international business Chapter 013 global sourcing

international business

1. International Business: The New Realities Fifth Edition, Global Edition Chapter 13 Exporting and Global Sourcing Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Slides in this presentation contain hyperlinks. JAWS users should be able to get a list of links by using INSERT+F7

2. Learning Objectives 13.1 Understand exporting as a foreign market entry strategy . 13.2 Describe how to manage export-import transactions. 13.3 Explain identifying and working with foreign intermediaries . 13.4 Understand outsourcing, global sourcing, and offshoring . 13.5 Describe the benefits and risks of global sourcing. 13.6 Understand global sourcing strategies and supply-chain management.

3. Exporting as an Entry Strategy Usually the firm’s first foreign entry strategy. Low risk, low cost, and flexible. Popular with SMEs. Trade, trade deficits, and trade surpluses are related to exporting. Most exports involve merchandise. Export channels: Independent distributor or agent; or Firm’s own marketing subsidiary abroad.

4. International Sales Intensity of Typical U.S . Industries Industry Average International Sales in the Industry (as percentage of total sales) Example Firm in the Industry Example Firm’s International Sales (as percentage of total sales) Energy 59 % Exxon Mobil 66% Information Technology 57 Advanced Micro Devices 78 Materials 53 Corning 72 Industrials 45 Caterpillar 59 Healthcare 37 Abbott Laboratories 69 Consumer Discretionary 35 Mattel 40 Consumer Staples 34 General Mills 28 Sources: Patti Domm , “Shrinking Dollar Could Boost the Market and Make These Stocks Big Winners,” CNBC , July 24, 2017, www.cnbc.com ; Forbes , “The Global 2000,” 2017, www.forbes.com ; Hoovers corporate profiles, 2018, www.hoovers.com

5. Services are Exported as Well Examples: Architecture, education, banking, insurance, entertainment, information. Many pure services cannot be exported because they cannot be transported. Retailers offer their services by establishing retail stores abroad, via F D I. Retailing requires direct contact with customers. Overall, most services are provided to foreign customers via entry strategies other than exporting, especially F D I.

6. Advantages of Exporting Increase sales volume; improve market share. Generate better profit margins. Increase economies of scale. Diversify customer base. Stabilize sales fluctuations. Minimize market entry costs. Minimize risk. Maximize flexibility. Leverage the capabilities of foreign distributors.

7. Disadvantages of Exporting Compared to F D I, exporting offers fewer opportunities to learn about customers, competitors, and other aspects of foreign markets. Firm must acquire and dedicate new capabilities in international sales contracts and transactions, international financing methods, and logistics and documentation, all of which can strain organizational resources. Exposes the firm to tariffs and other trade barriers as well as fluctuating exchange rates.

8. A Systematic Approach to Exporting

9. Export Intermediation Options Indirect exporting : Contracting with an intermediary in the firm’s home country to perform all export functions, often an Export Management Company or a Trading Company. Common among firms new to exporting. Direct exporting : Contracting with intermediaries in the foreign market to perform export functions, such as distributors or agents. They perform downstream value-chain activities in the target market. Company-owned foreign subsidiary: Similar to direct exporting, except the exporter owns the foreign intermediation operation; the most advanced option.

10. Alternative Organizational Arrangements for Exporting

11. Export Documentation (1 of 2) The official forms and other paperwork required to transport exported goods and clear customs. Quotation or pro forma invoice : Issued on request to advise a potential buyer about the price and description of the exporter’s product or service. Commercial invoice: Actual demand for payment issued by the exporter when a sale is concluded. Bill of lading : Basic contract between exporter and shipper. Authorizes the shipping company to transport the goods to the buyer’s destination.

12. Export Documentation (2 of 2) Shipper’s export declaration: Lists the contact information of the exporter and buyer, full description, declared value, and destination of the products being shipped. Used by governments to collect statistics. Certificate of origin: The “birth certificate” of the goods, showing country where the product originated. Insurance certificate: Protects the exported goods against damage, loss, pilferage and, sometimes, delay.

13. Incoterms (International Commerce Terms) A system of universal, standard terms of sale and delivery. Commonly used in international sales contracts and price lists to specify how the buyer and the seller share the cost of freight and insurance, and at which point the buyer takes title to the goods.

14. Examples of Incoterms Incoterms Definition Key Points Arrangement of Shipping EXW Exworks (named place) Delivery takes place at the seller's premises or another named place (i.e., works, factory, or warehouse). EXW represents minimal obligation for the seller; the buyer bears all costs and risks involved in claiming the goods from the seller's premises. Buyer arranges shipping. FOB Free on board (named port of shipment) Delivery takes 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 loss or damage upon delivery. The seller clears the goods for export. Buyer arranges shipping. CIF Cost, insurance , and freight (named port of destination) Seller pays the cargo insurance and delivery of goods to the named port of destination. From the desti-nation port, buyer is responsible for customs clearance and other costs and risks. The seller pays for freight and insurance to transport the goods to the named port of destination. At that point, responsibility for the goods transfers from the seller to the buyer. Seller arranges shipping and insurance.

15. Methods of Payment Method Advantages Disadvantages Cash in Advance Best for the seller. Risky from the buyer’s standpoint, and thus unpopular; tends to discourage sales. Open Account Easy for the exporter, who simply bills the buyer, who is expected to pay at some future time as agreed. Risky unless there is strong established relationship between exporter and buyer Letter of Credit A contract between the banks of the buyer and the seller. Largely risk-free, it helps establish instant trust. Requires following a strict protocol, specified in the contract. Can involve much paperwork.

16. Letter of Credit Cycle

17. Countertrade An international business transaction in which all or partial payments are made in kind rather than cash. Similar to barter. Used when conventional means of payment are difficult, costly, or nonexistent. Accounts for between 10% and 1/3 of all world trade. Common in large-scale government procurement. Risky. May involve inferior or hard-to-price goods; may lead to price padding; Can be complex, cumbersome, and time-consuming.

18. Types of Countertrade Barter: Goods are directly exchanged, without the transfer of any money. Compensation deal : Payment in goods and cash. Counterpurchase: Entails two distinct contracts. In the first, the seller agrees to a set price for goods and receives cash from the buyer, contingent on a second contract in which the seller agrees to purchase goods from the buyer. Buy-back agreement: Seller agrees to supply technology or equipment to construct a facility and receives payment in the form of goods produced by it.

19. Examples of Countertrade Boeing traded aircraft for oil, in Saudi Arabia. Caterpillar received caskets in Colombia and wine in Algeria, in exchange for earthmoving equipment. Goodyear traded tires for minerals, textiles, and agricultural products. Coca-Cola received tomato paste from Turkey, oranges from Egypt, and beer from Poland, in exchange for Coke.

20. Sources of Export Financing Commercial banks. Distribution channel intermediaries. Buyers. Suppliers. Government assistance programs . Airbus is Europe’s leading exporter of commercial aircraft

21. Types of Exporting Intermediaries Foreign distributor : Based in the foreign market. Works under contract for the 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. Manufacturer’s representative : Contracted by the exporter to represent and sell its merchandise or services in a designated country or territory. Trading company: Engages in import and export of a variety of commodities, products, and services. Export management company (EMC): Based in the home market. Acts as an export agent on behalf of a client firm.

22. Working with Foreign Intermediaries The exporter relies on intermediaries for much of the marketing, physical distribution, and customer service activities in the export market. The exporter should cultivate mutually beneficial, bonding relations; respond to the intermediary’s needs ; demonstrate commitment; and build trust. Intermediaries prefer handling good , profitable products, and desire various types of support . Intermediaries help green car manufacturers sell electric vehicles around the world.

23. Common Dispute Areas with Intermediaries Compensation arrangements. Pricing practices. Advertising and promotion practices and the extent of advertising support. After-sales service. Return policies. Adequate inventory levels. Incentives for promoting new products. Adapting the product for local customers.

24. Criteria for Evaluating Export Intermediaries (1 of 2) Intermediary Dimension Evaluation Criteria 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 government 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

25. Criteria for Evaluating Export Intermediaries (2 of 2) Intermediary Dimension Evaluation Criteria Marketing Capabilities Experience with the product line and customers Extent 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 Sources : Based on Business International, “How to Evaluate Foreign Distributors,” pp. 145-149 (May 10, 1985); S. Tamer Cavusgil, Poh-Lin Yeoh, and Michel Mitri, “Selecting Foreign Distributors: An Expert Systems Approach,” Industrial Marketing Management 24, No. 4 (1995), pp. 297-304; International Trade Administration, Basic Guide to Exporting: The Official Government Resource for Small and Medium-Sized Businesses (Washington, D C: International Trade Administration, 2011); Franklin Root, Entry Strategies for International Markets (Hoboken, N J: Jossey-Bass, 1983/1998).

26. Exporting Vellus Products Inc. is a U.S.-based producer of grooming products for dogs, and exports to countries worldwide. It is one of many small and medium-sized enterprises that find success by internationalizing their unique products.

27. Global Sourcing Procurement of products or services from suppliers located abroad for consumption in the home country or a third country Also called global outsourcing, global procurement or global purchasing; it amounts to importing. Involves a contractual relationship between the buyer and the foreign supplier, in which the performance of a specific value-chain activity is subcontracted to the firm’s own subsidiary or to an independent supplier.

28. Sourcing for Typical Smartphone

29. Drivers of Global Sourcing Technological advances in communications, especially the Internet and international telephony. Falling costs of international business. Entrepreneurship and rapid economic transformation in emerging market countries.

30. Two Key Decisions Regarding Global Sourcing Decision 1: Outsource or Not? Decide whether each value-adding activity should be conducted in-house or by an independent supplier. Known as the ‘make or buy’ decision. Firms usually internalize activities that are part of their core competence or that involve the use of valuable intellectual property. Decision 2: Where in the World Should Value-Adding Activities Be Located? Firms configure their value-chain activities in specific countries to cut costs, reduce transit time, access favorable factors of production, and access competitive advantages.

31. Example of Worldwide Value Chain Configuration BMW employs more than 60,000 factory personnel at 30 sites in 14 countries to manufacture its vehicles. The Munich plant builds the BMW 3 Series and supplies engines to other BMW factories abroad. A plant in South Carolina makes 350,000 vehicles per year. A plant in NE China makes cars in a local joint venture. A plant in India makes BMWs for the Asia market. BMW configures sourcing to minimize costs (e.g., by producing in China), access skilled personnel (by producing in Germany), remain close to key markets (by producing in China, India and the United States).

32. Business Process Outsourcing (B P O) Outsourcing of business functions to independent suppliers such as accounting, human resource functions, I T services, and customer service. B P O includes: Back-office activities, including internal, upstream business functions such as payroll and billing, and Front-office activities, which includes down-stream, customer- related services such as marketing or technical support.

33. Contract Manufacturing Arrangement in which the focal firm contracts with an independent supplier to manufacture goods according to well-defined specifications. E.g., Nike, I K E A. Example : Patheon is a leading contract manufacturer in the pharmaceutical industry, providing drug development and manufacturing for pharmaceutical and biotechnology firms worldwide. Operates 11 factories in North America and Europe, producing over-the-counter drugs and numerous top prescription drugs for leading pharmaceutical firms.

34. Global Sourcing from Subsidiaries versus Independent Suppliers In global sourcing, the focal firm has two major choices. It can source from: Independent suppliers, or Company-owned subsidiaries and affiliates. Global sourcing from independent suppliers involves outsourcing production to a third-party provider abroad. Captive sourcing is sourcing from the firm’s own production facilities located abroad. Production is carried out at a foreign facility that the focal firm fully or partly owns through direct investment.

35. Nature of Outsourcing and Global Sourcing Blank Value-adding activity is internalized Value-adding activity is externalized(outsourced) Value-adding activity kept in home country A Keep production in-house, in home country B Outsource production to third-party provider at home Value-adding activity conducted abroad (global sourcing) C Delegate production to foreign subsidiary or affiliate(captive sourcing) D Outsource production to a third-party provider abroad (contract manufacturing or global sourcing from independent suppliers) Sources: Based on B. Kedia and D. Mukherjee, “Understanding Offshoring: A Research Framework Based on Disintegration, Location and Externalization Advantages,” Journal of World Business 44, No. 3 (2009), pp.250-261; Information Economy Report 2009 (New York: United Nations, 2009); World Investment Report 2004 (New York: U N C T A D, 2004).

36. Offshoring A natural extension of global sourcing, it refers to the relocation of a business process or entire manufacturing facility to a foreign country. MNEs shift production of goods or processes to foreign countries to enhance their competitive advantages. Common in the service sector, including banking, software writing, legal services, and customer service activities. Example Large legal hubs have emerged in India that provide services such as drafting contracts and patent applications with lawyers in North America and Europe costing $300 an hour or more, Indian firms can cut legal bills by 75 percent .

37. Choices in Outsourcing Value Chain Activities

38. Benefits of Global Sourcing Cost Efficiency, due to lower wages abroad, leading to improve profitability. Ability to Achieve Strategic Goals Faster corporate growth. Access to qualified personnel. Improved productivity and service. Business process redesign. Increased speed to market. Access to new markets. Technological flexibility. Retailers source their products from China and other countries worldwide

39. Risks in Global Sourcing Lower-than-expected cost savings. Environmental factors, such as exchange rate fluctuations, trade barriers, and labor strikes. Weak legal environment, which can affect protection of intellectual property. Inadequate or low-skilled workers. Overreliance on suppliers. Risk of creating competitors. Erosion of morale and commitment among home- country employees, due to outsourcing jobs .

40. Labor Cost per Hour of Typical Workers in Various Locations Sources: Sharon Chen, “U.S. Wages Will Be 58 Times Indonesia’s By 2019,” Bloomberg, April 5, 2015, www.bloomberg.com ; “Eurostat: Hourly Labour Costs,” 2018, ec.europa.eu; International Labour Organisation , “Statistics and Databases,” 2018, www.ilo.org ; Labour Bureau, Government of India, 2018, http:// labourbureau.nic.in ; The Economist Intelligence Unit, “Still Making It: An Analysis of Manufacturing Labour Costs in China,” 2014, www.eiu.com

41. Reshoring and Nearshoring Many firms have reestablished formerly foreign-based manufacturing back to the home country. Reshoring refers to the return of a business process or entire manufacturing facility to the home country. Dissatisfaction with global sourcing has led companies to return production operations to the home country. Many MNEs have underestimated the costs and logistical planning required to locate production abroad. Firms must weigh the pros and cons of global sourcing. Nearshoring refers to the offshoring or relocation of processes or manufacturing to a nearby country, often sharing a border with the home country.

42. Corporate Social Responsibility Global sourcing can lead to three major problems in the home country: Job losses Reduced national competitiveness Declining living standards M N Es may be ineffective or indifferent about: Protecting the environment Promoting human rights Labor practices and working conditions abroad

43. Useful Public Policy for Minimizing the Harm of Global Sourcing Global sourcing involves creative destruction. It may eliminate jobs, but it creates new advantages and opportunities, that benefit firms, increase profits, and often lead to the ability to create better jobs. Governments should strive to: Keep the cost of doing business low (e.g., via appropriate economic and fiscal policies). Ensure a strong educational system, that supplies engineers, scientists, and knowledge workers. Maximize worker flexibility to help those who lose jobs find other positions.

44. Strategies for Minimizing Risk in Global Sourcing (1 of 2) Go offshore for the right reasons. The best rationale is strategic, such as enhancing the quality of offerings, improving productivity, and freeing up core resources. Get employees on board. Poorly planned sourcing projects creates unnecessary tension with existing employees. Choose carefully between a captive operation and a contract with outside suppliers.

45. Strategies for Minimizing Risk in Global Sourcing (2 of 2) Choose suppliers carefully. There are many options to choose from. A sourcing broker can help. Emphasize communications and collaboration with suppliers. Minimize problems by developing clear and effective relations with suppliers. Safeguard interests in terms of maintaining the firm’s reputation, building a stake for the supplier, keeping open options for finding alternate partners if needed, and withholding key intellectual property.

46. Global Supply Chain Management Global supply chain: The firm’s integrated network of sourcing, production, and distribution, organized on a world scale, and located in countries where competitive advantage can be maximized. Sourcing from numerous suppliers scattered around the world requires efficient supply-chain management. Third party logistics providers (3P Ls) as well as independent logistics service providers such as FedEx, T N T, and U P S are useful facilitators.

47. Stages, Functions, and Activities in the Global Supply Chain

48. Features of Global Supply Chain Management The costs of physically delivering a product to an export market may account for as much as 40% of the total cost. Firms use information and communications technologies (I C Ts) to streamline operations, reducing costs and increasing distribution efficiency. Logistics involves physically moving goods through the supply chain. Incorporates information, transportation, inventory, warehousing, materials handling and similar activities associated with the delivery of raw materials, parts, components, and finished products.

49. Transportation Modes Land transportation is via highways and railroads Ocean transportation is via large container ships. Air transportation involves commercial or cargo aircraft. Ocean and air transport are common in international business because of the long distances. Ocean transport is the cheapest and most common. Ocean transport was revolutionized by the development of 20- and 40-foot shipping containers.

50. Comparing Ocean, Land, and Air Transport Ocean Transport Land Transport Air Transport Accounts for about 90 percent of international shipments Relatively slow Relatively inexpensive Revolutionized by the development of 40-foot shipping containers Usually more expensive than ocean transport but cheaper than air Exporters often opt for ocean shipping even when land transport is available. For example, some Mexican firms send goods to Canada by ship. Accounts for only 1 percent of international shipments. Fast and predictable Expensive Used mostly for: perishable products (e.g., food, flowers) products with a high value-to-weight ratio (laptop computers) urgently needed goods (medicines, emergency supplies).

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