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CHAPTER 13
International and global sourcing
Objectives of this chapter
• To define international and global sourcing
• To appreciate why it is necessary or preferable to source internationally
• To outline the stages of international sourcing development
• To highlight the growth in international sourcing
• To consider the problems associated with international sourcing
• To provide a briefing on ‘Incoterms’
• To explain countertrade as a form of barter
• To outline the role of the European Union
• To provide an overview of the decisions to onshore
• To outline a guide to sourcing from China
List of Cases, Research Boxes and Figures in this chapter
Mini Case Studies
• Diageo/EMI
• Courts UK
Research Boxes
Nil
Figures
• Figure 13.1 Definitions of international and global sourcing
• Figure 13.2 Global sourcing
• Figure 13.3 International v global sourcing
• Figure 13.4 GATT/WTO
• Figure 13.5 Documentary letters of credit
• Figure 13.6 Three main types of letters of credit
• Figure 13.7 Letters of credit procedure
• Figure 13.8 Countertrade
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• Figure 13.9 Barter trade
• Figure 13.10 Switchtrading
• Figure 13.11 Full compensation
• Figure 13.12 Compensation with buy-back
• Figure 13.13 (a) Counter purchase and (b) offset
Teaching Notes
A key emphasis of this chapter is for students to differentiate between the varying degrees of
international sourcing, and truly global sourcing, which is only practised by multinational
corporations.
Useful definitions can be found below:
Global sourcing/procurement
Global sourcing is often used when what is meant is international procurement/sourcing. Some
textbooks whose titles include expressions such as ‘global purchasing’ or ‘global sourcing’ have
subtitles, which indicate that they really mean international purchasing and that is often the
majority of the content.
Global sourcing is more of an approach born of the globalisation of large multinational
conglomerates within a range of industries and services. Due to the globalisation of
corporations, phrases such as global purchasing or global sourcing have become common but
they are, as yet, without a totally clear definition. There have been various suggestions such as:
• Using local suppliers, controlled locally, but under the wider direction of a central corporate
structure
• Using local suppliers controlled from a central corporate site
• A contract between multinational organisations to service the needs of the contract
worldwide on a local basis.
A clear definition comes from John Stevens (1995): ‘Global sourcing is the integration and
coordination of procurement requirements across the worldwide business units, looking at
common items, processes, technologies and suppliers.’
It is only practised by large corporations as they have the need and leverage to gain
competitiveness from global sourcing, and also the facilities around the globe to enable them to
apply the process. They are usually contractually bound with other large corporations who have
the ability to supply products to the globally located sites of the multinational purchaser. A good
example of this is the agreement Volvo have with Meritor Automotive Inc. to supply axles to all
Volvo plants.
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Other key concepts to be emphasised are as follows:
• Increases in international trade from GATT and WTO
• Additional difficulties associated with international sourcing
• Payment/letters of credit
Incoterms
The International Chamber of Commerce (ICC) publishes International Commercial Terms
(Incoterms). This document is a valuable aid to negotiators in that it provides standard
terminology, clarifying the responsibilities of buyer and seller in international trade. The parties
need to negotiate and agree which term to use, of course, but their meanings are clearly
explained. There have been, over the years, several editions of this document; the one current at
the time of writing is Incoterms 2000.
Incoterms are a series of defined terms used in international trade. The ICC designed them in an
attempt to establish a standardised language for buyers and sellers who are conducting
international business.
Countertrade
Countertrade is a form of barter. It takes place whenever goods are traded internationally, not in
exchange for cash or currency, but for other goods. Countertrade is widely practised in
international business, and facilitates transactions with countries which are unable or unwilling
to export in a more conventional manner, perhaps for one or more of the following reasons:
• One or both trading partners have no (or limited) foreign exchange.
• A country wishes to promote exports, and is prepared to accept goods rather than hard
currency in payment to facilitate this.
• There may be political pressure to balance trade between two countries.
The most straightforward form of countertrade is the full compensation arrangement, where a
single contract is established between two parties, and goods are exchanged for other goods. Of
course, it is unlikely that a coincidence of wants will be experienced in practice, and one party
to the transaction is likely to need to sell the goods received under the contract. When British
Aerospace supply military aircraft to Saudi Arabia in exchange for oil from that country, or a
European car maker sends vehicles to a South American country in exchange for sheepskins, it
does not mean that the supplying company is likely to have a use for the materials exchanged.
What happens under a full compensation arrangement is that the goods are valued in money,
and the party who wishes to liquidate the materials received will do so by arranging for the sale
of goods, usually with the assistance of an experienced third party. Counter-purchase
arrangements are also widely employed, where two separate contracts are formed
simultaneously. A company in country A agrees with a company in country B to ship goods
from country A to country B in exchange for money. At the same time agreement is made that
country B will ship goods to country A, also in exchange for money. Although the two contracts
balance each other, so that the net effect is simply that an exchange of goods has taken place, it
is easier to manage two conventional contracts, to assign rights and responsibilities, to arrange
insurance and so on.
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On-shoring
At the time of publication of this edition (2015), Onshoring is becoming increasingly attractive.
Companies have proudly announced the return of manufacturing to the UK and large retailers
are considering sourcing their goods from the UK.
Marks and Spencer has unveiled a ‘Best of British’ range, featuring clothes made in the UK,
while John Lewis wants to boost sales of UK sourced goods .With reports that production costs
are on the rise in China, difficult communication, rising prices, quality, long lead times and
large minimum orders were the most frequently encountered problems of sourcing from China.
Other firms have moved their sourcing closer to home, including Symington’s, the makers of
Pot Noodle, which announced it will be bringing manufacturing of the snack to Yorkshire from
China. Increasing costs and long lead times were given as reasons.
Following difficulties with is supply chain, model train maker Hornby announced that it was
bringing production of its Humbrol paint brand back to the UK.
Electronics group Premier Farnell, the maker of Raspberry Pi, the credit card sized computer,
has also moved production from China to the UK, to a Sony production facility in Wales.
As a result of different time zones, (China is 8 hours ahead) one day a week was lost in hands
on, day to day communications.
(On-shoring has given them greater flexibility at a time when demand has outstripped supply,
despite an increase in manufacturing.)
Production costs in China are rising as a result of increases in labour, overheads and the
exchange rate costs , and this increased total costs.
According to a survey of 1,124 businesses by Versapak, 67% of respondents said they would
consider a return to the UK or Europe for manufacturing if the market forces were right.
38% of respondents who were considering such a move said they were ‘already in discussion’ to
return to the UK or Europe for manufacturing, citing the unreliability of overseas production.
The five most frequent problems experienced with the manufacturers in the Far East were:
• Difficult communications – 48%
• Rising prices – 48%
• Long lead times – 40%
• Poor quality of production – 35%
• Large minimum order quantities – 32%