliers overseas in international procurement. Some of the
important actions points are provided as under:
• The sourcing manager should ensure that system is developed to

facilitate collection and provision to all parties with the information they
need to plan more effectively (e.g., share supplier/vendor audit reports).
• The sourcing manager should also work towards building efficient

communications and formalised, streamlined buying and production
processes.
• The organisation needs to empower the procurement professionals to

select and reward good practice and leadership of suppliers.
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• Establish a robust risk management mechanism to identify and prevent

the buyer organisation from the supplier’s unethical practices.
• The organisation needs to encourage buyers and suppliers to collaborate

with organisations who have expertise in addressing systematic problems
within the supply chain and ensure that the buyer organisations is well
protected from such issues.
• Establish mechanism to identify and address unacceptable practices like

fraud, bribery and modern slavery.
• Identify and explore opportunities to enable the buyer to collaborate,

where possible, with other buyers who are purchasing from the same
supplier.
Some of the important practices which have been adopted by large MNCs
like Adidas, Carrefour, H&M, Inditex, Nike and brands like Tesco are
provided as follows:
• Publically committed to International Labour Organisation (ILO)
• Participation in the industry/multi stakeholder approach in the area of

global sourcing
• Provision of factory/manufacturing training
• Disclosure of the audit results
• Surprise and unannounced audits of the supplier premises and workers’

interviews
• Evaluation of the purchasing practices
• Tackling and addressing more difficult challenges related to labour

standard, living wages, union rights at the supplier region
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8.8 C h e c k l i s t a n d Q u e s t i o n n a i r e f o r p r a c t i c a l
implementation of Global Sourcing process and ensuring
Ethical Procurement
The global sourcing manager needs to carefully evaluate each step and
activity primarily when it is related to international procurement. Some of
the key questions which a sourcing manager should be exploring answers
tat at each and every step in global sourcing is provided as under:
Initial Procurement Planning
• Evaluate known vulnerabilities to modern slavery where migrant workers

are used.
• Are any key contracts coming up for renewal?
• Are lower risk alternatives available?
• Do staff members have specific expertise or knowledge?
• Can external experts be engaged to assist in innovation and
improvements?
Engaging Suppliers
• Are there suppliers which meet the organisation’s desired standards?
• Should the buyer ask suppliers to progress towards these standards?
• What are examples of good practice amongst current or potential

suppliers?
• What issues have suppliers identified?
• What expertise can they bring to a discussion about improvements?
• Which suppliers have the awareness and skills needed to improve?
• Do suppliers understand what the buyer considers to be high priority or

high risk areas?
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Supplier Market Assessment
• Does the labour earn a living wage or are they trapped in cycles of debt?
• Are they able to influence their terms of employment?
• Have they paid a fee or bribe to get that job?
• Have they borrowed money for travel and recruitment fees?
• How does this impact on the risk of forced labour?
• Are laws updated and enforced?
• Are there relevant national or sectoral initiatives to improve worksites?
• What standards or codes of conduct are currently in use in the supplier
market?
Pre-qualifying the Suppliers
• During the pre-qualification of suppliers stage, following questions may

be enquired:
• How is the supplier’s attitude?
• What standards a supplier is working to?
• What is the current situation, if the supplier submits previously

completed audit reports?
• Whether the supplier will be willing to meet the buyer’s ethical and
sustainability standards?
• Is there any evidence of leadership by the supplier to improve workplace

conditions, the local environment or address community needs?
• Does workers’ pay equal or exceed the income needed to meet their
living costs?
• What are the labour hire practices of the supplier?
• Are there recruitment intermediaries engaged by the suppliers?
• Does the supplier employ migrant workers?
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• What is the legal status of such workers, if at all such migrant workers
are engaged?
• Do the workers have effective protections?
• Has the supplier company ever detected bribery or corruption and what
was the response?
• Does the supplier has any fraud control measures are in place?
8.9 Evaluating procurement Ethics and Compliance levels
• Some of the key metrics used for evaluation of procurement practices on

the ethics and compliance levels can be as follows:
• % of business through suppliers who demonstrate commitment and

action to improve working conditions
• % of suppliers who have acknowledged issues and made improvements

in the manufacturing process and operations
• % of suppliers making no progress who have been delisted
• Number of deviations from the desired path
• Number of late changes in the orders
• Number of contracts with ethical criteria for supplier selection and

evaluation
• Staff turnover at production sites
• Good human resource management systems
• Good labour standards audit results
• Sharing good practice with other suppliers.
• Quality of business relationship between brand/retailer and supplier,

gauged by 360-degree feedback
! !151
1. Visit website of large multinational companies and review the code of

conduct and standard for ethical purchasing. Understand important
aspects and its linkage with the procurement process.
…………………………………………………………………………………………………………………………
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8.11 Summary
Ethics in global sourcing is not just a buzz word but over a period of time
has become a living reality for several organisations worldwide.
Considering the Global Sourcing Function routes the highest amount of
spend of the organisation for various purposes, ensuring that the money
spent is for approved purpose and the process is carried out in ethical
manner is of paramount importance. Organisation globally formulate code
of conducts and framework for compliance with the ethics. Regulations like
anti-bribery have a far-reaching impact on the way organisation engages in
procurement activity. Both buyers and the suppliers need to take adequate
initiatives to ensure compliance with the highest standards of ethics.
Additionally, the buyer organisation may consider setting up an appropriate
system for periodic measurement of the compliance with the ethics
guidelines by all the parties involved in a sourcing transaction. In addition
to ethics, the buyers and suppliers also need to pay attention to social and
environmental responsibilities.
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1. Highlight and explain the role and important of ethics in global sourcing.
2. Write a short note on the following:
a. Green Purchasing
b. Sustainability in Global Sourcing
c. Buyer and Supplier Initiatives to Ensure Compliance with Ethics in
Purchasing
3. Explain the role of global sourcing manager in ethical purchasing.
1. Which of the following is least likely to be an appropriate step for raising

the ethics compliance levels of the suppliers?
a. Pay higher price for products to be purchased

b. Proper contracting procedures
c. Periodic training and awareness to the suppliers
d. Audit of the transactions with suppliers
2. Which of the following is least likely to be component of code of conduct

for ensuring ethical purchasing?
a. Compliance with the national regulations

b. Transparency and disclosure in dealings
c. Acceptance of child labour for manufacturing
d. Ensuring compliance with the environmental regulations
Answers:
1. (a), 2. (c).
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REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !154
ROLE OF INFORMATION TECHNOLOGY IN GLOBAL SOURCING
Chapter 9
Role of Information Technology in Global
Sourcing
Objectives
• Gain an understanding of evolving role of information systems in global

sourcing
• Understand the key drivers of e-procurement for buyer organisation

• Understanding the process of measuring the effectiveness of E-
procurement
• Gain understanding of e-procurement success stories and case studies

• Gain understanding of various methods and avenues for global sourcing
through the information technology enabled environment
• Understand various types of auctions

• Understand various tools in purchasing through e-marketplace
• Understand the issues and challenges involved in procurement through
e-purchasing or e-market based models
• Understand the services offered by global sourcing e-portals
Structure:
9.1 Evolving Role of Information Systems in Global Sourcing – Emphasis

on e-Procurement
9.2 Key Drivers of e-Procurement for Buyer Organisation
9.3 Measuring the Effectiveness of e-Procurement Process
9.4 e-Procurement Success Stories and Case Studies
9.5 Methods and Avenues for Global Sourcing through the Information
Technology Enabled Environment
9.6 Types of Auctions
9.7 Emergence of e-Markets
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9.8 Tools in Purchasing through e-Marketplace

9.9 Issues and Challenges in e-Purchasing or e-Market Based
Procurement Models
9.10 Service Offerings by Global Sourcing Portals
9.12 Summary
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9.1 Evolving role of Information Systems in global

sourcing – Emphasis on E-Procurement
Information Technology has a far reaching in the arena of global sourcing

and procurement. The regular transactional activities involved in the
sourcing process can be performed with higher efficiency and better
precision. Information Technology has a shrinking effect of the globe and
improves access to the information. This goes long way to reduce the
transaction costs, make the one-stop shopping possible, reduction in the
transaction costs, promoting the paperless transaction. Technology brings
in multiple buyer and sells together. Following are some of the additional
benefits that the purchasing and selling organisations can derive from use
of information technology in global sourcing:
• Reduction in the number of traditional middlemen across the globe

• Lower inventory and shorter inventory cycles throughout the supply
chain
• Tighter relationships between seller and buyer in varied business

transactions
• Power shifts from producer and retailers to the customer in an IT enabled

purchasing environment
• Lower prices and greater variety for consumers across products and
services
• Greater responsiveness to the customer needs from the supplier’s end
9.2 Key drivers of E-Procurement for Buyer organisation
Several factors have exerted pressure on the buyer organisation to solicit

for e-Procurement as a viable option in the process of global sourcing.
Some of the important drivers are:
• Increasing cost pressures and management expectation to reduce the

cost of procurement.
• Compliance related issues like reducing or preventing leakage of

information, a better spend visibility as per the organisations policies,
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prevention of corruption/anti-bribery related law have forced the

management to built-up a very transparent process while sourcing
material and services. e-Procurement has a great potential to facilitate a
transparent process.
• Need for end-to-end procurement management process. e-Procurement

service providers in the market provide IT enabled tool for managing the
procurement from requisitioning stage to supplier development and
evaluation initiatives. The integrated approach reduces cost, cycle time
and make the procurement process more efficient.
• Exponential expansion of supplier hub, network has led to emergence of

e-Procurement as a feasible way to tap the network.
• Evolving pricing models are also driving the businesses to reorient their
procurement processes. e-Procurement enables the businesses to adopt
the new pricing models, e.g., on-demand pricing.
9.3 Measuring the effectiveness of E-Procurement Process
• Organisations should ensure that adequate measurement systems are

implemented to measure the effectiveness of the e-Procurement process.
Some of the important measures can be as follows:
• Percentage of spend managed by the e-Procurement system compared to

the aggregate spend of the organisation
• Breadth and scope of automation deployment in the organisation
• Reductions in transaction costs and other costs translated into rupee/

dollar terms
• Process cycle turnaround time reduced and cost efficiencies gained

through implementation of e-Procurement
• Enhancements in compliance, budgeting and risk mitigation
• Alignment and integration of the e-Procurement initiative with broader

supply chain management and business operations of the company
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9.4 E-procurement Success Stories and Case Studies
GlaxoSmithKline (GSK) is a research-based pharmaceutical company with

100,000 employees worldwide. The company operates 80 manufacturing
sites in 37 countries and 24 research and development centres globally.
Annual revenues total $37.2 billion, and annual corporate spend exceeds
$13 billion. Research scientists spend millions each year on lab supplies.
Prior to implementing e-Procurement, GSK scientists relied on paper
catalogue and phone communication to order the supplies they needed.
Not only did these processes waste valuable time scientists could otherwise
devote to research, the archaic buying process created situations in which
GSK was not getting the benefit of negotiated deals with suppliers. GSK
needed a way to make the most of their global sourcing group
management process.
A cross-functional team was formed consisting of representatives from

procurement, finance, research and development, and information
technology to review available tools and recommended a solution. GSK
realised that gaining significant cost savings from an e-Procurement tool
required the delivery of accurate and up-to-date content to end-users. The
GSK team evaluated a number of e-Procurement tools that would provide a
large amount of lab supply content to researchers.
GSK implemented its e-procurement solution as a pilot in 2001. Time from

pilot stage to implementation was about eight months. The application was
rolled out to US and UK business units in 2002 and 2003. The e-
Procurement system, called “eSP,” includes requisition creation, approval,
distribution and receipt-creation functionality. More than 3,500 buyers use
the system each month. Currently, GSK has about 200 U.S. suppliers
enabled on the company’s US and UK e-Procurement platform. Of that,
160 suppliers are enabled through the Spend Director solution. The GSK
site in Italy is currently piloting the Spend Director application and has
enabled 30 suppliers through the tool. The Spend Director solution is
externally hosted by SciQuest, and the SciQuest tool is integrated with
Ariba Buyer. For other category areas, GSK uses a mix of supplier
enablement and content management approaches, including punch-out,
aggregated solutions, and internally managed content.
Today, the e-procurement system manages about 50% of GSK’s indirect

spend. Spend categories covered by the e-Procurement application include
! !159
lab supplies and equipment; office supplies; maintenance, repair, and

operating (MRO) supplies; computer hardware and software; print
purchasing; facilities services; marketing research; capital goods and
construction services; and training and instruction services.
The Results Achieved by GSK
Contract compliance has improved more than 20% overall. Just as

importantly, the higher compliance rate has been sustained. In addition,
implementing supplier content directly through SciQuest allowed GSK to
halt the practice of using a wholesaler, saving more than $500,000 a year.
The e-procurement system has also streamlined GSK’s procurement
process, allowing the company to capture more detailed spend information,
enhancing spend analysis. Manual purchase orders have been eliminated,
allowing GSK to reduce headcount or reassign resources.
Objectives of the Organisations to Engage in Information

Technology Based Purchasing Organisation
Organisation deploy the information technology in the Purchasing to Pay

process (commonly referred as P2P process) to meet the following
objectives:
• Have their purchasing cycle and activities organised and controls

enhances drop manual communication, all redundant work, and their
inevitable errors
• Achieve effectiveness of company guidelines on all purchases

• Identification of purchasing bottlenecks
• Obtain a comprehensive database of suppliers, and suitable tools to
evaluate them on standardised parameters
• Increase the purchasing visibility for managers

• Enhance the collaboration between purchasing and other/user function
departments
• Standardise the documentation
• Reduction in the total purchasing costs
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• Significant reduction in the transaction costs

• Improvement of procurement process efficiency
• Increased level of contract compliance
e-Procurement can shift transaction processing to the end users who

actually use the purchased goods or services, freeing up supply
management personnel for strategic value-creation work.
9.5 Methods and Avenues for global sourcing through the

Information Technology enabled environment
Emergence of internet has led to new avenues of procurement which

includes internet buying, e-Commerce, development of B2B hubs, company
websites, e-Procurement systems, web services, etc. Let us evaluate each
of the avenues.
B2B Hubs
One of the emerging electronic methods for selling/purchasing goods and

services among firms is B2B (Business-to-business) e-Hub. These hubs,
just like network hubs, work as third party intermediaries that enable
electronic exhibition, search, data interchange and transaction activities
such as negotiation and signing contracts.
Users of e-Hubs can take advantage of single-point purchase, as well as

enhanced product search based on the desired criteria and broader range
of options. The purchasing processes handled by this method also result in
higher marketplace liquidity and quality of purchasing services with lower
total transaction costs. The procurement can be administered as a Private
Marketplace or Public marketplace. The key differences between Private
and Public Marketplace are as follows:
Component Private Marketplace Public Marketplace
Owner A single buyer Independent owner or a group of

companies from the same
industry
! !161
Objectives • Share proprietary data • Buying and selling

including product design, commodities by focusing on
demand forecast and price
production plans • Finding new suppliers
• Allow for logistics and • Buying and selling excess
supply chain collaboration inventory and capacity
Participants • Selected group of • Open market

suppliers
Buyer cost • Building and maintaining • Subscription fee

the site/internet • Licensing fee
• Transaction fee
Supplier cost • No Fee • Transaction fee
• Subscription fee
Main issues • Initial investments • Recent collapse of many
and challenges • Data normalisation and marketplaces
Uploading • Objections by referred
suppliers because of price
focus
• Sharing of proprietary
information
• Data normalisation and
uploading
9.6 Types of Auctions
Various types of auction as dealt with are:
• Standard Auction
• Reverse Auctions
• Multi-dimensional Auctions
• Closed Auction
Standard Auctions
• Auctions are a market mechanism where the buyer and seller agree upon
the item and the purchase price.
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• Auction can be seen as a one-time transaction since the bidding process

can select difference winner each time.
• There are several types of auctions but the most common are the
progressive or standard auctions where the bids are freely placed and the
auction stops when there is no purchaser that wants to place a higher
bid.
Reverse Auctions
• In reverse auctions, it is the purchaser that sells a contract of a

predefined item.
• The objective in reverse auctions is to place the lowest bid in order to get
the contract.
• One of the conditions of the reverse auctions is that the seller is

unknown for the buyer until the bidding is over.
• This makes it important that the description needed to describe the item
is low in order to decrease the risk of the process, e.g., that a supplier
get the bid but is not capable to supply the specific item.
Multi-dimensional Auction
• Multi-dimensional auction is relatively more complex type of auction.
• Several aspects are considered in the bidding, e.g., the price and the
quantity could be used in a two-dimensional auction.
• Other dimension such as the price and delivery could be used in order to
secure demand in peak seasons.
• Multi-dimensional auctions might be good to use in order to match the

buyers’ need with the sellers’ availability and capacity to produce.
Closed Auction
• In a closed auction, the transaction is prepared in the way that the

suppliers are pre-qualified.
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• Since the closed auction requires that the transaction is prepared with
detailed descriptions and to write a contract the auctioneer have to be
more active than in a standard auction.
• Closed auctions are typically carried out for the purpose of reversed
auctions, and it is also suitable for more complex items due to the
preparation of the auction.
Issues and Challenges with Auctions
Some of the key challenges and problems with auctions in a global

purchasing environment are as follows:
• Often views as one time transaction by the suppliers participating in the

auction
• There is a risk of sub-optimal relationship between the buyer and the

seller as the benefits of auction are mostly inclined to the buyer side
• Buyer in standard auctions and the supplier in the reverse auctions may
get stressed when they have to place a bid as the time is a constraint
• Most of the auctions are suitable for items or services of a commodity

nature. Auctions tend to be complex exercise in case of highly technical
requirements and needs of very specialised nature
9.7 Emergence of E-Markets
Globalisation and developments in the technology space has led to

emergence of an electronic marketplace. There are many great features
and advantages of the availability of an e-Marketplace. Some of those are
mentioned below:
• Electronic purchasing assistance is an e-Market mechanism that helps

the company to find the best supplier with the lowest price points. It
helps the buyer organisation to discover the price more efficiently.
• The e-Marketplaces uses a set of software that, e.g., use different set-
ups of matrices in order to detect items that are overpriced or have a
better alternative.
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• The e-Marketplace assistances includes electronic catalogues,

recommendations agents and price search engines available on the
internet
• One of the issue with the e-Marketplace is that the use of internet mode
could be time consuming since the buyer has to compare his decision
with the decision aid and evaluate the outcome.
• Sourcing through e-Marketplace also requires that high level of detail and
standardisation in order to provide a desired result.
• E-Markets also have led to emergence of platforms like Flipkart,

Snapdeal, IndiaTrade, etc. Such platforms perform an activity of
electronic agents. Electronic agents perform business with all possible
suppliers and buyers and the transaction occurs as one time.
• Analysis of purchasing data and activities can be performed through use

of e-Commerce. The analysis reveals cost bill amount and purchase price
variances. Such analysis if useful for optimising the procurement
decision.
9.8 Tools in purchasing through e-marketplace
• Lead time analysis: It provides an assistance to group of purchasing

and production managers reduce total product lead times by pointing out
the most influential steps of purchasing and production on lead time. For
example, consolidation of the purchase orders provide effective tool to
supply chain managers to plan its purchasing and production activity
• Vendor related tools: Such tools provide purchasing Managers an

ability to track quality and delivery related to each member of the
supplier base and evaluates terms of their services.
• Advanced analysis: Large amount of available data for analysis in the

e-marketplace. The organisation should develop its own set of key
indicators for performing a meaningful analysis of the data.
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9.9 Issues and Challenges in e-purchasing or e-market

based procurement models
• High level of dependence of Information Systems: The organisation

may find itself highly dependent on the generation of requisitions,
quantity to be purchased through system based purchasing alerts. While
the IT based purchasing could be very useful from regular products/
materials, often for purchase of high value products or capital goods,
application of global purchasing manager’s judgement is very crucial.
• Issues by related to lead times and lot size: At times, issues are
faced on account of inflated lead times or impracticable lot size provided
by the information systems.
• Privacy and confidentiality risks: As the Information Systems

contains the information about the budgets, quantities required, current
suppliers, terms and conditions, pricing history. The quantum of
information is compromised turns out to be a great risk for an
organisation.
Exxon Mobil Case Study – Procurement to Pay Operations (P2P)
Exxon Mobil has one of the largest procurement organisation comprising of

more than 2600 professionals across 37 countries. The group oversees
global procurement, materials supply chain management, and accounts
payable, managing US$55 billion in annual spend and US$528 billion in
disbursements. The organisation implemented Ariba software tool for
procurement to pay operations. The organisation has the following
objectives before the implementation of the software:
• Eliminate carbon-paper forms for generating purchase orders (PO)
• Increase global supplier connectivity for full Purchase Orders and invoice
collaboration
• Simplify the generation and tracking of orders throughout the process

across the globe
• Provide visibility into the workflow for accounts payable across multiple
systems on a global basis
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• Accelerate invoice processing to receive any early payment discounts so

that the cost of purchase is reduced
The benefits accrued to the organisation on implementation of the Ariba

Software tool are as follows:
• Lower order management and invoice processing costs

• Faster procure-to-pay cycle and improved visibility across the process
• Fewer invoice errors and exceptions
• Increase in the capture rate for early payment discounts
Statistics on the Benefits
• 3.2 million electronic invoices processed annually

• 1,400 suppliers on the Ariba Network in the United States
• 98% of invoices processed through the Ariba Network that automatically
post for payment
9.10 Service offerings by Global Sourcing Portals
Number of software and information technology companies have launched

global sourcing portals. Some of the important functionalities which could
be of immense use to global sourcing managers are as follows:
• Supplier relationship management enabled: The portals are capable

of providing easy access to wide range of data/information at one place
which may include supplier specific information, categories and items
supplied, requests, quotes, enquiries, e-mail integration, ERP integration
inter alia.
• Supplier registration and products items management: The portals

allow the supplier to auto register and upload the products/items/
services offered.
• Planning on Tender: The portal is capable of sending the service

requests to identified suppliers for participation in the tender ad
submission of the quotes/proposal.
• Supplies quotes: The portal also has capability to arrange all the
supplier quotes and perform comparison.
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• Customs Duty Management: The portals facilitating the global

sourcing is generally integrated with the customs duty rates, customs
gateways of various countries. This enables the global sourcing manager
to quickly compute the duties and enable timely payment with
completion of the necessary formalities.
• Tracking and Tracing of Shipments: The procurement portals are

capable of providing information related to each order as the portal is
integrated with the systems of various logistics service providers.
• Business Intelligence and Analytics: With high value and volume of

data available at the portal, the global sourcing manager can perform
business analytics and come out with meaningful strategies to add value
to the procurement function and the overall business.
1. Browse through various e-Procurement portals, e.g., Trade India, B2B

Marketplace, Business Bazaar and Ariba Sourcing and identify the
features and services offered by the e-Portals.
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9.12 Summary
Like any other business function, Technology has also contributed to

significant level of evolution of Global Sourcing Functions. The interaction
with suppliers, access to newer markets has phenomenally increased with
emergence of e-Procurement models and tools at the disposal of the global
sourcing Manager. The e-Procurement also generate large volume of data
which can be analysed by the Global sourcing manager and use the
insights to build competitive advantage for the organisation. There are
number of challenges the organisation may face while implementing the e-
Procurement models. Some of the facilities offered by the e-Procurement
portals include supplier discovery, supplier registration, planning of tender,
management of duties and taxes, facilitating auctions, and tracking and
tracing of shipments among other things.
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1. Explain the role and importance of technology enabled supply chains in

global sourcing.
2. What are the key drivers for e-Procurement in a buyer organisation?
3. Write a short note of indicators for measurement of effectiveness of e-

Procurement process.
4. What are the key objectives of implementation of e-Procurement

process in an organisation?
5. What are the various methods and avenues available to organisations

globally for sourcing through information technology enabled
procurement process?
6. Explain various types of auctions.
7. What are various issues and challenges with auctions in an e-

Procurement model?
8. Highlight and explain the benefits of various service offered by e-

Sourcing portal to the buyer organisation.
! !169
1. Which of the following is not a type of auction?
a. Standard Auction
b. Special Auction
c. Reverse Auction
d. Closed Auction
2. Which of the following is not likely to be an important issue or challenge

of sourcing through e-Procurement model?
a. Access to large number of suppliers

b. High level of dependence on information system
c. Non-standard lot size
d. Increased lead time
Answers:
1. (b), 2. (a).
! !170
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !171
RISK MANAGEMENT IN GLOBAL SUPPLY CHAIN MANAGEMENT AND SOURCING
Chapter 10
Risk Management in Global Supply Chain
Management and Sourcing
Objectives
• Understand the various risks involved in global sourcing

• Gain an understanding of role of insurance in global sourcing
• Understand in detail the importance, coverage and benefit of Marine
Insurance
• Understand the probable reasons for damage to cargo
• Understand the role and responsibilities of Global Sourcing Manager in
Insurance
• Gain an overview of key international regulations
Structure:
10.1 Risks Involved and Importance of Risk Management in Global

Sourcing
10.2 Role of Insurance in Global Sourcing
10.3 Marine Insurance
10.4 Probable Reasons for Damage to the Cargo
10.5 Responsibility of the Cargo Owner in Marine Insurance
10.6 International Regulations Covering the Global Sourcing and
International Supply Chain
10.8 Summary
! !172
10.1 Risks involved and importance of Risk Management in

Global Sourcing
Risk Management in the global supply chain is an essential component of

the activities. The risk emanates across all activities of the supply chain.
Some of the emerging issues related to the supply chain are as follows:
• Leaner supply chains: Over a period of time, organisations have

invested significant resources in making the supply chains leaner. While
leaner supply chain reduces the costs across the supply chain, it also
results into number of issues in case of emergency. For example, some of
the past events such as strike at the dock of California, typhoon in
Taiwan, tsunami in Asia, hurricane in New Orleans, and oil explosion have
impacted to maximum extent the leaner supply chains. At times, too
much of leanness and meanness can severely hurt companies in the time
of severe distress.
• Security risks: Low cost global sourcing destination is also subject to

political uncertainty or even internal political turmoil. This can lead to
huge risk in the event of global sourcing. That risk needs to be assessed
in terms of whether your offshore/ overseas supplier will be able to
provide the products successfully with minimal environmental risks. For
example, ABC Limited decided to set up a Thermal power plant on the
basis of availability of coal through imports from Indonesia. The project
viability was based on agreed price with the Indonesian supplier. Going
one step further, the buyer company also acquired stake in the vendor.
However, a prices of coal started moving upwards across the globe,
Indonesia decided to restrict the export of coal from their country.
Further, the exports became very costly on account of high export duties.
This posed a great risk to the power project and the project work has to
be shelved off. The project became completely unviable considering the
increase in the coal prices in the international market. To survive, the
buyer company made number of technological changes to the power
plant and made it capable to process coal available domestically.
• Hidden costs: The differences in culture, time zone, and other

regulatory issues, it is possible that the there are some hidden costs in
the area of global sourcing. Some of the hidden costs applicable for the
global sourcing are as follows:
! !173
๏ Loss/damage or loss of control of cargo during the transportation

and logistics activity
๏ Excessive custom duties and those are subject to change as per the
country’s regulations
๏ Warehousing risks, cargo theft, contamination
๏ Risk of currency fluctuation eating up all the savings generated
through global sourcing models
๏ Re g u l a t o r y c o m p l i a n c e m a n a g e m e n t / s t a n d a r d s m ay g e t
compromised
๏ Costs related to correction of quality defects

๏ Increased levels of inventory and working capital requirements
๏ Additional costs related to vendor performance monitoring
๏ Cost of compliance with extra-territorial standards
๏ Stock outs – affecting the lean supply chains
๏ Information systems related risks
• Quality risks: Certain low cost countries may not pay adequate
attention to the quality standards. This can result into damage to the
company’s brand and high reputational damage.
• Compromise on the intellectual property: The buyer owned or

proprietary knowledge of design, process, engineering, may get leaked
and exposed to sharing to outsourced partner. In the event of adverse
business situation, it can result into significant loss of competitive
advantage for the buyer company.
• Risks related to compromise on business ethics: Some of the

geographies in the emerging markets rated very high on corruption index
and unethical business practices. Dealing with vendors in such
geographies can significantly pose the business to number of allied risks.
! !174
10.2 Role of Insurance in Global Sourcing
Securing the stock in transit across the supply chain is prime objective in
risk management. Global sourcing manager should be aware of various
policies available at its disposable. The various insurances available are
packaged into a programme termed as Marine Insurance. While the term
used is Marine Insurance, it also cover cargo in other modes of
transportation, i.e., air, surface, storage etc.
10.3 Marine Insurance
Origin of Marine Insurance
• World Trade started with discovery of land by traders.

• Trader used to carry cargo along with them in large ships/vessels.
• There was a need to protect the cargo against losses on account of
various risks.
• On the basis of law of large numbers, the Marine Insurance started with
contribution from participants.
• The participants where mariners/traders/financiers to the trade.

• Friendly guilds/association started offering insurances.
• England pioneered the concept of Maritime Insurance and Llyod’s was
formed.
• Oldest type of Insurance.

• Also called as Marine, Aviation and Transit, commonly known as MAT.
Types of Marine Insurance
• Import Transit
• Export Transit
• Inland Transit
• Marine Hull
While the word used in Marine, it covers Cargo Transported and Store from
anywhere to anywhere including Air, Railway, Surface Transport and
Warehousing Storage
! !175
Coverage in Marine Insurance
One of the major risks that international traders (Exporters and Importers)
face is the risk of damage or loss during the transportation process.
‘Marine Insurance’ is, thus, the term used to describe the Insurance taken
out to cover the risks involved in all forms of transportation, for example,
sea, road, rail and air, from the point where the goods are loaded onto
their first form of transport until they arrive at their final destination.
• Physical Damage Coverage
➡ Guards Motor, Boat and Equipment

➡ Risks covered include Fire, Theft, Vandalism
➡ The value of policy can be Actual Value or Agreed Value
• Liability Coverage
➡ Insured or passenger causes injury to another passenger’s property

➡ Vessel accidently collides with another vessel or dock area
➡ Coverage protects passengers and property
➡ Liability caused to other property is covered under this Insurance
• Medical Coverage
➡ In event of boat accident, provides medical coverage to the Insured

Personnel and the Guests
➡ Protection against hospital bills of high value
• Extensive Coverage
➡ Damage to Ship
➡ Cargo
➡ Damage to Terminals
➡ Interim movement of cargo between two modes of transportation
Important Features of Marine Insurance Policy
• Standard terminology used across the Globe
• Liability of underwriters in Several and NOT Joint…
! !176
• If one underwriter of the policy defaults, other underwriters/Insurers are

not liable to pay his portion of claim
• Marine Insurance – Split into two parts
➡ Marine Hull and Machinery

➡ Marine Cargo
• Coverage can be on Total Loss Basis – which means Insurance claim is

payable only on Total Loss. No insurance claim is payable in case of
partial loss, e.g., similar to Death Policy without any accidental loss with
respect to an individual
• Cover can be on the basis of
➡ Time – Cover a period, generally one year

➡ Voyage – from Port A to Port B
Protection and Indemnity (P&I)
• Marine policy covers only 1/3rd of the actual liabilities
• To cover the rest Ship-owners started a club popularly known and P&I
Club
• Some of the risks which P&I Club covers include Nuclear, Oil Pollution,
etc.
• Club collect “Calls” – similar to premiums and build up sufficient

reserves. The fund is used to obtain reinsurance
Concept of Actual Total Loss and Constructive Total Loss
• Actual Loss – Where the vessel and cargo is totally lost
• Constructive Loss – The vessel and cargo are in such a damaged

conditions, that reconstructing is not economical. The same needs to be
written off
! !177
Average Clause – First Type Particular Average
• In case of storm, ship has to be protected/repaired
• Certain cargo is to be jettisoned – thrown away from ship
• Cargo owners whose cargo is safeguarded/protected need to compensate

the cargo owners whose cargo is jettisoned
• Particular average is, thus, applicable
Average Clause – Second Type – Under-Insurance
Applicable when the insured has taken less coverage than the actual value
of the vessel/ cargo, e.g.,
• If the insured has taken insurance of only ` 75 crores against the actual
value of ` 100 crores of the property, this is a case of Under Insurance.
• In the event of loss say of ` 80 crores, the insurance company will be

paying only 75% of the loss, i.e., ` 60 crores and NOT total ` 80 crores.
Average Adjuster
• For the claims where Average Clause is applied, an expert is involved.

• The expert is called as Average Adjuster.
• A specialist responsible for adjusting and providing general average
statement.
• Appointed by Ship-owner or the Insurer.
Excess
• Excess is the amount payable by the INSURED in the event of loss.
• Excess is used to discourage Moral Hazard or remove small claims.
• In normal parlance, Excess means Deductible, i.e., the portion/

percentage of loss the Insured has accepted to bear.
• It is also called as Retention.
! !178
Tonners and Chinamen
• Tonner is a policy setting out the global tonnage loss for a year.
• If this loss is reached or exceeded, the policy is paid out.
• Chinamen is a policy which is exactly reverse. If the limit of loss of

tonnage is not reached, then the policy is paid out.
• These are the early forms of reinsurance and both are technically
unlawful.
Cargo Insurance
• Insurance is offered under Institute Clause on various A, B and C basis.

• A category is of widest coverage.
• C is the most restricted.
• A valuable cargo is called as specie.
Warranties and Conditions
Normal Understanding
• Condition – If condition is breached, the whole contract ends.

• Warranty – Breach of warranty will not result into breach of entire
contract.
Under insurance law, the meaning of above terms is reversed.
• Implied warranties exists – e.g., the vessel is seaworthy and fit for
sailing.
Salvage
• Means practice of rendering assistance/aid to a vessel under distress

• Sailors honour bound to render assistance where required
• Policy has “Sue and Labour” clause which covers reasonable costs
incurred by the ship-owner in avoiding great loss
! !179
10.4 Probable Reasons for Damage to the Cargo
Following are some of the reasons tabulated which the global sourcing
manager should be aware of while seeking appropriate insurance. Some of
the losses are also responsibility of the shipper or the logistics partner.
• Lack of export packaging • Wrongly declared cargo

• Increased use of weak retail • Temperature notations misleading/
packaging unachievable
• Inadequate ventilation • Lack of reefer points
• Wrong choice of container • Organised crime

• Poor condition of container • Heavy containers stowed on light
• Lack of effective container • Stack weights exceeded
interchange inspection
• Ineffective sealing arrangements • Heat sensitive cargoes stowed on/
adjacent to heated bunker tanks or in
direct sunlight
• Lack of clear carriage instructions • Fragile cargoes stowed in areas of
high motion
• Ineffective internal cleaning • Damaged, worn, mixed securing
equipment
• Contaminated floors (taint) • Poor monitoring of temperatures
• Wrong temperature settings • Wrong use of temperature controls
• Condensation
• Overloading
• Poor distribution of cargo weight
• Wrong air flow settings
Important Aspects to Remember in Marine Insurance – Global

Sourcing Manager’s Perspective
• Declare Second Hand Goods – Utmost good faith
! !180
• Placing the goods in a warehouse for storage other than during the
normal course of transportation will terminate the cover
• Unless the assured notifies the insurance company of the additional

storage requirements and he would have to pay an additional premium
for such extended cover
• Policies automatically terminate
➡ When the cargo has been received at the place of delivery (the
warehouse)
➡ Sixty days after the completion of discharging the goods from a

vessel
➡ Thirty days after the completion of discharging the goods from an

aircraft
• Marine Insurance cover is available in three options these are:
➡ Institute Cargo Clauses (A): These clauses provide cover against

the most comprehensive set of risks and to equate with what was
formerly known as the “all risks” clauses.
➡ Institute Cargo Clauses (B): These are restricted so that they

cover losses or damage arising from certain nominated risks only.
➡ Institute Cargo Clauses (C): These are substantially restricted

both in relation to the risks covered and the nature of the events
from which those risks arise.
• General Average: General average losses are losses, damage and

expenses, which occur as a result of voluntary action taken by the ship's
master/captain in a time of genuine peril when the entire voyage is in
danger. Ensure that this is always covered in the Insurance Policy.
! !181
10.5 Responsibility of the Cargo Owner in Marine

Insurance
• Responsibility to mitigate the extent of damage, taking all reasonable

measures to minimise and prevent further loss or damage where
possible.
• Various modes of transportation carry strict limitations on the time in
which you must notify the carrier of loss or damage. Failure to report on
time may lead to loss of claim.
• Know the deductibles, exclusions and other important clauses.

• On cargo arrival at the destination:
➡ Count, weigh, tally, and examine the cargo before you sign for it
➡ On sealed shipments, examine and record the seal number. Retain

the seal in all cases (where possible)
➡ Under no circumstances should you sign a clean delivery receipt for

damaged or short shipments
➡ If the carrier refuses to deliver the goods unless a clean receipt is

issued, immediately file a written protest with the head office or local
office of the carrier
➡ Contact all carriers and parties who handled the shipment, advising
them of the loss or damage and invite their inspection
➡ Keep copies of all correspondence with the carriers and all other
parties
• DO NOT:
➡ Do not sign a clean delivery receipt for damaged or short shipments

➡ Do not destroy or dispose of damaged property or packing material
until survey has been completed
➡ Do not accept offers of settlement from carriers without insurers’

approval
! !182
10.6 International Regulations covering the Global

Sourcing and International Supply Chain
• US Shipping Act – 1984

• US Federal Maritime Commission
• IATA – Air Freight
• Harmonised System (HS) – International Product Nomenclature system
adopted by 190 countries
• WTO Agreement on Methods for Determining Customs valuation – for

assessment of duty
• Revised Kyoto Convention – Simplification and harmonisation of methods

and procedures of national customs authorities
• The Arusha Declaration on Customs Integrity, revised in 2003, is the

reference point for addressing issues of corruption in customs
administrations
• The WCO Framework of Standards to Secure and Facilitate Global Trade

(SAFE) Program contains 17 standards that promote the security and
facilitation of the international supply chain
➡ Electronic manifest information

➡ Common risk management methods and approach
➡ Inspection of high risk cargo at the origin
➡ Trade facilitation
• Uniform Customs and Practice for Documentary Credits

• FONASBA – Federation of National Associations of Ship Brokers and
Agents – Body regulating the profession of Ship Brokers and Shipping
Agents in the global supply chain
• Trade Agreements
• Trade agreements are of the preferential and free trade types are
concluded in order to reduce (or eliminate) tariffs, quotas and other
trade restrictions on items traded between the signatories
• Agreements can be Bilateral or Multilateral
! !183
• Most Favoured Nations (MFN)

• Green Channel Facility – Major importers are being given Green Channel
Facility by various countries for speedy clearance of cargo. There is no
physical inspection of the goods
• WCO – World Customs Organisation (WCO) – Intergovernmental
organisation comprising of 174 member states and deals with 98% of
international trade
1. Download an Annual Report of any publicly listed company and review

through the Risk Management Section. Identify the important supply
chain risks.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
2. Review a Marine Insurance Policy of any organisation engaged in Import

and Export business and identify the key features, coverage and
exclusions.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
10.8 Summary
Global Supply Chain is increasingly becoming susceptible to number of

business risks which include physical, financial and operational risks. The
risks have emerged because of number of causes some of which are leaner
supply chains, security incidents, exposure to piracy, exposure to various
hidden costs and quality issues with the suppliers. Insurance has a very
important role to play in the global sourcing. The critical policy is Marine
Insurance, which is very crucial to manage the logistics risks. Global
Sourcing Manager should be aware of all the important aspects of various
insurance programmes to provide a financial protection to the global
sourcing model and the supply chain. The Global Sourcing Manager is also
expected to be aware of various International regulations involved in the
global sourcing process.
! !184
1. Highlight and explain the important factors leading to various risks in

the global sourcing models.
2. Explain the role of insurance in securing the global supply chain.
3. Write a short note on Marine Insurance.
4. Provide an overview of key regulations governing the International

Sourcing and supply chain.
1. Which of the following is least likely to be an important risks to the

global supply chain?
a. Cargo damage
b. Supplier financial bankruptcy
c. Adequate discounts over the price
d. Cargo theft
2. Which of the following is not the type of Marine Insurance?
a. Import Transit
b. Export Transit
c. Inland Transit
d. Outland Transit
Answers:
1. (c), 2.(d).
! !185
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture
! !186
QUALITY MANAGEMENT IN GLOBAL PROCUREMENT
Chapter 11
Quality Management in Global Procurement
Objectives
• Understand the role and importance of quality management standards in

global procurement
• Gain an understanding as to how the supplier should meet the buyer
expectations with respect to quality
• Understand the ISO standards
• Understand the benefits of ISO Implementation
• Understand the importance of quality management in contract
manufacturing
Structure:
11.1 Importance of Quality Standards

11.2 Meeting Quality Expectations of Buyer – Key Steps
11.3 ISO Standards – Framework for Quality Management
11.4 Benefits of Implementations of ISO Standards
11.5 Quality Management in Contract Manufacturing
11.7 Summary
! !187
11.1 Importance of Quality Standards
It is very crucial to select the supplier with focus on quality of the products
and services. The important dimension of quality in supplier’s performance
will include:
• Performance of the product and services: The product’s primary

operating characteristics relevant for the buyer firm.
• Features of the product: It includes attributes that supplement the

product’s primary operating characteristics.
• Reliability: The probability of a product failing within a specified time

period needs to be lowest.
• Conformance: The extent to which a product’s design and operating

characteristics meet predetermined standards as defined by the buyer’s
organisation.
• Durability: The amount of use a product offers a consumer before the

product deteriorates. The buyer expects a long-term durability of the
product and its performance with an objective to reduce to total cost of
ownership.
• Serviceability: Buyer organisation prefers products covered by long-

term warranty. How fast, how easily, and with what degree of courtesy
and competence repairs are performed.
• Aesthetics: It is also very important to ensure that the product is

aesthetically appealing. Aesthetics determines how the product appeals
to the five senses.
• Perceived quality: Number of features of the product determine the

quality of the product. Reputation, image, or other inferences regarding
the attributes of a product.
Without ensuring the adequate quality level of a supplier’s delivery of

goods or services, supplier development efforts will not be successful and
activities like involving suppliers in product development will be
problematic. Quality has also been proven to correlate with productivity
! !188
and an increased quality loads to an increased productivity. This in turn

ensures effective and efficient purchasing for the buyer organisation.
11.2 Meeting quality expectations of Buyer – Key Steps
Organisations need to implement multiple steps to ensure that the

supplier’s product and services are of good quality and acceptable
standards. Some of the important steps to ensure this objective is as
follows:
• Optimisation of the supplier base to a manageable level: Pursuing

value-added activities with less than 250 suppliers is much possible in
comparison to managing the quality issues with more than 5000
suppliers. The organisation should be on its path to eliminate
incompetent or in-feasible suppliers over a period of time as an initial
step.
• Continuous measurement of supplier quality performance:

Continuous, dynamic and in some cases even mutual measurement of
suppliers’ quality performance is vital. It can be done in align with other
measurement and evaluation systems such as overall supplier evaluation.
• Establish aggressive supplier improvement targets and

periodically monitor the same: This activity is related to the
competition between the buying firm and its suppliers. This method is
based on that the suppliers need to increase their quality performance
level faster than their competitors; otherwise they will lose out in the
market and also their business. It is very demanding approach, from the
supplier’s point of view, but if the method can be managed actively great
positive benefits can be gained by the buyer organisation.
• Reward superior supplier performance and improvement: Reward

is always a tempting offer to motivate suppliers to improve their quality
levels on a continuous basis. The rewards may include sharing of the
benefits, resulting from supplier-initiated improvements, by offer the
improved supplier a greater share of a buyer’s total volume.
• Certify supplier processes and methods: Certification ensures that

the supplier has adopted minimum standards required for quality product
manufacturing and service delivery. Certification helps to assure that the
! !189
supplier’s processes and operating methods are in control. That often

limits the need for inspections of incoming supplier material and
components. It should be a challenging to get a certificate and the
decision about approving a supplier should be taken mutually by cross-
functional teams and perhaps with help of external consultancy at times
where required. When the supplier is approved and has received the
certificate, the buyer will be in a position to eliminate unnecessary
quality securing processes, such as eliminating inspections of incoming
material and components for every receipt.
• Commit the necessary resources and time for supplier

development: Commitment of necessary resources and time for
supplier development should only be be performed after a rationalisation
process of the supplier base. For example, Honda commits to supplier
quality development 40 full-time Engineers in the Purchasing
Department. These Engineers work with improving the supplier’s
productivity and quality. The suppliers receive technical support in form
of a Honda “quality up” programme, which aim is to work directly verses
the executive management team at a poorly performing supplier’s
production site.
• Involve suppliers early in product and process development: This

initiative is to maximise the benefit received from a supplier’s
engineering, design, testing, manufacturing and tooling resources.
Qualified suppliers, which take part directly in a cross-functional product
development team as the buyer, can provide early insight into the
production processes. Furthermore, by involving and inviting a supplier
to take part in these types of R&D projects can lead to better design
solutions regarding quality and the need of production resources which
often lead to both better quality and a lower purchasing prices. This is a
crucial step of supplier quality development although it improves both
the suppliers and the buying organisation’s quality.
11.3 ISO Standards – Framework for Quality Management
ISO-9000 Series
The ISO-9000 series was issued by the International Organisation of

Standards (ISO), a nongovernmental organisation established to promote
the development of standardisation, in 1987. It has since then become an
! !190
international recognised quality standard. The standard is revised in

regular intervals. There was a big revision in 2000 transferring it from an
object-oriented approach to a process-oriented approach. The ISO-9000
series consists of four parts: ISO-9000, ISO-9001, ISO-9004 and
ISO-90011. ISO-9000 covers the basics of quality management systems
and also contains the definitions of concepts and terms for the ISO-9000
series. ISO-9001 contains the requirements in the standard for a quality
management system. ISO-9004 provides the guidelines for implementation
of a quality management system as well as processes for continuous
improvements and work towards customer satisfaction. ISO-90011
provides guidelines for carrying out audits related to quality and
environmental issues.
ISO-9000 is based upon eight quality management principles that

companies implementing ISO-9000 should follow:
1. Customer focus: Number of organisations look towards customer

delight through focus on customers and strive to meet and exceed
customer expectations and requirements.
2. Leadership: The management should establish a unity of purpose and

direction in the whole organisation and create an environment that
encourages people to be involved. Without a competent leadership, in
number of organisations fail in achieving the quality products.
3. Involvement of people: All personnel should be involved and use their

full abilities for the company’s benefit to meet the customer needs.
4. Process approach: All activities and resources should be managed as

a process. While people’s involvement is important, the approach
adopted by the organisation should be process based and not too much
dependent on the people.
5. System approach to management: The management should have a

holistic view of the company to reach its goals effective and efficient.
6. Continual improvements: Continuous improvements should be a

permanent objective of an organisation.
! !191
7. Factual approach to decision-making: Base all decisions of facts and

analysis of data.
8. Mutually beneficial supplier relationship: The company should have

a mutually beneficial relationship with its suppliers.
ISO-14000 Series
The ISO-14000 series was developed by ISO in 1996 and is a standard to

improve environmental performance. ISO-14000 builds on the same
principles as ISO-9000. The ISO-14000 environmental standards specify
the structure of information technology, in the form of an environmental
management system that an organisation must have in place if it seeks to
obtain ISO certification. The ISO-14000 standards describe the basic
elements of an effective environmental management system. These
elements include creating an environmental policy, setting objectives and
targets, implementing a programme to achieve those objectives,
monitoring and measuring its effectiveness, correcting problems, and
reviewing the system to improve it and overall environmental performance.
It is common that a company’s management systems related to quality and
environment, e.g., ISO-9000 and ISO-14000, are integrated into one
system.
11.4 Benefits of implementations of ISO Standards
• It helps the organisation to create new opportunities for improvement

across many competitive dimensions
• Improvement in the company’s operations as well as customer

relationship
• ISO certified companies conform to quality standards and are poised to

deliver better quality of products and better delivery precision
• More flexible and adaptable to the customer requests and needs
• Improvement of productivity with effective implementation of the process
• Improvement of financial performance and specific improvements in the

return on assets
! !192
• ISO certification process forces the company to examine all its processes
in detail and in this processes new opportunities to reduce waste or cut
costs often turn up. Certified companies go through a process of
organisational learning that has a positive effect waste reduction
The specific areas which a buyer should look forward while selecting the
suppliers with focus on quality management systems around the following
important components:
• Quality of product and services

• Efficiency of process
• Cost-effective service delivery
• Productivity of business operations
• Continuous improvements across the business process
• Flexibility and adaptability of the delivery processes to respond to
customer requirements
• Waste reduction
• Focus on customer satisfaction – an important priority
• Precision of the delivery
• Innovation in the manufacturing, processes and customer relationship
management
A table summarising the linkage of Quality Management Systems on

supplier selection and evaluation is provided as under:
Eight Effects of Effects of Key Factors Key Factors for

Management Implemen Implement of Supplier Supplier
Principles of tation of ation of Evaluation Performance
Quality ISO 9000 ISO 14000
Management
Systems
• Leadership • Quality • Quality • Quality • Conformance to
standards as
defined by the
buyer
• Involvement • Delivery • Cost • Delivery • Immediate
precision precision response to
buyers needs
! !193
• Process • Cost • Waste • Price • Implementa-

Approach tion of quality
management
policies
• Holistic view • Continuous • Environmental • Continuous • Documentation
improvement Performance improvement of the policies
• Continuous • Customer • Company • Customer • Participation
improvement satisfaction image service
• Customer focus • Flexibility • Innovation • Flexibility • Process control
• Factual • Efficiency • Quality control

approach and assurance
• Mutually • Innovation
beneficial
relationships
11.5 Quality Management in Contract Manufacturing
The Owner/Buyer generally enters into a Quality Agreement with the

contract manufacturer. A Quality Agreement is a comprehensive written
agreement that defines and establishes the obligations and responsibilities
of the quality units of each of the parties, i.e., Supplier, Purchaser and any
other entity involved in the contract manufacturing. The key elements of
quality agreement are as follows:
• Purpose/scope of the contract arrangement and quality

• Terms including effective date and termination clause
• Dispute resolution
• Responsibilities, including communication mechanisms and contacts
• Change control and revisions
The purpose and scope of the quality agreement between the buyer and
the contract manufacturer will largely depend on the nature of contractual
services being sought or provided under the agreement. Consensus of the
buyer and the contract manufacturer on precise meaning of terms used in
the Quality Agreement is an important step in drafting. Owners may
consider adopting the terms and procedures used by contracted facilities in
order to reduce the likelihood of misinterpretation and personnel error
during actual manufacturing. The parties to a Quality Agreement should
include a communication plan that explains how manufacturing deviations
will be relayed to the owner by the contracted facility, and how such
! !194
deviations will be investigated, documented, and resolved. Dispute

resolution provisions should also be included as an important feature of the
quality agreement.
Some of the important aspects which the global sourcing manager should
be aware of while entering into a quality agreement with the contract
manufacturer as stated as below:
• Owners/Buyers and the Contract manufacturers should clearly define and

precisely mention the scope, role and responsibilities of each of the
parties to the contract.
• Often the owner organisation, e.g., in the pharmaceutical industry are

subject to various regulations like Good Manufacturing Practices and FDA
Guidelines. While in the quality agreement, the owners may assign a
particular responsibility to the contract manufacturing unit, however, it
will not absolve any party from the responsibility to comply with the
requirements.
• Quality Agreement should identify the specific site/locations at which

manufacturing operations will be performed along with addresses and the
particular services to be provided.
• The Agreement should clearly specify and indicate who is responsible for
setting specifications for raw materials; auditing, reviewing, qualifying,
and monitoring suppliers of those materials; and conducting required
sampling and testing and certifications, if any as applicable.
• Product specific terms should be appropriately incorporated as a part of

the quality agreement.
• Where the contracted manufacturing facility or the owner entity is

subject to laboratory controls, the same needs to be specified in the
quality agreement.
While Quality Agreement is a great feature in the area of contract

manufacturing, the owner/ buyer needs to periodically perform checks
through various modes such as audits, inspections, surprise visits to
ensure that the manufacturing facilities at the contracted facility are in full
alignment with the Owner’s and Regulator’s expectations.
! !195
Case Study Demonstrating the importance of Quality Agreement
FDA inspection of a Contracted Facility of one of the leading manufacturer

in the pharmaceutical industry that manufactures injectable product for the
product owner revealed significant objectionable conditions at the
Contracted Facility. A Warning Letter is issued to the Contracted Facility by
the FDA initially. The key issue are that most of the conditions observed
are related to deficient maintenance of the facilities and equipment used to
manufacture the injectable product, such as defective or partially broken
equipment, visibly tarnished piping, leaking seals, etc.
In addition, facility design was inadequate to prevent contamination which

may pose a wide array of risks to the consumer of the injectable. This
Contracted Facility had a Quality Agreement with all conditions and terms
specifying the product owner’s responsibility for upgrades and maintenance
of the facilities and equipment. The owner company failed to provide the
requisite resources or carry out the necessary upgrades and maintenance,
but and the Contracted Facility continued to manufacture the product under
non-CGMP conditions (non-compliant with Good Manufacturing Practices)
that could result in product contamination. The FDA warned the owner and
issued orders to ensure necessary compliances prior to continuation of any
manufacturing.
1. Review of the Quality Policy and Quality Manual of any large

organisation and document the important aspects.
…………………………………………………………………………………………………………………………
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2. Conduct interview or discussion with Head of Quality Management and

gain a wider perspective of quality management process followed in the
sourcing function.
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! !196
11.7 Summary
One of the important parameter in addition to the commercials of the

product is quality. The Global Sourcing Managers needs to have a sound
understanding of the quality requirements so that the details can be
communicated to suppliers and the desired product or service can be
obtained. Organisation implement various types of quality standards which
include ISO-9000 and ISO-14000 series. It is very crucial for an
organisation and especially the Global Sourcing Manager to communicate
the importance and benefits of quality management to the suppliers. The
Global Sourcing Manager also need to ensure an appropriate quality
management process for the contract manufacturing activities.
! !197
1. Highlight the importance of quality standards in global procurement.
2. What are the key steps which organisation should follow to ensure that
the products/ services procured from various suppliers meet the quality
requirements?
3. Write a short note on:
a. ISO-9000 standard
b. ISO-14000 standard
4. Highlight and explain the benefits that will arise to an organisation by

implementing the quality management standards in global sourcing.
1. Which of the following is least likely benefit that may arise from
implementation of quality management standard?
a. Increased cost of quality

b. Reduction in defects
c. Better supplier relationship
d. Compliance with quality requirements
2. Which of the following is least likely to be a consideration for a buyer

while evaluating the supplier on various quality parameters?
a. Production process
b. Quantum of discounts in price
c. Efficiency and effectiveness of the process
d. Efforts for defects reduction
Answers:
1. (a), 2. (b).
! !198
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
Video Lecture 
! !199
INTERNATIONAL TRADE PAYMENT PROCESS IN GLOBAL SOURCING
Chapter 12
International Trade Payment Process in
Global Sourcing
Objectives
• Understand the International Trade Finance and payment process is

Global Sourcing
• Understand various payments modes available at the disposal of Global
Sourcing Manager
• Understand common discrepancies in documents which may lead to issue
in the payment process
Structure:
12.1 International Trade Finance and Payments

12.2 Payments Modes in Global Sourcing
12.3 Common Discrepancies in Letter of Credit Which Should be Avoided
12.5 Summary
! !200
12.1 International Trade Finance and Payments
International Trade poses wide range of risks (geographical distance

between buyer and seller, Jurisdiction, intermediaries). Basically, there are
five types of the payments:
a. Cash in advance
b. Letter of Credit
c. Documentary Collections
d. Open Accounts
e. Consignment basis
Commercial Banks provide the following facilities for trade financing:
• Non-fund Based
➡ Letters of Credit
➡ Bank Guarantees
• Fund Based
➡ Pre-shipment Finance
➡ Post-shipment Finance
➡ Project Finance
Limits are fixed by the banks for these facilities.
12.2 Payments Modes in Global Sourcing
Cash in Advance
• Credit Risk completely eliminated for the exporter
• Payment made through:
➡ Wire Transfers (receiving bank’s details, SWIFT code (international

counterpart of IFSC code), seller’s name and address, bank account
details to be shared with the buyer)
➡ Credit Cards
! !201
• International Check/Cheque –
➡ This method is less prevalent now. However, still continues to areas

with limited banking facilities
➡ Risk of insufficient funds in buyers account or stop payment exists
This method is used where:
• Importer is a new customer and/or has a less-established operating

history
• The importer’s creditworthiness is doubtful, unsatisfactory, and

unverifiable
• The political and commercial risks of the Importer’s home country are
very high
• The Exporter’s product is unique, not available elsewhere, or in heavy

demand.
Escrow Service
Escrow Services – Money is allocated to specific account and on submission

of export documents, the amount is transferred to exporter’s bank account.
• Importers send the agreed amount to Escrow service provider (normally

a bank).
• After payment is verified, exporter ships the cargo.
• Importer has pre-determined time to inspect the goods and accept the
goods.
• Once goods accepted, payment is released to exporter.

• Similar to pre-authorisation of the credit card.
Letter of Credit (At Sight/Usance)
• Most secure instruments available to international traders.
! !202
• Commitment by a bank on behalf of the buyer that payment will be made

to the Exporter.
• Terms and Conditions of the Letter of Credit has to be met.
• The compliance is verified after presentation of all the documents.
• The buyer establishes credit and pays his or her bank to render this
service.
• L/C is most useful when reliable credit information about a foreign buyer
is difficult to obtain.
• However, the Exporter should have reasonable confidence on the Foreign

Bank.
• L/C also protects the Importer since the documents required to trigger
payment provide evidence that goods have been shipped as agreed.
• Any discrepancy in Letter of Credit will lead to negation of the payment.
• The issuing bank will typically use intermediary banks to facilitate the
transaction and makes payment to the Exporter.
• Banks are not concerned with the quality of the underlying goods or
whether each party fulfils the terms of the sales contract.
• The bank’s obligation to pay is solely conditioned upon the seller’s

compliance with the terms and conditions of the L/C.
• Unless the conditions of the L/C state otherwise, it is always irrevocable,

which means the document may not be changed or cancelled unless the
importer, banks, and exporter agree.
• Revolving L/C
➡ With a revolving L/C, the issuing bank restores the credit to its
original amount each time it is drawn down.
• Confirmed L/C
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➡ L/C issued by Foreign Bank (bank of the Importer) is confirmed by
exporter’s bank or other bank from the country of the Exporter.
• Standby L/C
➡ Similarly, standby L/Cs are often posted by Exporters in favour of an

importer to pay invoices when due
➡ Standby L/Cs are often posted by exporters in favor of importers

because they can serve as bid bonds, performance bonds, and
advance payment guarantees.
➡ Standby L/Cs are often used as counter guarantees against the

provision of down payments and progress payments on the part of
foreign buyers.
• Transferable L/C
➡ In Transferable L/C, the buyer can transfer a part of the value of L/C
or the full value of L/C in favour of one or more beneficiaries.
➡ Transferability should be expressed specifically in the L/C.
➡ Since the buyer relies on the integrity of beneficiary, transferability in

favour of someone unknown has risks.
• Back-to-back L/C
➡ In back-to-back L/Cs, Beneficiary's banks open several L/Cs within

the value of the mother L/C.
➡ This is also known as countervailing L/Cs.
➡ The terms and conditions of the second L/C are exactly the same as
that of the first L/C.
➡ The second L/C may be a Domestic L/C.
➡ Any change in the second L/C is possible only when the opener of
the original L/C agrees to such a change in the mother L/C.
! !204
• Red Clause L/C
➡ In Red Clause L/C, advance payment is provided against the supply

of certain documents like drawings and manufacturing schedule as
mobilisation advance for manufacture of capital goods whose
manufacturing cycle time is high.
➡ The advance payment details are printed in RED thereby being called
Red Clause L/C.
• Green Clause L/C
➡ In this type of L/C, advance is provided against goods, which are

manufactured and kept in a warehouse for a buyer against
warehouse receipt, before the same is shipped.
12.3 Common discrepancies in Letter of Credit which

should be avoided
• Letter of Credit expired – documents presented after expiration date of

the letter of credit
• Late shipment of goods

• Merchandise description not strictly as per L/C term
• Inconsistent spelling of parties’ names in documents
• Late presentation of documents
• Terms of sale not complied with
• Ocean Bill of Lading issued by forwarding agent unacceptable
• Partial shipment or trans-shipment effected despite L/C terms
• Insurance does not cover risks stipulated in L/C
• Foreign language documents must be exactly as per L/C
• Documents are not consistent with one another

• Bills of Lading not clean
! !205
• Insurance issued after shipment date

• Bills of Lading not properly endorsed
• Late shipment--shipment made after latest allowable shipping date
• Late presentation – documents presented more than 21 days after
shipment (or as specified in the L/C)
• Letter of Credit overdrawn – amount of drawing exceeds amount

available under the letter of credit
• Short shipment
• Bill of exchanges (draft) drawn on incorrect party
• Bill of exchanges (draft) payable on an indeterminable date
• Merchandise description in invoice differs from that in the credit
• “On-board” notation on bill of lading not dated
• Bill of lading showing incorrect consignee
• Bill of lading shows port of loading and/or discharge other than ports
specified in
• Bill of lading does not indicate whether freight is prepaid or payable at

destination/collect
• Documents inconsistent with each other

• Bill of lading, insurance certificate/policy and/or bill of exchange (draft)
are not properly endorsed
• Absence of signature, where required, on documents presented

• Shipping terms (ex-factory, FAS, FOB, C&I, C&F and CIF) on invoices
differ from those specified in the letter of credit
• Set of documents presented under Letter of Credit incomplete
• Bill of exchange (draft) drawn with incorrect tenor

• Corrections on bill of lading or Insurance certificate/policy not initialled
! !206
1. Obtain a copy of Letter of Credit (sample) and review the important

sections. Relate the sections to specific process in the global sourcing.
…………………………………………………………………………………………………………………………
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12.5 Summary
Security of the payment is the biggest concern of the supplier, be it

domestic or international. Payment after ensuring the compliance with the
terms and condition of the vendor contract is one of the key responsibilities
of the Global Sourcing Manager. The Global Sourcing Manager has to
appropriately choose between the various products and services available
for ensuring smooth payment to the vendor, contract manufacturer. One of
the caution which the global sourcing function needs to be aware of, is to
prevent any discrepancy in the payment related documents, e.g., letter of
credit.
! !207
1. What are the various options available at the disposal of the Global
Sourcing Manager for payments to international vendors?
2. Highlight various potential discrepancies that can exists in letter of

credit.
1. Which of the following payment mechanism is in the best interest of the

supplier?
a. Cash in advance
b. Letter of Credit
c. Payments against documents
d. International cheque
2. Which of the following is not a type of letter of credit?
a. Red clause L/C

b. White Clause L/C
c. Transferable L/C
d. Back-to-back L/C
3. Which of the following is least likely to be an important discrepancy in

the letter of credit?
a. Full shipment delivery

b. Issuance of Insurance after the shipment date
c. Inconsistency in documents
d. Late shipment
Answers:
1. (a), 2. (b), 3. (a).
! !208
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !209
OUTSOURCED MANUFACTURING
Chapter 13
Outsourced Manufacturing
Objectives
• Understand the fundamentals of outsourced manufacturing

• Gain an understanding as to how to determine the contract
manufacturing needs
• Understand the benefits that may accrue to the buyer organisation from
outsourced manufacturing
• Gain understanding of various outsourced manufacturing practices
• Understand how to evaluate the outsourcing rationale
• Gain an understanding of step by step approach for outsourcing decisions
• Understand the risk and challenges in outsourcing decisions
• Understand specific of engaging into contract with the outsourced
manufacturer
• Understand various operating models in outsourced manufacturing
Structure:
13.1 Introduction to Outsourced Manufacturing

13.2 Determining Contract Manufacturing/Outsourcing Needs by Global
Sourcing Manager
13.3 Benefits that may Accrue to Buyer Organisation from Contract
Manufacturing/Outsourcing
13.4 Outsource Manufacturing Practices
13.5 Evaluating Outsourcing Rationale
13.6 Step by Step Approach for Outsourcing Decisions
13.7 Risk and Challenges in Outsourcing Decisions
13.8 Formulating Agreement with Contract Manufacturer
13.9 Operating Model of Contract Manufacturing Business
13.11 Summary
! !210
13.1 Introduction to Outsourced Manufacturing
Outsourced manufacturing, also referred as “Collaborative manufacturing”

or “Contract manufacturing” or “Subcontracting of manufacturing” in some
industries, is rapidly evolving as a feasible business strategy across the
globe. Traditionally, global manufacturers have outsourced their
manufacturing functions to reduce costs, gain the advantage of low cost
labour, avail taxation arbitrage, optimise the logistics costs and improve
margins among other reasons. Recently, number of organisations globally
have adopted this approach to also offer their products and services in
emerging markets (BRIC), such as Brazil, Russia, India, and China. For
service outsourcing the preferred locations in addition to India and China
are Philippines as well. Transferring the responsibility of in-house
manufacturing has allowed brand owners and Original Equipment
Manufacturers (OEMs) to concentrate more on their core competencies like
brand building, research and development, product innovation, customer
service, strategic mergers and acquisitions and sales and marketing.
The results of outsourced manufacturing have been very good. Some of the
benefits accrued to the manufacturers globally include reduced costs,
shorter cycle times, enhanced ability to deal with demand and price
pressures, broader product portfolios, greater global market share and,
increased margins that significantly influence a company’s bottom line and
enables rapid growth.
13.2 Determining contract manufacturing/outsourcing

needs by Global Sourcing Manager
The need for contract manufacturing needs to be carefully evaluated by

business organisations. Some of the factors that drive the need are as
follows:
• Unavailability of specialised manufacturing capabilities with the

buyer firm: Certain products may require evolved processes or latest
technology, the investment of which may not be feasible for the buyer
firm in the short term.
• Product development: The existing facilities of the buyer organisation

may get largely occupied for completion of orders of existing customers.
! !211
The organisation may not have any spare capacity for carrying out trials
or research activities. Contract manufacturing offers opportunity for
buyer firm to undertake R&D or product development activities at a
relatively lesser capital investment.
• Product establishment waiting period: There could be a requirement

to establish the market potential of a new product is required before
investing in specialised capabilities in-house.
• Unavailability of facility on account of optimum/over occupancy:

There could be situations where current facility and the manufacturing
schedule may not be able to accommodate the small research, clinic, or
commercial batches. In such scenarios, the buyer organisation may need
to shift to outsourcing which may include contract manufacturing.
Companies are finding many reasons why they should be outsourcing their
production to other companies, especially in low cost countries. However,
production outside of the company does come with many risks attached.
Companies must first identify their core competencies before deciding
about contract manufacture. A company’s core competencies are what
make them competitive in the marketplace. If a company allows another
company to take control of them, it loses that advantage. For example, in
the Telecommunication equipments, one of the leading brand outsourced
its operations to another entity. The outsourced manufacturer now has
emerged as one of the equally large and tough competitor for the buyer
organisation.
A survey conducted for Outsourcing – Directions and Decisions by

Outsourcing Trends – CIO revealed the following major reasons for global
procurement through the outsourcing:
• Desire to reduce the costs

• Focus on core competencies
• Access to special expertise
• Increase in revenue and profitability
• Speed up delivery
• Relieve the constraints on resources
• Access to new technologies
• Elimination of problem area for the organisation
• Augmentation of the existing staff and resources available
! !212
The survey also observed that cultural differences can become a major
limitation in achievement of the above objectives through outsourced
manufacturing.
13.3 Benefits that may accrue to buyer organisation from

contract manufacturing/outsourcing
Number of key benefits accrue to a global sourcing manager out of the

outsourcing decision. Some of the key decisions include:
• Significant cost savings: Companies save on their cost of capital

investment because they do not have to pay for a facility and the
equipment needed for production. They can also save on number of
recurring costs like labour costs such as wages, training and benefits.
Some companies may look to contract manufacture in low-cost countries,
such as China, to benefit from the low cost of labor. The outsourcing of
manufacturing also reduces the need for carrying inventory and has a
positive impact on the need for working capital. Some of the companies
like Hindustan Unilever Limited which are extensively engaged in contract
manufacturing, have a negative working capital.
• Mutual benefit to contract site availability: A contract between the

manufacturer and the producing company may last several years. The
manufacturer will know that it will have a steady flow of business.
• Access to advanced manufacturing and process skills: Companies

can take advantage of skills that they may not possess, but the contract
manufacturer does have.
• Ensuring quality product: Buyer Company should provide inputs to

contract manufacturers of the processes and necessary controls to
ensure quality output. Contract Manufacturers are likely to have their
own methods of quality control in place that helps them to detect
counterfeit or damaged materials early and accordingly initiate necessary
action.
• Focus on core competencies: With outsourcing of non-core operations,

the buyer company can focus on core operations and continue to develop
the core competencies.
! !213
• Realisation of benefits of economics of scale: Contract

manufacturers serves many customers that they produce for. Because
they are servicing more than one customers, they can offer reduced
costs in acquiring raw materials by benefiting from economies of scale.
The more units there are in one order, the less expensive the price per
unit will be for the buyer organisation.
• Other general benefits: Some of the other benefits include the

following:
➡ the rapid use of technology and other advancements in the industry

➡ gain a global manufacturing presence and competitive edge
➡ Improved asset utilisation and operational efficiencies
➡ Gain a window on a new technology and better methods of
operations
➡ Freedom to the buyer organisation to concentrate on core functions
➡ Faster time to market and innovation
➡ Greater reach and access to market, etc.
13.4 Outsource Manufacturing Practices
Practice 1
An Original Equipment Manufacturer (OEM) completely outsources

manufacturing to a partner.
The customer places an order on an Original Equipment Manufacturer (or a

brand owner, product owner) for supply of an assembly. The OEM in turn,
outsources the complete manufacturing of the assembly to a
manufacturing partner by raising a purchase order for supply of the
assembly. Upon completion, the Manufacturing Partner ships the assembly
to the OEM. The OEM receives the assembly and ships it to the customer. It
is also possible that the OEM may ask the manufacturing partner to directly
ship the product to the ultimate customer (consignee and bill to address
will be different in the invoice). This practice is most prevalent in the FMCG
and Automotive sector.
! !214
Practice 2
Partial outsourcing of the manufacturing by the Original Equipment

Manufacturer.
In this case, the Original Equipment Manufacturer handles a part (often the
most critical part, e.g., Assembly and finishing or mounting of the engine,
inspection and testing, etc.) of its manufacturing operations by itself and
outsources the rest to either a single or multiple manufacturing partners.
This method is also called as “Outside Processing” where the
manufacturing partner generally gets paid for the value-added services/
processing jobs.
Practice 3
Outsourced Manufacturer supplies components.
In this case, the outsourced manufacturer is primarily acts like a vendor.

The manufacturing partner manufactures components as per the
requirements and customised design.
Practice 4
Partial supply of components.
In this case, the OEM fully controls the supplies of critical components and
the assembly. The manufacturing partner manufactures non-critical
components and supplies to OEM. In certain case, the manufacturing
partner also assembles the final product. In that scenario, the OEM
supplies the critical components for the assembly process.
Practice 5
Ownership of components.
• In certain cases, the Original Equipment Manufacturer owns and

manages component inventory at the outsourced partner’s facility and
periodically replenishes stock based on consumption.
! !215
• In certain cases, the OEM ships the components that are used to build
the assembly at the outsourced partner’s facility and registers a sale of
the components to the outsourced partner by raising an invoice. The
outsourced partner pays against the invoiced amount resulting in a
complete transfer of ownership of the components.
• There is also another type of chargeable outsourcing (also called as

SHIKYU in Japan). In this kind of arrangement, the product owner ships
and makes a provisional sale of components used to build the assembly
at the outsourced partner’s facility. The ownership of the components still
lies with the main manufacturer and the inventory is reported under
main manufacturer’s inventory valuation. When the assemblies are
completed and returned to the main manufacturer, the outsourced
partner invoices the Original Equipment Manufacturer for the full or gross
price of the assembly. The main manufacturer periodically nets/adjusts
payable and receivable invoices and makes payment to the outsourced
partner only for the value addition done by the outsourced partner on the
components supplied by the OEM. The payables and receivable invoices
used in this type of outsourcing serves as documentary evidence related
to transactions with the outsourced partners and are maintained to
comply with the local regulatory norms in Japan (SHITAUKE Law).
13.5 Evaluating Outsourcing Rationale
Key questions which the global sourcing managers should ask themselves
before taking decision about the outsourcing activity are:
• Why do organisation outsource?

• What drives the initiative?
The various reasons which drives an organisation to consider the

outsourcing decision can be broken down and analysed into several
dimensions. Let us explore the various dimensions as stated in the table
below:
! !216
Driving Factors Particulars
Organisationally • Enhance effectiveness by focusing on what you do best and

driven reasons the organisation’s core competence
• Increase flexibility to meet changing business conditions,
demand for products and services and technologies as the
organisation is relieved from number of standard operations
• Transform the organisation and its business processes
• Increases product and service value, customer satisfaction,
and shareholder value over a long term
Improvement • Improve operating performance of the organisation or

driven reasons business unit
• Obtain expertise, skills, and technologies that would not
otherwise be available to the organisation. Certain contract
manufacturers have developed a special expertise over a
period of time, which helps the owner/buyer entity to gain
immense knowledge and improve the business process as a
key intangible benefit
• Improve management and control of the operations
• Improve risk management as most of the risks (not
responsibilities) related to the manufacturing activities are
transferred to the contract manufacturer
• Acquire innovative ideas through exchange of knowledge
• Improve credibility and image by associating with superior
providers thereby providing the end customer a great level of
confidence
Financially driven • Reduce investments in assets and free up these resources for
reasons other purposes which can be effectively used by the
organisations
• Generate cash by transferring assets to the provider which can
be deployed for more capital/operational investments for
developmental activities of the organisation
Revenue driven • Gain market access and business opportunities through the
reasons provider’s network which can assist the organisation to
explore more options
• Accelerate expansion by tapping into the provider’s developed
capacity, processes, and systems and launch operations in
other regions across the globe
• Expand sales and production capacity during periods when
such expansion which could not be solely financed by the
owner or buyer entity
! !217
Cost driven • Optimise costs through superior provider performance and the
reasons provider’s lower cost structure which will help to improve the
bottom line of the buyer/owner company
• Turn fixed costs into variable costs and reduce the burden of
fixed costs on the organisations operations
Employee driven • Give employees a stronger career path as the organisation is

reasons focussed on new developmental activities
• Increased commitment and energy in non-core areas where
organisation can explore options for innovation and
breakthroughs
13.6 Step by Step approach for Outsourcing Decisions
Outsourcing is an important strategic decision taken by the organisation.

The Global sourcing manager needs to have an answer to number of
questions before counting on the outsourced/ contract manufacturer to
meet the requirements of the company. Following table lists down the
important steps and the key questions to be enquired by the global
sourcing manager before concluding on outsourcing as a profitable
arrangement.
Key Aspects of Important Questions

Outsourcing
Decisions
Requirements • What are the key objectives of the organisation?
Analysis and • What is the organisation’s business strategy?
formulating • What are the company’s key strengths and weaknesses?
outsourcing • What are the important opportunities and the threats that the
strategy organisation may encounter in future?
• What are the products that can be excluded from the portfolio
and from which of the markets?
• Is the organisation’s supply chain based on cost, on business
cycles or on innovation?
• What are the emerging and growing markets for the
organisation?
• Is the current business strategy of the company need any
significant changes considering ever dynamic business
environment?
! !218
Outsourcing • What are the semi-finished, intermediate and final products

Processes, that the organisation manufactures?
Products, Business • What are the key in-house processes?
• What are the key competencies (knowledge and skills) of the
organisation?
• Which production processes or parts of them that can be
considered or evaluated for outsourcing?
• What are the non-financial advantages that may accrue to the
organisation from outsourcing?
• What are the drawbacks or limitations of outsourcing?
• Whether outsourcing is going to be long term decision for the
organisation?
• How the relationship with the supplier will be managed?
Selection of Sub- • Whether the potential sub-contractors have been identified

contractor/Contract appropriately?
manufacturer • Whether the prospective contract manufacturer has their
quality management process certified?
• Does the contract manufacturer a professional in his
approach?
• Does the contract manufacturer consider your organisation as
an important client?
• What is the reliability levels of the sub-contractor?
• How the contractor is managing the business?
• Is the sub-contractor financially well managed and solvent?
Quotation and • Request for quotation from the sub-contractor?

Review • Evaluate the quotations on multiple parameters?
• Whether the comparison of costs for in-house manufacturing
and outsourcing has been evaluated appropriately?
• Is there any risks perceived with the financial as well as Non-
financial advantages?
Ordering and • Is the contract documentation formalities completed?

Testing • Has the test order given to the subcontractor successfully
completed?
• Has the results of test order evaluated comprehensively?
13.7 Risk and Challenges in Outsourcing Decisions
While outsourcing does offer number of benefits to an organisation, it also

brings in its own set of challenges and risks. Some of the key risks and
challenges worth mentioning are as follows:
• Inadequate control over the outsourced arrangements: As the

buyer company enters into a contract allowing another company to
produce their product, the buyer company loses a significant amount of
! !219
control over that product. The buyer company is in a position to suggest

strategies to the contract manufacturer, however the force them to
implement them cannot be exercised at times.
• Conflict in relationships: The outsourced partner may also have other

customers in the buyer industry in absence of an exclusive arrangement.
Hence, it is imperative that the buyer organisation forms a good
relationship with its contract manufacturer. The company must keep in
mind that the manufacturer has other customers and the arrangement
may not be exclusive. They cannot force them to produce their product
before a competitor’s and reschedule the production priorities. Most
companies mitigate this risk by working cohesively with the manufacturer
and awarding good performance with additional business and incentives/
rewards as an ongoing exercise.
• Concerns over quality of the product: When entering into an

outsourcing arrangement and contract, the buyer companies must make
sure that the manufacturer’s standards are in perfect alignment with
their own. They should evaluate the process and approach in which they
test the products to make sure they are of good quality and acceptable
standards. The buyer has to rely on the contract manufacturer for having
good suppliers that also meet these standards as per the defined norms
and acceptable to the buyer.
• Loss of intellectual property of the buyer firm: In the process of

entering into an outsourcing arrangement, the buyer company is sharing
their formulas or technologies. This is why it is important that a buyer
organisation should not give out any of its core competencies to contract
manufacturers, e.g., Bill of materials, chemical formulae and production
recipe to the contract manufacturer.
• Inherent risks of outsourcing in a global environment: While

outsourcing to low-cost countries is a lucrative opportunity for the buyer
firm, it does bring along risks such as language barriers, cultural
differences, long lead times and variations in the raw materials,
production processes, etc.
• Capacity constraints at the contract manufacturer: If a buyer

organisation does not constitute a large portion of the contract
manufacturer’s business, they may find that they are deprioritised over
! !220
other customers of contract manufacturer during high production periods

or periods of peak demand. Thus, the buyer company may not obtain the
product during need or emergency situations.
• Parting with flexibility and responsiveness: The buyer company

does not have direct control the manufacturing facility of the contract
manufacturer. Thus, the buyer organisation will lose some of its ability to
respond to disruptions in the supply chain. It may affect ability to
respond to demand fluctuations, risking customer service levels of the
buyer organisation.
• Other risks: Some of the other important risks include following:
➡ Challenges in monitoring the supplier performance
➡ Often there is a need for change in the mind-set of the buyer

company
➡ Loss of critical skill and tacit knowledge to the contract manufacturer
➡ Absence of shared vision of the contract manufacturer with that of

the buyer company
➡ Cultural differences adversely affecting the delivery of product/

services
➡ Increased dependency and concentration risks on the supplier
➡ Issues related to planning and managing inventory throughout the

supply chain of the company
➡ Issues related to product ingredients and the quality aspect
➡ Loss of key intellectual property and intangible assets
➡ Management of the variability and uncertainty related to the third

party
➡ Enforcing and ensuring regulatory compliances
! !221
13.8 Formulating agreement with contract manufacturer
The buyer organisation while formulating an agreement with the contract

manufacturer should pay attention to various important components of the
arrangement. Some of the key components will include the following
aspects:
• Duration and term of the contract

• Testing procedures
• Specifications required by the buyer
• Lot quantities expected and the standard size
• Yield expectations and treatment of normal losses
• Acceptable tolerance and deviations
• Price components and important deductions/adjustments
• Incentives
• Payment terms agreed
• Inclination of the buyer firm for capital expenditures
• Expectations of the buyer firm from the contract manufacturer with
respect to capital investments
• Minimum quantity of supply and maximum level of business requirement
• Procedures to handle lot rejections
• Situations leading to termination including expiry of the contract period
• Review period, frequency and the key parameters
• Forecast and purchase orders, inspections
• Raw material purchase and vendor qualifications criteria
• Technical transfer/knowledge transfer
• Process changes and continuous improvement
• Dispute resolution process
Outsourcing through Contract Manufacturing
Contract manufacturing is one of the oldest form of outsourcing of the

manufacturing process especially by companies engaged in fast moving
consumer goods, pharmaceuticals, agro-chemicals and other consumer
businesses. It involves production of goods by firm, under the label or
brand of another firm, often referred as white labelling of products.
Contract manufacturers provide such service to several firms based on
their own or consumers’ designs, formulas, and or specifications. For
example, the pharmaceutical industry is having major share in contract
manufacturing. The reason is that buying equipment for mass production
! !222
of certain chemicals is very costly, and some companies can’t do it. So,
they enter into a contract with a manufacturer to produce certain chemicals
for them so they can combine those chemicals with what they have to
produce the end result.
When making the decision on whether or not a company should contract

manufacture, the company should consider the benefits and risks
associated with contract manufacturing decision. Contract manufacturing is
beneficial if the company gets involved with the right company, which is
able to manufacture quality product and consistently meet the quality
requirements of the buyer organisation.
Essential Features of Contract Manufacturing
• It is a process of establishing a working agreement between two

companies.
• In the agreement, one company assumes responsibility for custom made

products for another customer entity.
• The client/customer does not have to maintain manufacturing facilities,

purchase raw materials, or hire labor in order to produce the finished
goods.
• Offers opportunities to brand owners for improving their bottom lines

through the conversion of fixed costs to variable costs.
Contract manufacturing is also could be of two major categories:
• Supplier vendor: Supplies manufacturer’s material for inventory.

Supplier in this category is sells products from its inventory to one or
more companies for their use or disposition. This type of contractor
manufacturer is sometimes known as an “original equipment
manufacturer”, commonly referred as OEM.
• Toll vendor: The key activities of the tolling party/toll manufactures is

as follows:
➡ Receive a raw material from another company,

➡ Convert that material into another form, and
➡ Return the converted material to the contracting company for its use
or further disposition.
! !223
13.9 Operating model of contract manufacturing business
In a contract manufacturing operating business model, the hiring firm

approaches the contract manufacturer with a design or formula. The
contract manufacturer quote the parts based on processes, labor, tooling,
and material costs. Typically, a buyer firm will request quotes from multiple
Contract manufacturers. After the bidding process is complete, the buyer
organisation will select a source, and then, for the agreed-upon price, the
CM acts as the buyer firm’s factory, producing and shipping units of the
design on behalf of the buyer firm. Job production is, in essence,
manufacturing on a contract basis, and thus it forms a subset of the larger
field of contract manufacturing. But the latter field also includes, in addition
to jobbing, a higher level of outsourcing in which a product-line-owning
company entrusts its entire production to a contractor, rather than just
outsourcing parts of it.
Make or Buy Analysis
Before taking any decision related to outsourced manufacturing, the

organisation needs to thoroughly evaluate various factors. It needs to
assess whether it is feasible to procure from outsourced vendor or
manufacture the product in-house. Following factors need to be evaluated
properly:
• Cost
• Risks involved in the outsourcing
• Availability or limitation on the in-house skills
• Knowledge and experience of the outsourced partner
• Sharing of confidential information and other matter with the outsourced
partner
Sometime, it is possible for the organisation that in spite of capability in-

house, for want of capacity, the organisation has to outsource some of the
work load. This can happen during the peak business scenario.
Illustration of Make vs. Buy Decision
ABC Ltd., an Italian shoe manufacturer, has a production unit at Milan. ABC
Ltd.’s total cost to produce a pair of shoe is $50 (variable cost $35 and
! !224
fixed cost $15). Some of the Asian manufacturers have approached ABC
Ltd. to supply shoe of equivalent quality in unlimited quantity for $45.
1. Should ABC Ltd. consider the offer to procure its annual requirement of
5,000 units?
2. What would you suggest if the company can cut down its fixed cost to
$5 and earn rental revenue of $10,000 p.a. on outsourcing?
Solution
Case 1: Assuming the fixed costs are not avoidable,

ABC Ltd.’s relevant cost = $35
Procurement cost from Asian suppliers = $45
ABC Ltd. should manufacture the shoes in-house as it is cheaper
by $10/unit
Case 2: Part of the fixed cost is avoidable

ABC Ltd.’s relevant cost = Variable cost + Avoidable fixed cost +
Opportunity cost if any
= $35 + $10 + ($10,000/5,000 units)
= $47
Procurement cost from Asian suppliers = $45
ABC Ltd. should outsource the manufacturing to Asian suppliers
as it is cheaper by $2/unit
Illustration for Service Outsourcing
XYZ Ltd. runs a cafeteria for its staff. The management of the company is
contemplating outsourcing cafeteria’s O&M to a catering agency. Current
cost structure for XYZ is:
Food and other ingredients: $50,000

Labour cost: $20,000
Overheads: $15,000
The overhead is 40% fixed and 60% variable. The fixed overheads also
include the salary of the cafeteria supervisor. The remainder of the fixed
overhead has been allocated from total company overhead. Assuming the
! !225
cafeteria supervisor will continue as it is, at what cost should XYZ consider
outsourcing the cafeteria operations.
Solution
Total operating cost excluding unavoidable costs for XYZ is:

Food and other ingredients: $50,000
Labour cost: $20,000
Overheads @ 60%: $15,000 x 60% = $9,000
Total avoidable cost of operation = $79,000
Hence, XYZ’s management can consider outsourcing if quoted costs =<

$79,000. In case company plans to let go the supervisor on outsourcing of
operations, the avoidable cost will increase by supervisor’s salary amount.
Illustrative Overview of Contract Manufacturing in Pharmaceutical

Industry
Service offered by contract manufacturer to its end customer
• Primary manufacturing: involves the synthesis of the bulk active

ingredients
• Secondary manufacturing: formulation of bulk drug substances into

the final drug products
The pharmaceutical market uses outsourcing services from providers in the

form of contract research organisations (CROs) and contract manufacturing
organisations (CMOs). Of late, the concept of a comprehensive single-
source provider from drug development through commercial manufacture
has emerged. This concept has been implemented by providers known
today as contract research and manufacturing services (CRAMS) or
contract development and manufacturing organisations (CDMO). CMOs are
a response to the competitive international nature of the pharmaceutical
market as well as the increasing demand for outsourced services.
The best-positioned service providers focus on a specific technology or

dosage form and promote end-to-end continuity and efficiency for their
outsourcing clients. With lower cost international manufacturers capturing
an increasing percentage of the contract manufacturing market,
specialisation may be an effective hedge against loss of market share.
! !226
Having realised that manufacturing cost reduction is a key to participating

in the critical generics space; global Pharma firms have been exploring
various means to achieve their objective. Key initiatives that can be
explored to reduce manufacturing cost to up to 15% can include
innovation, process redesign and consolidation; however the option with
the best cost and quality advantage at lower capital investments is contract
manufacturing. India has the largest number of USFDA approved Pharma
plants worldwide, after the US – a total of 75 plants. This is three times
more than the number of plants in China which have FDA approval. This
not only reflects the quality of the Indian Pharma industry but also the
depth of expertise that exists industry-wide.
Over a period of time, the contract manufacturing in the pharmaceuticals

industry has evolved. The activities performed include formulation, fill and
finish, chemical synthesis, cell culture and fermentation, analytical testing
and other laboratory services and packaging and labelling processes.
Ethical Issues in Global Outsourced Manufacturing
In the area of global outsourced manufacturing, it is always an issue faced

by multi-national corporations to manage various issues on the ethical
related to vendor management. There have been several incidents which
unfavourably indicate the issues related to global outsourcing. Some of the
issues and incidents are provided as follows:
• Labour working in unsafe working conditions – garment factory collapse

in Bangladesh in 2004 which resulted in loss of lives of several labour
• Locations where labour is perceived to be cheap, generally, it is observed

that the regulations and environmental related to safety, health and
other rules are more lax. For example, a decade back Nike, the leading
US footwear company, has several subcontractors in Taiwan, South
Korea, and Indonesia, which run more than twelve factories in Indonesia,
producing 70 million pairs of Nike sneakers a year. Today, Nike’s
contractor network involves some 800,000 workers. Like any other
footwear factories every where in Asia, work conditions are tough, with
mandatory overtime work and constant exhaustion. Although these
factories may be modern, those have vast sheds housing row upon row
of mostly young women working many hours. The basic daily wage in
Indonesia for these workers is a mere $2-3 a day. There a pair of
Pegasus running shoes costs about $18 to put together, and retails for
! !227
$75 once shipped to the United States. The condition is similar in

Vietnam, where 35,000 workers producing Nike shoes at five plants put
in 12 hours a day to earn $1.60—less than the $2 or so it costs to buy
three meals a day.
Service Outsourcing
Service sector contributes to higher share of India’s GDP in comparison to

core manufacturing. The growth of the service sector is also enabled by
business process outsourcing (BPO) and Knowledge Process Outsourcing
(KPO) by large multinational corporations to countries like India, China,
Philippines, Thailand inter alia. The following are some of the important
features of service outsourcing which the Global Sourcing Manager should
be well versed with:
1. Fosters efficiencies in process and innovation: Sourcing initiatives

generally focus on eliminating inefficiencies and controlling costs. But
the benefits do not halt at increased efficiency alone. New value through
innovation and transformation are also created in the service
outsourcing.
2. Models like Insource, Outsource, Captive and Offshore:

Outsourcing decisions are also impacted by regulations. For global
corporations with large captives (own shared service centres) of their
own in low cost and/or high-talent locations, there is the added
complexity of whether to increase the operations in the captives or
outsource. Often business needs are overridden by legislation and social
needs in the geography of the buyer organisation. It might become
crucial to recruit locally in the head office geography to meet job growth
requirements, while offshoring is actively discouraged. Reconciling these
needs in the short term without adversely affecting long term growth
and resilience is a priority for all global sourcing decision makers. For
example, in the post bail-out business scenario in America banks like
Bank of America are not even hiring fresh non-US MBAs due to
government restrictions, and where the hiring of H1Bs is reduced, the
decision on whether to outsource is not driven by business needs alone.
The regulations also play a very crucial role.
3. Maximum savings with low risk: According to leading research firm,

Gartner, results or outcome based pricing, aided by platform based
! !228
delivery models and cloud computing applications, are becoming more

the norm and will soon overtake traditional T&M and fixed price
commercial constructs. Thus, the service sourcing initiatives are not just
driven by a need to save costs, but also by a desire to minimise risks.
4. Transitioning to the outsourced model with minimum disruption

to the business: The global sourcing manager should ensure that in
case the outsourcing decision is taken, the transition should happen
with minimum disruption to the business. For example, ABN Amro
awarded its entire applications portfolio for maintenance to Infosys and
TCS. The entire transition period was extended to well over a year.
5. Achieve accelerated results and avoid any pitfalls: Business needs

are very dynamic in nature and it is the endeavour of the global
sourcing manager to achieve the accelerated results through service
outsourcing and protect business from any likely pitfall.
1. Study contract manufacturing models of companies in various sectors

e.g. Pharmaceutical, Fast Moving Consumer Goods (FMCG), and
Automotive and identify the basic feature of such models.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….
13.11Summary
While outsourced manufacturing is not a new phenomenon, the scale and

complexity of the outsourced manufacturing model has undergone a sea
change in terms of geography, scale and complexity. It is very crucial for
the Global Sourcing Manager to understand the pros and cons of
outsourced manufacturing. It is also important to have an understanding of
the various models and practices. The global outsourcing industry is also
subject to regulations like transfer pricing, legal issues and other taxation
related aspects. The organisation should also pay attention to the probable
ethics issues in outsourced manufacturing. The organisation should also
evaluate the options, benefits and challenges involved in service
outsourcing.
! !229
1. Explain the need and importance of outsourced manufacturing for the

buyer organisation.
2. What are the various factors that the Global Sourcing Manager should
consider to determine the need for outsourced manufacturing?
3. What are the key benefits that are likely to accrue to the buyer
organisation through outsource manufacturing contract?
4. Write a short note on Outsourced Manufacturing practices and models.
5. Explain the steps to be adopted by the Global Sourcing Manager while

taking the outsourcing decision.
6. What the risk and challenges are of outsourced or contract

manufacturing?
! !230
1. Which of the following is least likely to be an important reasons for

Global Sourcing Manager resorting to outsourcing decision?
a. Limitation on capacity
b. Internal quality Issues
c. Cost arbitrage
d. Customer request
2. Which of the following is least likely to be benefit of the contract

manufacturing to the buyer?
a. Quality of product improves

b. Low cost of manufacturing
c. Higher price of product and increased defects
d. Locational advantage of the contract manufacturer
3. Which of the following is most likely to be a key risk for organisation

evaluating a contract manufacturing?
a. Loss of cost advantage

b. Exposure of intellectual property
c. Reduction in quality of product
d. Tax disadvantages
Answers:
1. (d), 2. (c), 3. (b).
! !231
REFERENCE MATERIAL
chapter
Summary
PPT
MCQ
! !232

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Global Supply Chain

Management and Outsourced

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Prof. Kanu Doshi Prof. B.N. Chatterjee

Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Prof. B.N. Chatterjee Prof. Vineel Bhurke

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Prof. Sandeep Kelkar Mr. Anuj Pandey

Prof. Dr. Swapna Pradhan Course Editor

Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Mr. P.M. Bendre Course Coordinators

Mr. Ajay Prabhu Ms. Kirti Sampat

Mr. A.S. Pillai Mr. Kishor Tamhankar

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition (July-2015)

Chapter No. Chapter Name Page No.

1 Introduction and Background to Global Supply Chain 3-16

5 International Packaging 89-104

9 Role of Information Technology in Global Sourcing 154-170

11 Quality Management in Global Procurement 186-198

13 Outsourced Manufacturing 209-231

The key learning objectives is to –

• Understand the basics of global procurement

1.1 Introduction to Global Procurement

1.1 Introduction to Global Procurement

Procurement as an activity is of strategic importance to the management of

1.2 Objectives, Features and key activities of Global

Objectives of Global Procurement

1. Low landed cost of materials: Purchasing managers often compare

2. Elimination of inefficiencies in procurement and control over

3. Evaluation of own manufacturing and outsourcing decisions: The

4. Reducing risks to the business through managing supplier

5. Embedding global best practices in the procurement process: As

to global procurement, the best practices of respective geography, over

6. Result based purchasing and reduced learning curve: As the

7. Innovation led purchasing: With the advent of technology and

Features of Global Procurement

Key features of Global procurement are provided as under:

1. Promotes procurement of near shore countries as a part of

development of new suppliers across the near shore countries to

2. Requires a trade-off between low cost procurement vis-à-vis

3. Endeavours to move beyond just the cost advantage: Organisation

4. Requires set up of a Local Procurement Office at respective

a. Market research for identification of new suppliers

b. Evaluate suppliers for necessary qualification on a basis of defined

c. Perform inspections to get assurance that suppliers will be able to

d. Study the logistics planning and execution of procurement operations

e. Evaluate the local and global regulations impacting the procurement

f. Develop a qualified supplier database for future procurement purpose

g. Explore opportunities to integrate the procurement process into the

The additional key activities undertaken by the LPO post establishment

5. Management of extra-territorial regulations: Organisation with

6. Category management: Global sourcing requires high level of

7. Subject to global risks: Global procurement is subject to additional

a. Increased level of supply lead times

8. Use of advanced demand planning and forecasting methods: On

9. Involves engagement of global sourcing representatives: As

a. Reduced search and response period

b. No overhead costs as the agent works primarily on a commission

c. Overseas representatives are aware of the reputation and delivery

Video Lecture - Part 2 