The Future of Purchasing and Supply: Reaching Around the Globe

#11 Take the Initiative: Continuing coverage of the trends shaping the profession
By Roberta J. Duffy, writer for Purchasing Today®.
April 2000 Purchasing Today®, page 43.

Going global? Not so fast; first, purchasing and supply organizations must make supply chain decisions dictating who they will be sourcing from, which suppliers they will be developing, and whether the whole adventure fits into their global strategy.

The purchasing director for a large clothing manufacturer tells it like it is:

"In order to be competitive, I have to use labor from various parts of the world, where the rates are lower. There's no two ways about it. Everyone else in the industry does it and if I didn't, our products would need to be priced unreasonably high."

Another supply professional from a worldwide hotel chain voices different concerns: "Our customers have come to expect certain standards as they visit our various locations. They want the room amenities and service to be familiar. At the very least, they expect to receive the same value for their money with each stay. If I use local suppliers in each region, I might not be guaranteed that consistency. We're considering developing one supplier who can meet all our regional needs, even if it means huge investments upfront. It will be worth it in the long run."

Yet another executive, this one from the banking industry, articulates some of the more subtle issues related to international business activity:

"We've learned that opening up operations in other parts of the world is more than just buying and selling goods and services there. You become part of a community and need to be sensitive to that. You must understand the business dynamics of that country or region. In instances where we've wanted to use our existing suppliers, it can go a long way to at least work jointly with local suppliers in some fashion and establish some roots. You must be wise to broader trade and political influences."

Getting a Broader View

Clearly, there are many possible scenarios why organizations would choose whether or not to source or develop suppliers globally. And there is only one overriding reason why they should not: doing it just for the sake of doing so. "It should always come down to the question: are you sourcing from the best place - for your situation - in the world?" Robi Bendorf, president of Bendorf and Associates, a firm in Monroeville, Pennsylvania, specializing in global sourcing, says he is constantly posing that question to clients to keep them focused on the fact that the "best place" often changes. "The purchasing world needs to broaden its perspective and understand why it needs to know how to conduct business internationally. It's not always about finding a lower price for the U.S. market, but may be about supporting activities in foreign locations or just simply understanding the cost drivers of foreign competitors. It's about developing an ideal sourcing strategy around knowledge of both the domestic and international potentials - that may or may not include global suppliers," says Bendorf.

Marc Van Eeckhoudt, deputy manager of procurement for Exxon Mobil Corporation in Fairfax, Virginia, agrees. Although his company operates in nearly 200 countries around the world, he says that there is no fundamental distinction between domestic and international relationship activities. "It all goes back to the sourcing strategy. We have split our total spend into nearly 200 different commodity groups, and for each group, a strategy is developed." ExxonMobil then examines total systems costs, including supply chain costs, price, quality, and service. "The key success factor - and our priority - is to find a good match between supplier capabilities and our needs," says Van Eeckhoudt. In some situations the company will use a local supplier, in others it has tried to expand existing relationships.

In order to make those wise decisions about business strategy, the purchasing and supply management professional has to be as knowledgeable as any CEO on overall organization strategy and global business activity. He or she needs to know all the nuances of working in other countries to assess where the appropriate supply base resides.

For example, before the value of global sourcing opportunities can be truly evaluated, the climate must be right in terms of trade regulations or customs duties - some say that duties need to be below 20 percent before true trade can take place. Other factors to consider are fluctuations in currency exchange and how overseas organizations fund their operations. In many instances, supplier firms want to obtain letters of credit from the purchasing organization to secure funds for a given project. If a purchasing organization doesn't realize the value in this activity, it might end up with less agreeable payment terms, when a letter of credit could've offered the solution.

What are the Implications?

Many of the above factors are important when organizations use global suppliers in a local region. However, according to "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," a recent NAPM and Center for Advanced Purchasing Studies (CAPS) study, forming relationships with new global suppliers is just one option for the multinational firm. The study suggests that, more and more, organizations will persuade current suppliers to develop operations in other countries. In some cases, a current domestic supplier might be encouraged to enter into a joint venture with local suppliers, to ultimately support the purchasing firm. The desired outcome of these activities is a world-class supply base.

Imagine that some of the predictions about global source development come true. What if these models were taken to extremes? If an organization were to move into a particular region of the world and opt to develop current domestic suppliers, rather than sourcing from the local supply base, ultimately, that local supply base might shrink or disappear altogether. What effect does this have on a long-term, healthy competitive environment?

Even if organizations strive to develop a single supplier for a commodity group, it might not always be possible. As mentioned, often one of the main goals of developing suppliers on a global basis is to create standardized pricing, service, or quality requirements for the worldwide organization. Unfortunately, what can happen is that the organization will be able to develop a single supplier who will service many regions, but not all. The result is still a segmented supply base, causing variations or inconsistencies in the factors above, or additional administrative costs and complications.

Van Eeckhoudt says this is the situation with ExxonMobil. "We find there are very few commodities or sourcing strategies in which a single supplier can match our entire geographic scope." He says that a potential supplier is evaluated not only on the product or service it would provide to the region, but on secondary factors, such as the ability to service equipment, install equipment, and provide local services. "The decisions all have to begin with the sourcing strategy," he says.

So for some, developing the single supplier may not be wise. For those organizations that do believe it would be worthwhile to develop suppliers for standardization, there is a way. Large organizations may be able to exercise their buying power and place conditions on the suppliers who want to serve them on a global basis. In other words, "In order to do business with us in one region of the world, you must be able to service us in all regions of the world." Suppliers could resort to outsourcing, third-party providers, or even acquiring other organizations to meet this condition.

Because, according to the NAPM/CAPS study, managing these complex relationships will be a strategic management issue in and of itself, one possibility is that international purchasing offices (IPOs) will play a different role than they do today. Currently, many work as an entity that conducts the necessary transactions with the global supply base. There may be a shift toward IPOs being instrumental in establishing suppliers and supply relationships, but the actual management of those suppliers will fall more on the operational unit that is actually requiring the relationship with the supplier.

Where Do You Start?

What are the key steps to beginning a global supplier development venture? Some fundamental guidelines apply. First, it's unreasonable to believe that a global operation will be successful and smooth if processes and priorities aren't functioning properly on the domestic front. As organizations expand, they must make sure they're expanding with solid processes. One interesting note: this process of self-examination might prove to have great value as an isolated exercise. There have been instances where organizations have learned of inconsistencies in procedures, requirements, and standards in various facets of a domestic operation. Aligning and standardizing on a national scale can not only result in cost savings, but will help ensure that these standards make the trip abroad. Along these same lines of thinking, it can also be beneficial to roll out global supplier development efforts in a systematic manner: first at a single, larger facility, perhaps, then to all facilities in the region.

Many successful organizations speak of a global strategy and it's a key component: a purchasing organization must realize what it is trying to accomplish with global endeavors and what the priorities will be in establishing those relationships. Here are some guidelines:

  • Buying power: Many firms are looking to leverage buying power for widespread operation, and considering all suppliers in the world in the hunt for the "best suppliers" can help.
  • Price: Obviously, price variations on commodities from different markets are available and, in some cases, overemphasized. If a purchasing organization considers price alone, without analyzing supply chain costs or the possibility that the market price in particular regions could change, the value of the low price is lost. Make this just one component of your strategy.
  • Consistency of product: If standardized requirements are critical, one way to achieve this is through common suppliers that service your every address. As the study mentions, in some cases, this means developing a supplier who previously had not had operations in the region.
  • Administrative simplicity: Finally, once the other components (price, quality) have been addressed, developing suppliers can ease administrative simplicity and allow the purchasing organization the benefit of contracting, transacting, paying, and negotiating with a single entity. This could be the source of competitive advantage when all else is equal.

Around the Globe: Into the Future

There are polarized views of what the future holds for organizations that are planning to optimize the supply base on an international basis. One possibility, as "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" suggests, is that organizations will encourage current domestic suppliers to develop on a global basis. In some cases, the purchasing organization will encourage these suppliers to help develop native suppliers at the local level. Either way, the supply base will be located geographically close to the purchasing organization's operations in that area.

One other possibility is that certain areas of the world will naturally develop as leaders within particular commodities or industries, with the rest of the world sourcing from that supply base. In other words, countries or regions of the world will focus on their core competencies, based on where raw materials naturally lie. This concept was articulated by Jagdish N. Sheth, Ph.D., professor of marketing in the Goizueta Business School at Atlanta's Emory University, at last year's NAPM Annual International Purchasing Conference. He said certain products will naturally shift from being produced where the market is, to where the materials are. For example, Germany might emerge as the automotive capital of the world, with other auto-makers essentially conceding to that fact and allowing mergers and acquisitions to transpire that move the entire auto industry to Germany. Sheth says the United States will excel in financial services, knowledge services, and telecommunications. Traditional industries, such as agriculture, may reside solely in South America, for example.

The one factor that may end up carrying the most weight in the direction of global sourcing and global supplier development is supply chain costs. If several tiers within a supply chain move to or develop in a certain region, purchasing organizations may see incredible price reductions, but the longer the geographic chain, the higher the supply chain costs, such as travel expenses or supporting infrastructure costs. "Transportation costs might prove to be a limiting factor," says Bendorf. "People are making all kinds of advances in technology or process, but there's only so much you can put on a highway or on a cargo ship."

On the other hand, if the world supply markets become fragmented into different countries or continents, transportation costs of moving the product down the supply chain could be the component that distinguishes competitive advantage. If all the automobiles and automotive components are manufactured in Germany, supply chain costs for the customer in Europe will be much lower than for the customer in Asia. At some point, would demand force supply operations to begin again in other parts of the world?

A secondary effect that is likely - and actually already taking place - is that purchasing organizations may come to have more and more invested in the regions where they operate and develop suppliers. Executives talk about the need to build local infrastructure, schools, and communication lines before they can hope to fully develop suppliers and get down to the business at hand. The depth of involvement, awareness, and financial resources all become part of the supply chain costs which must be considered.

Are there global opportunities for each supply professional's situation? Perhaps. Will the clothing manufacturer, the hotel executive, and the banker all benefit from a global strategy? Most definitely -as long as they realize that a global strategy doesn't necessarily mean the same for each. Whether they choose to source from a particular market, develop existing suppliers to meet new requirements, or - after analysis - avoid the issue altogether is unknown. The only certainty is that complexities in sourcing, contracting, and operating a business multiply across borders, so knowledge is the name of the game.

Initiative #11: Global Supplier Development

"Box page 46"

The 1998 study, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," by NAPM, the Center for Advanced Purchasing Studies (CAPS), A.T. Kearney, Arizona State University, and Michigan State University, details 18 future initiatives that will shape the purchasing and supply management function in coming years. For a complete list of the previous articles in this series and upcoming topics, see page 32 of the February issue of Purchasing Today®. This month, Purchasing Today® provides commentary on one aspect of the study: Initiative #11, Global Supplier Development. The study offers the following predictions:

  • Global supplier development will prove critical to foreign market penetration.
  • Firms are likely to continue to ask existing world-class suppliers to grow with them as the firms expand.
  • Organizations will ask those suppliers to develop manufacturing capabilities in foreign markets.
  • The pressure for local content suppliers is still present, but decreasing.
  • When local content requires development of a new supplier, the trend is to ask an existing strategic supplier to create a joint venture with a local firm.
  • An emerging strategic issue is the management of these joint-venture relationships.
  • Internet technology will become the interface for supply chain management.

Your Passport to Excellence

"Box page 48"

Global supplier development is cited in "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" as a trend facing purchasing and supply management professionals. Ask yourself the following questions to determine if your organization has in place some of the key success factors for global supplier development:

  • Does your organization have processes and procedures in place that are well-tested, efficient, and effective? It's often best to optimize these in one location, then regionally, before moving into foreign markets.
  • Are international regulations, such as customs duties or international trade laws, favorable to your sourcing or supplier development efforts?
  • Have you examined all of the supply chain costs that are incurred as an operation reaches global proportions?
  • How familiar are you with the geographic region in which you're considering sourcing or developing suppliers? Do you know the nuances of the culture, the political forces in power, the demands of that marketplace, and the accepted business practices?
  • The ultimate question is "Are you sourcing from the best suppliers in the world?"