sourcing - University of Manitoba

Global Sourcing
I find it useful to consider sourcing as really being part of the same
“pipeline” as marketing the output
So even though we are now considering Inputs,
we still keep a marketing focus
Sourcing, like marketing, is concerned with the interface between the
Organization and its environment
Focus on Logistical management of R&D/manufacturing/marketing
Product Life
Optimum location may shift with change in the stage of the
product life cycle
Source of ideas
Source of product
Source of market
- R&D
- manufacturing
- Marketing
Must see them ALL working together to succeed
Advantage of globalization - locate each activity where it makes the
most sense
TV’s and Catscans are both examples of products which are
technically inferior but which were successfully
manufactured and marketed
CAT invented by Emi (UK) but developed by GE (USA)
TV’s - British held the original patents, but the Japanese
designed around the circuits - more complex, but built it
Limitations on international product life cycle theory:
1. Faster product development, shorter innovation lead times reduces
the advantage of polycentric approach
2. Predicting development of new/better sources during PLC gives
shrewder companies an advantage.
3. Actively managing resource deployment on a global basis can give
company pre-emptive first-mover advantage.
Inherent conflict
Marketing dominated:Product modification to meet market
differences at the expense of manufacturing efficiency
2. Production dominated:Excessive product standardization to meet
production efficiency at the expense of satisfying market
3. R&D dominated: Over designed - too complex, too expensive, too
much delay in time to market
Trends in Sourcing Strategy
1. Decline in importance of X/C rate (i.e. not just price)
2. Effects of Excess Capacity - particularly in capital intensive “old
economy” industries e.g. Steel, autos, newsprint, chemicals
3. Changes in International Trade Infrastructure
(a) Growing management skill and expertise e.g; Row between GM &
VW over new VP Purchasing
(b) Transportation - Intermodal - containerization
- scheduled liner services
- air freight - costs have come down enormously - e.g. cheaper
for me to air freight personal effects Bahrain- Winnipeg than send by
- forwarders/ consolidators/brokers e.g. DHL, UPS, TNT
Skypack, etc. now providing global coverage
(c) Communication - fax, email, shipment tracing
(d) New financing options - like countertrade. But old fashioned system of
L/C’s still dominates . Perhaps, however, some shift to open
30-60-90 day lines of credit, as in domestic trade.
(e) Multiplicity of sources, and shifts in source location
- raw materials - grain, coal, iron ore, alumina, crude oil
- components - I/c’s, chips, auto components
- assembled goods - OEM’s, contract manufacture
- regional aircraft - not US, Holland or UK but Canada and Brazil
4. Enhanced role of purchasing manager - role of purchasing and logistics
starting to come out of the shadows
5. Trend to Global Manufacturing
Old style - manufacture at home, export everywhere
New style - manufacture everywhere, sell everywhere
- Two trends - (a) setup complete assembly factories in foreign markets
(b) setup factories to build key components in particular place
and supply all factories from there, e.g. Ford engine plants.
Potential Pitfalls of Global Sourcing
Unresolved tension in global manufacturing
Financial Pressure
Local Market Differentiation
Political pressure nationalism
Modern globalization - willingness to face this dilemma and get a balanced answer Partly being forced by competition - many multi-nationals out there as well as
local firms - “if we don’t, someone else will”
Note criticism of US companies over last several decades- management thinking
dominated by marketing and finance/accounting - inadequate
consideration of production factors.
- Criticism also applies equally to a lot of UK and European companies
as well
Offsetting this, however, we must acknowledge the tremendous gains in
productivity in the US economy during the 1990’s - and you can’t do that by
ignoring manufacturing!
Another factor which arises repeatedly in international case studies, is the
tendency for parent companies, particularly American ones, to force home office
systems and procedures on subsidiaries, whether they fit or not
- planning
- budgeting
- reporting (including converting accounts to US$)
- decision making
- organization structure
- patterns of HR
- etc.
Concept of the Value Chain:
Sequence of all activities from product design, resource acquisition through
inbound logistics,
manufacturing and assembly,
promotion, sales, distribution, and after-sales service
which adds value to the final product in the hands of the customer;
Together with support activities such as
- human resource mgt,
- technology development
- accounting/IT
Elements of the Value Chain
Planning, Finance, MIS , Legal
Technology, R & D, Design
Purchasing, ProducRaw Mat’l tion
Marketing, Distribution Customer
Advertising Warehouse M’tce &
Human Resource Management
Steps in value chain analysis:
1. Identify the separable links in the company’s value chain
2. For each link, do we have any competitive advantage - either scale or scope?
3. What are the transaction costs between links?
- negotiation
- monitoring
- uncertainty/risk - economic? political?
4. Determine the comparative advantage of countries/locations relative to
- each link of the value chain
- associated transaction costs
5. Build in sufficient flexibility to cope with changes in
- competitive advantage of the company
- comparative advantage of the country
Managing R&D - Manufacturing Interface
-Focus on both Process technology and Product technology
Product technology examples
- EMI / GE CAT scan
- TV’s
- Xerox
- Polaroid
Process technology - Canon over Xerox - photocopier
- Boeing over BAe - jet aircraft
- Pfizer and penicillin
- Rolls Royce still competitive in jet enginesNote too that Production can influence R&D by defining problems areas
or issues that need improvement or a new solsution
Ways of Managing Production / Marketing Interface
1. Standardize core components
e.g. auto engines, transmissions
computer memory chips, hard drives
2. Group products into product design families to gain some economies of scale
e.g. auto industry base models (“platforms”)
3. Universal product with all features - either all standard or as selectable options
e.g. Canon cameras
4. Universal product but different positioning, i.e target different market segments
in different countries
Long prod’n runs
Produce to order
Marketing - R&D Interface
Problem is trying to maximize satisfaction of consumers needs and wants
While at the same time trying to maximize what is technically possible.
Management problem: Deciding when to “freeze” development and go into
One possible answer: continuous product development - staged improvements to
basic product.
Problem - overtaken by a “blockbuster” novelty (fashion trade particularly
- lose out to fundamental shift in character of product, so that our
standard product suddenly finds itself obsolete.
Fundamental issue: monitoring trends
keeping response time and development times short
Logistics of Sourcing
Vertical integration
But - Higher mgt
- Slow response time
We focus on core competencies
But - lose contact with
manufacturing skills
Which way to go ?
One solution: strategic alliances
-separate as in outsourcing
- blended as in integrated
Problem: Who’s in charge?? Dominant partner?
Equal partners ? (but some of us are
more equal than others!)