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Global Sourcing – A Strategic Business Activity

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Title: Global Sourcing – A Strategic Business Activity


1
Global Sourcing A Strategic Business Activity
  • Group 1

2
Presenters
  • Virendra Lamba Roll no 52 (Introduction)
  • Bedanta Choudhury Roll no 10 (General Trends)
  • Preetika Anand Roll no 28 (Offshoring )
  • Satish Menon Roll no 43 (Backsourcing)
  • IP Bharti Roll no 16 (Cost Factors)
  • M C Bhardwaj Roll no 20 (Cost Factors)
  • R K Datta Roll no 37 (Value Proposition
  • Sunil Kini Roll no 47 (Sourcing Issues)
  • Vandana Ray Roll no 49 (Conclusion)

3
Introduction
  • Global sourcing occurs when buyers purchase goods
    and/or services from sellers located anywhere in
    the world.
  • Global Sourcing is best defined as the process of
    identifying, evaluating, negotiating and
    configuring supply across multiple geographies in
    order to reduce costs, maximize performance and
    mitigate risks.

4
Introduction
  • Global Sourcing is a key ingredient for corporate
    survival.
  • Low cost labour,
  • Cheap international logistics
  • Less Regulated Operating Environments
  • Global sourcing helps companies reduce their
    costs by 10 to 35.
  • An engineer in the US costs 87 per hour, while
    the same skill set in India costs just 25.1. A
    successful transition results in an instantaneous
    cost savings of 70.
  • Sourcing decisions require companies to balance
    the tradeoffs
  • Cost, Performance and Risk

5
Introduction
  • Cost savings, however, are a one-time return.
    This offshore move brings a host of new
    challenges.
  • Wage inflation and attrition rates skyrocket as
    demand outstrips the supply of talent. (Ireland
    is already priced out of traditional help desk
    services. Indias rates are nearly doubling
    annually, as firms attempt to retain staff they
    have diligently trained.)
  • Companies are now looking beyond the one-time,
    cost-based decision to move offshore and are
    broadening the scope of their global sourcing
    strategy.
  • This includes expanding beyond the initial
    low-cost region into multiple locations around
    the world to mitigate inflationary or
    geopolitical risks..

6
Introduction
  • Outsourcing is not synonymous with offshore
  • The need is to explore a broader approach to
    achieving its development, production, and
    support goals
  • Discussions no longer center on cost.
  • The need is to address more strategic challenges
    of productivity, quality, and sustainability.

7
Introduction
  • Four-phased development process
  • Phase 1 Domestic purchasing only,
  • Phase 2 Foreign buying based on need
  • Phase 3Foreign buying as part of the
    procurement strategy
  • Phase 4 True global sourcing effort.

8
Introduction
  • The Fifth P
  • Strategic procurement concept with an
    international focus to reap economic advantage.

9
Introduction
  • This shift in perspective raises a host of new
    questions
  • Which markets offer the best short- and long-term
    potential ?
  • What about the geopolitical risks in emerging
    markets ?
  • Which partners provide the most stable coverage ?
  • Can we future-proof our sourcing model ?
  • What about communications between partners and
    internal staff ?
  • How will the global offices react to the new team
    ?

10
Global Sourcing Trends in Global Sourcing
  • Bedanta Choudhury
  • Roll no.10

11
Changing Role of Procurement
  • The buyer is becoming a strategic procurement
    officer.
  • The pain of non-strategic procurement removed by
    automating many buying processes, through
  • Portals, buying hubs smart cards which link
    directly into a companys back-office processes.
  • Efficiency in this area is added through tighter
    controls and measurement.
  • Long-term collaborative relationship with
    supplier

12
Trends in Services Sourcing (1/2)
  • The real secret of sourcing success is in
    "right-sourcing"
  • Choosing and then successfully implementing the
    right strategy for each organization at a
    particular point in time.
  • A trend that shows maturity in the IT Outsourcing
    market and continued above-average growth in BPO
  • Companies finding new areas beyond those
    traditionally considered as right for outsourcing
  • HR outsourcing (HRO)
  • Procurement Outsourcing (PO)
  • Finance Accounting Outsourcing (FAO)

13
Trends in Services Sourcing (2/2)
  • Increased prevalence of the various offshore
    delivery models will keep up pressure on pricing
    amongst the vendor community.
  • Key Indian vendors are intelligently reinventing
    themselves in order to retain market leadership
    by strongly moving towards onshoring activities
    from the current offshoring activities.

14
Manufacturing Sourcing
  • An appropriate manufacturing strategy could
    provide a competitive advantage in terms of cost,
    delivery, quality, innovation, and flexibility
  • The location of manufacturing has a strong
    implication on these, primarily on cost, delivery
    and flexibility
  • The economic impact of such practices is under
    great dispute,
  • Advocates claim that off-shoring has a positive
    impact on national productivity due to the access
    to cheaper services and products,
  • Opponents refer to the adversarial impacts of the
    resulting unemployment
  • Disputing the theorem that workers in the
    industrialized countries will be able to transfer
    to higher, more value-added activities once the
    basic manufacturing operations have been
    relocated.

15
Multi Sourcing
  • A greater desire for improved operational
    efficiency and accelerated growth of clients
    businesses is driving the sourcing strategy
  • Therefore organizations are looking increasingly
    at more integrated, less discrete sourcing
    options.
  • Customers are increasingly splitting up deals
    that would previously have been put with a single
    vendor with a aim to receive more flexible,
    best-of-breed services.
  • A key issue with multi-sourcing is that making
    it work requires strong but flexible governance,
    and more effort, resource and skills

16
Business Process Sourcing
  • The core of BPO has traditionally been the
    outsourcing of front and middle-offices and which
    still represents over 70 of the BPO market.
  • HR outsourcing, in fact underpinned the continued
    growth of the BPO market and is likely to fuel
    further growth in future.
  • Procurement outsourcing has been slow to achieve
    traction but customers are coming to realize that
    it offers the opportunity to secure a potential
    double benefit
  • Savings on operational costs at the time of
    outsourcing
  • Savings on goods and services procured through
    better re-negotiation with suppliers.
  • Typically, if a large organization's indirect
    spend accounts for 20 of revenue, and if an
    outsourcer can deliver savings on that around the
    10 mark, PO is an attractive proposition.

17
Global Sourcing Offshoring
  • Preetika Anand
  • Roll no. 28

18
Offshoring
19
Offshoring An overview
  • Offshoring the process of relocating business
    processes to lower-cost overseas destinations
    is a growing activity.
  • 11 percent of the 1.46 billion jobs worldwide
    have the potential to be performed remotely.
  • By 2008, total offshore employment will grow to
    approximately 4.1 million.
  • Experts predict that growth in the offshore
    marketplace will continue at the rate of over 30
    per annum.
  • India continues to lead the global sourcing
    picture.
  • However, many new countries such as Canada,
    China, Czech Republic, Hungary,
    Ireland,Philippines and South Africa are entering
    the market

20
Favorite offshore country is India
21
Comparison
22
Services being offshored
Consulting
Architecture, IT strategy, process, quality,
strategic sourcing
Applicationservices
Testing, App Dev, maintenance, production support
Infrastructureservices
Monitoring, server mgmt., DBA, DT mgmt
Businessprocess outsourcing
Contact centers, collection services, KPO
(research/analytics), mortgage processing, legal
services, tax preparation, claims processing
23
IT and BPO service
24
Geographic Trends
  • United States
  • It is estimated that 70 of offshoring comes from
    the US.
  • Outsourcing market is expected to grow by average
    of over 9 over 2005-10.
  • A key driver will be increased adoption of BPO as
    companies prioritize the outsourcing of key
    business processes.
  • Europe
  • UK is the second largest client country for
    offshoring services
  • UK remains the biggest market for BPO deals and,
    generally across Europe, demand for outsourcing
    is growing.

25
Geographic Trends
  • Asia
  • Sourcing market is supply-side driven.
  • Japan, remains the enigma of the sourcing market.
    According to a recent survey it is estimated
    that, 14.8 of Japanese corporations have used IT
    outsourcing for more than 3 years 19.8 have
    considered IT outsourcing but decided against it
    but a startling 50.9 of Japanese corporations
    are not currently considering the use of IT
    outsourcing.

26
Global Sourcing Backsourcing
  • Satish Menon
  • Roll no.43

27
BACKSOURCING
  • Everyone knows about outsourcing and the
    benefits it can bring if handled properly. But
    what happens when there is a clear shift in your
    business that signals you should be doing an
    outsourced function yourself?

28
BACKSOURCING
  • Backsourcing is bringing functions that were
    outsourced back into an organization.
  • Like outsourcing, backsourcing is expensive
    and should only be done when a full investigation
    of the alternatives has been undertaken and the
    decision to backsource is clearly the right one.

29
BACKSOURCING
  • Here are the Seven Practices of Backsourcing
    that should be considered.
  • 1. Ask, Why Did We Outsource?
  • The first best practice of backsourcing is
    to understand why the functions were outsourced
    in the first place so that the decision to
    backsource can be appropriately evaluated.

30
BACKSOURCING
  • Good reasons to outsource include
  • The function was non-core and it was outsourced
    to allow adequate time to be spent on core
    functions.
  • To reduce costs.
  • To access the providers state-of-the-art
    technology.
  • To improve customer satisfaction.
  • To obtain a competitive advantage.
  • To avoid capital expenditure.
  • To increase capacity.

31
BACKSOURCING
  • 2. Consider All Legal Issues
  • A key consideration when making the
    backsource decision is what the contract says
    about removing the outsourced business from the
    provider. Term of the relationship, notification
    period is required to remove the outsourced
    business, regulatory requirements?
  • 3. Gain Clear Commitment
  • The decision to backsource should be made
    with the understanding that your organization has
    made a commitment to reinvest in this portion of
    your business. If this commitment is not clear,
    the backsourcing decision needs to be
    reevaluated.

32
BACKSOURCING
  • 4. Figure Out What Has Changed
  • Chances are very good that the systems,
    functions and processes you outsourced are
    considerably different than the functions and
    processes you backsource.
  • Therefore, one of the most challenging
    hurdles to clear involves fully investigating and
    understanding if the knowledge base you had of
    the outsourced function is still the knowledge
    base needed to backsource the function today.

33
BACKSOURCING
  • 5. Plan, Plan, Plan!
  • Define your backsourcing team.
  • Define the backsourcing requirements.
  • Develop the backsourcing business plan and
    backsourcing schedule.
  • Assess skills and readiness to successfully
    backsource.
  • Establish a cooperative relationship with the
    current provider and define communication
    protocols.
  • Clarify roles and responsibilities and the legal
    relationship with the outsource provider.
  • Maintain a relationship with the outsourced
    provider of teamwork, open communications,
    cooperation, and collaboration.

34
BACKSOURCING
  • 6. Communicate, Then Communicate More
  • Notify the outsource provider of your
    decision to backsource as early as possible and
    communicate in a way that begets a culture of
    cooperation.
  • 7. Focus Contingency Planning on Customer
  • Never forget about the impact backsourcing
    can have on the customer. Develop a contingency
    plan to cover as broad a set of business
    continuity issues as is realistic.

35
Global Sourcing Cost Factors
  • I P Bharti Roll no 16
  • M C Bhardwaj Roll no 20

36
Global Sourcing Cost Factors
  • COST THE PRIMARY REASON FOR OUTSOURCING.

37
Global Sourcing Cost Factors
  • Other Cost Factors
  • - Multiple Vendors
  • - Source directly from OEMs
  • - Bulk Purchase ( Economy of Scale, Savings
    on ordering
  • costs)
  • However care need to be taken as
  • a) It adds to inventory cost
  • b) Storage facility limitations
  • c) Risk of theft and damage
  • d) Risk of obsolescence

38
Global Sourcing Cost Factors
  • Other Cost Factors (Contd)
  • Hidden Cost
  • High running / maintenance charges
  • No / Poor after sales service
  • Costly spares
  • Proprietary Technology
  • Attrition Cost
  • Management cost
  • Recurring Cost
  • Exchange Rate
  • Correct use INCOTERMS

39
While cost advantage was the initial attraction
  • Significantly favorable total transaction cost
    economics
  • Gross savings on factor cost up to 78
  • Net realized savings ranging between 25-60

Source McKinsey Global Institute
Source GECIS, FT Outsourcing to India Conference
November 2004
Source NASSCOM, Evalueserve Analysis Blended
rate for voice and non-voice operations
The above figures are indicative and the actual
costs savings could vary by process further
the cost advantage may be partially offset by
travel, transitioning and non-process
communication costs
40
Global Sourcing Cost Factors
  • Global sourcing cost factors can be segmented
    into six categories
  • Material Cost
  • - Price, setup, tooling, transaction and
    other costs related to
  • the actual product or service delivered.
  • Transportation Cost
  • - Transportation, drayage, fuel surcharges
    and other fees
  • included in a freight rate.

41
Global Sourcing Cost Factors
  • Inventory Carrying Cost
  • - Warehousing, handling, taxes, insurance,
    depreciation,
  • shrinkage, obsolescence, and other costs
    associated with
  • maintaining inventories, including the cost of
    money or
  • opportunity costs.
  • Cross-border taxes, tariffs, duties
  • - Often referred to as landed costs, which
    include duties,
  • shipping, insurance and other fees and taxes.

42
Global Sourcing Cost Factors
  • Supply Operational Performance
  • - The cost of noncompliance or
    underperformance, which, if
  • not managed properly, can offset any price
    variance gains
  • attained by shifting to an offshore source.

43
Global Sourcing Cost Factors
  • Recurring Costs
  • - There are some major recurring costs
    that need to be monitored.
  • Some of these costs are intangible and others
    are not, but all can
  • have a strong impact on any global sourcing
    initiative.
  • Price Creep
  • Efficiency Costs
  • Management Costs
  • Attrition Cost
  • Currency Hedging

44
Global Sourcing Cost Factors
  • Price Creep
  • - The cost of price creep is a tangible cost but
    may come as a surprise.
  • - Several vendors provide the lowest, most
    basic figures during the bidding process and
    systematically add in costs after the contract
    begins.
  • - Price creep can throw budgeting, ROI and cost
    calculations awry.
  • - To control price creep, define final
    deliverables and terms before the bidding
    process.

45
Global Sourcing Cost Factors
  • Efficiency Costs
  • - Efficiency cost is an intangible cost that is
    rarely captured.
  • - In any business relationship, both partners
    often work jointly to improve productivity- that
    is, to make the processes and work more
    efficient.
  • - However, in many cases the benefits of higher
    productivity are not passed on.
  • - This essentially means that you may be paying
    a higher rate, even when the cost of production
    has dropped.

46
Global Sourcing Cost Factors
  • Management Costs
  • - As processes move offshore, organizations
    often neglect to capture management costs
    associated with effectively running the
    co- sourced process.
  • - It is difficult to estimate these costs since
    the time required depends on the complexity of
    problems and is often spread out.
  • - For example, many companies many not know, how
    do they calculate the additional management
    time for late night or early morning conference
    calls?
  •  
  • - When supervising onsite staff, the time
    involved is often smaller since all processes
    are in one physical location. But with global
    sourcing, management costs are higher. Since top
    management usually devotes a lot of time in the
    initial stages of co-sourcing, costs are high.

47
Global Sourcing Cost Factors
  • Attrition Cost
  • - Attrition costs are hidden costs.
  • - Loss of talent not only means knowledge loss
    but also results in additional costs for
    training new personnel and lower productivity.
    Given the fact that global sourcing is growing
    at a rapid pace, human resources jump jobs
    quickly.
  •  

48
Global Sourcing Cost Factors
  • Currency Hedging
  • - Since costs are delivered from globally
    scattered locations, vendors may incur costs
    related to fluctuating local currencies.
  • - These costs may be passed on to the company by
    the vendor through a price increase.
  • - This cost is tangible but hidden and to keep
    these costs down it is best to keep these open
    and known to both the parties and settled in the
    best interest to both to keep the costs down in
    future.
  •  

49
Global Sourcing Value Proposition
  • R K Datta
  • Roll no 37

50
What is Value Proposition?
  • Every Industry is now driving down costs and
    developing products and services faster to meet
    new challenges.
  • The need to provide more value to customers
    (higher level of products and service and reduced
    costs) can be achieved thru Global Sourcing.

51
How Global Sourcing creates value
  • The emergence of world-class service providers
    around the world
  • Multi-tier suppliers, multiple country options -
    enabling clients to appropriately balance cost,
    control, quality risk
  • Maturing industry structure, highlighted by
    vendor consolidation and greater standardization
    of infrastructure elements.
  • Highest use of technology domain

52
How Global Sourcing creates value
  • To improve the financial position through cost
    savings that contribute directly to the bottom
    line.
  • Also makes companies more agile
  • Organizations are leveraging the latest model of
    outsourcing - Multi-sourcing - benefit from the
    skills and efficiencies of multiple vendors.
  • Access to huge trained pool of talent and end to
    end quality delivery.

53
Other factors in Value Creation
  • Technology makes much of the work of the modern
    organization placeless , paperless.
  • It no longer matters where information is
    processed, where accounting is done
  • Competition As competition intensifies,
    organisations must get more efficient and more
    effective to survive.

54
Global Sourcing Drivers
Improve Quality
Save Costs
Access Skilled Resources
Reduce Cycle-time
Source Globally
  • In the current economic environment cost
    savings has become an important aspect.
  • At the same time, quality remains an important
    consideration for companies.
  • Important avenue for scarce skills.
  • Cycle time reduced due to multi-vendors,
    multi-sourcing activities.
  • Globally competitive environments barriers
    across geographic regions reduced.

55
India Value Proposition
  • Indias telecom infrastructure between Chennai,
    Mumbai and Singapore, provides the largest
    bandwidth capacity in the world, with well over
    8.5 Terabits (8.5Tbs) per second.
  • With more than 250 universities, 1,500 research
    institutions and 10,428 higher-education
    institutes, India produces 200,000 engineering
    graduates and another 300,000 technically trained
    graduates every year.
  • 80 of the Worlds 117 SEI CMM Level-5 companies
    are based in India.
  • Indias GDP growth has been growing consistently
    at over 7.5 year on year and makes it the
    fastest growing economies.
  • Cheaper workforce than their Western
    counterparts. According to Nasscom, The wage
    difference is as high as 70-80 percent when
    compared to their Western counterparts.
  • Round-the-clock advantage for Western companies
    due to the huge time difference.

56
Global Sourcing Issues
  • Sunil Kini
  • Roll no 47

57
WTO Compliance
  • Important Factors
  • Pace and scope of globalization
  • Shifting economic and trade policies
  • Global sourcing as a means to control costs
  • The WTO is the only international organization
    dealing with global rules of trade between
    nations.
  • After 2005, all quota limitations have been
    lifted, changing the face of global sourcing
    dramatically.
  • Sourcing from any region covered by trade
    agreements formulated by WTO comes with potential
    significant advantages.
  • While one should not expect an immediate
    improvement in operating margins, full commitment
    will be essential to the global sourcing plans
    success.

58
Trade Agreements (1/4)
  • Broadly the trade agreements under WTO cover the
    following areas which directly impact global
    sourcing-
  • Benefits to importers
  • - To facilitate imports, imports must be allowed
    in without further restrictions upon payment of
    duties.
  • - Tariff bindings assure importers that their
    importing costs will not be increased by higher
    customs duties.

59
Trade Agreements (2/4)
  • Rights of domestic producers and importers.
  • Some Agreements require the legislation of
    member countries to provide certain rights to
    domestic producers and importers under their
    legal systems.
  • Rights of exporters
  • The rights which the Agreements create in favour
    of exporters is the right to give evidence for
    the levy of anti-dumping or countervailing duties
    during investigations in importing countries.

60
Trade Agreement (3/4)
  • Using WTO dispute settlement procedures
  • Knowledge of systems enable business communities
    to help their government to take full advantage
    of the WTO mechanism to monitor implementation of
    the Agreements and to settle differences and
    disputes

61
Trade Agreement (4/4)
  • Influencing Negotiations
  • Negotiations with important implications for
    trade are often held during the implementation
    stage, during periodic reviews to examine how the
    Agreements are operating.
  • Feedback from the business community also greatly
    assist governments in securing appropriate
    modifications to the Agreements

62
Global Sourcing Road Ahead
  • Vandana Ray
  • Roll no 49

63
Data Privacy and Secrecy
  • Around the world, governments are reacting in
    different ways to the issues posed by
    cross-border data transfers and data security
    breaches.
  • Failures in data security in a sourcing
    transaction will likely lead to some combination
    of fines, loss of customers, and potential
    litigation.
  • The real cost can be damaged reputation it is
    neither adequate nor acceptable to say "sorry,
    it was our outsourcing vendors fault that your
    account details got released".
  • More attention than ever before to strategies to
    anticipate and prevent data security breaches.
  • Going well beyond merely complying with the
    various laws on data privacy and protection of
    the laws of the outsourced country.

64
Road Ahead
  • Developing global sourcing strategy will bring
    enhanced capabilities, smoother projects
    greater control of the organization's destiny.
  • Majority of the companies have clear plans to
    significantly enhance their investment in the
    offshoring initiative.
  • Increasing evidence the term offshoring may
    soon be passé
  • pursuing a global sourcing strategy with the
    relentless pursuit of low cost, high quality
    locations around the globe
  • resilience and the assurance that they will not
    be held hostage to skill shortages/ wage
    increases in any one location.

65
Conclusion
  • Off-shoring is now deeply rooted and will
    continue to form part of many transactions
  • In coming years, offshore and onshore will become
    inextricably blended.
  • Offshore delivery models have forced suppliers to
    become more price-competitive clients are
    becoming more sophisticated and learning from
    their own and others deals and there are more
    external advisers to advise on correct
    approaches.
  • The key to success for companies considering
    sourcing projects is how to position themselves
    to maximize the value on offer in the sourcing
    market

66
Thank You
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