Discuss the problems associated with global sourcing.

Question

What will be an ideal response?

Answer 1

Answers may vary but could have elements such as the following: Inasmuch as lower price is the primary reason companies make foreign purchases, they may be surprised that what initially appeared to be a lower price is not really lower once all the costs connected to the purchase are considered. For purchases of capital goods such as manufacturing equipment, many U.S. buying organizations now use life-cycle costing to analyze purchasing decisions through the life of the purchased item, including trade-in or future estimated salvage value. Even on components, firms are increasingly including full costing, including the use of activity-based costing systems, to ensure that all the costs associated with foreign sourcing (e.g., transportation, insurance, increased inventory levels to insulate against delays in delivery) are fully recognized when they make purchasing decisions. It is essential that global sourcing decisions be closely linked to the organization's strategy and that explicit objectives for suppliers (such as delivery times and cost objectives) be defined and incorporated in contracts, ideally with incentives for meeting or exceeding them. Cross-company teams should also be developed in order to enhance the likelihood that best practices can be effectively shared between the organization and its suppliers, in order to avoid supply problems. The buyer must understand the terms of sale because international freight, insurance, and packing can add as much as 10 to 12 percent to the quoted price, depending on the sales term used. One disadvantage an importer should not have to face is an increase in price because the home currency has lost value as a result of exchange rate fluctuation. For example, if an American importer requires that the exporter quote dollar prices, the importer has no exchange rate risk. However, if the firm has a large volume of imports and the dollar is unstable, management may want a quotation in foreign currency. In that case, the chief financial officer of the importing company probably will protect the company from exchange rate risk by using one of the hedging techniques. Hedging has been used for many years by companies that operate internationally, particularly if their raw materials include one or more of the commodities traded on established commodities markets. In most cases, such hedging has been done not for speculative reasons but as a means of protecting the company from the risk of rapid price fluctuations. The emergence of e-procurement has also been accompanied by problems. E-procurement and electronic commerce as a whole cannot be isolated from the company's overall business system. Many early efforts at developing e-procurement systems have been made in isolation and have subsequently failed to deliver on their potential. Successful electronic commerce initiatives include connections to traditional systems for fulfilling procurement and other value chain activities, as well as considerations on how to manage the transition to new electronic approaches. The traditional functions of purchasing-supplier determination, analysis, and selection-still have to be accomplished before the actual purchasing via e-procurement. In most instances, a company may be able to use the Internet for quicker data acquisition about possible suppliers and generally from a much broader information base than was previously available in a timely manner. Ensuring that a supplier is selected that can meet all of the company's conditions for its raw material in terms of quality, delivery, price, and so forth, remains a challenge, particularly in a broadscale e-procurement network involving suppliers with which the company is not familiar. Suppliers located in emerging nations may also encounter difficulty in accessing and supporting sophisticated IT infrastructures, which can affect e-procurement performance. Security also is often a significant concern for e-procurement. For B2B electronic commerce to achieve its full potential, access to the company's internal systems from outside is critical. Companies are wary of opening up the details of their business-including pricing, inventory, or design specifications-to competitors, to avoid risking the loss of brand equity and margins. In addition, exposing internal business systems to access via the Internet can expose the firm to a wide range of potential security issues, such as unauthorized entry ("hacking") and fraudulent orders. Although extensive research and development efforts have been undertaken in encryption technology and other technology and processes to ensure integrity, much progress still remains to be achieved before these systems can be considered fully secure. Different country standards are also of concern in attempting to implement international e-procurement systems. Governmental concerns with potential anticompetitive effects of collaboration among competitors may also cause problems for industrywide B2B exchanges.