11. Global sourcing FM : FM : Anis Gunawan, MBA,MM,SP

11. Global sourcing FM : FM : Anis Gunawan, MBA,MM,SP
Copyright © 2014 Pearson Education Copyright © 2014 Pearson Education Inc.

International business III.Strategy and opportunity
V. Functional Area excellence 11. Global sourcing IV. Entering and operating in International Markets. III.Strategy and opportunity assessment II.The environment of International Business I.Foundation concepts of International business International Business: Strategy, Management, and the New Realities

Cavusgil, Knight, and Riesenberger
Chapter 17 International Business: The New Realities, Global Edition, 3rd Edition by Cavusgil, Knight, and Riesenberger Copyright © 2014 Pearson Education

Copyright © 2014 Pearson Education
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; it amounts to importing. Involves a contractual relationship between the buyer and the foreign supplier in which the performance of a specific value-chain activity is subcontracted to the firm's own subsidiary or to an independent supplier. Global sourcing is a low-control strategy in which the focal firm sources from independent suppliers through contractual agreements, as opposed to the high-control strategy of buying from company-owned subsidiaries. Global sourcing frequently represents the firm’s initial involvement in international business. For many firms, it increases management’s awareness about other international opportunities. Based on experience it gains through such inward internationalization, the firm may progress to exporting, direct investment, or other forms of outward internationalization. Global sourcing has been an established international business activity since the 1980s and has gained momentum in the current phase of globalization.8 Contractors such as Softtek in Mexico help U.S. banks develop customized software, manage IT systems, and perform support and maintenance for commercial finance operations. Softtek ( has 3,500 employees, mostly engineers. Its outsourcing facilities are located in Brazil, Colombia, Peru, and Venezuela. Argentina boasts one of the best educated workforces in Latin America and is aggressively promoting its software development centers. The low salaries of software engineers (typically less than $12,000 a year) have persuaded such companies as Disney, Peugeot, and Repsol to have Web site design and software development performed in Argentina. Copyright © 2014 Pearson Education

Sourcing for Dell Inspiron Notebook Computer
Dell sources most of the components for its notebook computers from suppliers in Asia. Other firms move entire sections of their value chains abroad, such as R&D, manufacturing, or technical support. In the sports apparel industry, firms such as Nike and Reebok contract out nearly all their athletic shoe production to lower-cost foreign manufacturers. Clothing retailer Gap sources more than 80 percent of its apparel from suppliers in Asia. The Gap, Nike, and Reebok function primarily as brand owners and marketers, not as manufacturers. Apple sources some 70 percent of its production abroad while focusing internal resources on continuously improving its software platforms. This allows Apple management to optimize usage of the firm’s finite capital resources and focus on its core competencies. The total worldwide sourcing market for product manufacturing and services now exceeds $1 trillion. The IT industry alone in India now employs more than two million people and indirectly affects the lives of more than 8 million people. Global sourcing employs more than 500,000 people in the Philippines. Worldwide, the most frequently outsourced business processes include logistics and procurement, sales and marketing, and customer service, followed by finance and accounting. Global sourcing by the private sector now accounts for more than half of all imports by major countries. Copyright © 2014 Pearson Education

Drivers of Global Sourcing
Technological advances in communications, especially the Internet and international telephony Falling costs of international business Entrepreneurship and rapid economic transformation in emerging market countries Three key drivers are especially responsible for the growth of global sourcing in recent years: ■ Technological advances in communications, especially the Internet and international telephony. Access to vast online information means focal firms can quickly find suppliers that meet specific needs, anywhere in the world. Firms can communicate continuously with foreign suppliers at very low cost. ■ Falling costs of international business. Tariffs and other trade barriers have declined substantially. Efficient communication and transportation systems have made international procurement cost effective and accessible to any firm. ■ Entrepreneurship and rapid economic transformation in emerging markets. China, India, and other emerging markets have quickly developed as important suppliers of various products and services. Entrepreneurial suppliers aggressively pursue sourcing partnerships with foreign buyers. Copyright © 2014 Pearson Education

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. 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. Decision 1: Outsource or Not? Managers must decide between internalization and externalization—whether each value-adding activity should be conducted in house or by an external, independent supplier. In business, this is traditionally known as the make or buy decision: “Should we make a product or perform a value-chain activity ourselves, or should we source it from an outside contractor?” Firms usually internalize those value-chain activities they consider part of their core competencies, those that require the use of proprietary knowledge and trade secrets they want to control. Canon uses its core competencies in precision mechanics, fine optics, and microelectronics to produce some of the world’s best cameras, printers, and copiers. It usually performs R&D and product design itself to reduce the risk of divulging proprietary knowledge to competitors and to generate continuous improvement in these competencies. By contrast, firms will usually source from external suppliers when they can obtain non-core products or services at lower cost or from suppliers specialized in providing them. Decision 2: Where in the World Should Value-Adding Activities Be Located? Configuration of value-adding activity refers to the pattern or geographic arrangement of locations where the firm carries out value-chain activities. Instead of concentrating value-adding activities in their home country, many firms configure them across the world to save money, reduce delivery time, access factors of production, or extract maximum advantages relative to competitors. This helps explain the migration of manufacturing industries from Europe, Japan, and the United States to emerging markets in Asia, Latin America, and Eastern Europe. Depending on the firm and the industry, management may decide to concentrate certain value-adding activities in just one or a handful of locations, while dispersing others to numerous countries. External suppliers are typically located in countries characterized by low-cost labor, competent production processes, and specific knowledge about relevant engineering and development activities. Copyright © 2014 Pearson Education

Example of Worldwide Value Chain Configuration
BMW employs more than 60,000 factory personnel at 17 sites in six countries to manufacture its vehicles. The Munich plant builds the BMW 3 Series and supplies engines to other BMW factories abroad. A South Carolina plant makes 300,000 vehicles per year. A plant in NE China makes cars in a local joint venture. A plant in India makes BMWs for the Asia market. BMW configures sourcing to minimize costs (e.g., by producing in China), access skilled personnel (by producing in Germany), and remain close to key markets (by producing in China, India and the United States). Copyright © 2014 Pearson Education

Global Sourcing of Manufacturing
Toy companies like Lego and Mattel outsource much of their production to manufacturers in China. Global sourcing reduces costs, improves productivity, and facilitates the redesign of critical value-chain activities. Copyright © 2014 Pearson Education

Business Process Outsourcing (BPO)
Outsourcing of business functions to independent suppliers such as accounting, human resource functions, IT services, and customer service. BPO includes: Back-office activities including internal, upstream business functions such as payroll and billing, and Front-office activities, which include down-stream, customer- related services such as marketing or technical support. Copyright © 2014 Pearson Education

Business Process Outsourcing
Minimizing the risks of global sourcing entails several, critical strategies. Following a careful selection process, the focal firm should invest in collaborating and communicating with suppliers, such as this call center in New Delhi, India. Copyright © 2014 Pearson Education

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. Copyright © 2014 Pearson Education

Contract Manufacturing
Arrangement in which the focal firm contracts with an independent supplier to manufacture goods according to well-defined specifications. E.g., Nike, IKEA. Example Patheon is a leading contract manufacturer in the pharmaceutical industry that provides drug development and manufacturing for pharmaceutical and biotechnology firms worldwide. It operates 11 factories in North America and Europe, producing over-the-counter drugs and numerous top prescription drugs for leading pharmaceutical firms. Copyright © 2014 Pearson Education

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. Example Large legal hubs have emerged in India that provide services such as drafting contracts and patent applications. With lawyers in North America and Europe costing $300 an hour or more, Indian firms can cut legal bills by 75 percent. Offshoring is common in the service sector, including banking, software code writing, legal services, and customer-service activities. Large legal hubs have emerged in India that provide services such as drafting contracts and patent applications, conducting research and negotiations, and performing paralegal work, all on behalf of Western clients. In each of the business functions—human resources, accounting, finance, marketing, and customer service—certain tasks are considered routine and discrete. Many are candidates for offshoring as long as their performance by independent suppliers does not threaten or diminish the focal firm’s core competencies or strategic assets. Examples of functions successfully offshored to foreign providers include billing and credit card processing in finance, creating customer databases and recording sales transactions in marketing, and payroll maintenance and benefits administration in human resources. India is the current leader in the processing of advanced economies’ relocated business services. Its market share has grown dramatically in the 2000s and is expected to increase by several hundred percent between 2010 and 2020 thanks to India’s huge pool of qualified labor working for as little as 25 percent of what comparable workers get in the advanced economies. The recent economic turndown is expected to pressure advanced-economy firms to seek further ways to reduce costs, to the benefit of service suppliers in India. Firms in Eastern Europe perform support activities for architectural and engineering firms from Western Europe and the United States. Accountants in the Philippines perform support work for major accounting firms. Accenture has back-office operations and call centers in Costa Rica. Many IT support services for customers in Germany are actually based in the Czech Republic and Romania. Boeing, Nissan, and Nortel do much of their R&D in Russia. South Africa is the base for technical and user-support services for English-, French-, and German-speaking customers throughout Europe. Copyright © 2014 Pearson Education

Nature of Outsourcing and Global Sourcing
Copyright © 2014 Pearson Education

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 from 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 Not all business activities or processes lend themselves to global sourcing. Many jobs in the service sector cannot be separated from their place of consumption. People normally do not travel abroad to see a banker, doctor, dentist, or accountant. Personal contact is vital at the downstream end of virtually all value chains. By 2008, fewer than 5 percent of jobs in the United States that require substantial customer interaction (such as in retailing) had been transferred to low-wage economies. Fewer than 15 percent of all service jobs have moved from advanced economies to emerging markets Many firms, such as Harley-Davidson ( in the United States, have their own reasons for keeping production at home. Harley both assembles its motorcycles and procures key components such as the engine, transmission, gas tank, brake system, and headlight assembly in the United States. Harley customers view the product as a U.S. icon and highly value its “Made in the U.S.A.” character. However, countless other firms benefit from global sourcing Jobs most conducive to being sourced abroad tend to be in industries characterized by: ■ Large-scale manufacturing whose primary competitive advantage is efficiency and low cost ■ High labor intensity in product and service production, such as garment manufacturing and call centers ■ Uniform customer needs and standardized technologies and processes in production and other value-chain activities, such as automobiles and machine parts ■ Established products with a predictable pattern of sales, such as components for consumer electronics. ■ Information intensity whose functions and activities can be easily transmitted via the Internet, such as accounting, billing, and payroll. ■ Outputs that are easily codified and transmitted over the Internet or by telephone, such as software preparation, technical support, and customer service. Copyright © 2014 Pearson Education

Choices in Outsourcing Value Chain Activities
The exhibit explains the strategic implications of the two choices that firms face: whether to perform specific value-adding activities themselves or to outsource them, and whether to concentrate each activity in the home country or disperse it abroad. The exhibit portrays a typical value chain, ranging from R&D and design to customer service. The first row indicates the degree to which management considers each value-adding activity a strategic asset to the firm. The second row indicates whether the activity tends to be internalized inside the focal firm or outsourced to a foreign supplier. The third row indicates where management typically locates an activity. In addition to large firms, global sourcing provides big benefits for small and medium-sized enterprises (SMEs). Main Street businesses from car dealerships to real estate firms increasingly farm out accounting, support services, and design work to suppliers in Brazil, Hungary, India, and other top destinations. Outsourcing brokers and international online sites such as and do big business serving the global sourcing needs of countless SMEs. Internet search engines allow small firms to find service vendors anywhere in the world. An auto dealership in New York hired an Internet developer in Brazil to design a multimedia Web site to sell cars online. A real estate agent in California uses suppliers in Hungary, India, and Portugal to design graphics, manage databases, and update online information. Copyright © 2014 Pearson Education

Overview of 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 India is perhaps the world’s leading offshoring destination for software development and back-office services such as telephone call centers and financial accounting activities. It is one of the leading world centers in the IT industry, thanks in part to the emergence of indigenous MNEs such as Infosys ( .com) and Wipro ( Infosys rivals Microsoft as one of the top software firms worldwide. India has better intellectual property protection, a workforce with English language skills, and infrastructure that, although poor by advanced-economy standards, is often superior to that of China. India has become an enabler of growth in various global industries through expansion of its own offshoring firms into other countries. It is likely to remain the global-sourcing leader in the services sector for some time to come. India is the current leader in the processing of advanced economies’ relocated business services. Its market share has grown dramatically in the 2000s and is expected to increase by several hundred percent between 2010 and 2020, thanks to India’s huge pool of qualified labor working for as little as 25 percent of what comparable workers get in the advanced economies.14 The recent economic turndown is expected to pressure advanced-economy firms to seek further ways to reduce costs, to the benefit of service suppliers in India. A call center worker in India earns roughly $500 per month, while the same worker in Europe or the United States earns $2,000 to $3,000 monthly. This wage discrepancy explains why firms like HP, Accenture, Citicorp, Dell, and HSBC grew their Indian operations 30 to 50 percent a year during the 2000s. Copyright © 2014 Pearson Education

Key Players in Global Sourcing by Region
Diamond processing is a labor-intensive industry that uses standardized processes to make diamond jewelry and equipment used for fine cutting. For five centuries, the industry was concentrated in Antwerp, Belgium. However, diamond cutting is increasingly outsourced to firms in India that perform the work more cost-effectively and provide other advantages. China is also emerging as an important participant in diamond cutting. In addition to China and India, numerous other countries are active players as well. As for buyer countries, global sourcing is practiced by firms around the world. Insourcing supports a variety of relatively high-skilled jobs in engineering, management consulting, banking, legal services, and other areas. Firms based in advanced economies outsource the most services by volume. U.S. firms have led by offshoring over 50 percent of their service projects. More than 75 percent of major U.S. financial institutions send a portion of their IT work offshore. In Europe and Japan, the majority of large firms outsource some of their services, most often to China and India, followed by countries in Eastern Europe, Latin America, and the Middle East. In Asia, the Philippines is a successful recent entrant in global services sourcing. It draws on solid English skills and long-standing cultural ties with the West to attract call-center work. Singapore and Dubai assert that their safety and advanced legal systems give them an edge in handling high-security and business-continuity services. Central and South American countries seek call-center contracts for the Spanish-speaking Hispanic market in the United States. With Europe as its largest export market, Vietnam dramatically increased outsourced production in the 2000s because it offers modern but low-cost operations, skilled but inexpensive labor, and access to local sources unburdened by trade restrictions. Copyright © 2014 Pearson Education

Benefits of Global Sourcing
Cost Efficiency due to lower wages abroad and 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 Cost efficiency is the traditional rationale for sourcing abroad. The firm takes advantage of the large wage gap between advanced economies and emerging markets. Ability to Achieve Strategic Goals The strategic view of global sourcing—called transformational outsourcing—suggests that just as the firm achieves gains in efficiency, productivity, quality, and revenues by leveraging offshore talent, it also obtains the means to turn around failing businesses, speed up innovation, restructure operations, and fund otherwise-unaffordable development projects. Global sourcing allows the firm to free expensive analysts, engineers, and managers from routine tasks to spend more time researching, innovating, managing, and generally undertaking high-value-adding activities that contribute more productively to increasing company performance. In this way, global sourcing becomes a catalyst to overhaul organizational processes and company operations and increase the firm’s overall competitive advantages. It allows the firm to achieve large, longer-term strategic goals. In 2009, the clothing company Liz Claiborne sold its sourcing operations, which handle all aspects of production from finding materials to manufacturing garments, to Li & Fung Group, based in Hong Kong. Li & Fung ( is specializes in managing the supply chains of dozens of brands and retailers worldwide. Claiborne management took the step to dramatically shift the firm’s business model and focus on its core competencies, such as marketing and distribution. Faster corporate growth. Firms can focus their resources on performing more profitable activities such as R&D or building relationships with customers. Access to qualified workers abroad. Disney has much of its animation work done in Japan because some of the world’s best animators are located there. Improved productivity and service. Manufacturing productivity and other value chain activities can be improved by suppliers that specialize in these activities. Penske Truck Leasing improved its efficiency and customer service by outsourcing dozens of business processes to Mexico and India. Business process redesign. By reconfiguring their value-chain systems or reengineering their business processes, companies can improve their production efficiency and resource utilization. Multinational firms see offshoring as a catalyst for a broader plan to overhaul outdated company operations. Increased speed to market. By shifting software development and editorial work to India and the Philippines, the U.S.-Dutch publisher Walters Kluwer was able to produce a greater variety of books and journals and publish them faster. Big pharmaceutical firms get new medications to market faster with global sourcing of clinical drug trials. Access to new markets. Sourcing provides an entrée to the market, an understanding of local customers, and the means to initiate marketing activities there. Technological flexibility. Leveraging independent suppliers abroad provides firms the flexibility to quickly change sources of supply, employing whichever suppliers offer the most advanced technologies. Improved agility by shedding unnecessary overhead. Unburdened by a large bureaucracy and administrative overhead, companies can be more responsive to opportunities and adapt more easily to environmental changes, such as new competitors. Copyright © 2014 Pearson Education

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 Lower-than-expected cost savings. Establishing an outsourcing facility can be surprisingly expensive due to the need to upgrade poor infrastructure or locate it in a large city to attract sufficient skilled labor. Environmental factors. These include currency fluctuations, tariffs and other trade barriers, high energy and transportation costs, adverse macroeconomic events, labor strikes, power outages, and poor road and rail networks. Workers in India occasionally stage violent labor protests. Weak legal environment. China, India, and Russia have weak intellectual property laws and poor enforcement. Inadequate legal systems, red tape, convoluted tax systems, and complex business regulations complicate local operations in many countries. Inadequate or low-skilled workers. Many suppliers suffer rapid turnover of skilled employees. Typical Indian operations in business processing may lose 20 percent or more of their workers each year, and good managers are often in short supply. In 2009, customer complaints about the quality of service led Delta Airlines to move its corporate call centers from India back to the United States. Overreliance on suppliers. Suppliers occasionally encounter financial difficulties or are acquired by other firms with different priorities and procedures. Overreliance can shift control of key activities too much in favor of the supplier and reduce the focal firm’s control of important value-chain tasks. Risk of creating competitors. Schwinn, long the leader in the global bicycle industry, transferred much of its production and core expertise to lower-cost foreign suppliers, which acquired sufficient knowledge to become competitors, eventually forcing Schwinn into bankruptcy (from which it later recovered). Erosion of morale and commitment among home-country employees. When outsourcing forces retained and outsourced staff to work side by side, tensions and uncertainty may evolve into an “us-versus-them” syndrome and diminish employee commitment and enthusiasm. Copyright © 2014 Pearson Education

Labor Cost per Hour of Typical Workers in Various Locations
Copyright © 2014 Pearson Education SOURCE: Adapted from International Labour Organisation (ILO), Statistics and Databases,

Average Annual Entry-Level Salaries of Workers in Business-Process Outsourcing (US Dollars) The exhibits reveal typical salary levels of BPO and IT workers in various countries. One study found that firms expect to save an average of more than 40 percent off baseline costs as a result of offshoring, particularly in R&D, product design activities, and back-office operations such as accounting and data processing.25 Aworker in business process outsourcing in Egypt or the Philippines earns less than $5,000 per year. A call center worker in India earns roughly $500 per month, while the same worker in Europe or the United States earns $2,000 to $3,000 monthly. This wage discrepancy explains why firms like HP, Accenture, Citicorp, Dell, and HSBC grew their Indian operations 30 to 50 percent a year during the 2000s. Copyright © 2014 Pearson Education

Average Annual Salaries of IT Professionals (US Dollars)

Ethical Connections If you call customer service for a computer or cell phone, you may reach someone on the other side of the world. Outsourcing to countries where labor is cheaper helps companies lower labor costs and improve profits. In a global economy, domestic workers compete with overseas workers for jobs whose output can be transmitted by telephone or the Internet. Jobs once done by domestic workers are effectively shipped overseas. Working conditions in emerging markets occasionally amount to sweatshop conditions. At the same time, global sourcing from emerging markets creates jobs for those who may otherwise face poverty. Copyright © 2014 Pearson Education

Strategies for Minimizing Risk in Global Sourcing
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. Go offshore for the right reasons. The best rationale is strategic. Cost cutting is the main reason, but it is often a distraction from more beneficial, long-term goals such as enhancing the quality of offerings, improving overall productivity, and freeing up knowledge workers and other core resources that can be redeployed to improve long-term performance. To maximize returns, management should examine tasks and activities in each of the firm’s value chains and outsource those in which the firm is relatively weak, that offer relatively little value to the bottom line, or that can be performed more effectively by others, yet are not critical to the firm’s core competencies. Get employees on board. Global sourcing can invite opposition from employees and other organizational stakeholders. Disaffected middle managers may undermine projects and other goals that offshoring seeks to achieve. When Dutch bank ABN Amro ( decided to offshore accounting and finance functions, it set up a full-time communications department to explain the move to middle managers and staff in advance. Senior executives held town hall-style meetings with employees and involved unions in managing the shift. Choose carefully between a captive operation and contracting with outside suppliers. Strike the right balance between the organizational activities they retain inside the firm and those they source from outside. Many firms establish their own sourcing operations abroad to maintain control of outsourced activities and technologies. When Boeing sought to outsource key value-chain tasks, management established a company-owned center in Moscow where it employs 1,100 skilled but relatively low-cost aerospace engineers. The Russian team is working on a range of projects, including the design of titanium parts for the new Boeing 787 Dreamliner jet. Copyright © 2014 Pearson Education

Strategies for Minimizing Risk (cont’d)
Choose suppliers carefully. There are many options to choose from. 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 Choose suppliers carefully. Finding and managing foreign suppliers is complex. The focal firm may have limited influence over suppliers’ manufacturing and processes. Suppliers may engage in opportunistic behavior or act in bad faith. Identify and screen potential suppliers and then monitor the activities of those suppliers from which it sources. Emphasize effective communications with suppliers. To avoid mistakes and frustration, partners must share necessary information. Where differing business philosophies and practices lead partners to approach the same issue differently, effective communication helps minimize misunderstandings that diminish buyer–supplier relationships. Invest in supplier development and collaboration. When a business function is delegated to a supplier, the parties need to exchange information, transfer knowledge, troubleshoot, coordinate, and monitor. Over the long haul, benefits emerge when the focal firm adjusts its processes and product requirements to match the capabilities of foreign suppliers. Close supplier cooperation also enables the focal firm to tap into a stream of ideas for new products, processes, technologies, and improvements. Efforts to build strong relationships help create a moral contract between the focal firm and the supplier, one that is often more effective than a formal legal contract. Safeguard interests. The focal firm should take specific actions to safeguard its interests in the supplier relationship. First, it can advise the supplier against engaging in potentially destructive acts that jeopardize the firm’s reputation. Second, it can escalate commitments by making partner-specific investments (such as sharing knowledge with the supplier) on an incremental basis, allowing for ongoing review, learning, and adjustment. Third, it can share costs and revenues by building a stake for the supplier so that, in case of failure to meet expectations, the supplier also suffers costs or foregoes revenues. Fourth, it can maintain flexibility by keeping open its options for finding alternate partners if needed. Finally, the focal firm can keep the partner at bay by withholding access to intellectual property and key assets. If conflicts are unresolved by negotiations, one option is to acquire full or partial ownership of the supplier. Copyright © 2014 Pearson Education

Global Supply Chain Management
Global supply chain: the firm’s integrated network of sourcing, production, and distribution, organized on a world 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) as well as independent logistics service providers such as FedEx, TNT, and UPS are useful facilitators. A global supply chain is 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. Global supply-chain management includes both upstream (supplier) and downstream (customer) flows. The concepts of supply chain and value chain are related but distinct. Recall that the value chain is the collection of activities intended to design, produce, market, deliver, and support a product or service. By contrast, the supply chain is the collection of logistics specialists and activities that provides inputs to manufacturers or retailers. Skillful supply-chain management serves to optimize value-chain activities. Sourcing from numerous suppliers scattered around the world is neither economical nor feasible without an efficient supply-chain system. In a supermarket, the speed with which these products are delivered to end users is equally impressive. When a customer orders a Dell laptop computer, it is typically routed to the Dell factory in Malaysia, where workers must access thirty distinct component parts that originate with Dell suppliers scattered around the world. Indeed, the total supply chain for a typical Dell computer, including multiple tiers of suppliers, typically includes some 400 companies in Asia, Europe, and the Americas. Dell is so skilled at managing all this complexity that customers typically receive their computers within two weeks of submitting an order. Networks of supply-chain hubs and providers of global delivery service are an integral part of global supply chains. Many focal firms delegate supply-chain activities to such independent logistics service providers as DHL, FedEx, and TNT. Consulting firms that manage the logistics of other firms are called third party logistics providers (3PLs). Using a 3PL is often the best solution for international logistics, especially for firms that produce at low volumes or lack the resources and expertise to create their own logistics network. Copyright © 2014 Pearson Education

Third Party Logistics Providers
A good example of evolving supply-chain management is the integration of the European Union. The removal of border controls allowed supply-chain managers to redraw the maps of their sourcing and distribution activities throughout Europe. Warehousing and distribution centers were consolidated and centralized. In another instance, the computer chip company Intel significantly reduced shipping costs by consolidating its freight expenditures into four transportation suppliers. As a result, from its fourteen manufacturing sites around the world, Intel considerably improved on-time delivery and customer-service performance. Running a business as far flung as DHL’s package delivery service requires support offices around the world. This delivery boat travels the Amstel River in Amsterdam. DHL has tracking centers in three time zones that are 8 hours apart, allowing it to offer 24-hour worldwide tracking service. Copyright © 2014 Pearson Education

Stages, Functions, and Activities in the Global Supply Chain

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, which reduces costs and increases distribution efficiency. Logistics involves physically moving goods through the supply chain. Incorporates information, transportation, inventory, warehousing, materials handling and similar activities associated with the delivery of raw materials, parts, components, and finished products. Costs of physically delivering a product to an export market may account for as much as 40 percent of the good’s total cost. Experienced firms use information and communications technologies (ICTs) to streamline supply chains, reducing costs and increasing distribution efficiency. Britain’s Tesco supermarket chain ( greatly reduced inventory costs by using an EDI system to link point-of-sale data to logistics managers. Tesco tracks product purchases down to the minute, and many canned foods that once sat in its warehouses for days or weeks now come directly from suppliers to Tesco stores. Specialized software enhances information sharing and improves efficiency by allowing the firm to track international shipments and clear customs. The Spanish retailer Zara uses EDI technology to optimize supply-chain management, inventory management, and responsiveness to consumer demands. Store managers use wireless personal digital assistants and instantaneous communications to help headquarters conduct ongoing market research. Such technologies have allowed Zara to become the leader in rapid-response retailing. Logistics physically moves 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. Competent logistics management is critical, especially for just-in-time inventory systems. The California ports of Los Angeles ( and Long Beach ( handle more than 40 percent of imports into the United States, processing over 24,000 shipping containers per day. Infrastructure deficiencies and increasing demand can result in long delays, which translate into longer transit times and higher costs for U.S. importers. Because of delays, Toys “R” Us had to build 10 extra days into its supply chain. MGA Entertainment lost $40 million in revenues when it could not deliver its best-selling Bratz dolls to retailers on time. As a result of poor supply-chain planning, Microsoft’s Xbox 360 games console sold out soon after launch. Scarcity led to high prices in unofficial channels. On eBay, Xbox consoles sold for as much as $1,000, compared with the official price of about $400. Copyright © 2014 Pearson Education

Major Sources for Components of the Boeing 787
You probably heard about Boeing’s new 787 Dreamliner, a fuel-saving, medium-sized passenger aircraft that uses carbon composite for the fuselage instead of aluminum. It is lightweight and has spacious interiors and higher cabin pressure than other models, for a more comfortable journey. However, the most remarkable aspect of the Dreamliner is the extent of outsourcing. Boeing ( is responsible for manufacturing only about 10 percent of the jet’s value—the tail fin and final assembly. Some forty suppliers worldwide contribute the remaining 90 percent. The wings are built in Japan, the carbon composite fuselage in Italy, and the landing gear in France. The global dispersion of manufacturing responsibility has allowed Boeing to transform itself into a systems integrator and focus on its core capabilities—design, marketing, and branding. Nevertheless, the execution of this global manufacturing network has been far from flawless. The 787’s inaugural flight and deliveries were delayed more than two years. Production delays resulted in lost earnings estimated to exceed $11 billion. Much of the difficulty is attributable to the complexity of coordinating a global supply-chain network. Copyright © 2014 Pearson Education

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. International logistics usually make use of multiple transportation modes, including land, ocean, and air transport. Land transportation is conducted via highways and railroads, ocean transport is via container ships, and air transport is via commercial or cargo aircraft. Transportation modes involve several trade-offs. The three main considerations are cost, transit time to deliver the goods, and predictability, the match between anticipated and actual transit times. Land transport is usually more expensive than ocean transport but cheaper than air. Exporters often opt for ocean shipping even when land transport is available. For example, some Mexican firms send goods to Canada by ship. Ocean transport is slower than air but far cheaper. Ocean transport was revolutionized by the development of 20- and 40-foot shipping containers, the big boxes that sit atop seagoing vessels. The ability of a modern ship to carry thousands of containers yields economies of scale, which makes ocean transport very cost effective, often accounting for less than 1 percent of a product’s final price. Air transport is fast and extremely predictable but expensive. Given its high cost, it is used mostly to transport perishable products (like food and flowers), products with a high value-to-weight ratio (like fine jewelry and laptop computers), and urgently needed goods (like medicines and emergency supplies). While the use of air freight has increased because of gradually declining cost, it still accounts for only 1 percent of international shipments. Copyright © 2014 Pearson Education

Comparing Ocean, Land, and Air Transport
Ocean Transport Land Transport Air Transport ● Accounts for about 90 percent of international shipments ● Relatively slow ● Relatively inexpensive ● Revolutionized by the development of 40-foot shipping containers ● Usually more expensive than ocean transport but cheaper than air ● Exporters often opt for ocean shipping even when land transport is available. For example, some Mexican firms send goods to Canada by ship. ● Accounts for only 1 percent of international shipments. ● Fast and predictable ● Expensive ● Used mostly for: -- perishable products (e.g., food, flowers) -- products with a high value-to-weight ratio (laptop computers) -- urgently needed goods (medicines, emergency supplies). Copyright © 2014 Pearson Education

Corporate Social Responsibility
Global sourcing can lead to three major problems in the home country: Job losses Reduced national competitiveness Declining living standards MNEs may be ineffective or indifferent about: protecting the environment promoting human rights labor practices and working conditions abroad Critics worry that as more tasks are performed at lower cost with comparable quality in other countries, high-wage countries will eventually lose their national competitiveness. Long-held knowledge and skills will eventually drain away to other countries, they fear, and the lower wages paid abroad will eventually pull down wages in the home country, leading to lower living standards. A major concern is job losses. The number of jobs in the U.S. legal industry outsourced to foreign contractors now exceeds 25,000 per year. Some estimate that more than 400,000 jobs in the United States IT industry have moved offshore. Projections are that more than three million jobs will be outsourced from the United States by Job losses also increase when companies source input and finished goods from abroad. Walmart sources as much as 70 percent of its finished merchandise from abroad. This has led concerned citizens to form a protest group called Walmartwatch.com. Job losses are occurring in developing economies as well. For example, in the textile industry, El Salvador, Honduras, Indonesia, and Turkey have seen jobs gradually being transferred to China, India, and Pakistan. For nearly 40 years Electrolux ( the Swedish home-appliance company, manufactured refrigerators in Greenville, Michigan, providing 2,700 jobs. Once the world’s largest refrigerator factory, the plant developed weak financial performance and high labor costs. Electrolux closed the factory and established a maquiladora plant in Juarez, Mexico, seeking to profit from lower wages and the El Paso Foreign Trade Zone just across the border in Texas. Management believed it was acting in the firm’s best interest and strengthening its global competitiveness. From Greenville’s standpoint, however, the decision was devastating. How could so many jobs be replaced in such a small community? What would happen to the town’s social and economic landscape? Wage concessions by the labor union and over $100 million in grants and tax breaks in Michigan were insufficient to halt the closure. Copyright © 2014 Pearson Education

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. The consequences of global sourcing for the national economy and workers are not yet fully known. A recent comprehensive study carried out for the United States argues that official statistics understate the impact of offshoring on national economies. The study found that import growth, adjusted for inflation, is faster than the official numbers show. The study author concluded that more of the gain in living standards in recent years has come from cheap imports and less from increased domestic productivity. U.S. consumers may thus enjoy an even better standard of living from imports than previously thought. Offshoring is a process of creative destruction, a concept first proposed by the Austrian economist Joseph Schumpeter. According to this view, firms’ innovative activities tend to make mature products obsolete over time: The introduction of personal computers essentially eliminated the typewriter industry, the DVD player eliminated the VCR, and so on. Just as offshoring results in job losses and adverse effects for particular groups and economic sectors, it also creates new advantages and opportunities for firms and consumers alike. New industries created through creative destruction will create new jobs and innovative products. Public policy should strive to mitigate the potential harm global sourcing can cause. Governments can use economic and fiscal policies to encourage the development of new technologies by helping entrepreneurs reap the financial benefits of their work and keeping the cost of capital for financing R&D low. Another useful policy is to ensure the nation has a strong educational system, including technical schools and well-funded universities that supply engineers, scientists, and knowledge workers. A strong educational system helps provide firms with pools of high-quality labor. And, as firms restructure through global sourcing efforts, flexibility acquired through education ensures that many who lose jobs can be redeployed in other positions. Copyright © 2014 Pearson Education

11. Global sourcing FM : FM : Anis Gunawan, MBA,MM,SP

Similar presentations

Presentation on theme: "11. Global sourcing FM : FM : Anis Gunawan, MBA,MM,SP"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

11. Global sourcing FM : FM : Anis Gunawan, MBA,MM,SP

Similar presentations

Presentation on theme: "11. Global sourcing FM : FM : Anis Gunawan, MBA,MM,SP"— Presentation transcript:

Similar presentations

About project

Feedback