1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

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