Global Sourcing Strategy

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Global Sourcing Strategy
Key Points International Product Cycle
Theory Trends in Global Sourcing
Strategy Potential Pitfalls in Global
Sourcing The Value Chain Functional
Interfaces Logistics of Sourcing
Strategy Long-term Consequences
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International Product Cycle Theory

• Global competition suggests a drastically
  shortened life cycle for most products, and no
  longer permits companies a polycentric,
  country-by-country approach to international
  business.
• A frequently used framework to describe
  cross-national business practices is the
  international product cycle theory.

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International Product Cycle Theory

• According to the theory, changes in inputs and
  product characteristics toward standardization
  over time determine an optimal production
  location at any particular phase of the products
  life cycle.

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International Product Cycle Theory (cont.)

• However, three major limitations of the
  international product cycle theory have to be
  borne in mind
• 1. Increased pace of new product introduction and
  reduction in innovational lead time, which
  deprive companies of the age-old polycentric
  approach to global markets
• Innovations can make the global market
  perspective wrong

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International Product Cycle Theory (cont.)

• However, three major limitations of the
  international product cycle theory have to be
  borne in mind
• 2. Predictable sourcing development during the
  product cycle, which permits a shrewd company to
  outmaneuver competition
• Stable inputs may allow for cost savings

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International Product Cycle Theory (cont.)

• However, three major limitations of the
  international product cycle theory have to be
  borne in mind
• 3. More active management of locational and
  corporate resources on a global basis, which
  gives a company a preemptive first-mover
  advantage over competition.
• Assumes management matters

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International Product Cycle Theory (cont.)

• Emphasis on logistical management of the
  interfaces of RD, manufacturing, and marketing
  activities on a global basis global sourcing
  strategy
• Balance between drive for cost savings
  (standardization) and customization needed
• The reality of global business is that the
  product life-cycle is not as predictable and
  stable as it once was

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Trends in Global Sourcing Strategy

• Trend 1 The Decline of the Exchange Rate
  Determinism of Sourcing
• Foreign sourcing occurs for non-cost reasons
  i.e. access to technology
• Difficulty of dropping overseas suppliers
• Domestic suppliers may increase prices when they
  know their customers dont have a choice
• Long-term relationships tend to survive exchange
  rate fluctuations
• Portfolio perspective of foreign operations

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Trends in Global Sourcing Strategy

• Trend 2 New Competitive Environment Caused by
  Excess Worldwide Capacity
• Price, quantity and delivery now not so uncommon
  or important as are quality and uniqueness which
  lead to higher price expectations weakening FX
  concerns

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Trends in Global Sourcing Strategy

• Trend 3 Innovations in and Restructuring of
  International Trade Infrastructure
• More experienced purchasing managers
• Improvements in transportation and communication
• Finance availability and options
• Global diffusion of manufacturing
• Neighbouring country sourcing opportunities

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Trends in Global Sourcing Strategy

• Trend 4 Enhanced Role of Purchasing Managers
• Purchasing now considered strategic ? more of a
  role and resources to do their job better ? will
  still get lowest cost/highest quality regardless
  of FX fluctuations
• JIT production so ingrained into production
  processes that stores of inventory no longer held
  ? requires constant influx of raw materials to
  keep business operating

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Trends in Global Sourcing Strategy

• Trend 5 Trend toward Global Manufacturing
• Globally dispersed facilities mean firms have no
  choice but to continue with global sourcing
  regardless of FX fluctuations

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Potential Pitfalls in Global Sourcing

• Conflict between unification and fragmentation -
  a close-knit operational strategy with similar
  foreign units versus a loosely related, highly
  variegated family of activities.
• Diverse activities are still inhibitors rather
  than facilitators of cost savings

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Potential Pitfalls in Global Sourcing

• Dilemma revisited in such terms as
• standardization versus adaptation (1960s)
• globalization versus localization (1970s)
• global integration versus local responsiveness
  (1980s)
• scale versus sensitivity (1990s)
• However, ability and willingness of companies to
  integrate have changed due to competitive urgency.

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The Value Chain

• The collection of activities that are performed
  by a company to design, manufacture, market,
  deliver, and support its product is called the
  value chain.

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The Value Chain

• The value chain can be divided into two major
  activities performed by a company 
• (1) primary activities consisting of inbound
  logistics (procurement of raw materials and
  components), manufacturing operations, outbound
  logistics (distribution), sales, and after-sale
  service, and
• (2) support activities consisting of human
  resource management, technology development, and
  other activities that help promote primary
  activities.

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The Value Chain (cont.)

• Five continuous and interactive steps are
  involved in developing such a global sourcing
  strategy along the value chain.
• 1. Identify the separable links (RD,
  manufacturing, and marketing) in the companys
  value chain
• 2. In the context of those links, determine the
  location of the companys competitive advantages,
  considering both economies of scale and scope

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The Value Chain (cont.)

• 3. Ascertain the level of transaction costs
  between links in the value chain, both internal
  and external, and selecting the lowest cost mode
• 4. Determine the comparative advantages of
  countries (including the companys home country)
  relative to each link in the value chain and to
  the relevant transaction costs
• 5. Develop adequate flexibility in corporate
  decision making and organizational design so as
  to permit the company to respond to changes in
  both its competitive advantages and the
  comparative advantages of countries.

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Functional Interfaces

• Management of the interfaces, or linkages, among
  these value-adding activities is a crucial
  determinant of a companys competitive advantage.
  

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Functional Interfaces

• Global sourcing strategy encompasses management
  of
• The interfaces among RD, manufacturing, and
  marketing on a global basis and
• Logistics identifying which production units will
  serve which particular markets and how components
  will be supplied for production.
• RD/Manufacturing Interface
• Manufacturing/Marketing Interface
• Marketing/RD Interface

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Logistics of Sourcing Strategy

• Sourcing is used to describe the management by
  multinational companies of the flow of components
  and finished products in serving foreign markets.
  
• Intrafirm Sourcing.  
• Multinational companies procure their components
  in-house within their corporate system around the
  world.
• Domestic in-house sourcing.
• Offshore subsidiary sourcing.

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Logistics of Sourcing Strategy

• Outsourcing.  
• Component procurement from overseas (offshore
  subsidiary sourcing and offshore outsourcing) has
  been a serious social and economic issue as it
  affects domestic employment and economic
  structure.

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Long-term Consequences

• Two opposing views of the consequences of
  offshore outsourcing
• Strategic Alliances
• Maximizes specialized competences
• Dependence
• Creates uncertain environment for independent
  suppliers, increasing production and material
  costs.