Global Supply Chain

Management and Outsourced

Manufacturing
Sub Code - 475

Developed by
Prof. Smitesh Bhosale

On behalf of
Prin. L.N. Welingkar Institute of Management Development & Research
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Advisory Board
Chairman
Prof. Dr. V.S. Prasad
Former Director (NAAC)
Former Vice-Chancellor
(Dr. B.R. Ambedkar Open University)

Board Members
1. Prof. Dr. Uday Salunkhe
 2. Dr. B.P. Sabale
 3. Prof. Dr. Vijay Khole
 4. Prof. Anuradha Deshmukh

Group Director
 Chancellor, D.Y. Patil University, Former Vice-Chancellor
 Former Director

Welingkar Institute of Navi Mumbai
 (Mumbai University) (YCMOU)
Management Ex Vice-Chancellor (YCMOU)

Program Design and Advisory Team

Prof. B.N. Chatterjee Mr. Manish Pitke

Dean – Marketing Faculty – Travel and Tourism
Welingkar Institute of Management, Mumbai Management Consultant

Prof. Kanu Doshi Prof. B.N. Chatterjee

Dean – Finance Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai

Prof. Dr. V.H. Iyer Mr. Smitesh Bhosale

Dean – Management Development Programs Faculty – Media and Advertising
Welingkar Institute of Management, Mumbai Founder of EVALUENZ

Prof. B.N. Chatterjee Prof. Vineel Bhurke

Dean – Marketing Faculty – Rural Management
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai

Prof. Venkat lyer Dr. Pravin Kumar Agrawal

Director – Intraspect Development Faculty – Healthcare Management
Manager Medical – Air India Ltd.

Prof. Dr. Pradeep Pendse Mrs. Margaret Vas

Dean – IT/Business Design Faculty – Hospitality
Welingkar Institute of Management, Mumbai Former Manager-Catering Services – Air India Ltd.

Prof. Sandeep Kelkar Mr. Anuj Pandey

Faculty – IT Publisher
Welingkar Institute of Management, Mumbai Management Books Publishing, Mumbai

Prof. Dr. Swapna Pradhan Course Editor

Faculty – Retail Prof. Dr. P.S. Rao
Welingkar Institute of Management, Mumbai Dean – Quality Systems
Welingkar Institute of Management, Mumbai

Prof. Bijoy B. Bhattacharyya Prof. B.N. Chatterjee

Dean – Banking Dean – Marketing
Welingkar Institute of Management, Mumbai Welingkar Institute of Management, Mumbai

Mr. P.M. Bendre Course Coordinators

Faculty – Operations Prof. Dr. Rajesh Aparnath
Former Quality Chief – Bosch Ltd. Head – PGDM (HB)
Welingkar Institute of Management, Mumbai

Mr. Ajay Prabhu Ms. Kirti Sampat

Faculty – International Business Assistant Manager – PGDM (HB)
Corporate Consultant Welingkar Institute of Management, Mumbai

Mr. A.S. Pillai Mr. Kishor Tamhankar

Faculty – Services Excellence Manager (Diploma Division)
Ex Senior V.P. (Sify) Welingkar Institute of Management, Mumbai

COPYRIGHT © by Prin. L.N. Welingkar Institute of Management Development & Research.

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NOT FOR SALE. FOR PRIVATE CIRCULATION ONLY.

1st Edition (July-2015)

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 CONTENTS

Contents

Chapter No. Chapter Name Page No.

1 Introduction and Background to Global Supply Chain 3-16

2 Cost Management in Global Procurement 17-35
3 Sourcing Methodology and Process 36-65
4 Changing Role of Procurement Function and the 66-88
Emergence of Global Sourcing Manager

5 International Packaging 89-104

6 Role of International Logistics in Global Procurement 105-128
7 Measuring Performance in International Procurement 129-136
8 Ethics, CSR, Sustainability and other Considerations 137-153
in Global Purchasing

9 Role of Information Technology in Global Sourcing 154-170

10 Risk Management in Global Supply Chain 171-185
Management and Sourcing

11 Quality Management in Global Procurement 186-198

12 International Trade Payment Process in Global 199-208
Sourcing

13 Outsourced Manufacturing 209-231

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

Chapter 1
Introduction and Background to Global
Supply Chain

Objectives

The key learning objectives is to –

• Understand the basics of global procurement

• Understand the need for global procurement
• Understand the important features of global procurement
• Understand important differences between domestic purchasing and
global procurement

Structure:

1.1 Introduction to Global Procurement

1.2 Objectives, Features and Key Activities of Global Procurement
1.3 Important Differences between Domestic Sourcing and Global
Procurement
1.4 Activity for Students
1.5 Summary
1.6 Self Assessment Questions
1.7 Multiple Choice Questions 


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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

1.1 Introduction to Global Procurement

Procurement as an activity is of strategic importance to the management of

any organisation. The procurement function is an important driver of cost
and responsible for spending the allocated budget, be it a regular
operational expenditure, e.g., raw material, consumables, services or a
one-time capital expenditure, e.g., projects, plant and machinery.
Traditionally, organisations have been depending primarily on local vendors
for their purchasing needs. With the advent of technology, development of
international trade, increased level of awareness about potential sources of
procurement, increased pressure on profitability and continual cost
optimisation initiatives often has led to unique challenges and well as
opportunities for Purchasing Function. The need of the hour is to ensure
least cost and best quality purchasing from a vendor wherever it may be
located. This need has also resulted into evolution of Global Procurement
Function and Global Procurement Companies in the business structure of
large number of multinational corporations. It is, thus, a business process
which involves identification, evaluation, negotiation and design of supply
chain across multiple locations, suppliers and geographies around the
globe. It has also led to emergence of a new role – “Global Procurement
Manager”. Depending on the level of global activities, e.g., manufacturing,
exports and distribution, organisations develop a sourcing strategy based
on the integration and coordination of suppliers across worldwide
purchasing, engineering, and operating locations with regard to materials,
processes, designs, technologies, services among other things. Global
sourcing is, thus, defined as a centralised procurement strategy for a
multinational company, wherein a central buying organisation seeks
economies of scale through corporate-wide standardisation and
benchmarking.

The key drivers which are shaping up the global sourcing are as follows:

• Political influences
• Infrastructure in respective geographies
• Currency
• Climate changes and shifts
• Culture

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

1.2 Objectives, Features and key activities of Global

Procurement

While the overall objective is to ensure procurement at least cost and best
quality, over a period of time, innovation, efficiency, transparency, ethics
and compliances have also become equally important.

Objectives of Global Procurement

1. Low landed cost of materials: Purchasing managers often compare

various options while carrying out the procurement activity. One of the
important objective of a global purchasing manager is to scout of new
vendors so that the landed cost, i.e., total cost of procuring the material
at the consumption location, is the least. In this endeavour, the
purchasing manager may need to evaluate vendors for more than one
geography.

2. Elimination of inefficiencies in procurement and control over

costs: Considering the current economic situation, cost savings has
become of prime importance. However, as the businesses become
increasing complex, there is a need for constantly innovating and
seeking every opportunity to eliminate the inefficiencies. Generation of
value for the organisation through constant improvement is imperative.

3. Evaluation of own manufacturing and outsourcing decisions: The

organisation constantly evaluates opportunities where the non-core
activities can be outsourced to a significant extent. The outsourcing
framework leads to saving of organisation’s limited resources and help
the management to deploy on sharpening the core competence.

4. Reducing risks to the business through managing supplier

concentration: One of the important aim of global procurement is also
to develop a resilient supplier network. In the recent Tsunami in Japan,
number of organisations dependent on Japanese supplier faced a high
level risk of business disruption. An alternate supplier network, could
have mitigated the risk of dependency of single supplier or sourcing
materials from suppliers concentrated in a single location.

5. Embedding global best practices in the procurement process: As

the organisations actively mature their process from local procurement

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

to global procurement, the best practices of respective geography, over

a period of time are consciously embedded in the procurement process.
The global best practices foster innovation and continuous improvement
in the overall purchasing process.

6. Result based purchasing and reduced learning curve: As the

businesses become more complex and technology advances, the
business needs become more critical and expect a faster response. One
of the important objective of the global procurement is also to enable
business achieve faster results and by-pass the learning curve. Some of
the initiatives which enable achievement of this objective is engaging a
global sourcing partner, promotion of multi-vendor scenario with clear
business allocation inter alia.

7. Innovation led purchasing: With the advent of technology and

political lines fading away, e.g., formation of Brazil, Russia, India and
China (BRIC) as group of emerging economies, constant innovation is
an important challenge for the business. One of the key objective of
global procurement is to inculcate an innovation culture in the
purchasing function.

8. Develop new technology and capacity: More often than not, the
domestic supplier lacks capacity to significant extent for want of
investments. The technology advances also occur at a relatively slow
pace. Thus, dependence of domestic sources may lead the business not
being able to keep up with the global competitive forces. One of the key
deliverable of global procurement is to enable superior quality product
and service sourcing.

Features of Global Procurement

Key features of Global procurement are provided as under:

1. Promotes procurement of near shore countries as a part of

global sourcing strategy: Multinational organisation prefer
procurement from countries like Mexico, Brazil and Argentina as a part
of their global sourcing strategy. Corporations in Germany look forward
for sourcing of supply across the European Union. Asian Multinational
Corporation’s focus of procurement from countries like China for
majority of the material based needs. There is also a focus on

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

development of new suppliers across the near shore countries to

mitigate the supplier concentration risk.

2. Requires a trade-off between low cost procurement vis-à-vis

investment in inventory and increased transportation cost: One
of the unique feature of global sourcing is that the supply chain needs to
be constantly innovated to ensure that the benefit of low cost sourcing
is not lost because of increased investment in inventory and the
transportation cost. Organisations often use Total Cost of Ownership
(TCO) approach to factor in the various costs and benefits before taking
the procurement decision.

3. Endeavours to move beyond just the cost advantage: Organisation

often focus on engaging in mutually rewarding business partnerships,
alliances, develop skills and expertise in the sourcing, and enhance
transparency in the purchasing in addition to just achieving the
objective of realising cost advantage through global sourcing. Over a
period of time, global sourcing becomes an essential core of the
business strategy. Experience of sourcing for multiple geographies
enables the management to understand the DNA of business at
respective geographies. This understanding also helps the organisation
to explore additional business opportunities on the sales, business
development, and marketing and distribution side of the organisation.

4. Requires set up of a Local Procurement Office at respective

geography: Organisations with global sourcing at the core to their
business strategy often set up Representative Office (RO) or Local
Procurement Office (LPOs), for the respective supplier/country/region.
The key activities of the LPO is to perform as follows:

a. Market research for identification of new suppliers

b. Evaluate suppliers for necessary qualification on a basis of defined

criteria

c. Perform inspections to get assurance that suppliers will be able to

meet the quality expectation of the organisation

d. Study the logistics planning and execution of procurement operations

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

e. Evaluate the local and global regulations impacting the procurement

f. Develop a qualified supplier database for future procurement purpose

g. Explore opportunities to integrate the procurement process into the

organisation

The additional key activities undertaken by the LPO post establishment

includes execution of bidding process, establish and provision of Logistics
Management services, facilitation of procurement transactions, contract
and project management and administration of invoicing and payments

5. Management of extra-territorial regulations: Organisation with

global sourcing strategy often need to comply with country specific as
well as international/extra-territorial regulations. For example, recent
enforcement of Foreign Account and Tax Compliance Act (FATCA) by
United States requiring information of payments made to US-based
vendors/ citizens by non-US financial institutions.

6. Category management: Global sourcing requires high level of

expertise in specific areas of procurement. Multinational Corporation,
thus, define Category Management as a sub-function within the
Purchasing Department. For example, information technology
purchasing which may include hardware, software, IT services, requires
special technical expertise and domain knowledge. Corporations have IT
procurement as a separate category.

7. Subject to global risks: Global procurement is subject to additional

risks in comparison to domestic procurement. Some of the important
risks include:

a. Increased level of supply lead times

b. Increased transportation and logistics costs
c. Delivery concerns from supplier end
d. Variation in the quality of material
e. High level of dependence on supplier’s intellectual property in certain
cases
f. Cultural and language barriers.

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

8. Use of advanced demand planning and forecasting methods: On

account of significant lead time and country specific challenges, it is
very crucial that the organisation plans the requirements well in
advance to eliminate the last moment surprises. Organisations globally
deploy advance demand planning and forecasting tools to formulate a
robust purchasing plan.

9. Involves engagement of global sourcing representatives: As

coordinating with suppliers for multiple geographies can become
increasing complex, certain organisation establish tie-ups with overseas
sourcing agents for countries where setting up of Local Procurement
Office may not seem feasible. The important benefits gained by
purchasing companies include:

a. Reduced search and response period

b. No overhead costs as the agent works primarily on a commission

basis

c. Overseas representatives are aware of the reputation and delivery

capabilities of the supplier

d. Ability to find small and medium suppliers with quality deliverable

which lead to substantial reduction in cost

e. Higher level of awareness and understanding of local customs and

culture

f. Improved negotiation opportunities

g. Facilitates performance of onsite supplier inspections

h. Faster communication and expediting the supply chain

Some of the key services provided by Overseas Sourcing Agent (OSA) are
as follows:

• Understanding the purchaser’s requirements in detail

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

• Finding and qualifying potential suppliers that meet the purchaser’s

requirements

• Helping potential suppliers understand requirements and ensure they

provide all information necessary to the buyer

• Obtaining Quotes and details of rates/commercials

• Negotiations with suppliers in the best interest of the buyer

• Arranging for evaluation visits by purchaser. Certain products may

require the buyer to visit the premises of the purchaser

• Escorting purchasers while in country/at the sourcing location

• Ensure that the orders are entered and placed

• Resolve any issues or differences between buyer and seller

• Facilitate timely communication with the stakeholders

• Expedite for delivery as per the provided timelines of the buyer

• Resolve any quality issues and initiate resolution/corrective steps

• Orders can be placed on OSA who will place the same on the end
supplier

• OSA can arrange for make payment to supplier and obtaining the
settlement of the purchase contract

• With sufficient delegation of authority by the purchaser, the OSA can

perform inspection of the products, supplier site etc as required

• Often the OSA can assume full responsibility for the quality and
meeting other requirements of the purchaser

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

Significant Advantages of Engaging an Overseas Sourcing Agent

(OSA)

• The search and response period is significantly reduced.

• The OSA generally works on commission basis, which is of assistance to

the buyer as significant payments are to be made only on success.

• OSAs are aware of the reputations of the suppliers overseas and they
share this understanding and knowledge with the buyer entity.

• OSAs have an ability to locate and discover very small and obscure
suppliers.

• OSAs are well aware of the customs and culture.

• OSAs are able to act as in country escorts for the buyer.

• The buyer has chance of improve negotiations with the supplier

through engagement of the OSAs.

• OSAs can perform the necessary inspections and provide report to the
buyer.

• OSAs play an important role in expediting and providing communication

assistance to the buyer.

Limitations or Disadvantages of Using Overseas Sourcing Agent

(OSA)

• Engaging an Overseas Sourcing Agent may lead to additional costs to

the direct material which can range from 5% to 20% at times.

• May limit number of potential suppliers as the OSA could be aware of

few suppliers.

• Buyer may face difficulties in terms of identification of right OSA.

• Successful OSA model works in the relationship is continued for long

term.

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

• There could be conflict of interest if the OSAs are also paid by

suppliers.

• It is very difficult to remove OSA from supplier/purchaser relationship

over a longer horizon.

10.Requires significant change in the structure of Purchasing

Function: Global sourcing calls for higher level of cross-functional and
cross-location coordination within the organisation. Use of ERP or
advanced procurement/sourcing software platforms could be an
important enabler to facilitate such coordination.

Key Strategic Initiatives in Global Procurement

Key strategic initiatives of a global procurement functions with

multinational corporations are listed as under:

1. Understanding and identification of need for global procurement

2. Development the management expertise and talent for effective

administration of procurement process

3. Defining the procurement strategy for the Group and different Business
Units

4. Evaluation of opportunities for sourcing across the globe

5. Bringing in standardisation in the global procurement process

6. Prioritisation of opportunities and identifying the focus areas

7. Develop Global, Regional and Local (Country) sourcing teams

8. Communication and development of implementation road map of global

sourcing strategies

9. Establishment of business processes, technology support and

performance measures

10.Setting up a performance evaluation mechanism for the global sourcing

function

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

1.3 Important differences between Domestic Sourcing and

Global Procurement

Following table indicates some of the key differences between domestic

sourcing and global procurement

Particulars Domestic Sourcing Global Sourcing

Purchasing Area Acquisition of resources is Purchasing activity

restricted to one country/ extends to sourcing from
region multiple countries

Supplier Risk Entails limited risks for the Large scale and
purchasing organisation magnitude of purchasing
transaction exposes the
organisation to higher
level of risks

Regulations Subject to local country Subject to International/

regulations extra-territorial
regulations

Supplier Requires limited amount of Need higher level of

identification and standardisation supplier selection and
purchasing criteria qualification criteria

Quality Quality of products and Quality of products and

services aligned to local services is comparable
standards with the International
standards

Level of purchasing Purchasing management Purchasing organisation

management perceived to be an formulates global
operational activity sourcing as a business
strategy

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

1.4 Activity for Students

1. Explore any multinational company’s website and seek information

about the global sourcing process.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….

1.5 Summary

On account of increased costs of transportation and logistics, local labour

and contractors issues, domestic regulations, sub-optimal quality and
globalisation, organisation across the world are compelled to rethink their
sourcing strategy and global procurement has solutions to address most of
these challenges. Companies have been forced by increasing global
competition to formulate and pursue international purchasing strategies
that have a primary focus on reduction in the cost of procurement and
optimisation of product and service quality. Such global procurement
strategy focusses on supplies from vendors across the globe instead of
limiting options only to sourcing from domestic vendors.

1.6 Self Assessment Questions

1. Identify and explain the factors that have compelled the organisation to
switch over to global procurement instead of depending of local sources
of supply.

2. Explain the important objectives of global procurement.

3. What are the features of global procurement?

4. Highlight important differences between domestic sourcing and global

procurement.

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

1.7 Multiple Choice Questions

1. Which of the following is least likely to be an important factor driving

organisation globally to pursue global sourcing strategies?

a. Low cost and best quality material availability in domestic market

b. Increased level of global competition
c. Globalisation
d. Changing consumer preferences

2. Which of the following is not likely to be an important advantage of

global sourcing?

a. Increased quality levels

b. International supplier follow higher standards of production
c. Exposure to increased lead times
d. Optimal cost

3. Which of the following is not likely to be an important feature of

domestic sourcing?

a. Entails limited risks for the purchasing organisation

b. Subject to local country regulations
c. Need higher level of supplier selection and qualification criteria
d. Requires limited amount of standardisation

Answers:
1. (a), 2. (c), 3. (c).

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 INTRODUCTION AND BACKGROUND TO GLOBAL SUPPLY CHAIN

REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture - Part 1

Video Lecture - Part 2


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 COST MANAGEMENT IN GLOBAL PROCUREMENT

Chapter 2
Cost Management in Global Procurement

Objectives

The key learning objectives is to –

• Understand the Total Cost of Ownership (TCO) Concept in Procurement

• Understand implications of the Logistics Costs
• Understand the role of Taxation, Incentives and Other Credits in global
sourcing
• Understand how global sourcing manager should implement practices for
effective tax, incentives and credits management

Structure:

2.1 Total Cost of Ownership (TCO) Concept in Cost Management

2.2 Impact of Logistics Costs
2.3 Role of Taxation Costs, Taxation Incentives and Other Credits in
Global Sourcing
2.4 Implementation Aspects for Global Sourcing Manager for Effective Tax
and Incentives Management
2.5 Best Practices for Effective Tax and Incentives Management – A
Global Sourcing Manager Guide
2.6 Activity for Students
2.7 Summary
2.8 Self Assessment Questions
2.9 Multiple Choice Questions

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

2.1 Total cost of Ownership (TCO) Concept in Cost

Management

The global sourcing manager is expected to have a detailed understanding

of all costs associated with the procurement of any product, be it capital
expenditure or operational expenditure. The TCO concept considers
lifecycle costs of the equipment, goods and services. The costs perspective
the expected cash outgo reduced by any benefits over the lifetime of the
goods/asset purchased. The costs include money spent or costs involved
right from the requisition stage to the disposal of the asset. It considers full
costs instead of only focus on purchase price. For example, if any
organisation decides for technology procurement, the global sourcing
manager will have to consider the costs as indicated below:

Computer and Operation Expenses Other Long-term

Hardware Programs Expenses
• Network hardware and • Infrastructure (floor space • Replacement costs
software costs occupied by the equipment)
• Future upgrade or
• Server hardware and • Electricity (for related scalability expenses
software costs and other equipment, cooling, backup
associated costs power, etc.) • Decommissioning

• Workstation hardware • Testing costs of the • Disposal costs

set-up and software equipment and software
installation costs
• Downtime, outage and failure
• Installation and expenses related
integration of hardware
and software costs • Diminished performance and
related costs for maintaining
• Purchasing research costs the equipment

• Warranties and licenses • Security (including breaches,

associated with the loss of reputation, recovery
equipment and prevention)

• License tracking – • Backup and recovery process

compliance costs of the software

• Migration expenses, if any • Technology training to the

employees/operators

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

• Risk management costs • Audit (internal and external)

associated with costs
susceptibility to
vulnerabilities, availability • Insurance premium for the
of upgrades, patches and lifetime of the equipment
future licensing policies
related to the equipment • Information technology
personnel deployment costs

• Corporate management time

If the TCO concept is to be applied to the procurement of transportation

equipment, the lifecycle costs to be consider will be as follows:

• Purchase Price
• Tax Benefit on Depreciation (reduction)
• Insurance Costs
• Fuel Costs
• Financing Costs
• Repairs Costs
• Fees and Taxes applicable to the transportation equipment
• Costs of Maintenance
• Opportunity Costs
• Downtime Costs associated with the transportation equipment

Provided herewith the following illustration for computation of Total Cost of

Ownership on procurement of Computers:

Sr.No. Cost Source +/– $

1 Purchase price/fixed price of the laptop + 100

2 Cost of warranty or maintenance + 50

3 Cost of delivery of the laptop + 10

4 Disposal of delivery packaging + 5

5 Set-up and installation costs + 5

6 Testing cost + 10
7 End-user training + 20

8 Accessory cost + 30

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

9 Energy consumption (over lifetime) + 60

10 Purchase of energy saving devices + 15

11 Support/maintenance/management costs + 30
12 Repairs and lost productivity (based on probability) + 20

13 Recycling and disposal of laptop + 20

14 Value added tax + 15

15 Input credit on value added tax – 10

16 Tax benefit on depreciation – 25

Total Cost of Ownership (over Lifetime) 355

2.2 Impact of Logistics Costs

Logistics costs are an important component of the landed cost of

procurement. In addition to quality and other standards related to products
and services, logistics costs is the key driver of global procurement
decisions. The common concerns that many MNCs engaged in global
sourcing have is the selection of the most cost-effective transportation
mode and the total amount spent on sourcing from foreign/supplier
countries. It is generally agreed that manufacturing cost is significantly
lower in developing countries, however, the extended distance, the
coordination between the partners, and numerous other problems related
to international trade often complicate the profit picture. Certain locations
can lead to significant level of additional costs. The logistics costs can be
broadly classified into following categories:

1. Transportation
2. Inventory holding
3. Administration
4. Customs charges
5. Risk and damage
6. Handling and packaging

Let us have a look at each of the category.

1. Transportation Costs: Transportation costs is further segregated into

various categories.

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

(a) Freight charge: Cost incurred during delivery using various

transportation modes

(b) Consolidation: The fee for combining small shipments to form larger
shipments

(c) Transfer fee: Cost incurred during the transfer of goods between
different modes of transportation

(d) Pick-up and delivery: Transportation charges incurred between

shipper’s warehouse and air, rail consolidator’s terminal

2. Inventory Holding: The key inventory holding costs depends on the

quantity and the location of the inventory.

(a) Pipeline holding: Holding cost during the transfer

(b) Safety stock: Holding cost of safety stock

3. Administration: Administration consists of order processing,

communication and other overheads.

(a) Order processing: Salaries of employees responsible for purchasing

and order management

(b) Communication expenses: Telephone, fax and information transfer

related costs associated with international logistics

(c) Overheads: Rent paid by the international logistics group

4. Expenses related to customs and clearance procedure are significant

component of the logistics costs in case of imports and exports.

(a) Customs clearance expenses: Fee imposed by local customs to clear

goods

(b) Brokerage fee: Charge levied by an agent acting on behalf of the

shipper or the receiver depending on the delivery terms

(c) Allocation fee: Allocation fee is charged per house bill

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

5. There is also a risk of damage to cargo and expenses are also incurred
for protecting the cargo in international logistics.

(a) Damage/loss/delay: Percentage of the value of each unit shipped

that will be lost, damaged or delayed

(b) Insurance: generally charged as a percentage of the value of goods

insured

6. Significant costs in global procurement is also on handling and

packaging of the material. The key expenses incurred are as follows:

(a) Terminal handling: Material handling fee charged by the

transportation company

(b) Material handling: Cost of labour and equipment used to move goods
within the shipper’s or receiver’s warehouse

(c) In/out handling: Material handling charge levied by the freight

forwarder for use of its facilities

(d) Disposal charge: Fee for taking away an empty container from the
receiver’s warehouse

(e) Packaging/supplies of materials: Cost of preparing goods for

shipment

(f) Storage: Rental fee of the warehouse space

2.3 Role of Taxation Costs, Taxation Incentives and Other

Credits in Global Sourcing

Globalisation is changing how we do business in every industry, business,

region, product line and in every part of the world. Global companies are
rapidly transforming their supply chains and sourcing practices and
procedures to go wherever necessary to reduce costs, launch products and
enter lucrative new markets. Operating in this volatile, uncertain, complex
and ambiguous global environment presents a range of challenges for
indirect taxes such as value added tax (VAT), goods and services tax
(GST), customs and excise duties, environmental duties, grants and

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

incentives. Addressing those challenges and finding effective solutions will

continue to be crucial as the business landscape continues to change in the
global environment.

Taxation laws and regulations have a very broad impact on the way goods
and services are procured in International market. The developments have
profound effects on global supply chains and the sourcing process
effectively changing how and where materials and products are sourced,
manufactured, distributed and sold.

Indirect taxes are based on transactions, flow of goods and services and
not on the income or profits. This taxes are completely linked to the supply
chain activities. Changes in the tax regulations can impact the following
areas:

• Where the supply chain and sourcing activities are carried out
• The cost of finished products and delivery routes and timing
• Grants and incentives like export benefits, tax rebates, etc.
• Costs and risks of doing business internationally

The key indirect taxation challenges that may arise, which the global
sourcing manager should be aware of, throughout the supply chain
includes:

• Procurement of services from many countries

• Selling in, from and to many countries
• Ownership of goods in many countries
• Transacting in goods on consignment basis
• Movement of goods across the borders for storage
• Storage of goods as multiple geographies
• Movement of goods across various geographies for process and repair
• Provision of services in many countries
• Ownership of raw material, semi-finished products and finished products
throughout the global supply chain
• Maintaining title of ownership of the goods till last leg of the supply chain

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

Each time the goods cross the border, the goods are subject to many taxes
and compliance obligations. Some of those are provided as under:

• Import and Export licensing

• Value Added Tax and Goods and Service Tax Reporting and
Documentation
• Customs and excise duty reporting and compliance documentation
• Excise duties on importation (countervailing duties)
• Import and Export compliance obligations

Some of the important factors which need to be considered to evaluate the

impact of taxation on supply chain and global procurement are as follows:

• Shift in the trade pattern across the globe: In 1990, the world trade
was dominated by developed nations. However, in the last few decades
as the new markets are opening up, companies are exporting to more
countries than ever before and trade routes are changing. People’s
Republic of China is now the biggest trading partner for countries like
Australia, Japan, South Korea, India, Russia and South Africa and China
is increasing its share of trade with Europe and the United States as well.
As the current emerging economies (such as Brazil, Russia, India and
China, commonly referred as BRIC) grow, evolve and mature, new
developing economies are likely to emerge (such as Vietnam and
Cambodia, Indonesia among others).

• Ever changing and transforming supply chains: With changing

patterns and shift in global trade, companies are increasingly
transforming their supply chains to go across the world as necessary to
support growth, reduce costs and minimise the risks of doing business.
For number of organisations, supply chain activities, e.g., product
engineering, sourcing, manufacturing and logistics are spread across and
widely dispersed around the world. As increasingly the activities are
outsourced to emerging markets, centralised through set up of a
procurement company and streamlined to gain efficiencies and maximise
utilisation of the scarce resources, corporate structures and functions are
also being transformed. Number of organisations has set up a structure
called as Global Procurement Company established to carry out global
sourcing activities for the parent and fellow subsidiaries across the globe.

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

For example, Vodafone, the largest telecom player group across the
globe has set up a Vodafone Procurement Company, with head office in
Luxembourg. The company is established as strategic purchasing centre
for the Group and now serves third parties as well. This company
manages approximately Euro 10 billion of procurement in a year.

• Shift in the taxation regime across the globe: Governments around

the world are primarily focussing on indirect taxes to increase revenues
and provide funding to the tax reforms. Global Sourcing Manager needs
to be aware of the main trends and changing pattern in indirect taxation
and its impact not only on supply chain evolution or change but also on
the existing supply chains. Broadly, most of the recent changes across
the globe include increasing tax rates for Value Added Tax (VAT), Goods
and Services Tax (GST), Excise duties and Customs duties. Emerging
market like India has also recently introduced the common indirect
taxed, i.e., GST Regime. The GST regime in India is expected to counter
double taxation of goods. The average rate of tax is expected to be
approximately 27% as against the global average of 16.5%.



VAT and GST regime is now applicable in more than 150 countries across
the globe. For example, an increasing number of emerging markets are
adopting Value Added Tax and Goods and Service Tax regime in
preference to single-stage sales taxes or a range of local sales taxes. In
January 2012, China launched a Value Added Tax pilot scheme in
Shanghai with a view of eventually replacing its Business Tax (BT) and
VAT with a broad-based VAT throughout the whole country. India is also
undergoing reform in this area. The country has recently finalised its
“negative list” for excluded supplies and bringing the introduction of a
new, centralised GST one step closer.



Value Added Tax (VAT) and Goods and Service Tax (GST) is generally
borne by the final consumer, but the tax is collected and remitted by
business entities that supply taxable goods and services. The indirect tax
is charged on transactions at each stage of the supply chain and it is very
crucial that the global sourcing manager is completely aware of all the
incidences of the indirect taxation. The taxation generally applies to
imports of goods. Businesses are treated as VAT taxpayers who collect
and remit the tax. VAT taxpayers charge VAT/GST on their sales (output
Value Added Tax) and recover Value Added Tax paid on their business
purchases and overheads (input VAT). Organisations also get input credit

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

for the input VAT paid to the vendors. Therefore, businesses effectively
account for Value Added Tax on the value they have added, created at
that stage in the supply chain, as applicable.

• Trade Agreements, bans, action against dumping of the products:

Number of emerging geographies like India have trade agreements with
other nations. The trade agreement’s objective is to promote
international trade between participating nations in specified
commodities and services. Further, certain products are also subject to
anti-dumping duties under a protective taxation regime. For example, in
March 2015, to protect the domestic manufacturers of industrial grade
stainless steel, Indian trade ministry recommended anti-dumping duties
ranging from $180 to $306 per tonne for some industrial-grade stainless
steel imported from China, Malaysia and South Korea. The Ministry’s
report depicts that China’s annual stainless steel surplus is more than 4
million tonnes, compared with India's annual demand of about 2.6 million
tonnes and which leads to cheap supplies coming in from China and
hence to protect the domestic industry, it is important for introduction of
anti-dumping duty.

• Tax and Other Incentives of the Business: The Global sourcing

manager should be aware of the various incentives across the globe for
various transactions. These incentives go a long way to reduce the cost
of strategic as well as transaction sourcing. Indicative list of the
incentives is provided as under:

Type of Utility for the Particulars

Incentives Global Sourcing
Manager

Tax Incentives Reduced cost of • Sales/use tax exemptions/refunds

sourcing across the • Deferment of the tax payments (VAT)
globe • Additional input credit on capital
purchases
• Export Zone credits
• Research and development credits
• Capital investment tax credits
• Credit for alternative energy
• New markets tax credit

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

Hiring Outsourcing/
 • Wage rebates

Incentives Co-sourcing • Grants for job creation
Decisions • Employment related tax incentives
• Hiring and employee screening
incentives in some geography

Research and Useful for sourcing • Federal Government/State R&D credits

Development managers of R&D • Tax incentives for investments in
Incentives driven Research and Development Labs and
pharmaceutical expenditure
companies • R&D cash grants
• Additional/increased deduction for
Research and Development spend in
Corporate Tax

Property Tax Useful for set up of • Exemption of property or establishment

Relief overseas supplier tax for setting up manufacturing/service
establishment as centre in certain locations
subsidiary company • Favourable property tax treatment for
certain industries

Green Selection of right • Carbon credits

Incentives suppliers/ • Greenhouse Gas (GHG) reductions
outsourcing and co- • Incentives for LEED certified premises
sourcing decisions • R&D and manufacturing incentives for
green products

Training Outsourcing, • Incentives of training spends

Benefits overseas • Supplier development programs and
manufacturing hub incentives (especially for small and
medium businesses)
• Tax credits on training spend

Other Useful for reducing • Infrastructure grant and set-up

Incentives the total cost of assistance
ownership • Low cost financing for capital
expenditures
• Discounts on sourcing various utilities
• Waiver of permit/license fees
• Discounted land

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

2.4 Implementation aspects for Global Sourcing Manager

for effective tax and incentives management

The global sourcing manager is expected to perform the following action

points to effectively manage the tax issues in global sourcing:

• Identification and quantification of the indirect taxes and incentives that

the organisation is currently pays and receives

• Identification and quantification of the areas of current and future risks

and opportunity, including the costs of related to tax compliance
obligations

• Assignment of clear role and responsibilities for managing company’s

indirect tax performance and incentives

• Ensure that the team across various functions has understanding of

implications of taxes

• Ensure that standardised processes are implemented and leading

practices are encouraged throughout the organisation for effective tax
management

• Outsourced and co-sourced partners of the organisation ensure

compliance with the tax laws and periodic submission of the report to
global sourcing manager

• Establishment and measurement of the indirect taxes and incentives by

adopting key performance indicators (KPIs) related to organisation’s
supply chain and procurement goals

Implications of Taxation on Global Sourcing Models – Case Study of

a Large Multinational Company

ABC Global Group manufactures and distributes a wide range of consumer

products across many geographies. In recent years, the Group undertook
several transformation projects to streamline production and distribution
centres. The first project, carried out across three continents, i.e., Europe,
the Americas and Asia. The Global Head of Transfer Pricing (International
Taxation) discusses how the Group’s attitude to indirect taxes has evolved

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

from dealing with VAT and customs compliance resulting from these
transformations to basing decisions about where to carry out production, at
various sites across the globe, based on indirect tax considerations.

The Head of Transfer Pricing observed difference in the importance of

indirect taxes on the projects on a regional basis (across three continents).
The Group noted that in Europe the biggest challenge in general has been
making sure that the ERP systems process, the indirect tax aspects of
various supply chain transactions in such a way that there is less manual
activity, that the invoices are all prepared accurately and that the electronic
invoicing systems operate effectively. Harmonisation of Value Added Tax
and customs processes in the European Union has significantly helped the
group.

In Latin America, indirect tax was one of the key focus areas of the Group,
both on the legal entities set-up and for the transaction flows. Further in
deciding where to build or set up a manufacturing unit, in Asia and
customs and free trade agreements and other indirect taxes and indirect
tax incentives were key decision drivers.

2.5 Best Practices for Effective tax and Incentives

Management – A Global Sourcing Manager Guide

Global Sourcing Manager needs to formulate proper strategies to

effectively manage the taxes, reduce the overall cost of purchasing and
also avail various incentives available. Some of the best practices which
can be adopted by the global sourcing manager with respect to various
taxes is provided as under:

Valued Added Tax/Good and Service Tax

• Reduce the burden of VAT/GST, in terms of absolute costs and in terms of

negative cash flow

• Maximisation of positive VAT/GST cash flow on sales and procurement

• Reducing the costs of compliance and the risk of incurring penalties

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

• Adopting an effective and efficient VAT/GST management framework for

identification, quantification and management of transactions and cross-
border movements of goods, throughout the end-to-end supply chain

• Mapping out VAT/GST transaction flows to business processes and

against costs to identify opportunities to eliminate or reduce VAT/GST
costs and improve the cash flow

• Standardisation and automation of end-to-end processes (especially

Accounts Receivable and Accounts Payable processes)

• Centralising Indirect Tax compliance in global or regional shared services

centres

• Routing cross-border movements of goods to make best use of import

valued added tax and GST deferments, free trade zones, reverse charge
accounting, and other aspects to improve cash flow and avoid
irrecoverable (without input credit or refund) VAT/GST

Customs Duties

• Ensure compliance to all activities and process involved in customs

• Adopt effective customs duty management framework throughout the

supply chain covering end-to-end activities

• Use of economic customs procedures and customs planning tools, e.g.,

harmonised system of classification where available

• Routing cross-border movement through Free Trade Zones and other

locations to make best use of the free trade agreements

• Optimising purchasing through imports of goods to maximise the use of

customs procedures and duty benefits, e.g., avoiding procurement from
origin which is subject to anti-dumping duty

• Using accreditations of various organisations (SAARC) to transit goods

more quickly through international borders without any hassle

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

• Linking the use of special customs regimes in the end-to-end supply

chain for optimising the custom duty incidence

Excise and Other Duties

• Avoid sourcing goods on which the excise duty is irrecoverable unless

absolutely necessary and if there is no other alternative

• Use the manufacturing locational advantage for availing certain excise

duty related benefits

Management of Incentives

• Adopting an effective management incentive identification, quantification

and management framework to gain maximum benefit out of the
incentives structure

• The global sourcing manager can look forward to centralise the activities
related to management of grants and incentives to improve controls,
improve decision-making and maximise the benefit

• Periodically evaluate the benefits available compared with the compliance

conditions and costs, as on account of dynamic business environment the
decision may become unviable, e.g., issuance of new policy, withdrawal
of incentives, expiry of incentives, etc.

• Identifying potential investment destinations (industrial policy,

investment policy, state benefits) and negotiating investment packages
that are tailored to the company’s needs to maximise benefits and cost
reductions

• Combining grants or credits for new investment, employment and R&D,

etc. to minimise input costs throughout the end-to-end supply chain
activity

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

2.6 Activity for Students

1. Download the Annual Report of any publicly listed company from any
sector and analyse the purchase and other costs.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….

2. Perform research on various factors affecting Total Cost of Ownership

and its impact on procurement decision of an organisation.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….

3. Evaluate the impact of implementation of Goods and Services Tax (GST)

in India on the sourcing or outsourcing strategy of multinational
companies.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….

2.7 Summary

Over a period of time, there has been a shift in the way organisation take
the procurement decisions. The traditional methods directs towards
purchase price and so selection of the supplier with least quotes seems to
be most practical solution. However, the traditional approach completely
ignores the costs associated with the ownership of the asset, material over
its lifetime. To address this lacuna in the traditional approach and provide a
holistic perspective to taking procurement decisions, especially in a global
environment, Total Cost of Ownership (TCO) provides an appropriate
method to have end-to-end look of the costs. The TCO considers costs
which not only includes the initial purchase price but also considers the
costs of operations, utility, maintenance and disposal at the end of
economic life of the product. Some of the other cost components like
Transportation and Logistics, Taxation also contribute to the cost built up.
In global sourcing environment, consideration of the logistics costs,

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

incidence of various direct and indirect taxes and also availing benefit of
various tax incentives become very important, especially while spending on
capital equipment, incurring research and development expenses,
development of an outsourced vendor, evaluating offshore outsourcing/
service centre set-up and such many decisions. The global sourcing
manager should adopt various practices to identify, assess, quantify and
optimise processes so that the incidence of tax is reduced and the
organisation is positioned to maximise the utilisation of various benefits.

2.8 Self Assessment Questions

1. Explain the concept of Total Cost of Ownership? Provide suitable

illustration.

2. What are the various categories of transportation and logistics costs

which the Global Sourcing Manager should consider while evaluating a
capital asset procurement decision?

3. What role does taxation plan play in global sourcing?

4. What are the various practices that can be adopted by Global Sourcing
Manager to reduce the incidence of taxation and increase utilisation of
tax incentives?

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 COST MANAGEMENT IN GLOBAL PROCUREMENT

2.9 Multiple Choice Questions

1. Which of the following statement is least likely to be true about the Total
Cost of Ownership (TCO) methods of evaluation in global sourcing?

a. Warranties costs are included

b. Focus on end-to-end lifecycle cost
c. Ignore the tax incentives
d. Considers the incidence of non-refundable taxes

2. Which of the following is not likely to be part of the lifecycle cost of the
product to be purchased?

a. Operations and maintenance costs

b. Purchase price
c. Warranty costs
d. None of the above

3. Which of the following is least likely to be tax incentive?

a. Non-refundable taxes
b. Valued added tax with inputs credit
c. Additional depreciation on capital equipment
d. Reduced tax liability on research and development expenses

Answers:
1. (c), 2. (d), 3. (a).


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 COST MANAGEMENT IN GLOBAL PROCUREMENT

REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture - Part 1

Video Lecture - Part 2


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 SOURCING METHODOLOGY AND PROCESS

Chapter 3
Sourcing Methodology and Process
Objectives

The key learning objectives is to –

• Understand the strategic global sourcing process

• Understand the Global Procurement Cycle
• Understand various procurement methods – focus on procurement
through tendering process
• Understand the supplier selection and evaluation process
• Understand methods of supplier development in global procurement
• Understand the methods to enter into a formal contract with the
suppliers – a global sourcing perspective
• Understand various Global Sourcing Models
• Understand the use of Free Trade Zones (FTZs) in Global Sourcing

Structure:

3.1 Introduction to Strategic Global Sourcing Process

3.2 Global Procurement Cycle
3.3 Procurement Methods – Special Focus on Project Procurement and
Purchasing through Tendering Process
3.4 Supplier Selection and Evaluation Process
3.5 Supplier Evaluation Criteria
3.6 Supplier Development in Global Procurement
3.7 Entering into a Formal Contract with Supplier – a Global Sourcing
Perspective
3.8 Global Sourcing Models
3.9 Use of Free Trade Zones (FTZs) in Global Sourcing
3.10 Activity for Students
3.11 Summary
3.12 Self Assessment Questions
3.13 Multiple Choice Questions


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 SOURCING METHODOLOGY AND PROCESS

3.1 Introduction to Strategic Sourcing Process

Strategic purchasing is the process of planning, implementing, evaluating,

and controlling strategic and operating purchasing decisions for directing all
activities of the purchasing function towards opportunities consistent with
the firm's capabilities to achieve its long-term goals. The key steps adopted
by large number of organisations in the strategic sourcing process may
vary significantly with respect to the business profile of the organisation,
nature of the product, region and other factors. Broadly, the process can
be classified in following seven activities:

1. Developing the profile of category/nature of purchases required

2. Define appropriate sourcing strategy for each of the type of product/
service category
3. Generation of supplier portfolio
4. Select appropriate implementation path
5. Negotiations and selections of suppliers/vendors
6. Integration of suppliers
7. Benchmarking supplier market and periodic review

The important sub-steps are provided as under

1. Developing profile of category/nature of purchases: At this stage,

it is important for organisation to understand the nature of products/
services to be procured. Ordinarily, a category consists of a number of
products from similar vendors that can be grouped together in a
competitive sourcing exercise. For example, an automotive company
might purchase different tyres for different vehicles from different
manufacturers. It may make sense to group the total spent on tyres
together into one category in order to identify the savings potentials.
Carrying out a vendor segmentation analysis is one way to position the
product in relation to others purchased by the organisation.

Analysis of the spend is an important step for understanding the need of

the organisation. This activity may consists of following important sub-
steps:

➡ Information related to the total spending of vendor can be sought from

the accounts payable department.

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 SOURCING METHODOLOGY AND PROCESS
➡ Existing contracts with the vendors needs to be reviewed to estimate
the spend in terms of dollar amounts, locations, number of users and
volume of usage, pricing, terms and conditions and which sources are
used most heavily.

Analysis of the need for procurement is also an important steps. This may
include following key activities:

➡ Interview key current users to develop a thorough understanding of

their needs.
➡ Seek user’s views on supplier’s performance, and any enhancements
that they would like to see in the product/services.

Supplier market analysis is also a critical step in the process of global

procurement. The key activities include:

➡ Understand the external supply market in which the supplier operates

and the market pressures the supplier faces.
➡ Evaluate what is the current competitive situation? Are the providers
under cost pressures, competitive pressures, technology pressures?
➡ Understand what other suppliers could supply either the same product/
services or nearly so?
➡ Assess what are the trends in the relevant product/service industry?
➡ Check what insights are available into the value chain, suppliers’ cost
structures and pricing.
➡ At times, it is also advisable to adopt the Porter’s five forces model in
analysing the supplier portfolio. The analysis includes:

a. Evaluate bargaining power of the suppliers

b. Understand the threat of new entrants
c. Understand the bargaining power of buyer purchasing organisation
d. Evaluate the threat of substitute products
e. Evaluate the implications of rivalry among the existing supplier
firms on the procurement cost

➡ It is very important to carefully evaluate and understand the vendor

pricing structures.

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 SOURCING METHODOLOGY AND PROCESS

2. Selection of appropriate sourcing strategy: Organisation here

needs consider how the product you are sourcing aligns with company’s
overall strategy. Where to place the product the company is sourcing
within a category positioning matrix. The product can be, thus, broadly
classified into four broad category positions

(a) Leverage
(b) Strategic
(c) Non-critical
(d) Bottleneck

The details of each category is provided in the Category positioning matrix

as under:

Leverage Characteristics Strategic Characteristics

➡ Competitive market ➡ No true substitutes; usually
➡ High expenditure levels single source
➡ Commodity type items ➡ High-product differentiation
High Approach
➡ Key to core business
Approach
➡ Use competitive marketplace to 

reduce total cost ➡ Ensure availability of supply
➡ Consolidate volume as ➡ Focus on relationship building,
negotiation tool process integration & innovation

Non-critical Characteristics Bottleneck Characteristics

Busi
ness
➡ Low expenditure levels ➡ No true substitutes; usually
Imp ➡ Small % of expenses single source
act ➡ Not key to core business; ➡ Not core to business
commodity ➡ Lack of availability will cause
problems
Approach
Approach
➡ Simplify and streamline
purchasing process ➡ Search for alternatives
Low ➡ Reduce number of suppliers and ➡ Strengthen relationships
simplify ordering

Low Supply market Complexity High

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 SOURCING METHODOLOGY AND PROCESS

The sourcing strategies depend on the objectives the organisation which it

wants to achieve. The following strategies need to be deployed-

➡ Volume concentration: This step involves consolidation of the

suppliers

• Consolidate number of suppliers

• Aggregate volume across units
• Re-distribute volume among suppliers

➡ Best Price Evaluation: In this strategy, the focus of the organisation is

to achieve best possible pricing for the desired product/service.

• Compare “total” costs

• Model “should-costs”
• Renegotiate prices
• Unbundle pricing
• Hold an online auction

➡ Global Sourcing: Organisation needs to explore multiple sources of

procurement

• Expand geographic supply base

• Develop new suppliers
• Exploit global supply/demand imbalances

➡ Improvement of specification of the product: Organisations need to

improve the products over a period of time. This objective is an
important for evolution of the sourcing strategy.

• Conduct product value analysis

• Optimise lifecycle costs
• Rationalise/standardise specification
• Substitute materials

➡ Joint Process Improvement: Number of organisations across the

world engage with the suppliers for improvement of the process.

• Re-engineer joint processes

• Support supplier operations improvement

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 SOURCING METHODOLOGY AND PROCESS

• Share productivity gains

• Develop integrated supply chain

➡ Relationship Restructuring: Engaging into strategic partnership with

supplier assist the organisation in a big way to evaluate the strategic
decision of direct procurement or outsourcing.

• Establish/develop key suppliers

• Employ strategic alliances/partnering
• Examine strategic “make versus buy”

3. Generate the Supplier Portfolio: It is very crucial for all organisations

to develop a robust portfolio or database of suppliers. While
organisation may not purchase from all the suppliers, it is important to
understand the availability of robust database will assist organisation to
send enquiries and seek quotations from multiple suppliers in the
process of procurement. Some of the important questions that the
organisation should ask in the process of supplier selection is as follows:

Criteria Factors

Geographic • Details of geography which supplier is covering

Coverage • Interiors and key locations across the geographies of
coverage

Industry and • Understand the depth of coverage of the supplier across

Market Coverage various Industries/product use

Product Content • Availability of the material about the product/services

Pricing • Pricing structure of the supplier

• Combinations of prices – fixed per unit, discounts,
payment terms

Billing • Frequency of the billing

KPIs • Suppliers past performance on some of the important

key performance indicators that matter to the
organisation, e.g., product delivery time, periodic
reports to customers, representations and warranties

At this stage, the organisation should not discard any of the suppliers. It is
possible that Even if some of the suppliers are smaller or newer suppliers

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 SOURCING METHODOLOGY AND PROCESS

with whom the organisation may not be familiar, those small/new suppliers
may offer more favourable contract terms than some of the large suppliers.

4. Selection of the appropriate implementation path: From the

portfolio of suppliers, the organisation may need to shortlist some of the
suppliers for sending enquiries and calling for negotiations. Many
different routes are adopted by organisations to achieve this objective.
One of the traditional method adopted by buyers across the globe is to
conduct a Request for Proposal (RFP). In the RFP, the buyer states his
requirements and asks suppliers to set forth the specifics of their
proposed offer including pricing. Requiring the vendors to complete a
standard pricing matrix will allows the buyers to compare their offers on
an equal basis. A set of criteria and weightings for evaluating the
completed RFPs must then be developed. The use of an electronic RFP
tool can be a real asset in making sure that all potential suppliers
respond in a consistent manner, speeding up the entire process and
simplifying the analysis of responses. 



It is worthwhile to discuss the role of internet based negotiations in the
RFP process. Some of the important activities involved in internet
negotiations are as follows:

➡ Suppliers that have successfully got through the RFP process will
then be invited to number of negotiations rounds.

➡ Negotiations may be conducted either face-to-face or, depending on

the situation, by Internet negotiations (sometimes called reverse
auctions or e-auctions).

➡ The advantage of using an Internet negotiation is that it compresses

the time to arrive at the suppliers’ “best offer” from days or weeks
to a matter of hours.

➡ Even with the use of an Internet negotiation, however, there will still
be a final contract negotiations process with the successful bidder.

➡ Internet negotiations work best when there are at least three or

more suppliers whose products are broadly similar in the structure,
size and nature of the organisation.

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 SOURCING METHODOLOGY AND PROCESS
➡ If a large organisation has relatively high spend on any product or
service with a number of suppliers, internet negotiations would be a
technique worth considering

In a situation where there is only one viable supplier to consider, the

best approach is to negotiate directly with them instead of routing
through an RFP route.

5. Negotiation and Selection of Suppliers: Negotiating is very crucial

step in the process of global procurement. Important aspect here is
availability of information and development of the negotiation strategy.
Following are some of the important activities involved in the
negotiation and selection of suppliers:

a. Setting up of the negotiation team – the team may comprise of

technical experts, finance and accounts, senior authority, observer,
user function and procurement manager.

b. Understanding the bargaining position of the organisation and

determine most desired outcome (MDO), least acceptable agreement
(LAA) and best alternative to a negotiated agreement (BATNA).

c. Identification of negotiation drivers.

d. Identification of concessions the organisation is willing to give.

e. Organisation should never concede anything without getting

something from the supplier in return.

f. Thinking about the supplier’s objectives and consider the same in the
negotiation process.

g. Understanding the supplier’s negotiating position.

h. The negotiations process may require several meetings with each of

organisation’s potential suppliers before the buyer comes to an
agreement.

The organisation needs to remember that everything is negotiable. The

organisation can enter into various types of contracts as follows:

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 SOURCING METHODOLOGY AND PROCESS
➡ Fixed Price Contracts: Most favoured contract method as the price is
set and there is no room for further increase in the prices. Any cost
increases affects adversely the profitability of the vendor and not
that of the buyer.

➡ Cost Plus Contracts: In the “Cost Plus” arrangement type of

contracts, all allowable costs are reimbursed to the supplier.
Additional fixed amount or a percentage based fixed fee is paid as a
contribution towards the profit of the supplier.

➡ Time and Materials based: Hybrid form of contracts. Contains

aspects of both reimbursable model, i.e., cost plus contract as well
as fixed price contracts.

6. Integrate Suppliers: If organisation decides to work with a new

supplier and/or to discontinue an old one, organisation will need to:

a. Identify any transition issues

b. Consider the organisational implications and any required changes
c. Create new processes and procedures, if necessary
d. Create a transition/implementation plan
e. Communicate the changes to organisation’s user function

7. Monitoring of Supplier Market and Supplier Performance: Once

the organisation execute the new agreement with suppliers, it is also
important to plan ahead and stay abreast of supply market conditions,
so that next time when the contract is up for renewal organisation’s
team is already done part of the groundwork. The new contract/
agreement with the supplier it is important to define state performance
metrics like joint process improvements, quarterly meetings, turn
around time, delivery times, monthly/quarterly/ annual reports. It is
also important to put in place to monitor supplier performance on a
regular basis, and how will the organisation develop relationship with
the supplier so that organisation has a foundation to work from next
time.

Common Action Points in Sourcing

Some of the important action points are as follows:

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• Planning for the sourcing exercise at least 2 months in advance to

provide adequate time for the procurement activity.

• The new contract should be executed and signed at least 2 weeks before
the existing contract expires.

• Active engagement of the procurement function right at the planning

stage is very crucial.

• Involvement of an experienced negotiator will add value to the

procurement process.

• Prior knowledge of the pricing structure across the industry is very vital.

• Seeking legal advice is appropriate to understand the implications of

important terms and conditions of the contract.

• In the process of negotiation with a single supplier, demand management

is the key.

Fiat Global Procurement Model – A Case Study

Objectives of Global Sourcing

The company defined the following key objectives in the process of setting
up a global procurement function:

• Extreme standardisation of models across the globe to facilitate same

level of design, contents, quality levels, robustness and compliance with
the European regulations

• Clear identification of internal and external supply chain, i.e.,

components manufactured in-house and components sourced globally/
through outsourced manufacturing

• Ensure stable group of supplier throughout the globe

• To guarantee cross-plant and cross-market component uniformity and

worldwide efficiency in sourcing worldwide information transparency on
prices, quality and service

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• Decrease level of vertical integration

• Simplification of production arrangements

• Reduction of investments in fixed and non-fixed assets

• Enhance company’s focus on core activities and development of

distinctive capabilities streamline their purchasing structure and continue
to put strong pressure on suppliers to systematically reduce costs

High Level Implementation Steps to Achieve the Above Objectives

• Define a family of new models – to facilitate the aggregation of the

models and its component requirements

• Creation of worldwide supply chain to manufacture, in different places of

the world. This also reduces the supplier concentration risk

• Explore and engage into right composition and mix of sourcing and take
advantage of the cost differentials

• Establishment of the organisational learning process

• Development of a global supply chain flexibly and efficiently using the

production capacity and the supplier base available in different countries

• Development of a world material flow and world information flow

3.2 Global Procurement Cycle

Global procurement process can be broken down into various stages. The
key stages are provided as under:

1. Plan for the procurement: Involves identification of need for goods,

services or works. Develop procurement plan.

2. Formulate the budget: Ensure availability of the funds for purchase.

3. Requirement specification: Provide clear and accurate specification.

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4. Commitments of funds available from the budget: Organise

approval of treasury for allocation of funds.

5. Tender: Ensure the preparation of tender and release of tender

documents.

6. Contract establishment: Evaluate bids and award of the contract to

the eligible supplier.

7. Contract management: Once the contract is awarded to an eligible

supplier, entire activity of receipt of goods, services, inspection, review
of quality, review of performance, monitoring and reporting of the
contract execution

8. Handover of the contract management: Once the contract

management reaches a maturity level, handover of the management to
regular operations. Periodic review of the supplier performance and
annual supplier evaluation.

3.3 Procurement Methods – Special focus on Project

Procurement and Purchasing through Tendering process

In global procurement, various methods can be deployed for optimising the

process. Some of the important methods applicable to the tendering
process is provided as under:

1. Request for Quotation (RFQ): The most standard process across the
globe in RFQ. The RFQ process involves requesting and obtaining three
(generally procurement department across corporates require 3
quotations) written quotes should be used for purchases worth less than
the value defined by the management.

2. Public Tender Process: Public tendering process is followed by most

of the government entities for procurement of goods/services beyond a
particular limit defined by the management.

3. Tender by Pre-qualification: A standard process of limited tender by

pre-qualification can be used when the technical complexity or the high
value involved require a prior assessment of the financial, commercial
and technical capacities of the bidders or suppliers. The pre-qualification

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process can take place at any time on application by a potential supplier

or business. Where a pre-qualified list of bidders or suppliers has been
made, limited tenders are invited from one or more suppliers using a
quotation process.

4. Restricted Tenders: It is a process of restricted tender can be used

when the time and costs necessary to examine and assess a large
number of bids are much higher than the small amount of goods,
services or works to be procured. It is generally directed to registered
suppliers who are already known to have the capacity needed.

5. Procurement only by Negotiation: In exceptional circumstances, the

entity of the organisations may need to directly shift to negotiation,
especially of urgent/emergency purchases.

6. Agreement of Standing Offer: This process of standing offer

agreement entails approaching a pre-qualified/pre-registered supplier
listed on the supplier’s registry and inviting them to provide an offer in
response to a prospective supply requirement. The supplier would
commit to make their offer valid for a specified time period. Such offer
is also referred to as standing offer agreement. It is at the option of the
procurement function to avail the standing offer as per the requirement
of the organisation.

Use of Exemptions from the Normal Procurement Process

In the process of global procurement, organisation define a detailed

procurement policy and standard operating procedure manual. At times,
procurement department is under business pressure to purchase and
without complying the operating procedure requirements. Some of the
exceptions are provided as under:
• Matters of urgency, matters considering the health and safety or
concerning life

• Absence of competition in the materials and services required by the

organisation

• Unavailability of reasonable alternative or substitute goods or services

• Trial procurement, research and development related procurement

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Often, the exceptions require approval of the management of different

levels.

Important Rules and Conditions for the Tender Process in the

Procurement Activity

The rules governing the procurement of the tender needs to be

documented and followed by the organisation. Some of the important rules
are provided as under:

• Document restrictions on the eligibility of parties to bid against the

tender issued

• Objectives for the tendering process to be defined

• Scope, content and format required of bids, should be formulated

• Essential requirements of bids or bidders, for instance any skills or

experience, technical requirements which the bidder must have to
participate in the tendering process needs to be defined

• Desirable requirements of bids or bidders which would be advantageous

for the procurement process and the organisation
• Defined and documented the criteria against which bids are to be
evaluated

• Deadline for the submission of bids, and the location for lodging them

• Adequate procedures for managing late submissions by the bidders

• Defining what can constitute as non-conforming bids and procedures for

managing such bids

• Formulating procedures for handling day-to-day contacts procurement

team (managing the bids) and bidders

• Definition of other procedures governing the provision of information to

bidders, including any confidentiality arrangements, procedures for
variation in bids before execution

• Developing procedures for maintaining the confidence of bidders that a

decision to terminate a process will be taken with due care.

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Checklist for Procurement through Tendering Process

Components Explanation

General Information • User function representation

• Responsible and Accountable staff from
the procurement team

Procurement Requirement Title • Brief requirement and title of the project,

e.g., maintenance of equipment, turnkey
project, installation of machinery, etc.

Background of the Project • Brief background of the procurement

requirement
• Some information for the bidders

Objectives • Outline the key objectives of the project

Steps and Timelines • Detailing of the key steps and outline of

the project timelines
• Defining key milestones is advisable

Procurement Team • Name, title and role of the procurement

team from the buyer organisation
• The procurement team may consists of
Project Manager, Team member,
Commercial Adviser, Legal Adviser,
technical expert of the panel, etc.

Responsibilities of the Tender • Identification and definition of

Evaluation Team responsibilities of the tender evaluation
team. The key responsibilities may include
the following aspects:
➡ Evaluation of the procurement
responses according to the tender
evaluation criteria
➡ Testing and verification of the claims
made by the suppliers/service
providers participating in the tendering
process
➡ Preparation of the initial documents
➡ Proposing any variations in the initial
tender documents

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Key Requirements/Compliances • Defining how the effective competition will

to be Ensured be achieved
• Methods that will be adopted for the
tendering process, e.g., RFP, Standing
offer agreement, etc.
• Methods adopted to achieve consistency
and transparency in the process

Costs of Tendering • Defined costs for the potential tender

participants

Query Handling and Responses • Contact and other details of the desk
handling and responding to the queries
related to tendering process

Briefing Meetings • Dates and other details of the supplier

meetings

Security and Confidentiality • Process for receipt of tender

• Date of opening the tender and procedure
to be followed for ensuring adequate
security and confidentiality

Managing Conflicts • Process to identify and declare areas of

potential conflict for the suppliers
responding to the tender

Notifications • Notification for shortlisting and its

timelines
• Notification of unsuccessful tenders

3.4 Supplier Selection and Evaluation Process

Evaluation and selection of supplier is the most crucial event in the entire
global purchasing cycle. The manufacturing or user function needs to have
a supplier who is reliable and keeps promises in order to maintain an
efficient production. Some of the important steps involved in supplier
selection are as follows:

a) Screening: Screening of the suppliers starts with a sourcing request

from the organisation that initiates a finding process in order to find
potential suppliers. The sourcing request could contain finding a supplier
that could provide the sourcing company with material in order to

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produce a special product. Another initiator could be that the

manufacturer is dissatisfied with the current supplier and needs to find
another one to cover the needs. The screening process can be further
broken down into the following sub-steps:

➡ General and preliminary screening: This step consists of evaluation

of supplier on the basis of financial statements and other factors
which may include the past performance of supplier with similar
customers, environmental issues, compliances, etc. In this stage,
the objective of the buyer is to evaluate whether the potential
supplier will be suitable or no. If supplier fails at this stage of
evaluation, no further assessment is conducted and supplier may be
outright rejected.

➡ Further screening: Once the supplier passes the initial screening

process, the additional evaluation can be performed. In order to do
this, the material manufactured by the supplier is being tested and
evaluated in order to find out if the physical product is suitable for
the production or not at the buyer organisation.

➡ Specific screening: In the last step of the screening, the supplier is

evaluated on specific aspects related to material or services
required by the organisation. The potential supplier will be
evaluated in more detail and will be given scores on the basis of a
pre-determined criteria. Post the screening process, the supplier
with the best overall scores will be selected and will supply the
sourcing company as per the need of the buyer.

3.5 Supplier evaluation criteria

The buyer organisation can evaluate the supplier on various parameters.

Some of the important parameters can be as follows:

Component Sub-criteria

Performance Assessment • Shipment

• Delivery
• Cost

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Human Resources • Number of employees

• Organisational structure
• Training
• Number of technical staff

Quality Management Systems • Management commitment to quality

• Inspection and control
• Quality planning
• Quality assurance

Manufacturing Expertise and • Production capacity

Capability • Maintenance process and upkeep
• Lead-time management
• Up-to-date processes
• Storage facilities
• Product research and development

Business Specific Criteria • Reputation of the supplier

• Location of the supplier
• Price offered
• Patents and products available
• Technical capabilities of the supplier

Information Technology • Connected to Internet across locations

• Information technological compatibility

3.6 Supplier Development in Global procurement

In global sourcing, it is very crucial for the buyer organisation to focus on

supplier development activities. Development of suppliers can be defined
as follows:

• Supplier development is defined as any set of activities undertaken by a

buying firm to identify, measure and improve supplier performance and
facilitate the continuous improvement of the overall value of goods and
services supplied to the buying company’s business unit

• Supplier development is as any activity that a buyer undertakes to

improve a supplier’s performance and/or capabilities to meet the buyer’s
short-term or long-term supply need

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• Supplier development is a procedure by a company to help improve its

suppliers’ capabilities. More specifically, it may be interpreted as a firm’s
attempt to transfer (or replicate) some aspects of its in-house
organisational capability across firm boundaries

Supplier development generally refers to efforts made by procuring firms

to improve their suppliers’ performance and capabilities, which focus on the
strategies and activities the procuring firms adopt. The starting point will
be reviewing suppliers’ performance in order to identify which ones need to
be improved, and to ensure that the investment and efforts are worthwhile.

Supplier Developmental Activities

Supplier developmental activities are dependent on the buyer firm’s

objectives. Some of the initiatives through the suppliers can be developed
are as follows:

• Considerable time and financial investments in supplier’s manufacturing

capacities
• Trainings
• Supplier assessment and incentive program

Number of initiatives can be further segregated into following main

category of initiatives:

• Direct involvement of the firm,

• Providing incentives, and
• Ensuring enforced competition.

Let us evaluate the above categories in further detail.

Direct Involvement of the Firm is a kind of relationship where a buying

firm is actively involved in its suppliers’ development processes, which
entail investments and affords in order to achieve improvements. Some of
the sub-activities involved in this category are as follows:

• Buyer creates specific developmental plan for the suppliers based on its
procurement plan and the potential of the suppliers

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• Supplier site visit by purchasing firm premises help supplier to improve

its performance, when viewing the process and estimating its advantages
and disadvantages

• Inviting supplier personnel to the company’s site to increase its

awareness of how its product is used

• Motivational development can be achieved through consideration of the

recognition of suppliers performance and providing appropriate incentives

• Use of supplier certification programs in order to certify supplier’s quality,

making incoming inspection unnecessary is implemented by many buying
firms

• Buyer firm can contribute to its supplier’ development by providing

trainings and education

Thus, direct firm involvement activities include formal supplier evaluation,

feedbacks, supplier site visit, inviting supplier personnel, certification
programs, award programs, supplier verbal or written request, top
management involvement, trainings and education programs.

Provision of Incentives to Suppliers

In this type of supplier development programs, following could be some of

the features:

• Supplier and a procuring firm agree upon particular current and future
benefits, which they both expect from being involved in these
relationships.

• Buying firm commits only if a supplier improves, motivating supplier to

improve performance.

• To encourage suppliers to develop, the firm may give such promises as to

purchase of large volumes from particular suppliers.

• Preference treatment to suppliers, when other suppliers provide with the

same kind of product.

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• Proactive consideration of some of the suppliers for future business

activities, etc.

However, it is very important to understand that in such relationships the

buyer firm is committed to give particular benefits to the suppliers only if
they improve their performance and deliver as per the expectations of the
buyer.

Enforced Competition Process

In this kind of association with the supplier, importance is not given to

trust, continual commitment, proactive support and sharing of risks. The
key feature of such relationship is to motivate suppliers through the
competition.

• Some of the features of enforced competition process are as follows:

• Choosing the right suppliers is very crucial through competition to

prevent serious quality defects

• No commitment with the suppliers and a purchasing firm is not directly

involved in the supplier’s efforts to improve their performance

• In such kind of process, when a buying firm is not satisfied with the
supplier, regarding its price, location, delivery timelines, quality of the
product, behaviour, it may switch the supplier.

Collaboration with Suppliers in Global Sourcing

Collaboration in buyer-supplier relationships has a far-reaching impact on

the purchasing performance. It is one of the crucial area in the global
sourcing arena. Over a period of time, it has generated interest for
redefining the buyer-supplier relationships. Collaboration is the key.

Some of the important benefits that are likely to be realised in a

collaborative buyer-supplier collaborative relationships are as follows:

• Short-term benefits: Reduction of inventory risks and costs as well as

warehousing, distribution and transportation costs.

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• Long-term benefits: Cost reduction through increased productivity as

well as streamlined business processes in procurement and purchasing,
timely order fulfilment, prudent management of receivable and payable
accounts and greater level of confidence in exception management.

Measuring the Benefits of Collaboration

The buyer-supplier collaboration should reflect in the top-line (revenue)

and the bottom-line (profitability) of both the entities over a period of time.
Some of the measures can be as follows:

• Enhanced focus on innovation: As a success factor in terms of

reduced R&D expenses in combination with the product and process
improvement level.

• Purchasing cost reduction and benefits realised in total cost of

ownership: As a success factor containing communication,
transportation and ordering costs.

• Financial performance: As a success factor including the return on

assets and the return on sales for the collaborators

3.7 Entering into a formal contract with supplier – a

global Sourcing perspective

Documenting the key terms and conditions through a formal contractual

arrangement is an important process in the global sourcing space. The
following are the key terms that should be included in the contract or
purchase order with the supplier:

• Rights and obligations of both the parties

• Process of invoicing and payments
• Applicability of audits, if any
• Delivery terms
• Scenarios that may lead to cancellation of purchase order/contract
• Quantity and quality conditions
• Transfer of title
• Incidence of loss in case of goods in transit
• Insurance and claim process
• Applicability of various taxes – Local, Regional, Export and Import

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• Representations and warranties

• Indemnification by the supplier
• Limitation of liability of the vendor/customer
• Use of copyrights and trademarks
• Confidentiality of information
• Conditions and scenarios of force majeure
• Compliance with respective laws and regulations
• Governing law and jurisdiction
• Resolution of disputes
• Escalation matrix and process applicable
• Compliance to the ethical purchasing guidelines of the buyer

Models of International Sourcing

Broadly, six reasons which drive the organisations to source internationally.

These are:

• Increasing level of competition and pressure on prices

• Constant pressure on the business to reduce the costs
• Businesses need to be very flexible in term of manufacturing capacity
• There is need to further reduce the product development cycles
• Customer need and emphasise very stringent quality standards
• Technological advancements across the globe can make some of the
• products technologically obsolete in certain geographies. There is a need
• for exploring newer technologies.

Case Study on International Sourcing – Toyota Global Sourcing

Operations

Toyota’s global sourcing operations is a classic case of true implementation

of global sourcing strategy. To begin with, the Japanese car manufacture is
equipping its operations in the United States, Europe, and Southeast Asia,
i.e., across the three continents with integrated capabilities for creating
and marketing automobiles. The company gives the global sourcing
managers at those operations ample authority to accommodate local
circumstances and values without diluting the benefit of integrated global
operations. This also ensures that the local understanding and the
knowledge of the global procurement manager is effectively utilised.

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Thus, in the United States, Calty Design Research, a Toyota subsidiary in

California, designs the bodies and interiors of new Toyota models with
constant focus on Research and Development. The company also has
technical centres in the United States and in Brussels to adapt engine and
vehicle specifications to local needs. This also ensures that the company
considers the local requirements and accordingly suitably performs the
modifications to the production process.

Toyota operations centre that make automobiles in South-East Asia supply

each other with key components to foster increased economies of scale and
standardisation in those components—gasoline engines manufacturing in
Indonesia, production of steering components in Malaysia, manufacturing
of transmissions in the Philippines, and production of diesel engines in
Thailand. In this process, Toyota has ensured that local expertise of
respective geographies is fully leveraged. The procurement strategy has
gone a long way to ensure that it procures the best of the components
from external or internal vendors through creation of group companies
across the world and provides best value to the end consumer.

Toyota has also started developing vehicles in Australia and Thailand since
2003 which also demonstrates that the corporation. These new bases
develop passenger cars and trucks for production and sale only in the Asia-
Pacific region. The Australian base is engaged mainly in designing cars,
whereas the Thailand facility is responsible for testing those cars.

3.8 Global Sourcing Models

From a contracting perspective, firms may follow different sourcing models.

Some of the models which the companies follow are as follows:

• Parent to subsidiary – intra-firm or intra-group procurement

model: The intra-firm procurement can be further segregated into
domestic and international. In domestic in-house sourcing, a
company procures major components in house by producing them
domestically. In offshore subsidiary sourcing, a company procures major
components from its foreign subsidiary.

• Sourcing from independent suppliers – Outsourcing: The

outsourcing can also be broken down into the primary two segments
which include engaging into domestic purchasing agreement where a

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company buys major components from independent suppliers at home.

Offshore outsourcing where company buys major components from
independent suppliers overseas. For example, Apple, Dell, and Gateway
outsource 100 percent of their Laptop computers from Quanta Computer
Inc., a Taiwanese company and the world’s largest maker of Laptop
computers. Dell Computer alone accounts for half of Quanta’s sales.

3.9 Use of Free Trade Zones (FTZs) in Global Sourcing

A Free Trade Zone (FTZ) is an area located within a nation (say, India) but
is considered outside of the customs territory of the nation. The use of
FTZs has become an integral part of global sourcing strategy as they offer
various tax benefits and marketing flexibility on a global basis. Many
geographies/countries also have FTZs. For example, in the United States, a
free trade zone is officially called a Foreign Trade Zone. FTZs are licensed
by the Foreign Trade Zone (FTZs) Board and operated under the
supervision of the Customs Service. The level of demand for FTZ
procedures has followed the overall growth trend in global trade and
investment. Presently, some 700 FTZs are in operation and, as part of their
activity, about 540 manufacturing plants are operating with subzone
status. Subzones are adjuncts to the main zones when the main site
cannot serve the needed purpose and are usually found at manufacturing
plants.

Annexure – Limitation of Liability Related Regulations in United

States

Limitation of vendor/contractor’s liability is also governed by laws in

respective country. The United States alone has different laws across
various states.

Following table highlights the differences.

State Rule Applicable for Limitation of Liability in Contracts

Alaska The contractor’s liability for damages to the state for any
cause shall be limited to the greater of $100,000 or the
purchase price of the specified equipment which caused the
damage or that is the subject matter of, or is directly related
to, the cause of action

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Arkansas Cannot indemnify any party for liability or damages

California The contractor’s liability for damages to the state for any
cause whatsoever, and regardless of the form of action,
whether in contract or in tort, shall be limited to two times
the purchase price

District of There is not a standard limitation on liability, but the District

Columbia of Columbia does grant limitations on liability to vendors on a
case-by-case basis

Illinois Case-by-case basis, usually 100% of contract value

Iowa No more than 150% of contract maximum

Montana The contractor’s liability for contract damages is limited to

direct damages and further to no more than twice the
contract amount. The contractor shall not be liable for special,
incidental, consequential, punitive, or indirect damages

New Jersey New Jersey does have limitations on liability and the terms
start at 500% and have been negotiated down to 200% at
times. This is on a case-by-case basis

West Virginia West Virginia is unaware of any liability limitations for IT

contracts

Wyoming Wyoming does not have limitations on liability included in the

boilerplate contracts

3.10 Activity for Students

1. Select any large automotive company or Fast Moving Consumer Goods

(FMCG) company and analyse their global sourcing model.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….

2. Select an emerging economy or geography, e.g., China, Philippines and

India and understand the factors impacting development of suppliers in
those geography.
…………………………………………………………………………………………………………………………
…………………………………………………………………………………………………………………………
………………………………………………………………………………………………………………………….

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3.11 Summary

Global Sourcing Process is one of the important strategic component of the

business. The process commences from development of the supplier profile
based on various criteria and at the close, it focusses on the periodic
evaluation of the suppliers. The organisation needs to understand global
procurement cycle which starts with planning and over a period of time
ensure supplier empowerment to become an integral part of the business.
While selecting various methods of procurement, most common is
tendering and auction. The methods results into high level of competition
among the competent suppliers and generates a best possible value
addition for the buyer organisation. It is also crucial that organisation
adopt a robust supplier selection and evaluation technique and process.
Further, the organisation also needs to identify suppliers who have
potential to become a strategic business partner in the long run. Such
suppliers should be segregated from the transactional suppliers and right
investment of supplier development should be done. It is also crucial for
organisation to enter into a formal agreement or contract with the
suppliers. One of the important clause which the organisation should be
paying attention is the limitation of liability of the suppliers. This clause
defers from geography to geography and in times of distress, it is possible
that organisation may find itself at risk and may have to suffer the loss of
supply chain disruption without any fallback option.

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3.12 Self Assessment Questions

1. Explain, in detail, the key steps involved in the strategic sourcing

process.

2. ABC Limited is keen to develop a robust supplier portfolio. You are

required to highlight and explain the important factors which the
management of ABC Limited should consider while developing the
supplier portfolio.

3. Write a short note on Global Procurement Cycle.

4. Highlight the important methods which can be adopted by organisations

for sourcing through tendering approach.

5. Explain the criteria to be adopted for selection and evaluation of

suppliers.

6. Highlight the important benefits of collaborating with suppliers as a part

of global sourcing strategy.

7. Write a short note on important models of global sourcing followed by

MNCs.

8. Explain the importance of limitation of liability clause and its

implications on the buyer in global sourcing.

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3.13 Multiple Choice Questions

1. Which of the following clause is most important to be evaluated by

global sourcing manager in the process of entering into contract with
the supplier?

a. Rights and obligations of both the parties

b. Billing timelines
c. Applicability of audits
d. Order processing TAT

2. Which of the following is least likely to be a benefit of providing

incentives to suppliers for better performance?

a. Preferential treatment to buyer

b. Increased Total Cost of Ownership
c. Deterioration in quality
d. Higher involvement of the suppliers

3. Which of the following is not a supplier development initiative?

a. Training to supplier
b. Offering higher price
c. Supplier incentive program
d. Engagement on technical process

Answers:
1. (a), 2. (c), 3. (b).


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REFERENCE MATERIAL
Click on the links below to view additional reference material for this
chapter

Summary

PPT

MCQ

Video Lecture - Part 1

Video Lecture - Part 2

Video Lecture - Part 3

Video Lecture - Part 4


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 CHANGING ROLE OF PROCUREMENT FUNCTION AND THE EMERGENCE OF GLOBAL SOURCING MANAGER

Chapter 4
Changing Role of Procurement Function and
the Emergence of Global Sourcing Manager

Objectives

The key learning objectives is to –

• Understand the global developments and evolving role of the Global

Sourcing Manager
• Role and responsibilities of the sourcing manager
• Gain a high level view of the procurement function
• Understand the various levels of maturity of a global sourcing function
• Understand the emergence of a CXO Role – Chief Procurement Officer
(CPO)
• Understand how the supply chain analytics can be deployed by the global
sourcing manager
• Understand the process of performing health check of the procurement
function
• Identify and understand the factors to be considered by Global Sourcing
Manager while pursuing the procurement
• Understand the key difference between the traditional role and the
emerging new role of the global sourcing manager

Structure:

4.1 Evolving Role of Global Sourcing Manager

4.2 Emergence of New Role and Responsibilities – Key Positions in Global
Sourcing Organisation
4.3 High Level View of the Procurement Function
4.4 Levels of Global Procurement Function Maturity
4.5 Emerging CXO Role in MNCs – Chief Procurement Officer (CPO)
4.6 Supply Chain and Global Sourcing – Analytics

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4.7 Health Check of Global Sourcing/Supply Chain Function

4.8 Factors Which a Global Sourcing Manager Should be Aware While
Pursuing International Procurement
4.9 Managing Specific Aspects and Expectations in International
Procurement – Traditional vs. New Strategic Role
4.10 Activity for Students
4.11 Summary
4.12 Self Assessment Questions
4.13 Multiple Choice Questions

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4.1 Evolving role of global sourcing manager

The Global Sourcing Manager has multi-dimensional role to play in an

organisation. His has duties towards the internal aspects of the
organisation as well as external aspects. The internal duties of a
purchasing manager are:

• Collaboration with the internal network

• Making operating purchasing decisions
• Definition of purchasing strategies
• Formulate and organise the boundary interaction

The external duties of a purchasing manager includes:

• Ensure collaboration with the external network

• Effective management of supplier relationships
• Coordination of joint activities
• Periodically monitor, evaluate and develop suppliers

The trends in global sourcing affecting the evolution of role of global

sourcing manager are:

• Increasing strategic role of purchasing in corporate policy across number

of multinational organisations

• Shift towards more centralised control and establishment of global

procurement companies/business set-ups

• Continual effort towards decreasing number of suppliers

• Focus over entering into long-term contracts instead of transaction based

procurement

• Use of category management/functional management in the process of

global procurement - buying groups organised around end items rather
than commodities

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4.2 Emergence of new role and responsibilities – Key

Positions in global sourcing organisation

Corporate • Responsible for development of corporate purchasing

Procurement strategies, systems and reporting
Officer (CPO) • Provides overall guidance to various buyers

Corporate Buyer • Manages Strategic commodities – large volumes, high

investment projects and services
• Responsible for developing sourcing strategy for key
commodities
• Focus on long range planning horizon

Purchasing • Explores new materials and components

Engineer/ • Identifies and supports development of new suppliers
Technical Expert • Discusses and evolves new specifications
• Performs market research, assists in selection of suppliers
and negotiations.
• Often work on a decentralised level
• Important single point of contact of liaison between
purchasing and R&D function

Project • The Project Buyer holds similar responsibilities except that

Purchaser/ Buyer the key focus of buying is on equipment and capital goods

Material • Role involves materials planning and ordering

Management/ • Order handling – ensuring material supply, calling off
Planner materials against annual agreements
• Vendor rating – monitor and control suppliers quality and
delivery performance

4.3 High Level view of the Procurement Function

Procurement Function increasingly is considered to be enabler of business

strategy. It also drives sustainable methods of continual cost reduction
exercises. What can be expected from the ever evolving global
procurement function? The important expectations of the Top Management
and the Board of Directors is provided as under:

• Spend map and its visibility: The procurement function is expected to

have a detailed spend map across entire organisation and preferably the
same needs to be updated quarterly or other periodic intervals defined

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by the management. Mapping spend and periodically updating the map

will provide the procurement function invaluable insights. Some of the
important insights can be as follows:

➡ Knowing the total quantum and what total spend of the organisation is

➡ Knowing who is spending and on what activities/purposes

➡ Identification of vendors supply multiple business units

➡ Identification of business units that buy the same or similar goods and
services across the globe

➡ Knowing what portion of organisation’s spend is with the core

suppliers (e.g., top 10 suppliers)

➡ Having information about the total number of one-off and small value
transactions suppliers

➡ How many transactions organisation processes and what is the

associated administrative cost of such transactions.

• Driver of savings: Procurement function is seen to be a driver of

sustainable savings (proving perspective of when, where,why and how)
across the organisation.

• Cost reduction across value chain: The function is expected to be

engaged with the wider organisation to understand how procurement can
reduce costs across the value chain in the organisation globally. The
necessary factors which should be considered here are:

➡ Eliminating demand where applicable and opportunity exists

➡ Reviewing volume requirements of the organisation
➡ Achieving reduction in the demand frequency
➡ Evaluating alternatives to filling need
➡ Encouraging reuse
➡ Simplifying and/or standardising the product/service specification and
➡ Reducing portfolio range and complexity.

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• Realisation of value: The procurement function should ensure that the

value is realised through robust contract management and supplier
relationship management frameworks which are operationalised across
the organisation.

• Optimising commercial and technical capability: The global

procurement function is expected to deliver procurement within an
operating model that connects commercial and technical capability to
drive optimal client outcomes.

• Formulation and implementation of robust contract and supplier

relationship management framework: Over a period of time, the
Procurement Function is expected to build a robust contract and supplier
management framework. Number of times, large organisations fail in
implementation of a good contract and supplier management framework.
Some of the key reasons for failure include:

➡ Excessive focus and time spent in managing transactional suppliers

and inadequate attention to suppliers of strategic importance

➡ Issue based management for key suppliers and informal mechanism

➡ Late involvement of legal team. Only after an legal issue arises

➡ Lack of continuous improvement program as a part of supplier

management framework

➡ Lack of periodic conversations with strategic suppliers on various

aspects related to procurement

➡ Inability to identify supplier and assess on various aspects like

financial stability, performance on ethics, quality control standards,
technical capabilities and experience in the business value chain.

4.4 Levels of Global Procurement Function Maturity

The Global Sourcing/Procurement Function can evolve over a period of time

from just being passive, to an independent function and further maturing
to supportive to the business and reaching highest level of maturity of
integrative function. Thus, the four stages are:

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• Passive
• Independent
• Supportive
• Integrative

The characteristics of the procurement function is provided as under:

Passive Procurement Function

• Lack of strategic direction

• Function as a reaction to the requests of other departments
• Time spent on quick fix, routine, trivial and transaction oriented
operations
• Selection of supplier is purely based on price and material/service
availability

• More focussed on efficiency and timely purchasing

• Very limited amount of inter-functional communication
• Very low visibility of the procurement function in an organisation.

Independent Procurement Function

• The Procurement Function deploys latest purchasing techniques and

practices.

• Strategic direction is, however, independent of the firm’s competitive

business strategy.

• Performance of the function is largely evaluated on the basis of cost

reduction achieved and efficiencies gained.

• Good level of coordination links exist between purchasing and technical

departments.

• Top management of the organisation fully aware and recognises the

importance of professional development and opportunities that exist in
the procurement function which contribute to the profitability of the
organisation.

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Procurement as Supportive Function

• The procurement departments provide active support to the

organisation’s competitive strategy by implementing innovative
purchasing techniques and practices.

• The actions of procurement function strengthen the competitive

positioning of the organisation.

• Representatives from the purchasing team often are part of the sales/
proposal teams.

• Suppliers/vendors are looked at from the perspective as a business

resource/partner. Those vendors are carefully selected and continually
motivated to excel.

• The procurement function continuously monitors the markets, products,

vendors and other clues from the business.

Procurement as an Integrative Function

• The Procurement Function is completely integrated into the organisation’s

competitive strategy.

• The Procurement Function is one of the key contributor to the strategy

development process.

• Permanent lines of communication exist between other key functions and

the Procurement Function.

• Performance of the Procurement Function is clearly linked to the strategic

outcome and contributing factor to the organisation’s success.

4.5 Emerging CXO role in MNCs – Chief Procurement

Officer (CPO)

Considering the strategic importance of the procurement functions,

organisations globally has seen an emergence of a CXO role, often
designated as Chief Procurement Officer and responsible for number of

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strategic and policy matters related to global sourcing. Some of the

important responsibilities a CPO is expected to deliver are:

• Achieving financial objectives through cost reduction, purchase price

variance, sourcing from low cost markets

• Re-engineering business process and supply chain to increase efficiency

and effectiveness

• Satisfying business needs in delivery time and quality thereby meeting

the business objectives

• Managing outsourcing activity and delivering contracts, identify and

develop new avenues for sourcing

• Managing and enhancing the purchasing system, organisation and policy,

promote deployment of technology

• Guaranteeing quality of purchase at all times

CPO need to have competencies across diverse areas of management.

Some of the key competencies will include:

• Information Management and Technology Enablement

➡ Focus on innovation
➡ Ensure seamless integration with business processes
➡ Managing complexity of business

• Task and Process management

➡ Organising skills
➡ General business management skills

• Interpersonal skills

➡ Networking
➡ Developing relationship and engagement
➡ Influencing skills

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• People management

➡ Motivating and driving the performance

➡ Directing the team to achieve the business objectives

The Chief Procurement Officer (CPO) should essentially have the following
traits:

• Trading skills and street smartness

• High level of logical thinking capability
• Attention to details
• Thought leadership
• Ability to share and socialise ideas
• Self confidence
• Charismatic personality
• Ability to look at leverage, often useful for negotiations
• Extrovert
• Appreciation of simplicity and common sense

4.6 Supply Chain and Global Sourcing – Analytics

The Global Sourcing Manager or Chief Procurement Officer needs to be well

versed with supply chain and procurement analytics. Some of the areas
where analytics are very important are:

• Spend Analytics: The CPO can have the data from the procurement
system/ERP pulled out and perform analysis. There is need to be able to
interpret it, understand what it means, and determine the right potential
opportunities and courses of action arising. The analysis of data can
provide inputs for drawing out a good and implementable procurement
strategy.

• Market Analysis: Availability of big data is providing ample opportunity

to CPO for performing analysis of the market and come out with
meaningful analysis.

• Negotiation: Availability of information and performing analysis for

input to negotiation and seeking the best price and terms available in the
market.

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• Selection of supplier and sourcing: Analytics can be used for

designing evaluation methodologies, determining evaluation criteria and
weights, scoring systems, or balancing cost and qualitative factors.

• Informed market sourcing: The most crucial and complex task in

sourcing is increasingly addressed using market-informed or collaborative
sourcing tools and techniques. Organisations have been investing in
analysis of the market and taking very informed decisions.

• Contract management and supplier performance evaluation:

Availability of the detailed information related to delivery timelines,
quality results, outcome of inspections, rejections, discounts, etc. is in a
way assisting the CPO to perform a meaningful analysis of the supplier
service and periodically evaluate. The parameters used for analysis of the
supplier quality have gone beyond the material quality and price, but the
focus is on multiple factors such as innovation, pro-activeness, customer
centricity, etc.

• Procurement/supply chain risk management: Analysis is a very

important input risk management. The CPO should analyse the data to
assess the price risk, supplier concentration, unavailability of material,
quality, etc. on the basis of available information. CPO should also use
analytics for basic risk analysis including review of expected risk events,
their probability and impact.

Types of Analysis

The global procurement manager can perform some of the following key
analysis and assist the organisation to achieve the business objectives:

• Category analysis: This analysis is performed by the global sourcing

manager to answer the question whether the organisation is buying the
same/similar goods and services from different vendors or too many
vendors. Generally, organisations follow three categories based approach
that reflect the business and industry. The categories can be Super
category, Main Category and Subcategory. The category analysis allows
the organisation to identify spend leakage issues such as fragmented
purchasing across vendors and across the organisation for specific
categories, rogue spend, etc.

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• Analysis of Items procured: Item analysis is performed to know

whether the organisation is buying the same item from different vendors,
in different geographies or business units at different prices. The item
analysis allows the organisation to focus on fragmented purchasing in the
business and identify spend leakage issues such as purchasing from non-
preferred vendors, fragmented purchasing across the organisation and
rogue spending patterns.

• Analysis of Payments: This analysis is performed to understand

whether the organisation is leveraging all possible discounts or interest
from the invoice payment process. The analysis of vendor assists the
organisation in analysing the payment practices and terms within the
organisation’s procure to payment processes to identify issues such as
unrealised discounts through late payments of invoices or unrealised
interest/cash discounts from early payments of invoices.

• Analysis of Vendors: Vendor analysis allows the organisations to create

different spend profile of the vendors. Vendor profiling will allow the
organisation to assess vendor spend by category, organisation structure,
item, payment, contracts (where applicable) and historic spend over
time. Analysis of vendors help procurement function to provide a single
view of total organisation engagement with a single vendor.

• Contract Analysis: Contract analysis provides a good perspective to the

procurement function of the compliance levels with the existing
negotiated contract terms. Where contract data is available and used in
organisation’s finance system, the analysis will help identify spend
leakage through contract over spend and/or contract non-compliance.

4.7 Health Check of Global Sourcing/Supply Chain

Function

For evolution of a successful and performance driven global sourcing

function, it is crucial to periodically perform the health check of the
function. The health check of global sourcing function can be various
aspects which may include:

• Capturing voice of internal customer and external supplier

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• Evaluating the financial and non-financial benefits accruing to the

organisation

• Ensuring that the procurement function is operationally effective and

efficient

• Ensuring right data and information is available for procurement

decisions

• Risk management and robust compliance framework

Sample global sourcing health check questionnaire provided in the table

below.

Area Particulars Key Questions

Spend map Understanding how • How much is the organisation spending?

and on what the
• On what activities, services, and
organisation products is the organisation spending?
spends
• Is per unit cost varying significantly?
• How much is the spend associated with
strategic suppliers or top 10 suppliers?
• How many suppliers does the
organisation have who supply same or
similar products/services?

Savings Short-term and • Does the organisation evaluate the

long-term saving short-term and long-term saving? Is the
generated by the organisation striking a right balance
procurement between the savings?
function • Are potential savings part of the
planning, budgeting and forecasting
cycle?
• How effective is the procurement
activity?
• How the organisation is tracking the
realised and unrealised benefits/savings
in the procurement function?

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Procurement End to end • Focus of the initiatives just on saving

Value Chain management of costs or saving on total cost of
procurement ownership?
activity including
• Segregating between desirable or good to
demand,
have and what is necessary for the
inventory and not
organisation?
just costs
• Approach towards the suppliers – whether
collaborative or just a vendor?

Contract and Realisation to the • Generating the benefits as promised by

Supplier full potential of the suppliers?
Relationship the value of
• Whether the integration of strategic
Management supplier
supplier with the long-term planning,
relationship
budgeting and forecasting achieved?
• Whether the organisation is occupied in
addressing the transactional issues or
looking at business partnering with
suppliers?

Procurement Building of the • Is the vision, mission and objectives of

Model procurement the procurement documented?
model on the
• Does the organisation have all necessary
basis of strength,
team with technical and commercial
skills and
expertise?
expertise
• Does procurement function command
credibility in the organisation?

4.8 Factors which a Global Sourcing Manager should be

aware while pursuing international procurement

Sourcing internationally, especially to China and other low cost countries

(LCCs) involves a carefully evaluated strategy and more than just
managing the concept of ‘purchasing’. Global sourcing involves all aspects
related to helping make the product ‘happen’ on time, on budget, and with
quality standards good companies have come to expect.

By signing international sourcing agreements, executives put their name

(and their company) on the line. Decisions to manufacture company

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products half way across the globe should be made very carefully. When
sourcing offshore or overseas, more often than not, supplier and buyer
management can be comprised of significantly different cultural
backgrounds. Additionally, foreign management may also have quite
different business objectives and, sometimes, may even employ business
ethics that could be deemed questionable. These factors make the role of
purchasing manager challenging. Some of the important aspects which
purchasing manager/buyer should be aware are as follows:

1. Familiarise oneself with local social and business cultures:

Inadequacy of familiarity with foreign social and business cultures and,
communication issues that surface based on differences, are some of
the important reasons for failure of international sourcing activities fail,
especially in the Asian region.

2. Establish clear communication channels with functional

departments and management levels: The purchasing manager
must be in a position to be able to address and deal with issues within
the company at the corporate level while developing a cooperative team
to address offshore or outsourcing issues that may arise. If top
management support is not available for any reason, the job of
purchasing manager may become more difficult.

3. Source from within organisation’s geographic region, first, if

internal prototype and pilot production capabilities do not exist:
Before moving production to low cost regions (like China or other low
cost countries, it is very crucial to understand basic technical aspects of
items and products to be sourced. The key activities which include
supplier qualification (including design, quality, production, and financial
capabilities) visit to potential suppliers at their factory sites (not supplier
corporate offices). This may also involve verification of relative ISO and
other international standard certifications. Additionally, the process
should include potential supplier qualification for subcontractors (e.g.,
plastics, metal, and critical components not manufactured or produced
by organisation’s direct product supplier).

4. Develop a working knowledge of contracts: The global purchase

manager should be able to negotiate not only price but also payment
terms, return or repair compensation, and safety or buffer consignment
inventories, to mention a few items key to good supplier contracts. The

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purchase manager should be well aware of the factory ‘sales’ tour. Many
low cost countries suppliers provide predetermined, well-tuned
customer tours of their facility. Make an effort to get off the beaten path
to see additional areas; other buildings or, out back — where scrap is
sorted — to find out what’s really happening. Some suppliers try to
present only the latest high tech portions of their factories that may
have nothing to do with manufacturing processes required by
organisation’s products.

5. Informed about the phases involved in the supplier selection:

The global procurement manager should work closely with suppliers
from prototype and new product introduction (NPI) through first article
unit inspection and production volume increases. Develop a working
knowledge of product test yields (focus on first pass yield) and
reasonable rates for product field returns. Product export documentation
requirements; Freight consolidation, and other aspects of supply chain
management through product end of life (EOL) are also each equally
important to understand. It is a well-known attribute that good suppliers
anticipate problems. For example, from general experience, Japanese
and South Koreans companies are typically good at anticipating
problems. However, many mainland Chinese suppliers may not
anticipate the problems and may act only after the problems is noted at
its peak surface.

6. Engaging services of Local Sourcing Agents: The global

procurement Manager should be aware of local sourcing agents
practices and the tricks of the trade. Employ caution if the decision is
made to use local sourcing agents. Perhaps not surprising, companies
paying the best commissions typically get the best service since
sourcing agents rarely work with one client. Some of the local sourcing
agents in Low Cost Countries may earn a 3% FOB value fee from their
clients and an additional 5% kickback from the actual supplier. Beware
of such practices, as such activities may unreasonably increase the total
cost of purchase.

7. Getting right the quality aspects of the product intended to be

purchased: Inconsistent quality can sometimes be an issue because
documented procedures can be ‘forgotten’ in order to get a shipment
out. If shipping by sea, organisation could find itself in a situation with

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one to two months’ worth of sub-optimal product quality already on the

high seas en route to buyer’s location.

8. Use of offshore sourcing office: It may become at a point of time,

when it makes sense, to significantly reduce traveling back and forth to
the low cost country/another sourcing location. An offshore sourcing
office staffed with trained managers and staff for purchasing; quality
control, production control, product engineering, export documentation
and other functional areas can be appropriate to the solution. This
location may also provide capable product design activity. There is a
practical limit as to what can be managed effectively and efficiently
throughout the world. While offshore sourcing offices could appear to
help reduce total cost of ownership (TCO), they can also create
challenges for organisation.

9. Deep understanding of the international sourcing: International

sourcing is not just purchasing. The sourcing Managers must understand
the social and business cultural differences of the LCC, the sourcing
office General Manager on the ground in the LCC must understand
culture and business practices, especially those specific to his/her
organisation company. Global sourcing managers must have a broad
background across several functional disciplines; have access to
corporate resources, and employ a great deal of common understanding
of the international purchasing practices.

International Procurement – Changing Role as a Management

Service

Procurement today is a complex management service, intended to support

the strategic aims of the organisation. The global procurement department
has three broad functions:

• Managing the internal transactions for ordering goods and services. The
function is also responsible to manage the procurement data. The
function here is expected to bring maximum efficiency in the end to end
transaction flow and reporting.

• Supporting the vendor contracting and management process. The key

activities include identification of vendor, negotiation. Most of the
activities can be tactical and transaction focussed.

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• Value based procurement to ensure addition of significant savings and

improvement of the profitability of the organisation.

The advent of internet has created significant level of opportunities to gain

efficiencies in the end to end procurement to payment (P2P) process.
Some of the areas could be as follows:

• Automating ordering process

• Online bid management systems

The new role which procurement function is expected to manage in the

new age is:

• Assume increased responsibility for buying non-traditional services, e.g.,

consultancy, legal, audit, training and development

• Challenging the requirements assessment of the user functions to better

plan and negotiation with the suppliers/service providers. Also add value
to the business through innovation

• Contribution to the strategy of buying goods and services with high

transaction volumes

• Leading and supporting the outsourcing projects

4.9 Managing specific aspects and expectations in

International Procurement – Traditional vs. New Strategic
Role

1. Price discovery vs. value addition: In international procurement,

more than the price, other aspects like quality, business specification,
lead time, compliances matter. Internal customers often appreciate the
involvement of the global procurement function with the business
verticals.

2. Providing market based solutions: In international procurement, the

aim is to formalise the requirements, remove subjectivity, and bring the
service similar to commodity. Main aim in the international procurement
and also the challenge for the procurement manager is to commoditise

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all goods and services. However, the user function may explore
relationship with the vendor who they feel to be quite comfortable with.
The decision making model followed by the user function could be
completely different and off the line in comparison to the usual
screening and evaluation model followed by the procurement function.

3. Managing explicit vs. implicit contracts: While explicit contracts are

well written and formal, the implicit contracts are created during the
work relationship and based on trust. However, procurement function
unique challenge here is to prevent any circumvention of the formal
buying process by the user function and prevent any emergence of
implicit conditions. For example, vendor, in anticipation from the user
function and his discussions, may invest a significant money in the
production capacity and may request for premium from the buyer. He
may eventually find that the contract now has been awarded to the
lowest bidder. In such cases, the procurement function may win a war
on price ground. However, the user function may lose the relationships.

4. Conducting strategic discussions: In the process of international

procurement, the procurement team is required to get involved with the
business function earlier and more strategically. The objective being to
drive efficiencies and cost avoidance during the planning stages of
procurement.

5. Setting up appropriate measurement for cost savings: Depending

only on transaction based evaluations can create serious issues in
measurement of cost saving in the procurement activity. Some of the
benefits/savings which the procurement team can measure may
include:

a. Difference between two supplier quotes

b. Comparison of procurement value/price against the external
benchmarks
c. Internal savings/reductions (e.g., reduction in jobs)
d. Production efficiencies gained
e. Reduction in wastage across key processes
f. Reduction in working capital requirements

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4.10 Activity for Students

1. Conduct a brief interview of Heads of Procurement Function of any

multinational company and understand the factors leading to change in
the role.
…………………………………………………………………………………………………………………………
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4.11 Summary

As globalisation is compelling, the various geographies to ignore the

geographical boundaries and new economic boundaries are being drawn.
The Free Trade Agreements, emergence of internet and increase in global
trade has led to evolution of a new role, the Global Sourcing Manager and
Global Procurement Function. Over a period of time, the expectation of the
management has also undergone a sea change. Procurement Functions
across the globe are evolving from just being a passive observers to
provide support to the business processes. In some of the organisations,
the role has further evolved to being integral part of the business and not
just a passive, independent or supportive function. Role such as Chief
Procurement Officer (CPO) is finding its way to the C-Suite and the
Boardroom. The function is also increasingly deploying supply chain
analytics to facilitate procurement decisions. There are number of
differences between the traditional and evolved role of global sourcing
manager some of which includes increase focus on business partnering,
providing dynamic procurement solutions, driving cost reductions among
other things.

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4.12 Self Assessment Questions

1. Explain the factors affecting the evolving role of Global Procurement

Manager.

2. Highlight and explain the important expectations of the top

management from Global Procurement Function.

3. Write a short note on various levels of maturity of the Global Sourcing

Function.

4. Explain the emerging role and responsibilities of Chief Procurement

Officer (CPO).

5. Highlight the importance of supply chain analytics as an important tool

for Global Sourcing Manager.

6. Anand, an experienced professional in a supply chain, is assuming

leadership position of ABC Incorporated’s Global Sourcing Function.
Which of the factors he should be aware of while discharging his duties
in executing International Procurement?

7. Distinguish between the Traditional and Emerging Role of Global

Sourcing Manager.

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4.13 Multiple Choice Questions

1. Which of the following is least likely to be part of internal duties of a

global sourcing manager?

a. Collaboration with the internal network

b. Effective management of supplier relationships
c. Making operating purchasing decisions
d. Definition of purchasing strategies

2. Which of the following is not likely to be an important expectation of

management from the global procurement function?

a. Enabler of savings
b. Cost reduction across value chain
c. Deterioration of supplier relationship management
d. Providing spend map and visibility to management

3. Which of following is not a stage of evolution of global procurement

function’s maturity level?

a. Passive
b. Responsive
c. Integrative
d. Supportive

Answers:
1. (b), 2. (c), 3. (b).


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