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Globalisation White PaperProcurement - Challenges and Opportunities in a Global Marketplace

Contents

Globalisation ■ www.cips.org2

03 Executive Summary

04 Where it all began

05 Global economies make global businesses

06 More to globalisation than just cost-savings

08 Globalisation and the emerging markets

09 Risks and challenges of globalisation

12 Political unrest and globalisation

13 The future of globalisation and procurement

14 Secrets of success

15 Case Study

www.cips.org ■ Globalisation 3

This paper comes at a time when trade barriers have been significantly reduced; when internet usage providesincreasing, global flexibility and the world, as a whole, is shifting its main economic focus. In turn, this reportsubsequently examines the increased need for procurement professionals to engage in business activity on aglobal level, tracking the associated benefits and challenges involved.

Executive Summary

“When everything is connected...work flows to the placeswhere it will be done most efficiently and with the highestquality.”

While the concept of globalisationmay not be new, it is having achanging effect on business. Asmodern life allows for increasedprocurement mobility, ourunderstanding of globalisation,and what it really means,continues to be challenged.

It is crucial that procurementprofessionals address theirunderstanding and involvement inglobalisation if their business is tomaintain its competitiveness andeffectively compete against rapidlyemerging markets on both a longand short term scale.

By engaging in procurement on aglobal level, procurementprofessionals can quickly ensure amore stream-lined business, fromthe way materials are sourced tothe final distribution process.Additionally, the possibility toparticipate with an internationalwork-force that can source,develop and produce higherquality goods at a cheaper andfaster rate is dramaticallyincreased.

Although globalisation can help tobuild a business’ corporatereputation, this, in itself, is aprocess which must be carefullymanaged. For example, theincreasing media focus on issuessurrounding outsourcing, carbonmiles and ethical standards, has animmense impact on how closely abusiness’ participation inglobalisation is managed.

This paper also examinessubsidiary issues involved withinthe globalisation cycle. It is crucialthat businesses are aware of andcan quickly identify socio-political,environmental and economicpatterns. Monitoring thefluctuation of these patterns cansignificantly affect the stability of abusiness’ supply-chainmanagement, helping to identifypotential areas of change.

I believe that it is only whenprocurement professionals areaware of the benefits andchallenges associated withglobalisation that they can fullyunderstand that just as globalissues make a local difference,local issues can also make a globalimpact. This paper outlines thesechallenges and discusses ways inwhich businesses can maintainoptimum businesscompetitiveness effectively.

Gerry Walsh FCIPS, President, The Chartered Institute ofPurchasing & Supply


The world did not proclaim the dawn of globalisation the moment McDonald’s opened its doors in Beijing, orwhen Vietnamese factories reeled off their first Nike trainers. The term entered popular consciousness in the1980s, but people, their economies, religions and cultures were interacting long before that.

Where it all began

Centuries before the slow boats from China were filledwith cheap electronics and clothing, they carriedspices for the Roman Empire and tea for the Britishmiddle classes of the early 18th century. Spanish orPortuguese would not be spoken in South America if ithad not been for the influence of colonial powers inthe 16th century. Islam would not have made its wayto Africa without the region’s long trading history withthe Sinai Peninsula and Egypt.

Neither is globalisation a novel concept for today’sprocurement professional. The benefits of low-costcountry sourcing are well known to buyers who haveoutsourced back office functions or manufacturing tothe Far East.

Whilst the concept may not be new, in today’scorporate climate it is having a changing effect onbusiness. Some argue that globalisation is changingthe fundamental concept of the modern business.

This is because the world’s economies and societieshave never been so interdependent. Barriers that onceprevented the flow of work, capital and informationare falling away with the arrival of the internet andreduction of trade barriers. There is now plentiful andcheap mobile capital and easier access to aburgeoning global workforce.

It is now up to procurement professionals to see theirrole within this global business context and to take awider view. As Ian Davis and Elizabeth Stephensonfrom McKinsey pointed out in ‘Ten trends to watch in2006,’ not only will business developments shape thefuture corporate landscape but also macroeconomic,environmental and social issues.


A number of factors, over recent decades, have accelerated the move towards globalisation.

Global economies make global businesses

"Procurement professionals that continue to see China andIndia as the “globe” in “globalisation” risk cutting themselvesoff from opportunities elsewhere."

In 2003, Goldman Sachs predictedin its influential report, ‘Dreamingwith BRICs: The Path to 2050’, thatBrazil, Russia, India and China (orthe BRIC economies as they havesince become known) wouldtogether eclipse the riches of theG6 within 40 years. Workingtogether, China and India wouldbecome dominant global suppliersof manufactured goods andservices, and Brazil and Russia thesuppliers of raw materials.

If businesses in the new shrinkingpart of the world economy were tocompete, they needed to rethinkhow they worked on a global scale.

IBM is one company that hasadapted to meet the forces ofglobalisation. Speaking at theINSEAD Business School inOctober 2006, CEO SamuelPalmisano illustrated the impactthe internet, free trade, a globallabour force and a shift to aservice-based economy has hadon business. For the first time inhuman history, he said,“everything is connected”.

At this “historic inflection point”,he argued that a new model for themultinational business wasemerging.

The multinational’s developmentbegan, he said, with the“international” model in the 19thcentury. Back then, the companywas based in its home country, butsold and distributed its goodsthrough overseas offices. Thencame the “multinational” model ofthe 20th century, where a firmcreated smaller versions of itself incountries around the world. IBMSpain, IBM UK or IBM India wereall mini-versions of its head office,each with their own sales,procurement, HR, finance and ITfunctions.

But this model has now becomeredundant. He argues, it is bothexpensive and cumbersome toreplicate the business so manytimes, in so many countriesaround the world.

The next evolution of themultinational is the “globallyintegrated enterprise”. Rather thanhaving mini-versions dottedaround the globe, IBM has createdone global entity and then locatesoperations and functionsanywhere in the world based onthe right costs, skills, and businessenvironments. They have oneglobal supply chain and theydeploy their human capital as oneglobal asset.

“When everything is connected,”he said, “work flows to the placeswhere it will be done mostefficiently and with the highestquality.”


IBM currently has more than 43,000 employees in India. They also plan to increase investment from $2 billionover the last three years to nearly $6 billion over the next three. This investment is not about finding cheaperworkers, but using the expertise of the country’s labour force to undertake research and development, andwrite research and development software.

More to globalisation than just cost-savings

As IBM’s case demonstrates,offshoring is no longer just aboutcutting costs or sending the mostbasic jobs overseas. Savingsremain an important driver forglobalisation (Hackett Groupcalculated last November thatcompanies in the FT Europe 500could save a combined total of£32.3 billion per year (€48 billion)through offshoring) but there areother factors at play.

The 230 manufacturersinterviewed by EconomistIntelligence Unit (EIU) for KPMG’sreport ‘Globalisation andManufacturing’, said it was theavailability of skilled labour, notlabour costs that was of mostconcern to them.

Similarly, the 2006 OffshoringResearch Network Surveyconducted by Duke University’sFuqua School of Business andBooz Allen Hamilton, also reveals ashift in the rationale behindoffshoring. No longer is it aboutmoving jobs elsewhere, but about“sourcing talent everywhere”.

But it is not just the rich countries’universities or science parks thatare producing all the talent orinnovation.

As Demos explains in its 2007report, ‘The Atlas of Ideas’, US andEuropean pre-eminence ininnovation can no longer be takenfor granted. Growth in markets,increased state spending onresearch and expanding pools ofskilled labour are all contributing tothe growth of innovation incountries such as China, India andSouth Korea.

As the report highlights, Indiaproduces 2.5 million graduates ininformation technology,engineering and life sciences eachyear. And the number of engineersflooding the world market everyyear could treble by 2015.

Since 1999, China’s expenditure onresearch and development hasincreased by more than 20 per centeach year. In December 2006, theOrganisation for Economic Co-operation and Development(OECD) announced that China hadmoved ahead of Japan for the firsttime, to become the world’ssecond highest research anddevelopment investor after the US.

In 2006, Taiwan won 146international awards for productdesign including Japan’s GoodDesign Award, Germany’s iFdesign award and IDEA DesignAward in the USA.

As a result of this investment intoR&D, companies are not onlyhappy to pass manufacturing tothe Far East, but also productdesign. Dell for example nowdesigns its notebooks in Taiwanand desktops in China.

For procurement professionals,therefore, globalisation should notonly mean lower costs but alsonew products, new services, andbetter processes.

Additionally, given purchasers’experience in handlingrelationships and links throughoutthe supply chain, they are in thebest position to help theirbusinesses see global innovationas a source of collaboration, notcompetition.

As the authors of the Demos reportargue, more innovation in Asiadoes not mean less in Europe. Andalongside new sources ofcompetition, there will also be newopportunities for collaboration.


"Purchasers could be wise to take such a balanced approachto their purchasing decisions, mixing local with global supplywhere possible."


Procurement professionals that continue to see China and India as the “globe” in “globalisation” risk cuttingthemselves off from opportunities elsewhere.

Globalisation and theemerging markets

Last year, Professor RichardLamming, director of the Schoolof Management at the Universityof Southampton and one of CIPS‘Foundation’ Professors, urgedpurchasers to remember that low-cost country sources only remaincompetitive for two years.

Once a country has enjoyed theinitial influx of foreign investment,a local boom ensues. This forceswages to increase and employeeattrition rates to increase. Bearingthis in mind, procurementprofessionals need to be ready toswitch between countries readily.

The vast majority of respondentsto the EIU and Atradius report,‘Succeeding in second-tieremerging markets’, said they havemade investments in second-tieremerging markets. These includeVietnam and Indonesia in SouthEast Asia; Poland and Romania inEastern Europe; Mexico andVenezuela in Latin America; andSouth Africa and Nigeria in Africa.

The Asia Pacific region was theirtop choice for investment wherethey saw opportunities for low-cost labour and resources as wellas growth and expansion.

When considering offshorelocations, purchasers must factorin the availability of skills, labourcosts and technologicalinfrastructure. In the case ofmanufacturing, this shouldinclude the price of raw materialsand the location of the country.China may win on supply oflabour now, but could countries inAfrica with higher birth rates takeover in the future? Could Polandbeat the Far East given itsproximity to the UK and lack ofbarriers due to its membership inthe EU?

There are also the new spendingpowers of the world to consider.By setting up operations andforming ties with countries suchas India, companies also gainaccess to an emerging middle

class with a healthy appetite forgoods and financial services. Respondents to McKinsey’s 2006survey on business trends saidthat the most importantdevelopment to affect globalbusinesses over the next fiveyears will be the growing numberof consumers in emergingeconomies.


Taking a balanced approach and building a portfolio of sources will allow purchasers to hedge some of the risksthat are inherent in global supply, because when it comes to risks, there are many.

Risks and challenges ofglobalisation

First there is the damage to brand reputation sustainedas a result of using suppliers with unethicalemployment practices. Since the sweatshop scandals ofthe 1990s, companies have been laid bare toaccusations of child labour, low wages and horrificworking conditions in their suppliers’ factories. With thegrowing consumer and media interest in corporatesocial responsibility, this spotlight looks set to continue.

Many buying organisations now sign up to codes ofconduct, such as the Ethical Trading Initiative’s BaseCode of Conduct, that set out ethical principles theirsuppliers have to meet.

Purchasers are warned they cannot hide behind thesecodes and on-site audits, safe in the belief they aredoing the best they can to improve the conditions forworkers in their supply chains. Factories will continue tocheat on labour standards as long as buyers continue tolower prices and shorten lead times. Buyers need toreview the impact of their core decisions on theirsuppliers’ ability to meet their standards.

There is growing evidence that brands and their buyersare making steps in the right direction.

To protect Starbucks from some of the backlash it hasreceived from anti globalisation activists in the 1990s,the coffee retailer set about changing its buyingpractices to ensure farmers were fairly paid for theircoffee.

In 2004, they produced guidelines which becameknown as the Coffee and Farmer Equity Practices(C.A.F.E.).These set standards for producers which, ifachieved, guarantee them a premium price for theircoffee crop.

The guidelines cover environmental considerations(shade-grown and bird friendly crops), social issues(labour practices), economic transparency (ensuringeveryone is paid fairly) as well as quality. In order toqualify for a premium price commitment fromStarbucks, producers must provide independentverification that they meet the guideline requirements.

BT has won two CIPS Supply Management awards infour years for its work to improve corporateresponsibility in the supply chain. Since 2001 it hascarried out more than 2,000 supplier risk assessmentsof environmental and labour standards. Buyers are nowworking with 191 suppliers to improve their impact onthe environment and they are helping 148 suppliers toimprove working conditions for employees. Not onlydoes good practice pass between BT and the supplier, italso filters down the supply chain.

With suppliers dotted around the globe, buyers must beon the look out for everything from shortages, latedeliveries and supplier closings to weather changes andport strikes, as well as disruption from natural disastersor acts of terrorism. Local issues soon become global:consider the impact on supply routes of thecontamination of livestock through avian flu, or madcow disease.

"Climate change should also be on the radar...few companieshave considered the potential effects of a future shortage ofnatural resources."


Taking a balanced approach and building a portfolio of sources will allow purchasers to hedge some of the risksthat are inherent in global supply, because when it comes to risks, there are many.

Risks and challenges ofglobalisation continued

Climate change should also be on the radar. McKinseyargues in its article ‘Going from global trends tocorporate strategy’ that few companies haveconsidered the potential effects of a future shortage ofnatural resources.

Beyond a lack of energy, businesses should alsoconsider the potential impact, for example, of scarcity ofwater or deforestation. Which businesses will win andwhich will lose? Will large-scale shipping of waterbecome viable for the cargo industry, asks the report?Can biotechnology companies grow crops that requireless water or trees that grow faster?

Then there is the impact of debt and trade deficits, andcurrency fluctuations on global economics. Buyersshould consider the impact of a potential revaluation ofthe Chinese renminbi in reaction to trade imbalancesbetween China and the West. If such a move were tohappen, China could quickly become more expensiveto trade with.

Global supply chains also provide a healthy market forcounterfeiters. The Medicines and Healthcare ProductsRegulatory Agency announced in January it wasinvestigating twice as many cases of fake drugs as itwas five years ago.

An estimated £30 million worth of counterfeit electricalproducts reaches the UK each year, according toelectrical products trade body BEAMA Installation. Thisincludes products that could put lives at risk such asfake fuses, sockets, cables and surge protectors.

As they point out, many products from China gothrough the Middle East, where there are examples ofgenuine products being mixed with counterfeitproducts.

Buying organisations still frequently fail to protect theintellectual property rights of their productsmanufactured oversees.

As Ian Bremmer and Fareed Zakaria pointed out in‘Hedging Political Risk in China’ (Harvard BusinessReview, November 2006), many foreign corporationsmay pursue legal action to protect their patents.However, due to the nature of China’s legal system, thiscould pose problems for outsiders.

Some firms, they said, have found innovative solutions.These include releasing existing computer code andpatents for public use, forming alliances with Chinesepartners for joint production, and intensifying lobbyingefforts with influential Chinese government officials.

“Involving Chinese stakeholders in the benefits thatflow from technical innovation may, over time, promotegreater enforcement protection,” the article says. Someforeign firms have found success in this area by poolingtheir efforts.


"For procurement professionals...globalisation should not onlymean lower costs but also new products, new services, andbetter processes."


A growing risk to global supply comes from new threats such as terrorism and political violence.

Political unrest andglobalisation

Respondents to Atradius’sSucceeding in second-tieremerging markets said the mostcommon challenges to investing inemerging markets were political,with 55 per cent saying that poorrule of law and political stabilitywere the most significant.

A report published in May byinsurance company Lloyd’s,revealed that over a third ofcompanies avoid investing inoverseas markets for fear ofpolitical violence. The report,‘Under Attack: Global business andthe threat of political violence’, alsofound that one in five of the 154board-level executives interviewedhave turned away from otherwisepromising business opportunitiesfor the same reason.

Using Côte d’Ivoire as an example,the report demonstrates howrecent political unrest, includingrioting and threats againstforeigners, led the AfricanDevelopment Bank and a number

of foreign businesses to relocate.Likewise in Nigeria, politicalviolence subsequently caused anumber of firms to rethink theirinvestments in the country.

The research also found that only37 per cent of business leadershave a strong understanding of thepolitical violence risks. Perceptionsof risk appear to be driven bymedia headlines rather thanrigorous analysis.

Other sources of information, thereport suggests, for analysis ofpolitical risks include business-to-business forums; governmentbriefings; NGOs; local mediasources in potential trouble spots;information from employees; andresearch by private companies andacademia.

Companies should continuallymonitor the political and economicperformance of the participatingcountries to look out for signs ofturmoil, dissatisfaction, or religious

and social tensions. In China, forexample, fast growth, publicresentment over landredistribution, the widening gapbetween rich and poor andindustrial accidents all have thepotential to fuel social instability.This can lead to governmentalaction to disrupt supply chains orerode investor confidence.

As Atradius points out, managingpolitical risks requires companiesto combine hard data with morerelationship-based informationthat comes from contacts on theground among peer companies,governments and localcommunities.


Another risk for purchasers is the potential backlash against globalisation. The concept has always had itscritics. Some have argued that it only favours corporations of the West, promotes unequal distribution ofwealth and homogenisation of brands and Western culture.

The future of globalisationand procurement

"With the growing consumer and media interest in corporatesocial responsibility, this spotlight looks set to continue."

A growing interest in localisationcould intensify this backlash. Theimpact of carbon emissions fromtransportation on climate changeis now high on the political andpublic agenda, which meanscompanies are having to justify thedistance goods have travelled toreach their end destination.

Companies, especially in the retailsector, are already responding tothis trend by rethinking their globalpurchasing strategies in responseto this.

“Food miles”, or the distance fromfield to plate, has long been aconcern for the food sector. As aresult, supermarkets, such asWaitrose have launched “locally-produced” ranges and Tescoannounced in March 2007 that it isintroducing carbon labelling tomeasure the carbon footprints ofits products.

Purchasers in other sectors couldbe wise to take such a balancedapproach to their purchasingdecisions, mixing local with globalsupply where possible. Doing thisnow could pre-empt futuredamage to a brand once the mediaand consumer attention hasspread beyond the clothes storesand supermarkets.

Globalisation often puts unlikelysectors in the line of fire. As OliverBalch pointed out in the FinancialTimes in November 2005, humanright issues such as child labour orsweatshops are not the everydaypreoccupations, for example, forthe UK utilities industry. But as itssupply chain becomes increasinglyglobal, its exposure to such risksgrows rapidly.

Outsourcing of the procurementfunction overseas is also on therise. Booz Allen Hamilton noted in‘The Globalization of White-CollarWork’ that India and more recently,China are now the preferredlocations for the offshoring ofprocurement functions.

A study by the Everest ResearchInstitute into the procurementoutsourcing market in 2007suggested that foreignprocurement service providers,such as Wipro in India, were alsoset to expand in 2007.

Working on a global scale wasnever meant to be easy and it isimpossible to truly predict whatthe future holds. But if purchasersare to seize opportunities as wellas avoid the risks of globalisation,they need to take a wider lookaround them. In a world whereeverything is connected,everything matters.


A less-discussed but crucial impact of globalisation is on the procurement function itself. As companies spreadthemselves around the world, buyers follow. As a result multi-site purchasing teams are now common.

Secrets of success

IBM Last year IBM took a step further in this respect bymoving its procurement chief to China to run the firm’sglobal purchasing operation. This is made up ofaround 5,000 employees in more than 80 countries andhas a $40 billion worldwide spend.

This was the first time such a senior purchasing figurehad been relocated to China and for many it was thebeginning of a trend.

IBM’s CPO, John Paterson, told Supply Managementmagazine that the motivation for the move was toimprove relationships with suppliers and form newones. By having a CPO in China he said they alsohoped to tap into a “talent pool” and to be well-placedif and when China becomes a customer base as well assupply base of IBM. “To be successful, we need todevelop a deeper internal procurement team andexternal supply chain in Asia that will support thisoffering.”

HSBC International secondments have helped HSBC to set upits purchasing teams around the world. The HSBCGroup Purchasing International Resourcingprogramme, launched in 2002, won the purchasingteam a CIPS Supply Management award in 2006. Thisprogramme involves seconding buyers to purchasingdepartments overseas in locations as varied as HongKong, Canada and Saudi Arabia. The bank estimatesthat around 4 per cent of its purchasers are on asecondment at anytime.

The project gives purchasers the opportunity todevelop their procurement skills, swap best practicewith buyers in other countries, spread HSBC’scorporate ethos, and give those employees who havebeen identified as having “high potential” a chance tobroaden their international business skills.


Pittards plc has been making leather in the UK for over 180 years. Up until two years ago their two factories inLeeds and Yeovil supplied global brands with material to be made into shoes, gloves and luxury leathergoods.

Case study

All this was to change in 2006. Thecompany shut down its operationsin Leeds and moved production toYeovil and a sub-contractingfacility in Teh Chang, Taiwan.Previously in 2005 it also tookresponsibility of the managementof Ethiopia’s largest state-ownedleather production facility, EthiopiaTannery Share Company.

The move to the just-emergingeconomy of Ethiopia may haveinvolved risks, uncertainty anddisruption, but the company isalready demonstrating itssuccesses.

By managing leather production inEastern Africa, Pittards has beenable to access lower labour andproduction costs, as well as tightenits supply chain by being closer toits main source of its sheep andgoat skins.

Pittards’ move to Taiwan likewiseenabled the business to improvethe efficiency of its operations.Most of its shoe leather wasalready being sent to factories in

Mainland China, Vietnam andCambodia to be made into finishedgoods for its customers. Bymoving its operations nearer tothese facilities, they could improvecommunications and reduce leadtimes.

Pittards sent out UK staff to itsoffshore locations to ensure thecompany’s high standards weremaintained. But these UK staff willnot stay permanently, saysPittards’ chairman, Stephen Boyd.“You can’t stand behind people forever and a day; otherwise youmight as well do it yourself. Youhave to train them to achieve it.”

Boyd acknowledges that inEthiopia this may be a long-termprocess, as there is significantwork to be done in raisingstandards and expertise. “Theywere used to doing the first stageof processing,” he explains. “Butthe idea of producing a finishedproduct, to a very specificindividual customer requirement isa big cultural change.”

Even in Taiwan, which has farmore sophisticated manufacturingoperations, there was also a lack ofexperience of meeting specificcustomer requirements, to tightdeadlines and to high qualitystandards. “We had to putenormous time in to achieveresults,” he points out.

Despite the challenge of meetingthe UK’s standards, for example inshipping documentation orbanking systems, Boyd saysEthiopia is showing an “enormouswillingness to learn”. This isevident right from the top of thecountry to the staff in the tannery.

Pittards has worked with the localteam to reorganise the factorylayout, improve the workflow andmake room for new machinery.“By introducing standards andrequirements for quality andoutputs, we have been able to cutstaffing by two thirds and yetimprove output by 50 per cent.”

In the six months to December2006, turnover increased by 8 percent on the budget agreed with theEthiopian government who ownthe Tannery. Profitability has alsoimproved.

Globalisation is central to Pittards’ongoing strategy and they arelooking to expand in othercountries including Africa andIndian Sub-continent. But Yeovilwill always be its “centre ofexcellence”, says Boyd. “We willcontinue to develop new productsand technologies here and use itas a centre for commercial andfinancial operations.”

Easton House, Easton on the Hill, Stamford, Lincolnshire PE9 3NZ, UK Tel: +44 (0)1780 756777 • Fax: +44 (0)1780 751610 • Email: [email protected] • Web: www.cips.org

The Chartered Institute of Purchasing & Supply

CIPS is an international organisation, based in the UK,

serving the purchasing and supply profession. Dedicated to

promoting good practice, CIPS provides a wide range of

services for the benefit of members and the wider business

community. It is the worldwide centre of excellence on

purchasing and supply management issues with over

42,000 members in 134 different countries.

Its role as a professional body is defined by its Royal

Charter. The Charter provides clear objectives, which need

to be achieved for the public benefit.

©The Chartered Institute of Purchasing & Supply 2007

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reproduced without the permission of CIPS.

Globalisation White Paper

Author - Emma Clarke, Freelance business journalist

globalisation white paper - kbresearch white paper.pdf · the world did not proclaim the dawn of...

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