Chapter 16 Global Sourcing International Business Strategy Management

Chapter 16 Global Sourcing International Business Strategy, Management & the New Realities by Cavusgil, Knight & Riesenberger International Business: Strategy, Management, and the New Realities 1

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. International Business: Strategy, Management, and the New Realities 2

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. International Business: Strategy, Management, and the New Realities 4

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. International Business: Strategy, Management, and the New Realities 5

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. International Business: Strategy, Management, and the New Realities 6

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. International Business: Strategy, Management, and the New Realities 7

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. International Business: Strategy, Management, and the New Realities 8

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). International Business: Strategy, Management, and the New Realities 9

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. International Business: Strategy, Management, and the New Realities 10

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. International Business: Strategy, Management, and the New Realities 12

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 International Business: Strategy, Management, and the New Realities 15

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 International Business: Strategy, Management, and the New Realities 16

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 (3 PLs) as well as independent logistics service providers such as Fed. Ex, TNT, and UPS are useful facilitators. International Business: Strategy, Management, and the New Realities 17

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. International Business: Strategy, Management, and the New Realities 20

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. International Business: Strategy, Management, and the New Realities 21

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 International Business: Strategy, Management, and the New Realities 22

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 International Business: Strategy, Management, and the New Realities 23

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 International Business: Strategy, Management, and the New Realities 24

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. International Business: Strategy, Management, and the New Realities 25

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. International Business: Strategy, Management, and the New Realities 26