Chapter 14
Global Supply
Management
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc., All Rights Reserved.
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Growth in World Trade
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The total value of world merchandise imports in 2008 was
$16.4 trillion
World commercial services exports in 2008 was $3.5 trillion
The total value of U.S. merchandise imports in 2008 was $2.1
trillion
The total value of U.S. commercial services trade in 2008 was
$368 billion
The WTO estimates the value of worldwide merchandise trade
imports grew by a factor of 95 times between 1948 and 2001
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Reasons for Global Purchasing
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Unavailability of items domestically
Price/cost
• labor costs, exchange rates, equipment and
processes, product and pricing focus
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Government/marketing pressures
Quality
Faster delivery and continuity of supply
Better technical service
Technology
Marketing tool
Tie-in with offshore subsidiaries
Competitive clout
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Potential Problem Areas in Global
Purchasing
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Source location and evaluation
Lead/delivery time
Expediting
Political and labor problems
Hidden costs
Currency fluctuations
Payment methods
Quality
Warranties and claims
● Tariffs and duties
● Administration costs
● Legal problems
● Logistics and transportation
● Language
● Communications
● Cultural and social customs
● Ethics and social responsibility
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Potential Hidden Costs
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Foreign exchange premiums
Commissions to customs brokers
Terms of payment costs and finance
charges: letter of credit fee, translation
costs, exchange rate differentials
Foreign taxes imposed
Import tariffs
Extra safety stock/buffer and transit
inventory, plus inventory carrying costs
due to longer lead times
Extra labor for special handling
Obsolescence, deterioration, pilferage,
and spoilage
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Additional administrative expenses
Packaging and container costs
Business travel
Fees for freight forwarders,
consultants, or inspectors
Marine insurance premium.
Customs documentation charges
Transportation costs, including from
manufacturer to port, ocean freight,
from port to company plant, freight
forwarder’s charges, port handling
charges, warehouse costs
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General Guidelines for Dealing with
International Suppliers
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Even if English is spoken, speak slowly, use more communication
graphics and avoid use or metaphors and jargon
Bring an interpreter to all by the more informal meetings
• Allow extra time to educate interpreters on issues
Document in writing the main conclusions and decisions
Learn about the country’s history and taboos
Do not use first names unless invited to
Get cultural advice from professional or your own company
employees, not from supplier representatives in the U.S.
Expect negotiations to last longer with some cultures
• Suppliers must learn to accept you and your company as a
customer
Source: Dick Locke, Global Supply Management, New York: McGraw-Hill, 1996
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Organizational Considerations
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Regional purchasing offices
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Organized geographic regions
Global Commodity Management Organization
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When there are a large number of common requirements
across facilities or business units and the supply base is
not always located in the same geographic area as the
buying company’s operations
International Purchasing Office (IPO)
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Separate purchasing organization usually reporting to
head office purchasing department
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Intermediaries
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Import brokers and agents
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For a fee will assist in locating suppliers and handling the
paperwork
Import merchants
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Buys the product, takes title and delivers it to buyer
Supplier’s subsidiary
Sales representatives
Trading companies
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Potential advantages: convenience; efficiency; potentially lower
costs, due to volume; reduced lead times; and greater assurance
of the product meeting quality specifications
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Information Sources
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The Internet
Government sources
Chambers of commerce located in major cities in the
United States, Canada and around the world
Supply organizations at other companies
Supplier locator directories
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Kelly’s Directory, Thomas Register, Dun & Bradstreet
Importers and foreign trade brokers
Other sources
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e.g., Suppliers, banks
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Incoterms
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Developed by the International Chamber of Commerce
Updated: Incoterms 2000
Internationally recognized standard definitions that
describe the responsibilities of a buyer and seller in a
transaction
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Variations across regions and among carriers possible so
make sure to specify conditions
13 standard Incoterms
Each term must be followed by a geographic location,
such as a port or city
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Incoterms: Departure
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EXW: Ex Works (named place)
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Buyer takes title when goods picked up at the supplier’s
factory and is totally responsible for shipment, customs
clearance and duties.
Places greatest responsibility on the buyer
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Incoterms: Main Carriage
Unpaid
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FCA: Free Carrier (named place)
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Goods have cleared by the seller for any export customs
procedures and the seller is responsible for loading the
goods
The buyer takes possession at the named place in the
seller’s country
FAS: Free Alongside Ship (named port of shipment)
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The seller clears the goods for export and delivers them to
the port of export
The buyer takes possession at the dock at the port of
export
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Incoterms: Main Carriage
Unpaid
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FOB: Free on Board (named port of shipment)
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The supplier clears the goods for export and is responsible
for the costs and risks of delivering the goods past the rail
at the named port of shipment
The buyer takes responsibility for the goods as they pass
over the ship’s rail during the loading process.
Note: This term is used differently from the conventional
North American term “F.O.B.”
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Incoterms: Main Carriage Paid
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CFR: Cost and Freight (named port of destination)
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The supplier clears the goods for export and arranges and
pays freight as far as the port of entry
Title and risk of loss transfer to the buyer from the time the
goods go over the ship’s rail in loading - the buyer owns
the goods on a carrier selected by the supplier.
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Incoterms Main Carriage Paid
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CIF: Cost, Insurance and Freight (named port of
destination)
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The supplier clears the goods for export, arranges and
pays the freight and marine insurance for the goods
Title and risk transfer once the goods clear the ship’s rail
while being loaded
CPT: Carriage Paid To (named port of destination)
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The supplier clears the goods for export, delivers the
goods to the carrier and pays for carriage to the port of
destination, unloading customs clearance and duties
Title and risk risk of loss transfers when goods are
transferred to the carrier
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Incoterms Main Carriage Paid
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CIP: Carriage and Insurance Paid To (named port of
destination)
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The supplier clears the goods for export, delivers the
goods to the carrier and is responsible for paying carriage
and insurance to the named port of destination
The seller is also responsible for costs of unloading,
customs clearance and duties
Title and risk risk of loss transfers when goods are
transferred to the carrier
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Incoterms: Arrival
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DAF: Delivered at Frontier (named place)
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The supplier clears the goods for export and is responsible for
making them available to the buyer at the named place at the
frontier, and not cleared for import.
Title transfers at named place and time at the frontier.
DES: Delivered Ex Ship (named port of destination)
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The supplier is responsible for clearing the goods for export
and for making them available to the buyer on board the ship
at the port of destination, not cleared for import.
Title transfers from time the goods are made available at the
named port
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Incoterms: Arrival
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DEQ: Delivered Ex Quay (named port of destination)
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The supplier is responsible for clearing the goods for
export and making them available to the buyer on the warf
at the named port of destination, not cleared for import
The buyer is responsible for import clearance, duties and
other costs upon import and transport to the final
destination
Title transfers from time the goods are made available at
the warf
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Incoterms: Arrival
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DDU: Delivered Duty Unpaid (named place of
destination)
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The supplier clears the goods for export and is responsible
for making them available to the buyer at the named
destination, not cleared for import.
The buyer is responsible for import clearance, duties and
associated administrative costs.
Title transfers at the named place of destination
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Incoterms: Arrival
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DDP: Delivered Duty Paid (named place of
destination)
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The supplier clears the goods for export and is responsible
for making them available to the buyer at the named
destination, cleared for import, but not unloaded
Title transfers at the named place of destination.
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Countertrade
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Countertrade is the practice of a company promising to
buy material, products or services from a country in
return for the privilege of selling in the country
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The supply function may be called to:
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Use material acquired through a barter/swap
Identify cost-effective sourcing alternatives to fulfill offset
agreements
Identify goods and services to fulfill counter purchase agreements
Set-up buyback agreements
Negotiate switch trade agreements with a broker or trading house
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Foreign Trade Zones (FTZ)
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FTZ: isolated, enclosed area in or adjacent to a port of
entry, used to used to import, process, and reship
products to foreign markets.
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Main purpose for using FTZ’s are to avoid, postpone, or
reduce the tariff on imported goods
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FTZ’s differ depending on their major functions.
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transshipments, storage, exhibition and display,
manufacturing