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Christopher Marshall

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Fundamentals of International Procurement and Outsourcing
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  Acknowledgements
I would like to thank my parents, Don and Sondra Marshall, for their love and
continuous support and faith in me. Their unshakable spirituality has been an inspiration
to me throughout my life.
To my son, John Christopher, for his love and support. For his patience and understanding
with me through the past several challenging years.
To Lisa Richards, whose love, understanding and support I have always been able
to count on. Her steadfastness, loyalty, and inspiration have been of immeasurable value
to me.
To my colleagues: Mike Rosberg (Maytag VP International Sourcing), Jim Gran
and Mark Champaign (Maytag Sourcing Directors for Finished Products), and SW Wu
(Sourcing Director, Maytag Asia Pacific Sourcing Organization), for providing me with
the many opportunities to learn and grow professionally.
To my co-workers and fellow team members: Tito Sandoval (Hoover International
Product Procurement Team Leader), Eric Koh and Gretchen Bercaw (Hoover International
Product Procurement Team Buyer/Planners), Barb Deluca, & Kent Weida
(Hoover - Supplier Quality Engineers), who’s efforts have helped make Hoover’s international
procurement activities successful. The challenges and successes of working together
with people whom I have come to respect make my work fulfilling and meaningful.
I have enjoyed the last sixteen years at The Hoover Company and Maytag and am
looking forward to continuing our international sourcing activities in the support of
achieving our business objectives.
General Introduction
"Boundaries are shrinking and disappearing, and what’s becoming apparent is that
global purchasing and domestic purchasing are flowing, blending, and converging into
one stream."
R. Jerry Baker
"Operating in an increasingly interconnected world, leading companies perceive
competition as global and are moving to implement an integrated strategy worldwide.
Global competitors are learning to develop and manufacture products that can be introduced
and marketed simultaneously in many countries. In doing so, they are sourcing
technology, materials, and components from sites and suppliers located throughout the
world."

Carl R. Frear, Lynn E. Metcalf, and Mary S. Alguire The Hoover Company, a division
of the Maytag Corporation, is in turmoil. Like many other U.S. manufacturers in
related industries, virtually all of our competitors have outsourced the production of their
products offshore to low-cost labor regions around the world, specifically in Asia.
Though Hoover senior management was knowledgeable of these “outsourcing” trends in
our industry they did not fully realize the impact that it would have on the company.
Hoover had considered the quality of our products to be our number one strength
and, to a large extent, believed that the best way to maintain this quality was to keep the
production of our products in our own North American manufacturing facilities.
Further, management viewed many of the moves overseas by our competitors as a
“last gasp” effort to save their brands. Up until a few years ago, Hoover senior management
did not believe that foreign manufactures were capable of achieving the level of
quality that would be necessary to effectively compete against us in the U.S. market.
They couldn’t have been more wrong.
The challenges that face the Hoover Company, Maytag, and many other U.S.
based manufactures due to low-cost, foreign manufactured products competing with
American made products in the U.S. market are significant. Many companies, such as
Hoover and Maytag, are meeting this challenge by developing their own international
sourcing strategies to outsource the production of products outside of the Unites States.
Thesis Abstract
The purpose of this dissertation is to explore what is required for a company to be
successful in international procurement and outsourcing.
My research suggests that there are many actions that companies can take to increases
their chances of success as well as minimize their exposure to risks.
Through a combination of: research, personal business experience at The Hoover
Company and Maytag, as well as the documented experiences of other companies, I will
address each of the following questions:
• Why has outsourcing become so popular to U.S. based companies in such a
short period of time?
• What are the benefits and risks of international / global outsourcing?
• What are the cultural issues and challenges that U.S. based companies need to
be aware of when dealing with foreign based manufacturers?
• What are the key transactional processes that are critical to achieving a successful
sourcing program and relationship with foreign suppliers?
• What are the major distinctions between China, Mexico, and India as low-cost
labor countries relating to international purchasing and product outsourcing?
• What is the current political climate in the United States regarding the loss of
U.S. jobs attributable to international outsourcing?
Table of Contents

Chapter One:
Today’s Business Environment and Challenges
• Outsourcing Trends................................................................... 6
• Explaining Growth: Globalization and Cost............................. 6
• Caution is the Key..................................................................... 7
• How to Configure Success Through Outsourcing..................... 8
Chapter Two:
Fundamentals of International Procurement & Outsourcing
• Benefits & Risks of International Sourcing............................... 12
• Culture....................................................................................... 15
• Logistics.................................................................................... 17
• Specifications............................................................................ 17
• Paying a Foreign Supplier......................................................... 18
• Liability & Supplier Agreements .............................................. 24
• Social Standards........................................................................ 25
• Quality....................................................................................... 25
• Timeliness & Cost ..................................................................... 26
• Product and Process Technologies............................................ 26
• Broadening the Supply Base and Countertrade......................... 27
Chapter Three:
Outsourcing – Getting Started
• Hoover/Maytag Experience....................................................... 28
• Setting Up a Deployment Plan .................................................. 30
• Putting Together a Strategy....................................................... 30
• Starting a International/Global Sourcing Program.................... 33
• Identifying and Qualifying Potential International Suppliers ... 35
Chapter Four:
Learning from the Experience and Errors of Others
• The Six Most Common Outsourcing Mistakes ......................... 38
• 13 Big Mistakes to Avoid When Outsourcing .......................... 40
• Resolving International Disputes..............................................43
Chapter Five:
Low-Cost Country Facts/History & Business Outlook

• China.......................................................................................... 46
• Mexico....................................................................................... 58
• Analysis: China vs. Mexico....................................................... 60
• India........................................................................................... 64
Chapter Six
Conclusion
• Political Considerations in the U.S. Re: Outsourcing ............... 72
• America Fights Back................................................................. 74
• Summary.................................................................................... 78
Bibliography ................................................................................ 79
Chapter 1:
Today’s Business Environment and Challenges
Outsourcing Trends
“Not made in America? Who cares?” A recent survey sponsored by Marketing
Support Inc., a Chicago based branding agency, confirmed what many already knew; that
it doesn’t much matter to many U.S. shoppers – especially the younger ones – where the
stuff they buy comes from.
Politicians may rally against Benedict Arnold CEO’s shipping work abroad, and
unions may bemoan the loss of U.S. factory jobs. But do Americans care where the stuff
they buy was made? Not much, it turns out, and that apathy could hasten the offshore
movement.
When shoppers for home improvement or home decorating products at big-box
retailers were surveyed, seven out of ten people said that they don’t look at the country of
origin. What’s more, 57% say the national source has little to no effect on what they toss
into their carts. The percentages are notably higher for those aged 18 to 24: Nearly 85%
in that group don’t know where the products that they buy come from or care.
The report predicts that the acceptance of foreign products will only grow, as
more nationalistic seniors die off and are succeeded by laissez-fair youth. Another factor:
The quality of many imported goods has greatly improved, negating a selling point many
American manufacturers once had.” (Michael Arndt, Not Made in the U.S.A.? Who Cares?
BusinessWeek online, May 2004)
Explaining Growth: Globalization and Cost
“The dramatic pace of growth in many developing countries comes from many internal
and external factors. From a commercial standpoint, this growth can be attributed
primarily to two key factors:
• Multinational corporations building significant operations abroad to take advantage
of skilled, low-cost labor.

• Global firms sourcing both products and services from offshore suppliers to reduce
cost margins and increase competitive positioning.
The cost advantages low-cost countries afford can be huge. Compared with Western
nations, skilled manpower in low-cost countries in Asia like China and Thailand can
cost between 50 to 75 percent less, while unskilled manpower can be as much as 95 percent
cheaper. Significant savings go beyond labor costs to reduced costs on production
and manufacturing equipment. Tooling, for example, cost roughly 30 to 50 percent less in
low-cost Asian regions than it does in North America and Western Europe. At the same
time, increased globalization has brought with it fewer trade restrictions and tariffs, lowering
the costs of doing business with low-cost countries even more.
While many organizations are just getting started with low-cost country sourcing,
a number of global organizations have begun to adapt their entire supply chain to take
advantage of the opportunity. For example:
• According to Rubber and Plastics News, Goodyear plans to “nearly double by
2005 the percentage of tires it sources from Asia for North America and Europe.”
• Home Depot, the hardware concern, has opened two sourcing offices in China,
one in Shanghai and another in Shenzhen, to “greatly enhance their opportunity to purchase
more goods directly from manufacturers” with the goal to grow its imports to about
ten percent of sales in stores.
• Wal-Mart, one of the more operationally efficient corporate giants, has already
leveraged global sourcing to dramatically improve its bottom line. In Wal-Mart’s Q1
2003 conference call in May of this year, the company noted that “Consolidated gross
margins were up 20 basis points in the quarter due to improved mix and the benefits of
global sourcing.” In addition, Wal-Mart has leveraged its global sourcing initiatives to
compete on price against competitors globally, especially in Europe, where the company
was late to the market.” (Bush, Connell, and Lee of FreeMarkets Inc., Low-Cost Country
Sourcing – An Executive Overview, 2003)
Caution is the Key
The move to low-cost country sourcing is not an easy transition for many companies.
It isn’t simply a matter of building a new factory or searching for new suppliers in a
low-cost country. There are unique challenges and additional risks that organizations
must plan for and mitigate, from cultural challenges to quality and on-time performance
issues. Companies must balance the tremendous opportunity that low-cost country sourcing
presents with the risks it can create in order to reap true benefits.
Indeed, low-cost country sourcing can bring significant up front costs without any
guarantees of success. Traditionally, companies often pay considerable sums in order to
make low-cost sourcing work – from the millions it can cost to set up IPOs (International
Procurement Offices) to the large fees (up to 20 percent paid to brokers) to name just a
few of the costs. This traditional approach has yielded mixed results for some companies,
and created a cycle where high fixed costs have turned into sunk costs.

How to Configure Success Through Outsourcing
• Going offshore for economic gains will only work if you closely and carefully
manage your partners. “For many logistics and purchasing professionals, the word configure
can sound a bit intimidating. In reality, though it may sound like a technical term,
configuring is really just part of a relatively painless process called outsourcing.
Obviously, tackling outsourcing from start to finish can be a cumbersome task.
There are many decisions to be made, from selecting an outsourcing provider to determining
which business components to outsource to configuring the system. Listed below
are some of the key decision-making steps you'll confront.
Start with an assessment of your company's strengths and weaknesses. If your
company has optimal resources in the area of R&D or sales and marketing, for example,
that is where you should focus.
Every company has its own budget and finite dollars to spend in creating and distributing
products. Financial resources and personnel should be directed toward the area
where a company shines, not to areas that can be successfully handled by an outsourcing
partner. When done right, outsourcing can free up resources, both cash and management
that can be better spent on innovation and growth.
• Keep pace with your competitors.
Don't follow a path to self-extinction by operating in a vacuum. To survive in to-
day's competitive marketplace, companies of all sizes need affordable and reliable product
assembly and delivery, and most can't do it all themselves. While many companies
are resistant to the latest offshoring trends, they need to wake up to the reality that offshore
companies are becoming their direct competitors, if they aren't already. You can
outmaneuver your competitors with a strategic outsourcing initiative if it's a proper fit for
your business.
• Don't just go with your gut.
Evaluation of an outsourcing provider goes beyond liking your rep. It's always
important to trust your instincts. However, are you willing to risk unhappy customers by
selecting a company based on a relationship alone? Check references, not just one, but a
current customer in both the small and large categories, and two former customers.
Look for a strong financial foundation and high sense of security. A long-standing
business with customer testimonials to back it up and the security systems to keep proprietary
information safe are key.
Develop a relationship with the outsourcing provider by visiting them to see their
capabilities and infrastructure, as well as the quality of their people, which translates to
their ability to serve your needs through their resources.
Having an outsourcing partner with professionals trained in specific areas managing
the process can help enhance accuracy and quality. Well-run outsourcing companies
have resources that allow them to do specific tasks more efficiently, and these cost savings
are passed on to customers.
• What to outsource?

For starters, consider the high-volume, stable products that don't change much in
type or quantity over time. If a product is volatile, it might still make sense to set up some
type of logistical chain to get it made or assembled elsewhere. Using a third-party distributor
to remove the internal hassle of dealing with product volatility may help manage
fluctuations.
What about warehousing and transportation? Ideally, the same provider handling
the parts and assembly can do this. The various tasks come together more easily when
fewer sourcing companies are part of the plan from dock to distribution. This way companies
don't have to chase down their own raw materials suppliers, provide shipping, or
worry about meeting production deadlines when a shipment from a supplier is delayed.
Comparing quotes.
When comparing quotes, be sure to compare apples to apples to get the total
landed cost. This should include component sourcing, inventory, service lead times,
change controls, warehousing, distribution and transportation to your plant or to your cus-
tomer's facility. Knowing the grand total and what it includes helps end users of outsourcing
services save money and pass along savings to their own customers.
A solid outsourcing partner will offer options and solutions, not complications
and hassle. If a quote on an assembly was requested, what about the sub-assembly, customs
clearance and cross-border transportation with final distribution to the end user? A
legitimate outsourcing provider will also tell a logistics officer when it simply doesn't
make sense to outsource that component or service. Sometimes the answer is "no," or the
answer is not a single solution but multiple options. A modular recipe is desirable with
various components segmented as a menu on the proposal.
What about geopolitical factors and duties/tariffs?
Working with foreign entities is a learning process. There's nothing like on-site
evaluation, especially when it's not obvious through news tracking. Go to the country and
look around. If it seems like chaos and instability, it probably is. Sure, it might be the
cheapest deal in terms of labor costs, but if the news yields stories of political unrest over
time, it's best to look elsewhere.
Too little or too much police/military personnel, lack of traffic control and illegal
behaviors occurring in broad daylight without consequences are all bad indicators . None
of these things can be determined without a trip to the country to view it first-hand.
The unavoidable duty/tariff is never a factor to ignore. In fact, this fee can completely
change the bottom line cost. It basically comes down to the country of origination
of the raw materials, where they enter the country (via U.S. or Mexico, etc.) and in what
form. Because of a free trade agreement, the materials could be duty-free if handled
within legal guidelines for a specific country. To cite an example, hardwood plywood is
cheapest in Brazil. When brought into Mexico there is an 18% duty rate, but it's still
cheaper because if the plywood is cut up in Brazil, it has no duty coming into Mexico.
Duties are different in various countries, and there are legal loopholes based on
the customs classification of materials. Raw materials versus cut or partially assembled

materials play a factor in many cases. A good outsourcing provider will know this and
should be able to provide counsel.
With the evolving market, global trade allows the lowest possible resulting cost.
The trend toward offshore outsourcing is here to stay, so learning how to work the logistics
chain from the supplier's supplier to the customer's customer is critical to staying in
business. Those who lead in accomplishing this will dominate the marketplace in 2004
and beyond.” (Laird Carmichael, executive vice president of International Outsourcing
Services LLC)





 
 
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