BURDINES vs. DRIP-DRY APPLLANCE CORP.
BUYER’S FACTS AND GOALS
General information: The appliance business has been good this season. It is Market Week, and you.
received a brochure from Drip-Dry outlining their market Special in the new model washers.
You are shopping for a mayor promotion for Labor Day Weekend Sale. A PREVIOUS PURCHASE YOU HAD
MADE FOR THIS EVENT HAS FALLEN THROUGH, AND THAT VENDOR HAS REFUSED TO SHIP TO YOU DUE
Specifics: You are looking for a LABOR DAY PROMOTION, and you need between 200 and 250 washers.
Your goal is to run a Preseason Introductory Sale on new model washers @ 25% off the regular prices.
Regular Retail Price $250 ea. Proposed Retail: $187.50 ea. Regular Cost Price: $175 ea.
Previous statistics show that at least 50% of the assortment should be WHITE with the balance made up
of Copper, Harvest Gold, Avocado, and Blue.
You have $1 000 budgeted for the Ad.
OBSERVER’S NOTE
During the negotiation: What did the buyer attempt to get? What did the vendor agree to?
BUYER’S ATTEMPT
VENDOR AGREEMENT
Indicate
• What talked most often?
• Who cited first number?
• Was vendor self-esteem maintained?
ANCILLARY LECTURE 12-2- INTERNATIONAL SOURCING DECISIONS
Instructor’s Note: The purpose of this lecture is to supplement material in the text. A good portion of
this material is already in the book. Therefore, instructors should use either this version or the shorter
version in the book.
————–——–——–—————–——
Refact: Over the last 20 years, importing has gone from a small segment of the production strategy for
apparel to a dominant force, now accounting for about 67 percent of all goods sold at retail.1
Take a look at what you are wearing to see if anything is made in the US. Chances are your shirt or
blouse is made in Hong Kong. Your jeans are made in Italy. Those beautiful new shoes are Brazilian,
while those old sweat socks are from China. Your undergarments are from Honduras. To top it off, your
watch is probably from either Japan or Switzerland.
In this section we will first examine the cost implications of international sourcing decisions. On the
surface, it often looks like retailers can get merchandise from foreign suppliers cheaper than from
domestic sources. Unfortunately, there are a lot of “hidden” costs, including managerial issues,
associated with sourcing globally that make this decision more complicated. The influence of
Costs Associated with Global Sourcing Decisions
A demonstrable reason for sourcing globally rather than domestically is to save money. Retailers must
Country of Origin Effects
The next time you are buying a shirt that is made in Western Europe — Italy, France, or Germany —
notice that it is probably more expensive than a comparable shirt made in a developing country like
Hungary, Ecuador, or Taiwan. These European countries have a reputation for high fashion and quality.
Unfortunately for the US consumer, however, the amount of goods and services that can be purchased
in those countries with US dollars is significantly less than in the developing countries. When making
Foreign Currency Fluctuations
An important consideration when making global sourcing decisions is fluctuations in the currency of the
exporting firm. Unless currencies are closely linked, for example, between the US and Canada, changes
in the exchange rate will increase or reduce the cost of the merchandise.
To lessen the risk of a falling currency exchange, i.e., the US dollar becoming less valuable compared to
the currency of the vendor, Service Merchandise could engage in the foreign exchange market. Suppose
that Service Merchandise believes that the value of the dollar will fall in relation to the Swiss Franc
before payment is due, as in our example. Service Merchandise can get a bank to agree to guarantee
Tariffs
A tariff, also known as a duty, is a list of taxes placed by a government upon imports or exports. Import
tariffs have been used to shield domestic manufacturers from foreign competition and to raise money
for the government. Although more common in less developed countries, export taxes are only used to
The General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO). In
1946, the average US tariff rate was 26 percent, compared to approximately five percent in 1987.3 The
General Agreement on Tariffs and Trade (GATT) is partially responsible for this reduction. Started in
1947, GATT has evolved into a group of 125 member countries that sponsors international trade
negotiations.
In 1993, a GATT accord was reached that has far-reaching effects on the reduction of tariffs and other
trade barriers. Importantly, in January 1995, the World Trade Organization (WTO) was formed to
supervise and arbitrate GATT agreements and encourage future negotiations.
North American Free Trade Agreement (NAFTA). The ratification of NAFTA on January 1, 1994 created
a tariff free market with 364 million consumers and a total output of $6 trillion.4 NAFTA members are
currently the US, Canada, and Mexico, but other Latin American countries are expected to join in the
next few years.
NAFTA was not passed without opponents, however. There are segments of the US economy that will
suffer. Since US employers will be able to buy or manufacturer merchandise cheaper in Mexico, the
wages and employment of US unskilled workers may decrease. Further, some labor-intensive industries
such as furniture, and clothing are likely to suffer. Finally, those involved in the production of sugar,
peanuts, citrus, vegetables and seafood may lose business to Mexican competition.
Foreign Trade Zones
Retailers involved in foreign sourcing of merchandise can avoid import tariffs completely by using
foreign trade zones. A foreign trade zone is a special area within a country that can be used for
Cost of Carrying Inventory
The cost of carrying inventory is likely to be higher when purchasing from suppliers outside the US than
from domestic suppliers. Recall from Chapter 6 that:
Cost of carrying inventory = Average inventory value (at cost) X Opportunity cost of capital.
Why is the lead time typically longer when sourcing globally? The lead time tends to be longer because
order transmission, order filling, packing and preparation for shipment, and transportation tends to be
longer and more complicated for global transactions. Order transmission time — the time it takes for the
order to get from the retailer to the supplier — depends on whether electronic data interchange (EDI),
telephone, fax, or mail is used in communicating. The order filling time may also increase because of a
lack of familiarity of customs and procedures between the retailer and their foreign supplier. Packing
and shipment preparation require more attention. Finally, and probably most important, transportation
time increases with the distances involved. 5
Transportation Costs:
In the previous section, we described how the cost of carrying inventory is higher when sourcing globally
than when sourcing domestically. Part of this cost is due to longer shipping distances — the longer the
distance, the higher the transportation cost for any particular mode of transportation. For instance, the
cost of shipping a container of merchandise by ship from China to New York is significantly higher than
from Panama to New York.
Retailers can use the following rule of thumb to determine which transportation mode is best. First,
relatively high weight/high density/low cost staple merchandise such as furniture is more likely to be
shipped via lower cost modes such as water, truck, or train. Alternatively, relatively low weight/low
density/high value fashion merchandise such as jewelry is more likely to be shipped by air. What do
Managerial Issues Associated with Global Sourcing Decisions
In the previous section we examined the specific costs associated with global sourcing decisions. In
Quality Control
When sourcing globally, it is more difficult to maintain and measure quality standards than when
sourcing domestically. Typically these problems are more pronounced in countries that are further
away and that are less developed. For instance, it is easier to address a quality problem if it occurs on a
There are both direct and indirect ramifications for retailers if merchandise is delayed because it has to
be remade due to poor quality. Suppose Banana Republic is having pants made in Haiti. Before leaving
the factory, Banana Republic representatives find that the workmanship is so poor that the pants need
to be remade. This delay reverberates throughout the system. Banana Republic could carry extra safety
stock to carry them through until the pants can be remade. More likely, however, they won’t have
advance warning of the problem, so the stores will be out-of-stock.
Building Strategic Alliances
The importance of building strategic alliances is examined later in this chapter. It is typically harder to
build these alliances when sourcing globally, particularly when the suppliers are further away and are
The Influence of Collaborative supply chain management on Global Sourcing Decisions
Sourcing globally and collaborative supply chain management inventory systems are inherently
incompatible. Yet both are important and growing trends in retailing. Collaborative supply chain
to be a strong alliance between vendor and retailer that is based on trust and a sharing of information
through electronic data interchange (EDI). In the preceding section we argued that each of these
activities are more difficult to perform globally than domestically. Further, each of these activities is
Third Party Logistics Companies
Third party logistics companies are companies that facilitate the movement of merchandise from
manufacturer to retailer, but are independently owned. These companies provide transportation,
warehousing, consolidation of orders, and documentation, or a combination of several of these services.
Increasingly, third party logistics companies provide information services called Value Added Networks
(VANs) that facilitate the electronic data interchange that is such an integral part of collaborative supply
chain management systems.
Warehousing. To lessen the chance of being out-of-stock as a result of long and inconsistent lead times
on overseas shipments, retailers are insisting that their vendors maintain inventories in warehouses in
the US. Rather than owning these warehouses themselves, the vendors typically use public warehouses
which are owned and operated by a third party. By using public warehouses, vendors can provide their
retailers with the same level of service as domestic suppliers can.
freight rate. These companies offer shippers lower rates than the shippers could obtain directly from
transportation companies because small shipments generally cost more per pound to transport than
large shipments.9 One of the most daunting tasks for a retailer involved in importing merchandise to the
US is government bureaucracy. The international freight forwarder helps retailers by preparing and
expediting all documentation such as government-required export declarations, consular and shipping
documents.10
Integrated third-party logistics services. Traditional definitions between transportation, warehousing,
freight forwarding, and VANs have become blurred in recent years. Some of the best transportation
firms, for example, now provide public warehousing, freight forwarding and VANs. The same
diversification strategy is being used by the other types of third party logistics providers. Retailers are
finding this “one stop shopping” useful when implementing Global sourcing. Business Logistics Services,
a division of Federal Express, for example, performs multiple logistics functions well beyond
transportation for Laura Ashley.
Source Closer to Home (or Stay Home)
Some US retailers are shifting suppliers from Asia to nearby Central American and Caribbean countries
to improve quality control and shipping times. Others are attempting to “Buy American.” (See following
section.) For example, although China is still an important source for apparel, the North American Free
Trade Agreement (NAFTA) and similar initiatives with other Latin American Countries such as the
Made in America Controversy
Refact: In a national survey, 84% indicated a preference for buying American-made products; 64% said
they would spend 10% more for domestically-produced goods over foreign-made items.13
The second reason that retailers are attempting to buy more products that are “Made in America” it is
simply more profitable. They don’t have to worry about foreign currency fluctuations or tariffs. Also, it
is easier to implement Collaborative supply chain management inventory systems with suppliers that
are located close to their retailers. Since lead time and fluctuations in lead time are shorter when
buying domestically, retailers don’t have to carry as much inventory. Transportation costs and the
problems associated with global transportation issues are also less when “Buying American.” Finally, it
is typically easier to manager quality and develop and maintain strategic alliances when sourcing
domestically.
Ethical Issues — Violation of Human Rights and Child Labor in a Global Setting
Wal-Mart, The Gap, J.C. Penney, Dayton Hudson, Columbia Sportswear, Liz Claiborne, Eddie Bauer and
Phillips Van Heusen, among many others, have had to publicly deflect allegations about human rights,
child labor or other abuses involving factories and countries where their goods are made.16
Nevertheless, in the eyes of activists pressing the cause of factory workers abroad, manufacturers and
retailers alike largely fall short of their ethical obligation as importers. How companies view their role in
the business of socially responsible importing varies. Some have embraced the idea pushed by human
rights groups of establishing independent monitoring programs to keep tabs on contractors. Others say
periodic, announced inspections of contractors and reports by quality control employees are the most
they will require.
One such group is Business for Social Responsibility (BSR), a San Francisco-based nonprofit organization
started three years ago and designed to help member companies address the question of rights in
factories abroad. Some prominent BSR members include Liz Claiborne Levi Strauss, Patagonia, Reebok
and Timberland.
David Zwiebel, vice president of the CEP, said he would ask importers to establish a set of internationally
accepted compliance standards, much like what is being done by the television industry to curb violent
programming. This would be particularly helpful for small to medium-size importers that don’t have the
wherewithal of a Levi’s to embark on a company-wide endeavor.