School of Engineering and Design Dissertation
Excerpt from Dissertation :
The last century has seen an increase in the level of international purchases which has been supported by the developments in transportation and technology. Goods can move faster than before with developments in logistics. The negotiation and forming contracts for purchase with companies and communicate with potential suppliers in distant countries is also easier than in the past with the internet and tools such as video conferencing and emails. This facilitates the use of international suppliers. However, other firms may choose local suppliers believing strategy will best suit their needs. Local suppliers may be able to provide where there is an increase in the transparency of the supply chain, less exposure to risks such as interruption and exchange rate risks and proximity may allow closer collaborative relationships to develop. Both procurement strategies are viable, to assess the advantages associated with each approach the procurement from international and local suppliers can be examined.
Advantages and Disadvantages in International and Domestic Procurement Alternatives
There are a number of advantages and disadvantages associated with international vs. domestic procurement. Some of the advantages of procuring items internationally include the following:
1. Availability of specific items,
2. Higher levels of product quality,
3. Use of advanced product and process technology,
4. Item price (Smith 2007, p. 118).
In addition, international procurement can provide a number of additional benefits including:
1. A wider range of potential items and vendors,
2. Further price improvement,
3. Direct access to new technologies,
4. Influence over quality,
5. Improved delivery service,
6. Meeting terms of off-set agreements,
7. Introducing greater competitiveness to domestic markets,
8. Gaining a knowledge of foreign markets, and
9. Exploiting tax and currency opportunities (Smith 2007, p. 188).
Global procurement can hence secure advantages in terms of availability, quality, delivery, technology and price for certain items. There can nevertheless be the problems dealing with remote suppliers. Communications with foreign vendors can be impaired by language, cultural differences, time zone differences and the use of different systems of measurement, leading to delays and misunderstandings. Buying from abroad may also involve increased freight costs, import duty and possibly customs delays. The need to pay in foreign currencies introduces both the uncertainty of not knowing what a future cost may be and also the risk of fluctuating costs; steps can be taken to mitigate against these after using stable currencies and by hedging and risk sharing, but such actions themselves can incur additional costs (Smith 2007, p. 118).
Beyond the foregoing, one of the main advantages associated with the purchase of materials or components from foreign markets is the potential to gain economically from comparative advantages; buying at a lower cost per unit compared to nearby suppliers (Lee and Wilhelm, 2010, p225). In developing and low cost countries such as China and India, there are lower wages and lower overheads which have the potential to reduce the overall cost of production. This may be passed on in lower prices. However, the decision will rest not only the price per unit but on the total cost associated with the foreign procurement, noting there are both benefits and risks to the practice (Kamann and van Nieulande, 2010, p. 65).
There are a number of different elements which will impact on total cost, which will differ depending not only on the good being produced, but on the country of origin which may supply that good (Kamann and van Nieulande, 2010, p. 65). These will include the type of good being sources, the complexity of its production, the amount of labor input in the production process and the length of the products lifecycle (Kamann and van Nieulande, 2010, p. 65).
Goods that are used in mass production, which are easy to produce and/or are high in terms of their associated of labor costs may be best acquired for suppliers in countries where there are low labor costs (Kamann and van Nieulande, 2010, p. 65). Where there are issues of time sensitivity the low labor costs may need to be combined with consideration of the relative proximity of the supplier. For example, a U.S. firm may choose to purchase from Mexico due to its closer geographic proximity rather than a more distant supplier in India. The issues of quality may also impact on the choice of country that may supply to a greater extent than the decision to buy locally or from a foreign country. Although there are some standardized
purchasing practices available for some specific equipment, there are less formalized processes available for other commodities and services (Schulte & Jackson, 2007, p. 55). According to Schulte and Jackson, for example, "Although it is not standardized, technology exists and can be 'procured' worldwide" [but] there is simultaneously a high level of customer service required in all markets, and a great deal of government intervention" (2007, p. 55).
Government intervention in international procurement practices is certainly not new, but it has become especially salient in recent years as more and more companies internationalize their operations. For instance, Warrilow (1999, p. 25) reports that, "Some governments use public procurement to foster specific social objectives such as developing small regional-based industry or providing support to enterprises employing disabled persons." Public procurement goals typically include the following considerations set forth in Table __ below.
Typical public procurement goals
Efficiency and nondiscrimination:
The aim of reaching an objective and transparent decision in the award of a contract is paramount. The possibilities of negotiating conditions with bidders are therefore restricted except in specific cases usually covered in the bid guidelines. Although it may be necessary to restrict negotiations with bidders, such a measure does not always serve the interests of economy and efficiency. Many professional procurement staff claim that it limits their professional powers of discretion and prolongs the contract award process. Furthermore it often prevents resourceful procurement staff from negotiating more advantageous conditions for their organizations. International agreements on public procurement increasingly provide for grievance procedures that permit dissatisfied bidders to object to contract award decisions and even claim damages.
Economy and narrow cost factors:
Because of the concern to achieve optimum objectivity and transparency, buyers sometimes neglect to incorporate those elements concerned with resource management in the tender document. For instance bid documents for capital equipment sometimes include no provision for spare parts, maintenance or option clauses to cover possible future orders for identical equipment. A consequence of this restriction is that price information for capital equipment, requested in tender forms, tends to be over simplified. There is no reason that tender forms should not request bidders to give a full and detailed price breakdown. Such information enables buyers to discover any price anomalies and provides them with a basis for negotiating conditions for subsequent orders, where open or selective tendering may no longer apply.
Domestic preference and other factors:
Excessive preferences for domestic industry over a long period could be detrimental to the principles of economy and nondiscrimination.
Competition and long-term relationships:
The principle of open competition without due regard to the notion of resource management can, in some instances, lead to diseconomies. This is particularly true in the case of state-owned enterprises engaged in manufacturing.
Efficiency in decentralization and integrity of process:
Experts have long debated the conflicting advantages and disadvantages of centralized and decentralized procurement systems. The desired efficiency gained by quick and effective decisions at a decentralized level may clash with the notion of accountability or transparency and the advantages of economies of scale. Protagonists of decentralization state that purchases required at a local level are much better handled by buyers employed in the same working environment as the technical users of those requirements. Others argue conversely that certain goods - especially those supplied from foreign sources - are more economically purchased by a centralized body. Governments should bear in mind a number of factors, such as:
* the degree to which the national public administration, served by a procurement service, is decentralized.
* the existence of a public procurement "culture" (i.e. knowledge and experience) at the central and local levels, backed by trained personnel.
* the existence of financial ceiling limits for local procurement entities.
* the types of products and services that can be purchased efficiently at the local level - at the right quality, at the right time and the right price - so that local procurement will be in harmony with the purchasing operations of the centralized procurement entities.
Source: Adapted from Warrilow, 1999, p. 25
The costs that are associated with transportation are also noted important; where goods are costly to transport this may reduce the overall level of comparative advantage and buying from a long distance supplier may become prohibitive. Goods which are suitable to be transported by sea, containing shipping options can provide some cost effective solution, with this method of transportation having one of the lowest costs when calculated by weight and distance. However, this is only suitable for goods that have a relativity…
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