INTERNATIONAL SOURCING: BEYOND SHOPPING AND FRANCHISING
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INTERNATIONAL SOURCING: BEYOND SHOPPING AND FRANCHISING
PAST INTERNATIONAL SOURCING PATTERNS BY US-BASED COMPANIESTWO MAIN PATTERNSINTERNATIONAL CATALOG SOURCINGsourcing from independent foreign vendorstransactions handled by purchasingcontracts awarded on cost, specifications, delivery reliability
INTERNATIONAL FRANCHISINGcore manufacturing dispersed internationallylocated close to customerslocal managers focus on serving local customers
MOTIVATING FACTORSCATALOG SOURCING: Low cost production of componentsFRANCHISING: Proximity to customers in industrialized countries
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BUT THE WORLD CHANGED IN THE LATE 1980sINTERNATIONAL COST DIFFERENTIALS IN A DECLINING TREND
JAPAN AND WESTERN EUROPE EQUALLY IMPORTANT SOURCES OF TECHNOLOGY AS U.S.
TRAVEL, COMPUTATIONAL AND COMMUNICATION TECHNOLOGIES ALLOW GREATER COORDINATION AMONG MFG. SITES
DIMINISHING INTERNATIONAL LABOR DIFFERENTIAL (1970-1985) Ratio of wages in a country to those in the US
Electrical
Shoes
1970
1985
1988
1970
1985
1988
Canada
.84
.87
.97
.75
.90
1.0
France
.44
.42
.50
.44
.62
.74
Ireland
N/A
.43
.49
.49
.63
.72
Japan
.22
.48
.92
.26
.70
1.3
Korea
.06
.13
.15
.06
.16
.19
Mexico
N/A
.13
N/A
.25
.26
N/A
Singapore
.07
.15
.16
.09
N/A
N/A
U.K.
.45
.50
.69
.60
.80
1.11
W. Germany
.45
.53
.90
.52
.76
1.29
THE RISE OF THE INDUSTRIAL TRIADDEMAND SIDE:markets similar in size and buying powerglobal productsSUPPLY SIDEdiminishing cost differentialsno individual company operating in one region can expect to be self-sufficient and world competitive for long, regardless of how much it invests in R&DEXAMPLESSpecialty chemical companymanufacturing network of six plantsWest German plant: enhanced product formula and process improvement for cost reductionJapanese plant: waste management techniques and efficient material utilizationSunbeam Appliance Companyiron that automatically shuts off when no movement (idea from Austrialian subsidiary)Oshar, small food processor (hear about its unsuccessful introduction to Europe
REQUIREMENTS FOR TRIAD-WIDE INNOVATIONMultidomesticor National innovationTriad-wide innovationNational and LittleInnovationLittle Innovationand InternationalCoordinationInnovationRatehighhighlowlowDegree of InternationalCompetition
NEW INTERNATIONAL MANUFACTURING CONFIGURATIONSFOR GLOBAL PRODUCTSexploitation of economies of scalecentral design and manufacturing for a product familydispersed location due to the use of different facilities for different product families
FOR GLOBAL CUSTOMERSTwo alternativesgeographic dispersion of the plants, high coordination across plantsa fixed assignment (one-to-one) of customers to plants
FOR HIGHER ACCESS TO INNOVATIONgeographic dispersion of plantsjoint engineering, design and development projects
WHY SHARING OF INFORMATION, TECHNOLOGY AND KNOWLEDGE IN INTERNATIONAL MANUFACTURING NETWORKS HAS BEEN DIFFICULTESTABLISHED REGIONAL ORGANIZATIONS AND COMPENSATION SYSTEMS
NOT INVENTED HERE (NIH) SYNDROME
ETHNIC, LANGUAGE AND NATIONAL DIFFERENCES
SUBSTANTIAL TRAVEL BUDGETS AND ROTATION OF EMPLOYEES
OFFSHORE SOURCING, SUBCONTRACTING AND MANUFACTURING
DIFFERENT FORMS OF OFFSHORE SOURCINGOFFSHORE PURCHASINGOFFSHORE SUBCONTRACTINGJOINT-VENTURE OFFSHORE MANUFACTURINGCONTROLLED OFFSHORE MANUFACTURINGOffshore purchasingOffshore subcontractingJV offshore mfg.Controlled offshore mfg.paymentProducts&/or partsTechnology,materialspaymentProducts&/or partsProducts&/or parts;profits &/or feesInvestment,capital, mgme,technology,materialspayment
SELECTION CRITERIA FOR THE FORM OF OFFSHORE SOURCINGCOMPANY CAPABILITIES AND RESOURCESInvestment capital requirementsManagement time investmentOffshore ExperienceAVAILABILITY AND CAPABILITIES OF SUPPLIERS OR PARTNERSAvailability of partners depends on: country, complexity of production, size of operationApparel vs. electronicsPROJECTED SOURCING VOLUME AND VARIABILITYLarge volumes, fixed investmentsSmall volumes, independent suppliersVariability favors purchasing or contractingDEGREE OF INTEGRATION OF OFFSHORE AND DOMESTIC OPERATIONSHigh level of integration, controlled offshore manufacturing
PRODUCTS SUITABLE FOR OFFSHORE SOURCINGLABOR INTENSIVE PRODUCTS (low skilled labor)
STANDARDIZED PRODUCTS (design, specifications and production technology do not change)
PRODUCTS WITH A PREDICTABLE SALES PATTERN (as opposed to products with abrupt shifts in demand)
PRODUCTS THAT ARE EASY TO SHIP AND FACE LOW IMPORT DUTIES
PRODUCT LIFECYCLE AND THE CHOICE OF TECHNOLOGY AND LOCATION OF PRODUCTION FACILITIESSTART-UP PHASELOCATE:near technologywhere production is easily controllednear material suppliers (if product not well defined)RAPID GROWTHconcentrate in one location to gain from learning and economies of scalemove towards marketsMATURITYlow cost laboroffshore facilities
EVALUATING PRODUCTION SITESLABOR FACTORSlabor costslabor availability (of the right kind)labor productivitylabor reliability and unionsINFRASTRUCTURE FACTORSIndustrial sitesTransportationLocal suppliers of goods and servicesGOVERNMENT POLICY FACTORSGeneral attitudes (for export-oriented foreign investment)Government regulationsGovernment incentives (favorable tax treatment, subsidized service, freedom of movement of goods, tax holidays, interest subsidies, etc.STABILITY FACTORSEconomic stability (inflation, currency)Political stability
COMMUNICATION PROBLEMS (AND SOLUTIONS) FOR OFFSHORE SOURCINGTIME ZONES ANDDISTANCElimit quality of communicationcreate distrustLANGUAGECULTUREparticularly for labor and government relationsLACK OF INTERNATIONAL EXPERIENCESOLUTIONSright peoplefrequent visits between US and offshore sites
SELECTION MATRIX: OFFSHORE VS. FDI
COUNTRY ENVIRONMENT
LOW
HIGH
ECONOMIC FACTORS
Market Size and Growth
OP
FDI
Labor Cost
FDI
OP
Labor Skill
OP
FDI
Local Managerial Capacity
FDI
OP
Infrastructure Adequacy
OP
FDI
POLITICAL FACTORS
Risk
FDI
OP
Government Receptivity to FDI
FDI
OP
Import Controls
OP
FDI
Capital Controls
FDI
OP
Price Controls
FDI
OP
CULTURAL FACTORS
Compatibility
OP
FDI
SELECTION MATRIX: continued
LOW
HIGH
COMPETITIVE SITUATION
Industry Concentration
OP
FDI
Relative Competitive Strength
OP
FDI
Local Barriers To Entry
FDI
OP
Cannibalization Risk
OP
FDI
PRODUCT
Maturity
FDI
OP
Brand Differentiation
OP
FDI
Line Diversity
FDI
OP
Service Intensity
OP
FDI
TECHNOLOGY
Matutity
FDI
OP
Stability
OP
FDI
Complexity
OP
FDI
Patentability
FDI
OP
GLOBALIZATION
Transnational Strategy
OP
FDI
TO FULLY AUTOMATE YOUR OFFSHORE PLANT , OR NOT :
THIS IS THE QUESTION!
USUAL MOTIVATIONS FOR FULL AUTOMATIONLOCAL GOVERNMENT (LDC COUNTRY) AND/OR PARTNER WANTS IT
COMPANY HAS EXPERIENCE WITH IT
TURNKEY PLANT, PROBLEM FREE (at least not labor problems)
AUTOMATED vs. SEMI-AUTOMATEDAvoids short-term management headachesGuarantees product quality (machine controlled quality)Lack of skilled labor may cause maintenance & set-up problemsAbsenteeism and turnover might be equally a serious problem (competitors hiring away skilled workers)Unprofitable substitution of labor for capitalUntested technology for primitive environmentsManagement finds it easier to operate (habit or experience)Better government relations (local labor employment)Better process design, same result (labor controlled quality)Absenteeism and turnover is always a problem.Training can be a serious expense
Profitable investments
Guadual introduction of technology
Development of management skills and useful process experience
POLICY GUIDELINES IN DEVELOPING THE PROPER MIX OF AUTOMATION & LABORCONTROL THE ENGINEERING BIAS
LOOK AT LOCAL TECHNOLOGIES
CONSIDER SECOND-HAND MACHINERY AND EQUIPMENT FROM LESS DEVELOPED COUNTRIES
REQUIRE JUSTIFICATION FOR ALL EXPENDITURES ON MATERIALS HANDLING EQUIPMENT
ELIMINATE THE BIASES IN REPORTING SYSTEMS
CHECK WHETHER THE COMPANYS STANDARD PLANTS ARE APPROPRIATE FOR LOW WAGE COUNTRIES
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