The import strategy
The import Strategy
There are two different types of considerations for potential importers: procedural and strategic. Procedural considerations relate more to the rules and regulations of the customs office of a country. This was a key concern to John Robertson in the Sunset Flowers case, because he needed to determine the regulations for importing flowers from New Zealand to the United States.
Importation requires a certain degree of expertise in dealing with institutions and documentation that a firm may prefer to avoid. As a result, the importer may wish to work through an import broker, as John Robertson did. The broker obtains various government permissions and other clearances before forwarding necessary paperwork, such as a bill of lading, to the carrier that is to deliver the goods from the dock to the importer. The bill of lading serves as
a receipt for goods delivered to the common carrier for transportation, a contract for the services to be rendered by the carrier, and a document of title.7
The strategic considerations are more critical in the long run. In the case of the U.S. auto industry, the strong U.S. dollar in the early 1980s forced GM and other auto companies to consider sourcing more of their purchases abroad. They felt that they needed to do this to help achieve cost parity in competing with foreign manufacturers. Although it is easy to say that a company chooses a foreign over a domestic supplier because of a cheaper price, the reasons given for foreign sourcing are more complex than that.
Domestic companies often choose foreign goods over domestic ones for nine basic reasons: price; quality; unavailability of items domestically; faster delivery and continuity of supply; better technical service; more advanced
technology; a marketing tool (especially in conjunction with offset, where firms are required to import products from a country in order to be able to sell to consumers in that country); a tie-in with foreign subsidiaries (such as when GM decides to buy parts produced by its foreign operations in Korea or Japan); and competitive clout (to convince local suppliers to keep their prices low).8
In particular, the import of goods from related foreign operations is a key strategic issue. Part of the strategic advantage of the firm is its ability to recognize when it can capture more profits by establishing production facilities abroad to service local assembly or markets rather than subcontract these functions to outside firms. In 1986 almost 36 percent of U.S. imports and exports were transactions between U.S. firms and their foreign affiliates or parents. In a study of intrafirm transactions, it was found that the most important factor that caused firms to import intrafirm products was the technological intensity of the products; that is, the more technologically intense the product, the more likely the firm was to become involved in intrafirm transactions rather than to subcontract or purchase from the outside.9
In spite of the benefits, a number of problems can result from using foreign suppliers: location and evaluation of reputable vendors abroad; lead/ delivery time; difficulty of expediting delivery and direct contact with foreign personnel; political and labor problems; currency fluctuations; payment methods; quality of merchandise; rejects and the problem of returns; tariffs and duties; paperwork costs due to the extra documentation needed to clear goods from customs; legal problems; transportation; language; and cultural and social customs.10 Many of these problems are more problematic with purchases from external firms, because intrafirm transactions imply more control over quality of merchandise. However, problems that relate to the importing process, such as foreign exchange and customs documentation, are common to both types of sourcing.
The relative importance of the factors that companies must consider in developing a foreign sourcing strategy varies from industry to industry and country to country. But in some MNEs, such as electronics, instruments, and automotive, a wide variety of factors other than cost have influenced sourcing decisions in recent years.
The movement toward just-in-time inventory management (receiving components just as they need to enter the manufacturing process) has forced firms to focus more on quality, prompt delivery, low incidence of defects, and strong technical capacity.11 In some cases, this works against the selection of traditionally low-cost labor areas and forces firms to look to countries that can provide quality and reliability. Sourcing in countries such as Japan and Germany can solve the quality and reliability problems, but the strength of their currencies against the dollar during the latter half of the 1980s made them prohibitively expensive as a source of U.S. supply. As a result, firms are looking more to the NICs, such as Brazil and South Korea. As these countries increase their technical capability, they can combine cost factors with reliability to result in a strong source of supply.
There are two different types of considerations for potential importers: procedural and strategic. Procedural considerations relate more to the rules and regulations of the customs office of a country. This was a key concern to John Robertson in the Sunset Flowers case, because he needed to determine the regulations for importing flowers from New Zealand to the United States.
Importation requires a certain degree of expertise in dealing with institutions and documentation that a firm may prefer to avoid. As a result, the importer may wish to work through an import broker, as John Robertson did. The broker obtains various government permissions and other clearances before forwarding necessary paperwork, such as a bill of lading, to the carrier that is to deliver the goods from the dock to the importer. The bill of lading serves as
a receipt for goods delivered to the common carrier for transportation, a contract for the services to be rendered by the carrier, and a document of title.7
The strategic considerations are more critical in the long run. In the case of the U.S. auto industry, the strong U.S. dollar in the early 1980s forced GM and other auto companies to consider sourcing more of their purchases abroad. They felt that they needed to do this to help achieve cost parity in competing with foreign manufacturers. Although it is easy to say that a company chooses a foreign over a domestic supplier because of a cheaper price, the reasons given for foreign sourcing are more complex than that.
Domestic companies often choose foreign goods over domestic ones for nine basic reasons: price; quality; unavailability of items domestically; faster delivery and continuity of supply; better technical service; more advanced
technology; a marketing tool (especially in conjunction with offset, where firms are required to import products from a country in order to be able to sell to consumers in that country); a tie-in with foreign subsidiaries (such as when GM decides to buy parts produced by its foreign operations in Korea or Japan); and competitive clout (to convince local suppliers to keep their prices low).8
In particular, the import of goods from related foreign operations is a key strategic issue. Part of the strategic advantage of the firm is its ability to recognize when it can capture more profits by establishing production facilities abroad to service local assembly or markets rather than subcontract these functions to outside firms. In 1986 almost 36 percent of U.S. imports and exports were transactions between U.S. firms and their foreign affiliates or parents. In a study of intrafirm transactions, it was found that the most important factor that caused firms to import intrafirm products was the technological intensity of the products; that is, the more technologically intense the product, the more likely the firm was to become involved in intrafirm transactions rather than to subcontract or purchase from the outside.9
In spite of the benefits, a number of problems can result from using foreign suppliers: location and evaluation of reputable vendors abroad; lead/ delivery time; difficulty of expediting delivery and direct contact with foreign personnel; political and labor problems; currency fluctuations; payment methods; quality of merchandise; rejects and the problem of returns; tariffs and duties; paperwork costs due to the extra documentation needed to clear goods from customs; legal problems; transportation; language; and cultural and social customs.10 Many of these problems are more problematic with purchases from external firms, because intrafirm transactions imply more control over quality of merchandise. However, problems that relate to the importing process, such as foreign exchange and customs documentation, are common to both types of sourcing.
The relative importance of the factors that companies must consider in developing a foreign sourcing strategy varies from industry to industry and country to country. But in some MNEs, such as electronics, instruments, and automotive, a wide variety of factors other than cost have influenced sourcing decisions in recent years.
The movement toward just-in-time inventory management (receiving components just as they need to enter the manufacturing process) has forced firms to focus more on quality, prompt delivery, low incidence of defects, and strong technical capacity.11 In some cases, this works against the selection of traditionally low-cost labor areas and forces firms to look to countries that can provide quality and reliability. Sourcing in countries such as Japan and Germany can solve the quality and reliability problems, but the strength of their currencies against the dollar during the latter half of the 1980s made them prohibitively expensive as a source of U.S. supply. As a result, firms are looking more to the NICs, such as Brazil and South Korea. As these countries increase their technical capability, they can combine cost factors with reliability to result in a strong source of supply.
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