Chapter
Global Sourcing Strategy
Key Points
International Product Cycle Theory
Trends in Global Sourcing Strategy
Potential Pitfalls in Global Sourcing
The Value Chain
Functional Interfaces
Logistics of Sourcing Strategy
Long-term Consequences
5
International Product Cycle Theory

Global competition suggests a drastically
shortened life cycle for most products, and no
longer permits companies a polycentric,
country-by-country approach to international
business.

A frequently used framework to describe
cross-national business practices is the
international product cycle theory.
International Product Cycle Theory

According to the theory, changes in inputs
and product characteristics toward
standardization over time determine an
optimal production location at any particular
phase of the product’s life cycle.
International Product Cycle Theory
(cont.)

However, three major limitations of the
international product cycle theory have to be
borne in mind:
1.Increased pace of new product introduction
and reduction in innovational lead time, which
deprive companies of the age-old polycentric
approach to global markets

Innovations can make the “global market” perspective
wrong
International Product Cycle Theory
(cont.)

However, three major limitations of the
international product cycle theory have to be
borne in mind:
2.Predictable sourcing development during the
product cycle, which permits a shrewd
company to outmaneuver competition

Stable inputs may allow for cost savings
International Product Cycle Theory
(cont.)

However, three major limitations of the
international product cycle theory have to be
borne in mind:
3.More active management of locational and
corporate resources on a global basis, which
gives a company a preemptive first-mover
advantage over competition.

Assumes management matters
International Product Cycle Theory
(cont.)

Emphasis on logistical management of the
interfaces of R&D, manufacturing, and marketing
activities on a global basis – global sourcing
strategy

Balance between drive for cost savings
(standardization) and customization needed

The reality of global business is that the product
life-cycle is not as predictable and stable as it
once was
Trends in Global Sourcing Strategy

Trend 1: The Decline of the Exchange Rate
Determinism of Sourcing

Foreign sourcing occurs for non-cost reasons – i.e.
access to technology

Difficulty of dropping overseas suppliers

Domestic suppliers may increase prices when they know
their customers don’t have a choice

Long-term relationships tend to survive exchange rate
fluctuations

Portfolio perspective of foreign operations
Trends in Global Sourcing Strategy

Trend 2: New Competitive Environment Caused by
Excess Worldwide Capacity

Price, quantity and delivery now not so uncommon or
important as are quality and uniqueness which lead to
higher price expectations weakening FX concerns
Trends in Global Sourcing Strategy

Trend 3: Innovations in and Restructuring of
International Trade Infrastructure

More experienced purchasing managers

Improvements in transportation and communication

Finance availability and options

Global diffusion of manufacturing

Neighbouring country sourcing opportunities
Trends in Global Sourcing Strategy

Trend 4: Enhanced Role of Purchasing Managers


Purchasing now considered strategic  more of a role
and resources to do their job better  will still get lowest
cost/highest quality regardless of FX fluctuations
JIT production so ingrained into production processes
that stores of inventory no longer held  requires
constant influx of raw materials to keep business
operating
Trends in Global Sourcing Strategy

Trend 5: Trend toward Global Manufacturing

Globally dispersed facilities mean firms have no choice
but to continue with global sourcing regardless of FX
fluctuations
Potential Pitfalls in Global Sourcing

Conflict between unification and
fragmentation - a close-knit operational
strategy with similar foreign units versus a
loosely related, highly variegated family of
activities.

Diverse activities are still inhibitors rather
than facilitators of cost savings
Potential Pitfalls in Global Sourcing

Dilemma revisited in such terms as:





“standardization versus adaptation” (1960s)
“globalization versus localization” (1970s)
“global integration versus local responsiveness”
(1980s)
“scale versus sensitivity” (1990s)
However, ability and willingness of companies to
integrate have changed due to competitive
urgency.
The Value Chain

The collection of activities that are performed by
a company to design, manufacture, market,
deliver, and support its product is called the
value chain.
The Value Chain

The value chain can be divided into two major
activities performed by a company:

(1) primary activities consisting of inbound logistics
(procurement of raw materials and components),
manufacturing operations, outbound logistics
(distribution), sales, and after-sale service, and

(2) support activities consisting of human resource
management, technology development, and other
activities that help promote primary activities.
The Value Chain (cont.)

Five continuous and interactive steps are
involved in developing such a global sourcing
strategy along the value chain.
1. Identify the separable links (R&D, manufacturing,
and marketing) in the company’s value chain
2. In the context of those links, determine the
location of the company’s competitive
advantages, considering both economies of scale
and scope
The Value Chain (cont.)
3. Ascertain the level of transaction costs between
links in the value chain, both internal and external,
and selecting the lowest cost mode
4. Determine the comparative advantages of countries
(including the company’s home country) relative to
each link in the value chain and to the relevant
transaction costs
5. Develop adequate flexibility in corporate decision
making and organizational design so as to permit
the company to respond to changes in both its
competitive advantages and the comparative
advantages of countries.
Functional Interfaces

Management of the interfaces, or linkages,
among these value-adding activities is a
crucial determinant of a company’s
competitive advantage.
Functional Interfaces

Global sourcing strategy encompasses
management of





The interfaces among R&D, manufacturing, and
marketing on a global basis and
Logistics identifying which production units will
serve which particular markets and how
components will be supplied for production.
R&D/Manufacturing Interface
Manufacturing/Marketing Interface
Marketing/R&D Interface
Logistics of Sourcing Strategy


“Sourcing” is used to describe the
management by multinational companies of
the flow of components and finished products
in serving foreign markets.
Intrafirm Sourcing.



Multinational companies procure their
components in-house within their corporate
system around the world.
Domestic in-house sourcing.
Offshore subsidiary sourcing.
Logistics of Sourcing Strategy


Outsourcing.
Component procurement from overseas
(offshore subsidiary sourcing and offshore
outsourcing) has been a serious social and
economic issue as it affects domestic
employment and economic structure.
Long-term Consequences


Two opposing views of the consequences of
offshore outsourcing:
Strategic Alliances


Maximizes specialized competences
Dependence

Creates uncertain environment for independent
suppliers, increasing production and material
costs.