INTERNATIONAL PROCUREMENT:
TOPIC 1 :INTRODUCTION TO INTERNATIONAL PURCHASING
Definition 1: In a global economy, international procurement is a term used to describe the
process of allowing firms around the world to bid on contracts for goods and services. The
concept has gained popularity as shipping and transportation costs have decreased due to an
influx of cheap, readily available fuel. The globalization of large corporations has allowed
them to reap the benefits of lower labor and materials costs while still selling the same quality
and quantity of products.
There are three primary benefits to international procurement: lower costs, stimulation of a
global economy, and increased consumer base. The lower costs that can be achieved through
purchasing services or goods from other counties are derived from currency valuation and the
effects of product specialization. Both of which are core concepts in economics.
In international procurement, industrialized nations purchase goods from countries with a
lower dollar, gaining in the currency exchange. This rate varies over time, but the multiplying
factor remains fairly static. The ability to purchase more with a dollar in another nation is one
of the primary driving factors behind the appeal of this type of procurement.
Global sourcing:
Definition 2: Global sourcing refers to the integration and co-ordination of procurement
requirements across the worldwide business units of a single firm. It also implies that a
particular organisation has adopted a single sourcing strategy for its worldwide business
units and that this strategy is aimed at providing a competitive advantage to business units
on a global scale. In order to be competitive most firms across the globe participate in global
sourcing. Additional attributes in global sourcing include quality improvements, time-tomarket
reductions, availability improvements and synergy creation of company resources
and global partnership.
It is worthwhile to underscore the fact that the bottom line as far as global sourcing is
concerned is to meet or exceed product expectations while driving down production costs
and streamlining the supply chain. The proliferation of technology to some extent has
boosted this approach since transactions in the contemporary business environment are
done by just a click of a computers button.
Reasons for sourcing internationally:
1. Competitiveness of overseas sources e.g. lower prices, improved deliveries, better
quality etc
2. Need for manufacturing flexibility
3. Stringent quality standards
4. Ever changing technology
5. The buyer may prefer to buy from foreign source which offers products which have
features which are not available domestically.
6. Insufficient domestic capacity to meet demand to ensure continuity of suppliers owing
to shortages or strikes
7. Reciprocal trading and counter trade owing to policy reasons
Successful elements in sourcing abroad:
1. Top management support
2. Development of efficient communication skills and
3. Information Communication system
4. Establishment of long term relationships with overseas suppliers
5. Vast knowledge of international opportunities
6. Good understanding of international rules under INCOTERMS
DIFFICULTIES IN BUYING ABROAD:
Currency difficulties is experienced- fluctuations
Legal difficulties incase of a dispute
Delays in delivery
Time required for negotiation is greatly increased
Too much documentation e.g. bills of lading, certificate of origin customs entry form etc
Import duties, procedures and insurance
Communication problems
Benefits of international/global sourcing:
1. Better prices
2. Higher world class quality
3. Counter-trade
4. Improved customer service
5. Improved competition position
6. Increased availability of suitable suppliers
Factors to consider when planning international procurement:
The following factors generally hamper planning for international purchasing:
1) International risks: These risks relate to:
(a) Financial factors such as currency uncertainty, financial policy uncertainty and financial
effect of economic performance
(b) Economic factors such as performers of economic indicators etc
(c) Political factors such as radical changes in government composition or policies
(d) Operational environmental factors such as the legal structure of the country of export,
the rules and procedures governing international trade.
2) Logistical barriers: Long distances mean increased transport costs and long delivery
times, hampering the supplier in rendering a service
3) Customs regulations and duties: Import duties can disrupt prepared cost estimates at
very short notice, political motives in the importing country can hamper purchases on
specific foreign markets etc
4) Nationalism: Local source preference is a factor that influences the development of an
international purchasing policy and strategy.
Sources of information about overseas suppliers:
1) Professional contacts: Professional contact of the purchasing staff can facilitate an
evaluation of specific suppliers capability
2) Trade journals: Trade journals are published regularly by different industries in various
countries and provide vital information on suppliers
3) Directories: Directories are good sources of information and are often printed by an
organised industry in a particular country
4) Trading companies: Japan frequently uses this marketing channel which provides
advantages of convenience, efficiency and assurance of supply to international buyers.
5) Import brokers: They offer a buying and forwarding service in exporting country and
often become very knowledgeable about the products
6) Internet: This is global system of inter connected computer networks that use the
standard internet protocol suite (TCP/IP) to serve billions of users worldwide. They
enable business people to search relevant suppliers across the globe.
7) Online marketing and mobile marketing
In a global economy, international procurement is a term used to describe the process of
allowing firms around the world to bid on contracts for goods and services. The concept has
gained popularity as shipping and transportation costs have decreased due to an influx of
cheap, readily available fuel. The globalization of large corporations has allowed them to reap
the benefits of lower labor and materials costs while still selling the same quality and quantity
of products.
There are three primary benefits to international procurement: lower costs, stimulation of a
global economy, and increased consumer base. The lower costs that can be achieved through
purchasing services or goods from other counties are derived from currency valuation and the
effects of product specialization. Both of which are core concepts in economics.
In international procurement, industrialized nations purchase goods from countries with a
lower dollar, gaining in the currency exchange. This rate varies over time, but the multiplying
factor remains fairly static. The ability to purchase more with a dollar in another nation is one
of the primary driving factors behind the appeal of this type of procurement.
Diferrences between global sourcing and international purchasing.
Difference #1: Firms that engage in global sourcing are larger and are more likely to have
competitors that are multi-regional or global compared with firms that engage in international
purchasing.
While this finding should come as no surprise, firms that pursue global sourcing initiatives
are clearly larger (average $3 billion in annual sales) compared with firms that engage in
international purchasing (average $900 million in annual sales). Larger firms are more Likely
to have worldwide production facilities, design centers, and marketing and sales activities. It
should be expected that the pursuit of global sourcing opportunities becomes a fundamental
extension of a larger firm’s sourcing philosophy given its worldwide scope in other areas.
The level of competition that a firm faces can also affect its sourcing response. The global
sourcing segment faces greater competition from companies that are multiregional or global
compared with firms in the international purchasing segment.
Difference #2: Firms that engage in global sourcing perceive their strategy implementation
progress to be further along compared with firms that engage in international purchasing.
Both segments recognize they have a long way to progress before they have a fully developed
global sourcing process in place, although Level IV and V firms know they have made
greater progress compared with Level II and III firms. The international purchasing segment
appears to understand that many sourcing opportunities are possible beyond what it is
currently pursuing.
Difference #3: Firms that engage in global sourcing perceive that performance improvement
and cost reduction opportunities are more widely available from theft sourcing efforts
compared with firms that engage in international purchasing.
An example from the field research provides another explanation for the difference between
the segments. One company that is rapidly gaining global sourcing experience has found that
local or site-based participants usually have a performance improvement expectation that is
formed (and limited) by what can be attained by local or regional practices. Site personnel
may perceive that a 5 percent price reduction is quite significant. The potential cost
improvements available from global sourcing far exceed what these participants are willing to
commit to or believe are available. However, participants begin to recognize the difference
between international purchasing and global sourcing outcomes once they become involved
with global projects. The international purchasing segment, on the other hand, has yet to
appreciate the dynamics of operating within a global context, which limits its perception
regarding potential performance improvement and cost reduction opportunities.
Difference #4: Firms that engage in global sourcing indicate that the development of global
strategies is more important to their executive management compared with firms that engage
in international purchasing.
After considering the differences between international purchasing and global sourcing
presented in an earlier section, one can easily conclude that international purchasing is best
described as a functional activity while global sourcing represents a strategic direction and
organizational process. Executive support and leadership are critical to a process as
organizationally complex and important as global sourcing.
Field research reveals that executive managers who stress the importance of global sourcing
back that belief with direct commitment–commitment that is not as necessary or as visible
with international purchasing. Examples of executive commitment include funding the
development of a global sourcing process, participating on an executive steering committee
that oversees global activities, and providing budget and staff to support global project teams.
Executive managers may also work to secure site- and plant-level buy-in to global processes
and agreements. Executive managers who recognize the importance of global sourcing must
be willing to support global initiatives, something that is not critical with international
purchasing.
Difference #5: Firms that engage in global sourcing indicate they face more rapid changes to
product and process technology compared with firms that engage in international purchasing.
Survey respondents assessed the annual rate of change they face across seven competitive
factors: quality improvement, product and process technology development, price/cost
reduction, new product development cycle times, responsiveness to customer improvement
requirements, on-time delivery improvement, and overall customer service improvement
requirements. The two segments rate each competitive factor, statistically the same except for
the rate of product and process technology. International purchasing firms indicate their rate
of product and process technology change is stable to moderate while global sourcing firms
indicate their rate of change is moderate to dynamic. Furthermore, the global sourcing
segment indicates it faces greater competitive and customer pressure to improve continuously
in the introduction of new product and process technology. While cost improvement will
remain a primary driver behind worldwide sourcing activities, the need for new sources of
technology will drive some firms to pursue higher sourcing levels.
Difference #6: Firms that engage in global sourcing realize greater and varied benefits
compared with firms that engage in international purchasing.
Perhaps one of the most revealing and interesting differences between the international
purchasing and global sourcing segments is the perception each has regarding the benefits it
realizes from its sourcing efforts. Table I presents these benefits sorted by the difference
between the averages for the two segments. Firms that engage in global sourcing indicate
they realize all 16 benefits at a statistically higher level than firms that engage in international
purchasing. In fact, the overall average across all benefit areas is 30 percent higher for global
sourcing firms compared with the overall average for international purchasing firms.
One benefit that both segments rate highly is the ability to achieve a lower purchase price or
cost through worldwide sourcing. It is concluded that the initial benefits from international
purchasing are price focused and are often available from basic international purchasing
activities. However, many non-price benefits are only realized once a firm has taken steps to
integrate its sourcing activities. In particular, this includes greater access to product and
process technology, an outcome that is particularly critical given the more dynamic
technology changes that global sourcing firms face. Also, better management of supply chain
inventory is a benefit that global sourcing firms enjoy at higher levels. This is critical given
the emphasis that many firms place on managing costs and inventory investment across the
supply chain.
Difference #7: Firms that engage in global sourcing rely on a wider array of communication
tools to support their efforts compared with firms that engage in international purchasing.
Global participants will presumably take advantage of evolving Web-based communication
tools in the future.
Examples of other communication and coordination approaches identified during the field
research include regular strategy review meetings between locations and joint training
sessions involving worldwide team members. Project updates reported through an intranet,
negotiation planning sessions, and collocation of functional personnel to facilitate face-toface
interaction were also identified as effective approaches.
Difference #8: Firms that engage in global sourcing have in place more organizational
features to support their sourcing efforts compared with firms that engage in international
purchasing.
Consider several items that show the highest difference between the segments and why these
differences are important. Global sourcing firms conduct regular strategy review and
coordination sessions with worldwide procurement and other functional managers on a
regular basis, a feature showing the largest average difference between the groups. Review
sessions promote consistency by creating a common sourcing language and approaches
coordinated at higher organizational levels.
Another differentiating feature is the greater likelihood that firms pursuing global sourcing
will have access to the services provided by international purchasing offices (IPOs). These
offices help identify potential suppliers, solicit quotations, support negotiations, obtain
product samples, conduct supplier site visits, and manage technical and commercial concerns.
These offices also support many of the operational issues that are part of global sourcing.
Difference #9: Firms that engage in global sourcing rate key aspects of their sourcing process
as more similar across geographic locations and buying units compared with finns that
engage in international purchasing.
Survey respondents rated the degree of similarity or difference across their geographic
locations and buying units for twenty items. Eleven of the 20 items were rated as statistically
more similar across locations by the global sourcing segment, which Table III reports. The
remaining nine items demonstrated no statistical differences in their average rating between
the two segments. Items such as business culture, operating standards and procedures,
language, and social culture and laws received similar ratings in terms of similarity.
In the longer term, one of the most important outcomes from global sourcing may be the
sourcing consistency created by this process–a consistency that most firms now lack. Firms
engaged in international purchasing, which is typically an uncoordinated activity across
buying units or sites, are unlikely to ever achieve the sourcing consistency that global
sourcing firms achieve. Most of the items in Table III relate to sourcing approaches, practices,
and beliefs consistency, which in the final analysis may be the most powerful benefit that
firms realize from global integration.
Difference #10: Firms that engage in global sourcing rate certain factors as more critical to
their sourcing efforts compared with firms that engage in international purchasing.
An executive mandate or commitment to source globally along with the right organizational
structure that features central coordination, cross-functional teams, and plant-level
participation all show significant differences between the segments. The availability of
required information and data and the ability to identify common requirements, also
differentiating factors, reveals the importance of information as a success factor.