Outsourcing 101 PART 1

1. A Word About International Sourcing

Being competitive in the world markets requires a combination of quality, technology, price, marketing savvy and after-sale service. Purchasing has direct bearing on factors affecting the company’s competitive position in the marketplaces.

“World Class” is our theme. We strive to be Global Leaders, able to assist our clients in standing up to competition in any part of the world, against any player in the market. Going global plays a key role in keeping our clients and their products globally competitive through the use of world-class suppliers and leading edge sales and distribution processes

You should consider importing if:

You want to reduce the cost of purchased materials by a minimum of 20% You want your suppliers to truly compete for your business Your current supplier isn’t achieving at least 5% annual productivity and sharing some of

that with you

Your current source (or the domestic industry) doesn’t have the capacity to meet your production needs

You’re stuck with getting quotes from the “good old boy” network and they keep coming up with the same old answers

You think you can’t get to the next level of quality with your current supplier You have a new product that requires a new skill set or technology that your current

supplier can’t offer You want to get ahead and stay ahead of the competition

2. Sourcing & Procurement At The Federal Group, we are continuously working to improve our products and services to better satisfy the needs and expectations of our customers. Our suppliers are expected to meet or exceed a list of criteria, some of which are summarized below:

Prompt and accurate communication Compliance with terms of purchase order Must meet commitments Must maintain confidentiality of business agreements Continued innovation and growth with focus on cost-effective processes and products Supplier Qualifications – Minimum Standards

Prospective suppliers must meet our minimum qualifications. These may vary by product and by service type, but the prerequisites are:

Financial Stability – Positive reviews, credit & financial reports from agencies like Dun & Bradstreet to determine financial stability.

Established Business – Should have been in business for at least a year, and should be able to provide references from customers.

Insurance Requirements – Must have insurance coverage compatible with the risks of the business.

Quality Standards – Must provide high quality products and equipment. Delivery Schedules – Must meet delivery schedules. Delivery may be to client’s

warehouses, job-sites or other specified locations. Competitive Pricing – Prices offered for products and services must be competitive

within the industry. We expect pricing and discounts to be equal to, or better than those given to other customers with a comparable volume of business.

Other Requirements:

Quality Program – We rate our suppliers by tracking their performance, our aim being to ensure that the products we purchase are reliable and of the highest quality.

Quality Control – Suppliers must be able to demonstrate their quality control programs. They should implement QC methods such as statistical quality control to ensure quality of products and services.

Technical Improvement – Suppliers, in particular manufacturers, should have a research and development program to continually improve their products and incorporate new technology. These improvements ensure maximization of our collective resources.

3. Supplier Performance Reviews The performance of our suppliers is vital to the success of our business. Our top priority is to ensure that our clients receive the value for money. Periodically, we review the performance of our suppliers in order to determine any necessary changes or improvements that can be made. The reviews are based on the following criteria:

Reliability: Can the supplier meet its commitments? Cost: How closely did the final tally correspond to the amount indicated at the beginning

of the transaction? Order Accuracy: Did the product / service delivered match order specifications and

quantity? Delivery / Timeliness: Was the product / service delivered on time? Quality: Does the quality of the product meet standards and specifications? Relations: Does the supplier try to maintain good working relations? Personnel: Is the staff courteous and professional? Responsiveness: How does the supplier follow up on requests, response to issues or

problems that arise during transactions?

4. Third-Party Inspection & Testing

In carrying out inspection services for industry, no project is too small or too large. The Federal Group’s services are tailored to meet individual requirements. With offices situated all over the globe, The Federal Group can respond to a client’s needs with prompt and efficient service at a competitive cost.

Quality is an essential ingredient of our overall business philosophy. Product quality is an integral part of our on-going efforts, superior quality being a priority for our customers. In pursuit of superior quality and the assurance of maintaining that quality, we have access to a large number of third party testing agencies.

Significance and Use:

The owner, contractor, material supplier and third-party inspector have a vital interest in the success of a project.

Effective third-party inspection can contribute to the success of a project and reduce needless delays, costs, disruptions or disagreement between owners / contractors / material suppliers To be commercially viable, the third party inspector must be able to demonstrate strict conformance to recognized standards. Adherence to this conformance has been a predominant issue with clients and their inspectors for many years.

Accreditation of some kind, whether global in nature such as ISO 9000 or local, such as a single facility audit or a combination of both, has been the most recent vehicle for trying to reach this goal. The result of this is a tapestry of commerce and technology, interwoven with threads of compliance and conformance, both mandatory and voluntary.

PART 2

5. Translation & Interpretation

Language can be a major impediment in international business. Some companies have English-speaking representatives to resolve this barrier. However, one finds that language fluency can vary widely. In addition, many technical concepts, material names and such are not easily translated The Federal Group employs experienced staff with fluency extending to all languages and dialects of regions where we operate. This ensures that all specifications are understood and observed.

In today’s global economy, document translation has become a necessity for companies who wish to offer their products and services on the international market. To be successful in their respective markets, companies must communicate with their customers and provide them with accurate documentation in their native language.

Translation is defined as the act of expressing something in another language while retaining the original meaning. Many people assume that translation is easy and consists only of changing each word into the equivalent word of a different language. This is not true because many words have no foreign equivalent. Some phrases if translated word for word would make no sense or could be offensive. Besides, specialized vocabularies and differences in cultures must be considered.

Interpretation is far more flexible as it involves communicating the meaning from one language to another and not a word for word translation. The task requires comprehension of what was said in the source language, analysis of the source message for meaning and restructuring the source message into the target language.

It is vital when engaging in international business to know and understand the differences between the two, and The Federal Group staff can help your business successfully correspond with your new customers or suppliers.

6. Cross-Cultural Training

Doing business overseas requires a lot more than just learning the country’s official language(s). For example, in Mexico it is a good idea to ask your Mexican business associates about their families, but in the Arab community your business relationship might never recover from this kind of questioning.

Today, businesses are increasingly becoming involved in international trade and competition is stiff. You could be selling to customers abroad, involved in a joint venture, managing a staff of foreign nationals or consulting for a company with overseas interests. For you to succeed it is imperative that you understand the nuances of doing business and socializing in your target country.

When living and working in a foreign country, our assumptions about the way things work and the way people behave are often incorrect. The experience can be quite overwhelming, but if a person is well-managed and has insight into cultural differences, it can be a very rewarding and successful experience on both personal and professional levels.

What is cross-cultural training?

Cross-cultural training enables professionals and their families to optimize their experiences in an international environment by making them aware of crucial patterns of behavior in their own culture as well as in the new culture. This helps them break down potential barriers and one can profit more from their international experience.

Cross-cultural training is relatively new on the circuit. Many companies experiencing global growth are sending employees and their families abroad only to find that they are not doing as well as expected because there is so much to learn, so much to adapt to and new ways of working that take time to master. Cross-cultural training or CCT is a program designed to specifically answer these needs.

Who can benefit from cross-cultural training?

Business professionals working abroad and their families Professionals and their families preparing to relocate overseas or recently relocated Long-term expatriates who wish to improve their efficiency Human Resource professionals in multinational corporations Managers of multinational teams Staff working on projects with colleagues from other countries

Cross-cultural training provides incoming and outgoing expatriate families a chance to learn what to expect and how best to deal with the changes. It allows you to meet with a trainer who understands what crossing cultures is like and offers you a chance to explore your decision confidently. He provides accurate information about daily life, political, historical, and economic data from a social and workplace perspective before you relocate.

7. Logistics

With the world markets getting more and more competitive, international logistics is becoming an important business area where companies turn to maximize profits, increase customer service and reduce operating expenses. The logistical issues play a major part in international trade, but can be complex and need to be well understood by those involved in the import or export of goods. In many cases, logistics can be a deciding factor in clinching the deal. The Federal Group is able to offer you expert advice in the following areas:

Ocean freight forwarding – sea cargo Air freight forwarding – jet cargo Rail freight forwarding – train cargo Customs brokerage Duty drawback Classification and compliance Multi-model Insurance

8. Importing Terminology

To provide a common terminology for international shipping and minimize misunderstandings, the International Chamber of Commerce developed a set of terms, known as Incoterms (Importing Terminology).

Cost and Freight (CFR): The exporter pays the costs and freight necessary to get the goods to the port of destination, but the risk of loss or damage is assumed by the buyer once the goods are loaded at the port of embarkation.

Cost, Insurance and Freight (CIF): The exporter pays the cost of goods, cargo and insurance plus all transportation charges to the named port of destination.

Delivered at Frontier (DAF): The exporter / seller’s obligations are met when the goods arrive at the frontier, but before they reach the Customs border of the importing country named in the sales contract. The expression is commonly used when goods are carried by road or rail.

Delivered Duty Paid (DDP): This expression puts maximum responsibility on the seller / exporter in terms of delivering the goods, assuming the risk of damage / loss and paying duty. It is at the other extreme from the “ex works” expression listed below, under which the seller assumes the least responsibility.

Delivered Ex Quay (DEQ): The exporter / seller makes the goods available to the buyer on the quay or wharf at the destination named in the sales contract, and bears all costs / responsibility

up to this point. There are two types of ex quay contracts in use: ex quay duty paid, whereby the seller incurs the liability to clear the goods for import, and ex quay duties on buyer’s account, whereby the buyer assumes this responsibility.

Delivered Ex Ship (DES): The exporter / seller must make the goods available to the buyer on board the ship at the location stipulated in the contract. All responsibility / cost for bringing the goods up to this point falls on the seller.

Ex Works (EXW): Opposite to “delivered duty paid.” This minimal obligation requires the seller only to make the goods available to the buyer at the seller’s premises. The seller is not responsible for loading the goods on the vehicle provided by the buyer, unless otherwise agreed. The buyer bears all responsibility for transporting the goods from the seller’s place of business to their destination.

Free Alongside Ship (FAS): The goods must be placed on the docks by the seller, alongside the vessel. The seller’s obligations are fulfilled at this point. The buyer bears all costs and risks of loss or of damage to the goods from that moment.

Free on Board (FOB): The goods are placed on board the vessel by the seller at the port of shipment specified in the sales contract. The risk of loss or damage is transferred to the buyer when the goods pass the ship’s rail.

Free Carrier . . . (named port): Recognizing the requirements of modern transport, including multi modal transport, this principal is similar to FOB, except that the exporter’s obligations are met when the goods are delivered into the custody of the carrier at the named port. The risk of loss / damage is transferred to the buyer at this time, and not at the ship’s rail. The carrier can be any person contracted to transport the goods by road, air, sea, rail or a combination thereof.

Carriage Paid to . . . (named place of destination): The seller pays the freight for the carriage of the goods to the named destination. The risk of loss or damage to the goods is transferred. The risk of loss or damage to the goods is transferred from the seller to the buyer when the goods have been delivered to the custody of the carrier.

PART 3

9. Shipping Documentation

The following is a list of some of the main shipping forms that are necessary for international transportation of goods:

Airway Bill Bank Draft / Transmittal Letter Canada Customs Invoice Commercial Invoice (English & Spanish) Dock Receipt Generic Certificate of Origin IMO Dangerous Goods Declaration Inland Bill of Lading Master Bill of Lading NAFTA Certificate of Origin (English, Spanish & French) Ocean Bill of Lading Packing List Pro Forma Invoice Shipper’s Declaration for Dangerous Goods Shipper’s Export Declaration (SED)

Shipper’s Letter of Instruction Shipper’s Domestic Truck Bill of Lading

10. Financing

The recent growth of the global marketplace brings with it opportunity and thereby inherent risks for both buyers and sellers. The goal for sellers of course, is to be paid promptly without having to initiate long-distance collection procedures. Buyers want to know that the merchandise they order will arrive on time and in good condition.

Today’s economic and political uncertainties highlight the need for businesses involved in international trade to understand methods of payment, their benefits and risks. Buyer and seller negotiate payment methods based on factors such as the amount of the sale, credit standing of the buyer, foreign exchange regulations in buyer’s or seller’s country, industry customs, competition and opportunities for repeat business. The length of time the two parties have worked with each other and the amount of trust built during that time also affect the payment methods they will find acceptable. Common payment methods are listed below:

Cash in Advance (Prepayment) Documentary Collection Open Account Letter of Credit (L/C) Standby Letter of Credit (SLC) Commercial Letter of Credit

How are you going to get paid for your export sales and which payment method is best suited for you? How can you ensure that you will receive the goods you have ordered and what is the best mode of payment? There are traditional payment methods used in international trade, which one is best for you?

These are the most common questions when it comes to International Finance. The Federal Group will help you select the best possible method of payment. We will also explain the risks involved with each method and once the choices is clear we will put you in contact with our trusted colleagues at an appropriate financial institution.

11. Letters of Credit

Buyer asks its bank to issue a letter of credit in favor of seller. Seller ships the merchandise and presents required shipping documents. Payment is then made to seller by the negotiating or paying bank. Two types of L/Cs – standby and commercial -are the most commonly used methods of payment for international commerce.

Risk / Usage: Other than cash in advance, letters of credit offer seller the greatest protection, while providing buyer with certain assurances through L/C documentation. Letters of credit are

used to alleviate risk on the part of both buyer and seller in cases where the two parties have not established a long and trusting relationship.

Standby Letter of Credit (SLC): Issued to back an obligation of the applicant, SLCs are not intended to be the primary source of payment, which is often on open account. Standby L/Cs act as a bid or performance bond, backing for open account trade terms or lease obligations, or support for a credit line or other type of financial obligation. Documents are normally not required, but buyer must have access to enough credit to cover the amount of the SLC.

Commercial Letter of Credit: Primary method of international payments because most buyers and sellers are not well known to each other and a commercial L/C facilitates trade when buyer and seller do not have absolute confidence in payment or receipt of merchandise. It covers shipment of goods or payment for services and offers several protections to both parties:

Minimizes credit risk for the exporter (seller), since payment is made by a negotiating or paying bank Alleviates risk in buyer’s country

Provides greater assurance to buyer that goods will arrive as ordered and in good condition Assures buyer that shipping documents will be in accordance with terms and conditions of the

letter of credit

There are four main types of commercial L/Cs:

Sight L/C requires payment when the beneficiary presents non-discrepant documents.

Usance L/C calls for payment at a future date, e.g., 30 days after shipment date, and requires a draft drawn on the issuing/paying bank for the amount of the invoice.

Deferred Payment L/C is similar to a usance L/C, but does not require a draft. It is often used in European countries that assess high stamp taxes on drafts.

Transferable L/C gives the beneficiary the right, but not the obligation, to transfer the credit fully or partially to a third-party supplier.

Transferable L/Cs are typically used by middlemen or trading companies that do not have the needed capital or do not wish to use their own capital to purchase goods to be delivered to another buyer. They can be structured so that the names of the supplier and final buyer are hidden. The disadvantages are high transfer costs and the difficulty of structuring transactions to hide the buyer and seller names.

Documentation

Letters of credit require documentation that must be precisely in accordance with the terms and conditions of the credit before payment will be made. Many payment delays are due to discrepancies in documentation. These documents typically include:

Draft Commercial Invoice Packing List

Shipping Document Ocean Bill of Lading Airway Bill of Lading Inland Bill of Lading Insurance Policy / Certificate

Reasons for Nonpayment

Nonpayment can result from a number of different causes, however, most happen due to errors in paperwork.

12. Doing Business With Other Cultures

Globalization: Crossing the Border To successfully engage in global commerce, it takes more than sending faxes and receiving wire transfers from your trading partners. When we do business in other lands, it is extremely important to understand and respect the ways of different cultures. Examine fundamental practices employed by successful international business people throughout the world. Learn various cultural aspects of:

Building the Relationship Greetings Titles, Rank, & Hierarchy Seating Building Rapport Dress Gifts & Hosting Visitors Using Intermediaries

Technology

The world is getting smaller and those who are not involved in global commerce will be left behind. Develop an awareness of the global market place and how to build your company’s international strategies. Follow some of these important guidelines to move your business in the right direction:

Carefully assess your capabilities Be flexible in picking a market Prepare a variety of market entry strategies Be diligent about conducting due diligence Put adequate financing in place Get your shipping and logistics in order from start to finish Choosing the best payment method Build on your success

We sincerely hope you found this article informative and valuable. We welcome your comments or suggestions regarding this article or any other subjects you would like to see us write about.

Thank you, The Federal Group USA

By Robert Levy – CEO TFGUSA © Copyright 2017