UNIT NINE (9) (B)

Global Sourcing

Objectives

Outsourcing, global sourcing, and offshoring

Benefits of global sourcing

Risks of global sourcing

Strategies for minimizing the risks of global

sourcing

Implementing global sourcing through supply-chain

management

Global sourcing and corporate social responsibility

Global Sourcing Procurement of products or services from suppliers located

abroad for consumption in the home country or a third country.

• Also called global outsourcing, global procurement, or global

purchasing - a type of importing

• A contractual relation between the buyer & the foreign

supplier

• Performance of a specific value-chain activity is subcontracted

to the firm's own subsidiary or to an independent supplier

• The total worldwide sourcing market exceeds $300 billion

• Decision 1: Outsource or not

Decide whether each value-adding activity should

be conducted in-house or by an independent

supplier

Known as the ‘make or buy’ decision

Firms usually internalize activities that are part of

their core competence or that involve the use of

valuable intellectual property

Two Key Decisions Regarding Global Sourcing

• Decision 2: Where in the world should value-adding

activities be located?

Firms configure their value-chain activities in

specific countries to cut costs, reduce transit time,

access favorable factors of production, and access

competitive advantages

Can explain migration of manufacturing from

developed to emerging markets

Two Key Decisions (cont.)

Example of Worldwide Value Chain Configuration

• DHL is a global package shipping provider

• To run its global network, it has offices in countries and

cities worldwide

• High-tech tracking centers established in Arizona,

Malaysia, & Czech Republic

• Can track locations of shipments around the world, 24/7

• Locations chosen because in a world of 24 time zones,

these are about 8 hrs. distant from one another

Sourcing for Dell Inspiron Notebook Computer

Drivers Growth in Global Sourcing

1. Technological advances in communications, especially

the Internet and international telephony

2. Falling costs of international business

3. Entrepreneurship and rapid economic transformation

in emerging market countries

Nature of Global Sourcing

• A natural extension of global sourcing; refers to

relocation of a process or entire manufacturing facility to

a foreign country

• MNEs shift production of goods or processes to foreign

countries to enhance their competitive advantages

• Common in the service sector, including banking,

software writing, legal services, and customer service

activities

Offshoring

Example

• Large legal hubs have emerged in India that provide

services (drafting contracts, patent applications).

Lawyers in North America/Europe can cost $300/hr or

more; Indian firms can cut legal bills by 75%.

• India:

Leading offshoring destination for software

development and back-office services, such as call

centers and financial accounting activities

A leading world center in the IT industry, employing

more than two million people

Global Sourcing Destinations

Global Sourcing Destinations (cont’d)

Strong English language skills

Abundant pool of educated engineers, managers, and

other specialists

Low labor costs

• Other popular locations:

Czech Republic

Romania

Russia

South Africa

• Many jobs in the services sector cannot be separated

from their place of consumption, such as retailing

• Other services are consumed locally, such as those

provided by doctors, lawyers, and accountants

• The firm’s reputation can be harmed by having jobs

performed abroad

Scope of Global Sourcing

Scope of Global Sourcing (cont’d)

• Labor union contracts often restrict global sourcing

• Easily outsourced jobs tend to be in industries:

– That benefit from efficiency & low cost

– That have uniform processes & customer needs

– In the service sector; labor intensive jobs

– Where outputs are easily transmitted via the Internet

Key Players in Global Sourcing by Region

Strategic Choices in Global Sourcing

Benefits of Global Sourcing

Benefits of Global Sourcing

• Faster corporate growth

• Access to qualified workers abroad

• Improved productivity and service

• Business process redesign

• Increased speed to market

• Access to new markets

• Technological flexibility

• Improved agility by shedding unnecessary overhead

Risks in Global Sourcing

• Lower-than-expected cost savings

• Environmental factors, such as exchange rate fluctuations,

trade barriers, and labor strikes

• Weak legal environment, which can affect protection of

intellectual property

• Inadequate or low-skilled workers

• Overreliance on suppliers

• Risk of creating competitors

• Erosion of morale & commitment among home-

country employees due to outsourcing jobs

• 2011 earthquake/tsunami in Japan created major supplier

disruptions

• Auto industry an example; typical car has over 15,000

parts; missing 1 can halt production

• Following quake, GM stopped production in Europe &

U.S., as did Ford

• 30% of global car production was halted or interrupted

following quake

A Global Sourcing Risk: Crises & Natural Disasters

Strategies for Minimizing Risk

• Go offshore for the right reasons. The best rationale is

strategic, such as enhancing the quality of offerings,

improving productivity, and freeing up core resources

• Get employees on board. Poorly planned sourcing

projects create unnecessary tension with existing

employees

• Choose carefully between a captive operation and a

contract with outside suppliers

Strategies for Minimizing Risk (cont.)

• Choose suppliers carefully. There are many options. A

sourcing broker can help

• Emphasize effective supplier communication

• Invest in supplier development and collaboration.

Proactively safeguard interests, such as key assets and the

firm’s reputation

• Safeguard interests in terms of maintaining the firm’s

reputation, building a stake for the supplier, keeping

open options for finding alternate partners if needed, and

withholding key intellectual property

Global Supply Chain Management

• Global supply chain

The firm’s integrated network of sourcing, production,

and distribution, organized on a worldwide scale, and

located in countries where competitive advantage can be

maximized

• Sourcing from numerous suppliers scattered around the

world requires efficient supply-chain management

• Third party logistics providers (3PLs) and independent

logistics service providers, such as FedEx, TNT, and UPS,

are useful facilitators

Stages, Functions, and Activities in the Global Supply Chaina

Features of Global Supply Chain Management

• The costs of physically delivering a product to an export

market may account for as much as 40% of the total cost

• Firms use information and communications technologies

(ICTs) to streamline operations, reducing costs and

increasing distribution efficiency

• Logistics involves physically moving goods through the

supply chain. It incorporates information, transportation,

inventory, warehousing, materials handling, and similar

activities associated with the delivery of raw materials,

parts, components, and finished products

Transportation Modes

• Land transportation is via highways and railroads

• Ocean transportation is via large container ships

• Air transportation involves commercial or cargo aircraft

• Ocean and air transport are common in international

business because of the long distances. Ocean transport

is the cheapest and most common

• Ocean transport was revolutionized by the

development of 20- and 40-foot shipping containers

Global Sourcing & Corporate Social Responsibility

• Global sourcing can lead to three major problems in the

home country:

Job losses

Reduced national competitiveness

Declining living standards

Useful Public Policy for Minimizing the Harm of Global Sourcing

• Global sourcing involves creative destruction. It may

eliminate jobs, but it creates new advantages and

opportunities that benefit firms, increase profits, and

often lead to the ability to create better jobs

Useful Public Policy for Minimizing the Harm of Global Sourcing

• Governments should strive to:

Keep the cost of doing business low (e.g., via

appropriate economic and fiscal policies)

Ensure a strong educational system that supplies

engineers, scientists, and knowledge workers

Maximize worker flexibility to help those who lose

jobs find other positions