OVERSEAS BUYING - SOME INSIGHTS FOR SMALL BUSINESS Vinay Kothari, Stephen F. Austin State University ABSTRACT This research study examines overseas buying practices and policies of small U. S. businesses. On the basis of secondary data and mail responses from 74 Texas manufacturers, the study concludes that most small firms do not buy directly from abroad because they lack the knowledge about foreign markets. Many problems, solutions and benefits of international purchasing are identified. There are several guidelines, which could benefit small American organizations. INTRODUCTION Purchasing is one of the crucial strategic areas of business. On the average, according to the U.S. Department of Commerce , materials and capital equipment expenditures account for 61 percent of the sales dollar in manufacturing organizations. This high purchase-to-sales ratio underscores the importance of effective buying strategies and practices, because any reduction in purchasing costs can have a significant impact on the profitability of business. There are several ways to reduce purchasing costs and thereby increase profits. The Vyas and Woodside  model of industrial supplier choice processes provides insights into certain purchasing areas in which costs reductions can be realized. Methods to reduce materials and equipment costs include: better planning and managing of purchasing strategies and operations [1 , 4, 9, 10, 15, 22, 29, 37, 45], flexibility , technical competence , exploring costcutting angles , research , hedging , bartering , computer usage [11, 40], and buying overseas [2, 12, 13, 16, 18, 19, 25, 32, 33]. This research paper provides some insights into overseas buying for small American business on the basis of secondary and primary data. Overseas buying problems, solutions and benefits are among the areas covered in the paper. BENEFITS Buying from abroad can be beneficial to small American business in many ways. Low costs of foreign products and services can enable the small manufacturing firm to become more competitive, increase sales, and increase profits. The problem of raw materials shortages can be alleviated by buying in the foreign markets which are abundant in natural resources. The availability of specific technology and/or cheap but trainable labor force abroad could overcome some manufacturing problems. When a firm wishes to market its product abroad, its international marketing objectives often can be better served through overseas buying. Benefits of international buying are evident further in the trends in foreign trade. According to the trends, scarce resources, technological innovations, and competition throughout the world should cut down artificial barriers to foreign trade in the future and political boundaries for economic purposes should become relatively less visible. International purchasing, consequently, will become an integral part of the corporate strategy. Walter Willets [in 8, pp. vii, viii] of the Thomas Register of American Manufacturers writes: --- "Today, like or not, we deal in a oneworld market. As professional purchasing managers, it is virtually impossible to confine our buying to domestic
sources ... We will be doing more buying from foreign sources." Breibart  believes that pragmatism rather than patriotism is likely to become the rule in purchasing. Despite concern over the U. S. balance of trade deficits, national pride and unemployment problems, small manufacturers will have to look at world markets in order to be successful; and they will have to learn to deal with the problems of overseas buying in order to derive its many benefits. DIFFICULTIES Undoubtedly, overseas buying represents profitable opportunities. There are, however, several difficulties or constraints which are unique to international purchasing [2, 18, 24]. The political and legal environment abroad is largely different from the American environment; as a result, political uncertainties or risks, complex import/export procedures and regulations, and differences in U.S. and foreign laws create some difficulties. Fluctuations in international currencies present problems to unwary buyers. Finding good and reliable foreign suppliers is most difficult particularly for the first time buyers; lack of adequate information about potential sources in the overseas markets adds to the already difficult problem of selecting suppliers. Situations of bartering or counter trading, points out Blue , are becoming very complex to understand and deal with. Other problems of overseas buying include: long-lead times, high inventory and working capital requirements, different methods of payment, inconsistency in product quality, the metric system of measurements, lack of local technological back up; logistics difficulties, lack of trained people, unfamiliar negotiation techniques, problems in communications, tariffs, and differences in foreign and American cultures and customs. While these international buying difficulties are complex and not easy to cope with, the benefits frequently compensate for the difficulties, according to Leenders, Fearon and England . The problems of long lead times, claims Greenberg , are not as serious as they once were; the main reason the U. S. buyers shy away from the foreign markets is that they do not understand the world of foreign trade and are not trained to cope with these difficulties. COPING WITH THE DIFFICULTIES To cope with the problems of purchasing from abroad, American buyers can follow certain guidelines and apply numerous measures [8, 16, 18, 24, 33]. To get started, the first time buyers can use a domestic firm that imports from abroad, and learn about the availability of products, quality, price, etc. from the importer. The first time buyers can also contact organizations, such as customhouse brokers, insurance brokers, commercial banks with international operations, and trade organizations to learn about foreign suppliers and import rules and procedures. Foreign trade groups, foreign consulates and embassies in the United States, foreign publications, U.S. publications, American embassies and consulates in foreign nations, U. S. Department of Commerce, Small Business Administration, foreign as well as American chambers of commerce, and other business firms with foreign market experiences can effectively guide in selecting foreign suppliers and in handling overseas buying problems. In selecting foreign suppliers, several factors must be carefully considered. For instance, the financial base of the supplier must be considered in order to minimize the problems of long lead times, great distances, material shortages, and high technological specifications. The reputation of the foreign supplier in terms of his integrity, honesty, business capability, knowledge and experience in doing business in Canada and the U.S., social and political power, dealing with labor unions, and business associates should be thoroughly investigated. Future long-term plans of the supplier need to be examined to determine his aims and capabilities in the long run, because the relationship between the buyer and the supplier should be long-term in
nature and not on a one-time basis. The application of sophisticated methods, including computer usage for materials control, by the foreign supplier should be evaluated. The presence of a supplier's representative in the U.S. should be viewed favorably, since the representative can help alleviate language, customs, distance and cultural difficulties. Problems of long lead times could be overcome through flexibility, which can be achieved through the use of multiple suppliers - both domestic and foreign. Small firms can achieve flexibility also through carefully designed delivery schedules, inventory built-up, and establishing long-term commitments. Hedging can minimize the difficulty of currency fluctuations and can protect the firm from financial losses resulting from changing exchange rates. Overall, most difficulties of overseas buying can be dealt with effectively by training the buyer to think and do business in new ways. If the buyer is open minded and responds adequately to new or different business and cultural environments, he can be effective. His clear understanding, patience, knowledge of foreign cultures, and realistic expectations are essential in deriving benefits of overseas buying. OVERSEAS BUYING BY SMALL U.S. FIRMS There are obviously many different ways to overcome the problems of overseas buying. As it is evident in the U.S. balance of trade figures, the United States is buying considerably from abroad and taking advantage of foreign purchasing opportunities. The growing trade deficit is indicative of the fact that U.S. business is learning to handle the difficulties of foreign trade. Some firms - for example, Singer, Johns - Manville, Union Carbide - have been buying from abroad for a long time and deriving benefits . Over the past few months, reports Wall Street Journal , Tony Lama, Magic Chef, Fuqua and a few other firms have increased their foreign purchases in order to take advantage of the strong U. S. dollar. These examples provide some indications about the involvement of U. S. business in foreign markets. But, since most examples are concerning large businesses, it is not clear to what extent and how effectively small U. S; firms are taking advantage of the profitable opportunities abroad. To gain insights into the nature of overseas buying by small American firms, an exploratory study was conducted. The primary purpose of this study was to establish the extent of foreign buying and to examine purchasing practices and policies of small firms. Primary data were collected through a mail survey of small manufacturing firms, which were defined as those having less than 250 employees. Two hundred businesses were selected randomly from the Directory of Texas Manufacturers (Bureau of Business Research, University of Texas at Austin, 1983). These firms were located in the greater metropolitan area of either Houston, San Antonio or Dallas-Ft. Worth. Of the 200 selected firms, 86 responded and returned the questionnaire. Nine of these 86 firms, including one that had gone out of business, either did not complete the questionnaire at all or completed partially; their responses thus were not useable. Three responding firms had 250 or more employees; because of the definition of "small business", their completed questionnaires had to be ignored. The remaining 74 questionnaires were found useable and analyzed. In addition to the mail survey, seven executives in the East Texas area were selected arbitrarily and interviewed. Based on the available primary data, the following are some preliminary findings and observations concerning the nature of overseas buying by small American manufacturers: 1. Only six firms, or less than 10 percent of the responding manufacturing businesses, had purchased directly from abroad over the past 12 months. Five firms had direct foreign purchases but not in the last 12 months. The remaining 63 manufacturers had never directly bought from the overseas markets. Of the 74 respondents, 11
expected to buy from abroad in the near (within two years) future; while the rest were not sure. A large number of small manufacturers, evidently, solely depend on the domestic sources and ignore the foreign suppliers. 2. The predominant reasons for the lack of interest in foreign sources are lack of knowledge about foreign markets and the feeling that domestic suppliers are meeting business needs satisfactorily. Almost all participants, who never imported foreign products, were satisfied with their present domestic suppliers; and 54 out of 63 classified their knowledge on foreign sources as inadequate. One executive wrote that he wished he had better knowledge and understanding about foreign sources and about importing laws and methods. 3. All participants - with the exception of two who did not answer - indicated the use of foreign products in their organizations to some extent. Sixty five respondents listed at least one product that could be categorized as "office equipment", such as typewriter, telephone instrument, and photocopier. Most firms had bought their listed foreign product(s) from the United States. 4. Although purchasing at home or from abroad was considered to be important for success, purchasing activities took up less than five percent of the respondent's time. 5. Overseas buying strategies or activities are not carefully planned by the small manufacturer. The involvement in the foreign market is largely a result of a "crisis" situation rather than of a corporate strategy. All participating businesses with purchases from abroad had no well -formulated plans for overseas buying, and the decisions to buy often were made at the last moment. Foreign suppliers were selected on the basis of availability, and other selection criteria were somewhat overlooked. A typical example was provided by one entrepreneur in a personal interview. This individual had designed a unique electric fan and had just acquired a patent. He formed a corporation to market this product nationwide. The company did not want to manufacture the product itself. The firm contacted several U. S. manufacturers and received price quotations. The lowest quoted pride or cost to this new firm was far above the competing retail prices. It became obvious that the business could not compete successfully with such a high manufacturing cost. The entrepreneur became desperate, flew to a foreign city, and signed a contract with the first foreign manufacturer who quoted a lower price. After the contract was signed and the individual returned home, the company learned about the possibility of product counterfeiting. Another trip was made immediately. A reputable law firm was retained at a great expense to protect legal rights in that nation. The respondent admitted that many of the tensed moments could have been avoided with some planning. 6. Only one firm had serious problems with a foreign supplier. Others classified their problems in overseas buying as usual and expected. Long lead times and red tapes were frequently mentioned problems. 7. Common sense, patience, and different outlook are essential to foreign procurement strategies. According to most participants, it is important for any one who wants to get involved abroad to learn first about the foreign market as much as possible; a good understanding of foreign cultures and business practices could solve most problems. 8. All respondents agreed that a business firm in the United States could benefit from overseas buying.
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