INTRODUCTION

International Procurement Operations (IPOs) are the nerve centers of decision-making for efficient global

procurement operations. Expansion into low-cost countries brings within the fold of an extended enterprise a

coalition of suppliers, buyers and logistics companies who can be more productive when they work in

concert. IPOs forge a network, whose members are initially tenuously tied to each other by their

transactions, into an interconnected global procurement network joined together by long-term relationships.

The several poles of decision-making local to a department, business unit or geography are merged into a

synchronized management process that spans the global procurement network.

The whole of a global procurement network is more valuable than the sum of its individual constituents.

Global procurement networks are more valuable when multiple redundancies are eliminated, real time

decisions become possible with greater visibility and communication between partners is bridged to ensure

that unanticipated costs are not incurred. IPOs reap these latent efficiencies in a global supply chain. The

business gains increase progressively as IPOs extend their initiatives from specific departments to

businesses across borders and finally to the whole of the supply chain. IPOs steer partners to integrate

technology, processes and communication systems so that the constituent enterprises, groups and

departments work as an intertwined extended enterprise. Their expertise in change management,

performance management and compliance enables seamless integration of the supply chain network.

Recent research by Accenture confirms a high rate of success achieved by IPOs; 70% of the companies

who have set them up report that they have met or exceeded their expectations1.

The difference that IPOs make is illustrated by the example of management of risks in an integrated

procurement network. When partners exist as silos, McKinsey found in a survey of a sample of enterprises

that two-thirds of them reported increased risks to their supply chains over the last five years. More than

eighty-percent of them are barely prepared to mitigate supply chain risks2. Experts agree that no individual

enterprise has the incentive to mitigate supply chain risks and they all have a tendency to “pass the buck” 3.

This is despite the fact that many of them have installed enabling technologies to gain visibility into global

supply chain networks. IPOs step in such a situation and make it clear that the “buck stops with them” and

ensure that action is taken to contain the damage from adverse events.

EVOLUTION OF IPOS

Enterprises, looking to benefit from international procurement, initially test the waters by outsourcing

commodity components that are not a part of their core business. The primary motivation for outsourcing, at

this stage, is labor arbitrage. Gains from lower labor costs are partially offset by higher transaction costs of

procurement from more distant sources and more so when several departments deal directly with suppliers.

IPOs become the single conduit for all transactions, consolidate information and processes internally and

negotiate with suppliers to keep procurement costs under control. These objectives can be achieved with a

virtual office with low overheads. Arm’s length transactional relationships with suppliers are adequate for

commodity procurement.

As they interact with suppliers overseas, IPOs learn more about their competencies. In time, they realize

that larger gains are possible from strategic sourcing including the core business of their clients. Entire

assemblies and products are outsourced. As business flows between partners, spread across the globe,

1 “Global Sourcing and Logistics: A roadmap for high performance”, Accenture. 2 “Disaster-proofing the supply chain” by Andrew K Reese, Supply and Demand Chain, August 6, 20073 As above in footnote no 2.

increase in volume so does the need for them to work in tandem. IPOs see a role in providing an array of

services to improve communication and collaboration among the members of the international procurement

network. Processes and technologies linking partners are streamlined for greater efficiencies. This is best

accomplished by a separate office with a charter and a steward to manage the international procurement

operations and a local office. The goal of IPOs is to reduce costs of all kinds---response time, cost of risk

and inventory costs.

Eventually, enterprises see an advantage in locating overseas closer to their suppliers as the locus of

manufacturing activity is centered overseas. Proximity brings with it informational gains such as a better

understanding of suppliers’ capabilities, risks and opportunities in the local business environment as well as

knowledge of local business practices. IPOs are incorporated as domestic companies to take advantage of

tax benefits, subsidies and other promotional programs available to local companies. Buying companies

have greater confidence in the ability of their suppliers and they decide to outsource entire product life

cycles. The local arm of the IPO becomes a recognized member of the local business community through

sustained networking in the community.

Emerging IPO Strategic Service Center Local control center

Strategy Global Purchasing Strategic SourcingOperational Excellence

Goals Reduce spend Reduce Total Costs Leverage local presence

Structure1.Virtual Office 2. Centralized decisions. 3.Rudimentary knowledge of trade4.Arm's length relationships

1.An independent office2.Decisions coordinated with local control offices.3.In-depth knowledge of trade4. Strategic partnerships

1. Physical location in supplying countries. Incorporated as a domestic company.2. Recognized in local business community.3. Relationships leverage local competencies.

Expected Benefit Lower Spend Lower opportunity costs Domicile gains.

Challenges Limited visibility internally.Control over global supply chain

1.Internal communication across locations.

2. Control of local subsidiary and business climate.

Change Management

1. Visibility into spend data.2. Aggregating internal data.3.Single interface with suppliers

1. Automation of processes and information across the supply chain. 2. Close-looped processes3. Vendor Managed Inventory

Product life cycle management systems and processes

Performance Management

Price and cost based metrics for assessing performance of suppliers.

Service Level Agreements: quantitative and qualitative metrics.

Financial performance of the local subsidiary.

Compliance Use catalogue for buying Compliance to global

processes.

Compliance to corporate policy and product life cycle

guidelines.

Realized Benefits

Price paid for procurement and overhead costs incurred on procurement are reduced.

1.Demand and supply matches2.Resilient supply chain3.Lower response time

1. Fiscal and other benefits for local companies.2. Management of local risks.3. Leverage local skills

EMERGING IPO

Strategy

An emerging IPO seeks to lower the expenditure incurred, as operating costs or purchase price, on

procurement.

Challenges

In the absence of a single international procurement operations office, individual departments procure

directly from suppliers overseas. When a company has several departments, each of them separately

procures goods from their preferred suppliers. The following are the consequences of this method of

procurement

The aggregate amount spent on international procurement is hard to estimate because

information is scattered in individual departments.

Multiple redundancies exist as the processes in individual departments, regions, IT systems,

types of products, etc are implemented without a common design and contribute to the

complexity of managing the supply chain4.

Individual departments place smaller size orders instead of bulk orders.

The negotiating power of buyers is weakened when they act independently.

It is not possible to compare the performance of suppliers when they place orders individually.

Altogether, the buyers don’t receive the most competitive prices and the operating costs of procurement are

high.

Solutions

Internal issues of managing information and processes take priority when buyers are purchasing

commodities from overseas suppliers. The following initiatives are representative of the solutions to expect.

Change Management :

Information: A single catalogue5, with an approved list of suppliers and verified prices, is

made available to buyers. IPOs consolidate spend data available with all departments. They

use spend data to negotiate deals with their suppliers.

Processes: are automated and a single platform is used for managing them internally; a

common B-to-B interface is created for interaction with suppliers.

Performance Management : cost and price based metrics are used to measure performance.

The availability of consolidated data as well as the catalogue helps to prepare benchmarks for

assessing performance.

Compliance : IPOs ensure that each department chooses suppliers from the recommended

list in the catalogue and pays prices suggested there.

Benefits

The level of spend is reduced as lower prices are negotiated with the suppliers, savings in operating costs

are realized as a single procurement office does all the buying and bulk orders are placed.

4 http://www.scmr.com/article/CA6406208.html5 http://www.scmr.com/article/CA6406208.html

Productivity gains and cost reduction is possible when processes linking partners are streamlined and

automated. Use of common processes and standardization can lower costs considerably. Air Products, for

example, realized 20% cost reduction in this way6.

SERVICE CENTER

Strategy

IPOs shift their focus from cost reduction to superior service across the global procurement network at this

stage. The services of IPOs are meant to ensure that all partners act in concert. A single global platform is

implemented for linking all partners. IPOs build bridges between partners to ensure communication and

collaboration between them. Long-term relationships of trust with suppliers underpin collaboration with the

buyers. The expected benefit at this stage is reduction of total costs including inventory costs, delivery time

delays and costs of disruptions in the global procurement network.

Challenges

The sprawling global supply chain needs to work harmoniously to maximize the benefit from its extension

into low-cost counties. As supply chains lengthen, the risk of a mismatch between demand and supply, time

delays and slippages in execution increase. IPOs have to drive suppliers to implement processes and

technologies that integrate the global supply chain. They have to reign in total costs by coordinating the

activities of partners across all businesses. The specific challenges of total cost reduction are

Matching demand and supply :

The risk of excess inventory in the supply chain are high as each partner in the

supply chain exaggerates demand to ensure adequate inventory for their

individual needs.

As the number of tiers in the supply chain increase, so does the number of

partners who exaggerate their demand. The mismatch between demand and

supply grows and the cost of holding unwanted inventory increases7.

When companies lower their inventories, they often find their costs from stock-

outs are higher.

Rapid change in the levels and patterns in demand on the one hand and

pervasive congestion in the ports and roads of emerging economies on the other

aggravate the problem of matching demand and supply. Recent research

confirms that the unanticipated costs incurred by non-integrated and semi-

integrated supply chains offset any gains from labor cost savings and only

integrated supply chains are able to benefit from globalization8. This is because

integrated supply chains are better able to respond to contingencies.

Reducing response time : Lags in responses to market signals and events increase total

costs. Enterprises need data in real time to respond to market changes and events. At a time

when as many as 89% of companies9 see new product and services launches as the most

6 “Effective Global Sourcing and Supply for Superior Results” by Robert M Monczka, Robert J Trent and Kenneth J Petersen, CAPS Research, 2006. 7 http://www.beergame.lim.ethz.ch/Bullwhip_Effect_Article.pdf8 “The China Rip Tide: Threat or Opportunity? Profiting from the Growing Supply-Chain Bottleneck”, by George Stalk Jr. and Kevin Waddell, June 2006. 9 “The challenge of complexity”, Deloitte,

important factor for increasing revenues, higher lead times can be expensive. When manual

processes pervade an enterprise, the responses are slow.

Risk managemen t: A holistic view of the status of execution is required to spot any

deviations from expected performance. This is contingent on close-loop processes. For

example, suppliers have to send back confirmations, within an agreed period of time, when an

order is placed and make specific commitments for delivery. The information needs to be

visible to all partners such as by posting it on a dashboard.

Solutions

The internal consolidation of information and processes is extended externally to all the partners in the

supply chain. IPOs provide a range of services that transform the global procurement network from a

labyrinth of discrete business units into a continuous supply chain. A common global platform for all partners

in the supply chain is the bedrock of an integrated supply chain network. Growing costs of unanticipated

delays, higher inventories or stock-outs and disruptions10 can be lowered with synchronization of activity

across the global supply chain network.

Change Management :

IPOs provide the leadership to shepherd partners into working within a common framework to

achieve the goals of the global procurement network. The role and status of the IPOs is

transformed by

Vesting greater authority to IPOs who become part of the senior management

team.

Assigning a mandate to IPOs to manage global processes.

Delegating stewardship of the supply chain to the Chief Procurement Officer with

a charter to control global processes. A survey of Deloitte Research found that

the masters of the management of complex supply chains are 50% more likely to

have one person oversee a supply chain network than their peers11.

Building a local presence for IPOs. They improve their understanding of local

business laws and taxes, trade rules and business practices. They also join local

business associations to blend in with the local community.

IPOs elicit co-operation from suppliers by

Building long-term relationships with partners

Defining common goals for constituent partners

Information: All partners in the network share information which is aggregated. The

processes of gathering and centralizing information are automated to make it available in real

time. Data on demand and supply and status of execution is made visible by displaying it on

a dashboard. A holistic view of the status of activity in the network provides actionable

intelligence which partners in the network can use to match demand and supply, respond

rapidly to mitigate risks and complete tasks concurrently to lower response times.

Processes: the processes linking partners are rationalized and automated to reduce cycle

time and productivity. All partners operate on a single platform.

10 “Effective Global Sourcing and Supply for Superior Results”, by Robert M Monczka and Robert J Trent and Kenneth J Peterson, CAPS Research, 2006. 11 “Unlocking the Value of Globalization”, Deloitte.

Performance Management : service level management with quantitative and non-quantitative

measures of performance. This ensures that cost reduction, for example, does not lower

customer satisfaction as stock-outs increase.

Compliance : suppliers adhere to the processes governing the global supply chain network.

Benefits: The implementation of global processes helps to reduce cycle time as information flows rapidly

between partners. According to a study conducted by A T Kearney, the processing of purchase orders and

requisitions, before they are sent to suppliers, alone account for 50% of the cycle time12. The processing

time can be reduced from as much as 30 days to less than a day13 with streamlining and automation of

processes.

The aggregation of information across the supply chain and its display electronically helps to respond rapidly

to adverse events. An example of how visibility enables companies to respond in real time to changes in

their business environment and gain long-term competitive advantage is the case of Nokia on the occasion

of the launch of a new generation of cell phones in March of 200014. The source of its chips was a plant of

Phillips NV located in Albuquerque, New Mexico which caught fire a few days before the delivery of the

order. Nokia’s managers sensed a delay when they looked at their computer screens. It was only after the

executives scrutinized the problem that they realized that the damage to the plant would delay shipments far

longer than anticipated. Other suppliers were not in a position to supply some of the critical components.

Nokia’s executives scoured over data on other Phillips’ factories and found other plants where the critical

components could be manufactured. They conferred with Phillip’s executives to press them to produce the

components in their other factories and were able to launch the new model of their cell phone in time. On the

other hand, Ericsson, who also procured its chips from the burned down plant, did not recognize the

magnitude of the problem; it lost market share for an extended period of time while Nokia gained.

LOCAL CONTROL CENTERS

Strategy

A local presence of IPOs in close proximity of sourcing countries becomes a compelling need at this stage.

The needs of a large number of suppliers clustered in sourcing countries are then better served. Their

numbers increase as entire product life cycles are outsourced. Depending on the size of the operations, the

local IPO could manage suppliers in a country or in an entire region such as South Asia.

Synergy in the workflows of partners, who constitute a supply chain network, sets the stage for effective

management of the supply chain from one end to another internally and externally. IPOs use their

knowledge of the region to increase efficiencies.

Opportunities in one country can be leveraged not only by the local unit but also globally. When threats

arise, they are managed not only locally but all along the supply chain.

As the business landscape of emerging countries is transformed by deregulation, IPOs have to find

opportunities for business growth locally and to keep track of risks inherent in the dynamic environment of

emerging economies.

THE CHALLENGES

Balancing the need for centralized strategic management and local autonomy becomes a major challenge.

Internal communications gets harder as the local subsidiary acquires a distinct character with its own

12 http://www.scmr.com/article/CA6406208.html13 http://www.scmr.com/article/CA6406208.html14 The description of the event was extracted from http://scm.ncsu.edu/public/risk/risk3.html

language and culture, business practices and time zone15. The constituent partners have to find a common

language for communications.

Optimization of supply chain from one end to another requires standardization of processes that are

dissimilar across countries. Sourcing countries have their own process management traditions, IT systems,

etc. Seamless integration of these systems involves substantial investment of effort. Nestle, for example

had to reduce the number of its data centers around the world from 100 to 416.

Global processes are required so that local opportunities and competencies can be leveraged for all units

within the company. One example of this is the case of Adidas which responded to the excitement over

Greece’s victory in a European championship by rapidly supplying its blue-and-white jersey to fans all over

Europe17. It was able to do so because it had the ability to synchronize production from its many contract

manufacturers.

When product life cycles are managed across borders, change happens at several levels and the chances

of clients and their suppliers adapting to change at a disparate pace are higher. This could mean, for

example, that client companies and their suppliers are using different versions of software and work at

cross-purposes. Recently, Airbus had to delay the launch of its state-of-art plane, the A380 super jumbo, by

two years and incurred losses in billions of dollars after errors occurred as a result of the use of different

versions of the CAD software in Germany and France.18

SOLUTIONS

Local considerations19 are of paramount importance in supply chain management at this stage. For example,

the IPO would have to find a way to adapt to the telecommunication infrastructure that may not be

sophisticated enough to build a network for real time communications.

IPOs provide more services to manage the gamut of product life cycle activities outsourced overseas; they

invest greater effort in selecting and developing more competent suppliers capable of offering higher value

services, ensure that global standards of quality are achieved and adapt to unique aspects of local

production methods. More knowledge of local business environment helps in due diligence of suppliers, risk

assessment and anticipating opportunities and threats.

The presence of IPOs locally helps to communicate the goals that the global strategy of the buying company

seeks to achieve. IPOs learn about the issues that would have to be addressed in order to implement global

processes. The local presence of an IPO and their networking within the community helps to gain knowledge

of reliable sources of supply, the pitfalls of the choices they make and the support they can find to solve

problems.

Change Management :

Information: data on the status of progress at each stage of the product life cycle is aggregated at

one point.

Processes: for ensuring that the activity at each stage of the product life cycle is synchronized.

When improvements are made in the processes, IPOs ensure that they are consistent across all

partners. IPOs help to ensure that processes across the extended enterprise change consistently.

Boeing, for example, updates software concurrently for all its suppliers four times a year. Suppliers

15 http://www.logisticsmgmt.com/article/CA6416244.html16 http://www.scmr.com/article/CA6444369.html17 http://www.scmr.com/article/CA6444369.html18 “PLM: Boeing’s Dream, Airbus’ Nightmare”, by Mel Duvall and Doug Bartholomew, Baseline, Feb 5th 2007. 19 http://www.oliverwyman.com/ow/pdf_files/MOTL-DifferencesGlobalSourcing.pdf

are offered incentives to make the changes in conjunction with the others20. Consequently, the

Dreamliner, Boeing’s answer to the Airbus’ A380, has gained an edge in the airline market.

Performance Management : the performance of the local IPO assessed by ROI metrics.

Compliance : adherence to guidelines for product life cycle management.

BENEFITS

IPOs located in the sourcing countries take advantage of tax benefits, government incentives and lower

pricing available to domestic companies. Closer relationships with suppliers help to evaluate their

competencies accurately and to take advantage of their unique skills. As emerging markets grow, it is also

possible to leverage the global supply chain to meet local needs.

An example of the impact a local organization can have in managing the risks of outsourcing is illustrated by

the experience of The Limited and Warner Bros after a currency crisis struck Asia in 1997 and disrupted

supplies. Exporters were unable to pay for imported materials when their currencies were unexpectedly

devalued. However, the supplies to The Limited and Warner Bros were not interrupted because they had

contracted with Li and Fung, a company that specializes in the management of supply chains in the East

Asian region. Li and Fung, with a supplier base of 4,000, have an agile enough supply chain to find

alternative sources of supply21 within the region when the need arises.

When entire product life cycles are managed offshore, the gains are higher not only in terms of lower costs

but also lower risk. Typically, each supplier absorbs the operating risk by incurring the non-recurring costs

associated with the assemblies they design and manufacture. Client companies can then afford to launch

more products.

Enabling Technology

The technology that underpins the solutions is a multi-enterprise platform for integrating the information

flows and processes across departments and enterprises. Business processes and information

management are automated from one end of supply chain to another.

20 See footnote 8. 21 “Robust Strategies for mitigating supply chain disruptions” by Christopher S Tang in International Journal of Logistics Research and Applications, 6th August 6, 2007, Taylor and Francis.