Factoring local content requirements into global sourcing decisions - Supply Management

Factoring local content requirements into global sourcing decisions

Jillian Lilico
posted by Jillian Lilico
18 September 2014

Jillian LilicoContracting and procurement specialists typically based at corporate Western-based headquarters (HQs) identify, pre-qualify and negotiate suppliers in order to set up lean, efficient global supply chains for use by buyers located in far flung regions. This includes regions with local content requirements (LCRs) applied to industries ranging from oil and gas (Ghana, Nigeria) to renewables (Brazil, India) and textiles (South Africa).

If local companies are not part of your supply chain and if LCRs are not part of the international sourcing process, the commercial impact could be the exclusion from preferential fiscal terms for import and export, exclusion from public sector tenders and development finance and restrictions on selling your company products to domestic customers.

I’ll explain with three scenarios. Company A is a wind farm developer. To meet local content requirements, company A establishes a wind turbine production plant in country Y which has an LCR of 100 per cent for cement used in wind turbine towers. Country Y has a domestic capacity to supply 100 per cent of the cement.

Scenario 1:  Global HQ has no strategic processes for local content requirements and negotiates global deals for cement. As a consequence, cement is imported. As local content is 0, company X pays 100 per cent import duty on cement and cannot take advantage of a lower sales tax on sales to domestic customers.

Scenario 2: Global HQ has some knowledge of LCRs. Supply contracts are agreed with local cement manufacturers achieving 100 per cent local content. However this is a reactive process to initially satisfy the LCR. Let us assume that company X has to increase its purchase of cement because of a change in the product specification for the construction of the tower. Accordingly, HQ authorises an increase in order quantities with a ‘non-local’ supplier. This means that the local content percentage for cement per unit of tower produced is no longer 100 per cent. Company X now falls into the relevant sanctions regime.

Scenario 3: Global HQ develops processes to support local content decisions in supply chain management and sourcing decisions. Product design, sales, tax, the SCM function and local content managers all share data to inform supply chain and local content decisions. Cement, for example, is flagged as a “strategic input” (in absence of a better term) and a key sourcing rule is that all cement supplies for wind turbine towers in country Y will need to come from a local supplier.

As part of the process, the local content manager has constant access to information from production and sales and works closely with domestic suppliers to let them know demand requirements so that they maintain capacity or liaise with the local content oversight body to inform it about potential shortfalls (especially if domestic capacity is not internationally competitive) to negotiate a mutually agreeable rectification plan to re-establish local content levels and to ultimately maintain the desired commercial position of your company.

☛ Jillian Lilico is is managing director at Demeter Development

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