Grow your trade

Return to:
Grow your trade
Manage overseas business relationships

Importing and exporting can be significant business opportunities. Overseas suppliers often offer
cheaper goods, giving you a cost advantage against your rivals; foreign customers can represent
huge new markets to sell to. But as in any other area of business, you need to manage the
relationship to make the most of the opportunities.
Doing business internationally presents special challenges, from sorting out the logistical
problems of organising long-distance deliveries to working out how to communicate with
someone who doesn't speak the same language. Overseas customers and suppliers operate in an
increasingly competitive global market. Assuming that everyone speaks English, or that they will
automatically want to do business with you, is not good enough. If you aren't prepared to put
effort into the relationship, somebody else will be.
1 Plan your approach
1.1 Research local product requirements.
Find out about customer preferences, local standards and product regulations. You might need to
change the product's appearance, or to fundamentally redesign it.
You may need to translate labelling and instructions (see section 4) or to redesign packaging to
suit the local market. You may even need to change your product's name or logo if they have
unfortunate connotations locally.
If you are importing, you need to check whether goods sourced overseas will meet UK
requirements.
1.2 Find out how local commercial practice differs from the UK.
Assuming that they operate in the same way as UK businesspeople leads to misunderstandings
and problems. For example, in some countries an extensive, written contract is the key part of
any agreement; in others, the handshake is more important.
Find out about local business behaviour (see section 5).
Investigate how products are marketed and sold, including any legal restrictions: for example,
rules prohibiting advertising to minors.
1.3 Identify the key contacts you need to build relationships with.
Key contacts may include customers or suppliers, agents, trade organisations and government
departments.
You may need to build relationships with UK organisations overseas (for example, the British
embassy) and with overseas organisations in the UK (for example, the UK representatives of
your customers or suppliers).
1.4 Decide what use you will make of agents.
The way the market operates may mean that it is easier to sell through a local agent (or
distributor), rather than directly. In some countries this is a legal requirement.
A local agent can be a valuable source of market information, and can help you find customers
and build relationships with them.
Take legal advice before entering into a contractual relationship with an agent or distributor. It
can be difficult and expensive to terminate the relationship later on.
1.5 Consider taking consultancy advice.
The British Chambers of Commerce offers a subsidised export communications review. This
looks at how you deal with overseas communications and makes practical recommendations for
improvements.
2 Get organised
2.1 Make sure you have a clear agreement.
Using an internationally recognised 'Incoterm' in your contract helps make it clear what your
responsibilities are at every stage.
2.2 Make effective transport arrangements.
Logistical problems and customs clearance can be a major source of friction.
Be prepared to work with customers or suppliers to resolve any problems. Both you and they
may find them equally frustrating, regardless of who has contractual responsibility.
2.3 Look for opportunities to make their lives easier.
Consider how you can improve your systems to suit them. For example, many delivery
companies now offer order tracking online so that customers can check the progress of their
goods.
Provide a contact in case of any problems (see section 3).
You may be able to offer personal help: for example, if an overseas contact is coming to the UK
on holiday.
3 Communicate regularly
3.1 Consider visiting, particularly in the early stages of a relationship.
It is easier to build a relationship face to face.
3.2
You may need to make several visits if you are hoping to win high value orders from overseas
customers.
Visiting gives you an opportunity to get to know their business and to find out more about the
country.
3.3 Think about the most cost-effective way to visit.
Exhibitions and trade missions can be a good way of meeting several customers in one trip.
UK Trade & Investment's Passport to Export programme can include financial support to visit an
overseas market.
Your Chamber of Commerce or trade association may lead a trade mission to the market you are
interested in.
3.4 Plan a regular communications schedule.
E-mail is cost-effective and convenient, particularly if there is a long time difference between
you, but lacks the immediacy and personal touch of a phone call.
Indirect contact, such as advertising, can help build your local presence.
You may want to revisit key contacts regularly, or invite them to visit you in the UK.
3.5 Make it easy for them to contact you.
Give them the name, phone number and email address of the individual responsible for dealing
with them.
A contact that speaks their language makes life much easier for them (and for you).
Provide key information and answers to frequently asked questions on your website.
4 Overcome the language barrier
4.1 Carry out an audit of your language needs.
The skills you require depend on whether your contacts can speak English and are happy to do
so. While suppliers may use English, customers might expect you to make more effort.
Different individuals may have different needs. For example, a salesman travelling overseas may
need basic language skills to get around, even if the customers all speak English.
Marketing brochures, product labels and legal contracts may need expert translation.
You may need to be able to at least get a rough idea what incoming mail is about, so that you can
decide whether you need to follow it up.
4.2 Consider whether you can use inexpensive solutions.
Getting a rough translation into English is usually relatively easy. You might be able to use a
student who speaks the foreign language, a foreign student who speaks English, or a web-based
machine translation.
Translation into a foreign language is more difficult, especially where specialised language is
involved.
4.3 Use professional translators and interpreters where necessary.
Errors in translation can be disastrous in, for example, a legal contract. You may need specialists
to deal with technical documents and negotiations.
Clever wordplay and humour do not usually translate directly into another language.
You may want to double-check sensitive translations by having them translated back into
English, or asking local contacts to read them through.
Use qualified professionals, and check that they have experience of the country you are dealing
with: an expert from France may not be the right person to use in a different French-speaking
country
4.4 Train employees to speak and understand as much of the language as they need.
Learn a little of the language yourself. Even if your contacts speak English, they will appreciate
the effort.
Produce business cards in both English and the local language.
It helps if a switchboard operator can recognise and use a few key phrases while putting a caller
through to the right contact.
It may be worth recruiting salespeople with existing language skills, or investing in language
training for them.
4.5 Train employees to speak simple English when dealing with foreign contacts.
Misunderstandings can and do occur when you use slang or speak quickly.
4.6 Think carefully about what foreigners might mean when they are using English.
Do not assume that they are using words in the same way as you do. For example, during
negotiations they might say "yes" to mean that they hear you, not that they agree with you.
4.7 Think about longer-term solutions.
If you often need translation, it helps if you can build up a relationship with a translator who gets
to know your business.
If you are investing in language training, tell the training company what your medium-term
objectives are and ask them to suggest appropriate solutions. It is usually unrealistic to expect
training to provide a quick fix.
5 Be culturally aware
5.1 Learn how to behave.
You may need to learn local rituals. For example, in Japan when you are given a business card
you should study it carefully; putting it in your pocket without looking at it is considered rude.
The way you present yourself may need changing. For example, in some countries sitting cross-
legged so that you show the sole of your foot is offensive.
While British businesspeople are usually on first name terms straight away, other cultures can be
much more formal.
Watch out for potentially sensitive areas such as religion.
Different cultures often have very different senses of humour.
5.2 Take an interest.
Do a little research into their history.
Find out what the main sports in the country are, and who are the local entertainment and
sporting heroes.
Be prepared to experience and appreciate their culture: for example, by eating the local food or
attending cultural events.
5.3 Establishing a personal relationship can be crucial.
Taking a contact to a meal is often an expected part of the process of building a business
relationship.
In some cultures, it is considered bad form to discuss business at social occasions.
Consider providing appropriate small gifts. Find out what is expected, when.
5.4 Be patient.
It can be difficult to identify the decision-maker and to get access to him or her.
You may have to meet a contact several times before winning any business.
In some cultures, it is perfectly normal to be late for business meetings.
5.5 Take advice where necessary.
Useful sources of information can include the local British embassy and UK Trade &
Investment.
Read a local travel guide, preferably one aimed at business travellers.
6 Make yourself local
6.1 Establish local contact points.
Consider creating a local language version of your website, and registering a local domain name.
Consider changing your local agent's role so that the agent is rewarded for building relationships
rather than just taking orders or making one-off sales.
Consider setting up a local office yourself if the level of business justifies it.
6.2 Expose yourself to local information.
Consider subscribing to local newspapers or business magazines.
Find out if you can join the appropriate trade association in the country. See if there is a
membership organisation for companies that trade between that country and the UK.
Build your local network, using one contact to get another.
6.3 Change the way you think.
Instead of thinking about how to adjust your product or the way you do things in the UK to suit
local conditions, start with a blank piece of paper.
Consider recruiting employees with first-hand experience of the country, its culture and its
language.
Look at ways to integrate yourself into the local economy, for example by using local suppliers.
SIGNPOST
1. Find out more about the Passport to Export programme on the UK Trade & Investment
website.
2. To find out more about how an Export Communications Review can help your business,
visit the British Chambers of Commerce website or call 024 7669 4484.
3. To find out more about Chamber of Commerce trade missions, visit
www.chamberonline.co.uk/exportzone/trademissions.
4. To find a trade association relevant to your sector, search the Trade Association Forum's
online database.
 5. To find your local Business Link, search the Business Link website or call 0845 600 9
006.
6. To find a translator or interpreter, search the BLIS Services database, the Institute of
Linguists database, the Institute of Translation and Interpreting directory or the
Association of Translation Companies member list.
7. For more information about their technical translation services, visit the BSI website at.
8. To use Alta Vista's web-based translation, visit http://babelfish.altavista

Rules for Successful Overseas Business

(and how to maintain it for the long term)
Whether you have been engaged in overseas business for some time, or you are just considering
dipping a toe in the water for the first time, here are some golden rules which should be applied
to minimize the risks and maximise profits.
1. Always do your market research – and keep on refreshing it on a regular
basis. If you already have local agents, do not expect them to give you all the
market information you require. They are not able to be objective and it
would be unfair to expect it of them.

There are numerous schemes run by the DTI (UK Trade Invest), local
development agencies and Business Links to give British businesses of any
size, access to good quality, highly subsidised market reports at bargain
basement prices. There’s even an online library of introductory market
reports available free of charge from UK Trade Invest. In addition, for small
and medium sized businesses, there are travel grants and overseas trade fair
schemes, export explorer schemes and export promoters. There is really no
excuse for going in blind. All the information is just there waiting for you to
take it. At this point you should consider, if you don’t have time to do the
market research thoroughly, you will not have time to make a success of
overseas business, so drop the idea now.

2. Visit the markets you are interested in. Not only are you trying to find initial
contacts and potential partners, but you are also getting a feel for the
business climate. So get out and about; go to local shops and restaurants,
walk the streets, try to get outside the capital city.

Just as important as visiting potential markets, is maintaining a visiting

frequency of no less than 4 times per year to markets in which you are
already doing business. As an overseas supplier, you have to work twice as
hard as local competitors to demonstrate your overwhelming commitment to
their market. When you visit the market, make sure you see your own
contact (distributor or agent) and also end users, factories and shops.

From time to time (maybe once a year), you should arrange to touch base
 with a commercial representative from the local British Embassy or
Consulate. These people have excellent local knowledge and contacts; a
major part of their role is local networking, often at the highest levels. The
more they know about your activities, the more likely they are to make a
connection which might benefit your business.

3. Communication, on all levels, is the key to making customers happy, no

matter where they are located. Once you have started to conduct business in
a market, invest in learning a little of the language. Whilst you might not
carry out your negotiations in, say Polish, it will go a long way if you are able
greet people, tell them your name and exchange a few pleasantries in the
local tongue.

Plan how you are going to communicate with overseas contacts once you
are home. If your business has several employees, decide who will be
responsible for overseas business, give them any required training and
explain how you will have to give your overseas customers exceptional
service to keep them. Nobody likes hassle and long distance hassle is even
worse.

4. Understand the real costs of doing business in your overseas market. Many
overseas contracts are thrown to the wind after a few months of what looks
like successful business, because the real costs were overlooked when the
deal was done.

This is a really bad move for a company, because not only are they wasting
all the investment which was made in winning the business in the first place,
but they are also demonstrating to the market that they have no
commitment. Once this has happened they are unlikely to be able to get back
into the market at a later date.

Before entering into a deal, consider everything – special packages,

translation and reprinting costs of sales materials, cost of overseas trips
(including additional costs incurred because you are not at your desk),
currency exchange and bank charges, cost of chasing bad debts, overseas
freight, insurance, customs charges, cost of breakages, wrong delivery,
returns……the list is endless. Assume the worst will happen, and if it doesn’t
you will make extra profit.

5. Finally, the key to successful long term overseas business is commitment. In

order to have that commitment, you need to have a vision for what you want
to achieve in 5, 10 and 20 years from now.

It is not a tenable position to be a long term, long distance exporter. Either

the local competitors will at some point oust you from the market by fixing
whatever problem allowed you into their back yard in the first place, or if
there is no local competitive product, somebody will start making it or
sourcing it from somewhere nearer than you.
 So if this is you, make a plan at the outset to get involved in local
manufacturing, when a set of market and sales criteria have been fulfilled.
And then work towards it, not underestimating the length of time and
bureaucracy which can be involved in investing in some markets.

As a long term short distance supplier, especially in the EU, you will
experience a different problem. You are very likely to suffer from increasing
competition from cheaper sources, especially the Far East. Plan at the outset
how you are going to deal with that without letting your customers down.
Many people shy away from exporting or doing business overseas. It can seem fraught with risk,
dangerous, difficult to control. In the extreme it really can be all of these things. But it can also
be exciting, a huge opportunity and very profitable. And for many businesses, especially those
involving manufacturing, you simply cannot ignore the opportunity or the threat of overseas
markets and suppliers.

So here they are, in summary, the Five Golden Rules of Successful

Overseas Business:

Approaches to International Sourcing

By Robi Bendorf, C.P.M.
(The following is the basis of the feature article in September 1998 issue of Purchasing Today)
With ever increasing global competition and demands for continuous cost improvement, today's purchasing
management is being challenged with the question, "Are we buying from the best place in the world?" Depending on
your company's internal resources, skill sets, and long term strategies there are many ways to obtain the answer. In
this article we will discuss the advantages and disadvantages of the following five most common methods that US
companies use to approach international sourcing:
• US Sales Contacts of Foreign Suppliers
• US Global Sourcing Companies
• Overseas Sourcing Representatives
• Direct to Suppliers
• International Procurement Office (IPO)
US Sales Contacts of Foreign Suppliers
US Sales Contacts of Foreign Suppliers abound in the U. S. and exist in all traditional Supplier forms including
Sales Representatives, Agents, Distributors, Importers, Direct Sales Offices, Trading Companies, Brokers etc. We
distinguish them from other global sourcing approaches in that they are undisputedly working on behalf of the
Supplier. Our approach to them is essentially the same as traditional US Supplier relationships and this of course is
their greatest advantage, since they generally make buying from overseas extremely simple. They generally handle
all communications, logistics, import, contractual, and pricing issues on behalf of the foreign Supplier to the point
that the US Purchaser may not even know the name of the foreign Supplier.
Sparing the Purchaser from dealing with the many issues we will discuss later in the Direct Approach, is of course a
great advantage, particularly if the Purchaser is limited in resources and skill sets, however we should point out the
disadvantages. Based on their knowledge of the US market, Sales Contacts of Foreign Suppliers will base prices, not
so much on the overseas production cost, but on what the US market will bare thereby often depriving the you of
significant savings opportunities. There is of course the added cost of the US sales operation that must be included
in the price and rarely will the Purchaser be notified of the positive impact of currency exchange rates on the cost.
This is a particularly important issue presently since the Dollar has strengthened significantly against most major
currencies in the last 12 months. One Purchaser was extremely upset to find out that their US Distributor for
pipefittings coming from Italy had not passed on the 11% savings resulting from the more favorable US Dollar to
Lira exchange rate which had occurred in 1997. And finally, although in some cases the Purchaser can insist on
dealing directly with the foreign Supplier, usually the Supplier will require the Purchaser to place orders and
communicate through the US Sales Contact.
US Global Sourcing Companies
Purchasers can take advantage of the capabilities and experience of US Global Sourcing Companies. As in the case
of many areas in international business, this segment is not well defined so that Purchasers can find these Sourcing
Companies having numerous classifications. Whether they are called Trading Companies, Third Party Sourcing,
Importers, Brokers, Global Search or Sourcing Companies, they are distinguished from US Sales Contacts of
Foreign Suppliers by the fact that they represent the Purchaser and not the Supplier.
The advantages of using the US Global Sourcing Company approach can be summarized by stating that they can
makes buying internationally as simple as buying form the Supplier across the street. Usually they provide the
following services:
• Determine items suitable for global sourcing
• Locate and develop Suppliers
• Negotiate pricing
• Determine logistic and import costs
• Coordinate formal evaluation process
• Place and administer Orders
• Handle communications & Translation
• Administer Quality Program
• Accept financial risk
• Handle currency issues
• Pay the Supplier
• Administer logistics and importation process
• Pay freight, duty, insurance, Broker and other import costs
• Act as the Importer of Record
• Resolve disputes
Because US Global Sourcing Companies have "been there, done that" many times, utilizing them for international
sourcing can frequently speed-up the global sourcing process, improve the potential for success, reduce the amount
of internal sources required, and eliminate the need for the development of internal global sourcing capabilities. This
would apply not only to the initial global sourcing effort, but also to the ongoing global procurement activities. The
Purchaser also has the advantage that most, if not all, of the initial search cost is borne by the Sourcing Company
and if insufficient savings are obtained, then the Purchaser has no further exposure.
The major disadvantages of using US Global Sourcing Companies for global sourcing fall under the categories of
increased price, reduced control, and the failure to develop internal capabilities that may be essential to maintaining
competitiveness. Increases in price vary widely depending on the type of Sourcing Companies utilized, their
relationship with the Supplier, the relationship with the Purchaser, annual volume from the Purchaser, and the
services required. Generally, Sourcing Companies who supply all the above services for made to print items, will
charge between 7 to 20% over their direct costs (goods, freight, duties, insurance, broker, etc.), not including
inventory carrying cost. Although this can appear high, for many Purchasers the Sourcing Companies fee is a good
investment when compared to the cost of developing in-house expertise, lost or delayed savings opportunities
because of lack of expertise, or the cost of moving through the learning curve.
Reduced control must be taken into consideration when using a US Global Sourcing Company. Most Sourcing
Companies will have formal agreements with both the Purchaser and the Supplier to insure their continued
involvement for, if not the life of the project, at least a 3 to 5 year period. This makes it extremely difficult to
remove the Sourcing Company if they do not perform or if the Purchaser wants to go direct to the Supplier on
additional items. Although Sourcing Companies do not usually restrict direct communication between Purchaser and
Supplier, as a practical matter, most communications flow through the Sourcing Company. As a result, the
beneficial exchanges between Purchaser and Supplier personnel who have specific product knowledge may not
occur, and product or process improvements may be missed.
US Global Sourcing Companies are generally used to obtain the advantages already noted and as a result the
Purchaser will most likely continue or increase their dependency on Sourcing Companies since there will be little or
no impetus to develop global sourcing capabilities in-house. The Sourcing Company basically becomes the
Purchaser’s international purchasing department and as a result the Purchaser is limited to the basic country,
product, and Supplier focus of the Sourcing Company. As noted by Donald L. Wineman, C.P.M., president of
Marston Group in Asheville, NC, US Global Sourcing Companies tend to be pretty specialized so the Purchaser has
to make sure that there is a good "fit" in product knowledge. Another issue presented by Ken Gallier, President of
WTC Services in Pittsburgh, Pa, is that since Sourcing Companies are usually focus on just one or a few countries,
opportunities in other parts of the world are not explored; nor are products considered by the Sourcing Company that
cannot easily bare the Company's price adder and still offer savings to the Purchaser.
Overseas Sourcing Representatives
Overseas Sourcing Representatives (OSR) can be a valuable resource in the Purchaser's efforts to determine the best
value in the World. They are based in and usually are citizens of the target country who have extensive knowledge
in purchasing, the capabilities of the local Supplier base, and acting as buying representatives for Foreign
Purchasers. They range in size from one-person operations to companies with large staff's with numerous
departments specializing in specific commodities. They routinely provide the following services:
• Understanding the Purchaser’s requirements
• Guidance in Selecting viable opportunities
• Translating
• Finding and qualifying potential Suppliers
• Helping potential Suppliers understand Purchaser's requirements
• Obtaining Quotes
• Negotiations with Suppliers
• Arranging for evaluation visits by Purchaser and escorting Purchaser while in country
• Insure order entry
• Resolve Issues
• Facilitate communications
• Expedite for delivery
• Resolve any quality issues
• Handle Shipping
• Orders can be placed on OSR who will place on Supplier
• OSR may make payment to Supplier
• OSR may perform or arrange for inspection
• OSR may take full quality and financial responsibility
Just like US Global Sourcing Companies, OSRs can greatly speed-up and improve the success rate of international
buying projects. Although it is not like buying across the street, since the Purchaser must communicate
internationally and usually handles all import details, the OSR does give the Purchaser what amounts to an
experienced purchasing department in that country. Since most OSRs work on commission paid by the Purchaser,
the Purchaser does not incur a cost unless the OSR comes up with a good Supplier used by the Purchaser. This is
both good and bad news, since the OSR will not continue to support the Purchaser's Global Sourcing efforts unless
there are financial successes for the OSR along the way.
Finding the best Supplier in a country is usually made easier by using an OSR since they know the reputations of
the Suppliers and are more likely to find the small obscure Suppliers who often offer the greatest values. Another
advantage confirmed by many veteran international Purchasers is that OSRs can be invaluable in negotiations since
they know the customs, culture, and the objectives of the Supplier in ways not known or easily understood by the
Purchaser. OSRs also have the ability to make in country visits by the Purchaser much more productive since they
handle the logistics and have reduced the potential Suppliers to only those that they know have a chance to be
qualified. And a final advantage is the ability of many OSR's to provide technical expertise and perform or arrange
for quality inspection.
The major disadvantage in using an OSR is that they will add 5 to 20 % to the direct material cost. As in the case of
the US Global Sourcing Company, often this may be money well spent. Most OSRs will agree to a sliding scale of
commission depending on the annual activity with the Purchaser and the number of services being performed.
Although there are many potential OSRs in each country, their capabilities and performance vary widely so that
Purchasers have to exercise a great deal of due diligence in the selecting process. Additionally OSRs are usually
good in just one country or in some cases good in only one major city, so that if an area such as Asia is targeted, the
Purchaser will have to select OSRs for each targeted country. Since OSRs may also be limited in product expertise,
specializing in stamping, castings, or electronics for example, Purchasers having varied product categories to source
may to do well to have multiple OSRs.
The same control issues noted above for the US Global Sourcing Companies applies to OSRs as well. Purchasers
most also be concerned that the Supplier may be paying a finders fee or sales commission to the OSR. Formal
agreements between Purchaser and OSR usually specifically prohibit this, but veteran international Purchasers
admit that it is difficult to confirm compliance with this provision. For Purchasers who are not committed to long
term global sourcing strategies, or have limited resources to devote to global sourcing activities, the OSR approach
should be considered.
Direct
With today's improved communications and the availability of high quality Suppliers all over the World, many
Purchasers deal directly with the Supplier in the foreign location without the use of any third party. According to a
survey reported in Purchasing (April 97), 62% of those who source overseas, use the Direct approach. When
considering whether or not to use the Direct Approach, Purchasers most first understand that all the services
identified above as being provided by US Global Sourcing Companies and OSRs, will have to be provided by the
Purchaser in the Direct Approach. This means that the following skill sets will have to exist or be developed by the
Purchaser for maximum success in International Sourcing:
• Targeting Countries
• Locating Suppliers in targeted countries
• Selecting suitable products
• International RFQs
• International and country specific business practices
• Understanding the foreign Supplier's, capabilities, expectations, and needs
• International terms & conditions
• Dispute resolution
• International negotiations
• Qualifying Suppliers internationally
• Communications
• Understanding cultural differences
• International travel
• Inspection at foreign locations
• Minimizing risk
• Payment methods
• International transportation, insurance, & ICC Incoterms
• Import process, regulations & duties
 • Country specific export regulations
• Currency exchange
• International order administration & overseas expediting
• Packaging for international shipments
• Foreign and US Government issues
In addition to the above skill sets, the Purchaser most also have available the financial and human resources to carry
out the Global Sourcing Process (see "Implementing Global Sourcing", 83rd Annual International Purchasing
Conference Proceedings). These resources often involve the need for additional people and considerable monies for
travel, research, training, qualification and approval.
For most Purchasers, the decision to go Direct should be based on the expected volume of international purchases,
the commitment to long-term international sourcing strategies and the internal resources available. These were the
criteria used by a Midwest manufacturer, where both a long-term international strategy was wanted and sufficient
resources to develop in-house capabilities were available. Based on an initial analysis, 174 “A" parts with annual
activity of $56 million were selected for global sourcing consideration. Preliminary savings analysis suggested that
savings of 28% of the total parts cost might be available. This savings estimate was based on the lower labor and
overhead costs found overseas and did not include the additional costs that would be added by using a 3rd party. As
stated above a third party could be expected to add 5 to 20 % to the overseas purchased price or an annual cost of
between $4 million to $11 million if all items where purchased overseas and through a third party. Assuming that
approximately 1/4 of the potential items where purchased overseas and through a 3rd party, would still result in
added cost of $1 million to $2.8 million for the 3rd party involvement. This amount is far in excess of the $300,000
to $400.000 estimated for the Company to perform global sourcing directly. Based on this analysis, the Purchaser
decided to use the Direct approach in order to gain the advantages of greater control, development of internal
capabilities, avoiding the country preferences of 3rd parties, and obtaining lower total material cost.
IPO
Having an International Procurement Office (IPO) is "actually" having the Purchaser's own Procurement Operation
located overseas. An IPO is owned and operated by the Purchaser, staffed with the Purchaser's employees and does
sourcing only for the Purchaser. According to the survey referenced above, 8% of those that do source overseas, do
so through an IPO.. The best IPOs have not only experienced buyers, but engineers, quality and production
personnel as well. IPOs while providing all of the services defined above for the OSR, also gives the following
advantages to the Purchaser over the OSR:
• No 3rd party markups
• Dedicated overseas resource with no other customers or priorities
• Direct in-country Purchaser interface with the Supplier
• Development of long-term in-country relationships with Government and Business community
• Better communications by direct interface with Purchaser's Engineering, Production, and Quality groups
• Reduces Purchaser's need for foreign travel
• Better in-country quality and engineering Support
• Greater flexibility to coordinate with other of Purchaser's overseas entities such as Sales Offices,
Manufacturing Plants, Joint Ventures, etc. to obtain advantages in administrative cost, taxes, currency,
human resources, import/export status, logistics, etc.
With all the valuable services provided by IPOs and the above advantages, why do not all international Purchasers
use them? The major reasons are that they are costly and challenging to operate, usually difficult to staff, and add to
the Purchaser's head count. Although expenses vary from country to country, office space, travel, and
communications cost are usually much higher overseas than in the US. According to Dick Lock, Principal of
Global Procurement Group, successful IPO expense rates are about 5% at the $10 to $15 million per year of IPO
volume and 1 to 2 % at over $100 million. Since Dick and other IPO experts strongly recommend that IPOs be
staffed by local people, finding and retaining the 4 to 5 high quality loyal employees is a major challenge for IPOs
and sending over expatriates is usually too expensive. Another issue is how the IPO is to be funded; Purchaser's
general business expense, markups on IPO volume to the Purchaser, or variations of both? Even with an IPO, the
Purchaser must still develop import capabilities. These issues notwithstanding and because of their many
advantages, IPOs should be considered when there is sufficient annual volume to cover expenses, a long-term
commitment to the country or region, and the Direct Approach is not providing the expected results.

Procurement definations

Approaches to International Sourcing

By Robi Bendorf, C.P.M.
(The following is the basis of the feature article in September 1998 issue of Purchasing Today)
With ever increasing global competition and demands for continuous cost improvement, today's purchasing
management is being challenged with the question, "Are we buying from the best place in the world?" Depending on
your company's internal resources, skill sets, and long term strategies there are many ways to obtain the answer. In
this article we will discuss the advantages and disadvantages of the following five most common methods that US
companies use to approach international sourcing:
• US Sales Contacts of Foreign Suppliers
• US Global Sourcing Companies
• Overseas Sourcing Representatives
• Direct to Suppliers
• International Procurement Office (IPO)
US Sales Contacts of Foreign Suppliers
US Sales Contacts of Foreign Suppliers abound in the U. S. and exist in all traditional Supplier forms including
Sales Representatives, Agents, Distributors, Importers, Direct Sales Offices, Trading Companies, Brokers etc. We
distinguish them from other global sourcing approaches in that they are undisputedly working on behalf of the
Supplier. Our approach to them is essentially the same as traditional US Supplier relationships and this of course is
their greatest advantage, since they generally make buying from overseas extremely simple. They generally handle
all communications, logistics, import, contractual, and pricing issues on behalf of the foreign Supplier to the point
that the US Purchaser may not even know the name of the foreign Supplier.
Sparing the Purchaser from dealing with the many issues we will discuss later in the Direct Approach, is of course a
great advantage, particularly if the Purchaser is limited in resources and skill sets, however we should point out the
disadvantages. Based on their knowledge of the US market, Sales Contacts of Foreign Suppliers will base prices, not
so much on the overseas production cost, but on what the US market will bare thereby often depriving the you of
significant savings opportunities. There is of course the added cost of the US sales operation that must be included
in the price and rarely will the Purchaser be notified of the positive impact of currency exchange rates on the cost.
This is a particularly important issue presently since the Dollar has strengthened significantly against most major
currencies in the last 12 months. One Purchaser was extremely upset to find out that their US Distributor for
pipefittings coming from Italy had not passed on the 11% savings resulting from the more favorable US Dollar to
Lira exchange rate which had occurred in 1997. And finally, although in some cases the Purchaser can insist on
dealing directly with the foreign Supplier, usually the Supplier will require the Purchaser to place orders and
communicate through the US Sales Contact.
US Global Sourcing Companies
Purchasers can take advantage of the capabilities and experience of US Global Sourcing Companies. As in the case
of many areas in international business, this segment is not well defined so that Purchasers can find these Sourcing
Companies having numerous classifications. Whether they are called Trading Companies, Third Party Sourcing,
Importers, Brokers, Global Search or Sourcing Companies, they are distinguished from US Sales Contacts of
Foreign Suppliers by the fact that they represent the Purchaser and not the Supplier.
The advantages of using the US Global Sourcing Company approach can be summarized by stating that they can
makes buying internationally as simple as buying form the Supplier across the street. Usually they provide the
following services:
• Determine items suitable for global sourcing
• Locate and develop Suppliers
• Negotiate pricing
• Determine logistic and import costs
• Coordinate formal evaluation process
• Place and administer Orders
• Handle communications & Translation
• Administer Quality Program
• Accept financial risk
• Handle currency issues
• Pay the Supplier
• Administer logistics and importation process
• Pay freight, duty, insurance, Broker and other import costs
• Act as the Importer of Record
• Resolve disputes
Because US Global Sourcing Companies have "been there, done that" many times, utilizing them for international
sourcing can frequently speed-up the global sourcing process, improve the potential for success, reduce the amount
of internal sources required, and eliminate the need for the development of internal global sourcing capabilities. This
would apply not only to the initial global sourcing effort, but also to the ongoing global procurement activities. The
Purchaser also has the advantage that most, if not all, of the initial search cost is borne by the Sourcing Company
and if insufficient savings are obtained, then the Purchaser has no further exposure.
The major disadvantages of using US Global Sourcing Companies for global sourcing fall under the categories of
increased price, reduced control, and the failure to develop internal capabilities that may be essential to maintaining
competitiveness. Increases in price vary widely depending on the type of Sourcing Companies utilized, their
relationship with the Supplier, the relationship with the Purchaser, annual volume from the Purchaser, and the
services required. Generally, Sourcing Companies who supply all the above services for made to print items, will
charge between 7 to 20% over their direct costs (goods, freight, duties, insurance, broker, etc.), not including
inventory carrying cost. Although this can appear high, for many Purchasers the Sourcing Companies fee is a good
investment when compared to the cost of developing in-house expertise, lost or delayed savings opportunities
because of lack of expertise, or the cost of moving through the learning curve.
Reduced control must be taken into consideration when using a US Global Sourcing Company. Most Sourcing
Companies will have formal agreements with both the Purchaser and the Supplier to insure their continued
involvement for, if not the life of the project, at least a 3 to 5 year period. This makes it extremely difficult to
remove the Sourcing Company if they do not perform or if the Purchaser wants to go direct to the Supplier on
additional items. Although Sourcing Companies do not usually restrict direct communication between Purchaser and
Supplier, as a practical matter, most communications flow through the Sourcing Company. As a result, the
beneficial exchanges between Purchaser and Supplier personnel who have specific product knowledge may not
occur, and product or process improvements may be missed.
US Global Sourcing Companies are generally used to obtain the advantages already noted and as a result the
Purchaser will most likely continue or increase their dependency on Sourcing Companies since there will be little or
no impetus to develop global sourcing capabilities in-house. The Sourcing Company basically becomes the
Purchaser’s international purchasing department and as a result the Purchaser is limited to the basic country,
product, and Supplier focus of the Sourcing Company. As noted by Donald L. Wineman, C.P.M., president of
Marston Group in Asheville, NC, US Global Sourcing Companies tend to be pretty specialized so the Purchaser has
to make sure that there is a good "fit" in product knowledge. Another issue presented by Ken Gallier, President of
WTC Services in Pittsburgh, Pa, is that since Sourcing Companies are usually focus on just one or a few countries,
opportunities in other parts of the world are not explored; nor are products considered by the Sourcing Company that
cannot easily bare the Company's price adder and still offer savings to the Purchaser.
Overseas Sourcing Representatives
Overseas Sourcing Representatives (OSR) can be a valuable resource in the Purchaser's efforts to determine the best
value in the World. They are based in and usually are citizens of the target country who have extensive knowledge
in purchasing, the capabilities of the local Supplier base, and acting as buying representatives for Foreign
Purchasers. They range in size from one-person operations to companies with large staff's with numerous
departments specializing in specific commodities. They routinely provide the following services:
• Understanding the Purchaser’s requirements
• Guidance in Selecting viable opportunities
• Translating
• Finding and qualifying potential Suppliers
• Helping potential Suppliers understand Purchaser's requirements
• Obtaining Quotes
• Negotiations with Suppliers
• Arranging for evaluation visits by Purchaser and escorting Purchaser while in country
• Insure order entry
• Resolve Issues
• Facilitate communications
• Expedite for delivery
• Resolve any quality issues
• Handle Shipping
• Orders can be placed on OSR who will place on Supplier
• OSR may make payment to Supplier
• OSR may perform or arrange for inspection
• OSR may take full quality and financial responsibility
Just like US Global Sourcing Companies, OSRs can greatly speed-up and improve the success rate of international
buying projects. Although it is not like buying across the street, since the Purchaser must communicate
internationally and usually handles all import details, the OSR does give the Purchaser what amounts to an
experienced purchasing department in that country. Since most OSRs work on commission paid by the Purchaser,
the Purchaser does not incur a cost unless the OSR comes up with a good Supplier used by the Purchaser. This is
both good and bad news, since the OSR will not continue to support the Purchaser's Global Sourcing efforts unless
there are financial successes for the OSR along the way.
Finding the best Supplier in a country is usually made easier by using an OSR since they know the reputations of
the Suppliers and are more likely to find the small obscure Suppliers who often offer the greatest values. Another
advantage confirmed by many veteran international Purchasers is that OSRs can be invaluable in negotiations since
they know the customs, culture, and the objectives of the Supplier in ways not known or easily understood by the
Purchaser. OSRs also have the ability to make in country visits by the Purchaser much more productive since they
handle the logistics and have reduced the potential Suppliers to only those that they know have a chance to be
qualified. And a final advantage is the ability of many OSR's to provide technical expertise and perform or arrange
for quality inspection.
The major disadvantage in using an OSR is that they will add 5 to 20 % to the direct material cost. As in the case of
the US Global Sourcing Company, often this may be money well spent. Most OSRs will agree to a sliding scale of
commission depending on the annual activity with the Purchaser and the number of services being performed.
Although there are many potential OSRs in each country, their capabilities and performance vary widely so that
Purchasers have to exercise a great deal of due diligence in the selecting process. Additionally OSRs are usually
good in just one country or in some cases good in only one major city, so that if an area such as Asia is targeted, the
Purchaser will have to select OSRs for each targeted country. Since OSRs may also be limited in product expertise,
specializing in stamping, castings, or electronics for example, Purchasers having varied product categories to source
may to do well to have multiple OSRs.
The same control issues noted above for the US Global Sourcing Companies applies to OSRs as well. Purchasers
most also be concerned that the Supplier may be paying a finders fee or sales commission to the OSR. Formal
agreements between Purchaser and OSR usually specifically prohibit this, but veteran international Purchasers
admit that it is difficult to confirm compliance with this provision. For Purchasers who are not committed to long
term global sourcing strategies, or have limited resources to devote to global sourcing activities, the OSR approach
should be considered.
Direct
With today's improved communications and the availability of high quality Suppliers all over the World, many
Purchasers deal directly with the Supplier in the foreign location without the use of any third party. According to a
survey reported in Purchasing (April 97), 62% of those who source overseas, use the Direct approach. When
considering whether or not to use the Direct Approach, Purchasers most first understand that all the services
identified above as being provided by US Global Sourcing Companies and OSRs, will have to be provided by the
Purchaser in the Direct Approach. This means that the following skill sets will have to exist or be developed by the
Purchaser for maximum success in International Sourcing:
• Targeting Countries
• Locating Suppliers in targeted countries
• Selecting suitable products
• International RFQs
• International and country specific business practices
• Understanding the foreign Supplier's, capabilities, expectations, and needs
• International terms & conditions
• Dispute resolution
• International negotiations
• Qualifying Suppliers internationally
• Communications
• Understanding cultural differences
• International travel
• Inspection at foreign locations
• Minimizing risk
• Payment methods
• International transportation, insurance, & ICC Incoterms
• Import process, regulations & duties
• Country specific export regulations
• Currency exchange
• International order administration & overseas expediting
• Packaging for international shipments
• Foreign and US Government issues
In addition to the above skill sets, the Purchaser most also have available the financial and human resources to carry
out the Global Sourcing Process (see "Implementing Global Sourcing", 83rd Annual International Purchasing
Conference Proceedings). These resources often involve the need for additional people and considerable monies for
travel, research, training, qualification and approval.
For most Purchasers, the decision to go Direct should be based on the expected volume of international purchases,
the commitment to long-term international sourcing strategies and the internal resources available. These were the
criteria used by a Midwest manufacturer, where both a long-term international strategy was wanted and sufficient
resources to develop in-house capabilities were available. Based on an initial analysis, 174 “A" parts with annual
activity of $56 million were selected for global sourcing consideration. Preliminary savings analysis suggested that
savings of 28% of the total parts cost might be available. This savings estimate was based on the lower labor and
overhead costs found overseas and did not include the additional costs that would be added by using a 3rd party. As
stated above a third party could be expected to add 5 to 20 % to the overseas purchased price or an annual cost of
between $4 million to $11 million if all items where purchased overseas and through a third party. Assuming that
approximately 1/4 of the potential items where purchased overseas and through a 3rd party, would still result in
added cost of $1 million to $2.8 million for the 3rd party involvement. This amount is far in excess of the $300,000
to $400.000 estimated for the Company to perform global sourcing directly. Based on this analysis, the Purchaser
decided to use the Direct approach in order to gain the advantages of greater control, development of internal
capabilities, avoiding the country preferences of 3rd parties, and obtaining lower total material cost.
IPO
Having an International Procurement Office (IPO) is "actually" having the Purchaser's own Procurement Operation
located overseas. An IPO is owned and operated by the Purchaser, staffed with the Purchaser's employees and does
sourcing only for the Purchaser. According to the survey referenced above, 8% of those that do source overseas, do
so through an IPO.. The best IPOs have not only experienced buyers, but engineers, quality and production
personnel as well. IPOs while providing all of the services defined above for the OSR, also gives the following
advantages to the Purchaser over the OSR:
• No 3rd party markups
• Dedicated overseas resource with no other customers or priorities
• Direct in-country Purchaser interface with the Supplier
• Development of long-term in-country relationships with Government and Business community
• Better communications by direct interface with Purchaser's Engineering, Production, and Quality groups
• Reduces Purchaser's need for foreign travel
• Better in-country quality and engineering Support
• Greater flexibility to coordinate with other of Purchaser's overseas entities such as Sales Offices,
Manufacturing Plants, Joint Ventures, etc. to obtain advantages in administrative cost, taxes, currency,
human resources, import/export status, logistics, etc.
With all the valuable services provided by IPOs and the above advantages, why do not all international Purchasers
use them? The major reasons are that they are costly and challenging to operate, usually difficult to staff, and add to
the Purchaser's head count. Although expenses vary from country to country, office space, travel, and
communications cost are usually much higher overseas than in the US. According to Dick Lock, Principal of
Global Procurement Group, successful IPO expense rates are about 5% at the $10 to $15 million per year of IPO
volume and 1 to 2 % at over $100 million. Since Dick and other IPO experts strongly recommend that IPOs be
staffed by local people, finding and retaining the 4 to 5 high quality loyal employees is a major challenge for IPOs
and sending over expatriates is usually too expensive. Another issue is how the IPO is to be funded; Purchaser's
general business expense, markups on IPO volume to the Purchaser, or variations of both? Even with an IPO, the
Purchaser must still develop import capabilities. These issues notwithstanding and because of their many
advantages, IPOs should be considered when there is sufficient annual volume to cover expenses, a long-term
commitment to the country or region, and the Direct Approach is not providing the expected results.
Procurement The complete action or process of acquiring or obtaining personnel, materiel,
services, or property from outside a military service by means authorized in pertinent directives.
More specifically, the action or process of acquiring or obtaining materiel, property, or services
at the operational level, for example, purchasing, contracting, and negotiating directly with the
source of supply.
Read more: http://www.answers.com/topic/procurement#ixzz1C7l1UQfl

Procurement can be defined as the purchase of merchandise or services at the optimum possible
total cost in the correct amount and quality. These good and services are also purchased at the
correct time and location for the express gain or use of government, company, business, or
individuals by signing a contract.
The process of acquisition of goods or services required as raw material (direct procurement) or
for operational purposes (indirect procurement) for a company or a person can be called
procurement. The procurement process not only involves the purchasing of commodities but also
quality and quantity checks. Usually, suppliers are listed and pre-determined by the procuring
company. This makes the process smoother, promoting a good business relationship between the
buyer and the supplier.
The synonyms for procurement, which are gain, purchase, buy, and acquire, can throw light on
the meaning of procurement. The process of procurement may differ from company to company,
and a government institution may have a slightly different procurement process compared to a
private company.
Procurement can also be simply defined as the procedure in which goods or commodities are
bought when prices are low. Procurement is advantageous if the goods are bought in bulk. E-
procurement is another method in which the electronic media is used for acquiring or purchasing
goods. Everything is processed electronically, from the search for the right bidder to the delivery
and payoff.
DEFINATIONS OF RISKS

Currency risk is a form of risk that arises from the change in price of one currency against
another. Whenever investors or companies have assets or business operations across national
borders, they face currency risk if their positions are not hedged.
• Transaction risk is the risk that exchange rates will change unfavourably
over time. It can be hedged against using forward currency contracts;
• Translation risk is an accounting risk, proportional to the amount of assets
held in foreign currencies. Changes in the exchange rate over time will render
a report inaccurate, and so assets are usually balanced by borrowings in that
currency.
The exchange risk associated with a foreign denominated instrument is a key element in foreign
investment. This risk flows from differential monetary policy and growth in real productivity,
which results in differential inflation rates.
For example if you are a U.S. investor and you have stocks in Canada, the return that you will
realize is affected by both the change in the price of the stocks and the change of the Canadian
dollar against the U.S. dollar. Suppose that you realized a return in the stocks of 15% but if the
Canadian dollar depreciated 15% against the U.S. dollar, you would make a small loss.
When a firm conducts transactions in different currencies, it exposes itself to risk. The risk
arises because currencies may move in relation to each other. If a firm is buying and selling in
different currencies, then revenue and costs can move upwards or downwards as exchange rates
between currencies change. If a firm has borrowed funds in a different currency, the repayments
on the debt could change or, if the firm has invested overseas, the returns on investment may
alter with exchange rate movements — this is usually known as foreign currency exposure.
Currency risk exists regardless of whether you are investing domestically or abroad. If you
invest in your home country, and your home currency devalues, you have lost money. Any and
all stock market investments are subject to currency risk, regardless of the nationality of the
investor or the investment, and whether they are the same or different. The only way to avoid
currency risk is to invest in commodities, which hold value independent of any monetary
system.
Currency risk has been shown to be particularly significant and particularly damaging for very
large, one-off investment projects, so-called megaprojects. This is because such projects are
typically financed by very large debts nominated in currencies different from the currency of the
home country of the owner of the debt. Megaprojects have been shown to be prone to end up in
what has been called the "debt trap," i.e., a situation where – due to cost overruns, schedule
delays, unforeseen foreign currency and interest rate increases, etc. – the costs of servicing debt
becomes larger than the revenues available to do so. Financial restructuring is typically the
consequence and is common for megaprojects.[1]