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Global Sourcing Strategy


Global Sourcing Strategy Key Points International Product Cycle Theory Trends in Global Sourcing Strategy Potential Pitfalls in Global Sourcing The Value Chain – PowerPoint PPT presentation

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Title: Global Sourcing Strategy

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
Strategy Long-term Consequences
International Product Cycle Theory
  • Global competition suggests a drastically
    shortened life cycle for most products, and no
    longer permits companies a polycentric,
    country-by-country approach to international
  • A frequently used framework to describe
    cross-national business practices is the
    international product cycle theory.

International Product Cycle Theory
  • 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.

International Product Cycle Theory (cont.)
  • However, three major limitations of the
    international product cycle theory have to be
    borne in mind
  • 1. Increased pace of new product introduction and
    reduction in innovational lead time, which
    deprive companies of the age-old polycentric
    approach to global markets
  • Innovations can make the global market
    perspective wrong

International Product Cycle Theory (cont.)
  • However, three major limitations of the
    international product cycle theory have to be
    borne in mind
  • 2. Predictable sourcing development during the
    product cycle, which permits a shrewd company to
    outmaneuver competition
  • Stable inputs may allow for cost savings

International Product Cycle Theory (cont.)
  • However, three major limitations of the
    international product cycle theory have to be
    borne in mind
  • 3. More active management of locational and
    corporate resources on a global basis, which
    gives a company a preemptive first-mover
    advantage over competition.
  • Assumes management matters

International Product Cycle Theory (cont.)
  • Emphasis on logistical management of the
    interfaces of RD, manufacturing, and marketing
    activities on a global basis global sourcing
  • Balance between drive for cost savings
    (standardization) and customization needed
  • The reality of global business is that the
    product life-cycle is not as predictable and
    stable as it once was

Trends in Global Sourcing Strategy
  • Trend 1 The Decline of the Exchange Rate
    Determinism 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
    rate fluctuations
  • Portfolio perspective of foreign operations

Trends in Global Sourcing Strategy
  • Trend 2 New Competitive Environment Caused by
    Excess Worldwide Capacity
  • Price, quantity and delivery now not so uncommon
    or important as are quality and uniqueness which
    lead to higher price expectations weakening FX

Trends in Global Sourcing Strategy
  • Trend 3 Innovations in and Restructuring of
    International Trade Infrastructure
  • More experienced purchasing managers
  • Improvements in transportation and communication
  • Finance availability and options
  • Global diffusion of manufacturing
  • Neighbouring country sourcing opportunities

Trends in Global Sourcing Strategy
  • 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

Trends in Global Sourcing Strategy
  • Trend 5 Trend toward Global Manufacturing
  • Globally dispersed facilities mean firms have no
    choice but to continue with global sourcing
    regardless of FX fluctuations

Potential Pitfalls in Global Sourcing
  • 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

Potential Pitfalls in Global Sourcing
  • Dilemma revisited in such terms as
  • standardization versus adaptation (1960s)
  • globalization versus localization (1970s)
  • global integration versus local responsiveness
  • scale versus sensitivity (1990s)
  • However, ability and willingness of companies to
    integrate have changed due to competitive urgency.

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.

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
    resource management, technology development, and
    other activities that help promote primary

The Value Chain (cont.)
  • Five continuous and interactive steps are
    involved in developing such a global sourcing
    strategy along the value chain.
  • 1. Identify the separable links (RD,
    manufacturing, and marketing) in the companys
    value chain
  • 2. In the context of those links, determine the
    location of the companys competitive advantages,
    considering both economies of scale and scope

The Value Chain (cont.)
  • 3. Ascertain the level of transaction costs
    between links 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 to each link in the value chain and to
    the relevant transaction costs
  • 5. Develop adequate flexibility in corporate
    decision making and organizational design so as
    to permit the company to respond to changes in
    both its competitive advantages and the
    comparative advantages of countries.

Functional Interfaces
  • Management of the interfaces, or linkages, among
    these value-adding activities is a crucial
    determinant of a companys competitive advantage.

Functional Interfaces
  • Global sourcing strategy encompasses management
  • The interfaces among RD, manufacturing, and
    marketing on a global basis and
  • Logistics identifying which production units will
    serve which particular markets and how components
    will be supplied for production.
  • RD/Manufacturing Interface
  • Manufacturing/Marketing Interface
  • Marketing/RD Interface

Logistics of Sourcing Strategy
  • Sourcing is used to describe the management by
    multinational companies of the flow of components
    and finished products in serving foreign markets.
  • Intrafirm Sourcing.  
  • Multinational companies procure their components
    in-house within their corporate system around the
  • Domestic in-house sourcing.
  • Offshore subsidiary sourcing.

Logistics of Sourcing Strategy
  • Outsourcing.  
  • Component procurement from overseas (offshore
    subsidiary sourcing and offshore outsourcing) has
    been a serious social and economic issue as it
    affects domestic employment and economic

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 material