Global Sourcing
International Business
Strategy
301LON
Unit: 9 Knowledgecast: 1
Module Learning Outcomes
• Integrate and apply
practical
situations
organisations
strategic approaches
in
various
types
to
of
• Assess current developments in the organisational
environment and alternative responses related to
strategy
• Resolve management problems in the area of
strategic management by evaluating alternative
outcomes
Global Sourcing
Is the procurement of products or services from suppliers
or company-owned subsidiaries located abroad for
consumption in the home country or a third country.
• Also called global procurement or global purchasing,
global sourcing amounts to importing -- an inbound
flow.
• It is an entry strategy that involves a contractual
relationship between the buyer (the focal firm) and a
foreign supplier. It involves subcontracting the
performance of specific manufacturing or services tasks
to the firm's own subsidiaries or independent suppliers.
Drivers of Global Sourcing
Technological
advances (e.g.
internet)
Declining
communication
and transportation
costs
Global
Sourcing
Entrepreneurship
& economic
transformation in
emerging markets
Access to
information and
growing
connectivity
Global Sourcing: Shopping the World
• Nike, Reebok and Adidas as brand owners and
marketers, not as manufacturers because they contract
out nearly all of their athletic shoe production to foreign
suppliers.
• Apple Computer sources some 70% of its production
abroad while focusing its internal resources on
improving its operating system and other software
platforms.
• Dell Inc. relies extensively on a global manufacturing
network, composed largely of independent suppliers.
This allows these companies to optimally utilize their
limited capital resources and focus on their core
competences.
Sourcing for the Dell Inspiron Notebook
Two Key Decisions Regarding Global
Sourcing
•
Decision 1: Outsource or not
• Decide whether each value-adding activity should be
conducted in-house or by an independent supplier.
• Known as the ‘make or buy’ decision.
• Firms usually internalize those value-chain activities they
consider a part of their core competence, or which involve the
use of proprietary knowledge and trade secrets that they want
to control.
•
Decision 2: Where in the world should value-adding activities
be located?
• Firms configure their value-chain activities in specific
countries to cut costs, reduce transit time, access favorable
factors of production, and access competitive advantages.
The Nature of Outsourcing and
Global Sourcing
Global Sourcing from
Subsidiaries Versus Independent Suppliers
•
In global sourcing, the focal firm has two major
choices. It can source from:
(1) Independent suppliers, or
(2) Company-owned subsidiaries and affiliates.
•
Global sourcing from independent suppliers involves
outsourcing production to a third-party provider
abroad.
•
Captive sourcing is sourcing from the firm’s own
production facilities located abroad. Production is
carried out at a foreign facility that the focal firm fully
or partly owns through direct investment.
Business Process Outsourcing (BPO)
•
•
Outsourcing of business functions, such as
accounting, human resource functions, IT
services, and customer service, to independent
suppliers
BPO includes:
 Back-office activities, including internal,
upstream business functions such as payroll
and billing
 Front-office activities, including down-stream,
customer-related services such as marketing or
technical support
Contract Manufacturing and Offshoring
Contract Manufacturing
Arrangement in which the focal firm contracts with an
independent supplier to manufacture goods according
to well-defined specifications; e.g., Nike, Ikea
Offshoring
•
•
•
A natural extension of global sourcing, it refers to the
relocation of a business process or entire manufacturing
facility to a foreign country.
MNEs shift production of goods or processes to foreign countries
to enhance their competitive advantages.
Common in the service sector, including banking, software
writing, legal services, and customer service activities.
Example
Large legal hubs have emerged in India, which provide services such as
drafting contracts and patent applications. Because lawyers in North
America and Europe can cost $300 an hour or more, Indian firms can
cut legal bills by 75 percent.
Scope of Global Sourcing
•
•
•
•
•
Many jobs in the services sector cannot be separated from
their place of consumption, such as retailing.
Other services are consumed locally, such as those
provided by doctors, lawyers, and accountants.
The firm’s reputation can be harmed by having jobs
performed abroad.
Labor union contracts often restrict global sourcing.
Easily outsourced jobs tend to be in industries:
—That benefit from efficiency and low cost
—That have uniform processes and customer needs
—In the service sector that are labor intensive
—Whose outputs are easily transmitted via the Internet
Benefits of Global Sourcing
•
•
Cost efficiency, due to lower wages abroad, leading to
improved profitability
Ability to achieve strategic goals
 Faster corporate growth
 Access to qualified personnel
 Improved productivity and service, especially when
a task is outsourced to a firm specialized in that task
 Business process redesign
 Increased speed to market
 Access to new markets
 Technological flexibility
 Improved agility by shedding unnecessary overhead
Risks in Global Sourcing
• Lower-than-expected cost savings
• Environmental factors, such as exchange rate
fluctuations, trade barriers, and labor strikes
• Weak legal environment, which can affect
protection of intellectual property
• Inadequate or low-skilled workers
• Overreliance on suppliers
• Risk of creating competitors
• Erosion of morale and commitment among
homecountry employees due to outsourcing jobs
Strategies for Minimizing Risk
• Go offshore for the right reasons. The best
rationale is strategic, such as enhancing the
quality of offerings, improving productivity,
and freeing up core resources.
• Get employees on board. Poorly planned
sourcing projects create unnecessary tension
with existing employees.
• Choose carefully between a captive
operation and a contract with outside
suppliers.
Strategies for Minimizing Risk (cont.)
• Choose suppliers carefully. There are many
options. A sourcing broker can help.
• Invest in supplier development and
collaboration. Proactively safeguard
interests, such as key assets and the firm’s
reputation.
• Safeguard interests in terms of maintaining
the firm’s reputation, building a stake for the
supplier, keeping open options for finding
alternate partners if needed, and withholding
key intellectual property.
Major Sources for Components of the Boeing
787
Knowledgecast Summary
• Integrate and apply strategic approaches to practical
situations in various types of organisations
• Assess current developments in the organisational
environment and alternative responses related to strategy
• Resolve management problems in the area of strategic
management by evaluating alternative outcomes
Seminar
Lessons of global sourcing
Useful Video on Outsourcing (Benefits, costs, risk and impact of technology)
http://www.youtube.com/watch?v=npJGgQunCLg
http://www.youtube.com/watch?v=syicHUMj6fc
http://www.youtube.com/watch?v=JrP4Xe7zceg
Group Activity
End of Module Assessment – Evaluating Internationalization
Strategy (Management Brief) (Unit 10)
Preparation – Preparing the Final Draft
This session will provide you with the opportunity to discuss your final draft
with your module tutor and ensure all your questions are answered as you
finalize your submission.
Although this is an independent piece of work giving and receiving feedback
from your peers is an essential skill, which will be of great value in the
workplace.
Be prepared to provide constructive feedback on other’s work and receive
feedback which can inform your progress.