The Global Sourcing Process - On the Road to World-Class

Author(s):

Robi Bendorf, C.P.M.
Robi Bendorf, C.P.M., Consultant, Bendorf & Associates, (www.bendorf.com), Monroeville, PA 15146-4735, Voice: 412-856-4453 Fax: 412-856-1226, robi@bendorf.com

86th Annual International Conference Proceedings - 2001 

Knowledge about Global Sourcing is one of the frequently defined skill sets needed for those on the road to World-Class purchasing performance. Implementing a successful Global Sourcing Initiative is both challenging and rewarding and usually brings significant competitive and strategic benefits to the organization as well as recognition to the purchasing professional involved. The probability of success can be greatly increased by defining and following a global sourcing process and developing an understanding of some of the key implementation issues that will be discussed in this presentation.

The Global Sourcing Process. Although a chapter of consider length could be written about each of the following listed 22 steps in the Global Sourcing Process, our objective in this presentation is to simply introduce the process and provide basic pointers from those who "have been there, done that" on the 1st five key steps of the process.

  • Obtain Senior Management & Cognizant Personnel Support
  • Select Products
  • Come to Know Analysis
  • Determine best Sourcing Method
  • Target Potential Supply Countries
  • Locate Interested Sources
  • Develop Inquiry Packages
  • Obtain Supplier Quotations
  • Determine Freight & Import Costs
  • Develop Delivered Price
  • Qualify Suppliers
  • Prepare for Negotiations
  • Resolve Technical, Commercial & Quality Issues
  • Write & Place Contracts
  • Issue Letters of Credit if required
  • Order Administration
  • Provide Shipping Instructions
  • Pay Supplier
  • Handle Export Details
  • Handle Shipping
  • Handle Import Details
  • Pay all Brokers, Duties, and Import Charges

Obtain Senior Management & Cognizant Personnel Support. It is very important, once senior management commitment is obtained, to also get the support from engineering, quality, marketing, HR, finance and any other function that may be involved or impacted. Getting these commitments is a must since you should not continue without the support of all cognizant activities. There have been many cases where months of work and thousands of dollars have been wasted because an engineering or quality department was not committed and therefore would not even evaluate a part from an overseas supplier. Make sure that all involved functions have the time to support your global initiatives and have budgeted for the additional expense involved for tooling, travel, and testing.

Select Products. No matter what sourcing approach is utilized, a formal method for evaluation and selection parts should be developed for the global sourcing initiative. This is a critical step which, when done well, will greatly increase the success rate and avoid wasting valuable resources on global searches which should have never been started. A typical formal method would include the following steps:

Step A. ABC analysis. Only the "A" category parts, those usually making up 80% of the Dollars but less than 20% of the parts, should be considered. As a general rule there is usually insufficient savings to justify the cost and risk to go global on items with less than $100,000 in annual activity. There are of course exceptions.

Step B. Group by Process. Organize the selected parts by manufacturing process, e.g. casting, stamping, machined part, assembly, etc.

Step C. Rate parts for stability, difficulty to manufacture, and longevity. Delete parts that are proprietary, subject to frequent design change, or have manufacturing, quality or design problems.

Step D. Rank remaining parts by potential savings of going global. Develop potential savings by cost or price analysis. Obtain labor rates for target countries and logistics costs. Confirm that current domestic purchases are from the best source at the best possible price. Often significant savings are obtained by going global because we have not properly evaluated the domestic market.

Step E. Select Parts for RFQ. Select 1 or 2 of the highest potential savings parts from each Group for the pilot RFQ.

Step F. Perform "Come to Know" analysis

"Come to-Know" Analysis. Most of the difficulties in taking parts made domestically to foreign locations occur because of the many things that you and the present supplier have "come to know" about the item that have never made it to the drawing or specification. Every part seems to have these "come to knows" and it is essential that you define what they are before the RFQ package goes out. It is best to hold a "come to know" meeting with everyone who has anything to do with the part. Create a checklist like the following to guide the meeting:

Come to Know Checklist

  • Confirm the results of the Global Sourcing selection criteria for the subject parts.
  • Have all referenced documents been identified and made available for review session?
  • Have all non-Company documents (Government/industry standards) been identified and made available for review session?
  • Are parts available for review session?
  • Have parts which will be sent to suppliers been inspected against current drawings?
  • Have all outstanding drawing and specification revisions been incorporated?
  • Have Addresses, phone numbers, and contacts been identified for US suppliers who are specified in drawings and specifications?
  • Identify any known manufacturing problems occurring with existing supplier and determine ways to eliminate with new supplier.
  • Identify the inspection methods that must be used by the supplier and confirm that the same method and equipment will be used by Company.
  • Identify any tooling or inspection items which must be supplied.
  • Is there any requirement related to the part that is not in the drawings or specifications?
  • Is there any requirement defined in the drawings and specifications that is not being met by the current supplier and therefore should not be applied to any new suppliers?
  • Can overseas suppliers get the required material.
  • Can overseas suppliers obtain all finishing and marking processes and materials?
  • Is packing method clearly defined and does it take into consideration overseas issues such as corrosive salt air.

Select Sourcing Approach. Depending on the estimated dollar volume, potential savings, the international purchasing experience level, the strategic objectives and the resources available, one of the following Global Sourcing approaches should be selected:

  • US Sales Contact Of Foreign Suppliers
  • US Global Sourcing Company
  • Overseas Sourcing Representatives
  • International Purchase Office (IPO)
  • Direct to Supplier

Each of these approaches has benefits and disadvantages. For example the following tables represent the services provided, the advantages, and major disadvantages of using a US Global Sourcing Company, Overseas Sourcing Representative (OSR), and going Direct to the Supplier:

US Global Sourcing Company
Services Provided by US 3rd Party
  • Determine items suitable for global sourcing
  • Locate and develop suppliers
  • Negotiate pricing
  • Determine logistic and import costs
  • Coordinate formal evaluation process
  • Place and administer Orders
  • Handle communications
  • Administer Quality Program
  • Accept financial risk
  • Handle currency issues
  • Pay the Supplier
  • Administer logistics and importation process
  • Pay freight, duty, insurance, Broker and other import costs
  • Act as the Importer of Record
  • Resolve disputes
  • Advantages US 3rd Party Sourcing
  • Speed-up the global sourcing process
  • Improve the potential for success
  • Reduce the amount of internal resources required
  • Eliminate the need for the development of internal global sourcing capabilities
  • Most of the initial search cost is born by the 3rd party and
  • If insufficient savings are obtained, then the buyer has no further exposure
  • Major Disadvantages
  • Increased price (7 to 20 %)
  • Reduced control
  • Failure to develop internal Global Sourcing capabilities that may be essential to maintaining competitiveness
  • Buyer has minimal communications with supplier
  • 3rd party may lack sourcing capabilities in other parts of the world
  • Very difficult to remove from the Buyer/Supplier relationship

  • Overseas Sourcing Representative
    Services Provided by Overseas Sourcing Representative
  • Understanding the purchaser's requirements
  • Finding and qualifying potential suppliers
  • Helping potential suppliers understand requirements Obtaining Quotes
  • Negotiations with suppliers
  • Arranging for evaluation visits by purchaser and escorting purchaser while in country
  • Insure order entry
  • Resolve Issues
  • Expedite Deliveries
  • Handle Quality issues
  • Facilitate Communications
  • Orders can be placed on OSR who will place on Supplier
  • OSR can make payment to supplier
  • OSR can perform inspection
  • OSR can take full quality responsibility
  • Advantages Overseas Sourcing Representatives
  • Shorten search & response period
  • Work on Commission
  • Generally know the reputations of the suppliers
  • Can find small obscure suppliers
  • Know the Customs & Culture
  • Act as in country escorts and make in country visits much more productive
  • Improve negotiations
  • Perform inspection
  • Expediting & Communication assistance
  • Major Disadvantages of using OSR
  • Add to direct material cost (5% to 20%)
  • Failure to develop internal global sourcing capabilities
  • May limit number of potential suppliers
  • Difficult to select OSR
  • OSR most receive successes for continued relationships
  • May be paid by the suppliers as well
  • Difficult to remove from supplier/purchaser relationship

  • International Purchasing Office
    Services Provided
  • Same services as OSR
  • Advantages IPO
  • All those identified for OSA plus
  • Total Company focus
  • Possibly lower cost that OSA or 3rd party
  • Major Disadvantages for using IPO
  • Costly to operate
  • Addition to headcount
  • Failure to develop internal Global Sourcing capabilities
  • Favors location Country
  • Most have very high activity to justify
  • IPO's Policy and Procedures
  • Must have Import capabilities

  • Global Sourcing Direct
    Services Provided
    Your organization must provide all activities of US 3rd Party direct and Overseas Sourcing Representative
    Advantages Company Direct
  • Greater Control
  • Develop Internal capabilities
  • No country preference
  • Lower Material Cost
  • Major Disadvantages for Company Direct
  • Additional Headcount
  • Must develop Internal capabilities
  • Longer search & response time
  • Increased Risk
  • Must develop country specific knowledge
  • In country expediting & communications
  • For most Purchasers, the decision to go Direct should be based on the expected volume of international purchases, the commitment to long-term international sourcing strategies and the internal resources available. The major point in presenting various global sourcing approaches is that there is choice from the 5 basic methods described above that will meet the objectives, skill sets, and resources of the organization.

    Target Potential Countries. First develop a clear understanding of the organization's objective for overseas sourcing: price, total cost, quality, capacity, technology, strategic, or expanded sales and then determine which countries will best meet the objective. An excellent place to search is the US Department of Commerce's National Trade Data Bank (NTDB) which has an almost unbelievable amount of trade and country information. For a very small annual fee you can get the NTDB on line (www.stat-usa.gov) or on CD.

    Although there are many reasons why companies source internationally, the opportunity to take advantage of lower labor rates still ranks the highest. The table shown below (Not available in Text-Only Version, go to www.bendorf.com ) presents the latest comparison of labor rates for production workers in selected counties. The table was developed by taking the latest data (1998 rates published January 2000) from the U. S. Bureau of Labor Statistics and adjusting it to reflect the November 20, 2000 currency exchange rates at the time of this report. Latest data with current exchange rates is available at www.bendorf.com. Sorry, the U.S. Bureau of Labor Statistics does not publish data for China or India at this time and does not currently have a plan to do so.

    In conclusion, although there are many steps to the Global Sourcing Process, the success and productivity of global sourcing initiatives can be greatly increased by careful attention to the selection of items, determining and documenting the "come to knows", the selection of the most appropriate global sourcing approach for the organization, and targeting the best countries to meet the objectives. Good luck on your journey to developing World-class performance for yourself and your organization.


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