No ebb tide for imports - buying foreign parts

Nation's Business, Sept, 1988 by Steven Golob

No Ebb Tide For Imports

To find the "things that go clank in the night," as he calls the mechanical devices he uses in his business, Charlie Harlfinger goes abroad.

Despite big increases in the prices of overseas goods because of the declining value of the U.S. dollar, Harlfinger still imports devices for the food-handling machines his firm assembles.

Harlfinger certainly isn't alone in importing in the weak-dollar era. More than three years into this period, 87 percent of American manufacturers still use foreign parts, according to a recent survey by the National Association of Purchasing Management.

In choosing an overseas source for parts over a domestic one, a U.S. manufacturer may be seeking higher quality, larger or smaller quantities, continuity of supply or any combination of the three. Also, by using foreign suppliers, U.S. firms may be seeking to benefit from the accommodations that overseas suppliers are making to cling to U.S. market shares won when the dollar was high and the prices of their parts, therefore, were low.

Of course, some imported parts are still cheaper than their U.S. equivalents because of lower labor costs in most countries or, in some others, more modern and efficient production machinery.

Harlfinger says he imports parts from Europe, especially Germany, because "in our business, German-produced mechanical devices really set the world standard.c Harlfinger's business, T.W. Kutter, Inc., of Avon, Mass., assembles machines for food processing and packaging. Its annoual revenues are about $40 million.

"Our core business is sausage-processing equipment," Harlfinger says. In making this equipment, he explains, "the Germans have an advantage because sausage is a staple in their diet. They produce much more of the equipment [than U.S. manufacturers do] just to keep up with local demand."

Nevertheless, Harlfinger's assemblers attach American electronic control devices to the German machines because Harlfinger believes American electronics are better. "Americans just seem to have a better intuition for those types of things," he says.

That's not necessarily so, says Norm MacInnis, an officer of the Electronic Representatives Association. "There's also an awful lot of good electronic engineering coming out of Japan." Ironically, MacInnis notes, in looking abroad for parts, U.S. manufacturers may find themselves dealing with overseas units of U.S. companies. And, in looking to "buy American," U.S. companies increasingly may find themselves buying parts made in their hometowns by foreign companies.

Sprague Electric, a unit of Sprague Technologies that makes electronic components, does not let national boundaries limit where it does its manufacturing or its purchasing. Christopher Steinberg, Sprague Electric's worldwide manager for international trade, says that when his company considers where to buy parts, there are "strategic considerations" apart from price. These include the need for continuity of supply from one source in case of disruptions in production or transportation of supplies from another.

When strategic considerations result in spending more for parts, Steinberg says, "we get more creative about how we pay." Sprague has protected itself against the falling dollar by contracting to pay for foreign parts in dollars or "in some cases, we have hedged by purchasing foreign-exchange contracts in expectation of purchasing parts in that foreign currency later."

Purchasing foreign-exchange contracts to hedge costs against currency fluctuations may sound complicated for small and midsized manufacturing companies. But, basically, it's the same hedging that farmers do with forward contracts to protect their incomes against fluctuations in commodities prices. Any bank with an international department can lead even the smallest company through the steps.

As another option, a U.S. manufacturer may be able to include in its contract with a foreign supplier an agreement to split the difference when changes in currency-exchange rates hurt one and help the other.

"The supplier should share the responsibility for shifts in currency valuation," insists Charles Intrieri, who began importing parts for Schwinn Bicycle 23 years ago. Intrieri is now head of worldwide procurement and scheduling for the Troy-Bilt Division of Gardenway, Inc. Troy-Bilt makes rototillers and lawn mowers, contributing some $100 million to Gardenway's more than $200 million in sales last year.

Intrieri, who has lectured on importing, offers "dual sourcing" as a valid reason for purchasing parts from suppliers both at home and abroad.

Other purchasing experts disagree, arguing that it is difficult enough to bring one supplier's quality up to desired levels. Trying to do this for two sources, they say, doubles the likelihood of quality-control problems.

Many single-source U.S. manufacturers were forced to switch to overseas suppliers in the early 1980s when the U.S. dollar skyrocketed and their U.S. suppliers conceded certain areas to foreign competitors. Now, despite higher costs, these single-source manufacturers are staying with their foreign suppliers, making it more difficult for some parts manufacturing to return to the United States.