Chapter 13: Exporting and Global Sourcing

importing or global sourcing

- also known as global procurement - the procurement of products or services from independent suppliers or company-owned subsidiaries located abroad for consumption in the home country or a third country - much international trade is regional rather than global - most international trade occurs among the advanced economies and increasingly between the advanced economies and emerging markets

CIF

- an incoterm that means "Cost, insurance, and freight" - implies that the seller pays the cargo insurance and delivery of goods to a named port of destination - responsibility for the goods transfers from the seller to the buyer

countertrade

- an international business transaction where all or partial payments are made in kind rather than cash - paying for goods and services using other goods or services when conventional means of payment are difficult or unavailable - common when dealing with governments in developing economies and emerging markets - the products that companies in developing countries offer are commodities such as agricultural grains, minerals, or manufactured goods - if firm agrees to take these products, it must arrange to sell them to convert the goods to cash

irrevocable letter of credit

- cannot be canceled without agreement by both buyer and seller - selling firm will be paid as long as it fulfills its part of the agreement - letter of credit immediately establishes trust between buyer and seller - letter of credit also specifies the documents the exporter is required to present, such as a bill of lading, commercial invoice and certificate of insurance

creative destruction

- concept proposed by Austrian economist Joseph Schumpeter - this view says that firm's innovative activities tend to make mature products obsolete over time - introduction of computers eliminated VRC - just like offshoring will create job losses and adverse effects for particular groups and economic sectors

letter of credit

- contract between the banks of a buyer and a seller that ensures payment from the buyer to the seller upon receipt of an export shipment - resolves most of the problems associated with cash in advance - popular with experienced exporters because it protects the interest of both seller and buyer

3 main considerations for transportation modes:

- cost - transit time - predictability

main benefits of global sourcing

- cost efficiency => labour costs in emerging markets are less expensive than advanced economies => wages have been rising in China which is helping in raise living standards but also makes China less attractive as a sourcing destination - ability to achieve strategic goals => transformational outsourcing => as the firm achieves cost efficiencies, it also obtains the means to restructure operations, speed up innovation, and fund otherwise-unaffordable development projects => global sourcing allows firm to free expensive analysts, engineers and managers from routine tasks to spend more time on important tasks

various sources are available for finding intermediaries abroad:

- country and regional business directories, such as Kompass (Europe), Bottin International (worldwide), and Japanese Trade Directory - trade associations that support specific industries such as the national furniture manufacturers association or the national association of automotive parts manufacturers - government departments, ministries, and agencies charged with assisting economic and trade development - commercial attaches in embassies and consulates abroad - freight forwarders and trade consultants with specific knowledge about the exporter's target markets **exporter should consider attending a trade fair in the target country - trade fairs are excellent sites to meet potential intermediaries, they also provide the means to become familiar with key players in the local industry and generally to learn about the target market

4 key factors influence the ability of an exporter or importer to obtain financing for export sales

- creditworthiness of the exporter => small or inexperienced firms may encounter difficulty in obtaining bank financing, especially large loans - creditworthiness fo the importer => some buyers particularly from developing economies or countries with currency controls, may be unable to secure financing - riskiness of the sale => banks are reluctant to loan funds for risky transactions => international sales are usually more risky than domestic ones - timing of the sale influences the cost of financing => exporter usually wants to be paid as soon as possible, whereas the buyer prefers to delay payment

intermediaries and/or retailers

- distribution to domestic customers or foreign customers (exports) - distribute and sell products and services - manage inventory, place or process orders, produce services, manage physical distribution, provide after-sales service

when intermediary relations go bad, there is a contract between an exporter and its intermediary contains various elements:

- duration of the relationship between the exporter and the intermediary - sales territory granted to the intermediary - manner in which the intermediary is expected to handle the product - tasks and performance goals that the intermediary is expected to perform - process to be followed for resolving disputes - conditions under which the relationship with the intermediary can be terminated

disadvantages of exporting

- exporting offers fewer opportunities to learn about customers, competitors, and other unique aspects of the foreign market because the firm does not establish a physical presence there - with exporting, firm must acquire and dedicate capabilities to conduct complex transactions, which can strain organizational resources - exporters must become proficient in international sales contracts and transactions, new financing methods, and logistics and documentation - exporting exposes the firm to tariffs and other trade barriers as well as fluctuations in exchange rates - exporters can be priced out of foreign markets if shifting exchange rates make their products too costly to foreign buyers e.g. US dollar lost 10% in value against the Japanese yen 2010-2011 - as the yen became more expensive in dollar terms, US buyers reduced their imports of Japanese goods

other benefits of global sourcing

- faster corporate growth => firms can focus on their resources on performing more-profitable activities such as R&D or building relationships with customers - access to qualified personnel abroad => countries like China, India, and Ireland offer abundant pools of educated engineers, managers, and other specialists to help forms achieve their goals - improved productivity and service => manufacturing productivity and other value-chain activities can be improved by suppliers that specialize in these activities - business process redesign => by reconfiguring their value-chain systems or reengineering their business processes, companies can improve their production efficiency and resource usage - increased speed to market => by shifting software development and editorial work to India and the Philippines, the US Dutch publisher Welters Kluwer was able to produce a greater variety of books and journals - access to new markets => sourcing provides an entree to the market, an understanding of local customers, and the means to initiate marketing activities there - technological flexibility => leveraging independent suppliers abroad provides firms the flexibility to quickly change sources of supply, employing whichever suppliers offer the most advanced technologies

3. acquire needed skills and competencies

- firm acquires skills and competencies to handle export operations, trains staff, and engages appropriate facilitating firms - facilitators are available to assist firms that lack specific competencies (freight forwarders, bankers, and international trade attorneys)

managerial guidelines for global sourcing

- go offshore for the right reasons - get employees on board - choose carefully between a captive operation and contracting with outside suppliers - choose suppliers carefully - emphasize communications and collaboration with suppliers - safeguard interests

foreign intermediaries expect exporters to provide:

- good, reliable products for which there is a ready market - products that provide significant profits - opportunities to handle other product lines - support for marketing communications, advertising, and product warranties - a payment method that does not unduly burden the intermediary - training for intermediary staff and the opportunity to visit the exporter's facilities to gain firsthand knowledge of the exporter's operations - help establishing after-sales service facilities, including training of local technical representatives and the means to replace defective parts, as well as a ready supply of spare parts, to maintain or repair the products

problems with countertrade

- goods the customer offers may be inferior in quality, with limited sales potential in international markets - putting a market value on the goods the customer offers may prove difficult, especially if they are commodities or of low quality => buyer may not have the opportunity to inspect the goods or analyze their marketability before the sale - parties to countertrade transactions tend to pad their prices => cash the seller receives upon selling received goods may prove less than expected - countertrade is usually complex, cumbersome, and time-consuming => deals are often difficult to bring to conclusion - government rules can make countertrade highly bureaucratic and often prove frustrating for the exporting firm

financing

- implies that the buyer or seller obtains a short-term loan to fulfill an export sale - the ability to offer attractive payment terms Is often necessary to generate sales

focal firm (stage in supply chain)

- inbound materials, outbound goods and services - manufacture or assemble components or finished products, or produce services - manage inventory, process orders, manufacture or assemble products, produce and deliver services, distribute products to customers, retailers or intermediaries

advantages of exporting

- increases overall sales volume, improve market share, generate profit margins that often more favourable than in the domestic market - increases economies of scale, reducing per-unit costs of manufacturing - diversifies customer base, reducing dependence on home markets - stabilizes fluctuations in sales associated with economic cycles or seasonality of demand - minimizes cost of foreign market entry; firm can use exporting to test new markets before committing greater resources through FDI - minimizes risk and maximizes flexibility compared to other entry strategies - leverages capabilities of foreign distributors and other business partners located abroad

critics of global sourcing point to 3 potential problems:

- job losses in home country - reduced national competitiveness - declining standards of living

industries that benefit most from global sourcing are characterized by:

- large scale manufacturing whose primary competitive advantage is efficiency and low cost - high labour intensity in product and service production, such as garment manufacturing and call centres - uniform customer needs and standardized technologies and processes in production and other value-chain activities such as automobiles and machine parts - established products with a predictable pattern of sales, such as components for consumer electronics - information intensity whose functions and activities can be easily transmitted through the Internet, such as accounting, billing, and payroll - outputs that easily codified and transmitted over the Internet or by telephone, such as software preparation, technical support, customer service

service sector exports

- largest component of economic activity - travel, construction, engineering, education, banking, insurance, and entertainment - sending employees abroad, by Internet, phone and mail, visiting customers directly in their home countries - pure services CANNOT be exported - cannot box up a haircut and ship it - many firms export some of what they produce but rely on other entry strategies e.g. Ernest and Young exports some accounting services by sending its employees abroad - international travel is a service export - when Canadian citizen stays in hotel in Brazil, hotel is said to have export its service to a foreigner

why is exporting good?

- limited risk, expensive & knowledge => most companies prefer exporting as their primary foreign market entry strategy - responsible for massive inflows & outflows that constitute global trade - generates enormous foreign-exchange earnings for nations - as an entry strategy, exporting is very flexible => exporter can enter and withdraw from markets fairly easily with minimal risk and expense

risks of global sourcing

- lower-than expected cost savings => international transactions are more complex and costly than expected - environmental factors => currency fluctuations, tariffs and other trade barriers, high energy and transportation costs, adverse macroeconomic events, labour strikes, natural disasters - weak legal environment => many popular locations for global sourcing have weak intellectual property laws and poor enforcement - inadequate or low-skilled workers - overrealiance on suppliers - risk of creating competitors - erosion of morale and commitment among home-country employees

1. assess global market opportunity

- managers assess the firm's readiness to internationalize and choose the most appropriate country markets and partners - estimate industry market potential and company sales potential

4. implement exporting strategy

- managers make decisions about product adaptation, marketing communications adaptation, pricing, and support to foreign intermediaries or subsidiaries

2. organize for exporting

- managers make decisions about the degree of the firm's involvement, resources to be committed, and the type of domestic and foreign intermediaries to hire

global sourcing

- relies on a contractual relationship between the buyer (the focal firm) and a foreign source of supply - "importing", "global procurement", "global purchasing" - low control strategy where focal firm sources from independent suppliers through contractural agreements as opposed to the high control strategy of buying from company-owned subsidiaries

company-owned subsidiary

- representative office of the focal firm that handles marketing, physical distribution, promotion, and customer service activities in the foreign market - allows the firm to manage major tasks in the market directly, such as attending trade fairs, doing market research, engaging distributors, and finding and serving customers

draft

- similar to a check, the draft is a financial instrument that instructs a bank to pay a precise amount of a specific currency to the bearer on demand or at a future date - for both letters of credits and drafts, buyer must take payment upon presentation of documents that convey title to the purchased goods and confirm that specific steps have been taken to prepare the goods and their shipment to the buyer - can be paid immediately or at a later date

suppliers (stage in supply chain)

- sourcing, from home country and abroad - provide raw materials, parts, components, supplies, as well as business processes - maintain inventory, process orders, transport goods, deliver services

outsourcing

- the procurement of selected value-adding activities, including production of intermediate goods or finished products, from independent suppliers - firms outsource because they are not superior at performing all value-chain activities & it is more cost effective to outsource these activities

key considerations for choosing between direct or indirect exporting:

- time, capital, and expertise that management is willing to commit - strategic importance of the foreign market - nature of the firm's products, including the need for after-sales support - availability of capable foreign intermediaries in the target market

barter

- type of countertrade in which goods are directly exchanged without the transfer of any money - still used in straightforward, one-shot deals - single contract, short time span, less complicated (other forms require managerial commitment and additional resources)

cash in advance

- when exporter receives cash in advance, payment is collected before goods are shipped to the customer - advantageous to the exporter, which need not worry about collection problems and can access the funds almost immediately upon concluding the sale - this method Is unpopular amongst buyers because of cash-flow problems and trust - buyer fears that buyer will not follow through with shipment

open account

- when exporter uses an open account, buyer pays the exporter at some future time following receipt of the goods - similar to the way a retail customer pays a department store on account for products he or she has purchased - because of this risk, exporters use this approach only with customers of long-standing or excellent credit or with a subsidiary the exporter owns - exporter simply bills the customer, who is expected to pay under agreed terms at some future time

BPO can be divided into two categories:

1) back-office activities - internal, upstream business functions such as payroll and billing 2) front-office activities - downstream, customer-related services such as marketing or technical support

in undertaking outsourcing, managers face two key decisions:

1) outsource or not? - decide between internalization and externalization - whether each value-adding activity should be conducted in house or by an external, independent supplier - known as "make or buy decision" - should we make a product or perform a value-chain activity ourselves, or should we obtain it from an outside contractor? 2) where in the world should value-adding activities be located? - configuration of value-adding activity => pattern or geographic arrangement of locations where the firm carries out value-chain activities - many firms configure their activities across the world to save money, reduce delivery time, access factors of production - helps explain the migration of manufacturing industries from Europe, Japan, and US to emerging markets in Asia, Latin America, Eastern Europe

growth of global sourcing has been driven by 3 key factors:

1) technological advances in communications, especially the Internet and international telecommunications - access to vast online information means focal firms can quickly find suppliers that meet specific needs, anywhere in the world - firms can communicate continuously with foreign suppliers at very low cost 2) falling costs of international business - tariffs and other trade barriers are declined substantially - efficient communication and transportation systems have made international procurement cost effective and accessible to any firm 3) entrepreneurship and rapid economic transformation in emerging markets - china, India, and other emerging markets have quickly developed as important suppliers of various products and services

systematic approach to exporting

1. Assess global market opportunity 2. Organize for exporting 3. Acquire needed skills and competencies 4. Implement exporting strategy

typical cycle of an international sale through a letter of credit

1. an exporter signs a contract for sale of goods to a foreign buyer, the Importer 2. the Importer asks its bank to open a letter of credit in favour of the Exporter, the beneficiary of the credit 3. the Importer's bank notifies the exporter's bank that a letter of credit has been issued 4. exporter's bank confirms the validity of the letter of credit 5. the exporter prepares and ships the products to the importer as specified in the letter of credit 6. the exporter presents the shipment documents to its bank, the exporter's bank, which examines them to ensure that they fully comply with the terms of the letter of credit - the documents typically include an invoice, bill of lading, and insurance certificate, as specified in the letter of credit 7. the exporter's bank sends the documents to the importer's bank, which similarly examines them to ensure that they comply fully with the letter of credit 8. upon confirmation that everything is in order, the Importer's Bank makes full payment for the goods to the exporter through the exporter's bank 9. the importer makes full payment to its bank within the time period granted, which, in many countries, can extend to several months

4 main type of countertrade

1. barter 2. compensation deals 3. counterpurchase 4. buy-back agreement

foreign distributor

A foreign market-based intermediary that works under contract for an exporter, takes title to, and distributes the exporter's products in a national market or territory, often performing marketing functions such as sales, promotion, and after-sales service

buy-back agreement

A type of countertrade in which the seller agrees to supply technology or equipment to construct a facility and receives payment in the form of goods produced by the facility - these agreements may require several years to complete and therefore entail substantial risk

counterpurchase

A type of countertrade with two distinct contracts. In the first, the seller agrees to a set price for goods and receives cash from the buyer. This first deal is contingent on a second in which the seller agrees to purchase goods from the buyer for the same amount as in the first contract or a set percentage of same.

bill of lading

Basic contract between exporter and shipper. - Authorizes the shipping company to transport the goods to the buyer's destination and serves as the importer's receipt and proof of title for purchase of the goods

certificate of origin

Birth certificate of the goods being shipped and indicates the country of origin

export management company (EMC)

a domestically based intermediary that acts as an export agent on behalf of a client company - some focal firms use the Internet to sell products directly to customers rather than going through traditional wholesale and retail channels - companies can sell their products more cheaply and faster

Electronic Data Interchange (EDI)

a standard format for the electronic exchange of information between supply chain participants (from customers to suppliers)

compensation deals

a type of countertrade in which payment is in both goods and cash

manufacturer's representative

an intermediary contracted by the exporter to represent and sell its merchandise or services in a designated country or territory - do not take title to goods they represent and are most often compensated by commission - do not maintain physical facilities, marketing, or customer support capabilities, so the exporter must handle these functions

trading company

an intermediary that engages in import and export of a variety of commodities, products, and services - manufacturers that lack the will or resources to sell their products internationally often employ trading companies

value-adding activity conducted abroad (global sourcing) & value-adding activity is internalized

delegate production to foreign subsidiary or affiliate (captive sourcing)

insurance certificate

exporters usually purchase this to protect the exported goods against damage, loss, pilferage (theft) and delay

indirect exporting

exporting that is accomplished by contracting with intermediaries located in the firm's home market

direct exporting

exporting that is accomplished by contracting with intermediaries located in the foreign market main advantage: gives the exporter greater control over the export process and potential for higher profits, as well as closer relationship with foreign buyers and the marketplace

value-adding activity kept in home country & value-adding activity is internalized

keep production in-house, in home country

product adaptation

modifying a product to make it fit the needs and tastes of the buyers in the target market

payment methods in international business

most to least secure from exporter's perspective: - cash in advance - letter of credit - open account - countertrade

comparison of ocean, land, and air transport

ocean transport: - 90% of international shipments - slower than air - cheaper - cost effective , only 1% of product's final price land: - more expensive than ocean - cheaper than air air: - fast and extremely predictable - expensive - used mostly to transport perishable products (food/flowers) - products with high value-to-weight ratio (laptops, jewelry) - 1% of international shipments

documentation

official forms and other paperwork required in export transactions for shipping and customs procedures - exporter usually issues a quotation or pro forma invoice upon request by potential customers - commercial invoice is the actual demand for payment the exporter issues when a sale is made

criteria for evaluating export intermediaries

organizational strengths: - ability to finance sales and growth in the market - ability to provide financing to customers - management team quality - reputation with customers - connections with influential people or gov't agencies in the market product-related factors: - knowledge about the exporter's product - quality and superiority of all product lines handled by the intermediary - ability to ensure security for patents and other intellectual property rights - extent to which intermediary handles competing product lines marketing capabilities: - experience with the product line and target customers - extend of geographic coverage provided in the target market - quality and quantity of sales force - ability to formulate and implement marketing plans managerial commitment: - percent of intermediary's business consisting of a single supplier - willingness to maintain inventory sufficient to fully serve the market - commitment to achieving exporter's sales targets

value-adding activity conducted abroad (global sourcing) & value-adding activity is externalized (outsourced)

outsource production to a third-party provider abroad (contract manufacturing or global sourcing from independent suppliers)

value-adding activity kept in home country & value-adding activity is externalized (outsourced)

outsource production to third-party provider at home

FOB

refers to "free on board" which means that delivery will take place when the goods pass the ship's rail at the named port of shipment , the port of origin in the seller's home country - the buyer bears all the costs and risks of shipping from the point of delivery - seller clears the goods for export but the buyer must arrange shipping from the port of shipment and onward

global supply chain

the firm's integrated network of sourcing, production, and distribution, organized on a worldwide scale and located in countries where competitive advantage can be maximized

business process outsourcing (BPO)

the outsourcing to independent suppliers of business service functions such as accounting, payroll, human resource functions, travel services, IT services, customer service, or technical support

offshoring

the relocation of a business process or entire manufacturing facility to a foreign country - common in the service sector, including banking, software code writing, legal services

exporting

the strategy of producing products or services in one country (often the producer's home country), and selling and distributing them to customers located in other countries

Incoterms

universally accepted terms of sale that specify how the buyer and the seller share the cost of freight and insurance in an international transaction and at which point the buyer takes title to the goods