Made by:Nikhil chabra Priyank vaish Saumya tripathi

5/5/2012 contract manufacturing or global sourcing 1

What is contract manufacturing

Definition

the procurement of products or services from independent suppliers or company-owned subsidiaries located abroad for consumption in the home country or a third country. also called global procurement or global purchasing, global purchasing, global sourcing amounts to importing-an inbound flow of goods and services.

5/5/2012

contract manufacturing or global sourcing

Key drivers especially responsible for the growth of global sourcing in recent years
Technological advances

Widespread access to vast information including growing connectivity between suppliers and the customers Declining communication and transportation costs Entrepreneurship and rapid economic transformation in emerging markets.

5/5/2012

contract manufacturing or global sourcing

Sourcing for the dell inspiron notebook

5/5/2012

contract manufacturing or global sourcing

One should outsource or not

Managers must decide whether each value-adding activity should be conducted in-house or by external, an independent supplier. i.e. between internalization and externalization Should we make a product or perform a particular valuechain activity ourselves or should we source it from outside manufacturers

5/5/2012

contract manufacturing or global sourcing

Why firms outsource:

firms generally are not superior at performing all primary and

support activities.
Most value adding activities(manufacturing , marketing, after

sales service) candidates for outsourcing

Historically outsourcing involved the acquisition of raw material,

parts and components now it has extended to include the procurement of services as well.
5/5/2012 contract manufacturing or global sourcing 6

Different types of sourcing

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.

Back-office activities Front-office activities

Captive Sourcing
Captive sourcing refers to sourcing from the firms own production facilities located abroad. Production is carried out at a foreign facility that results from the focal firm FDI activities. Fr eg : genpact
5/5/2012 contract manufacturing or global sourcing 7

The nature of outsourcing and global sourcing

Value adding activity is internalized
Value adding activity kept in home country Value adding activity conducted abroad(global sourcing) A
keep production in house ,in home country

Value adding activity is externalized(outsourced)

B Outsource production to third party provider at home D Outsource production to a third-party provider abroad(contract manufacturing or global sourcing from independent suppliers)
8

C Delegate production to foreign subsidiary or affiliate(captive sourcing)

5/5/2012

contract manufacturing or global sourcing

These decisions depend largely on the strategic importance of the particular activity to the firm
R&D design Component Manufacturi manufacturin ng or g assembly
Low imp. Low-medium imp.

Marketing and branding

Very imp.

Sales distribution and logistics

Medium imp.

Customer service
Medium imp.

Imp. Of this activity to the firm as a strategic asset Likelihood of internalizing rather than outsourcing this activity Geographic config. : overall tendency to locate activity at home or abroad

Very imp.

high

low

Low-medium

high

Low-medium

Low-medium

Usually concentrated at home

Usually dispersed across various market

Usually concentrated at few markets

Branding concentrated at home ; marketing concentrated or dispersed to individual markets

Dispersed to individual markets

Dispersed to individual markets, except call centers, which are often concentrated

5/5/2012

contract manufacturing or global sourcing

Whos the more popular global source? INDIA or CHINA

ChinaManufacturing

Large amount of skilled, low cost labor 350,000 engineers graduate each year Huge domestic market with rapid, sustainable growth Government attitude changing toward probiz Weak on IP Language and culture are challenging Lacks quality infrastructure Government bureaucracy IndiaServices (e.g., backshop)

5/5/2012 contract manufacturing or global sourcing 10

Key players in global sourcing by regions

Central & eastern Chiana & south europe asia Top-ranked countries Czech republic,bulgaria, slovakia,poland,h ungary Romania,russia,u kraine,belarus Luxoft(russia),E PAM systems(belarus),s oftline(ukraine),d ata art(russia) Latin america & the caribbean Middle east And africa India,chiana,mala Chile,brazil,mexic Egypt,jordan,unit ysia,philippines,si o,costa Rica, ed Arab ngapore,thailand Argentina emirates,ghana,tu nisia,dubai Indonesia,vietna m,sri lanka NCS(singapore),bl uem,neusoft group,broadengat e systems(chiana) Jamaica,panama, South Africa, nicaragua,colombi israel,turkey,moro a cco Softek(mexico),ne Xceed(egypt),ness oris(mexico),polict technologies ec(brazil),DBA (israel) acess(venezuela)
11

Up-and-comers

Emerging local providers

5/5/2012

contract manufacturing or global sourcing

Offshoring
The relocation of a business process or entire manufacturing facility to a

foreign country. The 2005 Offshore Location Attractiveness Index by A.T. Kearney

Identifies 9 emerging markets in its list of the 10 most attractive offshoring

suppliers: India, China, Malaysia, Philippines, Singapore, Thailand, Czech Republic, Chile, Canada, and Brazil. In addition to Canada, the other advanced economy in the top 20 destinations is the U.S. (11 th ). The index emphasizes various criteria:

Countrys financial structure (compensation costs, infrastructure costs, tax and regulatory costs); Availability and skills of people (cumulative business-process experience and skills, labor force availability, education and language, and worker attrition); and Nature of the business environment (the countrys political and economic environment, physical infrastructure, cultural adaptability, and security of intellectual property).

5/5/2012

contract manufacturing or global sourcing

12

Benefits of global sourcing:

Cost efficiency is the traditional rationale for sourcing abroad. The

firm takes advantage of labor arbitrage the large wage gap between advanced economies and emerging markets. One study found that firms expect to save an average of more than 40% off baseline costs as a result of offshoring. These savings tend to occur particularly in R&D, product design activities, and back-office operations such as accounting and data processing.

5/5/2012

contract manufacturing or global sourcing

13

Risk in global sourcing:

1. Less-than-expected cost savings . Conflicts and misunderstandings arise

because of differences

2. Environmental factors . Environmental challenges e.g., exchange rate

fluctuations, labor strikes, adverse macro-economic events, high tariffs and other trade barriers, and high energy and transportation costs.
enforcement regarding intellectual property, which can lead to erosion of key strategic assets. business-process knowledge with foreign suppliers
contract manufacturing or global sourcing

3. Weak legal environment . Many popular locations have weak laws and

4. Risk of creating competitors . As firms share its intellectual property and

5/5/2012

14

Continued..
5. Inadequate or low-skilled workers . Employees may lack

KSAs or high rapid turnover of skilled employees.

6. Over-reliance on suppliers . Unreliable suppliers may put

earlier work aside when they gain a more important client.

7. Erosion of morale and commitment among home-country

employees . Global sourcing can create a situation in which employees are caught in the middle between their employer and their employers clients.
5/5/2012 contract manufacturing or global sourcing 15

Minimizing risks:
Firms ought to go offshore for the right reasons . The best rationale is strategic. Cost-cutting

is often a distraction from more beneficial, long-term goals such as enhancing the quality of offerings, improving overall productivity, and freeing up knowledge workers and other core resources that can be redeployed to improve long-term performance.

Need to get employees on board . Global sourcing tends to invite opposition from employees

and other organizational stakeholders. Disaffected middle managers can undermine projects. Poorly planned sourcing projects can create unnecessary tension and harm employee morale.

Choose between a captive operation and a contract with outside specialists carefully .

Strike the right balance between the organizational activities that it retains inside the firm, and those that are sourced from outside. Choose countries and suppliers carefully . A common reason for global sourcing failure is that both buyers and suppliers tend not to spend enough time upfront to get to know each other well.

5/5/2012

contract manufacturing or global sourcing

16

Continued
The focal firm needs to invest in supplier development and collaboration . The

parties need to exchange information, transfer knowledge, troubleshoot, coordinate, and monitor.

Managers need to proactively safeguard interests:

Encourage the supplier to refrain from engaging in potentially destructive acts that jeopardize the firms reputation. Escalate commitments by making partner-specific investments (such as sharing knowledge with the supplier), allowing for ongoing review, learning, and adjustment. Share costs and revenues by building a stake for the supplier so that, in case of failure to conform to expectations, the supplier also suffers costs or foregoes revenues.
contract manufacturing or global sourcing 17

5/5/2012

For Example parting out 787

5/5/2012

contract manufacturing or global sourcing

18

5/5/2012

contract manufacturing or global sourcing

19