Foreign Procurement (LSCM 3084)

CHAPTER TWO
THE GLOBAL BUSINESS ENVIRONMENT AND ITS IMPLICATION IN FOREIGN
PROCREMENT
Introduction
Firms have to think beyond their domestic markets in order to survive and prosper. They have to
think globally and act locally. The task of international marketing management is the same as the
task in domestic markets. In all markets, customers are the driving force of marketing and companies
need to produce products efficiently. Products have to be distributed through the most appropriate
channels and priced according to local market environment conditions. Local market conditions may
be different and companies have to adapt to the needs of local customers. The PEST (Political,
Economic, Social, and Technological) factors have been used to analyze foreign market
opportunities, and what makes them different.

2.1 Elements of Global Business Environment

2.1.1 Marketing Environment
The marketing environment consists of all factors external to an organization that can affect the
organization’s marketing activities. These factors are largely uncontrollable, although marketers can
influence some of them. All marketers face the difficult task of identifying the important elements
of the marketing environment for their organization, assessing current and likely future relationships
between these factors, and developing effective strategies for a changing environment. This task has
become increasingly difficult in recent years as many elements of the marketing environment change
rapidly and unpredictably. The best way to understand the marketing environment is to place you in
the middle of the marketing circle. You are now a marketer for some organization and must make
decisions about the marketing exchanges, strategies, activities, positions, and institutions employed
by your organization. However, the decisions you can control depend on factors and trends in the
marketing environment that you cannot control. Thus, your task as a marketer is largely to identify
opportunities or threats in the marketing environment and then make marketing decisions that
capitalize on the opportunities and minimize the threats.

The marketing environment creates opportunities or threats in two basic ways.

First, changes in the marketing environment can directly affect specific markets. A market is a group
of people or organizations with common needs to satisfy or problems to solve, with the money to

8
Foreign Procurement (LSCM 3084)

spend to satisfy needs or solve problems, and with the authority to make expenditure decisions.
Specific markets can be defined at many different levels. Changes in the marketing environment can
make markets larger or smaller or sometimes create new markets. Market opportunities typically
arise when markets increase in size or new markets are created. For example, population growth,
increases in income, and lower interest rates.

The second way the marketing environment produces opportunities or threats is through direct
influences on specific marketing activities. Legislation requiring automakers to improve gas mileage
is an example. The law can be viewed as a threat, at least in the short run, because it limits the number
of current models car makers can sell and forces them to design new models with better gas mileage.
This adds to the cost of making a car, which can either reduce sales, if car prices are raised to cover
the additional costs, or reduce profits, if prices are not raised. The legislation, however, might also
be viewed as an opportunity to create new markets for cars with extremely good gas mileage or those
that use alternative fuels, such as the electric car. Changes in the technological environment similarly
provide opportunities to produce these high-mileage or alternative-fuel cars.

Many firms use environmental scanning to identify important trends and determine if they represent
present or future market opportunities or threats. Identifying relevant factors and assessing their
potential impact on the organization’s markets and marketing activities.

2.1.2 Social Environment

The social environment includes all factors and trends related to groups of people, including their
number, characteristics, behavior, and growth projections. Since consumer markets have specific
needs and problems, changes in the social environment can affect markets differently. Trends in the
social environment might increase the size of some markets, decrease the size of others, or even help
to create new markets. We discuss two important components of the social environment: the
demographic environment and the cultural environment.

The demographic environment refers to the size, distribution, and growth rate of groups of people
with different characteristics. The demographic characteristics of interest to marketers relate in some
way to purchasing behavior, because people from different countries, cultures, age groups, or
household arrangement often exhibit different purchasing behaviors. A global perspective requires
that marketers be familiar with important demographic trends around the world.

9
Foreign Procurement (LSCM 3084)

The cultural environment refers to factors and trends related to how people live and behave.
Cultural factors, including the values, ideas, attitudes, beliefs, and activities of specific population
subgroups, greatly affect consumers’ purchasing behavior. Thus, marketers must understand
important cultural characteristics and trends in different markets.

2.1.3 Economic Environment

The economic environment includes factors and trends related to income levels and the production
of goods and services. Whereas demographic and cultural trends generally affect the size and needs
of various markets, economic trends affect the purchasing power of these markets. Thus, it is not
enough for a population to be large or fast growing, as in many developing countries, to offer good
market opportunities; the economy must provide sufficient purchasing power for consumers to
satisfy their wants and needs.

Economic trends in different parts of the world can affect marketing activities in other parts of the
world. For example, changes in interest rates in Germany affect the value of the dollar on world
currency markets, which affects the price, and subsequently sales, of American exports and imports.
Market opportunities are a function of both economic size and growth. The gross domestic product
(GDP) represents the total size of a country’s economy measured in the amount of goods and
services produced. Changes in GDP indicate trends in economic activity.

2.1.4 Political/Legal Environment

The political/legal environment encompasses factors and trends related to governmental activities
and specific laws and regulations that affect marketing practice. The political/legal environment is
closely tied to the social and economic environments. That is, pressures from the social environment,
such as ecological or health concerns, or the economic environment, such as slow economic growth
or high unemployment, typically motivate legislation intended to improve the particular situation.

Legislation

Organizations must deal with laws at the international, federal, state, and local levels. US laws
directly affecting marketing typically fall into two categories: those promoting competition among
firms and those protecting consumers and society.

10
Foreign Procurement (LSCM 3084)

2.1.5 Technological Environment

The technological environment includes factors and trends related to innovations that affect the
development of new products or the marketing process. Rapid technological advances make it
imperative that marketers take a technology perspective. These technological trends can provide
opportunities for new-product development; affect how marketing activities are performed, or both.
For example, advances in information and communication technologies provide new products for
firms to market, and the buyers of these products often use them to change the way they market their
own products. Using these technological products can help marketers be more productive. Fax
machines and cellular telephones are illustrative. New technologies can spawn new industries, new
businesses, or new products for existing business. Firms at the leading edge of technological
developments are in a favorable position. Thus, marketers need to monitor the technological
environment constantly to look for potential opportunities that will improve their positions.

In general, the level of R&D expenditures and patents provides an indicator of technological
development.

2.1.6 Competitive Environment

The competitive environment consists of all the organizations that attempt to serve similar
customers. Two types of competitors are of major concern: brand competitors and product
competitors. Brand competitors provide the most direct competition, offering the same types of
products as competing firms. For example, Nike is a brand competitor of Reebok, LA Gear, and
other firms that market different brands of the same types of sport shoes. These firms target the same
markets and typically try to take customers away from each other. Product competitors offer
different types of products to satisfy the same general need. Domino’s Pizza, McDonald’s, and
Kentucky Fried Chicken are product competitors. They attempt to satisfy a consumer need for fast
food, but they offer somewhat different menus and services. Domino’s, McDonald’s, and KFC also
have brand competitors, which market the same types of fast food to the same customers. Brand
competitors of Domino’s, for example, are Pizza Hut, Godfather’s Pizza, and Little Caesar’s Pizza.

The competitive environment for most firms is fierce and often global. Marketers must identify their
relevant brand and product competitors in order to identify market opportunities and develop
marketing strategies. One trend affecting many industries is the changing competitive landscape.
Some product competitors have become brand competitors by expanding their product offerings.

11
Foreign Procurement (LSCM 3084)

2.1.7 Institutional Environment

The institutional environment consists of all the organizations involved in marketing products and
services. These include marketing research firms, advertising agencies, wholesalers, retailers,
suppliers, and customers. Many organizations are changing how they are structured and managed.
These trends in the institutional environment include reengineering, restructuring, the virtual
corporation, horizontal organizations, and empowerment. An organization’s adoption of any of these
concepts means that it is changing some elements of its structure and processes. These changes are
likely to affect the amount and types of products the firm needs as well as the purchasing processes
it uses. The potential marketing implications of organizational changes are illustrated by the total
quality management (TQM) and downsizing trends. Many organizations are implementing TQM
programs. These programs typically emphasize long-term relationships with selected suppliers

2.1.8 The Future

The only certainty about the future is that it will be uncertain and change will occur at an increasing
rate. Despite this caveat, there are hopeful signs that the world economy will exhibit strong growth.
The world growth rate for the past three years was nearly doubles that of the past two decades. The
expansion of economic freedom and property rights, more fiscal restraint by governments, increases
in investment, freer trade, and exploding technological innovation are some of the forces supporting
world economic growth. Although a large scale war, environmental catastrophe, political upheaval,
or other event could change the picture, the current prognosis is expressed by Jeffrey Sachs,
economist at Harvard University: ‘‘the positive side is spectacular. Economic growth will raise the
living standards of more people in more parts of the world than at any time in prior.

2.2 Potential Problem Areas in Foreign Procurement

Even if it is not possible to give a complete explanation of all the potential problem areas where
worldwide purchasers face and subsequent methods they have to use for minimizing the impact
of each, the major ones are highlighted in this unit. The astute buyer will recognize that she /he
must consider the total cost of ownership, and not just the initial purchase price, when evaluating
worldwide source.

12
Foreign Procurement (LSCM 3084)

2.2.1 Cultural and Social Customs

Perhaps one of the biggest problems (barriers) to international purchasing involves the cultural
differences that arise when doing business with other countries. Culture is the sum of the
understandings that govern human interaction in a society. Countries may differ along two broad
areas of difference, which affect the way people think, and behavior, which affect the way people
act.

Good purchasers do not focus only on economic transactions, but also on the caused by cultural
misunderstandings can lead to higher supply chain costs.

Therefore, purchasers need to have cross- cultural skills and must adjust top their suppliers’
customs if they are to be effective in communicating and negotiating with suppliers. This issue
has impact on international negotiation.

With the growth in international business over the last 20 years, the need to negotiate across
cultures has increased greatly. Negotiation with supplier takes an added complexity when the
parties have different language, extra planning must occur to accommodate translation, travel,
and other foreign business requirements.

Various barriers may be present that can affect international negotiation. In order of importance,
major obstacles to language, time limitations, cultural differences, and limited authority of the
international negotiators, which can help overcome these obstacles. These characteristics include
patience, knowledge of the contract agreement, and honest and polite attitude, and familiarity
with foreign cultures and customs.

Brazil. While Brazilians are receptive to discussing most subjects, home and family are private
matters and not a topic for casual acquaintances. They are generally more analytic than other
Latin American countries and look at the particulars of each situation rather than rules or laws for
guidance. During negotiations, Brazilians tend to approach problem directly, allowing their
feelings to influence their decision. While the presentation of facts during a negotiation is
acceptable, these facts usually will not overrule subjective feelings. The image of the macho male
is still prevalent and Brazilian men except women to be subordinate.

13
Foreign Procurement (LSCM 3084)

China: When negotiating with Chinese, it is important to avoid slang or jargon and to use short,
simple sentence with pauses to ensure your words are understood exactly. A negotiator should
expect to make presentations to many different groups at different organizational levels. Since
U.S managers have a reputation for impatience, the Chinese will extend negotiations beyond the
deadline to gain an advantage. They may even try to renegotiate previously agreed- upon issues
on the last day, and they will continue to try for a better deal even after signing the agreement.

France: given their formal and reserved nature, a casual attitude during business may alienate the
French. During negotiations, arguments are made from a critical perspective with elegant wit and
logic. The French enjoy engaging in debate, striving for effect rather than detail and facts. While
the French will accept information for the purpose of debate and may even change their minds, a
desire to maintain a strong cultural heritage often prohibits them from accepting anything that is
contrary to their cultural norm. Because the French are strongly individualistic with a centralized
authority structure, negotiating with the proper individual can lead to quick decisions.

Germany: Germans are not openly receptive to outside information. Their strict hierarchies and
separation of units often prohibits the sharing of information across the same organization. These
hierarchies can also slow the making of business decisions. During a negotiation, objective facts
form the basis of truth rather than subjective feelings, and Germans are highly analytical.
Nowhere is punctually more important than in Germany. Arriving just two or three minutes late
to a negotiation can be insulting. During negotiations, German tends to be unemotional because
of a high need for social and personal order.

Japan: Japanese culture is vastly different from America culture. Despite such differences, the
extra effort needed to develop mutually satisfying negotiations can result in an excellent
relationship: Japans firms are dependable and loyal suppliers. They will treat their customers like
valuable family members. The negotiating process is unique with Japanese companies.

For example, the Japanese are comfortable with extended silence, which is not true with
Americans. They are team players concerned with the well- being of their country and firm rather
than themselves as individuals. Politeness is valued above all else. Instead of saving no, Japanese
often say yes, which can often extend negotiations. When negotiating, keep in mind that it is
necessary to convince the whole group rather than a single individual. Also, avoid placing the

14
Foreign Procurement (LSCM 3084)

Japans in a position in which they must admit failure or “lose face”. Japanese do not like the
appearance of having to make forced concessions.

Middle East: an Arab businessman may interrupt a meeting repeatedly to talk to others who
wander in and out. This is not considered rude; rather, it reflects the communal style of doing
business.

Latin America: Names are often a combination of the mother’s and the father’s with the father’s
name used in conversation. Latin Americans have less need for personal space than most
Americans. A Latin American associative will stand nose to nose when talking to you to establish
intensity and intimacy.

Europe: Europeans are more formal than Americans; and so do not use first names unless invited
to. Formal business attire is common in many countries.

In general, the following guidelines should be followed:

1. Even if English is spoken, speak slowly, use more communication graphics, and avoid the
use of metaphor and jargon.
2. Bring an interpreter to all but the most informal meetings. Allow extra time to educate
interpreters on issues.
3. Document in writing the main conclusions and decisions.
4. Learn about the countries history and taboos.
5. Do not use first names unless invited to do so.
6. Get cultural advice from professionals or your won companies, not from supplier
representatives in the United States.
7. Expect negotiations to last longer with some cultures as the supplier learns to accept you and
your company as a customer.

2.2.2 Source Location and evaluation

The key to effective purchasing is, of course, selecting responsive and responsible suppliers. This
is sometimes difficult to do, because obtaining relevant evaluation data is both expensive and
time- consuming. The problem is intensified when the potential suppliers are located far away.
However, the methods of obtaining data on international suppliers essentially are the same for
domestic suppliers. Besides, the background data obtained (information sources), certainly the

15
Foreign Procurement (LSCM 3084)

best method of obtaining detailed data is an onsite supplier visit. Because a visit. Because a visit
to a supplier(s) in another country is expensive and time consuming, it must be planned in detail.
If the dollars and the risk involved are great, the onsite visit is necessary. Firms doing a great deal
of international buying Millions of dollars’ worth of video electronics equipment, the
responsibility purchasing manager may spend 20 to 30 percent of his/ her time in the far East
visiting and negotiating with potential or actual suppliers.

There are alternative to personal on- site visits. A survey by purchasing Magazine found a
growing use of consultants and local third- party purchasing organizations. The Internet has made
information on potential sources more readily available, and e-mail represents accost effective
method of communication.

2.2.3 Logistics and Transportation

Logistics presents some of the biggest problems for buyers involved in international sourcing.
The trend toward integrated logistics on the domestic side is mirrored by similar move in global
purchasing. Integrated logistics refers to the coordination of all logistics functions the selection
of modes of transportation and carriers, inventory Management policies, Customer service levels
and other management policies, Logistics companies that provide a wider base of services,
thereby allowing firms to coordinate logistic functions, should enable more cost effective and
competitive international sourcing. Many firms outsource their logistics activities to third-party
logistics providers. Deregulation and globalization have resulted in a series of mergers and
alliances, in the third party logistics industry, as service providers attempt to provide a global
presence for their major customers.

The most popular services include payment of freight charges, tracing and expediting shipments,
making routing recommendations, issuing export declarations, and preparing certificates of
origin. Traditionally, IFFs (International freight forwarders) arranged for water shipments and
airtight forwarders arranged for air shipments. While IFFs still generate more of their revenue
from water [68 %] than air (32%) shipments, the number of IFFS arranging only water transport
is decreasing. Further evidence of an integrated logistics approach is diversity of services
generating revenues for IFFs. Customs broker (CB) services and non-vessel – operating common
carrier (NVOCC) are the other two logistical intermediary services typically offered. The growth

16
Foreign Procurement (LSCM 3084)

of one stop service providers is likely to continue and appears to be in congruence with inter
modals (for example, air- sea, rather than all air) and outsourcing.

2.2.4 Legal Problems

If potential legal problems are a risk in domestic buying, they are several times greater in
international buying. If delivery time is critical, a penalty or liquidated damages clause tied to late
delivery may be advisable. Also a performance bond may be required; or, a bank guaranty
providing for payment in case of specified nonperformance may be substituted for the
performance bond. Litigation is time consuming and expensive, therefore, agreements to settle
international disputes by international arbitration are becoming increasingly common.

The United Nations convention contracts for international sale of Goods (CISG) went into effect
January 1, 1988. CISG applies only to the sale of goods and doesn’t apply to consumer goods and
services. There are several key differences between the Uniform commercial code (UCC) and the
CISG, and purchasers should be aware of them. These are;

1. Under the UCC, the terms of a contract may vary in acceptance form the proposed contract
and a contract still may exist. Under the CISG however, no contract is created if the terms of
acceptance differ from the proposed terms.
2. Under the UCC, the status of frauds requires a written agreement of the value of goods
exceeds $500. Under the CISG there is no dollar limit.
3. Under the UCC, there are implicit warranties, such as warranties of merchantability, and
warranties of fitness for propose. Under the CISG, there are additional warranties.

Purchasers should consider carefully the laws under which an international contract is governed.
If trading with a company in a country where CISG has been adopted, the CISG governs the
contract and the buyer should understand the difference between CISG and the UCC. CISG
allows the parties to “opt out” and agree on other relevant law to govern the contact. However,
unless another body of law specifically is stated and agreed upon, the CISG will apply
automatically if both nations have adopted the CISG. Likewise, if the other party is form the
countries that has not adopted CISG, for instance Japan, and wants to have its domestic low apply,
the U.S. Purchaser may try to get agreement on using the CISG.

17
Foreign Procurement (LSCM 3084)

2.2.5 Currency Fluctuations

Countries in different corners of the world have their own currencies.

Should payment be made in the buyer’s currency or that of the country in which the purchase is
made? If payment is to be made in a short period of time, there may be less of a problem.
However, if payment is not due for several months or if the supply relationship lasts for a long
time, the exchange rates could change appreciably making the price substantially higher or lower
than at the time of agreement was signed. This means that the buyer when contracting also must
make a forecast of how the exchange rates likely will move between now and the time of payment.

The biggest advantage comes from the choice of the best pricing currency the currency in which
prices is set). The payment currency (you may actually pay on equivalent amount of a different
currency) doesn’t make a big difference in prices. To choose a pricing currency you must answer
two questions.

Fixed/pegged currency denotes a nominal exchange rate that is set firmly by the monetary
authority with respect to a foreign currency.

Floating currency is determined in foreign exchange market depending on demand and supply,
and it is generally fluctuates constantly. For example, US dollar, euro, Swiss franc, the Indian
rupee, pound sterling, Japanese yen and Australian dollar.

2.2.6 Expediting

Because of distance, expending an offshore firm’s production shipment is more difficult. This
places premium on knowing a supplier’s personnel and ensuring that they are responsive. Some
firms also arrange to have an expeditor on contract in the offshore country or to use personnel
form a company owned subsidiary closer to supplier to assist with editing problems.

2.2.7 Tariffs and Duties

Even though theoretically the world is running to tariffs through various world Trade
organizations (WTO) agreements, they still exist. Examples of WTO agreements are NAFTA and

18
Foreign Procurement (LSCM 3084)

Mercosur. The North American Free Trade Agreement (NAFTA) is established by U.S Canada
and Mexico. The end result of NAFTA will be the elimination and reeducation of tariffs and no
tariffs barriers among the 3 member counties. Argentina, Brazil, Paraguay, Uruguay, and Bolivia
Created a custom association called Mercosur. At the summit of Americas in 1994, 34 nations
from western Hemispheres committed themselves to the create free trade area of the Americas by
the year 2005.

2.2.8 Paperwork Costs

Worldwide sourcing requires additional documentation such as reshipment, inspection

certificates. Export Declaration, Inspection Report and clean Report and clean report of findings),
Bill of exchange, shipment instruction, Delivery .Note/ Collection, Letter of credit, import
License are few to mention among several them. These documents are mainly used for duty and
customs, logistics activities, payment and financing transaction. Even with development such as
electronic funds transfers and in ternate- based communications system, the paperwork costs in
international buying pose a major problem. Besides being frustrating, it can be drag on the speed
of operations.

2.3 Management of Foreign Procurement Risks

International sourcing has ample potential for organizations, but some of these benefits can also
translate into downfalls and risks. The risks associated with international sourcing versus local
sourcing are often the reason why many organizations do not branch out from local suppliers.

So what are the common risks, and how can we minimize these and optimize the benefits of
international sourcing for organizations?

Price/Cost Risks

The varying and competitive price of goods and services purchased internationally is one of the
key advantages, but it can also translate into a risk factor. There are several issues that contribute
to the overall cost and price risk:

 International exchange rates; these often fluctuate and what was once a lower cost could
soon rise.

19
Foreign Procurement (LSCM 3084)

 Higher shipping costs and cost of delays/ loss in transit; depending on the customs, taxes,
security measures and sheer distance these costs can soon make a low cost transaction into
a much higher one.

 High transaction costs; complexity of documentation, time zone differences, contract

management, staff training, etc. can all contribute to rising costs of international sourcing.

These risks must all be taken into account when looking to outsource supply or manufacture to
international countries. Minimizing these risks involves spending time and money thoroughly
researching not only the suppliers but the country they reside in and the associated costs with doing
business in this or that country. The risks can be best minimized by making a detailed comparison
of the price/cost risks of suppliers in different countries.

Quality Risks

As different countries will have their own quality standards and legislation, this can cause issues
with purchasing goods and services internationally. There are a number of factors from which
quality risks can arise:

 Difficulty obtaining pre-qualification information from supplier; due to the distance and
difference in regimes, it can prove difficult obtaining this vital information.

 Difficulty monitoring suppliers’ quality management systems; distance again causes issues
with monitoring and sampling outputs.

 Difficulty ‘drilling down’ through suppliers’ own supply chains; different countries may
often have lapse or complete lack of communication infrastructure and supply chain
documentation.

 Perceived emphasis on price competition; this can lead to international suppliers cutting
corners on quality in order to keep prices low.

 Differences in regulation of consumer protection; this can impact quality control areas such
as labelling.

 Differences in quality standards; this can include work conditions, technology

infrastructure, perceptions of quality and quality standards.

20
Foreign Procurement (LSCM 3084)

The keys to minimizing the quality risks involved with international sourcing lie in rigorous
supplier pre-qualification and monitoring, specification of quality requirements, contract
incentives/penalties for quality performance and the employment of third party local consultants
to appraise supplier quality performance.

Supply Risks

Time, quantity and place are three main factors that define supply risks. The right quantity is
defined by how often it is used and how soon it is needed, the right time then must take into account
how long it will take for the supplier to produce/obtain and provide the items needed, which is
then impacted by the place where the items need to be sent to, taking into account handling times,
etc. Supply risk factors include:

 Potential disruptions to supply; internationally this can be caused by war, political

instability, civil unrest, war, terrorism, changes to trade policy or even natural disaster.

 Transport risks; this can include loss, deterioration, damage or theft in transit, or
weather/natural disasters disrupting transport.

 Increased lead times; due to the distance the goods must travel, the lead time compared
with local supply can be significantly increased.

 Misunderstanding of requirements; due to language difference and misinterpretation, the

supplier can misunderstand the quantity, place or time factors or contract negotiations.

 Communication delays; due to time zone differences and the need for interpretation,
communication can often be delayed.

Minimization of these supply risks comes down to:

 Proactive demand forecasting; taking into account extended lead times and risks associated
with international sourcing.

 Proactive transport planning; taking into account customs/security issues and timescales
for delivery.

21
Foreign Procurement (LSCM 3084)

 Rigorous identification of risk, and regular monitoring and assessment to ensure plans are
always in place to minimize risks.

 Contingency planning; ensuring plans are always in place for the unlikely but potential risk
events, such as having alternative local suppliers that can be used in the event of issues
occurring.

 Purchase of appropriate insurance; this should cover likely and/or high impact
contingencies.

 Collaboration with suppliers to minimize identified risks.

 Use of local consultants or agents for interpretation services when negotiating contracts.

Negotiation and Relationship Risks

Cross cultural communications can lead to misunderstandings, and it can be difficult to build
strong supplier relationships. The main risk factors with negotiating overseas are:

 Language differences; the need for interpretation during negotiations on contracts and
agreements.

 Differences in values, tastes and culture; there is often differences in the way businesses
are run and the core values, communication styles, etc.

In order to overcome these issues, it is vital to have a third party or member of the team on board
who understands the country your chosen supplier operates in. This will mean them not only being
able to speak their language fluently and interpret during negotiations, but also council on the
unspoken values and actions to be taken into account when building a strong relationship with the
overseas supplier.

Compliance, Legal and Reputational Risks

Different countries operate different standards and regulations within their supply chains, which
can have an impact on your organization’s reputation down the line. The key risk factors of this
include:

 Differences in legal frameworks; contract law, health and safety, employment law,
environmental protection, etc. all differ from country to country. For example, if poor labor

22
Foreign Procurement (LSCM 3084)

standards or adverse environment impacts are found to be linked to your supply chain, this
could have a negative effect on your organization’s reputation.

 Issues around ‘applicable law’; in the event of disputes within international contracts, there
are issues in determining which country’s law are applicable in relation to the dispute.

 Differences in ethical standards; there are high costs associated with managing ethical
standards in countries where they differ from our own, as well as the reputational impact
should there be poor ethical standards exposed within the organization’s supply chain.

Minimizing these risks requires setting common policy guidelines at the contract negotiation stage,
as well as putting strategic level sourcing professionals in place to ensure these policy guidelines
are followed. The guidelines should be mutually agreeable, but above all they should protect your
organization’s reputation.

CHAPTER THREE
LOCATING, EVALUATING, AND SELECTING GLOBAL SUPPLIER
3.1 SOURCE LOCATION AND EVALUATION

The key to effective purchasing is, of course, selecting responsive and responsible suppliers. This
is sometimes difficult to do, because obtaining relevant evaluation data is both expensive and
time- consuming. The problem is intensified when the potential suppliers are located far away.
However, the methods of obtaining data on international suppliers essentially are the same for
domestic suppliers. Besides, the background data obtained (information sources), certainly the
best method of obtaining detailed data is an onsite supplier visit. Because a visit. Because a visit
to a supplier(s) in another country is expensive and time consuming, it must be planned in detail.
If the dollars and the risk involved are great, the on-site visit is necessary. Firms doing a great
deal of international buying Millions of dollars’ worth of video electronics equipment, the
responsibility purchasing manager may spend 20 to 30 percent of his/ her time in the far East
visiting and negotiating with potential or actual suppliers.

There are alternative to personal on- site visits. A survey by purchasing Magazine found a
growing use of consultants and local third- party purchasing organizations. The Internet has made

23