Strategic Sourcing in Developing Countries

Spend Matters welcomes this guest article by Heather Towt of The Hackett Group.

The increased focus on strategic sourcing in response to ever-shrinking margins is not a phenomenon specific to the developed world. Throughout the developing world, companies in Latin America, Asia, the Middle East and Africa are shifting from transactional-based purchasing and tactical sourcing to a strategic sourcing model. While the goals of strategic sourcing (cost savings, improved performance, risk mitigation and improved supplier relationship management) remain the same across geographies, unique challenges arise when sourcing in developing countries. Besides the usual suspects of language barriers, differing cultural norms and complex financial issues, several additional challenges should be kept in mind when sourcing in a developing country.

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Currency Fluctuation

Exchange rate fluctuations among developed countries tend to occur gradually and in small increments. Moreover, most central banks in the developed world strive to meet inflationary targets, leading to much less volatility in core inflation. Not so in the developing world, which can see wild currency fluctuations and inflation rates approaching 20%. The hedging instruments used by developed countries to mitigate these factors are at worst unavailable and at best ineffective in the nascent banking systems of developing nations. Most suppliers will insist that contractual prices be denominated in the local currency, and that mandatory price reviews be triggered should inflation surpass a given level during the contract term.

Tariffs

Understandably, developing countries seek to protect their national interests as they strive to ascend new economic heights. In addition to statutes requiring that a certain percentage of inputs be bought locally, these protectionist efforts often manifest themselves in the form of high tariffs levied on goods entering the country. When the duties imposed on different classes of goods are clearly defined and consistently applied, the process of calculating total landed cost and thus evaluating potential suppliers is fairly straightforward. Oftentimes, however, tariffs are neither transparent nor uniformly imposed. In the worst cases, unscrupulous customs agents may impose “informal taxes” (a euphemism for bribes), which must be paid before the purchased goods can move into the country. These unplanned expenses can vary considerably, and they often lead to goods being trapped at the border for days, weeks or even months.

Infrastructure 

One aspect of strategic sourcing often taken for granted in developed countries is the ability to transport goods from supplier to purchaser seamlessly. Sound bridges, roads and tunnels, combined with reliable air and ground freight suppliers, provide for the worry-free movement of goods from point A to point B. In the developing world, on the other hand, poor infrastructure compounds the price of goods, with total landed cost often reaching multiples of unit price and savings from low-cost, distant suppliers being completely eroded. Inherent to many developing countries are also internal conflicts (such as political instability, disease and war), which significantly lengthen transit time and further inflate the fully landed cost of goods.

Government Regulation

All countries impose regulations that govern the way in which business is conducted within their borders. These controls, which vary widely based on region, political system and relative levels of economic development, must be adhered to in order to avoid fines, nullification of agreements and even potential legal action. Such statutes in developing countries tend to regulate, among other things:

  • RFP Process: some countries require that RFPs be published in local newspapers for a given period; others mandate that tenders be completed by hand and returned to the supplier in person; still others stipulate that a minimum number of responses must be received in order to conduct negotiations
  • Negotiations: certain countries prohibit the participation of foreign third parties in supplier negotiations (e.g., consultants working on behalf of the buyer); others require that negotiations be wholly conducted in the buying firm’s national language
  • Contracts: many countries mandate that contracts stipulate pricing in the local currency; others require formal government seals and/or signatures in order for contracts to be legally binding

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