Identifying and developing new procurement markets belongs to the core functions of Strategic Purchasers. In this context, “global sourcing” is one of the important catchphrases of our time. Generally, this term designates an internationally geared purchasing strategy and, subsequently, a globally optimised supply of products and services. Against the background of increased global interconnectedness of the economy and intensified competition, companies often have no choice but to look for the best partners for the satisfaction of their demands globally as in most cases the best suppliers will not be found on one’s own doorstep. Domestic markets often are no longer competitive due to higher wage levels, especially in the area of labour-intensive and standardised products. But even high-tech products of high quality can nowadays be procured in foreign markets at reasonable prices. As material costs represent a considerable share of a company’s total costs, globally oriented purchasing activities form an essential leverage for optimising the cost structure.
Companies can no longer focus on the domestic markets exclusively, not only for cost reasons but also from a technological point of view. In some industries, regional core competencies have formed over time. For example, Asiatic procure-ment markets command a tremendous advantage in knowledge in the electronics and computer industries as compared to the German market. There will be no alternative to developing foreign procurement markets in order to buy innovative products in this field, or even to engage in a development partnership.
A systematic and global design of the Purchasing function can thus be regarded as a major competitive advantage of one’s own company.
The question of whether global sourcing should have significant importance in purchasing is a pointless one. As the opportunities are still greater than the risks, the essential question would rather be how and where purchasers should procure globally. From my own experience, I know that even today one realises savings with regard to the total cost of ownership (TCO); for example, in the tooling sector
# Springer International Publishing AG 2017
U. Weigel, M. Ruecker,The Strategic Procurement Practice Guide, Management for Professionals, DOI 10.1007/978-3-319-57651-0_5
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savings of 60% are not uncommon, not to mention the incredibly short delivery times—especially for Europeans. Therefore, it can make sense sometimes to globally procure standard moulds for prototypes, and the development of a second source is also made easier. Direct savings even for components with high-quality requirements are daily fare. But exchange rate advantages and opportunities lying in a combination of local added value and rare or quoted raw materials may also create enormous competitive advantages. Another reason may be access to technologies that cannot yet or no longer (a consequence of global sourcing) be procured locally. The basis for the optimal exploitation of this potential creates the strategic foundations.
5.1.1 Aims of Global Sourcing
The fundamental purpose of purchasing—to safeguard the supply of necessary products and services at favourable total costs—is not changed by an international orientation of purchasing activities. What are changed are the framework conditions in which this target shall be fulfilled. In this respect, the following targets transcend the original purpose of purchasing.1
Global Competition On the one hand, global sourcing pursues the goal of generating cost savings by exploiting global competition potential, which can have a positive influence on the acquisition price due to lower factor costs such as wages, energy, or control costs in foreign markets. On the other hand, through global price benchmarking a higher degree of market transparency is realised, which will enable the enforcement of price reductions for domestic suppliers too.
In this respect, global sourcing can also indirectly contribute to cost reduction.
Capable Suppliers The best suppliers will not always be found on one’s own doorstep. An analysis of foreign procurement markets covers a greater number of providers, and new suppliers can be identified that may act at a higher level than domestic ones. Therefore, global sourcing aims at finding and making use of the best suppliers worldwide.
Innovative Technologies Today, the technological competence and level of innovation of suppliers can depend on their regional location. There are regions in which innovative technologies are further developed than in the domestic market. Some technologies do not yet exist or no longer exist at the local level.
Therefore, another aim of global sourcing is to provide access to required technologies and innovations.
1Cf. Arnolds et al. (2010, p. 375 ff.).
Providing a Basis for One’s Own Production Facilities If the establishment of a production facility in a foreign market is planned in the context of an internationally oriented business strategy, the prior identification and involvement of suitable suppliers can be beneficial. In this way, a supplier network can be created that will later supply the production facility.
Market Research Procurement market research conducted in the context of developing new procurement markets is cognate to sales market research, so synergy effects will occur. The collected data on markets, suppliers, moral concepts, and cultural peculiarities can offer starting points for developing new sales markets. Thus, the exploration of new sales markets can be regarded as a further objective of global sourcing.
Exchange Rate Risks Foreign currencies are always exposed to a risk of fluctuations that may bear positively or negatively on business results. If a company sells its products in different currency areas, it may aim at procuring in these areas too. Therefore, exchange rate fluctuations occurring in sales could be passed on to the suppliers.
Making Use of Government Subsidies In some countries, e.g. Mexico, corporations from the aviation and aerospace industries receive financial subsidies for the establishment of competence centres. Therefore, these potential suppliers can offer their services well below the market price level. Another example is subsidies for the production of steel in the Ukraine. Subject to a noteworthy proportion of added value, one can realise unbeatable prices for steel components there.
5.1.2 Strategies and Manifestations
The objectives of Purchasing, as derived from the strategy, are the basis for systematically identifying and developing global procurement markets. Strategic key motives in this context are:
• Long-term improvements of the cost structure
• Increasing product innovation
• Lacking alternatives in the home country or in-house manufacturing
Decisive factors will be established in the purchasing strategy through the choice of suitable commodity groups, procurement markets, and suppliers, which will define the international orientation of Purchasing. The range of parts suitable for global sourcing is selected as part of the commodity group strategy that has been described in Sect. 3.1. Often, labour-intensive as well as globally standardised products—the demands of which are highly predictable—are the most promising candidates. However, the higher the complexity and procurement risk of a product is, the more thoroughly the need for scrutiny of the adequacy of global sourcing. In
this context, one must also take into consideration what influence the selected parts have on the function of the final product and how critical these parts are with respect to know-how.
Simultaneously, the range of countries from which the items could be procured are evaluated. In the case of simple and standardised products, the focus will be on low-wage countries, and the aim will be to realise cost advantages. But one must not forget that it is not the net purchase price but rather the total costs which have to be considered. However, regional technological competences will determine the selec-tion of the procurement country when it comes to high-quality, complex, or innovative products. Over the years, particular regions have experienced techno-logical specialisation and thus secured competitive advantages over other regions.
In this context, the types and numbers of suppliers must be determined as part of the supplier strategy. Entering a new procurement market is often a very risky affair so it is advisable to first develop potential suppliers in a dual or multiple sourcing strategy and then to establish a long-term partnership later in the context of supplier management.
Depending on the objectives pursued, several approaches for implementing a global purchasing strategy have been developed. For example, the concept of low-cost country sourcing aims at buying a high share of the external added value in low-cost countries in order to realise the highest possible cost savings. Low-cost countries in this sense are offered extremely low wage levels compared to the domestic procurement market.
The concept of best-cost country sourcing goes a step further as here the total costs are considered. Apart from the price and wage levels, material and transport costs as well as quality and risk aspects are assessed.
Another manifestation of global sourcing is “offshoring” which means that business functions or processes are relocated to another region. This can be done by relocation inside the corporation or by shifting these activities to independent external companies in foreign countries.
Practical Tip: Globally Oriented Purchasing Strategy
The foundations for company-specific optimum concerns must already be laid during the strategy development stage. The current results and forecasts of procure-ment market research will help to position the commodity group globally at the right place or, more concretely, to answer the question of which parts of a com-modity group should be strategically procured at what place with regard to risk and TCO. Subsequently, the parts must be differentiated according to their volume and complexity in order to place the right parts at right supplier. Flanked by supplier development, the demands on the global partner increase continuously; in ideal cases, they will develop from a parts supplier to a system supplier. This effect in turn assists in the objective of reducing the number of suppliers. The goal has been achieved when such a global cost leader will have become a preferred supplier that is also involved in the development of new products early at the innovation stage and participates in designing them cost-efficiently.
To orient the purchasing organisation on global requirements strategically and operationally and where local native speakers are available, to have them lead is also a significant challenge. To cope with these challenges, Strategic Purchasing must be able to manage, and even to lead, on a global level while it must also become more technical. The latter can be achieved by training staff who only have experience only in commercial aspects or by complementing the purchasing teams with technicians or engineers. Furthermore, the members of the team have to be trained interculturally, e.g. by learning the language of the foreign partners. In my case, the knowledge of Chinese and Italian that I had acquired painfully many years ago in evening schools proved very useful as a “door opener” both in the “Middle Kingdom” and in “Bella Italia”—so I can only warmly recommend learning the language of the partner. It is imperative that all the measures mentioned should be part of a globally oriented purchasing strategy.
5.1.3 New Risks at the International Level
Internationally oriented purchasing activities offer companies enormous chances for optimising their supply of products and services. However, there are also a number of risks that have to be taken into account—risks that on the domestic level up to now have hardly been important or have been quite unknown. Issues such as language barriers, import duties, and exchange rate fluctuations have a major influence on the framework conditions of the decision-making process. Due to the spatial distances and the cultural, legal, and political diversity in procurement markets, the purchasing process becomes much more complex than before. How-ever, through comprehensive procurement market research the following risks can largely be identified and controlled:
Cultural Risks These risks occur when there are greater differences between the procurement and the domestic markets on a cultural level. These risks include all factors such as language, mentality, or legal understanding that may hamper communication and understanding between supplier and client.
Political Risks The political framework conditions of the procurement country may eventually pose risks, especially when largely unpredictable occurrences occur that are influenced by the respective rulers, and may restrict trade activities. These risks encompass statutes and regulations such as import and export controls, fluctuating rates of duty, as well as safety regulations or environmental standards.
On the other hand, events such as strikes, social unrest, or wars will massively put the security of supply in jeopardy.
Economic Risks These are risks caused by macroeconomic processes. Especially important in this respect are cyclical fluctuations, fiscal exchange rate fluctuations, fluctuations of raw material prices, and high public debts.
Risk of Natural Disasters From a macroeconomic point of view, the impacts of natural disasters are increasingly exceeding the risks mentioned above. The statis-tical surveys of damages from disasters such as earthquakes, floods, or storms show a clear upward trend. Especially in densely populated areas, such events may have massive repercussions that may be felt all over the world due to globally interconnected supply chains.
To handle these generally region-specific risks in a professional manner, infor-mation from business and rating agencies should be used. In country risk reports, these agencies inform about the attractiveness of the respective countries with regard to investments and on the risks with regard to credit allocations. In these reports, information, amongst others, on the economic and political stability of countries that could be used for developing new procurement markets is compiled.
Apart from such country-specific risks in general, there are also supplier-specific risks that could be subdivided into risks caused by their performance and by their rules of conduct.2
Performance risks Encompass all aspects that might lead to unfavourable results due to the supplier’s performance, especially price, quality, and deadline risks.
Conduct risks As result from the supplier’s behaviour, especially in the interna-tional field, one will often have difficulties to assess the conduct of suppliers in advance as normally the amount of reliable information and experience will be insufficient. For example, prior to the commissioning, promises and undertakings might be given which will afterwards prove to be unrealistic.
In order to scrutinise both risk areas, further information on potential suppliers should be gathered. Several methods (detailed in Chap. 4) such as obtaining supplier self-assessments or reviewing company reports are suitable for this purpose.
Practical Tip: Natural Disasters—Approaches to Crisis Management
Global purchasing involves a lot of risks one should always be aware of. Inconstant quality, corruption, bureaucracy, exchange rate risks, different cultures, different mentalities and customs, impending environmental disasters in ever-increasing numbers, and patent and industrial property right infringements are just some examples of risks modern purchasers must cope with.
As an example, the natural and nuclear catastrophe in Fukushima directly affected my procurement volume, which encompassed 28 suppliers at that time.
It is inconceivable to imagine what such a catastrophe would have meant for our supply chain in a country other than Japan. But thanks to their outstanding fighting spirit, the Japanese suppliers managed to compensate for the consequences in amazingly short time. In the following I would like to give a short description of our line of action in that situation and what we have learned from it:
Initiated by the executive board, a crisis management group consisting of representatives of the Sales, Marketing, Logistics, and Purchasing departments
2Cf. Arnolds et al. (2010, p. 372 ff.).
convened daily. The main task that had to be tackled first consisted of assessing the supplier shortfalls and their repercussions on production. At first, roughly 500 active orders for more than 280 individual articles seemed to be affected. As difficult as the situation was, we had to stay calm and show authority. After intense discussion with our 28 suppliers, the number of affected orders could be reduced to “only”
39 for 10 different articles of which luckily we had some stocks. At the same time, the internal and external information flow was perfectly aligned. While the market-ing communication exuded authority and composure, the Sales department looked for possibilities for compensating the looming revenue loss with the help of best-case and worst-best-case scenarios. Production readjusted its planning while Purchasing invested all its energy into developing new solutions. With joint forces—the affected suppliers were especially helpful—we succeeded in working out a great number of partly unusual measures. By substitutions, by modifications of old revision states, and by dismantling non-sellers in order to retrieve urgently neces-sary components, we were able to more than compensate for the lost revenues that had occurred in the first weeks following the disaster.