International Business and Trade GM0112, Global Sourcing (I) What is global sourcing? Global sourcing strategies Bent Petersen Visiting Professor 1 Global.

International Business and TradeGM0112, Global Sourcing (I)

What is global sourcing?

Global sourcing strategies

Bent PetersenVisiting Professor

1Global Sourcing - Fall 2010

http://www.storrey.com/images/pages/globalsourcing.jpg

Contents of today’s lecture

1. What is global sourcing?

2. Overview and trends of global sourcing

3. Global sourcing choices and strategies:– The WHAT question– The WHERE question– The HOW question


What is global sourcing?


What is global sourcing? A very broad definition includes import and foreign

sourcing for local use. However, for this course we suggest a narrower

definition: Firms’ use of foreign resources for global use. Global sourcing level V (Trent & Moncka, 2005):

Integrated and coordinated sourcing, not only among worldwide buying locations, but also across functional groups (such as R&D, operations and marketing).


Global sourcing and Dunning’s FDI motives

Global sourcing is not market seeking or horizontally organized subsidiaries...

...but may include: Resource seeking Efficiency seeking Strategic asset seeking (Dunning, 1980 &

1993)


Global sourcing – of which activities? For many activities - such as day care,

nursing, transportation, gardening - global sourcing is not feasible at all; these activities are inherently local activities.

However, all goods and services that can be transported or transmitted (digitization!) at reasonable costs are amenable to global sourcing.


A value chain approach

Presumably, MNC managers consider global sourcing in relation to individual value added activities.

Michael Porter’s value chain includes 9 distinct business activities that may differ significantly in terms of scale and scope economies, transaction costs/risks, resource requirements, and strategic importance.


Value Creation Logics

Not one generic, but several business sector specific value creation logics:

The value chain of manufacturing firms (Porter, 1985).

The value shop of consulting firms (Stabell and Fjeldstad, 1998).

The value network of banks and telecommunication firms (Stabell & Fjeldstad, 1998).


A value chain (Porter, 1985):

SUPPORT ACTIVITIES

PRIMARY ACTIVITIES

MARGIN


Dispersed value chain configuration(“multi-domestic MNC”)

Denmark

SalesSales

Germany

US Subsidiary

Sweden (HQ)


Concentrated value chain configuration(“globally integrated MNC”)

China

Manufacturing

IT

India

Denmark

Sweden

R&D

HRM

M&S

Norway


Concentrated value chain configuration precipitates an integrated network (Bartlett &

Ghoshal, 1989)


Some company examples…

….of mainly dispersed value chain configuration Carlsberg Isover Ikea… of mainly concentrated configuration Logitech Inc GN Resound


GN ReSound’s concentrated value chain configuration

Cork: Distribution and

production.

København: Headquarter. R&D, Brand development and production.

Bloomington: Administration, distribution, sales and marketing

Chicago: Salg og marketing, and R&D.

Xiamen: Production (largest factory).


Sourcing (onshore-offshore)

Location

Operator

Home country

Foreign country

Ourselves Onshore sourcing

FDI /Captive offshoring

ContractualPartner

Onshore outsourcing

Offshore outsourcing

J/V

globallocs.jpg


Global sourcing: Overview and trends


Offshoring of services– Global trends

Source: McKinsey Global Institute, 2005

Number of service jobs worldwide: 1.46 mia Number of service jobs that theoretically can be

carried out as remote services: 160 mio Offshored jobs until 2003: 1.5 mio

In 2003 US and UK firms represented around 70% of all offshored service activities.

India’s world market share of ”Business Process Offshoring” (including IT) is almost 50 %.


Offshoring – Global trends


What Drives Firms’ Global Sourcing? Improved transportation technology

(reversed by increasing energy prices) Advances of IT (digitization!) Market integration (lower trade barriers and FDI

restrictions) Product modularization techniques Increased global competition Improved market institutions, such as:

Intellectual property right protection Industry standards Certification, accreditation

October 4 19Global Sourcing - Fall 2010

Configuration of value chain activities

Coordination of value chain activities

Dispersed Concentrated

Low

High

Lower coordination (I&CT) and transportation costs

Market Integration

Porter’s (1986) global value chain framework

Shrinking factor cost differentials

Global sourcing

Oc 20Global Sourcing - Fall 2010

Local GlobalRegional

Arm’s length(procurement)

Contractual(outsourcing)

Equity (FDI)

Value chain specialization(Global sourcing)

Low (dispersed configuration/ sparse coordination)

Geographical expansion of sales(The Psychic Distance phenomenon)

Resource commitment to foreign sales effort

(The Establishment Chain phenomenon)

High (concentrated configuration/ extensive coordination)


Re-Configuring the Value Chain MNCs are in the process of a dual

transformation of their value chains:1. A surge from dispersed to concentrated

configuration strategies in which global sourcing plays a vital role.

2. A surge in direction of a more fragmented and modularized value chain in which offshore outsourcing plays a prominent role.


Typical US TNC re-configuration pattern

0. Point Zero: Dispersed, un-coordinated TNC units.1. Establishment of (regional) Shared Services

Centers Consolidation in terms of scale economies and transparent cost structures.

2. Fragmentation and modularization of value chain activities.

3. Decision about location (on/near/off-shore?) and ownership (captive/JV/outsourced?).


TNC example: American Express

1990s: 46 sites carrying out travel related services.– Process duplication and inconsistencies– Lack of customer focus– Inflexible, legacy applications

1993: 3 regional shared services centers in Phoenix USA, Brighton UK, Gurgaon India.

2000s: The Indian captive center provides services to Amex units outside Asia, thereby becoming a global sourcing center.


Global sourcing choices and strategies:

The What, Where and How questions


http://images.google.dk/imgres?imgurl=http://www.gingersolutions.co.uk/images/orangutan_260.jpg&imgrefurl=http://www.gingersolutions.co.uk/global.htm&h=340&w=260&sz=37&hl=da&start=118&um=1&usg=__iYfVR3_FY3N36gz9H0NMM3v90Tk=&tbnid=9aQYeYuMSLkv6M:&tbnh=119&tbnw=91&prev=/images%3Fq%3Dglobal%2Bsourcing%26start%3D105%26ndsp%3D21%26um%3D1%26hl%3Dda%26sa%3DN

The WHAT question

What should be sourced locally - and what in central hubs serving the MNC as a whole?

Which value chain activities should remain in the home country and which should be re-located to foreign destinations?

Theory, literature streams: RBP, open sourcing/innovation literature, information economics.


The WHERE question

Global Sourcing - Fall 2010 27

Where should value chain activities that cannot be retained (or developed) economically in the home country be moved to?

Closely related to the question of partner selection.

Theory: Economic geography (including global SCM/logistics and agglomeration economies), institutional theory.

The HOW question

How to organize the re-location? What should be the governance structure of

value added activities (re-)located abroad? Make-or-buy? JV?

Theory/literature streams: TCEs, organizational learning literature


Example: Different business models of the Danish apparel industry


International Business and Trade GM0112, Global Sourcing (I) What is global sourcing? Global sourcing strategies Bent Petersen Visiting Professor 1 Global.

Documents

global sourcing strategies

gardening global sourcing

global sourcing choices

trends of global sourcing

foreign sourcing

coordinated sourcing

global use

onshore sourcing fdi