In April 1998 the American Productivity & Quality Center (APQC) teamed with Dick Locke of the Global Procurement Group to conduct a consortium benchmarking study to identify best practices and emerging trends in international purchasing and global procurement. The goal of the project was to enlighten companies seeking to find, select, engage, and manage the world’s best suppliers by sharing the practices of companies that are world leaders in international purchasing. The project addressed key questions and concerns and explored best practices in the areas of:
- locating and engaging suppliers,
- channel management, and
- risk management.
Purchasing internationally, like many international business skills, is not well understood in the United States. This is because the United States, with the world’s largest economy, does a relatively small amount of importing and exporting when measured as a fraction of the country’s Gross Domestic Product (GDP). In 1995 the United States imported and exported approximately 18 percent of its GDP. This was the lowest percentage among major industrialized nations of the world. In comparison, Japan traded 29 percent of its GDP, Germany 38 percent, Taiwan 61 percent, and Singapore an amazing 379 percent. As a result of the relatively low level of importing, training for import-related issues is not well developed in the United States. This lack of training and information has caused international purchasing to be seen as mysterious and fraught with hazards. One frequently heard myth is that international purchasing should not be done unless a buying company can achieve 30 percent savings. This was published in a book sponsored by the National Association of Purchasing Management, and, if taken at face value, indicates a buyer should walk away from an arrangement that would save $10 million on a $40 million deal. Fortunately, there are successful practitioners who have seen through such faulty logic and have managed to find sources globally. The American computer industry, for example, is largely built on imported components and assemblies. While international purchasing is not as mysterious as its reputation would indicate, it does require skills that are not usually taught in business schools, and it does pose hazards (such as exchange rate fluctuations) that do not occur in domestic purchasing. This study addresses three of the differences between domestic and international
- channel management, and
- risk management.
KEY FINDINGS OVERVIEW
Following are the 13 key findings of this study, divided into three topical sections consistent with the study scope. The findings will be explored in detail throughout the remainder of the report.
Section One: Sourcing
Sourcing is the process of finding suppliers, evaluating them, and, if the evaluation is positive, engaging in business with them. Domestically, there are well-developed tools such as the Thomas RegisterTM and other directories to provide assistance. Internationally, it is more difficult to locate information sources and evaluate suppliers. Travel can be expensive, and cultural differences can confuse those who are inexperienced in a foreign country.
This study identified the tools companies use to locate potential supply sources and examined differences in the techniques used by companies to evaluate foreign and domestic sources. It also looked for differences in their legal approaches to domestic and international procurement.
1. Successful companies have a conscious goal to look for the best sources in the world. Excellence, as it relates to suppliers, includes technical considerations as well as quality and cost.
2. Best-practice companies certify suppliers in house, sometimes in conjunction
with ISO standards or third-party qualification.
3. Environmental standards are a significant concern among best-practice companies.
4. Best-practice companies strive to have legally enforceable contracts with their suppliers. These contracts are used to compel compliance through arbitration or the threat of lawsuits, although disputes are rarely settled in court.
5. The best way to locate good sources is to have employees in the supplier’s country.
6. Best-practice companies evaluate potential foreign suppliers the same way they evaluate domestic suppliers. They measure and manage existing foreign and domestic suppliers using the same criteria consistently throughout the organization.
7. Best-practice companies achieve credit terms with their suppliers and rarely use letters of credit.
Section Two: Channel Management
There are many ways to buy from a foreign supplier. One way is to purchase from
the supplier’s wholly owned subsidiary or independent representative in the buyer’s country. In the electronics industry, for example, this was the dominant method employed until approximately 15 years ago. Another method involves the buying company setting up a purchasing office in a foreign country. The office may handle purchase orders but is always involved in
locating potential sources. These offices are often called International Procurement Offices (IPOs), but many companies use other names. In some companies the name IPO carries with it baggage from past problems and is therefore avoided. For the purpose of this study, however, the name IPO will be used in reference to procurement offices.
A third method of buying from a foreign supplier is to deal directly with the
supplier without any intermediaries. This is becoming more popular as dealing internationally becomes easier and more familiar. Many other alternatives are employed, such as brokers, third-party IPOs, and other sales agents. In the past, selling companies often dictated which channel a buyer must use. However, this has always been negotiable, and many purchasing companies have been able to choose the channel that makes the most sense for them. This study showed the channel of choice for best-practice companies and looked closely at the functions and structure of the IPOs they operate. 8. Ordering directly from suppliers is the preferred order channel among best-practice companies. They rarely use independent representatives.
9. IPOs perform diverse functions with diverse staffs.
10. There is no consistent method of funding IPOs. Different expectations lead to different funding methods.
Section Three: Risk Management
There are perceived risks in international procurement that are not present in
domestic procurement. One major risk is exchange rate fluctuations, which, at a
minimum, make pricing uncertain over time. Hedging can reduce this uncertainty, but hedging has its own hazards. Failure to buy according to forecast (the normal state of affairs in most manufacturing companies) can lead to significant unexpected gains or losses when hedge contracts are put into place based on the forecasts. Another danger of exchange rate changes is that they might make a supplier selection less than optimum if the supplier’s currency strengthens relative to the currency of its competition. (Of course, this could happen with domestic suppliers as well as foreign ones.) This study addressed how these issues are handled by the partner companies. The second major investigated risk is political uncertainty. This uncertainty is
frequently mentioned as a significant concern for companies, and the study examined how many of them deal with it.
11. Best-practice companies are flexible in selecting which currencies to use in purchasing.
12. Best-practice companies forecast exchange rates and act accordingly. Purchasing sometimes does not absorb the consequences of missed purchasing forecasts when hedging.
13. Best-practice companies analyze political risks on an ad hoc basis and other risks more formally.
A listing of the sponsor companies in this study, as well as the best-practice (“partner”) companies that were benchmarked for their innovation and advancement in international purchasing.
- Executive Summary
A bird’s-eye view of the study, presenting the key findings discovered and the methodology used throughout the course of the study. The findings are explored in detail in following sections.
- Key Findings
An in-depth look at the 13 key findings of this study. The findings are supported by quantitative data and qualitative examples of practices employed by the partner companies.
- Partner Company Profiles
Background information on the partner companies, as well as their innovative international purchasing practices.