Topic 1: International Purchasing

1.1 Introduction

Purchasing refers to a process by which an enterprise or organization attempts to acquire materials or products in order to attain their goals. In the process of purchasing the ownership and possession of goods will be transferred from the seller to the buyer. The activities of purchasing include enquiry, an order, tracking the order, supervising and accounting for an order, receiving goods, and making payment

1.2 Nature of International Purchasing

International purchasing involves a commercial transaction between a buyer and a supplier located in different countries .A review of the literature indicates that there are a number of terms used to describe the purchasing process from suppliers outside the buying firms country. For instance foreign sourcing, international sourcing, international, worldwide sourcing and global have all been referred to in the literature to date. International sourcing has been defined by Johnson and Wood (1996) as buying components and inputs anywhere in the world in such a way that the manufacturer puts out a much broader net rather than relying only on local sources. Spekman (1991) cites global sourcing as the efficient use of worldwide human, material, energy, and capital resources. Mol (2000) provides a more general definition of global sourcing as finding and managing sources for production of final products on a world-wide basis. Trent (1991) argue that international purchasing involves commercial transaction between a buyer and a supplier located in different countries . Conversely ,global sourcing differs from international buying in scope and complexity; it involves proactively integrating and coordinating common items materials, process, technologies, design and suppliers across worldwide buying, design and operational locations. Furthermore, global sourcing requires horizontal integration between product design and development groups as well as between supply and demand planning activities. Global sourcing is a term used to a describe a strategy for buying goods and services from countries other than your own so that you can access significant benefits. This is because different parts of the world will be at different stages in their development and so have cost structures .It can also be because may own raw materials that are not available in your own country or are in short supply.

1.3 Reasons for International Purchasing

Access to raw materials. If your company uses raw materials that are not abundant in your own country then you can lower your supply risk by sourcing globally if availability of those materials is greater elsewhere. Economies of scale in extraction can also mean lower prices even with extra cost of transport and duties factored in.
Access to cheaper wages. Manufacturing processes that are labour-intensive can be sourced more cheaply from countries where wages are lower than in your own country.
Reciprocal trading. Global sourcing works both ways as it involves both a buying organisation and a selling organization. If your company sells its products to a country that can also provide products that you want to buy then there may be an opportunity for doing a deal that offsets your sales and purchases to give you a better overall economic benefit.
Learning how to do business in another country. Knowing the culture and ways of working of other countries can be significant benefit when you to sell to them.
Stimulating competition domestically. Sometimes suppliers in your own country can become complacent if they think that they have a major share of the local market. Finding alternatives overseas can be a good way of attracting new entrants (or just threatening to do so) and shaking up the local market.
Increasing supply capacity. If there is a current or potential shortage of a key material or component for your own manufacturing operation then you may have a serious supply risk.
Take advantage of having a global organisation. If your own organisation is a global one then sourcing via your subsidiaries can be an excellent way to access global sources that may be difficult to tap to your own.
Availability of new technology.
Superior quality. Many companies praise the quality of international sourced products compared to domestic products.

1.4 Benefits of international purchasing

(a) Better prices

(b) Higher world class quality

(d) Improved customer service

(e) Improved competition position

(f) Increased availability of suitable suppliers

1.5 Challenges faced in International Purchasing

Hidden costs might erode the net earnings from global sourcing.
Since global sourcing can mean lower responsiveness, there is a risk of lost sales.
Quality problems might occur due to long distance relationships .
Supply disruption due to poor infrastructure, communication, etc
Long lead times
Poor quality
Security issues ( political instability, potential terrorist activities etc)
Hidden costs due to changes in tarrifs, duties, taxes, etc
Too much document eg bill of lading, certificate of origin, sales contract, certificate of compliance.
Timely for negotiation is greatly increased
Currency difficulties is experienced

1.5.1 Overcoming challenges in International Purchasing

Developing a uniform currency. Different currency systems are used in different countries therefore it is important to develop a standard currency to be used in all countries.
Appointment of agents. Agents to be appointed should creditworthy so as not to mislead the importers and exporters.
Communication style. Business executive from different countries can encounter several barriers to effective communication besides obvious language difference so executive from other country may place a higher value on things such as facial expression instead of just the words that are being said. This will help to overcome the challenge in international purchasing.
Reducing risk in transit. This can be done through having competent insurance firm to insure goods on transit. This will help the supplier to have confidence in imports and exports.
Reducing time log. This is by reducing the number of intermediaries so as to reduce the long time gap between the dispatch of goods by exporter and their receipt and payment by the importer.
Identifying a true market need. Identifying the true needs of large numbers of people in a foreign country is not easy, so you must come up with a solution in a such an effective way that it is benefit and not difficult to communicate. That will help to identify a true market need and also overcome challenges that are faced in international purchasing.
Rules and regulations. When overcoming challenges in international purchasing rules regarding licenses are to be regulated in order to ensure fair rules regarding imports.

1.6 International Sourcing Costs

Material costs – price, setup, tooling, transaction and other costs related to the actual product or service delivered
Transportation costs -transportation, drayage, fuel surcharges and other fees included in a freight rate
Inventory carrying costs -warehousing, handling, taxes, insurance, depreciation, shrinkage, obsolescence, and other costs associated with maintaining inventories, including the cost of money or opportunity costs
Cross-border taxes, tariffs, and duty costs – often referred to as landed costs, which are the sum of duties, shipping, insurance and other fees and taxes for door-to-door delivery
Supply and operational performance – the cost of noncompliance or underperformance, which, if not managed properly, can offset any price variance gains attained by shifting to an offshore source.
Supply and operational risks -including geopolitical factors, such as changes in country leadership; tariff and policy changes; and instability caused by war and/or terrorism or natural disasters (e.g., typhoons, earthquakes) and disease, as in Severe Acute Respiratory Syndrome (SARS), all of which may disrupt supply lines

1.7 Sources of information about overseas suppliers:

1) Professional contacts: Professional contact of the purchasing staff can facilitate an evaluation of specific suppliers capability

2) Trade journals: Trade journals are published regularly by different industries in various countries and provide vital information on suppliers

3) Directories: Directories are good sources of information and are often printed by an organised industry in a particular country

4) Trading companies: Japan frequently uses this marketing channel which provides advantages of convenience , efficiency and assurance of supply to international buyers

1.8 Distinction between global sourcing and international sourcing

Trent (1991) argue that international purchasing involves a commercial transaction between a buyer and a supplier located in different countries. Spekman (1991) cites global sourcing as the efficient sourcing as the efficient use of worldwide human , material, energy, and capital resources. Mol (2000) provides a more general definition of global sourcing as provides a more general definition of global sourcing as ‘ finding and managing sources for production for final products on a world-wide basis. Conversely,global sourcing differs from international buying in scope and complexity; it involves proactively integrating and coordinating common items, materials, processes, technologies, designs and suppliers across worldwide buying , design and operational locations. Furthermore ,global sourcing requires horizontal integration between product design and development groups as well as between supply and demand planning activities. Global sourcing is a term used to describe a strategy for buying goods and services from countries other than your own so that you access significant benefits . Global sourcing can help companies reduce their costs by 10% to 35%. But sourcing decisions require companies to balance the tradeoffs of cost , performance and risk many of which are hidden.

Global sourcing entails identifying, evaluating, negotiating and configuring supply across multiple geographies to reduce costs, maximize performance and mitigate risks. Sourcing is also a cornerstone of total cost management (TCM), a technological and process framework for the optimal alignment, management and control of the total cost of ownership (TCO) of supply relationship

Revision Questions

Example: Differentiate between international procurement and international purchase

Solution: International procurement, differs from international purchasing in scope and complexity, involves proactively integrating and coordinating common items and materials, processes, designs, technologies and suppliers across worldwide purchasing, engineering, and operating locations. International procurement is not only a starting point of logistical activities, but is also a set of managerial activities. The object of said activities is to accomplish the goals of manufacture or sale, which includes the choice of suppliers, confirming the quality and quantity, negotiating the price, and so on. The process of International procurement is a long-term strategy, which includes the evaluation and selection of foreign potential suppliers, while international purchasing involves daily activities supporting manufacturing and services departments. In order to advance from the international purchasing stage to

International procurement, the purchasing department must be elevated to a position where it can make more strategic decisions for the business.

EXERCISE 1. _what is international purchasing?

EXERCISE 2. _ Identify the major reason why more and more Kenyan organization are sourcing for raw materials abroad even when material are locally available

EXERCISE 3. _ Identify and describe the major benefits of adopting an international sourcing procurement strategy