1. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-1 A Framework for International Business by Cavusgil, Knight, & Riesenberger Chapter 13: Global Sourcing

2. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-2 In this chapter, you’ll learn about: 1.Outsourcing, global sourcing, and offshoring 2.Benefits of global sourcing 3.Risks of global sourcing 4.Strategies for minimizing the risks of global sourcing 5.Implementing global sourcing through supply-chain management 6.Global sourcing and corporate social responsibility Learning Objectives

3. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-3 Global Sourcing 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 Procurement of products or services from suppliers located abroad for consumption in the home country or a third country

4. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-4 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 activities that are part of their core competence or that involve the use of valuable intellectual property

5. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-5 Two Key Decisions (cont.) 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

6. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-6 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

7. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-7 Sourcing for Dell Inspiron Notebook Computer

8. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-8 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

9. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-9 Nature of Global Sourcing

10. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-10 Offshoring 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 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%.

11. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-11 Global Sourcing Destinations 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 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

12. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-12 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 & low cost –That have uniform processes & customer needs –In the service sector; labor intensive jobs –Where outputs are easily transmitted via the Internet

13. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-13 Key Players in Global Sourcing by Region

14. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-14 Strategic Choices in Global Sourcing

15. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-15 Benefits of Global Sourcing

16. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-16 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

17. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-17 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

18. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-18 A Global Sourcing Risk: Crises & Natural Disasters 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

19. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-19 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

20. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-20 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

21. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-21 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

22. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-22 Stages, Functions, and Activities in the Global Supply Chain

23. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-23 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

24. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-24 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

25. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-25 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

26. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-26 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 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

27. Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall 13-27 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.