Global Sourcing: Benefits, Cost and Risks

October 13, 2006

Andrew PalmerCentre for Logistics and Supply Chain ManagementCranfield School of Management

The Global Product Sourcing Project

1. Systematic review

2. Conduct case studies

3. Develop a global product sourcing model

A 1 year project sponsored by the Department for Transport

Sourcing Alternatives

OutsourcingLocal Production/

Insourcing

Offshore Outsourcing

Global Manufacturing

Make or Buy decisionMake Buy

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GLOBAL PRODUCT SOURCING

outsourc*

A Systematic Literature Review

Risk

Environment &Transport

Infrastructure

Global sourcing

Global sourcingSuppl* management offshor*International sourcingSuppl* network

Environment

Infrastructure

Transport*

Emissions

Freight

RiskUnpredict*HiddenVulnerab*ResilienceSecurityReliability

Supply chain management

sustain*

pollution

shipping

World GDP vs. Global Exports

0

5

10

15

20

25

30

1950 1960 1970 1980 1990 2000

World GDP Exports Volume

Source: WTO 2005

Scenarios in 2020

• Globalisation unbound– trade barriers progressively dismounted; accelerated technological

progress; integrated financial markets

• Controlled globalisation – further gradual trade liberalisation constrained by security concerns

and protectionist pressures

• Globalisation in retreat– protectionist sentiment thrives in a climate of insecurity

• Globalisation sunk – global markets disrupted, stagnant consumption; technical advances

dwindle; restrictions on trade, migration and investment

10%

65%

20%

5%

Source: Economist Intelligence Unit (2006) Foresight 2020: Economic, industry and corporate trends

Positive Aspects of Global Sourcing

• COSTS + EFFICIENCY

– Lower overall cost– Lower labour cost– Lower land and facility costs– Lower taxes– Greater standardisation

• STRATEGIC– Penetration of growth markets – Introduce competition between

suppliers– Improve environmental

compliance

• VALUE– Improved quality– Improved delivery reliability– Improved new product

introduction– Improved sharing of information– Uniqueness

Negative Aspects of Global Sourcing

• STRATEGIC– Loss of Knowledge– Piracy / Abuse of IPR– Unknown long term impact on

demand / supply– Language, cultural and time

issues

• COSTS + EFFICIENCY – Hidden costs (transport, travel,

corruption, order processing, translation, legal fees)

– Bureaucracy– Customs requirements– Complex coordination– Risk of supply disruptions– Risk of currency fluctuations– Long lead-times, higher inventory– Security issues

• VALUE– Quality problems– Lower responsiveness

• ENVIRONMENT AND CSR– Longer distances (effects on

pollution and congestion)– Abuse of the environment– Abuse of employees– Loss of jobs

Case Study Outcomes

• Global sourcing strategy is a combination of right location, for right quality at the right price

• Global sourcing has affected risk profile of companies in a positive way-more awareness of risk management (RM)

• However, there are no risk departments – project/strategic risk management are conducted by sourcing departments or people involved in the decision

• Various tools are used for (RM) – process mapping, critical paths, 3x3 matrix but needs more development

• Product lead is biggest risk to both as well as exposure of NPI, product liability, IPR

• Hence much of design is done in UK, and video conferencing and close collaborative relationships to mitigate risks

Case Study Outcomes

• Company A have incorporated transportation risk into their critical path mgt & work closely with their logistics team. Together they have lots of transparency in their supply chain – they know exactly when products are docked, at customs, etc

• Company B have strong ethical trading policies which have been developed by themselves. They are very concerned/aware about chemical usage on their products. They are shipping products, only flying in emergency supply.

• Company C’s 3PL’s take accountability of freight from factories to destination, port congestions etc

• Company D’s relationship with 3PL needs more development for better visibility as lead time is their biggest problem area

Risks of Global Product Sourcing

• SUPPLY RISK– Supply disruptions– Longer lead-times– Lower responsiveness– Quality problems

• PROCESS RISK– Communication problems– Quality problems post-

manufacture

• DEMAND RISK– Indirect effects on corporate

social responsibly can affect demand

• ENVIROMENTAL RISK– Natural disasters– Terrorism– Global pandemic– Strikes and demonstrations– Currency fluctuations– Travel longer distances (effects

on pollution and congestion)

• CONTROL RISK– Loss of knowledge– Piracy / abuse of IPR

Examples of Global Risk

• Supplier Disruptions– Fire at Phillips plant

(Albuquerque) affecting Nokia + Eriksson

– Bankruptcy at UPF-Thomson affecting Land Rover

• Process Risk– Vulnerabilities of IT: eg.

Viruses Love Bug, Melissa or denial of service attacks

• Demand Risk– Nike reputation affected by

alleged practices at suppliers

Examples of Global Risk

• Environmental– Kobe earthquake affected

major port– Global pandemic: Motorola

closed a plant in Singapore due to one worker being infected with SARS

– Strikes and demonstrations: eg. Protest in France

• Control Risk– General Motors (GM) lawsuit

against China's CheryAutomobile Co. for alleged piracy of a mini car

Examples of Global Risk

• Transportation– 10,000 containers a year are

lost overboard– Heavy seas can damage

containers and contents

The impact of supply chain glitches on shareholder value

Source: Singhal and Hendriks (2002) "How Supply Chain Glitches Torpedo Shareholder Value." Supply Chain Management Review

• Sample of 1,100 glitches (USA)• Average drop percent in stock 7.5%

when the glitch was announced• Average drop of 18.5 % when stock

price is measured starting two quarters before and ending two quarters after the glitch

• Sample of 1,100 glitches (USA)• Average drop percent in stock 7.5%

when the glitch was announced• Average drop of 18.5 % when stock

price is measured starting two quarters before and ending two quarters after the glitch

Model Overview

• Developed using Excel spreadsheet with macros• Global sourcing input parameters• Local sourcing input parameters• Database of fixed values being developed• Analysis to show

– total costs, time, emissions for manufacturer to DC flow – tabular and graphical

– cost of stock in transit and stockholding implications

– risk assessment

InlandCarrier

Port terminal

CustomsCustoms Port terminal

InlandCarrier

Buyer

{ {

Manufacturer

International shipping

Offshore Sourced Costs

Manufacturing costs

Cost of freight

Inter state taxes

Cross border tariffs

Port costs

Export documentation

Export duty

International freight cost

Port costs

Import documentation

Import duties &Taxes

Freight cost to DC

Plus Cost of supporting offshore sourcing

Cost of setting up terms of payment

Cost of compliance – security requirements such as audit trail and official regulatory documents

Cost of financing manufacturing

Sourcing / procurement

Quality control

DC space costs

Stock financing costs

Raw materials

Import and export dutiesTransportation

Environmental Implications

Gms CO2 per metric tonne km Air (short haul <

452kms)

Air (medium haul 452 to 1600

kms)

Air (long haul > 1600 kms)

Sea (inland ship)

Sea (ocean ship)

Road (40 tonne HGV - diesel)

Rail (Diesel loco)

Rail (Electric

loco)

WRI-WBCSD GHG Protocol Initiative, June 2003

1,580 800 570 35 10 30 20 40

NTM, Sept 2005 1,925 867 633 - 15 33 17 1

INFRAS/Univ. of Karlsruhe (TRENDS1 database) - External Costs of Transport, Oct 2004

31 91 38 19

AP Calc based on 2.7kgs CO2/litre & 8 mpg (29.4 l/100km)

28

AP Calc based on 2.7kgs CO2/litre & 6 mpg (29.4 l/100km)

38

Values to be used in GSP model 1,580 800 570 33 13 30 20 -

673

The Model…

Conclusions from the study so far..

• Risk prevention and management should be central to the sourcing decision

• Lack of consensus on positive and negative aspects or outsourcing– Many contradictions– Likely to be differences across industries

• Limited consideration of environmental and transport factors in sourcing decisions

• Limited knowledge of the true cost of global product sourcing

Global Sourcing: Benefits, Cost and Risks

October 13, 2006

Thank you.Any questions?