Global Procurement

1. Global Procurement By: Munyao-mulwa Department of Management Science DPS 304: Procurement Management - UoN, School of Business

2. Terminology International Purchasing – A commercial transaction between a buyer and a seller located in different countries. Global Sourcing – Positively integrating & coordinating common items & materials, processes, designs, technologies and suppliers across worldwide purchasing, engineering and operating locations. DPS 304: Procurement Management - UoN, School of Business

3. Why International Purchasing? Changes in business environment Intense international competition Pressure to reduce costs Need for manufacturing flexibility Need for shorter product development cycles Stringent quality standards Ever-changing technology Factors related to the needs or competitiveness of the particular enterprise Domestic non-availability Insufficient domestic capacity Insurance reasons – continuity of supply Competiveness of overseas DPS 304: Procurement Management - UoN, School of Business

4. Why International Purchasing? Factors related to the needs or competitiveness of the particular enterprise Reciprocal trading and countertrade due to policy reasons or govt pressures – BOP Access to worldwide technology To obtain penetration of a growth market DPS 304: Procurement Management - UoN, School of Business

5. Benefits , in descending order Access to lower-priced goods Enhanced competitive position Access to higher-quality goods Access to worldwide technology Better delivery performance Better customer service Increased number of suppliers Helps meet countertrade obligations DPS 304: Procurement Management - UoN, School of Business

6. Challenges to Global Procurement JIT sourcing requirements Longer supply lines & risk of delays Culture and Language differences Information sharing and decision making – in Japan sharing is at all levels & decns are by teams Language – eg Japan, China , Korea Values – giving bribes Relationships & contracts eg eastern countries Political & Ethical Factors Understanding the political environment Political eg Afghanstan Ethicals like employing child labour, low pay Difficulties in supplier communication Time zones, weekend days for muslims & christians DPS 304: Procurement Management - UoN, School of Business

7. Challenges to Global Procurement Foreign exchange risk Manage exchange rate fluctuations thro; Research of Forex rates Price goods in currency of the supplier – if purchasers currency is expected to strengthen Agree on cost adjustments – separate cost increase and forex change Reduce the uncertainty by hedging with forward contracts for a period of no longer than 6 months Buy currency options – right not obligation to buy or sell forex at a specified price within a time Duty and Customs regulations Finding qualified foreign sources Logistics support for longer supply links DPS 304: Procurement Management - UoN, School of Business

8. How can one obtain information regarding buying overseas Professional contacts Trade journals Directories – international Trading companies Import brokers Ministry of Trade Shipping and forwarding agents The banks The world Bank Trade fairs & exhibitions Professional and trade organizations eg KISM & CIPS Customs & Excise departments “internet” DPS 304: Procurement Management - UoN, School of Business

9. Legal Difficulties in GP What law shall govern the transaction – buyer or supplier Arrangements for arbitration Protection of the buyer against infringement of patents Protection of the buyer against product liability Redress of complaints Delays in delivery due to the weather, cargo transfer, dock strikes and customs action Transportation including TOD Import duties and Insurance Documentations necessary for home trade eg BL, LCs, CoO etc Specifications especially where there are differences in units of measurement. DPS 304: Procurement Management - UoN, School of Business

10. Countertrade Defined as generic term for parallel business transactions, linking sellers and buyers in reciprocal commitments that usually lie outside the realm of typical money-mediated trade. i.e goods exchanged for goods Major forms of countertrade Barter or swaps Counterpurchase Buy-back or compensation eg xerox Corporation sold plant & technology to People’s Republic of China & contactually agreed to buy a larger portion of output from chinese plant DPS 304: Procurement Management - UoN, School of Business

11. Advantages of CT Avoid exchange controls Promote trade with countries with inconvertible currencies Reduce risks associated with unstable currency Enter new or formerly closed markets Expand business and sales volume Reduce the impact of foreign protectionsism on overseas business Firms make fuller use of plant capacity Firms have longer production runs Firms reduce expenses due to greater sales volume Firms are able to find valuable outlets for declining products DPS 304: Procurement Management - UoN, School of Business

12. Disadvantages of CT Negotiations tend to be longer & more complicated than conventional sales negos & at times powerful govt procurement agencies required Additional expenses eg brokerage fees reduce profitability Pricing problems for exchanged goods Offset customers can later become competitors DPS 304: Procurement Management - UoN, School of Business

13. Procurement Contribution to Countertrade identifying low-cost sources of supply that may be exploited on a countertrade basis Providing negotiating expertise when discussing countertrade arrangements with prospective suppliers Ensuring payment-in-kind products are properly inspected before the CT agreement is signed – quality Advising that raw materials are taken in compensation – for grading, comparison & flexibility of use Developing long-term CT partnerships Recognizing that properly used CT Recognizing that properly used, CT can be; A major source of low-cost, quality materials A means of preserving hard currency A means of upgrading manufacturing capabilities DPS 304: Procurement Management - UoN, School of Business

14. Incoterms Refer to the set of international rules for the interpretation of the chief terms used in foreign trade contracts. Define the responsibilities especially for passing title, risks and costs simply & safely eliminating any possibility of misunderstanding & subsequent dispute in an international transaction. Each incoterm is referred to by a three-letter abbreviation. The international chamber of Commerce (ICC) recommends reference to incoterms 2000. Terms should be used together with location. Incoterms are subject to regular revision so that they reflect transportation and communication changes. DPS 304: Procurement Management - UoN, School of Business

15. Incoterms Incoterms are grouped into 4 categories; “E” term category – EXW, the seller only makes the goods available to the buyer at the seller’s own premises. “F” term category – ( FCA, FAS & FOB ) , the seller is to deliver the goods to a carrier appointed by the buyer. “C” term category – ( CFR, CIF & CIP ), the seller has to contract for carriage but without assuming the risk of loss of or damage to the goods or additional costs due to events occurring after shipment or dispatch “D” term category – (DAF, DES, DEQ, DDU & DDP ), the seller has to bear all costs and risks needed to bring the goods to the place of destination. DPS 304: Procurement Management - UoN, School of Business