Supply Chain Management - Session Global Sourcing

Supply chain Management – Session 8
Global Sourcing
 Global sourcing Key reasons
 Benefits
 Tariff Impact
Overview  Foreign exchange Impact
 Key factors affecting the global
sourcing
 Integrated Logistics
2
Prepared by N.Hariharan
Global Strategies
 Boeing – sales and production are worldwide
 Benetton – moves inventory to stores around the

world faster than its competition by building
flexibility into design, production, and
distribution
 Sony – purchases components from suppliers in

Thailand, Malaysia, and around the world
Reasons to Globalize
Reasons to Globalize
Tangible
Reasons
 Reduce costs (labor, taxes, tariffs, etc.)
 Improve supply chain
 Provide better goods and services
 Understand markets
Intangible  Learn to improve operations
Reasons
 Attract and retain global talent
Gateway Versus Apple
Reasons for Globalization
Improve the supply chain &
Reduce cost
The supply chain can often be improved by

locating facilities in countries where unique
resources are available.
These resources may be human resource Major studios like Disney, Marvel, Warner Brothers, and
Hanna-Barbera send storyboards— cartoon action
expertise, low-cost labor, or raw material.
outlines—and voice tracks to the Philippines.
Artists there draw, paint, and film about 20,000 sketches for
a 30-minute episode. The cost of $130,000 to produce an
episode in the Philippines compares with $160,000 in Korea
and $500,000 in the United States.
Global sourcing
Terminology of sourcing
International sourcing Buying outside the firm’s country of manufacture

Multinational sourcing in such a way that does not coordinate requirements
Foreign sourcing among world-wide business units of a single firm.
The coordination and integration of procurement

requirements across world-wide business units,
Strategic global sourcing
looking at common items, processes, techniques and
suppliers.
A commercial transaction between a buyer and a

International purchasing
seller located in different countries.
Key considerations when sourcing overseas
Global sourcing
 The buyer’s experience

 Currency fluctuations
 Supplier evaluation
 Culture and language
 Political stability
 Logistics support
 Duty and Customs regulations
 Contractual risk
 Contract management
 International quality standards
Global sourcing
The buyer’s experience
Requires the ability to research sources of supply,

conduct vendor appraisal, negotiate and put in place
a contract that effectively deals with the risks
Global sourcing
Comparison of costs of overseas and Domestic suppliers
Expense category Costs Overseas Home

supplier supplier
Area of expenditure
1. Basic price Supplier’s quoted price per item
Packaging
Sea/air freight
Marine insurance
Suppliers final price CIF/destination
2. Handling/transportation Handling charges (port of entry)
charges Storage
Port costs
Internal transport to buyer
Freight forwarding fees
Insurance
3. Customs and associated Customs duties
charges Customs clearance fees
CIF – Cost /Insurance /Freight Prepared by N.Hariharan

Global sourcing
Comparison of costs of overseas and Domestic suppliers

(Continued)
Expense category Costs Overseas Home
supplier supplier
Area of expenditure
4. International financing Costs of documentation
Currency conversion rates
Exchange rate fluctuations
Bank fees
5. Inventory costs Holding costs of higher inventory
Levels at x per cent per annum
6. Sourcing costs Costs of visit to overseas supplier
Estimate communication costs
Costs of inspection by overseas agent
Special fees, e.g. translation, legal
Total actual or estimated costs
Global sourcing
Duty and customs Regulations
This is an ever changing scene and requires expert support either from
in-house specialists or freight forwarders.
Delays in customs clearance can lead to contract failures
Delay in Customs – Takes months in India compared to few days in China

Video on Tariffs CNBC
Trade Barriers
Trade barriers are government-induced restrictions on

international trade.
Economists generally agree that trade barriers are

detrimental and decrease overall economic efficiency.
Tariff- tax on imported goods

Quota- limit on the quantity of imports done.
Tariff Barriers
Average tariffs in India are much higher than in the world's
biggest economies, and they are also among the highest
compared with other emerging economies.
But other countries have high tariffs on specific products,
and the US has imposed tariffs on more than $360bn worth
of Chinese goods in its trade war with Beijing
15
Reasons for Globalization
Global Trade agreements to reduce cost and remove the trade barriers
• T he United States and Mexico have created maquiladoras (free trade zones) that allow manufacturers to cut their
costs by paying only for the value added by Mexican workers.
• North American Free Trade A greement (NAFTA). NAFTA seeks to phase out all trade and tariff barriers among
Canada, Mexico, and the U.S.
• APEC (the Pacific Rim countries), SEATO (Australia, New Zealand, Japan, Hong Kong, South Korea, New Guinea,
and Chile),
• MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay)
• CAFTA (Central America, Dominican Republic, and United States).
• European Union (EU) has reduced trade barriers among the participating European nations through standardization
and a common currency, the euro.
Global sourcing
Currency Fluctuations
Requires expert advice from finance/banking
specialists to optimize the risk
derived from currency fluctuation during the life of the
contract
Weakening Dollar / Strengthening Euro
Value of
•$1 = €1.00 (or €1 = $1.00)
U.S. dollar
•$1 = €0.67 (or €1 = $1.50)
Falling
•$1 = €0.50 (or €1 = $2.00)
Weakening Euro / Strengthening Dollar
Value of
•€1 = $2.00 ($1 = €0.50)
Euro
•€1 = $1.50 ($1 = €0.67)
Falling
•€1 = $1.00 ($1 = €1.00)
A stronger U.S. dollar means …
U.S. can buy foreign

goods more cheaply
and U.S. imports
will increase
India find U.S. goods

more expensive and
U.S. exports fall
A weaker U.S. dollar means …
India can buy

American goods more
cheaply and U.S.
exports will increase
Indian goods become

more expensive for
U.S. residents and
U.S. imports fall
A purchaser of an offshore product
will be required to pay more (or
less) than expected as a result of
Foreign Exchange risk fluctuations in the exchange rates

between the purchaser’s currency
and that of the supplier’s currency
in which payment may be made
23
Global sourcing
Foreign Exchange risk

Assume that a Indian company buys an item of capital equipment costing $100,000
at a ‘spot’ price of Rs 75 to the US Dollor , payable in six months’ time meaning Rs 75,
If, at the time of payment, the Rs has strengthened against the dollar,
so that the exchange rate is $ 1 = Rs 73,
the number of pounds required will be lower – in fact, Rs 73,00,000.
Conversely, if the Rs has weakened against the dollar so that the exchange
rate is $1 = Rs 77 to the pound, the number of pounds required to buy $100,000
will be greater – in fact, Rs 77,00,000
The risk of a rise in price due to an adverse exchange rate is termed transaction expos
Global sourcing
Foreign Exchange risk
Reduce the uncertainty by hedging with forward contracts for a period of

no longer than six months.
If a purchaser knows that a supplier must be paid a fixed amount in

foreign currency in, say, six months, the purchaser can arrange a six-
month forward contract with the bank under which the bank will provide a
fixed amount of the foreign currency at the end of that time.
.
Global sourcing
Supplier Evaluation
There is a need to develop and apply a tailored RFI

document to probe logistics, product support,
contract terms, supply chain, finances and quality
management
Global sourcing
Culture and Language
Expert knowledge of cultural differences and how to

deal with language barriers will be needed to prevent
misunderstandings and breakdowns
incommunication
The words ‘Yes’ and ‘No’ are not straightforward in any international context.
The Japanese often use ‘Yes’ to mean ‘Yes, I understand what is being said’. Directly uttering ‘No’ is con
impolite or inhospitable in Japan, as well as in China, India and the Middle East.
Global sourcing
Culture and Language – Communication (Non

Verbal)
Dress: fashionable, flashy or conservative

Hand gestures
Facial expressions: smiles, frowns, nods, eye contact (or lack of it)
Hair styles
Greetings: bows, hugs, kisses and hand shakes
Global sourcing
Culture and Language – Communication (Non

Verbal)
Perfumes and colognes

Physical contact: hand holding, pats on the back
Posture: formal or relaxed
Time: arrive promptly, early or late?
Waiting your turn: queue up or not?
Walking: fast, slow; in group or single file; position of leader within gro
Watch video on leader's body language

https://www.youtube.com/watch?v=33HYGYKKO7U
Global sourcing
Political stability
From time to time there are serious political instabilities and uncertainties th
impact on trade.
Examples are
• Thailand,
• Zimbabwe,
• Egypt,
• Libya and
• Cuba.
Global sourcing
Logistics Support
The ability to move goods around the world in a timely manner is vita
as is the certainty of shipping, use of special containers and availabilit
emergency stocks.
Toyota Case study
Global sourcing
Contractual Risk
The basis of legal jurisdiction, dispute resolution, currency, quality standards

and inspection rights are classic areas requiring the attention of procurement
Singapore or India ?
Global sourcing
Contract Management
Either the buying organization or a third party will have to undertake

contract management,
otherwise there is the risk of non-compliance with the contractual obligations
Global sourcing
International quality standards
The buyer will need to identify the international quality standards that must
apply to a specific purchase .
Logistics and
Distribution
Management
Starbucks Global Logistics:
From the World to your Cup
Surface
Harvest/Ocean Transport Roasting/Packaging Distribution/Sale
Shipping/Storage
Logistics Management
Logistics Management: movement and storage of

materials to meet customer needs and organizational
objectives
• Includes forward and reverse flow
• Includes flow of materials and information
• Load, offload, move, sort and select material
Activities of Integrated Logistics Management
Transportation Management
Transportation Economics:
• Economy of Scale: cost per unit of weight decreases
as shipment size increases
• Economy of Distance: cost per unit traveled decreases
as distance moved increases
11–40 Prepared by N.Hariharan

Consolidation
Consolidation: one large shipment made of

many smaller shipments
• By Market Area: combine small shipments from one
shipper going to the same area
• Pooled Delivery: combine small shipments from

different shippers going to the same area
• Scheduled Delivery: delivery at specific times

Consolidation or Not – Example 1
A firm has orders of
12,000 lbs each of Cost of individual shipments:
goods for three $15.75 x (12,000/100) = $15.75 x 120cwt = $1,890
customers. It is $15.75 total for all three shipments = 3 x $1,890 = $5,670
per hundredweight
(cwt) to ship direct, or
$10.50 cwt for Consolidated shipments:
shipments of greater $10.50 x (36000/100) = $10.50 x 360cwt = $3,780
than 30,000 lbs with a including stop charge = 3 x $300 + $3780 = $4,680
$300 fee for each
stop.
Saving with consolidation = $5,670 - $4,680 = $990
Should the firm
consolidate the orders
into one shipment?
Consolidation or Not – Example 2
A firm is shipping a
package to four
customers. It costs Cost of individual shipments:
$150 to ship direct, or $150 * 4= $600
could be consolidated
into one shipment for
$300 plus a $75 fee
Consolidated shipments:
per stop.
$300 + 75*4= $600
Should the firm
consolidate the orders
into one shipment?
Why?
Transportation Mode Selection
In order to decide which mode of transportation to use to ship
an order, consider:
Speed the elapsed time required to move from the

point of origin to destination.
Availability
the ability to service any possible location.
Dependability
the variance in the expected delivery times.
Capability the ability to handle any type of product

and/or size of load.
Frequency the number of scheduled movements that

can be arranged by a shipper.
Transportation Mode Selection:
Characteristics
Which is best
for:
Automobiles
Airplanes
Coal
Oil
Trucking Industry: 3 Segments
Truckload (TL) Less-than-truckload (LTL) Specialty Carriers

• carriers usually move loads of less • include package haulers such as
than 15,000 pounds. FedEx and United Parcel Service
• carriers generally carry only full (UPS).
trailers of freight.
• carriers experience relatively higher
fixed costs because of the need to
• trucks can be routed directly from stop at a terminal for load
the shipper to the consignee. consolidation.
• typically pay higher marketing costs

because they want to generate full
loads.
• dominated by a few large carriers.
Carrier Types
Value Density: ratio of value to weight, often

determines the type of carrier used
• Common: provide service to the public with published
rates
• Contract: provide service only to select, contracted

customers
• Private: firm owns its own equipment
Transportation Service Selection
A firm must ship a

parcel of 30 items Total cost = In-transit holding cost + Freight cost
valued at $500 each
a distance of 1,000
miles. In-transit holding = days in transit/365 x value x holding
Transportation cost
options are 8-day
ground for $50 or 2- Ground:
day air for $90. = [(8days/365) x $15,000 x 20%] + $50 = $115.75
Holding cost is 20%
of product value.
How should the firm Air:
ship their product? = [(2days/365) x $15,000 x 20%] + $90 = $106.44
Student Activity
A firm must ship a Rework prior example but 30 items are now valued at only
parcel of 30 items $50 each.
valued at $50 each a
distance of 1,000
miles.
Ground:
Transportation
options are 8-day = [(8days/365) x $1,500 x 20%] + $50 = $56.58
ground for $50 or 2-
day air for $90.
Holding cost is 20% Air:
of product value. = [(2days/365) x $1,500 x 20%] + $90 = $91.64
How should the firm
ship their product?
Warehouse Management – Primary
Functions of Warehousing
• the storage of inventory in warehouses to

Stockpiling protect against seasonality either in supply
or demand.
Production • dedicated to storing parts and components

Support needed to support a plant’s operations.
Break-Bulk,
Warehouse
• splitting the shipment into individual orders
Consolidation,
and arranging for local delivery to customers.
and Cross-
Docking
Warehouse Management – Break-Bulk,
Warehouse Consolidation, and Cross-DockingI
Break-Bulk
Consolidation
Cross-Docking
Break the Bulk
The term BREAK BULK relates to trades where

the cargoes are carried in unitized form such as
palletised, bagged, strapped, bundled, drummed
and crated like below and also non unitised general
cargo (vehicles, steel etc).
52 Prepared by N.Hariharan
Network Design Airconditioning company
• Two factories manufacturing air-

conditioners,
• Eight branch offices across the country,
• 16 sales depots (each branch office
controlled two depots),
• 800 dealers (each sales depot served
about 50)
In the second alternative, the Centralized model will carry less

sixteen sales depots would no inventory but high transportation
The two factories were
longer be stock points. cost
directly sending the
goods to the 16 depots. Instead, inventory would be
maintained only in the four Distributed model carry more
zonal DCs. The sales depots inventory with safety stock
They were held in the
depots as inventory until would merely act as receiving,
dispatching, Less transportation cost
invoiced to dealers.
and invoicing points.
Network Design
Airconditioning company
• Two factories manufacturing air-

conditioners,
• Eight branch offices across the country,
• 16 sales depots (each branch office
controlled two depots),
• 800 dealers (each sales depot served
about 50)
Centralized model will carry less

inventory but high transportation
cost
Distributed model carry more

inventory with safety stock
Less transportation cost

Warehouse Management
• Reverse Logistics:
- Material moves upstream in the supply chain
- Especially important in online retail
• Value Added Services: providing additional value to the

customer, such as postponement
Warehouse Management – Primary Process Activities
Warehouses must perform a variety of operations

on a daily basis:
• Receiving and unloading

• In-storage handling
• Storage
• Order picking
• Staging
• Shipping
Materials Handling and Packaging
• Handling material increases costs and risk of damage

• Packaging can decrease handling costs and risk of damage
- Containerization or Unitization: filling or creating a larger
container from smaller ones
- Automated Storage and Retrieval Systems: robots that get,
move and put-away material
- RIFD: electronic tracking of material
Watch EDI in Retail video : https://www.youtube.com/watch?v=S4xqLDoy5hs
The Bullwhip Effect
▶ The tendency for larger order size fluctuations as orders are relayed through the supply chain
▶ Creates unstable production schedules, expensive capacity change costs, longer lead times,
obsolescence
▶ Damage can be minimized with supplier coordination and planning
The Bullwhip Effect
60 – Suppliers believe sales

are huge and respond Wholesalers order even more
accordingly to be sure retailers can be
adequately supplied
50 –
Suppliers
40 –
Retailers respond Wholesalers
Order Quantity
by ordering more
Retailers
30 –
Consumers
20 –
10 –
A short-term increase in consumer demand

0–
| | | | | | | | | | | |
1 2 3 4 5 6 7 8 9 10 11
Day
RFID Helps Control Bullwhip
Distribution Management
▶ The outbound flow of products

1) Rapid response
2) Product choice
3) Service
▶ Increasing the number of facilities generally improves response time and
customer satisfaction
Distribution Management ( # of Retail outlets)
▶ Total costs are important
▶ Inventory costs How many stores should Office Depot open in a town?
▶ Transportation costs
▶ Facility costs
▶ Total logistics costs
(b) Cost $
(a) Response Time
Response time
Lowest cost Total logistics cost
Time
$
Facility costs
Inventory costs
1 2 3 4 5 Transportation costs
Number of facilities
1 2 3 4 5
Office Depot
(c) Cost, Revenue, and Profit
Revenue
Max
Total logistics cost
profit
1 2 3 4 5
▶ Facilities, packaging, and logistics

▶ Selection and development of dealers or retailers
▶ Downstream management as important as upstream management
Thank You
66

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Supply chain Management – Session 8

 Boeing – sales and production are worldwide

 Benetton – moves inventory to stores around the

 Sony – purchases components from suppliers in

The supply chain can often be improved by

International sourcing Buying outside the firm’s country of manufacture

The coordination and integration of procurement

A commercial transaction between a buyer and a

 The buyer’s experience

The buyer’s experience

Requires the ability to research sources of supply,

Comparison of costs of overseas and Domestic suppliers

Expense category Costs Overseas Home

CIF – Cost /Insurance /Freight Prepared by N.Hariharan

Comparison of costs of overseas and Domestic suppliers

Duty and customs Regulations

Delays in customs clearance can lead to contract failures

Delay in Customs – Takes months in India compared to few days in China

Trade barriers are government-induced restrictions on

Economists generally agree that trade barriers are

Tariff- tax on imported goods

Average tariffs in India are much higher than in the world's

biggest economies, and they are also among the highest

compared with other emerging economies.

But other countries have high tariffs on specific products,

and the US has imposed tariffs on more than $360bn worth

of Chinese goods in its trade war with Beijing

• MERCOSUR (Argentina, Brazil, Paraguay, and Uruguay)

• CAFTA (Central America, Dominican Republic, and United States).

U.S. can buy foreign

India find U.S. goods

India can buy

Indian goods become

Foreign Exchange risk fluctuations in the exchange rates

Foreign Exchange risk

so that the exchange rate is $ 1 = Rs 73,

the number of pounds required will be lower – in fact, Rs 73,00,000.

Foreign Exchange risk

Reduce the uncertainty by hedging with forward contracts for a period of

If a purchaser knows that a supplier must be paid a fixed amount in

There is a need to develop and apply a tailored RFI

Culture and Language

Expert knowledge of cultural differences and how to

Culture and Language – Communication (Non

Dress: fashionable, flashy or conservative

Culture and Language – Communication (Non

Perfumes and colognes

Watch video on leader's body language

The basis of legal jurisdiction, dispute resolution, currency, quality standards

Either the buying organization or a third party will have to undertake

otherwise there is the risk of non-compliance with the contractual obligations

International quality standards

Logistics Management: movement and storage of

11–40 Prepared by N.Hariharan

Consolidation: one large shipment made of

• Pooled Delivery: combine small shipments from

• Scheduled Delivery: delivery at specific times

Speed the elapsed time required to move from the

Capability the ability to handle any type of product

Frequency the number of scheduled movements that

Truckload (TL) Less-than-truckload (LTL) Specialty Carriers

• typically pay higher marketing costs