Implementing Global Sourcing

By Robi Bendorf, C.P.M.

(this article was written for and appeared in the NAPM 1998 International Purchasing Conference Proceedings)

Getting the greatest value for every dollar spent has become a common business imperative that has top management asking the question "are we buying from the best place in the world?" Those who know the answer have added an exciting and challenging aspect to their career. The purpose of this presentation is to improve the productivity and success of those new to global sourcing initiatives by outlining a process for implementing international purchasing based on the experiences of those who have "been there, done that".

The Global Sourcing Process. Although a chapter of consider length could be written about each of the following listed 20 steps in the Global Sourcing Process, our objective in this presentation is to simply introduce the process and provide some basic pointers from those who have had considerable experience in using it. It is strongly recommended that you take advantage of the many excellent NAPM articles and seminars in order to continue to build your global sourcing skill set.

1. 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 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.

2. Select Products. A method for evaluation and selection parts should be developed for the initiative. A typical 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. Delete parts that are proprietary, subject to frequent design change, or have manufacturing, quality or design problems.

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

Step C. Rank by Potential Savings. Develop potential savings by cost analysis. Use information like the comparison of hourly labor rates for selected countries published by the U.S. Bureau of Labor Statistics.

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

3. "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 and go over the "come to know" checklist which is covered in the article "The "Come to-Know" Analysis--Enhance the success of international procurements by this important step in the Global Sourcing Process found in the article section of this site."

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

Each of these approaches has benefits and disadvantages that are discussed in the article "Approaches to International Sourcing" located in the article section of this site.

5. Target Potential Supply Countries. First understand what your objective is for overseas sourcing, price, 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. An easy approach is to search the NTDB for the major countries of US imports for the products you are interested in.

6. Locate Interested Sources. Once you have identified the potential countries and determined that your best approach to international buying is to go direct instead of using the 3rd parties discussed in step 4, you are ready to identify potential suppliers. Besides antidotal information from other company buyers, the following is a list of sources for locating potential suppliers:

Once you have identified potential suppliers, send polite faxes giving a description of your company, some details of the items you are searching for, request that they respond with their interest in receiving a formal RFQ, and that they provide basic information about their company. Do not be surprised if you do not get a large response. One company sent out over 500 faxes and received only 30 responses.

7. Develop Inquiry Packages. This is a very important step that often receives too little attention. It is surprising how often companies issue very poor quality RFQ packages. These are the very same companies who are insisting on top quality from their suppliers. Make sure that the drawings are easily readable, that every drawing and specification referenced is included in the RFQ package. Include all referenced non-company documents such as government and industry standards. Make sure that cleaning, packaging and packing requirements are clearly defined. Be sure and specify not only the estimated annual quantity, but also the release quantity of each shipment. Clearly identify what information you will want to receive with the proposal so that you can perform the preliminary supplier evaluation.

If the supplier is in a country with an easily convertible currency, ask for prices to be quoted in the supplier's currency. Be sure and ask the supplier to identify the nearest port and request that he includes the size, weight and quantity of each box to be shipped. Become familiar with the ICC Incoterms that define the responsibilities of buyer and seller in international shipments. Obtain advice from experienced international shippers for the best terms to use in your situation. Be prepared to receive a lot of questions from the suppliers. It is best to provide telephone numbers and times when you can be reached during the supplier's workday.

8. Obtain Supplier Quotations. Make sure to ask to receive quotes in writing and by Fax. Send polite faxes to suppliers who are late with bids, asking them if they need help in quoting and also to confirm their interest in bidding by advising when the quote will be sent. If possible wait to receive all proposals before obtaining freight and import costs so that you can do this all at once for all bids received.

9. Determine Freight & Import Costs. Using the total package weights and sizes you received from the suppliers (be sure they are consistent with your own estimates), contact ocean freight and/or air freight carriers to obtain pricing. Select a Customs Broker who will eventually handle all the details of the import process, but at this point, will assist you in determining the import duty and the other charges applicable to the shipment and the import process.

10. Develop Delivered Price. Develop a spread sheet application that will allow you to easily calculate the final price based on the many variables you will encounter. The following is an example of the typical output:

Release Qty

1

10

50

100

Unit Cost

80

80

80

80

Order Cost

80

800

4000

8000

Customs Duty

6

56

280

560

Dock Fees

20

20

26

51

Broker Fees

100

100

100

100

L/C Fee

185

185

185

185

Ocean Freight

100

100

375

750

Insurance

1

2

12

24

Inland Freight

50

80

400

500

Overseas Sourcing Rep

2

16

80

160

Miscellaneous Costs

10

20

60

110

Delivered Cost

635

1379

5648

10440

Unit Del Cost

635

138

112

104

The table reflects not only the most common additional external cost in international buying, but also is designed to show the significant impact on the final unit delivered price by the quantity being shipped.

11. Perform Supplier Evaluation. Although many companies place orders with overseas suppliers without formal supplier evaluation, most experienced international buyers would find placing business with an overseas supplier without an on site evaluation to be unconscionable. Make sure the right people go to make the evaluation. All too often the company's "big wigs" go and leave behind those who really know the product and are in the best position to evaluate the supplier.

12. Resolve Technical, Commercial & Quality Issues. A good time to do this is during the on site evaluation visit. It is really important to resolve these issues in writing even if the supplier's personnel seem to have a good grasp of English. It is not unusual for foreigners to have much better reading and writing skills in English than their speaking and listening skills. Some cultures are reluctant or embarrassed to say that they do not understand you and therefore will agree even when they are not sure what was said.

13. Write & Place Contracts. Besides the standard stuff you would put in any purchase order or contract, you should include specifics related to the following in any international order:

Carefully review your standard terms & conditions. The clauses related to rejections, disputes, payments, and governing law might have to be changed. If the supplier's country is a signatory to the Convention on Contracts for the International Sale of Goods (CISG), then the provisions of CISG will apply unless you specifically state in the contract or purchase order that CISG does not apply.

Notify unsuccessful bidders by thanking them for their efforts, and explaining what might make them successful with your company in the future.

14. Issue Letters of Credit, if required. Letters of Credit (LC) are a very common method of payment in international transactions. They can easily be arranged with your bank, which usually will have a standard application for you to complete. It is important to note that when the bank issue the LC on your behalf, they will deduct the amount from your company's available line of credit, even though the money will not be paid out until shipment occurs. For companies with cash flow problems, this could be a compelling reason not to issue a LC.

15. Order Administration. Know the supplier's production process and schedule and check frequently for status. When checking status, be sure and ask questions that can only be answered with data that would indicate the particular production step had been completed. One of the biggest problems overseas suppliers have with US companies, once the project is underway, is our lack of timely response to their questions. Set an objective of 1-day turnaround for supplier questions.

16. Provide Shipping Instructions. Do not leave the shipping methods, routings, and selection of carriers up to the supplier. If these were not provided in the order, it is important to give the supplier formal shipping instructions as they approach the time for shipment. Discuss with your Broker, freight lines, and others who have shipped similar products to obtain the most reliable methods. Using the wrong carriers can lose you many days or even weeks.

17. Pay Supplier. Whatever the payment method (open account, LC, cash against documents), make sure that you pay on time in accordance with the agreement. Our overseas suppliers do not appreciate our standard story about a foul-up in accounting.

18. Handle Export, Shipping, & Import Details. You have done a great job getting it to this point so don't stop now. Make sure that you have identified who has responsibility for this phase of the project. Do they have the proper training. Develop a checklist like the one described in the article "The Export, Shipping, Import Checklist--Eliminating the common mistakes in the final phase of Global Sourcing" found in the article list of this site.

19. Pay all Brokers, Duties, and Import Charges. Since your Customs broker has paid out monies on your behalf for duties, freight and other import charges, they usually want to be paid in not more than 7 days. Make sure your system is set up for this. If not, your Broker will require you to pay them in advance of releasing the shipment, which will cause delays in your receiving the goods.

20. Country & Supplier Surveillance. Since supplier's financial and capacity conditions can change quickly, particularly in developing countries, it is important to monitor these closely. Also maintain an awareness of the country's economics, political issues involving economics and trade, and currency exchange rates which can quickly, sometimes overnight, effect the price you pay.

When you have completed this process give yourself and your team a well deserved congratulations and from those of us who have "been there, done that", we welcome you into an elite group of purchasing professionals who have added a broadening, exciting and challenging aspect to their careers.


By Robi Bendorf, C.P.M., principle of Bendorf & Associates Consulting in Pittsburgh, Pennsylvania (click here for a bio).

http://www.bendorf.com