Sourcing in Developing Countries – Issues and Opportunities Breakout Session # 1 Peter R. Easley, Esq. Senior Contracts Officer, World Bank April 7, 2003 10:00 am – 11:00 am NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Sourcing in Developing Countries Long term trend is toward sourcing internationally Developing countries should be considered as a potential source of goods and services Sourcing in developing countries poses both risks and opportunities NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

A little bit about the World Bank Our dream is a world free of poverty The World Bank Group is one of the world's largest sources of development assistance In fiscal year 2002, the institution provided more than US$19.5 billion in loans to its client countries We work in more than 100 developing economies with the primary focus of helping the poorest people and the poorest countries The World Bank helps countries complete basic market-opening reforms while also supporting the complex structural and social reforms that generally follow NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Why buy in developing countries? Price / Cost Labor Costs Exchange Rates Equipment and Processes Product and price focus Government / Marketing pressures Quality NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Why buy in developing countries? (cont.) Unavailability of items domestically Faster delivery / continuity of supply Tie-in with other offshore subsidiaries To support your local office in that country Availability of quality goods and services To help build capacity in that country NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Low Cost Regions Potential for 20 – 50% cost savings Countries include: Mexico, Poland, Czech Republic, China, India, Malaysia, Thailand, Vietnam, Taiwan and Korea NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Potential Challenges Source location and evaluation Lead time and delivery time Protecting your Intellectual Property Political and labor standards and laws Currency fluctuation Quality NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Potential Challenges (cont.) Warranties and claims Tariffs and duties Conflict resolution / litigation Logistics and transportation Language / communication Cultural and Social Customs Ethics Time difference NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Impact of Local Government Dealing with the local government bureaucracy Enforcement of laws Interpretations of laws It doesn’t need to be written down --“Trust Me” NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Potential Hidden Costs Commissions to customs brokers Exchange Rate Differentials Floating currency vs. pegged currency Foreign taxes Extra paperwork / documentation Local bureaucratic delays Travel Insurance Import Tariffs Legal Costs NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Overcoming Challenges Thorough supplier evaluation Risk mitigation through contract terms and conditions Quality monitoring and reporting Selection of suppliers with cultural and ethical fit Hire a local agent – someone who knows and understands local practices / laws NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Issues to consider in Supplier Selection in Developing Countries Conduct a site visit to evaluate capabilities Technical, Engineering and operations Quality systems and performance How will this be measured and reported? Engineering and technical strengths Capacity and flexibility to meet demand Process Capabilities Logistic capabilities NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Issues to consider in Supplier Selection in Developing Countries Management and Financial strengths Mission, corporate culture, values and goals This may be difficult to assess in some cultures Impact of culture on ethics NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Impact of buying in developing countries Rise in standard of living Increased commercialization Increased income disparity Increased popular expectations Decreased job security Conflict with local norms / culture (e.g.. Communism) More personal freedom for workers NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Social Responsibility Developing countries are characterized by low wages and an underdeveloped regulatory environment Stakeholder groups draw media attention to environmental and social issues increasing your company’s reputational risk Supply chain integrity is key NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Social Responsibility issues Fair Treatment Fair pay Fair benefits Child Labor Issues Food, clothing, medical care, education,etc. Safe Work Environment Enforcement / compliance with labor laws NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Mitigate reputational risks Codes and Certifications Buyer Codes Buyer pays for internal monitors / independent auditors Consider labor standards of your suppliers and monitor them Implemented by large retailers like Walmart and Target and companies like HP NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Codes should stipulate: Social responsibility requirements Environmental requirements Ethical requirements How will the code be monitored / reported NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

What to include in your Code Forced Labor Child labor Freedom of association Collective bargaining Discrimination Health and safety Wages and hours of work NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Factory Certification Schemes Factory pays for certification process, annual audits and implements remedial actions and infrastructure upgrades During supplier selection, consider requiring a factory certification Direct impact on quality and productivity Use as an incentive to award more business NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Dispute Resolution Try settling disputes informally Consider Alternative Dispute Resolution type procedures (e.g.. Mediation) Arbitration and litigation should be used as a last resort NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Best Practices Be flexible Exercise patience Accept cultural differences Be firm but fair Invest time and energy up front in developing a strong trust relationship Employ mutual benefit strategy NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders

Questions? NCMA 3rd Annual Commercial Contract Management Conference International Contract Management—Better Business by Crossing Borders