Conduct your own fact-finding when locating an international procurement office
Arvid Pedersen -- Purchasing, 7/15/2004 6:00:00 AM
Second in a series
For many companies considering the creation of an International Procurement Office (IPO), choosing the appropriate location can be the most difficult aspect of the decision. While there are always evaluation factors unique to a particular company and its product, there are a few common considerations that must be researched and answered. This article will discuss in greater depth one of the most difficult evaluation factors—the IPO location—and will assist in breaking it down to manageable tasks. This is the second article in a series.
Business Focus: The most obvious answer as to where to locate an IPO is at the center of your current international sourcing activity. However consideration must be given to the market dynamics, strategic growth plans, and the anticipated stability of labor rates and material costs over the business planning time horizon. Rather then looking simply at current sources of supply, perhaps it is best to look to where future sources of supply will be located, based on how managers see the business developing over time. Costs can vary country to country, so expatriate and local labor salaries must be evaluated, as well as anticipated travel costs from the various sites considered.
Cost Factors: Office rental rates can vary widely, as can taxes on office expenses. Income taxes on expatriate staff salaries and benefits can be significant, and quite often increases significantly year over year. The point of this is that all cost factors must be taken into consideration before the office search and staff recruitment process can be finalized.
Example: Although most IPOs to serve the China market were set up in Hong Kong, many firms have moved to Shanghai, Shenzen, and even Macau to reduce costs or to be closer to their supply base. Now that Hong Kong office rental rates have dropped by up to 60 % off the peak of 1997, many are considering Hong Kong again. The key message: conduct your own fact-finding and consider only current data with an eye towards the future.
Co-Location: If your firm has existing operations in the region, the natural tendency is to collocate the IPO with the manufacturing or regional office. This can reduce office costs significantly, however care must be taken to ensure that staff is committed to the procurement function and not "shared" with local operational tasks. The proximity of the operations to the supply base must also be considered as travel time should be minimized.
Concluding Considerations: IPO site evaluations between candidate locations should consider at a minimum: existing and planned business operations, office rental rates, utility costs, building amenities (parking, HVAC services, elevators, maintenance), expatriate salaries, local salaries, expatriate housing and associated costs, travel time and expense to supply base, proximity to major airports, cultural alignment, telecommunication costs, employee retention expectations, income and representative office taxes, tax incentives, and consideration of the political climate with home office country. As with any such evaluation process, weighting of the impact of these factors will vary by industry and individual company requirements.
Read the first article in the IPO series at www.purchasing.com/outsourcing
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