Presentation

1
Presentation 21ATTRACTING FDI VIA GLOBAL
SOURCING AND PRODUCTION

• By
• Prof. Dr. Zafar U. Ahmed
• President and CEO
• Academy for Global Business Advancement Inc.,
• Texas AM University at Commerce,
• Commerce, Texas, USA

2
Benefits of Global Sourcing and Production

• Acquisition of High Quality Technology
• Acquisition of Technical Expertise
• Acquisition of Foreign Capital
• Acquisition of Knowledge
• Acquisition of Global Standards
• Acquisition of Global Brands
• Acquisition of Global Export Marketing Expertise
• Building Global Networks
• Acquiring Global Success

3
Dynamics of Global Sourcing

• U.S. MNCs are the Most Experienced in the
  Industrialized World, and Sell More Than Three
  Times as Much Overseas Through Their Subsidiaries
  as They Export to the World.
• Intra-firm Trade is the Primary Factor Leading to
  the Total Volume of International Trade Among the
  Triad Region (i.e., the United States, European
  Union, and Japan) Increasing More than
  Fifteen-fold to 750 Billion in 2000.
• An Increasing Segment of International Trade of
  Components and Finished Products is Strongly
  Influenced by MNCs Foreign Production and
  Sourcing Investment Activities.

4
Trends in Global Sourcing Strategy

• Trend 1 The Decline of Exchange Rate
  Determination of Sourcing
• Trend 2 New Competitive Environment Caused by
  Excess Worldwide Capacity
• Trend 3 Innovations in and Restructuring of
  International Trade Infrastructure
• Trend 4 Enhanced Role of Purchasing Managers
• Trend 5 Trend Toward Global Manufacturing

5
Value Chain and Functional Interfaces

• The Design of Global Sourcing Strategy is Based
  on
• Competitive Advantage
• Comparative Advantage
• The Value Chain Concept Can be Divided into Two
  Major Activities
• Primary Activities
• Support Activities
• RD/Manufacturing Interface
• Manufacturing/Marketing Interface
• Core Components Standardization
• Product Design Families
• Universal Products with all Features
• Universal Product with Different Positioning
• Marketing/RD Interface

6
Procurement Types of Sourcing Strategy

• Intra-Firm Sourcing
• Domestic-in-House Sourcing
• Offshore Subsidiary Sourcing
• Outsourcing
• Domestic Sourcing/Purchase Arrangement
• Offshore Sourcing
• Hollow Corporations (Companies Adopting a
  Designer Role in Global Competition)

7
Costs and Consequences of Global Sourcing

• Sustainable Core Competence Versus Transitory
  Core Competence (Long-Term Implications of
  Offshore Sourcing)
• Strategic Alliances
• Dependence
• Gradual Loss of Design and Manufacturing
  Abilities

8
Outsourcing of Service Activities

• The Technological Revolution in Data Processing
  and Telecommunications Makes the Global
  Tradability of Some Services Possible.
• Intellectual Outsourcing
• Outsourcing of Service Activities May Serve the
  Following Purposes
• (a) Reducing Time to Implement Internal
  Processes
• (b) Sharing Risk
• (c) Improving Customer Service
• (d) Improving Access to Expertise Not Available
• in-house
• (e) Reducing Head-count
• (f) Instilling a Sense of Competition
• Core Services Vs. Supplementary Services

9
Determinants of Sourcing Globally

• Low Price Available from Local Sources -74
• Availability of Foreign Products - 49
• Firms Worldwide Operations - 28
• Advanced Technology Available Locally - 28
• Higher-Quality Products Available Locally - 25

10
FDI Entry Modes

• Independent Overseas Manufacturer
• Overseas Independent Contractor
• In-Bond Plant Contractor
• Overseas Joint Venture
• Wholly Owned Subsidiary
• Licensee
• Franchisee

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Problems With Global Sourcing

• Added Costs
• International Freight, Insurance, and Packing 10
  -12
• Import Duties 0-50
• Custom House Brokers Fees 3-5
• Inventory in the Pipeline 5-15
• Cost of Letter of Credit 1
• International Travel and Communication Costs
  28
• Company Import Specialists 5
• Reworking of Products Out of Specification 0-15
  

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Challenges of Global Sourcing

• Higher Vs. Lower Costs
• Improved Vs. Inferior Quality
• Higher Vs. Lower Productivity
• Advanced Vs. Low Production Technology
• Global Standardization Vs. Partial or No
  Standardization of Manufacturing Systems

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WORLD CLASS MANUFACTURING

• Total Quality Management (TQM)
• Ever Better
• Ever Quicker
• Ever Greater Flexibility
• Ever Lower Costs
• Just-in-Time Production System (JIT)
• Pull System
• Uniform Scheduling
• Small Lot Production
• Setup Time Reduction
• Group Technology and Multifunction Workers
• High Quality
• Dedicated Workers
• Reliable Suppliers

14
WORLD CLASS MANUFACTURING

• Factory Automation FA
• Computer Aided Engineering CAE
• Computer Aided Manufacturing CAM
• Various Forms of Technology
• Issue of Automation Vs. JIT, Which Rely Upon
  Workers
• Employee Involvement
• Define Involvement
• Define Organizational Mission and Goals
• Modify the Organization Design
• Provide Training
• Share Information
• Establish Two-way Communication
• Adopt Appropriate Compensation Plans
• Build Trust and Provide Job Security

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CHOICES IN WORLD CLASS MANUFACTURING

• Outsourcing Shun Vertical Integration and Pare
  Back to What The Organization Does Best
• Risks Include Forming Good Alliances and Making
  Valid Choices About What to Outsource
• At the Extreme, May Lead to the Virtual
  Corporation, a Temporary Network of Companies
• US Manufacturers Have Been Advised to Stop Making
  and Start Buying the Computers
• GM Buys Worth 55 of its Components from External
  Sources

16
MANUFACTURING IN THE 21ST CENTURY

• From Larger to Smaller Factories
• From Mass Production in Industrialized Areas
  Toward Customized Products
• Flexibility
• Shortening PLC
• Higher Value-Added Content in Products
• Intellectual Input from Employees
• Networking of Manufacturing Resources
• Providing Amenities to Make Jobs Appealing to
  Workers

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GLOBALIZATION OF MANUFACTURING OPERATIONS

• Decisions About Where to Locate Plants, What Each
  Should Produce and How to Coordinate Their
  Activities
• Basic Approaches to Plant Location
• Locate in Host Country Advantages
• Access to Low-Cost Production Factors
• Locate in Home Country Advantage is Simplicity
• Proximity to Markets
• Access to Technological Resources

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INTEGRATED GLOBAL MANUFACTURING OPERATIONS

• Rationalization Shifting From Local-for-Local
  Plants to an Integrated Network of Large-Scale,
  Production-Specialized Plants Serving a
  Worldmarket.
• Coordinated Global Manufacturing Even Where More
  Specialization is Needed and Rationalization is
  Inappropriate, Coordinate Operations to Take
  Advantage of Global Opportunities.
• Strategic Role of Factories
• Source Factories Access to Low-cost Production
  Inputs
• Server Factories Use of Local Technological
  Resources
• Contributor Factories Proximity to Market
• Lead Factories Access to Low-Cost Production
  Inputs
• Offshore Factories Use of Local Technological
  Resources
• Factory as Campus a More Extroverted Factory
  with Links Outside its Boundaries

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A DECISION-MAKING FRAMEWORK FOR GLOBAL SOURCING

• Benefits of Outsourcing
• Cost Reduction and Quality Improvement
• Research and Development Ideas (Volkswagen)
• Increased Exposure to Worldwide Technology and
  Production Processes GMs Plant in Mexico is an
  Exact Replica of Mazdas Plant in Japan
• Delivery and Reliability Improvements
• Costs of Outsourcing
• Long Lead Times and Lack of Flexibility
• Higher Inventory Costs
• Economic Risks in Host Countries
• Political Risks in Host Countries
• Overhead Costs Communications, Transportation
  and Public Services
• Engineering and Production Problems

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A DECISION-MAKING FRAMEWORK FOR GLOBAL SOURCING

• PROACTIVE MOTIVES FOR OUTSOURCING
• To Exploit Technological Superiority
• To Enhance Technological Capabilities
• To Assure Organizational Flexibility
• To Gain a Foothold in a Promising Market
• To Assure Delivery and Quality Improvements
• To Take Advantage of Foreign Government
  Incentives
• To Exploit Currency Fluctuations

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A DECISION-MAKING FRAMEWORK FOR GLOBAL SOURCING

• REACTIVE MOTIVATIONS
• To Protect Proprietary Technology Leakage
• To Cope with Intensifying Global Competition More
  Effectively
• To Lock Out Competitors From a Selected
  Competitive Base
• To Take Advantage of More Efficient
  Logistics/Delivery Systems
• To Diversify Supply Sources to Spread Risks
• To Exploit Cost Advantages Such as Cheaper Labor,
  Materials and Components
• To Satisfy Local Government Requirements Such as
  Local Content, Countertrade and Offset
• To Overcome Protectionist Barriers
• To Guard Against Currency Fluctuations

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A DECISION-MAKING FRAMEWORK FOR GLOBAL SOURCING

• PRODUCTS APPROPRIATE FOR OUTSOURCING
• Labor Intensive Textiles
• Standardized Autos
• Predictable Sales Patterns Electronics
• High Ratio of Value to Weight Semiconductors
• Not Subjected to High Duties Scientific
  Instruments

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A DECISION-MAKING FRAMEWORK FOR GLOBAL SOURCING

• SOURCING FOR FINAL PRODUCTS
• Global Industry Competitors (GM, Ford,
  Caterpillar, Komatsu, GE, Mitsubishi) Exploit
  Similarities Across Countries.
• They Manage Outsourcing in an Integrated Manner
  to Take Advantage of Scale Economies in Sourcing,
  Distribution and Product Development
• In Multidomestic Industries, Firms (Unilver,
  Colgate-Palmolive, and PG) Exploit Differences
  Among Countries.
• They Favor an Indigenous Sourcing System to Meet
  Heterogeneous Local Market Demands.

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A DECISION-MAKING FRAMEWORK FOR GLOBAL SOURCING

• PRINCIPLES OF OUTSOURCING
• Technologies That Promise Future Advantages and
  Are Still Emerging Should be Nurtured in-house.
• Labor-intensive, and Low Technology Components
  Should be Outsourced
• Patented, High-Technology Production Inputs
  Should be Internally Sourced
• Companies Never Outsource Their Core Competencies

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THE NEW DYNAMICS OF GLOBAL MANUFACTURING SITE
LOCATION

• Large and Sophisticated Overseas Markets Dictates
  a Global Presence for Leading Manufacturers
• Increasing Levels of Nontariff Barriers are
  Forcing Firms to Localize Production Resources
• Regionalization of Trading Economies is
  Increasing the Benefits to Decentralize
  Manufacturing Structures
• Exchange Rates and Other Aspects of Risks are
  Forcing Firms to be Flexible in Terms of Capacity
  and Locations
• The Emergence of Manufacturing Technologies and
  Methodologies such as Flexible Manufacturing
  Systems, Just-in-Time Manufacturing, and Total
  Quality Management have Reduced Scale, Increased
  the Importance of Worker Education and Skill, and
  Placed Demands on Local Infrastructure.
• The Need for Organizational Learning Has
  Increased the Benefits of Being Close to All
  Major and Sophisticated Markets.

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THE NEW DYNAMICS OF GLOBAL MANUFACTURING SITE
LOCATION

• PRINCIPLES OF SITE SELECTION
• Establish the Critical Success Factors of the
  Business, the Degree of Global Orientation
  Necessary, and the Required Manufacturing Support
  Role.
• Assess Options for Regional Manufacturing
  Configuration, Considering Market Access, Risk
  Management, Customer Demand Characteristics, and
  the Impact of Production Technologies on Plant
  Scale.
• Define a Set of Potential Sites, Primarily Based
  on Infrastructure, that Adequately Supports the
  Business and Manufacturing Strategies
• Rank the Most Cost-Effective Solutions, Using a
  Quantitative Analysis of Remaining Location
  Options, and Define the Manner of Operation.

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Indias New Multi Billion Dollar Export

• Software Development
• Call Centers
• Financial Analyses
• Medical Investigation

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Indias IT Exports A Model for Developing
Countries

• National Vision to Tap the Potential Global
  Trends
• World-Class Engineers and Scientists
• Global Network
• Case Study Microsoft It employs 20,000 Indian
  IT professionals in the US alone.
• Case Study NASA -- 60 of NASA Employees are
  of South Asian Origin
• Great Efficiency
• World-Class Quality
• Lowest Prices in the World

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Global Call Centers A New Phenomena in India

• English Speaking Talents
• Low Labor Cost
• Low Real Estate Cost
• Shrinking Cost of Global Telecommunication
• Network With Indian Americans
• A Large Number of Indian IT Professionals in the
  US

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Conclusion

• Developing Countries Have the Best Opportunities
  in the History of the World to Attract FDI and
  Participate in the Global Arena by Learning the
  Art of Global Production and Sourcing
• Global Sourcing Provides Them the Opportunity to
  Develop Their Economies Fast
• Key for Success -- Match Your Strengths with the
  Needs of MNCs as India has Done in the Field of IT