VII. Managing the Global
Purchasing Business
Managing global purchasing is basically managing supplier relationships and
managing supplier relationships is a critical component of an effective purchasing
operation. |
The trend in business is leading toward a reduction in the number of suppliers
reinforcing the need to select quality suppliers and develop and maintain strong
relationships with them. And in dealing with business people in other countries, it is
important to be sensitive to local business practices and etiquette, negotiating and
entertainment styles, as well as the cultural influences on the business environment. |
|
VII.1. Managing the Relationships
If there is one word which represents the basis for successful relationships in
global purchasing, that word would be "TRUST". |
Trust is the foundation and key to effective customer-supplier relationships. Trust
is the foundation and key to effective customer-supplier relationships. But,
"trust" unlike expression such as "cooperative supplier relationships"
which can be based and measured by a number of practical and quantifiable criteria,
"trust" is a philosophical idea. |
To translate "trust" from a philosophy into workable set of practices and
action, it requires three components - according to Timothy Laseter, vice president of
Booz-Allen, and Hamilton in New York: |
MUTUAL DEPENDENCY: "This occurs when both parties understand that
cooperation is necessary for each company to succeed." |
AMBITIOUS GOAL: Alone, mutual dependency can lead to stagnation but common goals
drive both sides to achieve the best they can from the relationship. A company might begin
with the philosophy that suppliers should be as profitable as their customers, resulting
in win-win negotiations, shared-savings programs, and incentives for superior performance. |
KNOWLEDGE OF COMPETENCY: Blind trust of even the most committed supplier is
misplaced, Laseter argues, noting that mutual dependency and common goals are meaningless
if a supplier lacks capacity to meet customer requirements. |
|
VII.2. Performances and Review of Suppliers
But, in spite of the best relationships possible, and on a continuous basis,
monitor the performance of your suppliers by tracking changes that may affect their
ability to meet your supply needs such as:
| - Changes in their risk score |
| - Changes in control |
| - Business moves |
| - Public filings such as suits, liens, judgments or
bankruptcie |
| - Disasters such as earthquake, fire or flood |
|
In addition, you still need a more elaborate system. |
Define a Performance and Review Program to monitor your suppliers. It becomes very
costly dealing with poor performing suppliers, and if you lack the measures you are doomed
to a life of putting out fires started by someone else. |
Following the lead of world-class purchasing departments, more and more companies
are developing formal program to measure performance throughout the supply chain. The
Performance and Review Program should be tailored to your company’s needs and
objectives. In addition, on regular basis re-qualify your existing suppliers and plan for
contingencies:
| Satisfactory past performance is
not necessarily an indication that your supplier will continually perform at an acceptable
level. |
| On a periodic basis, depending on the importance of
the supplier, re-qualify your suppliers using the same standards you’d use when
qualifying a new supplier. |
|
Ask yourself the following:
| - Are they upgrading their
technology? |
| - Can they continue to meet increased demands for
quantity and quality? |
| - Have supplier attitude or level of support
changed recently? |
|
And, make sure you source new avenues of supply for back-up before it’s too
late. |
|
VII.3. Negotiations
Regular negotiations are a part of global purchasing.
The globalization of product and service, competition and global purchasing turned the
table-banging negotiator of the past into a kinder, gentler advocate of trust-based
partnerships.
As a matter of fact, the table-banging negotiations were never part of the international
business culture. |
|
VII.3.a. Pricing |
VII.3.a.1. The Pricing Strategy
and the Terms of Sale
The pricing strategy and the terms of sale related to global purchasing should take
into account these additional considerations:
| - The effect of the prevailing
exchange rate on the local currency. |
| - These costs should also include any additional
costs associated with import, such as export packaging. |
| - The terms of sale specifies where, when, and
under what terms ownership of the goods, associated delivery expenses, and risk will shift
from seller to buyer. |
|
It is critical for a firm engaged in global purchasing to understand the
international trade terms, the relevant cost and risk assumptions, so that they can
minimize the risk associated with ownership of goods, while effectively managing the total
costs associated with a shipping program. |
A useful exercise in establishing the price is to develop a pro-forma invoice which
includes all of the specific costs associated with getting the good all the way to your
premises, or at least on-board ship. |
|
VII.3.a.2. The Sourcing Cost Index (SCI)
At the initial prices negotiation with suppliers, it is advisable that you develop
some tool to help you track price increase. This tool, such as SCI (Sourcing Cost Index),
which prevents any conflict between you and your supplier when it comes to price increases
and might even create an atmosphere where the supplier is encouraged to initiate cost
freeze or cost reduction while delivering increased value. |
To be effective, and fair, this tool should include overall commodity prices,
economic factors that drive those commodities, strength of the dollar, wage, technology,
etc. Tactically, this index gives the buyer leverage over the supply base as they have a
better idea of the suppliers’ cost structure. It is a powerful negotiation tool.
Through the index, buyers have a numerical backup to support their sense of the market. |
|
VII.3.b. Method of Payment
There are several methods of payment in common use by firms engaged in
international purchasing. The selection of a method of payment involves a trade-off
between credit risk exposure for the seller versus issues of cost and convenience for the
buyer. |
The four principal methods include:
| - Cash in Advance - which imposes the greatest
burden on the buyer but poses the least risk to the exporter. |
| - Letter of Credit (L/C) - where the buyer has to
shoulder the expense of opening a letter of credit, however the exporter is assured of payment
upon accurate presentation of the requisite documents to the guarantor bank. |
| - Documentary Collection or Draft - where the buyer
provides a cash payment or a written promise to pay at a specified future date when the
requisite documents are presented. The risk to the exporter is increased, however the buyer
does not have to incur the expenses associated with a letter of credit. |
| - Open Account - which poses the greatest risk to
the exporter. |
|
|
VII.4. Contract/Agreement and Addenda
Be aware of governments’ standard forms agreement or contract. Customarily,
such forms are utilized merely as a starting point. They should not be used blindly, that
is, without being tailored to the particular supplier or transaction and to the laws of
the countries involved. |
In general, in your negotiations, you should think about the following issues:
| 1. The description of the goods, including the
quality and the amount to be purchased; |
| 2. The time and method of delivery; |
| 3. If any governmental approvals are required for
one party to perform, who is to obtain them, and whether they are conditions precedent (one
party does not have to perform until the approval is obtained) or subsequent (one party is
released from performance if the approval is not obtained). |
| 4. Who is responsible to pay taxes and duties. |
| 5. The currency of payment and the method of
payment. |
| 6. Whether there is any right of inspection, and if
so, when it will be exercised. |
| 7. The terms of any warranties on the goods sold. |
| 8. Any limitations on damage recoverable between
the parties. |
| 9. Whether there is any right of indemnification
for product liability suits and patent, trademark or copyright infringement. |
| 9. Whether there is any right of indemnification
for product liability suits and patent, trademark or copyright infringement. |
| 10. A definition of force majeure and its effect on
the contract. |
| 11. A statement of what law governs the contract. |
| 12. A statement of the governing language of the
contract, that is, if written in more than one language, in the event of vagueness or conflict
in the meaning of words, which language controls. |
| 13. whether the parties can assign or transfer
their rights and obligations under the contract to someone else. |
| 14. Whether the contract is integrated, that is,
whether it expresses the entire understanding between the parties, or rather, can be
supplemented by other writings or oral communications. |
| 15. Where any notices from one party to the other
should be sent, how they should be sent, and when they will be deemed sent. |
16. If a dispute arises, the place where the
dispute will be resolved.
17. If arbitration, what is the enforceability of any award |
|
There might be other issues to consider in any given situation, and they should be
discussed with the lawyer actually drafting the contract. |
|
|
VII.5. Logistics
The logistic of global purchasing must be closely evaluated.
Shipping product from overseas involves a number of different parties (e.g. freight
forwarders, shipping companies, customs, etc.) as well as specific requirements for
packing, labeling, documentation, and licensing. |
Many companies out-source the responsibility to freight forwarders and other trade
service providers for coordinating the shipments and meeting these various requirements. |
However, it is still important to fully understand the various considerations
(including costs and risks) in order to avoid unnecessary problems and ensure that the
associated expenses are incorporated into the total cost of the product imported.
One of the considerations is the transportation options. When determining the mode to be
used in international shipping, the importer/exporter should consider the total logistics
cost, not simply the least cost transportation option. |
Although air carriers are more expensive from a narrow transportation cost
measurement, their cost may be offset by lower domestic shipping expenses or reduced
inventory carrying costs. Ocean transport is cheaper but slower, and requires further
transportation arrangements should the goods be bound for an inland destination. |
Documentation is an important element of the import/export process and is primarily
driven by the requirements of both exporter's and importer's governments. However, trade
documentation is also needed to support financial aspects of the transaction, such as the
insurance of the shipment and collection of payment from the importer or his bank. The
following documents are commonly used in exporting/importing, although which are actually
used in each case depends on the requirements of both the governments involved.
| - Commercial invoice |
| - Bill of lading |
| - Certificate of origin |
| - Inspection certification |
| - Dock Receipt and Warehouse Receipt |
| - Insurance certificate |
|
Documentation must be precise. Slight discrepancies or omissions may prevent
merchandise from being imported, cause delays or even result in the seizure of the
shipment by the customs authorities. Much of the documentation is routine for freight
forwarders or customs brokers acting on the firm's behalf, but the exporter is ultimately
responsible for the accuracy of the documentation. |
While developing a global purchasing strategy, you should consult with the
necessary trade service providers in order to establish the costs involved in a given
transaction. The most important trade service providers for importing include banks
and freight forwarders. |
|
VII.6. Managing the Risks
Firms dealing in the international marketplace must deal with a number of financial
risks, including foreign exchange risks and the risk of damage to goods while in transit.
Fortunately, the banking and insurance industries have developed a number of products and
mechanisms to help their clients lay off these risks, including:
The insurance industry offers various types of insurance policies to protect goods in
transit against theft or damage. Cargo insurance coverage can vary between "minimum
cover" policies and "all risks" policies, at the discretion of the insured.
Insurance can be purchased for a specific shipment or cover all shipments for a set time
period (open cover policy).
Remy M. Mauduit |
|
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