Materials Management BUS 3 – 141 Global Supply Week of Apr 30, 2007

Page 2 2 Agenda –“Deal of the Weekend” –Statistics for U.S. Imports and Exports –Reasons for Global Sourcing –Potential Problems in Global Sourcing –Career Opportunities and Risks –Global Supplier Management –Unique features of working in foreign countries

U.S. Imports and Exports: Selected Statistics

Page 4 4 Trends in International Trade $ (Millions) Year U.S. ImportsU.S. Exports U.S. Imports Increasing at a Faster Rate than Exports * Adapted from Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

Page 5 5 Key U.S. Trading Partners (Yr 1999 statistics) $ (Millions) U.S. ImportsU.S. Exports * Adapted from Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

Page 6 6 U.S. Imports by Selected Commodity $ (Millions) * Adapted from Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

The Case for Global Sourcing, along with some Problems

Page 8 8 Reasons for Global Sourcing –Items are not available in the United States (e.g. Coffee, precious metals) –Price (especially for highly labor-intensive items) –Government incentives –Faster / better support of Customers in the region –High Volume makes the business case –Product design stable or changes easy to implement –Repeatable, manufacturable Quality requires minimal buyer support

Page 9 9 Potential Problems in Global Sourcing –Additional Lead time –Additional Inventory required –Quality –Logistics and transportation costs and issues –Source location and evaluation –Expediting –Political and labor problems –Currency fluctuations –Tariffs and duties –Language and communications –Legal problems –Hidden costs A careful business case is required to validate that the problems are offset by significantly lower total cost of ownership than what can be sourced domestically

Page Inventory Risk in Global Sourcing lead time (L) ROP cycle stock INVENTORY TIME ROP = L × d Longer Lead Time increases Reorder Point, and Increases Pipeline Longer Lead Time pulls in Reorder Point, and Increases Pipeline Extra Inventory Earlier Reorder Point

Page Other Inventory Issues in Global Sourcing –Obsolescence –Damaged In Transit –Missing In Transit –Lost –Stolen

Page Hidden Costs –Business Travel –Some Overhead still required in the US –Commissions to customs brokers –Fees for consultants, inspectors –Exchange Rate differentials –Extra paperwork/documentation –Freight forwarder –Warehousing –Port handling –Possible political issues with customers –Personnel, Recruiting, and Retention issues in the US –Price Protection / Discounts can negate cost savings

Career Opportunities and Risks

Page Career Implications –Emphasis on Value –Critical requirement for Unique Skills –Benefits of continuous Learning –Expatriate opportunities –Fluency in other language(s) a differentiator –Leveraging offshore experience

Global Supplier Management

Page Prerequisites for International Sourcing –Professional Purchasing staff –Professional Logistics staff –Legal department in-house or on retainer –Information Technology applications and infrastructure –Volumes to support the Business Case

Page Suppliers can be found through many sources –Company records –Catalogs (online and printed) –Trade Journals and Trade Shows –Advertisements –Supplier and commodity directories –The Internet –Sales contacts and interviews –Colleagues, networking, professional contacts From Wk 12 – Chapter 10

Page Factors to Consider when Selecting Suppliers Technical, Engineering and Operations –Quality History –Quality Systems –Design Engineering capability –Sustaining Engineering capability –Facilities and Equipment –Output Capacity Ability to ramp up and down quickly Long term potential –Flexibility and responsiveness –Track record of cost reductions –Logistics expertise From Wk 12 – Chapter 10

Page Finding International Sources –Internet –Government Websites and Publications –U.S. Department of Commerce –Chambers of Commerce in selected cities –Brokers and Consultants –Thomas Register equivalents –Supply Departments from non-competing businesses Benchmarking and sharing “lessons learned” with non-competing businesses is valuable beyond Supply issues (e.g. Systems Selection and Implementations, Acquisitions, Change Management) Same Process as domestic sourcing, with a few Exceptions

Page Evaluating International Sources Same Process as domestic evaluations, with a few Exceptions –Detailed questionnaires –Phone interviews –Product samples –Sample receipts and order processing –Leveraging technical staff experience –Strategic Visits –Consultants and representatives in Region

Page Organizing for Global Sourcing –Centralized Control vs. Autonomy vs. Hybrid –Management commitment  Leverage expertise as a competitive edge  Recognize need for specialists if no expertise exists in-house –Commodity Teams Identify world-class suppliers, regardless of location Local purchasing groups focus on continuous supply; commodity teams negotiate selection and deals –Regional Purchasing Offices –International Purchasing Offices

Page Cultural Considerations and Social Customs –Pictures, graphics, and numbers are more effective communication than speaking –Keep as much as possible in writing –Use interpreters for key meetings and negotiations –Avoid using first names until you are invited –Avoid slang, jargon, and metaphors (“Pig and Chicken”) –Get advice from people in your own company –Know as much as possible about the country (countries) where you will do business –Visit as often as possible, taking time to know the culture in addition to business issues

Page International Purchasing Specialists Import brokers and agents  Help find suppliers  Handling paperwork and interaction with local import/export agencies Import merchants  Buy products and takes title. Then they resell and deliver to the buyer Trading companies  Handle a wide variety of products and services to and from a particular country or region (e.g. Japanese companies use trading companies to move goods into North America)  Similar to Distributors in the U.S.

Page Free Trade Zones (FTZ) Isolated, enclosed area in (or adjacent to) a port of entry, used to import, process, and reship products to foreign markets Major functions are –Storage –Manufacturing –Transshipments –Exhibition and Display Main purpose is to save TIME and MONEY –Avoid, postpone, or reduce Tariffs –Avoid, postpone, or reduce Paperwork