7 Global Procurement

Note. From Rosenke, 2020. Licensed for reuse under the Unsplash License.

Learning Objectives

1. Explain the need for identifying and evaluating global suppliers.
2. Outline the advantages of global sourcing.
3. Know the pros and cons of sole-sourcing and multisourcing.
4. Know how to source successfully internationally.
5. Understand the impact Trade Agreements have on sourcing internationally.

What do you know about global procurement?

Sourcing Globally

The search for new sources of competitive advantage is a relentless challenge that organizations face, and supply groups must showcase annual progress. Organizations must show constant improvements, particularly cost reductions, which result in a search for low-cost sources of supply that have become a central part of most supply strategies. This has resulted in procurement groups in many companies seeking overseas sources of supply to achieve lower costs.

Most companies are under constant pressure to contain and reduce their costs, which largely explains the motivation behind global sourcing; the primary reason companies source from around the world is to obtain lower prices. For example, as a cost-cutting measure, Dell moved its European manufacturing plant from Ireland to Poland (Fottrell & Scheck, 2009). This was no small undertaking and affected almost 2,000 employees; however, the move was part of a $3 billion company-wide cost reduction initiative. Other reasons that companies use global suppliers include gaining access to new technology sources, obtaining a higher quality, or introducing competitive organizations to the domestic supply base. Global purchasing can result in cost savings, but the global supply process also requires supply managers to address a broader range of cost, time, and complexity issues. At least a quarter of the unit cost savings from global purchasing disappears, on average, when estimating the total cost of purchase ownership. This is due to hidden costs associated with lengthened supply chains, including increased lead times, increased inventory, and increased risks.

Watch this video to learn about the challenges of sourcing globally.

Supply Chain Secrets. (2009, February 20). Global sourcing [Video]. YouTube. https://youtu.be/bMP6WBeCNLE

Finding Global Suppliers and Supply Classification

Many supply managers use a classification scheme to segment suppliers by geographic capabilities. This designation helps when searching databases for potential suppliers. Internal supply groups can benefit from this classification in their examination of potential suppliers, whether they are involved with global supply management or not. This approach helps strategy development teams understand the location of suppliers and supplier capabilities more accurately. The classification scheme is as follows:

• Local supplier: A local supplier serves only a limited number of sites or buying locations (often only one) within a country. The database should include information about the country and the sites within that country that the supplier is capable of serving.
• Domestic supplier: A domestic supplier can serve any location within a country. The database must note the country or countries that the supplier can competitively serve.
• Regional supplier: A regional supplier serves many countries within a single region competitively. Examples of regions include North America, Latin America, Asia-Pacific, and Europe. A few suppliers may also serve only a portion of a region.
• Multi-regional supplier: A multi-regional supplier can competitively serve two or more regions.
• Global supplier: A global supplier can competitively serve most, if not all, countries around the world.

Another classification system or terminology that deals with global procurement is nearshoring versus offshoring versus onshoring.

•  Offshoring is when companies offshore their processes to suppliers in distant countries like India, China, or the Philippines. The benefits of offshoring can be lower labour costs, lower tax rates, and larger talent pools. Challenges of offshoring include time zone differences, loss of control due to distance, higher travel costs to visit suppliers.
• Nearshoring involves outsourcing to a nearby country or neighbouring country. The benefits of nearshoring include those of offshoring. Benefits of nearshoring compared to offshoring include lower travel costs, more control as you can visit more often, and more cultural compatibility.
• Onshoring is outsourcing to another city in your country. The benefits of onshoring include fewer risks due to the same culture, same tax policies, lower transportation costs and time, and investing in own country’s economy.

(Skelia, 2019, para. 4)

Global Sole-Source Versus Multisourcing and Ethics

Global sourcing refers to buying the raw materials or components that go into a company’s products from around the world, not just from the headquarters’ country. For example, Starbucks buys its coffee from locations like Colombia and Guatemala. The advantages of global sourcing are quality and lower cost. Global sourcing is possible to the extent that the world is flat—for example, buying the highest-quality cocoa beans for making chocolate or buying aluminum from Iceland, where it is cheaper because it is made using free geothermal energy.

When making global-sourcing decisions, firms face a choice of whether to sole-source (i.e., use one supplier exclusively) or to multisource (i.e., use multiple suppliers). The advantage of sole-sourcing is that the company will often get a lower price by giving all of its volumes to one supplier. If the company gives the supplier much business, the company may have more influence over the supplier for preferential treatment. For example, during a time of shortage or strained capacity, the supplier may give higher quantities to that company rather than to a competitor as a way of rewarding the company’s loyalty.

Student Example

Nestlé is a global company comprising brands such as Kit Kat, Nesquick, Stouffer’s, and other food brands and baby formulas. To source their raw materials, they follow a multisource model. A specific example within Nestlé is that they are sourcing some of their global palm oil from five smallholder farms in Indonesia, Malaysia, Ghana, Côte d’Ivoire, and Peru. This multisourcing benefits Nestlé because they can source their palm oil from various countries, allowing for a supply chain with less uncertainty. If one palm oil supplier were to go out of business or provide less than expected, one of the other suppliers would be able to make up for the slack. A side benefit is that these smallholders gain a foothold in the global market.

Zach Harper, Class of 2020

On the other hand, using multiple suppliers gives a company more flexibility. For instance, if there’s a natural disaster or other disruption at one of their suppliers, the company can turn to its other suppliers to meet its needs. For example, when Hurricane Mitch hit Honduras with 180-mile-per-hour winds, 70 to 80 percent of Honduras’s infrastructure was damaged and 80 percent of its banana crop was lost. Both Dole Food Company and Chiquita bought bananas from Honduras, but Dole relied more heavily on bananas from Honduras than from other countries. As a result, Dole lost 25 percent of its global banana supply, but Chiquita lost only 15 percent (Sheffi, 2005).

Sole-Sourcing Advantages

• Price discounts based on higher volume
• Rewards for loyalty during tough times
• Exclusivity brings differentiation
• Greater influence with a supplier

Sole-Sourcing Disadvantages

• Higher risk of disruption
• The supplier has more negotiating power on price

Multi-Sourcing Advantages

• More flexibility in times of disruption
• Negotiating lower rates by pitting one supplier against another

Multi-Sourcing Disadvantages

• Quality across suppliers may be less uniform
• Less influence with each supplier
• Higher coordination and management costs

Whichever sourcing strategy a company chooses, it can reduce risk by visiting its suppliers regularly to ensure the quality of products and processes, the financial health of each supplier, and the supplier’s adherence to laws, safety regulations, and ethics.

Ethics in Action

The Case of Global Sourcing

While there is little systematic research on questions related to ethics and global sourcing, one recent survey in the context of clothing manufacturers identified the following most encountered issues (Pretious, 2006).

• Child labour. Forty-three percent of the respondents had encountered factories where child labour was being used. India, China, Thailand, and Bangladesh were cited as the worst offenders in this regard, partly because of the absence or unreliability of birth certificates, but also because of the difficulty that Westerners have in assessing the age of workers in these countries. Buyers relied on the management of the factory to check on documents supplied by the employee.
• Dangerous working conditions and health and safety issues. Forty-three percent of the respondents had encountered dangerous working conditions in factories. These included unsafe machinery (e.g., machine guards having been removed to speed up production), workers failing to use safety equipment such as cutting gloves, and the use and storage of hazardous chemicals (e.g., those used for dyeing and printing). Fire regulations were also sometimes inadequate, both in factories and in the dormitory accommodation often provided for workers who live away from their home regions. Sometimes fire exits were locked, and fire extinguishers were missing.
• Bribery and corruption. Thirty-one percent of respondents said that they had experienced bribery and corruption. One blatantly fraudulent practice mentioned was for suppliers to mislead the buyer over the true source of production. Many suppliers claim that goods are made in one factory, then transfer the production elsewhere, making it difficult for the retailer to audit.
• The exploitation of the workforce. Twenty-five percent of respondents mention some aspect of exploitation of the workforce, encompassing the issues of child labour and health and safety. However, it can also cover low wages being paid to workers and excessive overtime being expected by employers. Respondents specifically mentioned that they had encountered worker exploitation. Many spoke of long working hours in factories, especially at peak periods, with employees often working over seventy hours per week.

Student Example

Apple uses global sourcing to acquire most of its products. I learn that their products are made in factories in China. In the past, they have allegedly experienced ethical issues, like child labour and dangerous working conditions. It was reported in the news that they had children working in those factories. Also, they were allegedly working in very harsh conditions; so harsh that workers started committing suicide. If this is true, global sourcing can be risky for the reason that they may not have complete control over what happens in the factories, and might not even know what goes on inside them.

Elizabeth Garcia, Class of 2020

Incoterms

When procuring goods and services globally, transportation becomes more challenging. The International Chamber of Commerce has created rules to provide internationally accepted definitions and rules of interpretation for most common commercial terms used in contracts for the sale of goods. Incoterms 2010 provides short descriptions of the 11 rules from the Incoterm 2010 edition. ICC last updated the Incoterms^® rules in 2019. While Incoterms^® 2020 is the most current version of the trade terms, Incoterms® 2010 is still in effect today (International Chamber of Commerce, n.d.)

Watch this video to see an explanation of Incoterms® 2020.

Inco Docs. (2020, February 2). Incoterms 2020 explained for import exports global trade [Video]. YouTube. https://www.youtube.com/watch?v=7g7IC4IzjDM

Successful International Sourcing

The decision to source globally should be carefully considered. A company may need to source globally due to goods and services not being available in their own country or they may consider sourcing globally to decrease costs. Either way, sourcing globally increases risks due to longer transportation pipelines, sharing intellectual property and trade secrets, different cultures, different ethics, different environmental compliance regulations, and different quality expectations. See this article on 9 things you need to consider before you globally source your goods. (Blood-Rojas, 2017)

Marquit (2017) provides some great ideas on sourcing products from overseas.  Her suggestions are as follows:

1. Figure out where to source your products.  Some websites that are helpful are:
   • ThomasNet, MacRAE’S Blue Book, Kompass,  These are great trade directories to find suppliers, source suppliers and receive industry insights.
   • Global Sources This is an online marketplace to find reliable exporters.
   • Background Notes Publications provided by the US Department of State on different countries’ backgrounds including their economic information, foreign relations information, commercial ventures, and manufacturing industries.
   • Alibaba This is also a great resource for finding manufacturers, wholesalers, and importers.
   • WorldPages.com is a directory for the US and Canada and provides links to 350 international directories.
   • Yellow Pages provides a worldwide listing of companies.
   • Ziff Davis is a resource for information on e-commerce.
   • IndustryNet is an industrial search engine that helps you discover who makes it and supplies it.
2. Get sample products. Samples can provide examples of what quality and workmanship to expect.
3. Shop around. Compare prices and quality.
4. Contracts may not be final. Contracts can get you started however they might be re-negotiated later on.
5.  Learn everything you can about the sourcing process. Do background checks on foreign suppliers, check product samples for defects, get everything in writing, and know-how and when to pay suppliers.

Gonen (2018) also provides some good tips for sourcing internationally. In his article, 5 Tips for International Sourcing During Trade Wars , his tips include:

• Make sure your new supplier can keep up with your scale.
• Start slow, negotiate terms upfront, and learn new counties’ business practices.
• Build a relationship with the new supplier.
• Think culturally and plan ahead.
• Control the shipping process and find expert help on harmonized tariff codes.

Trade Agreements

When sourcing globally, trade agreements should be considered. Canada’s trade network gives Canadian companies access to markets all over the world. Canada has free trade agreements (FTA), foreign investment promotion and protection agreements (FIPA), and World Trade Organization (WTO) agreements. Trade agreements reduce trade barriers, such as tariffs, quotas, or non-tariff barriers. Canadian Trade and Investment Agreements has more information.

Canada – United States – Mexico Agreement (CUSMA)

This agreement entered into force on July 1, 2020. It preserves the key elements of the North American Free Trade Agreement (NAFTA). NAFTA created in 1994 created the largest free-trade region in the world. The new Canada-United States-Mexico Agreement serves to reinforce Canada’s strong economic ties with the United States and Mexico.

Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP)

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) is a free trade agreement between Canada and 10 other countries in the Asia-Pacific: Australia, Brunei, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

Canada-United Kingdom Trade Continuity Agreement

The Canada-United Kingdom Trade Continuity Agreement (Canada-UK TCA) came into force on April 1, 2021, and provides continuity, predictability, and stability for trade between Canada and the United Kingdom (UK). This agreement preserves the main benefits of CETA.

Canada-European Union Comprehensive Economic and Trade Agreement (CETA)

The Canada-European Union Comprehensive Economic and Trade Agreement (CETA) is a bilateral agreement between Canada and the EU. The agreement covers virtually all sectors and aspects of Canada-EU trade in order to eliminate or reduce barriers.

World Trade Organization Agreements

The World Trade Organization (WTO) is an international forum that establishes the rules of international trade and allows members to deal with trade issues. WTO agreements are negotiated and accepted by WTO members to help producers of goods and services, exporters and importers operate effectively in the international trading system.

(Government of Canada, n.d.)

Other regional trading agreements that buyers should be aware of and are in place throughout the world include:

• The European Union (EU).  This single market allows citizens to live or work in an EU country, move their money, sell goods without restrictions and provide services on the same basis.  (European Union, n.d.)
• ASEAN includes 10 Southeast Asian countries (Brunei Darussalam, Cambodia, Indonesia, Lao, PRD, Malaysia, Myanmar, Philippines, Singapore, Thailand, and Vietnam) that have made significant progress in the lowering of intra-regional tariffs. (Association of Southeast Asian Nations, n.d.)
• MERCOSUR is a regional integration process composed of Argentina, Brazil, Paraguay, Uruguay, Venezuela, and Bolivia.  It has agreements with countries or groups of countries to promote free trade.
• Andean Community is a free trade area with the goal of creating a trade block composed of a free trade area with a common external tariff. It is comprised of Bolivia, Colombia, Ecuador, and Peru. (Andean Community, 2021)
• China Trade Agreements.  China has 16 Free Trade Agreements and working on eight more Free Trade Agreements.  Currently, China has FTA agreements with ASEAN, Singapore, Pakistan, New Zealand, Chile, Peru, Costa Rica, Iceland, Switzerland, Maldives, Mauritius, Georgia, Korea, Australia, Hong Kong, and Macao. (International Trade Administration, 2021)

Key Takeaways

• Global sourcing refers to buying the raw materials or components that go into a company’s products from around the world, not just from the headquarters’ country. The advantages of global sourcing include access to higher quality or lower prices.
• When making sourcing decisions, companies must decide whether to sole-source (i.e., to use one supplier exclusively) or to use two or more suppliers. Sole-sourcing can bring advantages of price discounts based on volume and may give the company greater influence over a supplier or preferential treatment during times of constrained capacity. Sole-sourcing can also bring advantages of differentiation or high quality. The disadvantages of sole-sourcing, however, are that the company faces a higher risk of disruption if something happens to that supplier. Also, the supplier may hold more negotiating power on price.
• Different classifications of global sourcing have different geographic capabilities depending on if they are local, domestic, regional, multi-regional, global, offshore, nearshore, or onshore.
• To successfully source internationally a buyer must use many resources such as online directories to find and compare products,  take time in negotiating sound contracts, learn everything they can about the supplier, the supplier’s country and culture, build strong relationships with the suppliers, control the shipping process and find expert help on harmonized tariff codes.
• When sourcing globally, trade agreements should be considered.  Canada’s trade network gives Canadian companies access to markets all over the world.

Review Questions

1. Why do companies source globally?
2. What are the different classes used to segment suppliers by geographic capabilities?
3. What are the advantages and disadvantages of sole sourcing internationally?
4. What does the FOB rule for transportation stand for and what does it mean?
5. What are some resources you can use to find international suppliers?
6. What Canadian free trade agreement came into place on July 1, 2020?

Check your understanding of this chapter’s material by completing this quiz.

References

Andean Community. (2021, December 12) In Wikipedia.  https://en.wikipedia.org/wiki/Andean_Community

Association of Southeast Asian Nations. (n.d.) ASEAN Free Trade Area (AFTA Council). https://asean.org/asean-economic-community/asean-free-trade-area-afta-council/

Blood-Rojas, C. (2017, July 14). 9 things you need to consider before you globally source your goods. TradeReady. https://www.tradeready.ca/2017/fittskills-refresher/everything-you-need-to-consider-before-you-globally-source-goods/

European Union. (n.d.) What the EU does for its citizens. European Commission, Directorate-General for Communication. https://europa.eu/european-union/about-eu/what-the-eu-does-for-its-citizens_en

Fottrell, Q., & Scheck, J. (2009, January 8). Dell moving Irish operations to Poland. The Wall Street Journal. Retrieved from http://www.wsj.com/articles/SB123141025524864021

Gonen, O. (2018, October 8). 5 tips for international sourcing during trade wars. More Than Shipping. https://www.morethanshipping.com/5-tips-for-international-sourcing-during-trade-wars/

Government of Canada, (n.d.). Trade agreements. https://www.international.gc.ca/trade-commerce/trade-agreements-accords-commerciaux/agr-acc/index.aspx?lang=eng

International Chamber of Commerce. (n.d.) Incoterms 2020. https://iccwbo.org/resources-for-business/incoterms-rules/incoterms-2020/

International Trade Administration. (2021, February 3). China – country commercial guide – trade agreements. https://www.trade.gov/knowledge-product/china-trade-agreements

LINCS in Supply Chain Management Consortium. (2017, March). Supply management and procurement certification track. Version: v2.26.  https://www.skillscommons.org/bitstream/handle/taaccct/14294/LINCS%20Supply%20Management%20and%20Procurement%20Content.pdf?sequence=1&isAllowed=y.  

Marquit, M. (n.d.) 5 Tips for Sourcing Products from Overseas. Don’t Do It Yourself. https://ddiy.co/sourcing-overseas/

Mercosur. (n.d.) Mercosur in brief. https://www.mercosur.int/en/about-mercosur/mercosur-in-brief/

Rosenke, G. (2020, May 15). Earth in the palm of a hand showing India and China [Photograph]. Unsplash. https://unsplash.com/photos/GOWz0zTf_vY. Licensed for reuse under the Unsplash License.

Skelia. (2019, January 18). Nearshoring vs. offshoring vs. onshoring: when which and why? https://skelia.com/articles/nearshoring-vs-offshoring-vs-onshoring-when-which-and-why/

Creative Commons Attribution Statements

This chapter contains material adapted from Supply Management and Procurement Certification Track. LINCS in Supply Chain Management Consortium. March 2017. Version: v2.26. www.LINCSeducation.org.

This section contains material adapted from Core Principles of International Marketing, by Babu John Mariadoss and is used under a CC BY 4.0 international license. Download and access this book for free at https://opentext.wsu.edu/cpim/.