Procurement LO3

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Questions and Answers

What is the primary focus of outsourcing?

To increase the number of employees within the organization.

To contract independent suppliers for products or services. (correct)

To maintain all operations within the organization.

To fully integrate all suppliers into the organization.

Which term describes offshoring to a nearby country?

Nearshoring (correct)

Inshoring

Friendshoring

Reshoring

What is reshoring?

Outsourcing to countries with better trade relations.

Offshoring to countries within the same continent.

Bringing back functions previously outsourced overseas. (correct)

Contracting suppliers that are geographically distant.

Which factor suggests a preference for offshoring rather than reshoring?

High safety concerns regarding local production. Signup and view all the answers

Which of the following is likely NOT a reason for reshoring?

Greater availability of cheap labor domestically. Signup and view all the answers

What is the best explanation for friendshoring?

Prioritizing countries with favorable relations to the home nation. Signup and view all the answers

When would a company likely choose to nearshore?

When reduced shipping times are critical. Signup and view all the answers

Which scenario best represents offshoring?

A tech firm relocating support services to India. Signup and view all the answers

What is a significant barrier that affects worldwide sourcing?

Lack of knowledge and skills Signup and view all the answers

Which factor is associated with resistance to change in sourcing practices?

Established routine sourcing patterns Signup and view all the answers

What issue is often encountered due to a lack of knowledge in global sourcing?

Identification of potential suppliers Signup and view all the answers

What is one factor that contributes to customs challenges in worldwide sourcing?

Language barriers Signup and view all the answers

What type of nationalism can affect sourcing decisions?

Domestic market nationalism Signup and view all the answers

Which of the following is NOT typically a barrier in global sourcing?

Effective supplier communication Signup and view all the answers

Which of the following best represents the challenge of documentation issues in sourcing?

Extensive and complex paperwork for compliance Signup and view all the answers

What is one consequence of shifting from long-standing suppliers?

Enhanced risk of supply chain disruptions Signup and view all the answers

What overarching theme is prevalent across barriers to worldwide sourcing?

Knowledge deficiencies Signup and view all the answers

Which type of sourcing challenges are influenced by cultural differences?

Adaptation to local customs and practices Signup and view all the answers

What is a primary advantage of a Foreign Trade Zone (FTZ) regarding duties on re-exported goods?

No duties or quota charges are imposed. Signup and view all the answers

How does duty deferral help importers in a Foreign Trade Zone?

By postponing payment of duties until goods are withdrawn. Signup and view all the answers

What characterizes an inverted tariff in the context of FTZs?

Finished goods produced in the FTZ have a lower duty rate than the components used. Signup and view all the answers

What does Level IV of global sourcing philosophy focus on?

Integration and coordination of global strategies across business units. Signup and view all the answers

Which of the following best describes Level III in global sourcing?

Incorporating global sourcing as part of a strategic sourcing framework. Signup and view all the answers

What is a key characteristic of switch trading?

Requires a minimum of three parties to facilitate transactions. Signup and view all the answers

What does counter purchase require from the selling firm?

To purchase a specified amount of goods from the buying country. Signup and view all the answers

What is a potential downside of counter purchase agreements?

They can involve products unrelated to the company's main business. Signup and view all the answers

Which option best describes offset agreements?

They generally require the exporter to adjust to the importer's terms. Signup and view all the answers

How does switch trading specifically function?

Country A trades its products with Country B, which then engages Country C. Signup and view all the answers

What typically happens in a counter purchase?

A percentage of the original sale involves unrelated products. Signup and view all the answers

Which statement is true about switch trading?

It can adjust obligations between different parties. Signup and view all the answers

What is a common challenge associated with counter purchase agreements?

They may create difficulties in disposing of the goods purchased. Signup and view all the answers

Offset agreements often include requirements for exporters to do which of the following?

Market their products in the importing country. Signup and view all the answers

Which type of countertrade involves a sequence where goods flow through three distinct parties?

Switch trading Signup and view all the answers

What characterizes a direct offset in trade agreements?

It is based on co-production or subcontracts. Signup and view all the answers

Which of the following best describes an indirect offset?

It requires purchasing goods from the importing country. Signup and view all the answers

In buy-back compensation trading, what does the builder agree to receive?

Certain finished goods produced with provided technology. Signup and view all the answers

What is the primary purpose of a Foreign Trade Zone (FTZ) in Canada?

To provide tariff exemptions on imports. Signup and view all the answers

What administrative bodies oversee Canada's Foreign Trade Zone program?

Canada Revenue Agency and Canada Border Services Agency. Signup and view all the answers

How can a company benefit from using FTZs in Canada?

By delaying or decreasing duty payments on foreign goods. Signup and view all the answers

Which statement about buy-back agreements is true?

They are a form of indirect offset trading. Signup and view all the answers

What type of goods can enter a Foreign Trade Zone (FTZ)?

Raw materials, components, and finished products. Signup and view all the answers

Which feature distinguishes a general-purpose zone from a subzone within an FTZ?

Subzones can be customized for specific companies. Signup and view all the answers

What is one of the primary functions of direct offset agreements in international trade?

To require co-production or subcontracts with the importing party. Signup and view all the answers

What is the main characteristic of a forward exchange contract?

It guarantees a pre-established rate for future currency exchange. Signup and view all the answers

Which of the following best defines 'culture' in the context of human interaction?

The sum of understandings governing interactions in a society. Signup and view all the answers

Which barrier complicates negotiations in offshore business practices?

Cultural misunderstandings and communication issues. Signup and view all the answers

What is a crucial step before gathering information about potential suppliers?

Identifying items to purchase. Signup and view all the answers

How do offshore business practices generally influence supply chain management?

They often require closer management of delivery and engineering changes. Signup and view all the answers

Which of the following resources is useful for identifying potential global suppliers?

Worldwide sourcing directories. Signup and view all the answers

What role does language play in international business transactions?

It requires companies to clearly communicate purchasing requirements. Signup and view all the answers

Which factor is not typically addressed when evaluating worldwide sourcing directories?

Monetary exchange rates between currencies. Signup and view all the answers

What percentage increase in exports was recorded for transition economies?

24% Signup and view all the answers

In which region did imports increase faster than exports?

Asia and Oceania Signup and view all the answers

What factor is most closely associated with accelerating globalization?

Technology Signup and view all the answers

What was the percentage increase in imports for African exports?

Double the import rate Signup and view all the answers

What was the comparative growth rate of exports and imports in developed economies?

Both around 9% Signup and view all the answers

Which issue is NOT highlighted in the context of globalization impact?

Inflation control Signup and view all the answers

What is the impact of globalization observed in developing economies of Africa and America primarily focused on?

Export growth Signup and view all the answers

What does the globalization trend signify in terms of trade imbalance?

Impact on currency fluctuations Signup and view all the answers

Which area saw a significant increase in exports according to the data provided?

Africa Signup and view all the answers

Which statement best describes the relationship between technology and globalization?

Technology accelerates globalization. Signup and view all the answers

What advantage does an inverted tariff provide in a Foreign Trade Zone (FTZ)?

It ensures that finished goods have a lower duty rate than their components. Signup and view all the answers

Which level of global sourcing philosophy involves no foreign purchases?

Level I Signup and view all the answers

What is a benefit of streamlined customs procedures in a Foreign Trade Zone?

Weekly reporting and ease of trade facilitation. Signup and view all the answers

Which factor contributes to a lack of knowledge and skills in global sourcing?

Ignorance of the mechanism of global sourcing Signup and view all the answers

What characteristic defines Level V of global sourcing?

Coordination of global sourcing strategies across operations globally. Signup and view all the answers

What is a significant source of resistance to change in sourcing practices?

Established, routine sourcing patterns Signup and view all the answers

Which outcome results from duty deferral in a Foreign Trade Zone?

Improved cash flow by delaying duty payments. Signup and view all the answers

Which barrier can specifically complicate documentation in global sourcing?

Complexities of international law Signup and view all the answers

What challenge does cultural difference present in global sourcing?

Variability in product quality expectations Signup and view all the answers

What aspect of customs regulations represents a challenge in worldwide sourcing?

Variability in compliance requirements Signup and view all the answers

Which of the following would likely NOT be a barrier to worldwide sourcing?

Innovation in supply chain management Signup and view all the answers

How can domestic market nationalism impact sourcing decisions?

By destabilizing foreign supplier relations Signup and view all the answers

Which of the following is a barrier related to customs challenges in sourcing?

Lack of knowledge about tariffs Signup and view all the answers

What condition can hinder effective identification of potential sources of supply?

Overreliance on established suppliers Signup and view all the answers

Which issue is associated with ignorance in global sourcing practices?

Understanding complex trade agreements Signup and view all the answers

How does a direct offset agreement primarily function in international trade?

It involves coproduction or subcontracts related to the traded product or service. Signup and view all the answers

Which of the following best describes the concept of buy-back in compensation trading?

A receipt of finished goods in exchange for technology and equipment provided. Signup and view all the answers

What advantage does a Foreign Trade Zone (FTZ) offer to companies importing goods?

It allows companies to defer or reduce duty payments on foreign goods. Signup and view all the answers

Which situation distinguishes indirect offset agreements from direct offset agreements?

They require the exporter to buy unrelated goods or services from the importing country. Signup and view all the answers

What is the role of the Canada Revenue Agency (CRA) in relation to Foreign Trade Zones (FTZ)?

To administer the FTZ program alongside the Canada Border Services Agency. Signup and view all the answers

In the context of FTZ operations, what differentiates a general-purpose zone from a subzone?

General-purpose zones are designated for a range of activities while subzones are limited to specific operations. Signup and view all the answers

What is the fundamental nature of compensation in a buy-back agreement?

Finished products are paid for through technology and equipment supplied. Signup and view all the answers

What is one of the primary benefits associated with utilizing Foreign Trade Zones (FTZs)?

They allow importers to increase manufacturing speed without tariffs. Signup and view all the answers

Which of the following statements accurately reflects the obligations involved in direct offset agreements?

An agreement may involve subcontracting and shared production processes. Signup and view all the answers

What triggers the obligation to engage in indirect offsets for exporters?

The necessity to buy unrelated goods or services from the importing country. Signup and view all the answers

Study Notes

Outsourcing

Contracting with independent suppliers outside the organization to provide products or services that were performed inside the organization.
Common sourcing strategies include offshoring, reshoring, nearshoring and friendshoring.

Offshoring

Contracting with independent suppliers located outside geographic boundaries.

Reshoring

The practice of bringing back functions previously outsourced overseas (offshored).

Nearshoring

Offshoring to a nearby country, for example, US offshoring to Mexico.

Friendshoring

Offshoring or outsourcing that prioritizes countries with which a company's home nation shares positive diplomatic, economic, or trade relations.

Sourcing Location Criteria

High shipping costs relative to value, high product variety, forecast instability, safety concerns, and premium price items all support reshoring or nearshoring strategies.
Low shipping costs relative to value, standard product, stable forecast, labor-intensive products, and price competition all support offshoring strategies.

Reasons for Emergence in Reshoring

Reduction in the wage gap between developed and developing economies.

Barriers to Worldwide Sourcing

Lack of skills, resistance to change, currency fluctuations, customs, language, and cultural differences all pose barriers to worldwide sourcing.

Lack of Knowledge and Skills

Ignorance of the mechanism of global sourcing, identifying potential sources of supply, and documentation issues all present challenges.

Resistance to Change

Established sourcing patterns, shifting from longstanding suppliers, and domestic market nationalism can all create resistance to change.

Types of Countertrade

Countertrade involves using goods or services rather than currency in international trade.
Types of countertrade include barter, counterpurchase, offset, switch trading, and buyback.

Switch Trading

Involves a minimum of three parties. One party sells its obligation to another party to a third party.

Counter Purchase

The selling firm agrees to purchase a specified amount of goods from the country that purchased its products. This typically involves products unrelated to the company’s primary business.

Offset

The exporter agrees to the importer's terms such as marketing their products, final assembly of exported items, and buying other goods and services from the importer's country. Direct offsets are related to the product or service involved in the trade, while indirect offsets are not.

Buy-Back (Compensation Trading)

One party provides inputs like technology and equipment to another party and receives a certain amount of finished goods made using those facilities as compensation.

Foreign Trade Zones (FTZ)

A designated area where the purchase or import of raw materials, components, or finished products is eligible for exemption from tariffs and taxes.
The FTZ program in Canada is administered by the Canada Revenue Agency (CRA) and the Canada Border Services Agency (CBSA).
Allows importing companies to delay, eliminate, or decrease duty payments on foreign-produced goods.

Advantages of FTZs

Duty exemption - No duties or quota charges on re-exported goods.
Duty deferral - Allows for improved cash flow by postponing duty payments.
Inverted tariff - Lower duty rate on goods produced in an FTZ compared to imported components.
Streamlined customs procedures.
Reduced state/local inventory taxes and fees, special grants, tax reliefs, and reduced costs.

Moving to a Global Sourcing Philosophy

Level I - No foreign purchases.
Level II - Foreign purchases as needed.
Level III - Foreign purchases as part of strategic sourcing.
Level IV - Integration and coordination of global sourcing strategies across worldwide business units.
Level V - Integration and coordination of global sourcing strategies with other functional groups.

Global Supply Management

Globalization has led to a significant increase in global trade, particularly in transition economies and developing economies.
Technological advancements have accelerated globalization, creating opportunities for cost savings and new markets.
Issues such as trade balances and currency fluctuations need to be addressed within a globalized supply chain landscape.

Barriers to Worldwide Sourcing

Cultural differences can hinder effective communication and negotiations, especially in the areas of language, customs, and values.
Lack of knowledge and skills related to global sourcing practices, potential suppliers, and documentation requirements can be a major hurdle.
Resistance to change can arise from established sourcing patterns, reluctance to switch suppliers, and nationalistic sentiments within domestic markets.

Types of International Purchasing Agreements

Forward exchange contract is a type of risk insurance that protects both parties involved by allowing them to agree on a future exchange rate for currency, seeking risk aversion rather than monetary gain.
Offset agreements either directly or indirectly compensate the importing country for the purchase of goods or services.
- Direct offsets involve coproduction or subcontracts related to the product or service being traded.
- Indirect offsets entail purchasing goods or services not related to the main product but still sourced from the importing country.
Buy-back agreements (Compensation Trading) involve one party providing inputs like technology and equipment in exchange for finished goods produced using those facilities. This can involve building a plant in a developing country or providing support to a plant in exchange for receiving its output.

Foreign Trade Zones (FTZ)

A Foreign Trade Zone (FTZ) is a designated area where goods can be imported or purchased without incurring tariffs or taxes until they are withdrawn for domestic use.
FTZs are administered by relevant authorities in each country, such as Canada Revenue Agency (CRA) and Canada Border Services Agency (CBSA) in Canada.
Use of FTZs: Companies can delay, eliminate, or reduce duty payments on imported goods, improve cash flow, and benefit from inverted tariffs (lower duty rates on finished goods compared to imported components).

Advantages of FTZs

Duty exemption: Goods re-exported from the FTZ are exempt from duties and quota charges.
Duty deferral: Improves cash flow by postponing duty payments until goods are withdrawn from the FTZ.
Inverted tariff: Offers lower duty rates on goods manufactured in the FTZ compared to individual imported components.
Streamlined customs procedures: Weekly reporting and ease of trade facilitate efficient customs processes.
Reduced state and local taxes and fees: Special grants, tax reliefs, and reduced costs can enhance cost effectiveness.

Moving to a Global Sourcing Philosophy

Level I - Domestic Purchasing Only: No foreign purchases are made.
Level II - International Purchasing as Needed: Foreign purchases are made reactively and without coordination.
Level III - International Purchasing as part of Strategic Sourcing: Foreign purchases are strategically planned and integrated into overall sourcing strategies.
Level IV - Global Sourcing Integration and Coordination: Global sourcing strategies are integrated and coordinated across worldwide business units.
Level V - Global Sourcing Integration and Coordination with other Functions: Global sourcing strategies are fully integrated with other functional groups within the organization.

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Description

This quiz covers various sourcing strategies including offshoring, reshoring, nearshoring, and friendshoring. Learn about when to choose each strategy based on criteria such as shipping costs and product variety. Test your knowledge on how these strategies can influence organizational decision-making.