International procurement can give your company a wider variety of potential suppliers and provides more options for competition. Many international suppliers are happy compete competitively for international contracts.
Before making your supply chain global by jumping into international procurement there are some points to consider:
Large-scale manufacturing sites in operation often require a minimum order quantity (MOQ). If an international customer is only enquiring to purchase a few hundred stock units the factory may not be willing to supply such a low volume. With the set-up costs, running costs and material costs the manufacturer may have a MOQ of several thousand stock units.
The price per unit is also often affected by the volume – the more units are ordered the lower the cost per unit cost can be, which can be big advantage. This again is influenced by the set-up and running production costs. In large-scale operation once the manufacturing process has begun it can result in hundreds of units being manufactured per hour. So it is more efficient for the factory to produce several thousand units over a working day than a short production run. The buyer would need to balance their requirements with the suppliers minimum order quantities or volume discounts to obtain the best value for money.
Different quality standards and marks can be an issue when sourcing goods globally. The quality, safety standards and third party accreditations, such as ISO 9000, which are available for local companies may not be present in other countries. Global suppliers may operate under a different level of quality and safety standards. This can directly impact the ability to sell certain goods from other countries within a domestic market, which can be a significant disadvantage. With the the UK leaving the EU – the EU CE mark and the UKCA mark highlighted just such an issue.
Logistics can always be challenging when sourcing internationally. If suppliers are located in countries with limited transport links and transport options the movement of the goods can work out expensive. A large proportion of the cost of internationally sourced goods can be the actual shipping cost. Many international suppliers will offer their products on an ‘ex-works’ (EXW) basis, which is an international commercial term or incoterm, this may be a disadvantage depending on the local customs and export procedures. The ex-works incoterms state that the buyer is responsible for all shipping cost from the stated location. For example: ‘EXW Bangalore’ would mean the goods are available for collection from a facility based in Bangalore. The advantage of this method is the buyer can source his or her own shipping options.
The shipping cost is not the only cost when moving goods internationally. If the buyer is in Europe and the supplier is outside of Europe then customs formalities would also be required. This would include an export customs entry being completed in the supplier’s county and an import customs entry being completed when the shipment arrives. Depending on the country there may be import duty, excise duty, and tax to be paid on top of the shipping and customs costs. Import duty rates can vary widely depending on the type of goods and tax is paid on the value of goods, the shipping costs and the import duty.
The buyer of the goods would also need to check if there are any import quotas, restrictions or licenses required for the goods. If there are any this could add considerably to the cost of the goods. If the buyer is unfamiliar with international shipping and import procedures these additional charges can be quite a large and unexpected cost.
Sourcing internationally can provide an advantage if the supplier trades in a currency which is weak in comparison to the buyers currency. The US dollar (USD), the European Euro (EUR) and the British Pound (GBP) are the three main internationally recognised currencies. If the seller sells their product using a weaker currency, such as the Indian Rupee (INR), the buyer can gain a cost advantage because of the international exchange rate. XE.comrate the INR to GBP at 0.01021 so GBP 25,000 = INR 2,447,138.75.
The disadvantage of trading using international currencies is they can also become weaker as market conditions fluctuate. So an agreed purchase using a local currency can in fact end up costing more than expected if the exchange rate falls. It is due to this reason some international sellers choose to sell their products using either USD or EUR as to protect themselves and their buyers from potential currency fluctuations. Some suppliers may also choose to split their invoices into two different currencies depending on the product.
With international procurement communication can become an issue. Depending on the location of the international supplier in relation to the buyer there may be a time difference. This can greatly impact communication and cause delays as orders are processed and details exchanged, the larger the distance the larger the time delay in responding. In countries with different languages even communicating simple instructions can become a challenge. Often referred to as the ‘language barrier’ trying to confirm technical details of an order or shipment to a person in a non-native language can easily lead to misunderstandings, which can disadvantage both the buyer and seller.
The cost of international communication also used to be a disadvantage but not so much nowadays. International buyers and sellers can take advantage of Internet based messaging services such as Skype or Zoom a voice or video call can take place via any high-speed Internet connection.