The Background Of The Transportation Issues

Published Date: 02 Nov 2017

The companies have been forced by increasing global competition to devise and pursue international purchasing strategies that hinge on reducing prices and optimizing quality, fulfillment, production cycle times, responsiveness and financial conditions. As a result, purchase management has turned to improve globalizations with information technologies to support companies’ globalization processes. When the companies doing global source, there are some issues which should be faced by them to challenge and overcome. This paper will indicate three current issues which are transportation, e-procurement and supplier selection and development.

With the rapid increasingly developments of competition, most companies gradually improve their each function or part of supply chain. The purchasing is one of the most important business functions in the whole supply chain. Recently, purchasing has been changed continuously due to globalization, information technology and management philosophies. According to Eui and Holweg (2013), the globalization phenomenon has induced a considerable shift in manufacturing and supply chain strategies across many industry sectors. In the initial stage, most companies would consider global sourcing due to low-cost sourcing for other countries in order to achieve a cost advantage and acquire a competitive price. For some companies, this is still the main goal till now. However, true global sourcing is considerably more complex and has a more strategic objective. Thus, global sourcing has been widely concerned during the latest years because the increasing number of businessman would be aware of keeping competitive and thrives so that companies have to carry more value at lower costs. Global Sourcing has become a transformational lever that can empower businesses to take on new competition as well as develop new markets.

Many researches indicated the definition of global sourcing. Carrier (2012) indicated that the global sourcing means the purchasing companies only focus on get the lower labor or products costs from other countries in the earlier phase to achieve a cost leadership in the market so that they can beat their competitors. Nevertheless, as mentioned by Robert and Monczka (2005), the companies need to coordinate and restructure the processes, sources from all over the world so global sourcing was quite complex to implement. However, from a long-term strategic perspective, global sourcing can lead to a dramatically more competitive position and visible financial alternatives, but there are some current issues we have to consider and evaluate before the companies can implement the global sourcing strategy. It is almost impossible for the companies implementing global sourcing to avoid the issues of transportation, e-commerce and supplier selection and development.

Three current issues and their implications in Global Sourcing

Transportation Issues:

As known to all, one of the most important benefits in global sourcing could be saved costs for many companies because they can get the materials or finished products at a lower unit price so that they even consider global sourcing as a logical extension of their domestic make-or-buy tactical decision. As mentioned by Curtin (1987), external sourcing of products could reduce costs by 50 percent of the given cost in most cases. However, Chunnan and Yue (2009) indicated that the companies could not ignore transport costs and duty rate when implementing global sourcing. In global sourcing, the management of international logistics is absolutely an essential and key procedure.

Logistics in global sourcing refers to plenty of additional problems such as transportation delays, border-crossing procedures and longer inventory management. (Bradley, Thomas, Gooley, & Cooke, 1998). Similarly, Tony (2004) mentioned that there are some greater variability may result from sourcing globally, such as shipping schedules, customs practice, strikes, storms at sea all of which require greater co-ordination of the supply chain. For example, if lead time is variable, the organization can compensate to ensure the supply to maintain through the inventory. Although supply managers could rely on change other mode of transportation like airfreight to compensate for time delays, there are some additional inventory carrying costs and transportation costs incurred as a consequence of global sourcing should be added to the cost of purchase along with freight and administrative costs to evaluate the purchase decision.

In addition, the purchasing supervisor would face trouble due to the lack of complete logistics knowledge in low cost countries when they are implementing global sourcing. Nowadays, there are greatly improvements of logistics management in developed countries. On the other hand, underdeveloped countries lack of using the most advanced technology experience, and unfamiliar with the high standard requirement such as sequence deliveries combined with Just-In-Time; electronic data interchange communications and vendor-managed inventory solutions. (Cho & Kang, 2001,542-561). These capabilities of supply chain management are important in determining how much benefits a company can derive from global sourcing. Furthermore, low-grade infrastructure of logistics in developing countries influences the efficiency of global sourcing. For example, if a company plans to purchase materials or finished products from China, they have to consider the logistics capability in China. Although there is obvious improvement of transport infrastructure in China, it is not yet as developed by European or American standards. This is because transportation infrastructure did not develop at the same pace as international trading. In addition to that, some unqualified vehicles and drivers also cause problems of logistics. Although these troubles are being mitigated, they do have an effect on supply chain performance of enterprises sourcing from every point in China.

To avoid this problem happened, before making the contract, the company should evaluate the situation of supplier’s location which they want to choose to do the global sourcing, and then they should do cost analysis in order to analyze whether they should do global sourcing because sometimes it is not cheap. For example, an import department can provide a cost analysis by gathering all charges incurred on an import and providing a complete breakdown of costs. The company should look to the agreed Incoterm as to who has ownership of what transaction (such as freight and insurance) and at which location. If the company currently are procuring product form a foreign supplier who is delivering the shipment to destination and absorbing all associated costs, the company should review the breakdown of the unit price total the supplier charge it. Compared the costs, the company could know whether the costs are higher or lower than provided by the imported department. Next, the companies could put suitable INCOTERM into the contract in order to manage or control easily. Moreover, one of the useful solutions could be that the utilization of 3PL, or third-party logistics, plays an important role for the companies which are implementing global sourcing strategy. Also, we note that this shows immaturity in the development of a global sourcing strategy. In a company that is employing global sourcing effectively, logistics should be coordinated and managed by an in-house team.

2.2 E-procurement

Electronic procurement systems represent an important development for the purchasing process, offering benefits to the organization through purchase process efficiency gains and price reductions, enhanced collaborative relationships and significant opportunity for improving the internal service and statues of the purchasing function (Osmonbekov, Bello & Gilliland, 2002).

E-procurement is the generic term applied to the use of integrated database systems and wide area network communication systems in part or all of the purchasing process. The procurement process encompasses the initial need identification and specification by users, through the search, sourcing and negotiation stage of contracts and order placement and on to include mechanisms that register receipt, trigger payment and support post-supply evaluation.

E-procurement implementations have increased in both reach and scope, with more organizations implementing systems that span the whole enterprise, encompassing a greater range of procurement functions and activities. However, whilst progress has been made a number of challenges still remain. None of the respondents who had implemented e-procurement reported major or significant benefits. Moderate benefits were realized with respect to improve supply chain integration, reduced employee overhead and improved supplier sourcing e-procurement has been identified as an area of B2B e-commerce where IS-enabled transformations of business processes and practices are likely to yield significant benefits.

2.2.1 Cost Efficiency

One of the key themes in the existing literature on e-procurement has been concerned with the economies of information in particular the realization of cost improvements achieved as a result of transactional and process efficiencies. These efficiencies arise through greater opportunity for lower prices from suppliers; from the reduction in process activity needed to complete the total ‘requisition to payment’ process; through the increased speed of the procurement process and better decision making as a result of improved management information. The lure of cost efficiencies has been a major catalyst for the adoption of e-procurement and it has been widely contended in this body of literature that e-procurement implementation will have considerable implications for the design of the procurement process. However, it was contended by Lancioni, Smith and Olivia (2000) that the precise nature of these process changes was empirically unclear. Recently, Yen and Ng (2003) carried out a case study investigation of electronic commerce implementation providing a useful comparison of pre- and post-e-commerce procurement process performance. They support the claims from prior literature that such changes deliver process efficiencies. In addition to the three categories of efficiency improvement mentioned above, they highlighted four additional sources of cost benefit:

- Reduction in costs arising as a result of ‘digitizing’ catalogues,

- Reducing errors in order transmission,

- Reductions in inventory, and

- Reductions in suppliers’ marketing costs.

Consequently, improved economies of management information are considered to be a major catalyst for reducing purchase prices through greater transparency of market prices and lower search costs. This observation is supported in the practitioner and general management literature where there is a plethora of anecdotal case evidence to support the view that electronic procurement is a far more efficient and reliable method for the requisition to payment process than preceding manual and semi-automated processes.

Externally, Carr and Smeltzer (2002) found that increased use of information technology between buyer and supplier did not improve levels of trust between buyer and seller, although Ellram and Zsidisin (2002) found that close buyer-supplier relationships had a strong positive impact on the adoption of e-procurement. E-procurement itself could not be considered to deliver improved levels of trust, but it has been found that e-procurement transactions are more likely to be established first between close trading partners in high trust relationships (Malone, Yates & Benjamin, 1989). Since longitudinal research is required to fully explore how buyer-seller relationships develop under e-procurement, relatively little literature exists on this topic-although Archer and Yuan (2000) supports the view that increased use of e-procurement and inter-organizational systems will enhance opportunities to build closer and more effective customer-supplier relationships over time.

2.2.2 Solution

The main routes for achieving clear accountable cost savings on purchases were through three main mechanisms for external cost efficiency: Consolidation of purchase specificationsï¼›Reducing the number of suppliersï¼›Improved compliance with existing contracts.

Through reduction in the variety of alternatives available for users to select, the opportunity to negotiate discounted prices had been a ‘significant’ benefit. Improved management information had enabled consolidation of supply to fewer providers and increased user awareness of the ‘approved’ suppliers for each purchased item.

Most of the organizations reported that compliance with existing contracts had been one of the major difficulties they had encountered prior to e-procurement implementation. E-procurement adoption had significantly improved compliance due to the ease of access for users to contracted supplies. Moreover, it is widely accepted that greater accessibility and ease of use were significant catalysts in ‘encouraging’ users to conform to process.

For the internal cost efficiency, finance systems integration is a good choice. Finance systems integration was an important determinant of system selection or system design. This also had a direct impact on the level of process savings and the nature of the system rollout. Most of the large central government departments stated that their choice of e-procurement provider had been determined by their current or intended choice of finance system provider. Integration between purchasing and finance systems was seen as the most critical constraint for the selection of system.

2.2.3 Benefits of E-Procurement

The potentials of e-Procurement have already been proven in a number of studies (Andersen, 2001). According to these studies, e-Procurement enables companies to decentralize operational procurement processes and centralize strategic procurement processes as a result of the higher supply chain transparency provided by e-Procurement systems.

Typically, a company's procurement function is subdivided into strategic and operational processes since activities and priorities in these two areas are entirely different. Supplier management, the pooling of purchase requisitions and procurement-oriented product development are tasks which are typically assigned to strategic procurement. Prior to e-procurement, strategic procurement often had to deal with administrative routine work as well, such as individual transactions, converting purchase requests into purchase orders or ensuring the correct allocation of invoices received. Strategic aspects are frequently neglected in the process, with the buyer having little influence over the choice of suppliers and the purchased products. The use of Internet technologies in procurement is aimed at realizing faster and more efficient operational procurement processes which bypass the purchasing department and enable those people to concentrate on more strategic tasks. In e-procurement, requesters directly search for and select products in electronic catalogs which are authorized and negotiated by strategic procurement in advance.

2.3 Supplier selection and supplier development

When executing the strategy global sourcing, most companies usually face the difficult in selecting suppliers and managing the relationship with them. Even though the suppliers outside the country are plenty, selecting the right one is totally not easy. It is not convenient like searching the suppliers in domestic because of the difference from technology, culture, distance, etc. After establishing the global supply base, the mission is not over but it lead to another task, supplier relationship management. There is no more type of the arm’s length relationship but the long term relationship. To manage well suppliers in domestic is a difficult task to do but with the global suppliers this task is really a challenge.

2.3.1 Supplier Selection issue:

In order to have a competitive world class supply base, the first phase of sourcing, supplier selection, is always an important phase. Normally, there is no standard method to select suppliers. However the final objective of selection process is to reduce purchase risk and maximize overall value to the purchaser. The company must select the suppliers that can do business with an over extended period.

Although the theory seems so simple, the reality is a different story. The companies usually select the suppliers in domestic carefully with strict standards but act subjectively in selecting the offshore suppliers. They assume that the offshore suppliers can automatically satisfy a buyer’s performance requirements or expectations.

Instead of reducing cost is the main reason that companies apply global sourcing, companies do not calculate the hidden costs carefully when choosing the offshore supplier over a domestics one. For instance, Handfield, et al (2011) showed a case that the suppliers in China may offer the lowest price for manufacture but there are still hidden costs that include shipping costs (10 – 15 percent), warranty costs (4 – 7 percent), and travel/ coordination costs (1- 3 percent). After all, companies must ask themselves how much the significant total cost difference exists between the domestic and the offshore supplier.

Another issue that company must consider is the supplier’s technical capabilities. With the support of internet, searching the potential suppliers is no more difficult thing to do as long as the suppliers are in the database. However, when companies do sourcing in developing country with the low technology infrastructure, they must accept the fact that there are suppliers which can do the job but do not have equal technology to communicate or to do business in the global level. The question is set that whether the companies are willing to cooperate with these suppliers to do the business. If companies are willing to invest to upgrade or transfer the technology to the suppliers, they could gain the benefits from the potential suppliers in the future. Cheap does not mean good. Most companies are looking for the supplier outside the country for prior reason that is reducing cost. With bidder system, companies may easily find a suitable supplier with proper offered price. However, behind the low price, there are many uncover things that may harm the benefit as well as the reputation of company. Most companies expect the low prices which is offered by the suppliers come from the efficient production. Unfortunately, in developing countries, this is not always true. Because the technology of these countries is not developed, the manufacturers usually have one favor option to reduce cost is exploitation the labor or even using the sweatshop to do job. According to research of Johan Norberg (2003), Nike is a typical example of using the sweatshops outside USA. This event used to make Nike suffered by the customers when they refused to purchase what are made by exploited children.

Last but not least, the intellectual property protection is the most important thing that every company must be concerned with when doing global sourcing. Companies must evaluate that whether patents and proprietary technology are safe with this supplier and what legal system the suppliers expect to follow. For example, as Jack Perkowski (2012) mentioned that China is now well known for the efficient production with low cost. However, the intellectual property laws are not consistently enforced. This can make companies suffered because their products are probably counterfeited.

To avoid the issues, companies must execute a complete evaluation to the suppliers before selecting them. There are three main criteria: cost or price, quality and delivery. These three factors of performance are generally the most obvious and most critical areas the affect the purchaser. Moreover, the purchaser must pay a visit to the facility of supplier to ensure the collected information from the supplier is true. In order to audit the supplier thorough, it is necessary to form a cross – functional team in which there are experts in quality, engineering capabilities, and manufacturing techniques.

2.3.2 Supplier development issue:

Whether with domestic or global suppliers, the strategic sourcing process does not end when a contract is signed. The purchaser must continuously monitor the performance of suppliers based on predetermined and agreed – upon criteria such as quality, delivery performance, and continuous cost improvement. In order to be more competitive in global market, companies must have world class supply base by developing the potential suppliers. According to Michiel Leenders (1965), supplier development is any activity undertaken by a buyer to improve a supplier’s performance or capabilities to meet the buyer’s short and long term supply needs. There are many activities in supplier development, which Krause (2008) recommended, such as: sharing technology, providing incentives to suppliers for improved performance, promoting competition among suppliers, providing necessary capital, and directly involving its personnel with suppliers through activities such as training and process improvement. However, there are still some barriers that obstruct the development of suppliers, especially with the oversea suppliers.

The first barrier is the lacking of commitment on the part of supplier’s management. Normally, when the trust is still weak in the beginning, suppliers do not want to put all of their effort to build up the relationship. Therefore, the buyers must make suppliers believe by do as what buyers say in the commitment. Sharing information and sharing benefits are practical activities that demonstrate the willing to have a long term commitment with suppliers.

The next issue is that supplier’s management agrees to improvements but fails to implement the proposals. This problem can be fixed by encourage the supplier through the supplier champions program. This means that a key supplier employee, who understands buyer’s expectations and demonstrates a high level of competence and credibility, will submit actions to buyers to prove that the supplier has indentified for improvement. Those actions can be process mapping, failure mode effects analysis, quality control planning, best – practices benchmarking, and process auditing.

Another barrier is that supplier lacks engineering resources to implement solutions and required information systems. In this situation, buyers can help supplier with direct support. For instance, Honda of America Manufacturing has invested a significant amount of resources in its supplier support infrastructure. On the other hand, buyers can help suppliers to set up the electronic data interchange (EDI) to overcome the information sharing problem. Because result of supplier development comes in long term, some suppliers are not convinced development will provide benefits to them. To solve this problem, buyers should show suppliers where they stand now. Through evaluation system, buyers can show suppliers areas of potential improvement. By allowing suppliers to view their performance relative to competitors’ performance, buyers can expect that suppliers will see the potential benefits of participating in supplier development activities.

The final barrier is that supplier lacks employee skill base to implement solutions. Buyer can solve this problem by establishing the training centers and providing human resource support.

In conclusion, with the issues existing in the supplier development, there are normally three ways to overcome these issues. The first one is using direct – involvement activities. This means companies often send their own expert personnel to assist suppliers. The second one is that companies use incentives to encourage suppliers to improve, largely by means of their own efforts. And the last one is using warning and penalties. Companies may pull back current business or withhold potential future business if a supplier’s performance is deemed unacceptable or if a lack of improvement is evident. Buyers may also use a competitive marketplace to provide a viable threat or incentive to a poorly performing supplier.

Conclusion

Through this paper, it has been found three current issues which are transportation, e-procurement, and supplier selection and supplier development when the companies are doing global sourcing. However, as mentioned by Chunnan and Yue (2009), some manufactures believed that logistics was not the most major problem when the companies was implementing global sourcing because some large companies have own logistics department to handle the whole logistics issues, even though in complicated global sourcing processes or some companies could make use of 3PL which can provide professional services to help them overcome the challenges from logistics in global sourcing. Moreover, e-procurement also has a certain extent to influence purchasing like cost efficiency whatever internal or external. The cost efficiency increased into greater opportunities through the lower price from the supplier's process activities through reducing purchasing process and increasing the speed, better decision results as a result of improved management information. In addition, the third issue is supplier selection and development which should be considered the technical capability of suppliers and how to make use of supplier improvement to achieve the competitive advantages. Overall, when the companies do global sourcing, they have to face these issues and find the solution to overcome or manage them to help the companies to achieve competitive advantages.