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Global Sourcing Approaches and Implementation Issues

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

84th Annual International Conference Proceedings - 1999 

Obtaining success in Global Sourcing can be one of the purchasing professional's most challenging and rewarding experiences. The probability of success can be greatly increased with the understanding of the numerous approaches to International Procurement and a discussion of a few of the implementation issues related to the selection of parts, determining the "know to knows", and targeting counties from labor rate comparison data.

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), an IPO, 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 which 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
  • Facilitate communications
  • Expedite for delivery
  • Resolve any quality issues
  • 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 than 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 still 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. These were the criteria used by a Midwest manufacturer, where both a long-term international strategy was wanted and sufficient resources to develop in-house capabilities were available. Based on an initial analysis, 174 "A" parts with annual activity of $56 million were selected for global sourcing consideration. Preliminary savings analysis suggested that savings of 28% of the total parts cost might be available. This savings estimate was based on the lower labor and overhead costs found overseas and did not include the additional costs that would be added by using a 3rd party. As stated above a third party could be expected to add 5 to 20 % to the overseas purchased price or an annual cost of between $4 million to $11 million if all items where purchased overseas and through a third party. Assuming that approximately 1/4 of the potential items where purchased overseas and through a 3rd party, would still result in added cost of $1 million to $2.8 million for the 3rd party involvement. This amount is far in excess of the $300,000 to $400.000 estimated for the Company to perform global sourcing directly. Based on this analysis, the Purchaser decided to use the Direct approach in order to gain the advantages of greater control, development of internal capabilities, avoiding the country preferences of 3rd parties, and obtaining lower total material cost.

Select of Potential Items. 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, 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. Use information like that covered in the last section to obtain labor rates for target countries. 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. The following is a check list which can be used at "Come to Know" meetings:

Come to Know Check List

  • 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.

Target Potential Countries. First develop a clear understanding of the Purchaser's objective for overseas sourcing: price, total cost, quality, capacity, technology, strategic, 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 presents the latest comparison of labor rates for production workers in selected counties. The table was developed by taking the latest data (1997 rates published September 1998) from the U. S. Bureau of Labor Statistics and adjusting it to reflect the 1998 currency exchange rates at the time of this report. Latest data with current exchange rates is available at http://www.bendorf.com.

World Labor Rate Comparison--Production Workers 1997 Labor Rates revised to 1998 Exchange Rates (Note: Table is not available in this text-only format; however, the data for each country appears below.)

164.01 4.82
Australia
Labor Rate US $ 1997 - 16.00
Average Exchange Rate 1997 - 1.35
Current Exchange Rate 1998 - 1.60
Adjusted Labor Rate US $ 1998 - 13.47
Index US=100 - 73.83
% Change 1997/1998 - -18.81
% Change 1996/1998 - -22.67
Belgium
Labor Rate US $ 1997 - 22.82
Average Exchange Rate 1997 - 35.81
Average Exchange Rate 1997 - 33.81
Adjusted Labor Rate US $ 1998 - 24.17
Index US=100 - 132.51
% Change 1997/1998 - 5.59
% Change 1996/1998 - -7.12
Canada
Labor Rate US $ 1997 - 16.55
Average Exchange Rate 1997 - 1.39
Average Exchange Rate 1997 - 1.54
Adjusted Labor Rate US $ 1998 - 14.84
Index US=100 - 81.38
% Change 1997/1998 - -11.49
% Change 1996/1998 - -12.23
Denmark
Labor Rate US $ 1997 - 22.02
Average Exchange Rate 1997 - 6.61
Average Exchange Rate 1997 - 6.23
Adjusted Labor Rate US $ 1998 - 23.36
Index US=100 - 128.08
% Change 1997/1998 - 5.74
% Change 1996/1998 - -3.21
France
Labor Rate US $ 1997 - 17.97
Average Exchange Rate 1997 - 5.84
Average Exchange Rate 1997 - 5.49
Adjusted Labor Rate US $ 1998 - 19.11
Index US=100 - 104.80
% Change 1997/1998 - 5.99
% Change 1996/1998 - -4.21
Germany
Labor Rate US $ 1997 - 28.28
Average Exchange Rate 1997 - 1.74
Average Exchange Rate 1997 - 1.64
Adjusted Labor Rate US $ 1998 - 29.91
Index US=100 -
% Change 1997/1998 - 5.46
% Change 1996/1998 - -6.27
Hong Kong
Labor Rate US $ 1997 - 5.42
Average Exchange Rate 1997 - 7.74
Average Exchange Rate 1997 - 7.75
Adjusted Labor Rate US $ 1998 - 5.42
Index US=100 - 29.71
% Change 1997/1998 - -0.02
% Change 1996/1998 - 5.14
Ireland
Labor Rate US $ 1997 - 13.57
Average Exchange Rate 1997 - 0.66
Average Exchange Rate 1997 - 0.66
Adjusted Labor Rate US $ 1998 - 13.56
Index US=100 - 74.35
% Change 1997/1998 - -0.07
% Change 1996/1998 - -2.13
Italy
Labor Rate US $ 1997 - 16.74
Average Exchange Rate 1997 - 1704.00
Average Exchange Rate 1997 - 1622.00
Adjusted Labor Rate US $ 1998 - 17.59
Index US=100 - 96.43
% Change 1997/1998 -
% Change 1996/1998 - -0.81
Japan
Labor Rate US $ 1997 - 19.37
Average Exchange Rate 1997 - 121.00
Average Exchange Rate 1997 - 118.00
Adjusted Labor Rate US $ 1998 - 19.86
Index US=100 - 108.91
% Change 1997/1998 - 2.49
% Change 1996/1998 - -5.26
Korea
Labor Rate US $ 1997 - 7.22
Average Exchange Rate 1997 - 950.80
Average Exchange Rate 1997 - 1321.00
Adjusted Labor Rate US $ 1998 - 5.19
Index US=100 - 28.48
% Change 1997/1998 - -38.99
% Change 1996/1998 - -55.74
Mexico
Labor Rate US $ 1997 - 1.75
Average Exchange Rate 1997 - 7.92
Average Exchange Rate 1997 - 10.10
Adjusted Labor Rate US $ 1998 - 1.37
Index US=100 - 7.52
% Change 1997/1998 - -27.53
% Change 1996/1998 - -12.22
Netherlands
Labor Rate US $ 1997 - 20.61
Average Exchange Rate 1997 - 1.95
Average Exchange Rate 1997 - 1.85
Adjusted Labor Rate US $ 1998 - 21.81
Index US=100 - 119.58
% Change 1997/1998 - 5.51
% Change 1996/1998 - -5.81
Portugal
Labor Rate US $ 1997 - 5.29
Average Exchange Rate 1997 - 175.40
Average Exchange Rate 1997 - 167.80
Adjusted Labor Rate US $ 1998 - 5.53
Index US=100 - 30.31
% Change 1997/1998 - 4.31
% Change 1996/1998 - -0.94
Singapore
Labor Rate US $ 1997 - 8.24
Average Exchange Rate 1997 - 1.49
Average Exchange Rate 1997 - 1.62
Adjusted Labor Rate US $ 1998 - 7.55
Index US=100 - 41.42
% Change 1997/1998 - -9.07
% Change 1996/1998 - -10.13
Spain
Labor Rate US $ 1997 - 12.16
Average Exchange Rate 1997 - 146.50
Average Exchange Rate 1997 - 139.00
Adjusted Labor Rate US $ 1998 - 12.81
Index US=100 - 70.25
% Change 1997/1998 - 5.10
% Change 1996/1998 - -5.44
Sweden
Labor Rate US $ 1997 - 22.24
Average Exchange Rate 1997 - 7.65
Average Exchange Rate 1997 - 7.62
Adjusted Labor Rate US $ 1998 - 22.31
Index US=100 - 122.30
% Change 1997/1998 - 0.31
% Change 1996/1998 - -9.24
Switzerland
Labor Rate US $ 1997 - 24.19
Average Exchange Rate 1997 - 1.45
Average Exchange Rate 1997 - 1.34
Adjusted Labor Rate US $ 1998 - 26.19
Index US=100 - 143.61
% Change 1997/1998 - 7.65
% Change 1996/1998 - -8.19
Taiwan
Labor Rate US $ 1997 - 5.89
Average Exchange Rate 1997 - 28.78
Average Exchange Rate 1997 - 32.86
Adjusted Labor Rate US $ 1998 - 5.16
Index US=100 - 28.28
% Change 1997/1998 - -14.20
% Change 1996/1998 - -14.98
United Kingdom
Labor Rate US $ 1997 - 15.47
Average Exchange Rate 1997 - 0.61
Average Exchange Rate 1997 - 0.59
Adjusted Labor Rate US $ 1998 - 16.00
Index US=100 - 87.72
% Change 1997/1998 - 3.31
% Change 1996/1998 - 11.69
United States
Labor Rate US $ 1997 - 18.24
Average Exchange Rate 1997 - 1.00
Average Exchange Rate 1997 - 1.00
Adjusted Labor Rate US $ 1998 - 18.24
Index US=100 - 100.00
% Change 1997/1998 - 0.00
% Change 1996/1998 - 2.96

Although there are many steps to the Global Sourcing Process and a chapter of consider length could be written about each, the success and productivity of global sourcing initiatives can be greatly increased by the selection of the most appropriate global sourcing approach for the organization, careful attention to the selection of items, determining and documenting the "come to knows", and targeting the best countries to meet the objectives.


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