Chapter 16

Global Sourcing
International Business
Strategy, Management
& the New Realities
by
Cavusgil, Knight & Riesenberger

International Business: Strategy, Management, and the New Realities

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

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

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

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

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

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

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

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

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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.

International Business: Strategy, Management, and the New Realities

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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
International Business: Strategy, Management, and the New Realities

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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 suppliers manufacturing
processes
Vulnerability to opportunistic behavior by
suppliers
Limited ability to safeguard intellectual assets
International Business: Strategy, Management, and the New Realities

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Global Supply Chain Management

Global supply chain: the firms 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.
International Business: Strategy, Management, and the New Realities

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

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

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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
International Business: Strategy, Management, and the New Realities

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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
firms reputation
International Business: Strategy, Management, and the New Realities

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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
International Business: Strategy, Management, and the New Realities

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

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

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