"How to combine global and local sourcing? A
multiple case study within the brewery industry"
Ceuterick, Robin
ABSTRACT
The present thesis aims to bring insight into how brewing companies combine global and local sourcing.
The research also extends on production plant location, supplier selection and assessment process. It
intends to establish hypothetical propositions for other industries through a cross-analysis between the
theoretical framework and case findings. The first part of this thesis reviews the literature on global and
local sourcing and on the brewing industry. A holistic multiple-case approach is then used to bring about
similarities and anticipate contrasts in the results. To do so, four companies were selected based on their
size and internalisation factor: Ab Inbev (MNC), Martens (MNC), St Feuillen (SME), and L’Echasse (SME).
Each case is analysed separately to provide an in-depth characterisation of its different sourcing practices.
A cross-case analysis highlights the most important findings, comparing similarities and contrasts in the
single-case analyses. Results are discussed in the context of current theoretical knowledge aiming to
develop generalised propositions. Results indicate significant differences between SMEs and MNCs in
their “glocal” sourcing strategy. In addition, findings show that while the locational sourcing strategy does
not necessarily depend on the industry cluster factor, the nature of raw materials and the market strength
of the supplier vs. buyer have a compelling effect. Moreover, the efficiency of commonly used models
of suppliers’ selection and benefits of the location of production plants are discussed. In the discussion
section, ei...
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Ceuterick, Robin. How to combine global and local sourcing? A multiple case study within the brewery
industry. Louvain School of Management, Université catholique de Louvain, 2016. Prom. : Blome,
Constantin. http://hdl.handle.net/2078.1/thesis:7153
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UNIVERSITE CATHOLIQUE DE LOUVAIN
LOUVAIN SCHOOL OF MANAGEMENT
HOW TO COMBINE GLOBAL AND LOCAL SOURCING?
A MULTIPLE CASE STUDY WITHIN THE BREWERY INDUSTRY
Supervisor:
Prof Dr Constantin Blome
Research Master Thesis submitted by
Ceuterick Robin
With a view of getting the degree
Master in Management
ACADEMIC YEAR 2015-2016
Firstly, I would like to thank my supervisor Prof Dr Constantin Blome for his help,
his precious advice and his quick answers. Secondly, I also would like to thank Anaïs
F.V., Jonathan A., Bernard M. and my family for their significant support during all
phases of this thesis. Finally, I would like to express my gratitude to all interviewees
who devoted a significant amount of their time to meet up with me and to answer my
questions.
iv.
Abstract
Thesis subject
How to combine global and local sourcing? A multiple case study
within the brewery industry.
Author
Ceuterick Robin (NOMA: 70980800)
Supervisor
Prof Dr Constantin Blome
Academic year
2015-2016
Programme code
GEST2
The present thesis aims to bring insight into how brewing companies combine
global and local sourcing. The research also extends on production plant location,
supplier selection and assessment process. It intends to establish hypothetical
propositions for other industries through a cross-analysis between the theoretical
framework and case findings. The first part of this thesis reviews the literature on global
and local sourcing and on the brewing industry. A holistic multiple-case approach is
then used to bring about similarities and anticipate contrasts in the results. To do so,
four companies were selected based on their size and internalisation factor: Ab Inbev
(MNC), Martens (MNC), St Feuillen (SME), and L’Echasse (SME). Each case is analysed
separately to provide an in-depth characterisation of its different sourcing practices. A
cross-case analysis highlights the most important findings, comparing similarities and
contrasts in the single-case analyses. Results are discussed in the context of current
theoretical knowledge aiming to develop generalised propositions. Results indicate
significant differences between SMEs and MNCs in their “glocal” sourcing strategy. In
addition, findings show that while the locational sourcing strategy does not necessarily
depend on the industry cluster factor, the nature of raw materials and the market
strength of the supplier vs. buyer have a compelling effect. Moreover, the efficiency of
commonly used models of suppliers’ selection and benefits of the location of production
plants are discussed. In the discussion section, eight propositions highlight the results,
which managers can use when designing their sourcing strategy. The inherent
limitations of the approach are presented in the conclusion section -- it is essential to
note that these propositions are of hypothetical nature and should not be taken as
absolute.
v.
Table of contents
Abstract ..................................................................................................................................iv
Table of contents.................................................................................................................. v
List of tables ........................................................................................................................ vii
List of figures ..................................................................................................................... viii
1.
Introduction.................................................................................................................. 1
2.
Background section ................................................................................................... 3
2.1.
Literature review ............................................................................................................ 3
2.1.1.
A definition of global and local sourcing ........................................................................3
2.1.2.
Global sourcing .........................................................................................................................4
2.1.3.
Limits of global sourcing.................................................................................................... 13
2.1.4.
Reshoring ................................................................................................................................. 19
2.1.5.
Make-or-Buy decision ......................................................................................................... 21
2.1.6.
Supplier selection and assessment ................................................................................ 24
2.2.
Industry analysis ......................................................................................................... 29
2.2.1.
Structure of the industry ................................................................................................... 30
2.2.2.
Trends and challenges ........................................................................................................ 33
2.2.3.
Supplies for the production process ............................................................................. 34
3.
Methodology .............................................................................................................. 37
4.
Intra-case analysis................................................................................................... 40
4.1.
Case A: AB Inbev ........................................................................................................... 40
4.1.1.
Overview of the company .................................................................................................. 40
4.1.2.
Sourcing .................................................................................................................................... 41
4.1.3.
Plant location .......................................................................................................................... 44
4.1.4.
Supplier selection and assessment ................................................................................ 44
4.2.
Case B: Martens ............................................................................................................ 46
4.2.1.
Overview of the company .................................................................................................. 46
4.2.2.
Sourcing .................................................................................................................................... 47
4.2.3.
Plant location .......................................................................................................................... 49
4.2.4.
Supplier selection and assessment ................................................................................ 49
4.3.
Case C: St Feuillen ........................................................................................................ 51
4.3.1.
Overview of the company .................................................................................................. 51
4.3.2.
Sourcing .................................................................................................................................... 51
vi.
4.3.3.
Plant location .......................................................................................................................... 53
4.3.4.
Supplier selection and assessment ................................................................................ 53
4.4.
Case D: L’Echasse ......................................................................................................... 55
4.4.1.
Overview of the company .................................................................................................. 55
4.4.2.
Sourcing .................................................................................................................................... 55
4.4.3.
Plant location .......................................................................................................................... 56
4.4.4.
Supplier selection and assessment ................................................................................ 57
5.
Cross-case analysis .................................................................................................. 58
6.
Discussion................................................................................................................... 63
7.
6.1.
Sourcing .......................................................................................................................... 63
6.2.
Plant location ................................................................................................................ 67
6.3.
Supplier selection and assessment ....................................................................... 68
Conclusion .................................................................................................................. 70
Bibliography ....................................................................................................................... 73
Appendices .......................................................................................................................... 81
vii.
List of tables
Table 1. Monczka and Trent five-stages global sourcing model ................................................... 9
Table 2. Example of total cost of ownership calculation ............................................................... 26
Table 3. Example of pair-wise weight preference matrix between suppliers’ evaluation
criterion .................................................................................................................................................. 28
Table 4. Top ten countries consuming beers ..................................................................................... 29
Table 5. Top ten countries producing beers ...................................................................................... 30
Table 6. Information on the four biggest breweries ....................................................................... 31
Table 7. Quality tests for case studies .................................................................................................. 38
Table 8. Degree of importance of criteria for the supplier selection process at AB Inbev
.................................................................................................................................................................... 45
Table 9. Degree of importance of criteria for the supplier selection process at brewery
Martens. .................................................................................................................................................. 50
Table 10. Degree of importance of criteria for the supplier selection process at St
Feuillen. .................................................................................................................................................. 53
Table 11. Degree of importance of criteria for the supplier selection process at L’Echasse
brewery................................................................................................................................................... 57
Table 12. Cross-case analysis relating information founded in each single case of the four
brewing company analysed, which are AB Inbev, Martens, St Feuillen, L’Echasse... 62
viii.
List of figures
Figure 1. Probable Supply Routes .......................................................................................................... 17
Figure 2. Decision framework for assessing the risk of global sourcing decisions ............ 18
Figure 3. Competitive Advantage vs. Strategic Vulnerability ...................................................... 24
Figure 4. Market shares by volume in the brewery industry ...................................................... 31
Figure 5. Top 5 countries producing malt worldwide from 2000 to 2005 ............................ 35
Figure 6. World top malt exporters in 2007 ...................................................................................... 35
Figure 7. World top malt importers in 2007..................................................................................... 36
1.
1. Introduction
Nowadays, global trading takes more place than ever in business. Indeed, world
merchandise exports raised from 6.5 trillion USD in 2000 to 16.5 trillion USD in 2015
while world merchandise imports raised from 6.6 trillion USD in 2000 to 16.7 trillion
USD in 2015 (The World Bank, 2016). This merchandise trading represented 45.2% of
the world GDP in 2015 (The World Bank, 2016). This globalization trend is even more
visible with the current controversial events around the Transatlantic Trade and
Investment Partnership (TITP) or the Trans-Pacific Partnership that may link 12
countries accounting for 40% of the world GDP (The Economist, 2015). This kind of
agreement allows, inter alia, companies to source globally with more easiness. While
many scholars identify many objectives and benefits for firms to source globally,
Quintens et al. (2006) highlight that literature on the subject is inconsistent and identify
the need to perform more in-depth analysis. Indeed, depending on industries and
companies, objectives and benefits of global sourcing vary. Within the brewery industry,
AB Inbev offered 108 billion dollars for the takeover of SABMiller (The Wall Street
Journal, 2016). This acquisition will undoubtedly lead the company to implement a
much more global sourcing strategy. In contrast to this global strategy, Heineken puts
emphasis on sourcing raw materials locally in order to help the environment and reduce
transportation costs (Heineken, 2013, 2015). Belgium is known worldwide for its beer,
hosts many small breweries alongside the world number one brewing company (AB
Inbev). It therefore seems appropriate to analyse the combination of global and local
sourcing within the Belgian brewery industry. As a matter of fact, even with its small
surface area, Belgium is the third biggest exporter of beer in Europe with 11 million hl
per year (The Brewers of Europe, 2015).
The research question of this thesis is: “How to combine global and local
sourcing? A multiple case study within the brewery industry”. On top of analysing and
describing the combination of global and local souring, this research aims to analyse and
identify location of production plants, the supplier selection and the assessment process
within the brewery industry. Then, it highlights contrast and similarity between
findings, generalises them, and tries to develop potential propositions that could suit
other industries. More precisely, a more in-depth analysis is made on:
2.
-
Trends and challenges of global and local sourcing.
-
Objectives and advantages of such sourcing.
-
Procedure, criteria and common models of selection and assessment of
suppliers.
-
Decision factors for plants location.
In order to analyse these previous elements, a precise methodology has been
adopted. Firstly, the research question and sub research questions were raised.
Secondly, a literature review and an analysis of the industry were conducted to
encompass the subject in accordance with the research and sub research questions.
Thirdly, to analyse the subject in an appropriate manner, a holistic study on multiple
case was conducted. To do so; four companies were selected on their size and
internalisation level, because many differences appeared based on these factors during
the research. Therefore, two multinational companies were selected as well as two small
or medium companies to bring contrasts and similarities in the analysis. Fourthly,
interviews and collateral research was made on these companies. Fifthly, single case and
cross-case analysis were conducted. Finally, propositions have been identified thanks to
cases analysis and theoretical background.
Regarding the structure of this research, it starts with a review of the literature
on global and local sourcing, on reshoring, on the make-or-buy decision and on the
supplier selection and assessment process. Then, an analysis of the industry follows,
including an overview of the structure, trends, challenges and supply needs in the
production process. In the section after, a description of the methodology used to realise
this research is given. After that, each four selected companies are analysed separately
in a single case study. In the next section, the results for these four cases are compiled in
a table and compared. Subsequently, these findings are discussed in the discussion
section and hypothetical propositions are developed. To conclude, findings are
summarised, with managerial implications and limits of this research developed in the
last section.
3.
2. Background section
2.1. Literature review
2.1.1. A definition of global and local sourcing
These last decades, the concept of global sourcing has been used by many
scholars, in various terminologies and definitions, but always with the idea of
international purchasing (Quintens et al., 2006; Nassimbeni, 2006). Scully and Fawcett
(1994) define “international purchasing” as: “the acquisition of raw materials,
components, subassemblies, or finished good from foreign suppliers for use in the
country with buying responsibility” (p. 39). Swamidass (1993), who uses the term of
“import sourcing”, adds to this definition the possibility that sourcing could be internal
or external to the company. Multiple authors use different terms to refer to the purchase
from abroad suppliers: “global sourcing” (Kotabe, 1998), “offshore sourcing” (Frear et
al., 1992; Kotabe and Swan, 1994), “world-wide sourcing” (Monczka and Trent, 1992),
but the interpretation of international purchasing may slightly differ.
While many researchers do not make any difference between international
purchasing and global sourcing, Monczka and Trent (2005) make a strict distinction.
Indeed, they distinguish international purchasing as being a “commercial transaction
between a buyer and a supplier located in different country” (Monczka and Trent, 2005,
p.24) and global sourcing as being an “integration and coordination of procurement
requirements across worldwide business units, looking at common items, processes,
technologies, and suppliers” (Monczka and Trent, 1991, p.3). Later, Trent and Monczka
(2002) add another precision to the definition of global sourcing: “global sourcing
strategy is also linked horizontally with other functional groups, particularly
engineering, operations and increasingly marketing” (p.70). This definition is interesting
because of its nature to go beyond the simple fact of cross-border purchasing. Indeed, it
integrates the participation of worldwide purchasing units with functional groups (as
marketing or engineering) from the first phase of development to the end-of-life of a
product (Monczka and Trent, 2003a).
Quintens et al. (2006) propose a compressed but complete definition of global
sourcing: “the activity of searching and obtaining goods, services and other resources on
a possible worldwide scale, to comply with the needs of the company and with a view to
4.
continuing and enhancing the current competitive position of the company” (p.171).
This definition agrees with the definition of Monczka and Trent in the sense that global
purchasing is not only the physical and operational task of buying abroad but is an
opportunistic or pro-active strategy to improve the competitive position of the company
and is integrated during all phases of purchasing process (Quintens et al., 2006). In
addition of bringing the notion of strategy within this definition, Quintens et al. (2006)
consider that, if buying from a local supplier is a better decision than from a foreign one,
it also fits into the global purchasing strategy.
Although global sourcing is a common term in literature, scholars do merely not
use local sourcing. Nevertheless, the idea of local sourcing is frequently used through the
expression “domestic sourcing”. Domestic sourcing is defined by Murray et al. (1995):
“when the sourcing firm and its suppliers are located in the same country” (p.308).
However, Smith (1999) assumes that local sourcing is comprised within 50 to 60
kilometres of travelling from the sourcing company and specifies that enterprises in
small countries like Denmark fit in national characteristics of sourcing. For the sake of
simplicity, we assume that local sourcing is equivalent to domestic sourcing.
2.1.2. Global sourcing
Firms engaged in international purchasing have incredibly risen since the three
last decades (Trent and Monczka, 2002). Indeed, Trent and Monczka (2002) observed a
raise of US enterprises engaged in international purchasing from 45% in 1975 to 71% in
1987 and noticed an increase of the total annual dollars spent by US large firms from
foreign companies from 9% in 1993 to 25% in 2000. This amount spent abroad
continued to rise from 30% of the total purchase of US firms in 2000 to 40% in 2005 and
was expected to attain 48% in 2010 (Monczka et al., 2008).
Multiple reasons drive companies to engage in global sourcing. However, benefits
gained thanks to global sourcing are not always in line with the original objectives.
Objectives and benefits of global sourcing will be presented hereafter.
Objectives
Reasons of the evolving trend of global sourcing have been analysed by multiple
authors. Birou et al. (1993) have conducted a survey on the opinion of 149 purchasing
5.
and materials management executives of US firms of various sizes and industries about
reasons, challenges and success factors of global sourcing. The result of this survey
indicates that the first reasons of global sourcing are driven by: lower priced materials,
the availability of products not present in the domestic market, the importance of
worldwide operations and strategy, the access of advanced technology and the higher
quality of products (Birou et al., 1993). Most authors agree that these are the most
important reasons to head into global sourcing. In addition, the notion of enhancing the
competitive position or riposting against global competition arises in many research
projects as a crucial factor (Monczka and Trent, 1991; Frear et al., 1992; Birou et al.,
1993; Nassimbeni, 2006). Following objectives seem to have less impact on firms but
are also considered as decisive factors for global sourcing: developing a presence in
foreign markets and obtaining a better delivery service (Monczka and Trent, 1991;
Birou et al., 1993; Nassimbeni, 2006), beneficing of currency exchange rate (Scully and
Fawcett, 1994) or gaining reduction on commercial barriers (Nassimbeni, 2006).
Whereas Handfield (1994) reports no significant different reasons from small
and medium enterprises (SME) to engage in global sourcing than for larger firms, the
type of industry seems to play a role in these driving factors. Indeed, in many industries
where the rate of innovation is low, global sourcing is first embedded for the search of
low price materials because the process technology is already at a well-known stage
around the world (Frear et al., 1992; Nassimbeni, 2006).
Conversely, high-tech or dynamic industries, with products in the early stage of
their lifecycle, implement global sourcing mostly to obtain products, quality and
processes technology not available in their own countries (Handfield, 1994; Monczka,
1992).
Benefits
According to Trent and Monczka (2003b), a decrease of 15% of the purchase
price is observed within firms performing global sourcing. This result seems consistent
with other surveys placing the benefit of lower price through global sourcing as first
ranked (Scully and Fawcett, 1994; Nassimbeni, 2006). Nassimbeni (2006) distinguishes
the benefit of cost reduction through the availability of a lower price for materials and
manpower.
6.
Though, the benefit of reduced cost within global sourcing research has a
multidimensional element and is therefore quite inconsistent (Quintens et al., 2006).
Indeed, Holweg et al. (2011) tend to clarify this multidimensional concept and bring the
idea that the total cost is split between three different factors:
-
“Static costs include unit cost ex-factory, transportation cost and additional customs
clearance, insurance or handling charges that might be incurred on a regular basis”
(p.335)
-
“Dynamic costs” (p.335) include cost that could vary in the long term. Firstly, the
long lead time and the need of forecast could add inventory costs or a reduced
margin. Secondly, as the customer demand is changing, it brings various costly
issues: the inability of customizing products, the difficulty of introducing new
products in the supply chain, the cost of safety stocks, etc. In addition, problems of
delivery or quality could need additional air shipments that are expensive.
-
“Hidden costs are costs that are not related to the actual supply chain operation, but
impacting the wider business environment, such as currency fluctuations, changing
energy cost, and changes in the political climate or regulatory framework” (p.335).
Another important hidden cost is the rise of labour cost which is nowadays
observed in many emerging countries.
Holweg et al. (2011) conclude that the benefit of the cost gained by global sourcing is
generally overestimated by managers compared to reality because of variability and
changes over time in dynamic and hidden costs that are not taken into account.
According to Quintens et al. (2006), scholars consider the possibility of obtaining
higher quality products through global sourcing either as an advantage or as a barrier.
As a matter of fact, surveys top ranked the benefits perceived by respondents for higher
quality goods thanks to global sourcing (Birou et al., 1993; Scully and Fawcett, 1994;
Nassimembi, 2006).
However, Trent and Monczka (2003b) report that firms do not see an upgrade in
quality through global sourcing. Moreover, Smith (1999) assumes that a quality failure
in products could produce an important delay in the supply chain because of the
distance between the buyer and the supplier’s firm in global purchasing.
7.
Depending on authors, the on-time delivery factor of global sourcing is also
considered as a benefit and a barrier to global sourcing (Quintens et al., 2006). Indeed,
benefits are mitigated. Nassimbeni’s (2006) survey ranks the factor “delivery reliability”
as a relevant benefit but with an important variance from respondents, which proofs the
uncertain reliability of this one. This could be explained by the fact that “international
sourcing has greater problems of co-ordination and synchronization of the flow of
materials” (Nassimbeni, 2006, p. 703).
Some benefits from the reduction of commercial barriers could be obtained for
company whose main sales market is located in a foreign country by relocating their
production in this country and then avoiding trade barriers. Another point of view is the
opportunity for companies to benefit from the zero-tariff rates (Li et al., 2006) of Free
Trade Agreements (FTA) between their own country and other ones. Several FTA are
now implemented such as the European Union, the American Free Trade Agreement, the
Singapore-Australia Free Trade Agreement to name a few (Li et al., 2006).
On top of helping a company to be part of global purchasing, a multinational
structure with business units located in different foreign locations brings benefits from
global sourcing thanks to potential synergies (Trautmann, 2008). Trautmann (2008)
distinguishes three potential synergies from multinational companies in global
purchasing:
-
“Economies of scale” (p.54) arise only if (1) specifications and requirements for
products are common across sites; (2) demand and specifications are consistent
across sites (3) the supplier has the capacity of delivering all business units thanks
to sites across countries. In this case, multinational companies (MNC) could take
advantage of bundling their order and thus profit of negotiation power and reduced
price. Indeed, if the supplier does not have sites across countries, the advantage of a
reduced price is offset by the increasing cost of shipments or risk of quality issues.
-
“Economies of information/learning” (p.57) is based on the idea that for specific and
complex purchases, the buyer needs information to reduce the uncertainty related
to these. In a situation where (1) the supply market is risky (high volatility or low
transparency); (2) the position of the buying firm is “weaker” than the supplier; and
(3) the purchase is complex in customization, functionality or commercial
8.
procedure, then the buyer can gather information from categories and markets
across sites to decrease his uncertainty.
-
“Economies of process” (p.59) operate when (1) the value of the products purchased
is low and that numerous transactions occur for a category; and (2) the process
complexity (need of exchange of information across sites or between suppliers and
internal consumers during the purchasing process) is important. Implementing an
electronic solution across sites to share data, feedback or management
accomplishments reduce therefore the potential loss of all these costly and timely
procedures.
According to Trautmann (2008), it seems that MNC could benefit of economies
thanks to potential synergies through global sourcing if a proper purchasing structure is
implemented. Conversely, it appears that SMEs obtain less benefits of global sourcing,
especially in the access of new technologies and higher quality products (Scully and
Fawcett, 1994).
Taxonomies and typologies
So far, scholars have brought various typologies and taxonomies of global
purchasing. One of them is presented by Monczka and Trent (1991, 2002, 2003a) who
assume that to reach global sourcing, a firm should go through a phased development
process going from the phase of: “domestic purchase only” to a fully integrated and
coordinated purchasing strategy across locational and functional business units. In the
same direction, Swamidass (1993) also describes a four-stages model that emphasizes a
global sourcing dynamics where a firm goes from the strictly local purchasing stage to a
final stage where a multinational company can benefit of global sourcing as an asset
thanks to its international structure and expertise. Although Quintens et al. (2006)
assume that there is a lack of theoretical strength, descriptive power and external
legitimacy behind these models, most scholars stick to the Monczka and Trent model
(Quintens et al., 2006). Therefore, it seems interesting to describe this one hereafter.
In this model, Trent and Monczka (1991, 2002, 2003a) distinguish five phases to
reach global purchasing (see table 1):
9.
-
Level 1: Firms are only engaged in domestic purchasing because they do not feel the
need or do not have the capabilities to source internationally.
-
Level 2: Firms are partially engaged in international purchasing depending on their
needs. They are naturally turning to international purchasing because they need
materials not available in their own country or because of a pressuring global
competition. This evolution is often due to events on the market such as:
“disruption, rapidly changing currency exchange rates, a declining supply base”
(Trent and Monczka, 2002, p.69)
-
Level 3: Firms turn into level 3 because of the recognition of serious purchasing
improvements (especially monetary) going international. At this stage, companies
execute a global sourcing strategy with a decentralised structure and without
coordination between functional and locational business units.
-
Level 4: A global purchasing strategy is implemented across locational business
units worldwide and the purchasing process is centralised and coordinated. This
stage needs various coordination mechanisms in order to work appropriately.
-
Level 5: The final stage is described as having a coordination and integration of the
purchasing process across locational and functional business units from the
development phase until the end of life of a product. This stage requires a strong
organizational worldwide structure and communication mechanisms.
Phase
Description
Level 1
Level 2
Level 3
Level 4
Only engaged in domestic purchasing
Engaged in international purchasing when needed
Engaged in international purchasing
A global purchasing strategy is implemented and coordinated between
locational business units
Level 5
A global purchasing strategy is implemented and coordinated between
locational and functional business units.
Table 1. Monczka and Trent five-stages global sourcing model (Adapted from Monczka
and Trent, 2003a).
In this model, each company should take into account the following factors to choose the
appropriate stage for their firms: “intensity of worldwide competitive, customer
improvement requirements, available skills and resources, the location of buying and
10.
engineering centres, the location of world-class suppliers, and the performance impact
that global sourcing can have on firm performance” (Monczka and Trent, 2003a, p. 35).
However, Monczka and Trent’s survey (2003a) expects more than 50% of US
firms in the fifth level in 2008 and recognizes many competitive advantages for the
global purchasing stage versus the international purchasing stage. They list as
advantages: a “better management of total supply chain inventory”, a “greater supplier
responsiveness to buying unit needs”, a “greater standardization or consistency to the
sourcing process”, a “greater access to product technology” (Monczka and Trent, 2003a,
p. 32).
At the same time, Bozarth et al. (1998) have conducted a survey on a sample of
US firms involved in international purchasing and distinguished merely no difference in
purchasing performance between firms in level two or four of Monzcka and Trent’s
stages driven model.
Distinctly different from the Monczka and Trent stages model, Arnold (1999)
gives another interesting process model of global purchasing. This one tends to bring an
optimization of the organizational structure of firms involved in global sourcing using a
matrix that combines the degree of centralisation of a firm with the degree of its
internationalization (Arnold, 1999). Through this matrix, Arnold (1999) identifies the
central purchasing model, the coordination model and the outsourcing model:
-
“The central purchasing model” (p.173) is suitable for companies with a low ratio of
internationalization and a highly centralised structure. Therefore, the global
sourcing and the global sourcing strategy are managed by a strong centralised
department, which could benefit from economy of scale. Trautmann (2008) and
Arnold (1999) assume that even if strategic purchasing is managed by the
headquarters, local sites still have in charge operational procurement tasks (as
ordering) to benefit from proximity with the supply market. In addition, Monczka et
al. (2008) consider that the schedule and inventory planning, the shipment of
products, the management of orders issues are organizational tasks that should
remain at business units’ level in order to reduce the total cost of ownership, to
improve the service to customers and to improve the inventory management.
-
“The coordination model” (p.173) is suitable for companies with a high ratio of
internationalization and a centralised structure. It assumes that procurement
11.
managers of regional business units cooperate to work out a global sourcing
strategy for major purchasing.
This model is relevant as: “it combines the
advantages of independent regional business units with best market know how and
the advantages of demand bundling in purchasing” (Arnold, 1999, p.173). Monczka
et al. (2008) also argue that global firms usually use teams to manage global
sourcing strategy but that an electronic communication tool is necessary to ensure a
reduced purchase cost, a better cost saving through an optimized supply chain and a
better purchase process.
-
“The outsourcing model” (p.173) is suitable for companies with a high ratio of
internationalization and a very decentralised structure. The main idea is to spread
the global sourcing process across business units and “to give a purchasing mandate
for a specific foreign supply market to the business unit located there” (Arnold,
1999, p.173). Trautmann (2008) links this model to “transnational companies” and
assumes that each strategic purchasing is given to the business units with the best
know how across the multinational company.
Although many scholars accept the Monczka and Trent stages model, they limit
the scope of global sourcing to MNC. Indeed, in their point of view, a perfectly efficient
global purchasing could only be reached by MNC with sites and business units
worldwide where a centralised purchasing structure is implemented.
Nevertheless, these factors are not necessarily essential to have an efficient
global sourcing strategy. Indeed, Arnold (1999) demonstrates that each organisational
structure could benefit of global sourcing in an efficient way thanks to how specific
mechanisms apply to each different structure.
Challenges and success factors
Scholars have observed various challenges to realise a successful global sourcing.
Many of them recognize as one of the most challenging factors the difficulty of
evaluating and qualifying foreign suppliers’ competencies (Birou et al., 1993;
Nassimbeni, 2006). Nassimbeni (2006) consolidates this factor within the “information
and relational difficulties” category which is the most relevant of his survey. In addition
to that, this group includes the following factors: “difficulty of a positive relation with
suppliers, difficulty in finding information, lack of direct communication, difficulty in
12.
finding qualified personnel” (Nassimbeni, 2006, p.699). The cultural and language
difference, the difficulty of just in time and logistics management, customs barriers and
the fluctuation of exchange rates are also considered as having significant impact on
success in global sourcing (Birou et al., 1993; Nassimbeni, 2006).
To overcome some of these previous challenges of global sourcing and gain a
competitive advantage from it, it is necessary to conceive thoughtfully a global sourcing
strategy (Fawcett and Scully, 1998).
Firstly, it is essential to define the goals and purchasing needs of the firm (Birou
et al., 1993).
Secondly, firms must have sufficient resources in time, finance, skills and
personnel to ensure a successful global sourcing (Trent and Monczka, 2005).
Thirdly, it is appropriate to create a well-described purchasing process where
roles and responsibilities are defined (Trautmann, 2008). This process reduces the
difference of culture and practice between managers across worldwide business units,
assures the participation of functional units, reduces the self-interest of local sites and
makes a common framework for the corporate attention (Trent and Monczka, 2005,
2008).
Fourthly, an extensive information technology structure should be in place
through database, web based system and intranet to optimize the exchange of
information across sites (Trent and Monczka, 2005). This IT system allows companies to
share data on: “contract structures, preferred suppliers and current prices and volumes”
(Trautmann, 2008, p.32). In addition to allow companies to evaluate the best suppliers
in term of quality, cost or delivery, it allows them to better manage their relation with
preferred suppliers (Fawcett and Scully, 1998).
Fifthly, communication channels (as training sessions, conference calls, strategy
meetings) are needed between teams across sites to limit joblessness and to improve
managers’ understanding of the global sourcing strategy (Trent and Monczka, 2005).
Finally, it is important to monitor the realised saving achieved with global
sourcing (Trent and Monczka, 2005). In order to do so, companies implement multiple
key performance indicators (KPI) where sites can show their contribution (in terms of
cost saving, process and customer satisfaction) to the overall sourcing performance of
the company (Trautmann, 2008).
13.
Although all these success factors mainly fit for MNC with a centralised or
decentralised purchasing structure, it is also possible to implement an international
purchasing office (IPO) that partially centralises sourcing and procurement. Within the
Monczka and Trent’s (2008) survey, IPO is rated as extremely important in global
sourcing by 85% of respondent firms. Indeed, it brings a better managed global supply
base, a: “greater access to product and process technology, improved delivery reliability
from suppliers, reduced ordering cycle times, lower purchasing process transaction
costs, and increased responsiveness and flexibility (Monczka and Trent, 2008, p.51).
While these previous success factors mostly concern MNC aiming at reaching the
last stage of the Monczka and Trent model (coordination between locational and
functional business units worldwide), it amazingly appears that, due to their limited
environment and their easiness of reactivity, small firms report fewer challenges than
large firms to global sourcing (Scully and Fawcett, 1994). Nevertheless, for performing
well on a global scale, small firms should put even more emphasis on: (1) a sourcing
strategy in phase with the overall firm strategy; (2) a proper purchase process with an
analysis of weaknesses and strengths; (3) a sufficient international information
gathering (through experience, manager or third-party); (4) an awareness of logistic and
managerial complexity; and thus reduce the complexity of the purchasing channel in
order not to offset global sourcing benefits (Scully et al., 1994).
2.1.3. Limits of global sourcing
Although global sourcing can bring significant benefits, local sourcing could
better suit in some circumstances. This is why an exhaustive analysis of factors
influencing the decision of global or local sourcing is presented in this section.
Many authors argue that inventory issues and lead time play an important role in
the limits of global sourcing. Golini (2011) assumes that: “the average stock depends on
the supply lead-time and its variability” (p.88). Therefore, a long distance between the
buyer and the supplier location usually means a longer lead time that could rise in
variability due to the mode of transportation (Golini, 2011). This implies the need of
safety stock and a potential obsolete stock (if a wrong forecast has been made on the
fluctuating customer demand), which raises the total unit cost (Holweg et al., 2011).
14.
Although global sourcing has a negative impact on inventory, investment in supply chain
management contributes to reduce this negative effect (Golini, 2011).
Scholars consider the demand uncertainty as a major limitation to global
sourcing. Indeed, since the economic and financial crisis in 2007, firms seem less
tempted by global sourcing because of markets and customers demand uncertainties
(Tunisini et al., 2011). Undeniably, the more the demand uncertainty rises, the more a
safety stock and urgent shipments by plane are needed in order to fulfil customers’
orders (unless there is a risk of lost sale), which affects total unit cost (Holweg et al.,
2011). As Jin (2004) notifies, the demand uncertainty is often driven by the nature of the
product. He makes a distinction between the functional product with predictable
demand and the innovative product with unpredictable demand (Jin, 2004). As the
innovative product should be more market responsive, it is better to source it locally to
limit the risk of inventory stock (Jin, 2004). Moreover, innovative products usually
require more from the buyer and thus more contacts with the suppliers for drawing,
testing or approving (Smith, 1999). Therefore, it is better to have a small geographical
distance between the buyer and the supplier to allow these regular contacts (Smith,
1999).
However, in an innovative product range, if a model has less demand than others,
it could be produced in a slower way and thus sourced globally (Abernathy et al., 2000a,
2000b). On the contrary, standard products with low level of demand uncertainty could
be sourced globally to benefit of price competition (Jin, 2004).
A geographic location within an industry cluster, where subcontractors and
related industries are present, could be a source of lower labour and material cost, and
could then bring a competitive advantage (Jin, 2004). In addition, purchasers located
within an industrial cluster recognize the importance to maintain this cluster when
firms “hold sophisticated and long-term competences on the product and on the
production process” (Tunisini et al., 2011, p. 1020). Considering this, Steinle and Schiele
(2008) emphasize the need to be locally present within industry clusters in order to
become a preferred customer of one of the present suppliers. Moreover, valuable
specialized supplies (often technologic) are frequently only available from a limited
number of suppliers (Steinle and Schiele, 2008). Therefore, becoming a preferred
supplier and receiving a better treatment or a better resource allocation from suppliers
is an obvious competitive advantage (Steinle and Schiele, 2008). Tunisini et al. (2011)
15.
assume that this kind of interaction and cooperation can only happen when being in the
same region. Therefore, it is preferable to source locally when firms are located in a
cluster industry area (Jin, 2004).
Though, a survey conducted on 932 small and medium companies in Denmark
shows that firms find more interesting and important to relocate their production plants
close to their customers instead of their suppliers (Rasmussen et al., 2011). Indeed,
customers’ perception on a product could rapidly change from a functional to an
innovative product, in which case it is preferably to have production plants located
where the demand is (Gylling et al., 2015).
The availability of technologic products is often only available on a global scale
(Smith, 1999). However, if the technology rapidly changes, the buyer has an advantage
to have numerous contacts with suppliers in order to stay informed and thus need to be
geographically close to them (Smith, 1999). In addition, the more a product needs
technological sophistication, the more the risk of intellectual property theft exists
(Holweg et al., 2011). Therefore appears the need to have a long-term relationship with
a domestic supplier (which is preferably located within an industry cluster) and to
integrate him within the early stage of products development (Steinle and Schiele,
2008). In circumstances where technologic products are not available in the local area
and where a technology quickly evolves, buyers could benefit from a technically
competent national distributor (Smith, 1999).
Jin (2004) distinguishes the technology applied to products and the
manufacturing technology. He assumes that if suppliers possess manufacturing
technology and have sufficient sales information shared with buyers, even basic items
could be sourced locally at a lower cost and with a better delivery time (Jin, 2004).
Indeed, phases of production with high automation and low manpower needed could be
sourced locally at lower costs (thanks to gains in transportation cost, customs, handling
charges, etc) whereas production phases, in which automation could not be applied,
should be sourced from low wages countries (Bolisani and Scarso, 1996).
Even if high quality products could be sourced globally at a lower cost, the
sourcing decision should be made depending on the “tolerance in the quality
specification” and “the ease of correction quality defects” (Smith, 1999, p. 123). Indeed,
if the supplier’s tolerance in quality specification and if the ease of correction defects are
low, then buyers will need to be close to suppliers to provide them assistance and
16.
technical support when a quality failure arises (Smith, 1999). In addition, in case of
quality failure with a global supplier, the supply chain could be hardly hampered and
thus would produce longer delays (unless costly air shipments are organized to deliver
to buyer firms) (Holweg et al., 2011). Therefore, it seems more appropriate to source
locally (or from a national distributor with an appropriate contract) unless the quality
specifications are rather low, then global sourcing at lower cost should be privileged
(Smith, 1999).
Some products are often only available from few suppliers or few locations.
Those with low supply risks, low buyer’s requirements, predictable demand and not
critical items of operation (i.e. some commodities) should be sourced globally to benefit
from cost reduction. (Smith, 1999)
On the contrary, items only available on a global scale but with high demand
uncertainty and which are critical for operations could be sourced from a national
distributor to manage the risk of an interrupted supply chain (due to long lead-time,
potential quality failures, etc) (Smith, 1999).
Before finding an optimal balance between global and local sourcing, it is
necessary to consider the cost of the products purchased. Indeed, obtaining goods from
global suppliers represents several additional costs compared to local suppliers and
could be separated in: (1) set up costs (cost incurred during the first phase of global
purchasing process; these costs could include the selection of suppliers, the
implementation of commercial and technical analysis or the management of suppliers
relationship); (2) recurring costs (costs that occur frequently during purchases as
transportation, expediting, duties, inspection, etc) (Platts and Song, 2010). Therefore,
source low price products from global suppliers could offset the benefit of a low exfactory price (Smith, 1999). Moreover, as transactions costs (costs of managing
purchases) are more significant in global sourcing than local sourcing, it could be
monetarily inefficient to source globally low value and sophisticated products that are
available from domestic suppliers (Steinle and Schiele, 2008).
On the contrary, highly value products reduce the proportion of the delivery cost
on the total unit cost and increase the margin available on global markets (Smith, 1999).
The volume of products purchased should be taken into account when choosing
supplies’ sources. Indeed, Jin (2004) assumes that if the volume of production of an item
is low, it is financially interesting to source it locally depending on its demand
17.
uncertainty (because global sourcing incurs high transactions costs, high shipments
costs, potential economies of scale on large volumes, etc).
However, when the volume of production is high, firms should invest in
manufacturing technology in different worldwide sites to gain in profit and flexibility
(Jin, 2004).
By combining most factors explained here above, Smith (1999) proposes 3
different routes of sourcing (that are shown in figure 1):
-
“Source and buy on global markets” (p.125): it is preferred to use this route of
sourcing for items that are “expected to be either commodities, high technology
items or those with limited availability, high intrinsic costs or low delivery costs”
(p.125) but that are not “expected to be experiencing significant changes in
specification, technology or the pattern of demand” (p.125)
-
“Source globally but buy through distribution channels”(p.125): this route includes
items with same characteristics as items in the first group but with potential
changes in “specification, technology, or demand pattern, or exhibit significant risk
of failure or profound difficulties in correction should failure occur” (p.125)
-
“Source and buy locally and/or nationally” (p.126). In this case, we assume that
national equals local as explained in the definition part. Therefore, items in this
route are “showing significant change coupled with low technology, low cost, wide
availability, volatile demand or high delivery costs” (p.126).
Figure 1. Probable Supply Routes (Retrieved from Smith, 1999, p.127).
18.
Smith (1999) assumes that most items should have enough attributes in one of these 3
different routes to select the most appropriate one. However, if there are too many
opposite attributes making a choice hazardous, a more profound analysis should be
made to find out the reasons of these conflicting characteristics (Smith, 1999).
Holweg et al. (2011) present a different model that gives indications of
preference between global and local sourcing depending on five variables. These
variables are the following: “(1) the difference in lead-time between the domestic and
international supply chain; (2) the demand uncertainty for the components (often
driven by their product variety); (3) the importance of service level (or the cost of lost
sales and obsolescence); (4) the cost of expediting shipments; and (5) the product
complexity (its technological sophistication or its need to be manufactured to
customers’ specifications)” (Holweg et al., 2011, p.339). Then, he proposes to rate these
variables in “a five-point Likert scale (one being low importance/value/cost and five
being high importance/value/cost)” (Holweg et al., 2011, p.340), allowing managers to
draw a pentagon with those values (see figure 2). The idea behind this is that the more
the surface of the pentagon is large, the more the risk that global sourcing will generate
additional costs is high (as cost of safety stocks, obsolete stocks, urgent shipments,
delays in delivery, etc.) and offset its own benefits (Holweg et al., 2011). Here is an
example of a relatively low risk of additional costs with global sourcing (case B) and
relatively high risk of additional costs with global sourcing (case C):
Figure 2. Decision framework for assessing the risk of global sourcing decisions
(Retrieved from Holweg et al., 2011, p.339).
19.
2.1.4. Reshoring
Reshoring phenomenon that could be interpreted as the initiative of relocating
manufacturing activities, which were once offshored, in the home country has recently
gained in importance (Gylling et al., 2015; Gray et al., 2013). As a matter of fact,
approximately 3% of German industrial enterprises reshore per year (around 570
companies) (Maronde et al., 2015). In a Boston Consulting Group survey, 17% of U.S.
executive respondents claim that they are actively reshoring production and 30% claim
that they are either considering it today or will consider it in a near future (The Boston
Consulting Group, 2015).
The decision of reshoring deals uniquely with location and do not necessarily
considers the concern of ownership (Gylling et al., 2015; Gray et al., 2013). Indeed, Gray
et al. (2013) differentiate four types of reshoring: (1) “in-house reshoring” (p.28), in
which a company that had manufacturing activities offshore relocates these in its home
country; (2) “reshoring for outsourcing” (p.28), in which a firm that had manufacturing
activities offshore, outsources its activities to third-party suppliers in its home country;
(3) “reshoring for insourcing” (p.28), in which a company that outsourced its
manufacturing activities offshore, relocates these activities in wholly owned plants
located in its home country; and (4) “outsourced reshoring”, in which a company that
had manufacturing activities performed by offshore suppliers has now these activities
performed by domestic suppliers. In addition to reshoring, companies could also
“nearshoring” and for example, shift the manufacturing location from a previously low
cost country to an actual low cost country (Tate et al., 2014).
Various factors influence companies to reverse their previous and often
imperfect choice of offshoring manufacturing activities (Gray et al., 2013). Indeed, many
offshoring decisions have been taken on easily measurable costs, without taking into
account some hidden costs and risks such as: “midnight phone calls, delivery delays, IP
leakage, communication challenges, travel” (Gray et al., 2013, p. 30). Moreover, low cost
countries, where offshoring was applied, lost some of their attractiveness. Undeniably,
these regions suffer from: “higher labour costs, higher raw materials costs, and
decreased responsiveness and quality” (Tate et al., 2013, p. 382). Even though cost is a
major factor of reshoring, managers are driven by other significant elements in their
decision. Therefore, a more in-depth analysis of factors of decision seems appropriate.
20.
Firstly, due to the economic development of emerging countries, the cost gap
with developed countries is decreasing, which leads to a rise of labour cost (and other
costs) in these emerging countries (Tate et al., 2013). Indeed, Tate et al. (2013)
recognise that in some regions of China, wages have more than doubled. This is probably
due to market competition, which arises when firms “compete for the same resources”
(Tate et al., 2013, p.383). Moreover, many companies relocate their production in
distant regions from their home market to benefit from low labour cost, but this
distance implies additional costs (such as inventory costs, transport costs, energy costs,
etc.) (Tate et al., 2013). Therefore, it is necessary that these additional costs do not offset
the benefit of this lower (but increasing) labour cost (Tate et al., 2013).
Secondly, as most companies having manufacturing plants offshore increase the
automation, a shortage of skilled and semi-skilled labour appears (Tate et al., 2013).
Therefore, less skilled employees are hired and products quality becomes an issue (Tate
et al., 2013). Indeed, some quality requirements that were not anticipated by offshore
manufacturing contractors could lead to an increase in price per unit (Gylling et al.,
2015).
Thirdly, because of slow ocean transit and the additional inventory needed, safety
stock soars and working capital increases (Tate et al., 2013). Indeed, the slow ocean
transit increases the length of the global supply chain, thus leads to a more complex
management of the inventory and the working capital (Tate et al., 2013). Moreover,
customers’ requirements and demand could evolve rapidly, which could lead to a
mismatch between demand and supply (Gyling et al., 2015). Therefore, a production
close to customers market could increase the market responsiveness and the flexibility
(Gylling et al., 2015).
Fourthly, Tate et al. (2013) argue that the exchange rate risk is another factor in
the locational decision. Undeniably, they recognise that “from June 2003 to June 2013,
the Chinese Yuan strengthened by 35% against the U.S. Dollar” (Tate et al., 2013, p.384).
The fluctuating exchange rate between the Euro and U.S. Dollar is another concern that
is especially true for SME because they have lower financial resources and could not
easily implement a hedging strategy (Gylling et al., 2015). To avoid this kind of issues,
Gylling et al. (2015) propose to relocate manufacturing plants in a country with the
same currency and close to the home/customer market to benefit from market
responsiveness and lower manufacturing costs compared to home country.
21.
Finally, environmental regulations that take into account the entire carbon
footprint of the supply chain (Gray et al., 2013), the important attention of media on tax
havens and the theft of intellectual property are other factors influencing reshoring
(Tate et al., 2013).
Reasons of reshoring are partly driven by managerial computation but could also
be driven by consumers’ willingness to consume local products. Indeed, in their survey,
Maronde et al. (2015) analyse that if quality and price of products are equivalent, then
consumers strongly prefer locally made products. Moreover, reshoring is often a
synonym of manufacturing location close to consumers market, which reduces the
negative environmental impact (Maronde et al., 2015). This reshoring sustainable
attitude has an impact on purchasing behaviour (Maronde et al., 2015). Positively, US
customers are willing to pay a 15 to 20% price premium for reshored products that are
more sustainable (Maronde et al., 2015).
Following this recent trend of environmental concern, it is important for
companies to show their sustainable practices. One of the most visible practices in the
food and beverage industry is the use of locally sourced raw materials and products
(Campbell et al., 2014). Campbell et al. (2014) have conducted a survey within a
university’s foodservice operations. Results of this survey confirm that customers are
sensitive to local products if communication is made around local products attributes as
“better taste and freshness, support for the local economy and minimized environmental
impact” (Campbell et al., 2014, p. 48). Undoubtedly, when determining their willingness
to pay for products, students not only consider characteristics of a product but many
other factors like emotional ones or their belief in health and sustainability (Campbell et
al., 2014). In addition, they consider local products “to be of higher quality, to be fresher,
more nutritious, and better tasting” (Campbell et al., 2014, p. 43). Therefore, Campbell et
al. (2014) conclude that if consumers are aware that products are local, they are willing
to pay more for those.
2.1.5. Make-or-Buy decision
Global and local sourcing bring both respective benefits, as it is for reshoring.
Nevertheless, it is reasonable to think that many companies prefer to buy finished
products before commercialising it than buying each material and producing it
22.
themselves. Therefore, before going in depth in methods and factors prevailing in the
supplier selection, we should have an overview of the reasons contributing to the makeor-buy decision.
Quinn and Hilmer (1994) assume that if the supplier market was completely
trustworthy and efficient, it would be rational for firms to outsource all their activities
except the ones that are core business and procure a real competitive advantage.
Unfortunately, many supplies markets comport risks in terms of delivery time, quality,
price, etc (Quinn and Hilmer, 1994). All these risks could lead to an increase in cost for
the buyer firm, a loss of competitive advantage within a market or an increase of lost
sales. Therefore, many factors should be taken into account before making an
outsourcing or insourcing decision. Quinn and Hilmer (1994) present a few:
-
“Competitive edge” (p.48): Before choosing to keep in house a production, it is
necessary to identify if a company can maintain a competitive edge through a
unique capability and hence performing at a better price, quality and time.
-
“Transaction costs” (p.49): The balance between costs associated to insourcing or
outsourcing is another significant factor that influences make-or-buy decision.
Transactions costs of insourcing could include: “R&D, personnel development and
infrastructure investments that at least match those of the best external supplier”
(p.49) whereas outsourcing’s transaction costs could include: “searching,
contracting, controlling, and recontracting” (p.47).
-
“Vulnerability” (p.49): That depends on the supplier market. Indeed, if the supplier
market is mature and regroups many suppliers, the buyer firm has less chance to be
as competent as the best-in-class supplier. On the contrary, if the supplier market
regroups fewer suppliers, it can be harder to find competent suppliers that could
offer innovative products. Another form of vulnerability is the lack of market’s
information for buyer firms (i.e. if buyers only have limited information on raw
materials issues or on labour problems).
Welch and Nayak (1992) bring another notion to the make-or-buy decision. This
factor is based on the relation between competitive advantages and technology maturity
within industries (Welch and Nayak, 1992). They assume that if a technology is not
already available (or is emerging) in the market but could bring a competitive
23.
advantage, then firms with sufficient capacity should internalize this technology as well
as the production related to it, in order to benefit of this competitive advantage (Welch
and Nayak, 1992).
On the contrary, if a mature technology does not procure a competitive
advantage, firms should rather outsource and focus their resources on core activities
(Welch and Nayak, 1992). However, if a mature technology, that could give a
competitive advantage, is not present in the firm’s industry but is available from another
industry, firms with sufficient capacities could integrate this technology before
competitors do (Welch and Nayak, 1992).
Depending on the previous factors, an outsourcing decision could be preferable.
In this case, companies could benefit of lower investments in-house (i.e. costs of
infrastructure, manpower, coordination, etc) and therefore concentrate their resources
in core competencies and efficient tasks (Kotabe and Murray, 2004). In addition,
outsourcing enable buyer firms to (1) obtain a better flexibility when purchasing fast
moving products or technologies; (2) reduce production cycle time and get a better
quality (as many suppliers, each specialized in different components, work
simultaneously); (3) reduce the risk associated to failure in research and development;
and (4) avoid continuous investments in facilities to maintain efficient production
(Quinn and Hilmer, 1994).
However, an outsourcing choice could also involve these following risks: (1) a
dependency on some suppliers, which could mean losing track on evolving new
technologies and designs and thus potentially reducing a competitive advantage early
acquired (Kotate and Murray, 2004); (2) an inefficient manufacturing process due to
distance between buyer firms and new technologies and designs (Kotabe and Murray,
2004); (3) a loss of functional skills and a decrease of proficient expertise due to a
reduced intervention of cross functional teams in production process (Quinn and
Hilmer, 1994); (4) a loss of quality control that could lower the confidence of customers
(Kotabe and Murray, 2004); and (5) a of loss of intellectual property and expertise
(Quinn and Hilmer, 1994).
Nevertheless, to avoid some of these previous risks but still benefiting from
advantages of outsourcing, it could be interesting to make a strategic partnership with
suppliers. Quinn and Hilmer (1994) propose a decision matrix where axes are the
potential for competitive edge and the degree of strategic vulnerability (see figure 3).
24.
Figure 3. Competitive Advantage vs. Strategic Vulnerability (Retrieved from Quinn
and Hilmer, 1994, p.48).
They assume that, if there is a high potential for competitive edge and a high
vulnerability on the market, then a strategic partnership is preferred (Quinn and Hilmer,
1994). On the opposite, a full outsourcing is sufficient (Quinn and Hilmer, 1994).
Between the two extremes, there “are opportunities for developing special incentives or
more complex oversight contracts to balance intermediate levels of vulnerability against
more moderate prospects for competitive edge” (Quinn and Hilmer, 1994, p.50).
2.1.6. Supplier selection and assessment
As seen earlier, the managerial decision to locally or globally source depends on
many factors. Once decided, companies usually have the choice on a certain amount of
suppliers that could supply the same product. Therefore, managers must select and
assess carefully their suppliers to keep or bring a competitive advantage on the market.
To do so, managers base their choice on multiple criteria that are presented hereafter.
In their analysis of 78 articles on the supplier selection between 2000 and 2008,
Ho et al. (2010) identify the most used criteria that managers apply when selecting and
25.
evaluating suppliers. The most used criterion appears to be quality; which is followed
closely by delivery and price/cost (Ho et al., 2010). Some others criteria frequently used
in the suppliers selection are: “manufacturing capability, service, management,
technology, research and development, finance, flexibility, reputation, relationship, risk
and safety and environment” (Ho et al., 2010, p.21).
Beside these criteria, Kotula et al. (2015) identify in their survey an apparent
misalignment between supplier’s evaluation criteria and the overall business strategy of
companies. This misalignment could “directly affect organisation’s reputation, brand
value, and reliability (Kotula et al., 2015, p.239). Indeed, this is clearly inconsistent to
recognise quality as the most important success factor of a company and then select
suppliers on the criterion of cost (Kotula et al., 2015). Successes factors for the overall
business of a company should be integrated within the sourcing strategy and applied
when selecting and evaluating suppliers (Kolua et al., 2015). Therefore, it is necessary to
implement collaboration between internal stakeholders within the supplier selection
process in order to be in line with the corporate goals (Kotula et al., 2015). Moreover, to
get the full requirements from departments, it could be useful to create a team with
different representatives from functional departments (as finance, marketing,
purchasing, R&D, etc) to share the hidden knowledge and needs of each individual (Ho
et al., 2011).
Various models arise to evaluate and select suppliers in the best manner. Ho et
al. (2011) recognise the total cost of ownership model (TCO) and the analytical
hierarchy process (AHP) model as the most prevalent models in the supplier selection.
They will be presented below.
Total cost of ownership model
Total cost of ownership is a complex approach that allows firms to trace the total
cost of items, element cost by element cost (Ellram, 1995). Firms should evaluate what
are the most important costs during the whole lifecycle of the product (which include
pre-transaction costs) (Ellram, 1995). As it is complicated to quantify qualitative factors,
TCO is mainly based on quantitative elements (Buttha and Huq, 2002). In addition to
the price paid for the item, significant cost elements that could be analysed are: “order
placement, research and qualification of suppliers, transportation, receiving, inspection,
26.
rejection, replacement, downtime cause by failure, disposal cost and so on” (Ellram,
1995, p.4). An example of how TCO is calculated is presented in table 2.
TCO provides an excellent tool to understand which costs are the most important
for buyer firms and suppliers and thus brings consistent data for negotiation and costs
saving, and to analyse suppliers’ performance (Buttha and Huq, 2002). In case firms use
TCO for suppliers’ evaluation, they will logically use a user-friendly standard model that
allows firms to analyse repetitive buys and purchases with same significant cost
elements (Ellram, 1995).
Conversely, firms that use TCO for the supplier selection will rather use unique
models which are designed for significantly changing buys or for the need of a flexible
model that could be perfectly adapted to the user need (Ellram, 1995). If situation
allows, the use of a standardized model is preferred because it enables firms to
continuously measure suppliers’ performance after the selection process (Ellram, 1995).
Table 2. Example of total cost of ownership calculation (Retrieved from Buttha and Huq,
2002, p.130).
27.
Undeniably, TCO model faces different limits. Indeed, it is a complex tool that
requires lots of cost data that are not always available if suppliers are not already known
within buyer firms (Buttha and Huq, 2002). In addition, the cost elements chosen for the
analysis can greatly vary from a component to another, which could make the model less
appropriate for supplier’ performance measurement (Buttha and Huq, 2002).
Analytical hierarchy process model
AHP model is constructed on managerial judgments with qualitative and
quantitative factors that allow evaluating suppliers’ performance (Buttha and Huq,
2002). The idea is to assign weights of preference between criteria (quality, technology,
service, etc.), then multiply these scores with weights of preference assigned between
suppliers, and the highest total score is thus selected as the best supplier (Buttha and
Huq, 2002). The preference weighting scale that is commonly used in AHP goes from 1
to 9 (1 being equally preferred score and 9 being extremely preferred score) (Buttha
and Huq, 2002). To obtain the total score of suppliers, weights are compared pair-wise
within a matrix (Buttha and Huq, 2002). Firstly, managers judge their preference
between suppliers’ evaluation criteria, which are compared within a matrix (Buttha and
Huq, 2002). After that, the obtained results are divided by the total of the column and
give the ratio of each preference between criteria (See table 3) (Buttha and Huq, 2002).
Secondly, managers give preference scores about each criterion between suppliers and
multiply them by the ratio given in table 3. Finally, the supplier with the highest score is
considered as the best (Buttha and Huq, 2002). An example is illustrated below.
28.
Table 3. Example of pair-wise weight preference matrix between suppliers’ evaluation
criterion (Retrieved from Buttha and Huq, 2002, p. 132).
The main benefit of AHP is that it is a flexible model that can include a large
number of qualitative and quantitative factors without generating a too complicated
matrix (Buttha and Huq, 2002). When different goals arise within the supplier selection,
AHP offers a good alternative to TCO as a scale of preferences could be attributed
between each criterion (Buttha and Huq, 2002).
However, when a new criterion is integrated within the process, the entire
process needs to be reconstructed, which is time consuming (Buttha and Huq, 2002).
Moreover, all criteria are based on managers’ judgments, which could give a completely
different result depending on the decision maker who defines the importance of criteria
and the performance of suppliers (Buttha and Huq, 2002).
29.
2.2. Industry analysis
In 2014, the global beer consumption increased by 25.4% compared to 2004, to
reach 189.06 million kilolitres (Kirin Company, 2004, 2015a). Asia represents 34% of
global market share whereas Europe and Central and South America represent 27% and
16.6% respectively (Kirin Company, 2015a). In the global market share, top 3 countries
consuming beers are: China (23.7%), United States (12.8%) and Brazil (7%)(Kirin
Company, 2015a). The top ten countries consuming beers account for 66.2% of total
beer consumption (see table 4)(Kirin Company, 2015a).
Table 4. Top ten countries consuming beers (Retrieved from: Kirin Company, 2015a).
Two trends arise in the beer consumption worldwide. On the one hand, the
volume demand in developed countries is stagnant and even declining in many markets
(i.e. Germany, UK, Japan, etc.) (Gammelgaard and Dorrenbacher, 2013). On the other
hand, emerging countries (i.e. China, Russia and Brazil) experience an important growth
of demand (Gammelgaard and Dorrenbacher, 2013). Therefore, since several years, the
beer consumption market is relatively stable with a low growth (i.e. 0,4% of growth in
2014 compared to 2013) (Kirin Company, 2015a).
The worldwide production of beer represented 191 million kilolitres in 2014 and
increased by 24.2% compared to 2004 (Kirin Company, 2015b). Asia is the most
30.
important region of production (with 33.9% of global share), followed by Europe (27%)
and South America (17.2%) (Kirin Company, 2015b). The top ten countries producing
beer account for 65.2% of the total beer production (see table 5).
Table 5. Top ten countries producing beers (Retrieved from: Kirin Company, 2015b).
A similar trend of the beer consumption appears in the beer production. Indeed,
as we can see in table 5, developed countries have a declining beer production whereas
emerging countries have an important growth of their production. Indeed, the EESC
conference (2013) highlighted the sharp decrease in the European beer production that
fell from 420 million hectolitres in 2007 to 377 million hectolitres in 2011.
It is interesting to note that most countries have very close numbers for beer
consumption and beer production. Indeed, the worldwide average percentage of beer
importation is less than 1%, which is a sign that beer is mostly produced within the
country of production (Madsen and Wu, 2014). However, few countries are exceptions
as Belgium that exports 62% of the produced beers (Belgian brewers, 2014).
2.2.1. Structure of the industry
The brewery industry is mainly composed of either very large MNC or small
breweries. Indeed, top 10 brewing companies represent approximately 67% of the
global sales volume in 2011 (TCS, 2013). The four biggest breweries (CR4) in the market
31.
held more or less 47% of the global sales volume in 2013 and are listed in table 6
(Madsen and Wu, 2014).
Table 6. Information on the four biggest breweries (Retrieved from: Ascher, 2012, p. A9).
The next six breweries in the top 10 (CR4-10) hold 20% of the market, which let
only around 30% for smaller breweries (CR10-N) (Madsen and Wu, 2014). The market
domination by large MNC during the 2002 to 2013 period is given in figure 4.
AB Inbev offered 108 billion dollars for the takeover of SABMiller. Undoubtedly,
the question of monopoly arises and thus this potential transaction is, at the moment,
reviewed by worldwide antitrust agencies (The Wall Street Journal, 2016).
Figure 4. Market shares by volume in the brewery industry (Retrieved from: Madsen
and Wu, 2014, p.6).
32.
This trend is explained by important cross-border mergers and acquisitions from
large breweries that turn into MNC (Madsen and Wu, 2014). This strategy of mergers
and acquisitions from large breweries make sense for multiple reasons.
First, as beer is mainly composed of water and containers take large space,
transportation is expensive (Madsen et al., 2010). Therefore, it is more efficient to
produce beer close to the demand market through acquisition because it is a more
attractive route to the consumers than green field FDI (Madsen et al., 2010).
Secondly, multinational companies aim to enter in markets with fast growing
beer consumption (Gammelgaard and Dorrenbacher, 2013). This is translated into huge
investments by MNC breweries in China and Latin America countries (as Brazil and
Mexico) (Gammelgaard and Dorrenbacher, 2013).
Thirdly, large breweries want to increase their position in foreign markets in
order to benefit from efficient integration of management, distribution or production
(Gammelgaard and Dorrenbacher, 2013).
Finally, thanks to the global image of the brand, large brewing companies can
benefit from economies of scale by running worldwide marketing campaigns realised at
headquarter (Gammelgaard and Dorrenbacher, 2013). Indeed, Jain (1994) reports that
marketing accounts for 20% of total expenses of breweries. Moreover, Madsen and Wu
(2014) assume that large firms with worldwide beer brands benefit more from
marketing campaigns (such as sports sponsoring, internet campaigns, publications, etc.)
as most of the people they reach can buy the product whereas small firms with more
local sales could waste advertising on viewers that do not have the opportunity to buy
the product.
The rest of 30% of global share is composed of medium and small breweries. In
parallel to the consolidation of activities by large breweries, the number of small
breweries has risen in many developed countries (McKinsey&Company, 2015). This rise
is mainly composed of microbreweries or craft breweries. In United States, the “Brewers
association” defines a microbrewery as a brewery that does not produce more than
17.600 hectolitres annually whereas they consider a craft brewery to be small,
independent and traditional. Indeed, even if the market in developed countries is at a
mature stage, this growth is possible because consumers are looking more and more for
new tastes, new products and are willing to pay more for those (Ascher, 2012; Jain,
1994). In the U.S, the number of small brewers increased by 18% and reached 11% of
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the total sales volume whereas new beers on retailers’ shelves increased by 8 times in
Italy, 5 times in Czech Republic, 4 times in Spain and 3 times in France
(McKinsey&Company, 2015). However, multinational companies also try to compete in
the market of special beers as they suffer from a cut in their market shares (Ascher,
2012).
2.2.2. Trends and challenges
Beer brands are composed of multiple categories that have each a different price
scale (Ascher, 2012). These categories are: sub-premium, premium, super-premium,
ultra-premium, imports and craft beers (Ascher, 2012). On top of this, private label
beers also have an influence on the market (TCS, 2013).
In most developed countries, the consumer demand is shifting from pilsner beers
(sub-premium) to premium beers. Although most consumers in emerging countries with
a high growth rate mainly consume pilsner beers, the trend of “premiumization” starts
to materialise in countries as Brazil (McKinsey&Company, 2015). As production costs
are almost equivalent for discount and premium beers and as the price gap between
both is high, innovation in premium beers became a priority for breweries (Madsen et
al., 2010). Therefore, breweries need to expand in emerging markets to guarantee sales
volumes and need to focus on product diversification on mature markets to ensure high
margin (TCS, 2013).
Madsen et al. (2010) argue that there is some horizontal products’ differentiation
due to differences in the malting process or the mix between hops and malt in the
production process. However, consumers’ perception on these differences is extremely
low (Madsen et al., 2010). Therefore, advertising becomes an important competition
factor (Madsen et al., 2010). As advertising is difficult for small breweries, MNC has
undoubtedly a competitive advantage here (Ascher, 2012). In addition to advertising,
packaging is also a key innovation factor as consumers mostly judge the product value
through it (TCS, 2013). In order to optimize the product mix, MNC need to acquire local
brands to launch their local presence and to implement their international brands to
gain economies of scale on advertising budgets (TCS, 2013).
The beer consumption is at 75% off-premise (supermarket, grocery,…) and 25%
on-premise (restaurant, bar,…) (Jain, 1994). This off-premise consumption tends to
34.
enforce, which brings new challenges for manufacturers (McKinsey&Company, 2015).
Indeed, retailers often put more pressure on manufacturer prices and reduce their
margins (McKinsey&Company, 2015). Moreover, they ask more frequent and smaller
products deliveries in order to reduce their inventory stocks (McKinsey&Company,
2015). In addition, they are less loyal to a manufacturer and insist to have sufficient
deliveries
during
peak
consumption
and
sufficient
promotion
initiatives
(McKinsey&Company, 2015). With these interest conflicts between brewers and
retailers, brewers need to operate with a greater flexibility and need to reduce these
overall costs (McKinsey&Company, 2015). In order to do so, manufacturers should
centralise their supply chain in terms of sourcing, manufacturing and distribution across
markets and business unit’s location (TCS, 2013). This would enable improvement in
warehousing and transportation, and would enable the brewery organization to
“establish well in local as well and new markets, through cost competitiveness,
increased focus on consumer-facing activities and faster product launches” (TCS, 2013,
p.10).
2.2.3. Supplies for the production process
Brewing supplies are mostly and traditionally water, malt, hops and yeast (FAO,
2009). However, few additional raw materials could be added within the brewing
process to modify the beer’s taste (FAO, 2009).
Malt is the second most important raw material in quantity needed in the
brewing process after water, which represents 90% of beers (FAO, 2009). Malt is
obtained from barley grains after the malting process (FAO, 2009). This process is “the
controlled germination of cereals, a natural process terminating with the application of
heat” (FAO, 2009, p.17). The world barley production was 136 million tons in 2007
(FAO, 2009), mostly in three regions representing more than 50% of the total barley
production: “the European Union (EU) (43%, mainly Spain, Germany and France with
about 8% share each), the Russian Federation (11%) and Canada (9%) (FAO, 2009, p.9).
What is interesting to note is that breweries could either purchase malt barley from
manufacturers or from malting companies (FAO, 2009). Indeed, the top ten malting
companies produce approximately 40% of the total malt production worldwide (FAO,
35.
2009). The figure 5 shows the world leader countries producing malt whereas figure 6
and 7 show the world top malt exporters and importers respectively.
Figure 5. Top 5 countries producing malt worldwide from 2000 to 2005 (Retrieved
from: FAO, 2009, p.22).
According to the figure below, Belgium is the biggest exporter of malt worldwide
and the third biggest importer of malt (FAO, 2009). This is quite surprising for a country
of this size. An explanation could be that an important malting company is established in
Belgium and produces one variety of malt which is not absorbed by local breweries and
therefore exported. However, Belgian brewing companies may need various malt
varieties that are not produced within the countries and thus import those.
Figure 6. World top malt exporters in 2007 (Retrieved from FAO, 2009, p.24).
36.
Figure 7. World top malt importers in 2007 (Retrieved from FAO, 2009, p.24).
Hops are the third traditional ingredients of beers and are used to bring
bitterness and stability in beers (Deloitte, 2009). The quantity of hops used in the
brewing process depends on the type of beer produced. Indeed, craft beers would
usually need more hops than lager beers that are less bitter. Hops are produced in
approximately 30 countries worldwide but Germany and USA represent more or less
59% of the world production (Deloitte, 2009). In 2008, EU produced about 55% of the
hops world production, USA about 30% and China more than 10% (Deloitte, 2009).
Brewing companies usually purchase hops from merchants through forward contracts
(95% in Germany) (Deloitte, 2009). Indeed, hops supply is mainly held by large
transnational merchant companies that hold approximately 90% of forward contracts
worldwide (Deloitte, 2009). These transnational companies are composed of German,
American, Czech or English conglomerates (Deloitte, 2009). However, smaller
manufacturers exploit some niche markets (Deloitte, 2009).
37.
3. Methodology
A case study method is chosen in order to perform my descriptive research on:
“How to combine global and local sourcing within the brewery industry?”. A case study
is an empirical analysis that “investigates a contemporary phenomenon (“the case”) in
depth and within its real-world context, especially when the boundaries between
phenomenon and context may not be clearly evident” (Yin, 2014, p.16). Through the
“analytic generalization” (p.41), this research method could validate, reject or modify
theoretical concepts or bring new concepts that arise from the cases analysis. Yin (2014)
considers that the case study research method should be chosen if: (1) the research
question has a “how” form; (2) the researcher does not have control on events, and (3)
the research focuses on contemporary events. As this present research meets all criteria,
the case study method is used.
This research aims to analyse and describe the combination between global and
local sourcing within the brewery industry. Therefore, several research questions arise
before and during the theory development: (1) how a brewing company combines
global and local sourcing? (2) What are the advantages and disadvantages of both types
of sourcing? (3) What factors influence this combination? (4) How firms make their
location decision? (5) How firms select and measure the performance of suppliers?
In order to analyse this in an appropriate manner, a holistic multiple case study is
performed (Yin, 2014). As the research relates to an analysis of an industry, it is
necessary to gather data from multiple companies, which are called unit of analysis (or
case) (Yin, 2014). Within the multiple case study, Yin (2014) advises to carefully select
cases that could “predict contrasting results but for anticipatable reasons” (p.57). This
“theoretical replication” logic assumes that four to six cases are ideal when two different
patterns arise within the research (Yin, 2014). In the present theory development, it
appears that MNC could benefit more from global sourcing than SME (Trautmann,
2008). Moreover, within the mix strategy between global and local sourcing, Jin (2004)
assumes that the more the volume of production is low, the more it could be interesting
to source locally. In addition, the brewery industry seems essentially composed of large
international breweries and smaller craft beer breweries. Therefore, four companies
were selected depending on their internationalisation and sizes. These four companies
are the followings:
38.
-
AB Inbev: The largest multinational brewing company in term of sales volume;
-
Martens: Multinational brewing company with 3 production plants worldwide;
-
St Feuillien Brewery: Medium Belgian brewery;
-
L’Estaffe Brewery: Small Belgian brewery.
Yin (2014) recognises the following phases when performing a multiple case
study: (1) develop theory; (2) select cases; (3) design data collection protocol; (4)
conduct case studies; (5) write each individual report; (6) draw cross-case conclusion;
(7) develop policy implication; and (8) write cross-case report (p.60).
In order to achieve theses phases with quality, four tests should be implemented
to guarantee the credibility of the case study research (see table 7)(Yin, 2014)
Tests
Case Study Tactic
Construct validity Use multiple source of evidence
Internal validity
N/A
External validity
Use replication logic in multiple-case studies
Reliability
Develop case study database
Table 7. Quality tests for case studies (Adapted from Yin, 2014, p.45).
Yin (2014) defines the roles of each test as following: (1) “construct validity:
identifying correct operational measures for the company being studied” (p.46); (2)
“external validity: defining the domain to which a study’s findings can be generalized”
(p.46); and (3) “reliability: demonstrating that the operations of a study -such as the
data collection procedures- can be repeated, with the same results (p.46). The internal
validity has been omitted expressly as it suits only for explanatory studies.
The theory is developed in section 2. Then, cases selection is made through the
replication logic and therefore guarantees the external validity test. After that, Yin
(2014) recognises the importance of multiple sources of evidence when designing data
collection, to validate the construct validity test.
In reality, 6 sources of evidence help to collect case study data: documentation,
archival records, interviews, direct observations, participant-observation and physical
artifacts (Yin, 2014). Interviews seem to be one the most important and useful sources
of evidence in case study research (Yin, 2014). Open-ended interviews allow following
39.
the research line of inquiry but in a conversational manner (Yin, 2014). Moreover, it
allows to gather fresh comments and, at the same time, corroborations of certain
findings (Yin, 2014). Therefore, when appropriate companies were selected, I have
contacted employees of these companies asking them to put me in contact with a person
that is competent to answer my questions. Then, face-to-face interviews of 45 to 60
minutes were conducted in the interviewee company’s building. These interviews were
recorded when the interviewee allowed it. These interviews were performed using the
interview guide (see appendix 1 and 2), which is divided in 4 parts: (1) general
questions; (2) the mix strategy between global and local sourcing – factors of decisions,
benefits and limits; (3) plants location; (4) the supplier selection and assessment.
To implement boundaries to this research, global sourcing or global production
plants location was assumed to be at an international scale; local sourcing or local
production plants location was assumed to be within domestic borders.
The other source of evidence used was documentation. Documentations were
mainly found on Internet and/or given by interviewees. The triangulation method
permitted to corroborate findings with multiples sources of data and thus brought more
consistency and more support to data collection (Yin, 2014). This also allowed the case
study to gain in quality thanks to its construct validity (Yin, 2014).
To enforce the reliability of this research, transcripts of interviews were
performed as soon as possible after each interview and stored into a case study
database developed for that purpose (see appendix 3, 4, 5 and 6). The database also
contains a bibliography of data collection. The interview guide mainly gives the case
protocol.
To finalize this research study, each case study was separately analysed and
planned in 3 subsections (as previously used in the interview guide) (see point 4.1; 4.2;
4.3; 4.4). As Yin (2014) advises, first, all cases should be analysed as a whole and then
findings should be compared and conflicted with the other cases. Therefore, a cross-case
analysis was made to synthesize findings and highlight contrasts and similarities that
permitted to develop propositions. These propositions do not aim to give an exact
answer to the main research question but try to bring possible explanations and
descriptions of the subject.
40.
4. Intra-case analysis
4.1. Case A: AB Inbev
The information needed to analyse this company is retrieved from the AB Inbev
annual report of 2015 and from the interview with Mr. Bey Thomas who is responsible
for the sourcing and procurement of raw materials in Europe.
4.1.1. Overview of the company
AB Inbev is the leading company in the brewery industry and is in the world top
five of consuming products companies (AB Inbev, 2015). This company produced 457
million hectolitres of beer in 2015 and have a worldwide presence (AB Inbev, 2015). It
had revenue of 43.6 billion USD in 2015 and had a majority of its sales (in volume) in
North America, South America and Asia (AB Inbev, 2015). Europe represented only
9.4% of the total sales volumes of AB Inbev in 2015 (AB Inbev, 2015). AB Inbev employs
150.000 people in 26 countries and has its headquarters in Leuven, Belgium (AB Inbev,
2015). AB Inbev produces more than 200 branded beers (AB Inbev, 2015). Those 200
beers can be categorised in three best sellers groups. First, the global brands group with
Budweiser, Corona and Stella Artois that are top sales worldwide and receive the biggest
attention and marketing budget. Secondly, the international brands group comprises
Beck’s, Leffe and Hoegaarden. Finally, local champions group comprises 21 beers that
are AB Inbev best sellers in a local market (AB Inbev, 2015). The company has 144
production plants in various countries worldwide and has 11 production plants in
Europe located in Belgium, Luxembourg, UK and Germany (AB Inbev, 2015).
AB Inbev succeeded to reach the first place in the world beer market, mainly
thanks to important mergers and acquisitions. Indeed, historically, Interbrew merged
with Ambev to create Inbev. After that, Inbev acquired Anheuse-Busch (who produces
the Budweiser beer) and formed AB Inbev. Then, AB Inbev acquired Modelo who
produces the famous Corona beer. At the moment, AB Inbev attempts to purchase SAB
Miller (which is number 2 in the world beer market) for 108 billion dollars but this
acquisition is still revising by many anti-trust institutions.
41.
4.1.2. Sourcing
The procurement department is clearly centralised within AB Inbev. There is a
global procurement department that manages all most important purchases. These main
purchases are malt, hops and corn. This department negotiates with suppliers, finds
synergies, signs contracts and implements a strategy in collaboration with zone
purchasers. Once it is done, zone category buyers (Europe, Asia, North America and
South America) manage purchases depending on the volume needed, the price desired,
the quality requested, etc.
Zone category buyers are fully in charge of buys that
represents less important spending, such as: sugar, fruits, flavours and other various
adjuncts. Within the Monczka and Trent (2003a) stages driven model of global sourcing,
AB Inbev would position at the fifth level. As a matter of fact, AB Inbev has a centralised
purchasing structure and has a global purchasing strategy coordinated between
locational and functional (as technical, quality and supply chain department) business
units worldwide.
Because of the significant volume of raw materials sourced, AB Inbev is working
with the biggest suppliers worldwide and has a minimum of 2 or 3 suppliers by material
to secure their supply. According to Mr. Bey, AB Inbev could not work with small
suppliers because their prices is too expensive. In addition, AB Inbev has a payment
policy fixed at 200 days that does not suit well for small firms. The sourcing process
consists of using reverse auctions as a purchasing tool for all their main supplies. Firstly,
AB Inbev identifies approved suppliers that had passed a certain amount of test.
Secondly, when purchasers need a certain volume of a material, they activate a reverse
auction on an online platform with all specifications of the material needed. Thirdly,
suppliers bid on this platform with the best price at which they could let their supplies.
Finally, depending on their ranking on the bid, they could offer a better price to tempt to
reach the first place of the bid and then be selected as the supplier for this order.
According to Mr. Bey, this system of reverse auctions only works in an efficient manner
when the supply market is in overproduction. As an example, this year, because of the
drop of the Euro exchange rate, it was more favourable for suppliers to export their
production offshore to increase their margins. Therefore, reverse auctions was less
effective and price of raw materials (as malt) had risen.
42.
For the sourcing of raw materials cost, malt represents approximately 80% of the
total cost. Even if malt is the most important cost in the brewing process, Mr Bey put as
much importance on the sourcing of the other raw materials, because one ingredient
missing prevents the company to successfully produce beers. Therefore, he does not
have a different sourcing strategy depending on materials. The sourcing location of malt
is presented in the following paragraph, which is followed by the sourcing location of
hops and then the sourcing location of other raw materials.
According to Mr. Bey, France, Germany and UK essentially dominate the
production of malt barley. Within these countries, barley farmers are engaged in
cooperative managed by big malting companies as MaltEurop, Boortmalt or Cargill. For
the European zone, AB Inbev sources malt from around 15 suppliers, all located in
Europe. AB Inbev sources on a global scale compared to the location of its headquarters
located in Leuven, Belgium. However, purchasers try to source malt from the same
country where plants are located. Indeed, for their production plants in the UK, they
source malt from UK and a bit from Czech Republic; for their plants in Benelux, they
source malt from France or Holland; for their plants in Germany, they source exclusively
malt from Germany.
According to Mr. Bey, the hops market is extremely consolidated. As a matter of
facts, Haas and Hopsteiner (that are global companies) manage 70% of the hops market.
However, 50% of hops is coming either from Germany, either from USA. Therefore, the
AB Inbev global procurement department is making contracts with hops suppliers in
USA for their production plants in North and South America, and making contracts with
hops suppliers in Germany for production plants located in Europe. On top of these hops
suppliers, AB Inbev has a vertical integration for the sourcing of hops. Indeed, it has its
own hops farmers in Germany.
To summarise, hops are exclusively coming from
Germany for all European production plants of AB Inbev.
The rest of raw materials sourced for the brewing process are: corn, raspberries,
apples, elderberries, rice and fruit extract. These raw materials are entirely sourced in
Europe.
More precisely, raspberries and apples are sourced in Poland or Serbia;
elderberries are sourced in Poland or Austria; corn is sourced from Belgium or France;
and rice is sourced in Spain or Italy.
Mr Bey emphasises the fact that AB Inbev Europe only sources raw materials on a
regional scale (Europe). He also explains that today all companies are global and thus AB
43.
Inbev is making business with global companies that have regional business units and
could therefore deliver products locally. To justify the AB Inbev choice to source globally
but with a relatively close distance from their production plants (Europe), Mr Bey
emphasizes the need to secure the supply of raw materials. Indeed, he considers that a
reasonable driving distance from suppliers to breweries is about 2 to3 hours, in order to
secure the supply chain. In addition, as the biggest producers of Malt (France and
Germany) and Hops (Germany) are European, he does not see a reason to source from
Asia or Australia. Moreover, even if he could find cheaper malt in Asia, he wouldn’t
source it from there because: the delivery would take 3-4 months; important logistic
cost would be added to the initial price; there would be a risk of deterioration of the
material; and he would not be sure to find the quality required. He adds that it could be
interesting to source corn from South America in term of cost but, because of OGM, he
does not want to take the risk to be blamed in a region (as Europe) where people are
against OGM. However, Mr Bey does not feel any pressure from their customers to buy
locally or reduce to environmental footprint. Indeed, AB Inbev has settled target for CO
emissions but it concerns only the transportation of beers from the brewery to the point
of sale. Therefore, AB Inbev does not take this factor into account when choosing the
location of its suppliers.
Multiple advantages seem to influence AB Inbev to source in Europe: the
reactivity of suppliers, an efficient management of logistic costs and the possibility to
use train as transportation. In addition, the price could be more competitive regionally
thanks to low logistic costs. However, it varies from year to year depending on the
exchange rate and the willingness of suppliers to export their materials offshore.
AB Inbev is a preferred customer for their malt and hops suppliers. This is linked
to the volume of purchases and the guaranties implemented in contracts. Therefore, AB
Inbev gains benefits from this position in term of service but also in term of price.
The vision of the future sourcing strategy of AB Inbev is quite divergent within
the procurement department. Nevertheless, it is clear that AB Inbev could not
indefinitely fight for lower prices and for longer payment terms. Therefore, Mr. Bey sees
a future sourcing strategy with more collaboration, more win-win situations with
suppliers and more sharing of potentials innovations.
44.
4.1.3. Plant location
Breweries location is not really definite. Indeed, breweries are established in
their location since years. With the acquisition and merge policy of AB Inbev, it had
brought many breweries in the group that were also established in a specific location for
years. However, AB Inbev makes business cases to decide if it productions plants should
be built or production exported close to the market demand. As an example, AB Inbev
does not have any plants in France because Heineken and Carlsberg dominate the
market in this country. In addition, because of the rising consumption of Hoegarden in
China, AB Inbev decided to export a part of its production to their plants in China to fulfil
the demand there and lower logistic costs.
At the moment, AB Inbev has no plans of reshoring as the company hasn’t initially
offshore their production. However, to provide the Budweiser beer in Europe, AB Inbev
offshored a part of its production from the US to the UK but the company does not plan
to reshore it to the US unless a business case will advise to do so.
4.1.4. Supplier selection and assessment
AB Inbev has a particular supplier selection process. First, the supplier should
accept a payment term at 200 days. If not, he is not selected. Secondly, AB Inbev sends
their requirements related to quality, lead-time, etc. Thirdly, if the supplier could respect
the requirements, AB Inbev asks for a quote. Fourthly, if the price fits for both parties,
AB Inbev realises an audit of the supplier company. If the supplier passes the tests, he
can pretend to sell 20% of his production volume to AB Inbev the first year. Finally, if
the first year works well, the supplier is allowed to sell 100% of his production volume
to AB Inbev the year after. The following table shows the importance of additional
criteria in the supplier selection. They score from 0 to 10, with 10 being an extremely
important criterion.
45.
Suppliers’
selection criteria
Rating
Price
Quality
8
10
Delivery
Flexibility
Relationship
N/A
6
7
Comments
Not necessary to take into account as the supplier
should deliver in time
Rather important as closer the supplier is, lower the
Close location
7
cost of inventory stocks is
Service
8
Production capacity 8
Others: Payment
10
terms
Table 8. Degree of importance of criteria for the supplier selection process at AB Inbev.
Each year, AB Inbev does a ranking of suppliers’ performance, based on price,
delivery on time and quality complaints. They do not have a specific model to select and
assess suppliers. Mr Bey considers that a model as TCO would be useless because the
total cost of ownership is only given by the price of raw materials, logistic costs and
transportation.
46.
4.2. Case B: Martens
The information needed to analyse Martens brewery was retrieved from the
website of the company and from the interview with Mr Custers, who is the purchasing
director of the company.
4.2.1. Overview of the company
Martens brewery is the second biggest brewery in Belgium and produces 3.1
millions of hectolitres of beer a year. It exports 85% of its production and is present in
100 countries. It had a turnover of 93 million EUR in 2014 and employs 200 people.
Martens brewery is mainly working as a subcontractor that produces many different
branded beers for various companies. It has also important contracts with supermarkets
to produce private label beers. On top of this, Martens brewery produces 5 beers under
its own brand. Combining all this production of beers, the brewery produces more than
200 different beers that are exported worldwide. It has production plants in Bocholt
(Belgium), Kaulille (Belgium), Romania and has a production partnership in Soochow
(China). Earlier, the company had outsourced a part of its production. But, thanks to
recent investments in its production plants, the brewery has now the capacity to satisfy
the demand.
Martens brewery offers beers in various packaging as cans, glass bottles, PET
bottles, etc. It is the first brewery to offer on the market beers conditioned in PET
bottles. Indeed, after a law in Germany setting up a deposit for cans, numerous
supermarkets were concerned by a potential loss if they did not offer to their customers
an alternative for the low cost beers in cans. Therefore, the company decided to
innovate and offer beers in PET bottles, which enabled them to get important producing
contracts with Aldi and Lidl supermarkets in Germany.
Partially thanks to this
innovation, Martens brewery has doubled its turnover in 5 years.
47.
4.2.2. Sourcing
Martens brewery has a centralised purchasing structure, which is managed by
Mr. Custers and is based in the headquarters in Bocholt. Indeed, it has corporate
contracts for all types of materials purchased. Therefore, the unit price is equal between
production plants but the transportation cost varies. Mr. Custers could not imagine a
decentralised structure, as it would be really inefficient. Within the Monczka and Trent
(2003a) stages driven model of global sourcing, Martens brewery is positioned at the
fifth level because the purchasing is centralised and coordinated between production
plants and functional departments (such as production and quality).
The philosophy of Mr. Custers is to buy the best quality at the best moment and at
the lower price. Even if he considers that having a sole supplier for one material could
improve the competitiveness, he prefers to have minimum 2 or 3 suppliers to secure the
supply and to get better prices thanks to competition. Martens brewery has 1 to 5 years
contracts for most of its supplies (of malt, hops, glass, cans, etc.) with the biggest group
worldwide. Mr. Custers is not working with auctions as AB Inbev because he believes
that the relation with suppliers is primordial. Therefore, he hedges around 80% of the f
materials needs at a certain period of the year when he thinks that the price is at the
lower level. This hedging is done thanks to long term agreement with suppliers. But
because of the continuous development of the company, the volume of supplies can vary.
To satisfy this fluctuation, the company buys 20% of the rest of materials needed on the
spot market. At the end of the year, price of both type of buys are compiled and the
cumulated price still need to be lowest as possible.
Classification of materials importance is done depending on total expenditure for
a material. Indeed, the company puts more attention on budget savings for the biggest
expenses, which are malt, cans, PET preforms, utilities, packaging and cartons. In the
following paragraph, the sourcing location of malt is presented, which is followed by the
sourcing location of hops and then the sourcing location of other raw materials and
containers.
Concerning sourcing of malt, the Martens brewery has contracts with 3 global
malt suppliers, who are MaltEurop, Cargill and Boortmalt. All the barley malt that the
brewery needs is coming from Germany, Denmark or France. Most of these companies
have malting plants in Germany and have headquarters there. Therefore, Mr. Custers
48.
sources the malt from Western Europe. However, Cargill has a malting plant in
Antwerpen (Belgium) and supplies malt from this plant to the Martens brewery as well.
As a matter of fact, suppliers are global; they have malting plants in many regions of the
world. Consequently, the production plant in China sources malt from one of these local
malting suppliers.
Concerning sourcing of hops, Martens brewery also has contracts with 3 global
hops suppliers, which are Hopsteiner, Barth Haas and Yakima chief. Mr. Custers sources
hops at 40% from Barth in Germany and 30% from Hopsteiner and Yakima chief. Hops
that are sourced exclusively comes from Western Europe.
Mr. Custers, as the procurement director, also sources chemicals for the brewing
process and containers (as glass bottles, cans and PET preforms). Chemicals are
purchased from Western Europe and from the company Diversey Jonhson and the
company Sopura, both located in Belgium. Mr.Custers buys glass bottles from Russia;
PET preforms from China; and cans from the supplier Ball Packaging who has plants in
Holland, Germany, Serbia and France (this supplier delivers cans from one or another
plant depending on the inventory stock).
Mr Custers based his locational sourcing choice on two factors, which are quality
and cost. As an example, he explains that the best quality of hops and malt is mainly
coming from Western Europe; and that the biggest suppliers with the lowest price are
also based there. Therefore, he sources these supplies from Western Europe. Another
example is the market of glass bottles that is extremely consolidated and is dominated
by 3 suppliers. According to Mr. Custers, these 3 suppliers are making a cartel
agreement to increase slightly the price of glass bottles. Consequently, he purchases
glass bottles from a Russian supplier that is cheaper but with the same quality. Even
with duties and high transportation costs, he found cheaper PET preforms from China
with similar quality than in Europe. However, two important chemicals suppliers are
based in Belgium and could supply cheap and quality chemicals. Thus, the company
purchases it partially locally. However, it seems that the company does not feel any
pressure from their customers to buy locally or reduce to environmental footprint. To
summarise, Mr. Custers analyses every time where is the cheapest price with the best
quality on the market and sources from this location regardless of the country of the
supplier.
49.
As advantages to global sourcing, Mr. Custers identifies the availability of quality
and cheap supplies. On top of this, he claims that global suppliers have more pressure
with competition and thus battle more for price and quality materials. In addition, he
does not see additional lead time as an issue.
Thanks to the significant volume of production of the brewery and to the good
relationship with suppliers, the brewery benefits from preferred service from suppliers
as from Cargill. Actually, in the past, the brewery had a common business in R&D with
this supplier.
The future sourcing strategy is seen by Mr Custers as going forward with the
actual strategy but in putting more emphasis in new developments in fast growing
consuming regions such as Africa or South America.
4.2.3. Plant location
The first production plant of the brewery has been located in Bocholt since 200
years. The brewery acquired another plant in Kaulille (7 km from Bocholt) because
there were too many trucks traffic in the small village of Bocholt and it became an issue.
Even if the mobility in Kaulille is not optimized, the plant is located close to Germany
and Holland where the brewery has an important part of their delivery. However, Mr
Custers considers that the plant was not chosen because of the close market demand.
The production plant in Romania has been acquired 20 years ago but not with the
intention to get closer to the market demand. However, the plant in China was probably
chosen to supply the Chinese market. There are no plans to reshore any production.
4.2.4. Supplier selection and assessment
Supplier selection is firstly made on price. Subsequently, documentation such
certificates are asked to suppliers. After that, the brewery performs an evaluation on
quality and service and then, selects a supplier. The following table shows the
importance of additional criteria in the supplier selection. They score from 0 to 10, with
10 being extremely important criterion.
50.
Suppliers’
selection criteria
Price
Quality
Delivery
Flexibility
Rating
9
10
8-9
8-9
Comments
Because much of the production goes for private
labels beers that are focused on price
Considered as very important because it could
create a competitive advantage
Considered as not important at all
Relationship
N/A
Close location
7
Service
N/A
Production capacity N/A
Others: None
Table 9. Degree of importance of criteria for the supplier selection process at brewery
Martens.
To assess the performance of suppliers, the Martens brewery makes a yearly
review. This evaluation is done through continuous contacts with suppliers and is
mainly based on complaints of quality. The brewery does not use a common model but it
is in relation with the “international food standard” that assesses also suppliers in the
food industry.
51.
4.3. Case C: St Feuillen
The information needed to analyse this company is mainly retrieved from the
website of the company and from the interview with Mr. Briol Alexis who is the
production and procurement director of the company.
4.3.1. Overview of the company
St Feuillen brewery is a Belgian brewery that has been producing beers since
1873. The brewery produces 40.000 hl of beers per year. It had a turnover of 9.2 EUR
million in 2014 and employs 24 people. For years, the brewery has been specialized in
the brewing of special beers that emphasize the importance of the brewing recipe. The
beer portfolio of St Feuillen brewery is composed of approximately 15 beers. However,
the biggest part of the turnover is made on 5 beers, which are: St Feuillen blond, brown,
triple, season and “Grand Cru”. The only production site is located in Le Roeulx, Belgium.
The brewery outsources two parts of the production process. First, it outsources the
entire production of its fruity beers (known under the brand name of Grisette) because
it is a different process and the brewery is not specialized in this kind of process.
Secondly, the brewery outsources the bottling of most of the beers produced. According
to Mr. Briol, bottling is a totally different job and requires huge investments that the
brewery was not ready to make.
4.3.2. Sourcing
The structure of the procurement department is very simple because it is
composed of only two people that are in charge of the production and the sourcing
activities. Within the Monczka and Trent (2003a) stages driven model of global sourcing,
St Feuillen would naturally be located at the second stage because it is going
international only when it is necessary.
The first priority in sourcing for St Feuillen brewery is to secure its supply in
having enough quantity of raw materials to produce yearly the anticipated volumes of
beers. To do so, the company buys more materials than necessary and has one or two
52.
contracts by material. Depending on the volume, the brewery purchases either through
yearly contracts or on the spot market. Mr. Briol usually manages yearly contracts for
large volume of raw materials when the harvest is over. Nevertheless, during the year,
the price can rise depending on fluctuating costs factors such as energy or inventory
stocks. This price evolution is settled in advance in the contract and follows a fixed price
scheme. For smaller volumes of materials, Mr. Briol buys on day-to-day contract.
All materials are considered with the same importance but what concerns more
Mr. Briol is quality of hops, which he puts on top of his priority concerns. The sourcing
location of malt, hops and other materials is presented in the following paragraph.
For sourcing of raw materials, Mr. Briol would say that 85 to 90% of his suppliers
come from Belgium. For malt, Mr. Briol sources almost nearly all the quantity needed
from Belgium, and a little from Germany or UK. For hops, Mr. Briol sources mainly from
Belgium and Germany. He recognises that there are not many Belgian hops and that the
hops market is nearly entirely managed by 2 or 3 big companies. Therefore, he feels
forced to buy it offshore from big companies. Currently, the brewery has a contract with
the company Barth that is located in Munich, Germany and with the company Yakima
chief that has its European office in Louvain-la-Neuve, Belgium. The rest of raw
materials is also mainly bought in Belgium. Indeed, sugar is bought in Belgium because
the country is specialized on various types of sugar. Another example is spices that are
also bought from a Belgium company.
Mr Briol justifies his choice to mainly buy locally because he wanted to support
local people whenever it is feasible. In addition, he claims that he gets a better price in
Belgium thanks to a low transportation cost. According to him, the chance that Belgian
breweries have is that there is an important industry cluster in Belgium for raw
materials and other brewing materials. Therefore, Mr. Briol believes that if a brewery
has a good address book, it could find almost everything in Belgium. However, St
Feuillen brewery does not feel any pressure from their customers to buy locally or
reduce to environmental footprint. Though, whenever Mr. Briol is able to buy materials
from Belgium he does it but sometimes to get better quality or diversity, he is obliged to
source outside Belgium, as it is the case for hops.
As advantages of local sourcing, Mr. Briol identifies the proximity, the easiness to
work with people having the same language and who worrying about his requests. In
addition, the quality and the price are competitive.
53.
Because of the small volume of production of the brewery, it does not have a
status of preferred customer for some of its suppliers.
As a future sourcing strategy, the company emphasizes the need to find quality
materials and secure its supply. Indeed, the beer produced is considered as a quality
beer. Therefore, if the quality of beers drops, customers will not be satisfied anymore
and the brewery will lose sales.
4.3.3. Plant location
The location of the production plant is historical and has always been in Le
Roeulx, Belgium. Director managers thought to relocate to a more practical place but
finally decided to stay in the original place to keep a maximum of character to the
brewery.
4.3.4. Supplier selection and assessment
Supplier selection is built around two factors. First, suppliers should be able to
deliver materials and comply with specifications required. Secondly, suppliers should
have a competitive price. If both criteria are respected, then it could be selected to work
with the brewery. The following table shows the importance of additional criteria in the
supplier selection. They score from 0 to 10, with 10 being extremely important criterion.
Suppliers’
selection criteria
Rating
Comments
Price
9
Quality
10
Delivery
7
Flexibility
6
Relationship
5
Close location
4
Service
7
Production capacity 3
It is not an issue as the quantity purchased is small
Others: None
Table 10. Degree of importance of criteria for the supplier selection process at St
Feuillen.
54.
The company does not use a model to select or assess suppliers and does not
have any evaluation tool to control suppliers’ performance. Nevertheless, Mr. Briol finds
that it is complicated to assess suppliers that are all supplying different materials but it
could be interesting to do so.
55.
4.4. Case D: L’Echasse
The information needed to analyse this company has been mainly retrieved from
the website of the company and from the interview with Mr. Claude who is responsible
of production and sourcing.
4.4.1. Overview of the company
L’Echasse brewery is a recent brewery that has started its activity 3 years ago. It
sells around 1.000 hl per year and, at the moment, produces half of this quantity. The
brewery is focused on a single beer that is called Houppe. This beer is offered in 3
different sizes: 33cl, 75cl and 20l barrel. Most of sales are located in Belgium and
primarily in Namur, Belgium. A small part of sales is located in France. The production
site is also located in Namur, Belgium. However, a subcontractor located in the Northern
part of Belgium does a part of the production. In addition, the brewery outsources the
bottling part of the process to another company in Belgium.
4.4.2. Sourcing
Only one person manages purchasing and sourcing. Therefore, there is barely any
structure of the procurement department. Within the Monczka and Trent (2003a) stages
driven model of global sourcing, the brewery would naturally be located at the first
stage because it is purchasing exclusively locally.
The first priority for Mr. Claude is to secure his supply to avoid being out of stock.
As an example, hops used in the brewing process is quite specific (named “Citra”) and is
not easy to buy. Therefore, M. Claude puts emphasis in not getting short of his supplies.
The importance of materials is split between raw materials and other materials.
Indeed, Mr. Claude considers that materials needed for the brewing process are the most
important and thus implements a meticulous quality check. The rest of materials does
not influence directly the ability of the brewery to produce beers and is thus less
important. The sourcing location of malt, hops and other materials is presented in the
following paragraph.
56.
Concerning sourcing of materials, Mr. Claude explains that all materials are
sourced from suppliers located in Belgium. Indeed, malt is sourced from the company
Malterie du Château in Belgium. Hops is from US fields but is also sourced from Malterie
du Château and from the company Yakima chief who has its European centre in Louvainla-Neuve (Belgium) but is a American supplier. Glass and sugar are sourced from two
distinct companies located in Belgium.
Multiple reasons motivate the company to source locally. Indeed, as volumes
purchased are small, the brewery is looking for small and flexible suppliers that could
supply small quantities as well. As a matter of facts, its supplier of malt makes stock of
medium quantity of barley malt and repacks it for small breweries. In addition,
transportation costs are low thanks to local sourcing. On top of this, M. Claude
recognises the easiness to get malt and hops from the same supplier, with potential gain
on bargaining power. However, the brewery feels no pressure to purchase locally
because of customers’ willingness to consume local products or because of
environmental concerns, even if Mr. Claude prefers to limit CO footprint with local
sourcing.
Regarding advantages of sourcing locally, it seems that flexibility and low
transportation costs are key factors.
The company is absolutely not a preferred customer for some of its suppliers
even if all commercial representatives try to pretend it is.
If volumes of sales rise as expected, the future sourcing strategy of the company
will be to introduce competition between suppliers to try getting a better price from
them.
4.4.3. Plant location
The company was looking for a plant that brings an added value to the brand. As
the majority of its customers are located in Namur, managers found an old brewery
building that has a history in Namur and that has a lot of character.
57.
4.4.4. Supplier selection and assessment
Suppliers are selected because of the reputation they have in Belgium. In
addition, M. Claude knows many other brewers and people in the industry who advice
suppliers to him. Cost is another factor of decision. Therefore, when selecting a new
supplier, L’Echasse brewery try to get three quotes from different suppliers to compare
price. Most of the suppliers the company knows are located in the same region of the
brewery, thus the location is not considered as a criterion. The following table shows the
importance of additional criteria in the supplier selection. They score from 0 to 10, with
10 being extremely important criterion.
Suppliers’
selection criteria
Rating
Comments
Price
7
Quality
8
Delivery
N/A
All suppliers answer that they could deliver on time
Flexibility
9
Relationship
7-8
Close location
N/A
It depends on the price
Service
N/A
The service needs to be good
Production capacity N/A
It is not an issue as the quantity purchased is small
Others: None
Table 11. Degree of importance of criteria for the supplier selection process at L’Echasse
brewery.
Suppliers’ performance is not yet measured but it is planned to be measure on
the following factors: delivery on time, cost and quality. However, the brewery does not
have any tool or model to select and assess suppliers but thinks about implementing
one.
58.
5. Cross-case analysis
All cases have been analysed as a whole in the previous sections. Therefore,
findings should be compared and cross-checked with the other cases (Yin, 2014). This is
why a cross-case analysis is made to synthesize findings and highlight contrasts and
similarities. To facilitate the reading, all information are summarized and highlighted in
the table below. These findings will be analysed and compared with theoretical elements
in the following discussion section.
59.
Company A:
AB Inbev
Size
MNC
classification
Sales/Production 457 million hl
Turnover
43,6 billion USD
HQ location
Leuven, Belgium
Plants location
Decision factors
Reshoring
Outsourcing
Company B:
Martens
Company C:
St Feuillen
Company D:
L’Echasse
MNC
SME
SME
3.1 million hl
93 million EUR
Bocholt, Belgium
40.000 hl
9.2 million EUR
Le Roeulx, Belgium
Production
Belgium, Romania, China
Belgium
(partnership)
Worldwide
In Europe: Benelux,
Germany, UK
- Historic
- Historic
- Acquired from M&A
- Demand market
- Business cases
Not planned but could be if Not planned
business cases advice to.
N/A
Earlier
Monczka and
Trent (2003a)
stages model
Sourcing process
Level 5:
Global sourcing
coordinated
- 1 to 3 years
contracts
- Reverse auctions
First sourcing
priority
Secure the supply
- Historic
- Reputation of site
- Character of site
Not planned
-
Bottling
Fruity beers
Sourcing
Level 2:
International purchasing if
needed
- Yearly contracts
- Day to day
contracts
Level 5:
Global sourcing
coordinated
- 1 to 5 years
contracts
- Hedging
- Spot market
Secure the supply and get
the best price and quality
Secure the supply
1.000 hl
N/A
Namur, Belgium
Belgium
-
Reputation of site
Character of site
Not planned
-
Bottling
Half of production
Level 1:
Local sourcing
N/A
Secure the supply
60.
Materials
classification in
term of
importance
Malt
Hops
Other raw
materials
Containers
TO SUMMARIZE
All raw materials
Highest spends
Hops
All raw materials
Mainly global suppliers
(15)
Plants
Suppliers
- UK
- UK, Czech
- Germany
- Germany
- Benelux
- France,
Holland.
Global sourcing but
distance of 2-3 hours from
production plants
- Global suppliers
from Germany
- + Vertical
integration of hops
farmers.
Global suppliers (3)
N/A
Small supplier (1)
Plants
- Romania /
Belgium
Suppliers
- Germany,
Denmark,
France.
- China
- China
Global sourcing but
possible sourcing from a
supplier branch in Belgium
- Global suppliers (3)
from Western
Europe
Mainly from Belgium and a
small quantity from
Germany and UK
Entirely in Belgium
Local sourcing and a small
proportion of global
sourcing
- Global supplier (2)
from Germany and
from Belgium
(branch of a MNC
supplier)
Local sourcing
Global sourcing
Adjunts from Western
Europe and South Europe
N/A
Global sourcing
Adjunts from Western
Europe and Belgium
From China, Russia,
Holland, Serbia, France
Mostly global sourcing
Global / local sourcing
Adjunts from Belgium
Small supplier from
Belgium (1)
- Global supplier
from Belgium (1)
(branch of a MNC
supplier)
Local sourcing
Adjunts from Belgium
N/A
Belgium
Mostly local sourcing
Entirely local sourcing
Mostly global sourcing
but reasonable distance
from plants production
Reasons of
- Secure the supply
sourcing location No far sourcing because:
- Additional
-
Lower price
Better quality
-
Support local
people
Low price because
-
-
Possibility to order
small quantity
Possibility to order
61.
Advantages from
this sourcing
location
Pressure to buy
local because
environment or
consumers
willing to
consume local
Preferred
customer
Future sourcing
strategy
Selection
procedure
-
transport costs
Long lead time
Risk of OGM
Risk of
deterioration.
Efficient logistic
costs management
Delivery by train
Low logistic costs
No such pressure
Yes, benefits on tariff and
service
- More collaboration
- More sharing of
profit and
innovation
(1) Acceptation of long
payment terms
(2) Suits requirements
(quality, lead time,
etc.)
(3) Suits price limit
-
low transportation
costs.
Industry cluster
-
-
Availability of low
price
- Availability of good
quality
- Suppliers
competition
No such pressure
Proximity
Same language ease
Suppliers worry
about requests
- Competitive quality
and price
No such pressure
Yes, benefits on service
No
No
- New development in new
high potential markets
- Secure the supply
- Introduce competition
between suppliers thanks
to rising production
volume.
Supplier selection and assessment
(1) Price
(1) Suits specification
(2) Recognised
requirements
certificates
(2) Competitive price
(3) Evaluation on
quality and service
-
flexible quantity
Low transportation
costs
Flexibility
Low transportation
costs
No such pressure but
feeling of environmental
concerns.
(1) Good reputation
from relatives
(2) Price
62.
Additional
criteria (in order
of importance)
Assessment
method
(4) Audit
Payment terms, quality,
price, production capacity,
service, close location,
relationship
Ranking based on price, on
time delivery, quality
complaints
Not in use.
Price, quality, delivery,
flexibility, relationship
Quality, price, delivery,
service, flexibility
Flexibility, quality,
relationship, price, service
Yearly review on quality
complaints
No assessment
No assessment
Common model
Not in use.
Not in use.
Not in use.
for selection and
assessment
Table 12. Cross-case analysis relating information founded in each single case of the four brewing company analysed, which are AB
Inbev, Martens, St Feuillen, L’Echasse.
63.
6. Discussion
The discussion section will compare theoretical concepts to the information that
the cross-case analysis brought. The goal of this section is to generalise contrasts and
similarities highlighted in the cross-case analysis and thus develop hypothetical
propositions. However, these propositions do not aim to give an exact answer to the
main research question but try to bring possible explanations and descriptions of the
subject. The section is divided in accordance to the intra-case analysis, which means that
a part on sourcing is presented, followed by a part on production plant location and
finally the supplier selection and assessment part is presented.
6.1. Sourcing
Within cases analysis, it appears that companies C and D (both classify in the SME
group) turn naturally less to global sourcing compared to companies A and B (classify in
the MNC group). Indeed, reasons to source more locally for these small companies are
various. Company C and D identify the following factors: support local people, low
transportation costs, presence in an industry cluster, possibility to order small
quantities and possibility to order flexible quantities. In both cases, the factor low
transportation seems to be primordial. Indeed, as volumes of materials ordered are
relatively small, transportation costs from a distant region would hardly increase the
unit ex factory cost, which is less the case for bigger volumes. Many others factors would
probably indicate the same trend, but transportation cost seems to be the predominant
one. This finding corroborates the theory that claims that SME companies obtain fewer
benefits from global sourcing than MNC companies (Scully and Fawcett, 1994). In
addition, Jin (2004) assumes that if the volume of production of an item is low, it is
financially interesting to source it locally because global sourcing incurs high
transactions and shipments costs. The first proposition generalised this finding.
Proposition 1: SMEs turn naturally less to global sourcing because transportation
costs that hardly increase the unit ex-factory price when the volume ordered is
small.
64.
As the industry analysis demonstrates, hops market is mainly held by large
transnational merchant companies that hold approximately 90% of forward contracts
worldwide (Deloitte, 2009). Within cases analysis, it appears that all four companies
analysed source hops from multinational merchants. Indeed, companies A and B source
hops from global suppliers located in Germany or Western Europe. Company C sources
hops from a multinational merchant in Germany and from a branch of an American
multinational company in Belgium. For its part, company D also sources hops from the
branch of the same American multinational company in Belgium. Within the research, it
emerges that the market is hardly consolidated and managed by 3 MNCs that are: Barth,
Hopsteiner and Yakima chief. The medium brewery (company C) also recognises that
the brewery is forced to buy globally even if it would prefer to source locally that kind of
materials.
Smith (1999) claims that companies facing sourcing of low availability products
should source globally to benefit from cost reduction if the product is not critical for
their operations. Conversely, if the product is critical for their operation, companies
should better source from a national distributor to avoid the risk of an interrupted
supply chain (Smith, 1999). In the brewery industry, all materials needed for the
brewing process seem critical to production as without one of them, the production
cannot run. Therefore, following the idea of Smith (1999), it would be better to source
from a notional distributor. It is acceptable to consider the Belgian branch of the
American company as a national distributor, in which case findings would confirm the
theory. However, this supplier could not supply every variety on the market, with the
best quality and at the best price. Therefore, both MNCs analysed source globally and
both SMEs source globally or through a MNC local branch. This analysis leads to the
second proposition.
Proposition 2: A consolidated supplier market reduces the decision-making
power of a company and forces it to align its purchases on few supplier locations.
Findings indicate that the fourth analysed company sources raw materials (malt,
hops, adjuncts) from Europe, which could be considered on a regional scale. Indeed,
companies A and B source all raw materials from Europe but outside Belgium. Company
65.
C sources mainly from Belgium and for a lower extend from other regions in Europe.
Company D sources exclusively from Belgium. Reasons could be two folds.
First, all companies identify a relative low price of raw materials in Europe.
Indeed, as the price of raw materials has a low intrinsic value, sourcing from the rest of
the world (i.e. China) could be inefficient as transaction costs and transportation costs
could offset this benefit. As an example, a ton of barley on the sport market costs 148 US
Dollars (Indexmundi, 2016) in June 2016 and the sea shipping (without taxes) from
Shanghai to Northern Europe costs approximately 1350 US Dollars (UNCTAD, 2013) for
a 20 feet container in 2012. As the 20 feet container could carry maximum 24 tons, the
sea shipping from Asia of 24 tons of barley would rise the ex factory cost of 38%
(148USD x 24 T= 3.552USD; 3.552USD + 1350 USD = 4.902 USD). In the literature, Platts
and Song (2010) and Smith (2009) argue that set up costs and recurring costs of doing
business with distant suppliers could offset the benefit of a low ex-factory price, which
confirm the finding. Moreover, thanks to the large availability of barley malt and hops in
Europe, price is not exuberantly higher than other regions.
Secondly, for all fourth suppliers, the first sourcing priority is to secure their
supply in term of quantity and quality. It is primordial to get quality materials that
respect specifications in order to brew quality beers. Indeed, all analysed suppliers have
ranked quality higher than 7 on 10 in their suppliers’ selection criteria. In addition, as
sourcing from a distant region by boat could take up to 4 months, the quality of raw
materials could deteriorate during the sea shipping. Within the literature, Holweg et al.
(2011) consider that if a quality failure occurs with a global supplier, the supply chain
could be hardy hampered. In order to secure their supply, the forth companies prefers to
source regionally. The following proposition regroups both potential reasons of regional
or local sourcing.
Proposition 3: In order to secure the supply, low value and perishable raw
materials that are critical for business should rather be sourced regionally or
locally.
Companies A and B are both MNCs who has a global purchasing strategy
coordinated between locational and functional business units worldwide and are
therefore in the fifth level of the Monczka and Trent (2003a) global sourcing model.
Companies C and D are in the second and first level respectively. It appears also that
66.
company A and company B have more contracts with global suppliers than companies C
and D, buying more locally with smaller suppliers. Indeed, these two MNCs (companies
A and B) buy from global suppliers probably for multiple reasons such as: price more
attractive, significant volume needed, high quality requested, long payment terms
requested, etc. These global suppliers usually have branches and plants worldwide. This
situation profits to the two MNCs that could implement corporate contracts with an
identical price of materials across sites and that could receive a delivery from the plants
of the supplier close by the production plant of the MNC. In case of raw materials, as it is
in this research, it could be interesting because of a low lead time, a low transportation
cost and a low risk of materials deterioration. Indeed, company A sources malt from
global suppliers and receives for its production plant in UK, malt from UK; for its
production plant in Germany, malt from Germany; for its production plants in Benelux,
malt from Holland or France. Regarding company B, it has a corporate contract with
global suppliers and receives malt from Western Europe and France for its plant in
Belgium and malt from China for its plant in China. Literature confirms gains for MNCs
to source from other MNCs. Indeed, Trautmann (2008) identifies economies of scale for
MNCs if specifications and requirements for products are common across sites and if the
supplier has the capacity of delivering all business units thanks to sites across countries.
Consequently, the MNCs could take advantage of bundling their orders and thus profit of
negotiation power (Trautmann, 2008). Therefore, in order to secure their supply and
benefit from advantageous corporate price, MNC brewing companies try to buy globally
but to be deliver locally. The fourth proposition follows this conception.
Proposition 4: To benefit of advantageous corporate price and of better supply
management, MNCs implement a “glocal” sourcing strategy with other MNCs.
Within the literature, Campbell et al. (2014) conducted a survey on the purchase
behaviour of students on local products. Results were that students were willing to pay
more for local products because they identify themselves in these products: “better taste
and freshness, support for the local economy and minimized environmental impact”
(Campbell et al., 2014, p.48). However, in this research, none of the companies analysed
is confronted with pressure to buy local because of environmental concerns or because
of customers’ willingness to pay more for local products. Possible explanations are: (1)
beer is a processed beverage with ingredients that customers do not know the origin of;
67.
(2) customers perception on different beers is extremely low (Madsen et al., 2010); (3)
marketing budget accounts for 20% of total expenses of breweries (Jain, 1994).
Therefore, the following proposition is coming.
Proposition 5: Within the brewery industry, companies should invest in a brand
image that appears local instead of sourcing locally because customers pay
attention to the brand’s origin rather than the raw materials’.
Within cases analysis, it seems that companies C and D identify more benefits to
be part of an industry cluster than companies A and B. Indeed, company C considers that
mostly all materials are available in Belgium thanks to an important concentration of
breweries and brewery suppliers. For its part, company D receives many advices of
many other Belgian breweries concerning the choice, the reputation and the evaluation
of suppliers. However, company A and company B, mainly sourcing globally (outside the
cluster), consider being a preferred customer for some of their suppliers and thus
receiving better treatment whereas companies C and D do not. In the literature, Steinle
and Schiele (2008) emphasize the need to be locally present within industry clusters in
order to become a preferred customer of one of the local suppliers. In addition, Tunisi et
al. (2011) assume that this kind of interaction and cooperation can only happen when
being in the same region. The proposition is the following:
Proposition 6: To become a supplier’s preferred customer and benefit from this
status, it is not necessary to be located in the same industry cluster and thus
source locally.
6.2. Plant location
Within cases analysis, 3 companies (A, B and C) have their production plants
located in a specific region for historical reasons. Company D has started 3 years ago and
thus has decided recently of its placement. On top of being located in a certain region for
an historical reason, MNC companies (A and B) decided to locate some of their
production close to the market demand. Indeed, depending on the results of business
cases, company A offshores a part of its production to countries where the demand is
high. At the moment, it partially offshores to China the production of an international
well known Belgian fruity beer, because the demand is rising in that country. However,
68.
it still keeps in Belgium the most important part of the production for this beer for the
other regions of the world. Company B built a brewing plant in China through a
partnership to get closer to the rising Chinese demand. However, it produces still most
of its beers in the plant in Belgium. Company C and D (SME) did not choose the plant
location based on the market demand but rather on the character and the reputation of
the site. However, they are naturally close to their market demand as most of their
customers are Belgian. Within the literature, Gylling et al. (2015) assume that it is
preferable to locate a production plant close to the market demand in order to gain in
responsiveness and flexibility. However, the demand uncertainty is not high in the beer
market, which could give an indication of a relative low importance of the demand
market as a factor in a plant location decision. Though, the beer market shows that most
beers consumed in a country are produced in the same country, which is mainly due to
high transportation costs (Madsen and Wu, 2014). Belgium is an exception to this trend
as it exports 62% of beers produced in the country. Therefore comes the following
proposition.
Proposition 7: Deciding the location of their production plants on historical
reasons rather than on the market’s demand reduces the efficiency of Belgian
breweries.
6.3. Supplier selection and assessment
Within case studies, it appears that none of companies analysed use a common
model to select or assess suppliers. However, Ho et al. (2011) recognise the total cost of
ownership (TCO) and the analytical hierarchy process (AHP) models as the most
prevalent models in supplier selection. A possible explanation why TCO model is not
used in the sourcing of raw materials within the brewery industry could be that the total
cost of ownership of sourcing raw materials is given by the ex factory price of raw
materials + transportation costs + logistic management costs. As it is easy to compute,
purchasers do not identify an interest to adopt commonly used models that are time
consuming. Company A and B (MNCs) that source globally do not use this kind of models
despite incurring many additional costs when sourcing globally. Platts and Song (2010)
indeed identify additional costs in global sourcing such as: set up costs (costs incurred
during the first phase of global sourcing) and recurring costs (cost that occur frequently
69.
during purchases as transportation, expediting, duties, inspection, etc.). The following
proposition generalises this idea.
Proposition 8: When sourcing raw materials globally, it is inefficient to use a time
consuming model, such as TCO, to select and assess suppliers because of the
easiness to compute the total cost of ownership for this kind of sourcing.
70.
7. Conclusion
This thesis aims to analyse and describe the combination between global and
local sourcing within the brewery industry, then to generalise findings and try to
develop propositions that could suit other industries. Several research questions arose
before and during this research such as: (1) How does a brewing company combine
global and local sourcing? (2) What are the advantages and disadvantages of both types
of sourcing? (3) What factors influence this combination? (4) How firms make their
location decision? (5) How firms select and measure the performance of their suppliers?
In order to analyse these elements, interviews and documentation research were
conducted with four companies that were selected on their size and internalisation level
because many differences appeared based on those factors during the research.
Therefore, two multinational companies were selected as well as two small or medium
companies, to bring contrasts and similarities in the analysis. Then, intra- and cross-case
analysis were conducted, which allow developing propositions that generalise findings
to other industries.
This research brings several findings and propositions on the combination of
global and local sourcing, the supplier selection and assessment process and the plants
location. Firstly, small and medium enterprises seem to turn naturally less to global
sourcing because transportation costs hardly increase the unit ex-factory price when the
volume ordered is small. Secondly, it appears that a consolidated supplier market
reduces the decision-making power of a company and forces it to align its purchases on
the few suppliers’ location. Indeed, even if small companies would prefer to buy
materials locally for various reasons, they could be forced to source globally if the
market is heavily consolidated, which could be less efficient for small structure. Thirdly,
for some perishable raw materials that have a low intrinsic value and that are critical for
business, it may be more efficient to source it regionally or locally. Fourthly,
multinational companies that have business with other multinational companies would
rather implement a global contract to benefit from advantageous corporate prices but
would prefer to be delivered locally to secure their supply chain. Therefore, these
companies try to implement a “glocal” sourcing strategy. Fifthly, it emerges that within
the beer market, customers pay more attention to the brand origin than to the raw
materials origin. Therefore, to benefit from customers’ willingness to pay more for local
71.
products, brewing companies should invest more in a local branded image than sourcing
materials locally. Sixthly, this research shows that multinational companies would gain
from their status as preferred customers of one of their suppliers without sourcing
locally and being located in the same industry cluster. Seventhly, Belgian breweries
typically choose the location of production plants on historical reasons rather than on
the market demand, which leads to inefficiency. Finally, to source globally or locally raw
materials it seems inefficient and time consuming to use a common model of supplier
selection and assessment (such as TCO) because the total cost of such sourcing is easy to
compute.
These findings may be useful for managers when they formulate their sourcing
strategy. In addition, few managerial implications materialised in this research. Firstly,
because of the significant cost of transportation in the total cost of small volume
purchases, small and medium companies could create, in association, a central
purchasing office in order to bundle their purchases and benefit of reduced price with
global sourcing. Secondly, multinational companies should even more implement a
“glocal” sourcing strategy with global suppliers to benefit from corporate prices and to
secure their supply thanks to local deliveries. Thirdly, multinational companies that
have a sufficient purchasing volume making them essentials to their suppliers should
implement a reverse auction sourcing process when the supplier market is
overproducing to benefit from a more efficient competition on price. Fourthly, new
breweries should take more into account the demand and supply market before
deciding the location of their production plants. Finally, even if common models to select
and assess suppliers do not seem necessary when buying raw materials, small and
medium enterprises should set up a supplier performance process to gain in negotiation
power.
This research comports undeniably many limits. Limits presented in this
paragraph could also inspire other researches in this domain. Indeed, the choice of
companies analysed was made on size and internalisation factor. However, all these
companies produce various quality types of beers. On one hand, company A produces
pils, premium and sub premium beers whereas company B mainly produces discount
and pils beers. On the other hand, both smaller breweries produce craft beers that are
high quality beers. Sourcing strategy may probably differ depending on the beer
produced but boundaries of this research limit this aspect. Therefore, it could be
72.
interesting to select companies to be analysed based on this element. Another limit of
this research is that the analysis was focussing on a single industry whereas a single
industry could not reflect the entire locational sourcing strategy for all industries.
Indeed, depending on the industry, objectives and reasons to source global vary (Frear
et al., 1992; Nassimbeni, 2006). Therefore, it could be valuable to realise a research on
several industries to get more accurate and generalisable data.
73.
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