Chapter 16
Global Sourcing
International Business
Strategy, Management
& the New Realities
by
Cavusgil, Knight & Riesenberger
International Business: Strategy, Management, and the New Realities
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Global Sourcing: Shopping the World
• Along with competitors Reebok and Adidas, Nike
contracts out nearly all of its athletic shoe production to
foreign suppliers. These firms are best described as
brand owners and marketers, not as manufacturers.
• Apple Computer sources some 70% of its production
abroad while focusing its internal resources on improving
its operating system and other software platforms. This
approach allows Apple to use its resources optimally and
focus on its core competences.
• Boeing and Airbus rely extensively on global
manufacturing networks, composed largely of
independent suppliers.
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Global Sourcing
• Global sourcing: the procurement of products or
services from suppliers located abroad for
consumption in the home country or in a third
country.
• Also called global outsourcing, global procurement
or global purchasing; it amounts to importing.
• Involves a contractual relationship between the
buyer and the foreign supplier, in which the
performance of a specific value-chain activity is
subcontracted to the firm's own subsidiary or to an
independent supplier.
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Drivers of Global Sourcing
• Technological advances, including instant
Internet connectivity and broadband availability
• Declining communication and transportation
costs
• Widespread access to vast information
including growing connectivity between
suppliers and the customers that they serve;
and
• Entrepreneurship and rapid economic
transformation in emerging markets.
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Decision 1: Outsource or Not?
• Managers must decide between internalization and
externalization -- whether each value-adding activity
should be conducted in-house or by an independent
supplier.
• Known as the ‘make or buy’ decision: “Should we
conduct a particular value-chain activity ourselves,
or should we source it from an outside contractor?”
• 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 they want to control.
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Business Process Outsourcing (BPO)
• The outsourcing of business functions to
independent suppliers such as accounting, payroll,
and human resource functions, IT services,
customer service, and technical support.
• BPO includes:
 Back-office activities, which includes internal,
upstream business functions such as payroll
and billing, and
 Front-office activities, which includes
downstream, customer-related services such as
marketing or technical support.
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Decision 2: Where in the World Should
Value-Adding Activities Be Located?
• Configuration of value-adding activity: The
pattern or geographic arrangement of locations
where the firm carries out value-chain activities.
• Instead of concentrating value-adding activities in
the home country, many firms configure these
activities across the world to save money, reduce
delivery time, access factors of production, and
extract maximal advantages relative to competitors.
• This helps explain the migration of traditional
industries from Europe, Japan, and the U.S. to
emerging markets in Asia, Latin America, and
Eastern Europe.
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An Example of Worldwide Configuration of Value Chain
• The German automaker BMW employs 70,000 factory personnel
at 23 sites in 13 countries to manufacture its vehicles.
• Workers at the Munich plant build the BMW 3 Series and supply
engines and body components to other BMW factories abroad.
• In the United States, BMW has a plant in South Carolina, which
makes over 500 vehicles daily for the world market.
• In NE China, BMW makes cars in a joint venture with Brilliance
China Automotive Holdings Ltd.
• In India, BMW has a manufacturing presence to serve the needs
of the rapidly growing South Asia market.
• BMW must configure sourcing at the best locations worldwide,
in order to minimize costs (e.g., by producing in China), access
skilled personnel (by producing in Germany), remain close to key
markets (by producing in China, India and the United States).
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Contract Manufacturing:
Global Sourcing from Independent Suppliers
An arrangement in which the focal firm contracts
with an independent supplier to manufacture
products according to well-defined specifications.
Nike is a leading example.
Examples
 Patheon, a leading contract manufacturers in the
pharmaceutical industry, provides drug development and
manufacturing for pharmaceutical and biotechnology firms
worldwide. Patheon operates 11 factories in North
America and Europe, producing over-the-counter drugs
and several of the world's top-selling prescription drugs for
most of the world's largest pharmaceutical firms.
 Benetton employs contract manufacturers to produce
clothing.
 IKEA uses contract manufacturers to produce furniture.
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Magnitude of Global Sourcing
• In 2005, India alone booked $22 billion worth of
business in answering customer phone calls,
managing computer networks, processing invoices,
and writing custom software for MNEs from around
the world.
• Global sourcing has created more than 1.3 million
jobs during the past decade for India.
• Meanwhile, between 2000 and 2004, some 100,000
service jobs were outsourced each year from the
United States to other countries.
• In 2006, IT and business-process outsourcing
exceeded $150 billion worldwide.
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Benefits of Global Sourcing
•
•
•
•
Cost efficiency
Improved productivity
Technological flexibility
Improved agility to redesign company
activities
• Access to skilled personnel
• Increased speed to market
• Access to new markets
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Challenges of Global Sourcing
• Vulnerability to exchange rate fluctuations
• Partner selection, qualification, and monitoring
costs
• Complexity of managing a worldwide network of
partners and a global supply chain
• Limited influence over supplier’s manufacturing
processes
• Vulnerability to opportunistic behavior by
suppliers
• Limited ability to safeguard intellectual assets
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Global Supply Chain Management
• Global supply chain: the firm’s integrated
network of sourcing, production, and distribution,
organized on a world scale, and located in
countries where competitive advantage can be
maximized.
• Sourcing from numerous suppliers scattered
around the world requires efficient supply-chain
management.
• Third party logistics providers (3PLs) as well as
independent logistics service providers such as
FedEx, TNT, and UPS are useful facilitators.
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Features of Global Supply Chain Management
• Costs associated with physically delivering a product to
an export market may account for as much as 40% of
total cost.
• Experienced firms use information and communications
technologies (ICTs) to streamline operations, reducing
costs and increasing distribution efficiency.
• Logistics involves physically moving goods through
the supply chain. Incorporates information,
transportation, inventory, warehousing, materials
handling and similar activities associated with the
delivery of raw materials, parts, components, and
finished products.
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Transportation Modes
• International logistics typically involves multiple
transportation modes.
• Land transportation is handled via highways and railroads
• Ocean transportation is handled via large container ships.
• Air transportation involves commercial or cargo aircraft.
• Ocean and air transport are common in international
business because of long shipping distances. Ocean
transport is the most common and cheapest
transportation mode.
• Ocean transport was revolutionized by the development
of 20- and 40-foot shipping containers.
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Risks in Global Sourcing
1. Less-than-expected cost savings. Conflicts and
problems arise from various sources.
2. Environmental factors. Examples include exchange
rate fluctuations, trade barriers, macroeconomic
events, high energy costs, labor strikes
3. Weak legal environment. Can affect protection of
intellectual property, eroding key strategic assets.
4. Risk of creating competitors
5. Inadequate or low-skilled workers
6. Erosion of morale and commitment among homecountry employees due to outsourcing jobs
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Strategies for Minimizing Risk
1. 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.
2. Get employees on board. Poorly planned sourcing projects
creates unnecessary tension with existing employees.
3. Choose carefully between a captive operation and a
contract with outside specialists. Strike the right balance
between what to make, and what to buy.
4. Choose countries and suppliers carefully. There are many
options to choose from; A sourcing broker can help.
5. Invest in supplier development and collaboration
6. Proactively safeguard interests, such as key assets and the
firm’s reputation
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Potential Harm and Ethical Issues
• Global sourcing can lead to three major
problems in the home country:
 Job losses
 Reduced national competitiveness
 Declining living standards
• MNEs may be ineffective or indifferent about:
 protecting the environment
 promoting human rights
 labor practices and working conditions abroad
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Public Policy Towards Global Sourcing
• It is impractical to adopt a unilateral policy
against global sourcing.
• Rather, it is usually better to mitigate the harm
that global sourcing can cause.
• Offshoring is a process of creative destruction.
It creates new advantages and opportunities,
while eliminating certain types of jobs and
adversely impacting particular economic
sectors and segments of the economy.
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Helpful Public Policy Initiatives
Guiding employment towards higher value-added jobs
(e.g., by stimulating innovation)
• Keep the cost of doing business low (e.g., via
appropriate economic and fiscal policies,
encouraging innovation, keeping cost of capital low)
• Ensure a strong educational system, including
technical schools and well-funded universities that
supply engineers, scientists, and knowledge workers.
• Maximize worker flexibility to help those who lose
jobs find other positions.
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