international contract manufacturing

8/3/2019 International Contract Manufacturing

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Made by:-Nikhil chabraPriyank vaish

Saumya tripathi1contract manufacturing or global sourcing5/5/2012


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What is contract manufacturingDefinition

the procurement of products or services from independentsuppliers or company-owned subsidiaries located abroad for

consumption in the home country or a third country. also

called global procurement or global purchasing, global

purchasing, global sourcing amounts to importing-an inboundflow of goods and services.

2contract manufacturing or global sourcing5/5/2012


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Key drivers especially responsible for the growth of globalsourcing in recent years

Technological advances

Widespread access to vast information includinggrowing connectivity between suppliers and the

customers

Declining communication and transportation costs

Entrepreneurship and rapid economic transformation in

emerging markets.

contract manufacturing or global sourcing 35/5/2012


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Sourcing for the dell inspiron notebook

4contract manufacturing or global sourcing5/5/2012


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One should outsource or notManagers must decide whether each value-adding activity

should be conducted in-house or by external, anindependent supplier. i.e. between internalization and

externalization

Should we make a product or perform a particular value-

chain activity ourselves or should we source it from outside manufacturers



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Why firms outsource: firms generally are not superior at performing all primary and

support activities.

Most value adding activities(manufacturing , marketing, after

sales service) candidates for outsourcing

Historically outsourcing involved the acquisition of raw material,parts and components now it has extended to include the

procurement of services as well.



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Different types of sourcingBusiness Process Outsourcing (BPO) .

The outsourcing of business functions to independent suppliers such as

accounting, payroll, and human resource functions, IT services, customerservice, and technical support.

Back-office activities Front-office activitiesCaptive SourcingCaptive sourcing refers to sourcing from the firms own production

facilities located abroad. Production is carried out at a foreign facility that

results from the focal firm FDI activities. Fr eg : genpactcontract manufacturing or global sourcing 75/5/2012


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The nature of outsourcing and global

sourcing Value adding activity isinternalized Value adding activity isexternalized(outsourced)

Value adding activity keptin home country

Akeep production in house ,in

home country

BOutsource production to

third party provider at home

Value adding activity

conducted abroad(global

sourcing)

C

Delegate production to

foreign subsidiary oraffiliate(captive sourcing)

D

Outsource production to a

third-party providerabroad(contract

manufacturing or global

sourcing from independent

suppliers)



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These decisions depend largely on the strategic importance of theparticular activity to the firmR&D design Componentmanufacturing

Manufacturing orassemblyMarketingand branding Salesdistributionand logistics

Customerservice

Imp. Of this

activity to the

firm as a

strategic asset

Very imp. Low imp. Low-medium

imp.

Very imp. Medium imp. Medium imp.

Likelihood of

internalizing

rather than

outsourcing

this activity

high low Low-medium high Low-medium Low-medium

Geographic

config. : overall

tendency tolocate activity

at home or

abroad

Usually

concentrated at

home

Usually

dispersed across

various market

Usually

concentrated at

few markets

Branding

concentrated at

home ;marketing

concentrated or

dispersed to

individual

markets

Dispersed to

individual

markets

Dispersed to

individual

markets, exceptcall centers,

which are often

concentrated



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Whos the more popular global source? INDIA or CHINA

ChinaManufacturing

Large amount of skilled, low cost labor

350,000 engineers graduate each year

Huge domestic market with rapid, sustainable growth

Government attitude changing toward probiz

Weak on IP

Language and culture are challenging Lacks quality infrastructure

Government bureaucracy

IndiaServices (e.g., backshop)



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Key players in global sourcing by regionsCentral & easterneurope Chiana & southasia Latin america &the caribbean Middle east Andafrica

Top-rankedcountries

Czechrepublic,bulgaria,

slovakia,poland,h

ungary

India,chiana,malaysia,philippines,si

ngapore,thailand

Chile,brazil,mexico,costa Rica,

Argentina

Egypt,jordan,united Arab

emirates,ghana,tu

nisia,dubai

Up-and-comers Romania,russia,u

kraine,belarus

Indonesia,vietna

m,sri lanka

Jamaica,panama,

nicaragua,colombi

a

South Africa,

israel,turkey,moro

cco

Emerging local

providers

Luxoft(russia),E

PAM

systems(belarus),s

oftline(ukraine),d

ata art(russia)

NCS(singapore),bl

uem,neusoft

group,broadengat

e systems(chiana)

Softek(mexico),ne

oris(mexico),polict

ec(brazil),DBA

acess(venezuela)

Xceed(egypt),ness

technologies

(israel)



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Offshoring The relocation of a business process or entire manufacturing facility to a

foreign country.

The 2005 Offshore Location Attractiveness Index by A.T. Kearney Identifies 9 emerging markets in its list of the 10 most attractive offshoring

suppliers: India, China, Malaysia, Philippines, Singapore, Thailand, CzechRepublic, Chile, Canada, and Brazil.

In addition to Canada, the other advanced economy in the top 20 destinations isthe U.S. (11 th ).

The index emphasizes various criteria: Countrys financial structure (compensation costs, infrastructure costs, tax and

regulatory costs); Availability and skills of people (cumulative business-process experience and skills, labor

force availability, education and language, and worker attrition); and

Nature of the business environment (the countrys political and economic environment,physical infrastructure, cultural adaptability, and security of intellectual property).



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Benefits of global sourcing: Cost efficiency is the traditional rationale for sourcing abroad. The

firm takes advantage of labor arbitrage the large wage gap

between advanced economies and emerging markets. One study found that firms expect to save an average of more than

40% off baseline costs as a result of offshoring.

These savings tend to occur particularly in R&D, product design

activities, and back-office operations such as accounting and dataprocessing.



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Risk in global sourcing: 1. Less-than-expected cost savings . Conflicts and misunderstandings arise

because of differences

2. Environmental factors . Environmental challenges e.g., exchange ratefluctuations, labor strikes, adverse macro-economic events, high tariffs andother trade barriers, and high energy and transportation costs.

3. Weak legal environment . Many popular locations have weak laws andenforcement regarding intellectual property, which can lead to erosion ofkey strategic assets.

4. Risk of creating competitors . As firms share its intellectual property andbusiness-process knowledge with foreign suppliers



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Continued.. 5. Inadequate or low-skilled workers . Employees may lack

KSAs or high rapid turnover of skilled employees.

6. Over-reliance on suppliers . Unreliable suppliers may putearlier work aside when they gain a more important client.

7. Erosion of morale and commitment among home-countryemployees . Global sourcing can create a situation in whichemployees are caught in the middle between their employerand their employers clients.



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Minimizing risks: Firms ought to go offshore for the right reasons . The best rationale is strategic. Cost-cutting

is often a distraction from more beneficial, long-term goals such as enhancing the quality ofofferings, improving overall productivity, and freeing up knowledge workers and other coreresources that can be redeployed to improve long-term performance.

Need to get employees on board . Global sourcing tends to invite opposition from employeesand other organizational stakeholders. Disaffected middle managers can undermine projects.Poorly planned sourcing projects can create unnecessary tension and harm employee morale.

Choose between a captive operation and a contract with outside specialists carefully .Strike the right balance between the organizational activities that it retains inside the firm,and those that are sourced from outside.

Choose countries and suppliers carefully . A common reason for global sourcing failure isthat both buyers and suppliers tend not to spend enough time upfront to get to know eachother well.



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Continued The focal firm needs to invest in supplier development and collaboration . The

parties need to exchange information, transfer knowledge, troubleshoot, coordinate,and monitor.

Managers need to proactively safeguard interests:

Encourage the supplier to refrain from engaging in potentially destructive actsthat jeopardize the firms reputation.

Escalate commitments by making partner-specific investments (such as sharing

knowledge with the supplier), allowing for ongoing review, learning, andadjustment.

Share costs and revenues by building a stake for the supplier so that, in case offailure to conform to expectations, the supplier also suffers costs or foregoesrevenues.



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For Exampleparting out 787



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