International Business and TradeGM0112, Global Sourcing (I)
What is global sourcing?
Global sourcing strategies
Bent PetersenVisiting Professor
1Global Sourcing - Fall 2010
Contents of today’s lecture
1. What is global sourcing?
2. Overview and trends of global sourcing
3. Global sourcing choices and strategies:– The WHAT question– The WHERE question– The HOW question
2Global Sourcing - Fall 2010
What is global sourcing? A very broad definition includes import and foreign
sourcing for local use. However, for this course we suggest a narrower
definition: Firms’ use of foreign resources for global use. Global sourcing level V (Trent & Moncka, 2005):
Integrated and coordinated sourcing, not only among worldwide buying locations, but also across functional groups (such as R&D, operations and marketing).
4Global Sourcing - Fall 2010
Global sourcing and Dunning’s FDI motives
Global sourcing is not market seeking or horizontally organized subsidiaries...
...but may include: Resource seeking Efficiency seeking Strategic asset seeking (Dunning, 1980 &
1993)
5Global Sourcing - Fall 2010
Global sourcing – of which activities? For many activities - such as day care,
nursing, transportation, gardening - global sourcing is not feasible at all; these activities are inherently local activities.
However, all goods and services that can be transported or transmitted (digitization!) at reasonable costs are amenable to global sourcing.
6Global Sourcing - Fall 2010
A value chain approach
Presumably, MNC managers consider global sourcing in relation to individual value added activities.
Michael Porter’s value chain includes 9 distinct business activities that may differ significantly in terms of scale and scope economies, transaction costs/risks, resource requirements, and strategic importance.
7Global Sourcing - Fall 2010
Value Creation Logics
Not one generic, but several business sector specific value creation logics:
The value chain of manufacturing firms (Porter, 1985).
The value shop of consulting firms (Stabell and Fjeldstad, 1998).
The value network of banks and telecommunication firms (Stabell & Fjeldstad, 1998).
8Global Sourcing - Fall 2010
A value chain (Porter, 1985):
SUPPORT ACTIVITIES
PRIMARY ACTIVITIES
MARGIN
9Global Sourcing - Fall 2010
Dispersed value chain configuration(“multi-domestic MNC”)
Denmark
SalesSales
Germany
US Subsidiary
Sweden (HQ)
10Global Sourcing - Fall 2010
Concentrated value chain configuration(“globally integrated MNC”)
China
Manufacturing
IT
India
Denmark
Sweden
R&D
HRM
M&S
Norway
11Global Sourcing - Fall 2010
Concentrated value chain configuration precipitates an integrated network (Bartlett &
Ghoshal, 1989)
12Global Sourcing - Fall 2010
Some company examples…
….of mainly dispersed value chain configuration Carlsberg Isover Ikea… of mainly concentrated configuration Logitech Inc GN Resound
13Global Sourcing - Fall 2010
GN ReSound’s concentrated value chain configuration
Cork: Distribution and
production.
København: Headquarter. R&D, Brand development and production.
Bloomington: Administration, distribution, sales and marketing
Chicago: Salg og marketing, and R&D.
Xiamen: Production (largest factory).
14Global Sourcing - Fall 2010
Sourcing (onshore-offshore)
Location
Operator
Home country
Foreign country
Ourselves Onshore sourcing
FDI /Captive offshoring
ContractualPartner
Onshore outsourcing
Offshore outsourcing
J/V
globallocs.jpg
15Global Sourcing - Fall 2010
Offshoring of services– Global trends
Source: McKinsey Global Institute, 2005
Number of service jobs worldwide: 1.46 mia Number of service jobs that theoretically can be
carried out as remote services: 160 mio Offshored jobs until 2003: 1.5 mio
In 2003 US and UK firms represented around 70% of all offshored service activities.
India’s world market share of ”Business Process Offshoring” (including IT) is almost 50 %.
17Global Sourcing - Fall 2010
What Drives Firms’ Global Sourcing? Improved transportation technology
(reversed by increasing energy prices) Advances of IT (digitization!) Market integration (lower trade barriers and FDI
restrictions) Product modularization techniques Increased global competition Improved market institutions, such as:
Intellectual property right protection Industry standards Certification, accreditation
October 4 19Global Sourcing - Fall 2010
Configuration of value chain activities
Coordination of value chain activities
Dispersed Concentrated
Low
High
Lower coordination (I&CT) and transportation costs
Market Integration
Porter’s (1986) global value chain framework
Shrinking factor cost differentials
Global sourcing
Oc 20Global Sourcing - Fall 2010
Local GlobalRegional
Arm’s length(procurement)
Contractual(outsourcing)
Equity (FDI)
Value chain specialization(Global sourcing)
Low (dispersed configuration/ sparse coordination)
Geographical expansion of sales(The Psychic Distance phenomenon)
Resource commitment to foreign sales effort
(The Establishment Chain phenomenon)
High (concentrated configuration/ extensive coordination)
21Global Sourcing - Fall 2010
Re-Configuring the Value Chain MNCs are in the process of a dual
transformation of their value chains:1. A surge from dispersed to concentrated
configuration strategies in which global sourcing plays a vital role.
2. A surge in direction of a more fragmented and modularized value chain in which offshore outsourcing plays a prominent role.
22Global Sourcing - Fall 2010
Typical US TNC re-configuration pattern
0. Point Zero: Dispersed, un-coordinated TNC units.1. Establishment of (regional) Shared Services
Centers Consolidation in terms of scale economies and transparent cost structures.
2. Fragmentation and modularization of value chain activities.
3. Decision about location (on/near/off-shore?) and ownership (captive/JV/outsourced?).
23Global Sourcing - Fall 2010
TNC example: American Express
1990s: 46 sites carrying out travel related services.– Process duplication and inconsistencies– Lack of customer focus– Inflexible, legacy applications
1993: 3 regional shared services centers in Phoenix USA, Brighton UK, Gurgaon India.
2000s: The Indian captive center provides services to Amex units outside Asia, thereby becoming a global sourcing center.
24Global Sourcing - Fall 2010
Global sourcing choices and strategies:
The What, Where and How questions
25Global Sourcing - Fall 2010
The WHAT question
What should be sourced locally - and what in central hubs serving the MNC as a whole?
Which value chain activities should remain in the home country and which should be re-located to foreign destinations?
Theory, literature streams: RBP, open sourcing/innovation literature, information economics.
26Global Sourcing - Fall 2010
The WHERE question
Global Sourcing - Fall 2010 27
Where should value chain activities that cannot be retained (or developed) economically in the home country be moved to?
Closely related to the question of partner selection.
Theory: Economic geography (including global SCM/logistics and agglomeration economies), institutional theory.
The HOW question
How to organize the re-location? What should be the governance structure of
value added activities (re-)located abroad? Make-or-buy? JV?
Theory/literature streams: TCEs, organizational learning literature
28Global Sourcing - Fall 2010