MODULE-II- Global Sourcing Strategy

8/7/2019 MODULE-II- Global Sourcing Strategy

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MODULE-I

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 StrategyLong-term Consequences


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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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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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(cont.) However, three major limitations of the

international product cycle theory have to beborne in mind:

1.Increased pace of new product introductionand reduction in innovational lead time, whichdeprive companies of the age-old polycentricapproach to global markets

Innovations can make the global market perspectivewrong


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2.Predictable sourcing development during theproduct cycle, which permits a shrewdcompany to outmaneuver competition

Stable inputs may allow for cost savings


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3.More active management of locational andcorporate resources on a global basis, whichgives a company a preemptive first-moveradvantage over competition.

Assumes management matters


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(cont.) Emphasis on logistical management of the

interfaces of R&D, manufacturing, and marketingactivities 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 productlife-cycle is not as predictable and stable as itonce was


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Trend 1: The Decline of the Exchange RateDeterminism 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 ratefluctuations

Portfolio perspective of foreign operations


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Trend 2: New Competitive Environment Caused byExcess Worldwide Capacity

Price, quantity and delivery now not so uncommon or

important as are quality and uniqueness which lead tohigher price expectations weakening FX concerns


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Trend 3: Innovations in and Restructuring ofInternational 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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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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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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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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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 tointegrate 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 resourcemanagement, technology development, and other

activities that help promote primary activities.


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The Value Chain (cont.)

Five continuous and interactive steps areinvolved in developing such a global sourcingstrategy along the value chain.

1. Identify the separable links (R&D, manufacturing,and marketing) in the companys value chain

2. In the context of those links, determine the

location of the companys competitiveadvantages, considering both economies of scale

and scope


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The Value Chain (cont.)

3. Ascertain the level of transaction costs betweenlinks 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 toeach link in the value chain and to the relevanttransaction costs

5. Develop adequate flexibility in corporate decision

making and organizational design so as to permitthe company to respond to changes in both itscompetitive advantages and the comparativeadvantages of countries.


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Management of the interfaces, or linkages,among these value-adding activities is acrucial determinant of a companys

competitive advantage.


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Global sourcing strategy encompassesmanagement of

The interfaces among R&D, manufacturing, and

marketing on a global basis and Logistics identifying which production units will

serve which particular markets and howcomponents will be supplied for production.

R&D/Manufacturing Interface Manufacturing/Marketing Interface

Marketing/R&D Interface


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Logistics of Sourcing Strategy

Sourcing is used to describe themanagement by multinational companies ofthe flow of components and finished products

in serving foreign markets. Intrafirm Sourcing.

Multinational companies procure theircomponents 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 andeconomic issue as it affects domesticemployment 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 materialcosts.

Documents

MODULE-II- Global Sourcing Strategy