Working with international suppliers
Trading within the UK and trading with suppliers in international markets is significantly different. If you're working with an overseas supplier, you will have to manage the relationship carefully to secure the benefits and overcome the challenges of international supply chains.
This guide outlines the advantages of sourcing overseas. It also discusses the most common difficulties that you may encounter when dealing with overseas suppliers. Typically, these include language, cultural and business etiquettes, different payment methods and increased paperwork requirements.
This guide also takes you through the key steps involved in finding, choosing and working with overseas suppliers and agreeing overseas supplier contracts. Finally, it explains how to pay international invoices through the four common methods of paying overseas suppliers.
Advantages of sourcing overseas
Sourcing overseas refers to buying materials, products or services from manufacturers or suppliers that are located outside of your home country.
While domestic sourcing typically allows for quicker logistics, better production control and shorter time to market, sourcing overseas is generally considered cheaper.
Benefits of sourcing overseas
Cost-savings are one of the main advantages of global sourcing. Many foreign suppliers and manufacturers offer their services at a competitive price, especially in low-cost regions.
Manufacturing costs are generally lower and businesses can often buy goods at a lower unit price. For businesses with tight budgets, this can be a great way to maximise their bottom line. However, keep in mind that other factors can affect any potential cost-savings, such as costly international administration or communication, transport costs or duty rates.
Besides the often-cheaper unit price, other things can tip the scale in favour of sourcing overseas. For example:
- availability of world-class technology that exists in certain markets
- access to cutting-edge research, design or specialised knowledge
- proximity to raw materials that may be unavailable domestically
- manufacturing capabilities that may unavailable domestically
- higher quality goods compared to domestic products
- a great number of potential suppliers you can choose from
In addition, businesses that source overseas are often able to enhance their competitive position in the supplier home country by getting to know the market.
Disadvantages of sourcing overseas
Global sourcing is typically more complex than purchasing supplies domestically.
While the advantages of sourcing overseas can be obvious, you must carefully consider and manage the unique issues and increased risks. For example, dealing with increased rules and regulations that apply in international markets, the various customs requirements, cultural and language differences, quality risks, currency fluctuations, complicated logistics, etc. These obstacles are often the reason why many businesses decide to remain with local suppliers.
To make sourcing overseas a success, you should take steps to scrutinise and understand all of the complexities involved. Read more about the challenges of sourcing overseas.
The challenges of sourcing overseas
If you plan to source goods or materials overseas, you should be aware of the many unique problems that may arise. Typically, these may include difficulties with logistics, regulations, customs and language, cultural differences, time zones and currency fluctuations.
Problems associated with sourcing abroad
You shouldn't assume that the same rules will apply overseas as they do in the UK, particularly when dealing with a country outside the European Union.
Depending on the supplier's market, you may come across:
- different technical or industrial standards, which may or may not meet UK requirements
- varying import or export restrictions at either end of the transaction, such as tariffs and quotas
- complicated documentation requirements for cross-border processes
- fluctuation of currency exchange rate
- unstable economic and political climate or local or regional environment
Frequently, local customs or court decisions - in addition to international treaties - apply in overseas countries. It is therefore critically important to establish the relevant law and jurisdiction in case of a disagreement.
Conflicts with overseas suppliers
Common causes of disputes with overseas suppliers include:
- liability claims, in situations where a product causes harm or loss
- infringement of intellectual property rights
- provision of insurance at each stage of transit
A well-drafted, written supply contract will help establish expectations for responsibilities and indemnification, and avoid potential disputes. See more on overseas supplier contracts.
Other challenges with international purchasing
As well as legal and regulatory differences, other issues can come up when purchasing supplies abroad. For example:
- Language differences, especially if you need to discuss complex technical issues or engage in detailed exchanges. Misunderstanding or misinterpretation can affect your requirements - eg your supplier can confuse order quantities or miss deadlines. Language barriers can also affect contract negotiations or cause communication delays, both of which can affect your bottom line.
- Payment methods for international transactions can be complicated. Find out more about paying overseas suppliers.
- Shipping procedures are also more complex, given the increased distances and the need to cross borders. See international transport and distribution.
- Cultural differences can be a concern. Understanding the business and social practices of your supplier's country can help build trust and develop relationships. Read more about entering overseas markets.
- Managing the supply chain can be challenging. Consider how many suppliers you need. Over-reliance on key suppliers can result in problems if one of them goes down. On the other hand, having too many supplier may be difficult to manage. See how to manage your suppliers.
- Cashflow issues can crop up since payments usually take longer with overseas suppliers. You may need to send cash out earlier for advanced payments and have it tied up for longer, which can affect your liquidity and working capital.
Keep in mind that the origin of your goods can affect the level of duty you pay. Some goods attract a preferential rate of duty, so check the source of your supplier's raw materials. See rules of origin for imported and exported goods.
How to find an overseas supplier
The key to identifying overseas suppliers is comprehensive research. You should examine and carefully analyse the potential countries to trade with, as well as individual suppliers within those countries.
Decide where to set up a supply base overseas
You can import most goods and materials from a wide range of countries. Expect a trade-off between prices and levels of regulation and protection. Suppliers in developing countries may be cheaper, but it may be more difficult to resolve any problems.
Factors that should influence your decision include:
- familiarity with the country - knowing your target country and having contacts within your sector there makes doing business easier
- communication - if you (or your employees) don't speak the local language, check that English is widely spoken by businesses, or that translators and interpreters are available
- membership of the European Union (EU) - in EU countries, many key regulations and standards will be similar to or the same as in the UK
- development level - it's generally easier to trade with developed countries than developing ones
- distance - this affects shipping costs, the length of your trading cycle, and the ease of visiting suppliers, if necessary
- levels of existing trade with the UK - high volumes suggest other businesses have successfully chosen the route you're considering
Find the right international supplier
There are many sources of information about potential suppliers and markets, including:
- Invest Northern Ireland's Business Information Centre
- trade associations for your business sector
- other importers in your sector
- banks' trade services departments
- overseas trade visits and exhibitions
- the British Chambers of Commerce
- your target countries' embassy in the UK
- membership organisations for businesses trading between the UK and your source countries
It is vitally important that you look into potential suppliers to assess and verify their performance. You should also evaluate their technology, products, reliability, solvency and commitment to quality, to ensure that you select the best possible supplier for your business. See how to choose an overseas supplier.
You may need secondary suppliers, such as freight forwarders, to help with the trading process, or import agents to handle shipping and customs-related formalities and documentation. See finding and choosing a freight forwarder.
How to choose an overseas supplier
The process of choosing a supplier overseas is similar to the process of choosing a supplier within your home country. You should prioritise getting the right price and quality while making sure that the supplier can meet high standards and delivery dates consistently.
Competitive price is important, but the reliability of your supplier is crucial. If you're looking to work with a supplier on a tight budget, make sure that cost savings don't come with unacceptable compromises on quality or service you'll receive.
Stages in the supplier selection process
The main stages in the supplier selection process are:
- shortlisting potential suppliers
- assessing shortlisted suppliers against value for money, reliability and solvency
- visiting the suppliers, if possible, to see their operations
- deciding which of the suppliers to work with
Once you shortlist potential suppliers, you may want to ask them for a written quotation.
A supplier quotation is a formal statement of promise by a potential supplier to supply the required goods or services at specified prices, and within a specified period. A quotation should also clearly state the warranties, and terms of sale and payment, including who will be liable for the shipping, insurance and transportation costs, and any duty to be paid. For more information on the terms of sale, see International Commercial Contracts - Incoterms.
When you're happy with the price, quality and terms of service that the supplier is offering, you can ask them for a demonstration or a sample product based on your specification to make sure that they are capable of producing what you need.
Supplier evaluation due diligence
Due diligence is a must when choosing suppliers, whether at home or overseas. Carry out rigorous inquiries into their manufacturing practices, compliance, commitment to quality and reliability.
If possible, visit the supplier. Look at their work and their production system. Find out as much as you can about the supplier by talking to:
- any UK references the supplier can give you
- UK importers with experience in the market
- trade associations and other importers in your sector
- member organisations for UK businesses trading with the market
You should also check the reliability of any sub-contractors to which your supplier may be outsourcing work. See how to run checks on your supplier.
Supplier financial risk assessment
Financial checks of overseas suppliers can be difficult due to a lack of accessible financial information. Try to validate information on the supplier's financial stability so that you can assess the potential risks to your business.
Your bank's international trade team may be able to carry out a status query - ie look into the company's financial standing on your behalf. Until you trust the supplier, avoid advance payment or long-term contracts. See paying overseas suppliers.
Once you enter into an agreement, remember to review your suppliers' performance regularly.
Working with overseas suppliers
A strong relationship with an overseas supplier can be beneficial to your business. It can give you a competitive edge in a new market. It can also help you to negotiate a more favourable price, better terms and conditions of service, and greater availability of product.
Here are some fair practices you can follow to strengthen your connection with your international suppliers.
1. Build trust gradually
Trust is a crucial element of any supplier relationship. Fostering trust can take time and effort, especially if there are language barriers between you and your overseas supplier. The key is to build trading relationships slowly.
2. Set clear expectations and terms of service
Don't leave things to chance when developing your working relationship. Draw up clear written contracts and openly set expectations of service and quality for both parties. Your initial contract with a new supplier may be on a project-by-project or shipment-by-shipment basis. As the relationship develops, you may move to longer contract periods and potentially negotiate better terms. See overseas supplier contracts.
3. Understand cultural and social differences
An important part of building a strong supplier relationship is learning how things work in the supplier's country. Keep important cultural and social differences, and local business etiquette in mind when dealing with the supplier. See entering overseas markets.
4. Communicate clearly and openly
Communication is a potential hurdle in dealing with overseas suppliers. Even simple actions such as routine telephone calls can be complicated by factors such as time differences, low-quality phone connections and language barriers. To determine if a language may be an obstacle, consider:
- Which language will you use with your supplier?
- Do you have enough foreign-language speakers in your workforce?
- Do these employees have the skills they'll need to deal with your suppliers?
- Would it help to use local interpreters, especially for key meetings, to avoid misunderstandings?
Face-to-face meetings are likely to be infrequent, but they can be vital to building the trust - so plan them carefully. Use video conferencing or other modern communication platforms to ensure that you keep in touch with the supplier.
5. Manage your supplier relationship
You should carefully monitor key aspects of the new supplier relationship. This will help to identify areas for possible improvement. Follow best practices in supplier quality management when managing your overseas supplier.
You should also schedule progress reviews with the supplier. If you identify any problems, decide together how to resolve them. If everything is working smoothly and profitably, you may want to extend the level of business you're doing together. Find out how to review your supplier's performance.
6. Pay your supplier on time
If you want a long-term, successful relationship with your overseas supplier, you should pay them promptly and reliably. Payments in cross-border transactions are often a cause of disagreement. Agree clear payment terms at the start of the relationship and let your supplier know if you foresee any difficulties with meeting your obligations. See more on paying overseas suppliers.
Paying overseas suppliers
There are four main methods for paying overseas suppliers for the goods you import from them: cash-in-advance payments, letters of credit, documentary collection and open account trading. Each has their own advantages and disadvantages.
With advance payments, the supplier only ships goods once they receive your payment. Wire transfer is perhaps the simplest way of transferring funds in advance into your supplier's account. Cash-in-advance payments have a high level of traceability but, once issued, it's impossible to stop them and difficult to recover them if something goes wrong.
Letters of credit
With letters of credit, your bank guarantees to pay your supplier when they present it with relevant export documentation. This is arguably one of the safest ways to make overseas payments, as credit notes balance the risks of buyers and suppliers. However, you will spend extra time on paperwork and the bank guarantee may increase the cost of the transaction, due to interest and other expenses. See more on letters of credit.
With the documentary collection, the supplier ships the goods then sends the export documents via their bank to your bank, along with the payment instructions. The banks draw up a bill of exchange and channel all funds and documents in the transaction. This method is cheaper than letters of credit, but presents more risks to the supplier - it lacks verification process and has limited recourse if the importer doesn't pay.
Open account trading
With this type of payment, the supplier ships goods to you directly, and asks for payment within an agreed period. For suppliers, this option has the highest risk of non-payment as they bear the costs of production and shipping until you pay them.
Minimise risks associated with paying overseas suppliers
For importers, the risk decreases as you move down the list of payment options. Advance payment is the riskiest - there is a chance you'll pay but never receive the goods. Open account trading is the least risky - you only pay after receiving the goods.
For exporters, however, the risk increases as you move down the list. So while you might prefer open account trading, your overseas supplier may want advance payment.
Letters of credit and documentary collections offer some protection to both parties by involving their banks as intermediaries in the process.
Overseas sourcing and cashflow issues
Payment methods can have a major impact on your cashflow position. Most banks offer import finance packages to bridge the period between paying for your imports and receiving payment when you sell them on to your customers. See cashflow management.
To mitigate cashflow problems, you can often negotiate payment methods and terms. For example, you might offer a supplier a letter of credit in return for an extended 75-day payment period to match your cashflow requirements. See invoicing and payment terms.
Paying invoices in foreign currency
Unlike standard, domestic invoices, an international invoice could result in additional costs for your business, due to currency conversion fees, exchange rate margins and transfer fees. Find ways to mitigate foreign currency and exchange risks.
Overseas supplier contracts
There are many advantages to using overseas suppliers, but they can easily turn into a liability if you don't put formal agreements and contracts in place.
Importance of agreements with overseas suppliers
Language barriers, differences in business practices and increased rules and regulations are common challenges of sourcing overseas that can potentially cause difficulties between an importer and an overseas supplier.
A clear written contract is the best way to avoid problems. If disagreements do arise, they will be easier to resolve if you have a written contract rather than a verbal agreement. Your contract should make all aspects of the trading process as clear as possible - including what will happen, when it will happen, and exactly what each party is responsible for at each stage.
There are standard trading practices and systems to help you agree key issues. Incoterms are an internationally recognised set of trading terms used in contracts of delivery. See International Commercial Contracts - Incoterms.
What to include in a supplier contract?
Key things to cover in a contract with an overseas supplier include:
- Goods - what goods you are buying and what legal or technical rules (if any) they must comply with?
- Price - how much will you pay, in which currency and at which exchange rate?
- Payment method - when and how will you make payment? See paying overseas suppliers.
- Delivery - how will the supplier transport the goods to you? See international transport and distribution.
- Trading terms - use Incoterms to specify exactly who is responsible for shipping costs, duties, and customs-related formalities.
- Insurance - be clear about who bears what risks - eg for loss or damage - at each stage of the process. See insurance for international trade.
- Potential problems - agree procedures to follow in case of disputes, eg if one party's error causes delays or losses for the other.
- Service level agreement - define the level of service your supplier must provide. See more on service level agreements.
- Legal jurisdiction of the contract - establish where legal proceedings should take place if there is a dispute.
Bear in mind that the contracts you agree with a supplier will evolve with your trading relationship. While early contracts might be on a shipment-by-shipment basis, longer-term contracts might follow as familiarity and trust develop. Find out how best to negotiate the right deal with suppliers.