SOURCING FACE MASKS IN A PANDEMIC

I have been assisting a number of States and medical institutions on a worldwide hunt for personal protection equipment (PPE) and have a to-do list stretching into several hundred bullet points. I consolidated some of the main points below:

The past several months has seen extraordinary efforts to secure PPE ranging from N-95 face masks to ventilators from overseas suppliers. State, federal and private medical institutions are all trying to secure supplies and are often bidding against each other. Countries located in the Middle East to Latin America are sending in procurement teams to countries, like South Korea, that still have excess production capacity. Add to the mad scramble foreign countries starting, or already having nationalized, critical medical exports making sourcing PPE that much more difficult.

In a standard U.S. supplier to U.S. product procurement, it’s the norm to seek supplier pre-qualification, independent quality controls, jurisdiction, strict contract terms on performance, as well as negotiated payment terms. The standards often go out the door when there are entire countries bidding against your client, and product pricing and supplies are changing by the hour. As the global pandemic ranges on, international procurement has become a hot topic that has vaulted to the forefront and is often an area that U.S. entities do not have subject matter expertise.

COUNTRY DIFFERENCES

Just because you found an overseas supplier that speaks English doesn’t mean you have a meeting of the minds. I have been on several calls where what we talked about, was totally different from what was written. In one case, we thought we had a firm price but, in reality, it was only firm during the call. The price dramatically changed within 12 hours (yes, you will be spending many hours on the phone when you are typically having your cocktail or sleeping). 

ADVICE - Immediately follow up with an email and ask for confirmation within the hour on price, etc. Take the time to create a standard purchase order that is understandable and can be easily filled in-send that form as your confirmation. 

ADVICE - Find someone in-country. Someone in your state probably knows a friend of a friend. Avoid these types. They rarely have the business skills or level of technical understanding to act on your behalf. There are reputable consulting firms and law firms that, while costly, can make sure you are not disappointed. 

ADVICE-I was on a call where a U.S. attorney launched into legalize about claw backs. I spent the better part of an hour with the overseas supplier explaining what the attorney meant. Plain English please! Most everyone understands terms like FOB, but make sure you ask FOB where, what port, how long will the PPE be in the port (especially if temperature regulated).

TECHNICAL DIFFERENCES

Just because you found a supplier of say, a COVID-19 test kit, you are not out of the woods. What you may get may be totally inappropriate for the U.S. Test kits not compatible with local testing equipment and difficult testing procedures should be carefully considered.

ADVICE - Obtain local country certifications as to the testing procedures and lab results. Typically, there will be a letter with the country or medical institution seal. Carefully scrutinize the paperwork to insure it’s not a fraudulent certificate. This is definitely where a trusted counsel in country comes in handy.

ADVICE - Ask if they obtained U.S. approval. In the case of COVID-19 test kits, this would mean FDA approval. Generally, given the scarcity of overseas testing kits, the foreign supplier will have to obtain emergency use authorization from the FDA which can take weeks. Unless there is independent testing, prior to FDA authoritarian, you are in red flag territory.

ADVICE - Do not commit until you have obtained a sample. This might be difficult when dealing with ventilators, but you can ask questions such as is the ventilator new of refurbished, who handles maintenance, what it the warranty, etc. Even if you obtain a sample, remember that if you are sourcing say, 1 million N-95 face masks, you need a quality check provision after your purchase of, as an example, every 50,000, before you commit to the entire purchase. Go into the discussions knowing exactly how many samples are needed. I was on one transaction where the number of samples went from 100 to 4000 and back to 100 in 2 days- basically wasted time and confused the seller.

ADVICE - Don’t let a procurement personnel talk medical terminology. Get a medical professional involved early to ask the right questions! Also, remember, it’s not just the technical specifications, but what happens after you get the supplies and something doesn’t work…Are there U.S. maintenance companies the overseas supplier has already contracted with? Is there video technical training available? Are there available parts in the U.S.? 

PAYMENT TERMS

Most governments have strict rules about 100% payment in advance. It’s a bad idea in any event unless you have strict quality checks in place and a mechanism to claw back payment for defective products (the media has reported on many bad deals). On the other hand, it’s likely the foreign supplier will ask for a substantial prepayment. 

ADVICE - I have seen negotiated terms where, if the supplies do not arrive in time, or are defective, there is a reimbursement or additional supplies provision. On the other hand, I have seen clients close their eyes and hope….

ADVICE - If the payment can be segmented based on several shipments with the second payment only after arrival and inspection of the first shipment, you can minimize risk. Letters of credit and insurance are also something you should explore.

ADVICE - Sounds simple, but have you determined if your purchase is a foreign exchange transaction or U.S. dollars. Have you factored in exchange rates, hedging, and bank transfer fees? Have you considered U.S paperwork necessary for payment, such as one of the many W-8 forms which the foreign supplier will have no idea how to fill out….

ADVICE - A lot of foreign companies ask for a non-binding letter of intent. Don’t freak out. This is quite normal and it is non-binding (if properly drafted). The purpose is for the supplier to gauge its manufacturing capability versus all the procurement requests and to get you into the que. I have seen institutions lose out as it took them too long to sign an LOI. Word of advice, even if it’s difficult to enforce, I would try and make the LOI confidential so it’s not used to up the bidding war.

LOGISTICS

This is where U.S. entities get tripped up. They may not have the experience in international shipments.

ADVICE - Don’t assume medical supplies are transported like say, a book. In many cases, you are going to need FDA registration. This can be a problem if the overseas company has just filed with the FDA. Figure out the issues in advance. Note there is an FDA operations manual that has a section on permits, waivers, etc. In the case of last resort, you may need to get your senators and congressmen involved.

ADVICE - Retain a customs broker or freight forwarder. International procurement issues, duty, and customs documentation are generally not the experience of someone, say, in a hospital.

SUMMARY

Good luck. It’s a brave new world out there. This sourcing the world experience should help everyone learn a little more about international transactions. Next time, we will all be a little more prepared.

About the Author: Gary Sumihiro is the founder of Sumihiro Investments, LLC and global strategic advisor and board member of a number of companies. Learn more at www.sumihiroinvestmentsllc.com.