In the author’s seminars, managers doing offshore sourcing often report 15% to 30% lower prices than buying domestically. As a general rule, material cost savings of less than 15% may not offset the added costs to buy internationally. As always, purchasing’s aim should be to buy the right quality at the lowest total landed cost.
As we begin to consider constructing a global program, the buyer should review the following foreign sourcing issues:
Incentives to consider foreign sources How to begin buying offshore
The foreign purchase contract and documents used Customs regulations
Cultural and business differences
What incentives exist to consider offshore sourcing in worldwide markets? When surveyed about reasons for offshore buys, managers reported as follows: Price (74%) was the major reason for going offshore with price advantages in a few cases approaching 40%. Quality (46%) was second, and uniqueness (41%) third. Following were the increased number of suppliers (35%) where there was inadequate domestic supply (better deliveries), increased exposure to worldwide technology (23%), the need to become globally competitive (21%), and the need to meet supplier’s offset requirements (5%).
Foreign sourcing keeps domestic sources competitive! Often, the mere threat of buying internationally brings price reductions and service improvements from domestic sources.
HOW TO CONDUCT A GLOBAL BUYING EFFORT
4.
Let’s assume you’re just starting to source overseas. The following steps provide a useful checklist:
1. Sell yourself on the concept by testing the marketplace.
2. Decide what you want to buy. Start with simple, non-critical items, as early efforts need to be successful.
3. Gather all information relative to your purchase requirements:
specifications, drawings, and samples.
4. Determine quantity and timing required. Unlike a domestic supplier where ground shipment time is a few days, a foreign supplier usually requires a considerably longer delivery time. Decide what proportion of annual usage to source abroad, and consider having a domestic backup source allowing for occasional shipping problems.
5. Define quality requirements, including packaging. Don’t underestimate the importance of knowing exactly what’s needed. Consider that packaging that is satisfactory for a domestic truck shipment won’t necessarily hold up on a freighter in rough seas.
6. Communicate with others who have experience with international buys.
Don’t go it alone as other buyers may have solved similar difficulties.
The first new barrier to communication is language. Find and develop contacts abroad carefully.
7. Set a target price. To be advantageous, and as a general guideline, price should be 15% to 20% under current cost, including freight, In practice, some companies won’t source overseas unless there is at least a 20%
improvement, while others will settle for 10%. A total dollar volume target is also needed.
8. Decide how you will buy:
Direct from the foreign company Through local representatives Through trading companies
Through specialized independent agents or brokers
Through affiliate companies or another in-house division with contacts or experience in various international markets
9. Prepare yourself for discussions and negotiations as a team, allowing adequate time to fully explore all details. Experienced overseas buyers tell of how many a deal was botched because someone assumed something would be done and it was not done.
10. Visit suppliers only when your volume is sufficient to justify the transaction, and you have firm leads or quotes and are ready to buy.
Supplier visits may not be needed for all buys, but if they are, be well prepared.
When buying globally, it is important to consider the differences that affect buying offshore. Examples of procedures required for international but not for domestic purchases are routing of shipments through foreign countries, clearing through Customs and paying the proper duty.
International purchasing is additionally more complex because of transportation distance, language, terminology, fluctuating currency exchange rates, customs duties, methods of payments, and general business practices. Also, legalities differ between two contracting parties operating across national boundaries. Do your homework! Study literature, foreign business methods, and culture.
The following compares the major purchasing issues and activities between offshore and domestic suppliers. Put another way, experience has shown some disincentives or roadblocks to successful offshore sourcing are:
Language barriers
Nationalism and attendant local source preference Lack of knowledge of the foreign supplier’s culture Customs regulations and duties
Currency exchange rates Lack of detailed planning
The following Table 6-2 compares domestic and international buying across numerous dimensions:
In addition to the added complexities, there are many hidden costs in foreign sourcing. Ordering and administrative costs are generally higher than
those relating to domestic purchases, as more purchase documentation and extra paperwork are required. Increased costs additionally result from overseas business travel, international postage, FAX, and telephone rates.
As can be seen from the foregoing, the cost and complexity differences between domestic and international sourcing would appear to be significant and daunting! But there are also rewards if the buyer is willing to invest the time to master the challenges of global buying.
Within their own companies, buyers are exposed to every other department to some degree. They work with different people with varying temperaments both within and outside of their companies. But who has the need for broader outlook more than global buyers who deal with other cultures and business practices? They encounter different technologies, varied products, and ways of conducting business, as well as the complexity of global transportation systems and the unique legalities of international business.
In the ideal example of global buying, a company that has divisions in 15 countries seeks to get maximum value at all locations. Buyers use not only the other divisions’ purchase volumes to enhance their own division’s purchases, but truly global buyers use their knowledge of global markets to gain competitive advantage to get the minimum total landed cost for all buying operations, worldwide.
Using the global marketplace, the buyer gains leverage to keep domestic suppliers’ prices competitive. Exports provide capital and jobs for the local economy, while imports provide capital and jobs for offshore suppliers.
Buying goods abroad at a lower price and better quality increases U.S.
consumers’ collective buying power. As a result, real income rises, thereby providing a higher standard of living.