Global Supply Management: Strategies and Challenges

1. Chapter 14 Global Supply Management

2. Growth in World Trade The total value of world merchandise imports in 2008 was $16.4 trillion World commercial services exports in 2008 was $3.5 trillion The total value of U.S. merchandise imports in 2008 was $2.1 trillion The total value of U.S. commercial services trade in 2008 was $368 billion The WTO estimates the value of worldwide merchandise trade imports grew by a factor of 95 times between 1948 and 2001

3. Reasons for Global Purchasing Unavailability of items domestically Price/cost labor costs, exchange rates, equipment and processes, product and pricing focus Government/marketing pressures Quality Faster delivery and continuity of supply Better technical service Technology Marketing tool Tie-in with offshore subsidiaries Competitive clout

4. Potential Problem Areas in Global Purchasing Source location and evaluation Lead/delivery time Expediting Political and labor problems Hidden costs Currency fluctuations Payment methods Quality Warranties and claims • Tariffs and duties • Administration costs • Legal problems • Logistics and transportation • Language • Communications • Cultural and social customs • Ethics and social responsibility

5. Potential Hidden Costs Foreign exchange premiums Commissions to customs brokers Terms of payment costs and finance charges: letter of credit fee, translation costs, exchange rate differentials Foreign taxes imposed Import tariffs Extra safety stock/buffer and transit inventory, plus inventory carrying costs due to longer lead times Extra labor for special handling Obsolescence, deterioration, pilferage, and spoilage • Additional administrative expenses • Packaging and container costs • Business travel • Fees for freight forwarders, consultants, or inspectors • Marine insurance premium. • Customs documentation charges • Transportation costs, including from manufacturer to port, ocean freight, from port to company plant, freight forwarder’s charges, port handling charges, warehouse costs

6. General Guidelines for Dealing withInternational Suppliers Even if English is spoken, speak slowly, use more communication graphics and avoid use or metaphors and jargon Bring an interpreter to all by the more informal meetings Allow extra time to educate interpreters on issues Document in writing the main conclusions and decisions Learn about the country’s history and taboos Do not use first names unless invited to Get cultural advice from professional or your own company employees, not from supplier representatives in the U.S. Expect negotiations to last longer with some cultures Suppliers must learn to accept you and your company as a customer Source: Dick Locke, Global Supply Management, New York: McGraw-Hill, 1996

7. Organizational Considerations Regional purchasing offices Organized geographic regions Global Commodity Management Organization When there are a large number of common requirements across facilities or business units and the supply base is not always located in the same geographic area as the buying company’s operations International Purchasing Office (IPO) Separate purchasing organization usually reporting to head office purchasing department

8. Intermediaries Import brokers and agents For a fee will assist in locating suppliers and handling the paperwork Import merchants Buys the product, takes title and delivers it to buyer Supplier’s subsidiary Sales representatives Trading companies Potential advantages: convenience; efficiency; potentially lower costs, due to volume; reduced lead times; and greater assurance of the product meeting quality specifications

9. Information Sources The Internet Government sources Chambers of commerce located in major cities in the United States, Canada and around the world Supply organizations at other companies Supplier locator directories Kelly’s Directory, Thomas Register, Dun & Bradstreet Importers and foreign trade brokers Other sources e.g., Suppliers, banks

10. Incoterms Developed by the International Chamber of Commerce Updated: Incoterms 2000 Internationally recognized standard definitions that describe the responsibilities of a buyer and seller in a transaction Variations across regions and among carriers possible so make sure to specify conditions 13 standard Incoterms Each term must be followed by a geographic location, such as a port or city

11. Incoterms: Departure EXW: Ex Works (named place) Buyer takes title when goods picked up at the supplier’s factory and is totally responsible for shipment, customs clearance and duties. Places greatest responsibility on the buyer

12. Incoterms: Main Carriage Unpaid FCA: Free Carrier (named place) Goods have cleared by the seller for any export customs procedures and the seller is responsible for loading the goods The buyer takes possession at the named place in the seller’s country FAS: Free Alongside Ship (named port of shipment) The seller clears the goods for export and delivers them to the port of export The buyer takes possession at the dock at the port of export

13. Incoterms: Main Carriage Unpaid FOB: Free on Board (named port of shipment) The supplier clears the goods for export and is responsible for the costs and risks of delivering the goods past the rail at the named port of shipment The buyer takes responsibility for the goods as they pass over the ship’s rail during the loading process. Note: This term is used differently from the conventional North American term “F.O.B.”

14. Incoterms: Main Carriage Paid CFR: Cost and Freight (named port of destination) The supplier clears the goods for export and arranges and pays freight as far as the port of entry Title and risk of loss transfer to the buyer from the time the goods go over the ship’s rail in loading - the buyer owns the goods on a carrier selected by the supplier.

15. Incoterms Main Carriage Paid CIF: Cost, Insurance and Freight (named port of destination) The supplier clears the goods for export, arranges and pays the freight and marine insurance for the goods Title and risk transfer once the goods clear the ship’s rail while being loaded CPT: Carriage Paid To (named port of destination) The supplier clears the goods for export, delivers the goods to the carrier and pays for carriage to the port of destination, unloading customs clearance and duties Title and risk risk of loss transfers when goods are transferred to the carrier

16. Incoterms Main Carriage Paid CIP: Carriage and Insurance Paid To (named port of destination) The supplier clears the goods for export, delivers the goods to the carrier and is responsible for paying carriage and insurance to the named port of destination The seller is also responsible for costs of unloading, customs clearance and duties Title and risk risk of loss transfers when goods are transferred to the carrier

17. Incoterms: Arrival DAF: Delivered at Frontier (named place) The supplier clears the goods for export and is responsible for making them available to the buyer at the named place at the frontier, and not cleared for import. Title transfers at named place and time at the frontier. DES: Delivered Ex Ship (named port of destination) The supplier is responsible for clearing the goods for export and for making them available to the buyer on board the ship at the port of destination, not cleared for import. Title transfers from time the goods are made available at the named port

18. Incoterms: Arrival DEQ: Delivered Ex Quay (named port of destination) The supplier is responsible for clearing the goods for export and making them available to the buyer on the warf at the named port of destination, not cleared for import The buyer is responsible for import clearance, duties and other costs upon import and transport to the final destination Title transfers from time the goods are made available at the warf

19. Incoterms: Arrival DDU: Delivered Duty Unpaid (named place of destination) The supplier clears the goods for export and is responsible for making them available to the buyer at the named destination, not cleared for import. The buyer is responsible for import clearance, duties and associated administrative costs. Title transfers at the named place of destination

20. Incoterms: Arrival DDP: Delivered Duty Paid (named place of destination) The supplier clears the goods for export and is responsible for making them available to the buyer at the named destination, cleared for import, but not unloaded Title transfers at the named place of destination.

21. Countertrade Countertrade is the practice of a company promising to buy material, products or services from a country in return for the privilege of selling in the country The supply function may be called to: Use material acquired through a barter/swap Identify cost-effective sourcing alternatives to fulfill offset agreements Identify goods and services to fulfill counter purchase agreements Set-up buyback agreements Negotiate switch trade agreements with a broker or trading house

22. Foreign Trade Zones (FTZ) FTZ: isolated, enclosed area in or adjacent to a port of entry, used to used to import, process, and reship products to foreign markets. Main purpose for using FTZ’s are to avoid, postpone, or reduce the tariff on imported goods FTZ’s differ depending on their major functions. transshipments, storage, exhibition and display, manufacturing