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We
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Fundamentals of International
Procurement and Outsourcing
“The Colombian conflict in historical
perspective :
the evolution of the land issue“ (Chapter
1, Abstract, Acknowledgements)
By: Christopher A. Marshall all rights reserved
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 today'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 customer'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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