International Business Strategy301REN

Global Sourcing

Unit: 9 Knowledgecast: 1

• Integrate and apply strategic approaches to practical situations in various types of organisations

• Assess current developments in the organisational environment and alternative responses related to strategy

• Resolve management problems in the area of strategic management by evaluating alternative outcomes

Module Learning Outcomes

Global Sourcing

Is the procurement of products or services from suppliers or company-owned subsidiaries located abroad for consumption in the home country or a third country.

• Also called global procurement or global purchasing,

global sourcing amounts to importing -- an inbound flow.

• It is an entry strategy that involves a contractual relationship between the buyer (the focal firm) and a foreign supplier. It involves subcontracting the performance of specific manufacturing or services tasks to the firm's own subsidiaries or independent suppliers.

Drivers of Global Sourcing

Global Sourcing

Technological advances

(e.g. internet)

Access to information

and growing

connectivity

Entrepreneurship &

economic transformati

on in emerging markets

Declining communicat

ion and transportati

on costs

Global Sourcing: Shopping the World

• Nike, Reebok and Adidas as brand owners and marketers, not as manufacturers because they contract out nearly all of their athletic shoe production to foreign suppliers.

• Apple Computer sources some 70% of its production abroad while focusing its internal resources on improving its operating system and other software platforms.

• Dell Inc. relies extensively on a global manufacturing network, composed largely of independent suppliers.

This allows these companies to optimally utilize their limited capital resources and focus on their core competences.

Sourcing for the Dell Inspiron Notebook

Two Key Decisions Regarding Global Sourcing

• 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 those value-chain activities they

consider a part of their core competence, or which involve the use of proprietary knowledge and trade secrets that they want to control.

• 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.

The Nature of Outsourcing and Global Sourcing

Global Sourcing from Subsidiaries Versus Independent

Suppliers • In global sourcing, the focal firm has two major

choices. It can source from:(1) Independent suppliers, or (2) Company-owned subsidiaries and affiliates.

• Global sourcing from independent suppliers involves outsourcing production to a third-party provider abroad.

• Captive sourcing is sourcing from the firm’s own production facilities located abroad. Production is carried out at a foreign facility that the focal firm fully or partly owns through direct investment.

Business Process Outsourcing (BPO)

• Outsourcing of business functions, such as accounting, human resource functions, IT services, and customer service, to independent suppliers

• BPO includes: Back-office activities, including internal,

upstream business functions such as payroll and billing

Front-office activities, including down-stream,

customer-related services such as marketing or technical support

Contract Manufacturing and Offshoring

• A natural extension of global sourcing, it refers to the relocation of a business 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.

ExampleLarge legal hubs have emerged in India, which provide services such as drafting contracts and patent applications. Because lawyers in North America and Europe can cost $300 an hour or more, Indian firms can cut legal bills by 75 percent.

Arrangement in which the focal firm contracts with anindependent supplier to manufacture goods according to well-defined specifications; e.g., Nike, Ikea

Offshoring

Contract Manufacturing

Scope of Global Sourcing

• 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.

• Labor union contracts often restrict global sourcing.• Easily outsourced jobs tend to be in industries:

—That benefit from efficiency and low cost —That have uniform processes and customer needs —In the service sector that are labor intensive—Whose outputs are easily transmitted via the Internet

Benefits of Global Sourcing

• Cost efficiency, due to lower wages abroad, leading to improved profitability

• Ability to achieve strategic goals Faster corporate growth Access to qualified personnel Improved productivity and service, especially when

a task is outsourced to a firm specialized in that task 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 and commitment among

home- country employees due to outsourcing jobs

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.

• 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.

Major Sources for Components of the Boeing 787

• Integrate and apply strategic approaches to practical situations in various types of organisations

• Assess current developments in the organisational environment and alternative responses related to strategy

• Resolve management problems in the area of strategic management by evaluating alternative outcomes

Knowledgecast Summary

Lessons of global sourcing

Useful Video on Outsourcing (Benefits, costs, risk and impact of technology)

http://www.youtube.com/watch?v=npJGgQunCLg

http://www.youtube.com/watch?v=syicHUMj6fc

http://www.youtube.com/watch?v=JrP4Xe7zceg

Seminar

End of Module Assessment – Evaluating Internationalization Strategy (Management Brief) (Unit 10)

Preparation – Preparing the Final Draft

This session will provide you with the opportunity to discuss your final draftwith your module tutor and ensure all your questions are answered as youfinalize your submission.

Although this is an independent piece of work giving and receiving feedback

from your peers is an essential skill, which will be of great value in theworkplace.

Be prepared to provide constructive feedback on other’s work and receivefeedback which can inform your progress.

Group Activity