Chapter Four

GLOBAL SOURCING

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Chapter Objectives

 Upon completion of this chapter, students are

expected to:
 understand and appreciate the concepts of
global sourcing.
 recognize the importance and challenges of
global sourcing.

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4.1 Sourcing Process and Principles

 This section deals with the definition of procurement,

purchasing, and sourcing which can be differentiated
as follows (see Fig. 4.1).
 Purchasing is “the process of procuring the proper
requirement, at the necessary time, for the lowest
possible cost from a reliable source”.
 Purchasing deals mostly with commercial activities
and is related to transactional, ordering processes.
 Procurement covers a broader scope than purchasing
and covers both acquisitions from third parties and
from in-house providers.
 It also involves options appraisal and the critical
“make-or-buy” decision.
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 Sourcing needs to be understood as the entire “set of business processes
required to purchase goods and services”.
 The correlated activities range e.g., from the selection of suppliers, to
drawing up contracts, product design and collaboration, to evaluation of
supplier performance.
 Broadly speaking, sourcing is the process of establishing and managing
supplier relationships in the SC.
 In the narrow sense, sourcing is related to the activities and processes
which provide the enterprise with materials, services, capital equipment,
means of production, tools and supplies for work, etc. from external
suppliers or partners.
 In practice, sourcing integrates the strategic and operative decision-
making levels and coordinates supply strategy, procurement, and
purchasing activities.
 It is a fundamental element of SCOM as it is the linking process which
provides the organization with the inputs required for the creation of their
products or services.

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 Sourcing is a very important activity in the SC.
 The purchased parts and materials can account for over 60%
of the cost of finished goods; for retail companies within the
SC this can be as high as 90%.
 The quality of purchased material, costs of goods bought,
delivery of goods or services on time, supplier management,
and supplier relationships are some of the factors that have a
significant impact on SC performance and place particular
demands on procurement managers.
 As sourcing is a very important and broad subject, this
chapter focuses on the principles, processes and
organizational factors around sourcing strategies in SCOM
and related activities.

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Fig. 4.1 Purchasing, procurement, and sourcing [adopted with changes
from Mangan et al. (2008)]

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4.2 Global Sourcing

 Global sourcing refers to buying the raw

materials or components that go into a company’s
products from around the world, not just from the
headquarters’ country.
 Emerged with the increasing level of globalization
of businesses
 Taking off in the 1980s, global sourcing became
one of the major trends of the 21st century.
 One of the basic characteristics of the supply
chain of most of the modern business
organizations is the high degree of dependence on
global suppliers.
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 Global sourcing, which differs from
international buying in scope and complexity,
involves proactively integrating and
coordinating common items and materials,
processes, designs, technologies and suppliers
across worldwide purchasing, engineering,
and operating locations.
 Global sourcing is not only a starting point of
logistical activities, but is also a set of
managerial activities.
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 The process of global sourcing is a long-term
strategy, which includes the evaluation and
selection of foreign potential suppliers, while
international purchasing involves daily
activities supporting manufacturing and
services departments.

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Figure…From Domestic Purchasing, International Purchasing to Global
Sourcing

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4.3 Supplier selection Decision in global
sourcing
 Supplier selection is a vital aspect in the
performance of global sourcing implementation.
 Unlike dealing with domestic suppliers, the costs
involved in identifying, selecting, and evaluating
foreign suppliers can be prohibitive.
 Supplier selection and evaluation have an
important role in the supply chain process and are
crucial to the success of a manufacturing firm.

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Cont’d
 Factors to be considered while selecting suppliers are
as follows:
 Product and process technologies
 Willingness to share technologies and information
 Quality
 Cost
 Reliability
 Order system and cycle time
 Capacity
 Communication capability
 Location
 Service

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Single vs Multisource

 When making global-sourcing decisions, firms

face a choice of whether to sole-source (i.e.,
use one supplier exclusively) or to multisource
(i.e., use multiple suppliers).
 The balance of sourcing from two or more
suppliers has been a common supply strategy
to diversify risk.
 However, the trend is shifting toward the use
of a more collaborative single sourcing.
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 The advantages and disadvantages of the use of
sole and multisource are summarized below
 Sole-Sourcing Advantages
 Price discounts based on higher volume
 Rewards for loyalty during tough times
 Exclusivity brings differentiation
 Greater influence with a supplier

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 Sole-Sourcing Disadvantages
 Higher risk of disruption
 Supplier has more negotiating power on price

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 Multisourcing Advantages
 More flexibility in times of disruption
 Negotiating lower rates by pitting one supplier
against another

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 Multisourcing Disadvantages
 Quality across suppliers may be less uniform
 Less influence with each supplier
 Higher coordination and management costs

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4.4 Supply Channels Decision

 The next step after deciding to source globally

is to decide what supply channels to use.
 The following are alternatives of global
sourcing/ channel selections:
i. Global trade intermediaries
ii. International procurement offices
iii. Direct Suppliers
 Generally speaking using an intermediary is
the simplest way to source globally.

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i. Global Trade intermediaries

 The typical intermediaries are:

a. Import merchants:
b. Commission houses
c. Agents or representatives
d. Import brokers
e. Trading companies
f. Subsidiaries

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a. Import merchants:
 Buy goods for their own account and sell
through their own outlets.
 Since they assume all the risks of clearing
goods through customs and performing all
the intermediate activity, their customers are
relieved of import problems and, in effect,
can treat such transactions as domestic
purchases.
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b. Commission houses:
 Usually act for exporters abroad, selling in
the host country and receiving a commission
from the foreign exporter.
 Generally do not have goods billed to them
 Handle many of the shipping and customs
details

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c. Agents or representatives:
 Are firms or individuals representing sellers.
 Seller pays their commission.
 Generally handle all shipping and customs
clearance details,
 Do not assume financial responsibility of the
principals.

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d. Import brokers:
 Act as a bridge between buyers and sellers from
different nations.
 Their commissions are paid by sellers for locating
buyers and by buyers for finding sources of
supply, but they are not involved in shipment or
clearance of an order through customs.
 They also may act as special purchasing agents
for designated commodities on a commission
basis.
 Like agents, import brokers do not assume any of
the seller’s financial responsibilities.
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e. Trading companies:
 Are large companies that generally perform
all the functions performed individually by
the types of agencies previously listed.

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f. Subsidiaries:
 Are established by multinational corporations in
countries where a physical presence is needed to
improve competitive capability and/ or meet host
government restrictions.
 Such type of sourcing is sometimes known as
internal sourcing and carried out on “intrafirm”
contractual basis.
 Subsidiaries usually start with a large percentage of
expatriate managers competent in the local language,
which lessens over time as qualified managers from
the host country are developed.

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ii. International procurement Offices

 An international procurement office (IPO),

also called an international purchasing office
is an office in a foreign country that is owned
and/or operated by the parent company in
order to facilitate business interactions in the
foreign country and surrounding region.
 IPOs normally are established as cost centers,
charging a percentage markup (typically 2
percent) for their services.
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 IPO employees physically and personally
evaluate suppliers, negotiate for price and
other terms, and monitor quality and job
progress through direct site visits.
 These offices work to improve supplier
capability by accessing and applying proven
programs and facilitate understanding of in-
country trade and regulatory requirements, as
well as cultures.
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iii. Direct suppliers

 Direct procurement requires the involvement

of the company in all aspects of the
transaction.
 It eliminates the markups of global trade
intermediaries.
 But it requires an investment in travel,
communications and logistics.

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 Direct relations with the supplier should be
undertaken only after carefully conducting a
cost/benefit analysis.
 Before taking such action, the sourcing
company must ensure that it is set up to handle
items such as traffic, customs clearance, and
international payments.

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4.4 The Concept of Global outsourcing

 Outsourcing is the act of purchasing goods

and services that were originally produced in-
house from an outside supplier.
 Outsourcing is not new; for decades
companies have outsourced as a short-term
solution to problems such as an unexpected
increase in demand, breakdowns in plants and
equipment, testing products, or a temporary
lack of plant capacity.
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 However, outsourcing has become a long-term
strategic decision instead of simply a short-
term tactical one.
 Companies, especially large, multinational
companies, are moving more production,
service, and inventory functions into the hands
of suppliers.

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 Many companies are outsourcing as a strategic
move so that they can focus more on their core
competencies, that is, what they do best.
 They let a supplier do what the company is not
very good at and what the supplier is most
competent to do.

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 Outsourcing describes the deliberate movement of a
series of connected business processes to a third party
who manages them on behalf of the company.
 The classic processes were IT, warehousing and
distribution, facilities management, and payroll, and
to these can now be added: call centres,
manufacturing, web-development, home shopping,
credit cards, and even merchandising and design.
 In these movements the commercial risk and assets
are usually passed to the outsourcing company.

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 However, not all companies refer to the
process of business process management
transfer as outsourcing; for some, they are
just buying a service or a series of
products.
 In this case the transfer of assets is
unlikely.
 The definition of outsourcing does not imply
abdication of responsibility.
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 For example:
 In Toyota Company, the world car producer, while
70% of the inputs used in car assembly are
outsourced, only 30% of them are in-sourced.
 The company designs and produces 100% of the
engine.
 While 100% of transmission is designed by
Toyota, but produced by outside suppliers, 100%
of vehicle electronic systems are designed as well
as produced by external supplier.

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 Generally speaking outsourcing can offer
compelling advantages including:
 Lower costs,
 Greater flexibility,
 Enhanced expertise,
 Greater discipline, and
 The freedom to focus on core business
activities.

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Figure…. Outsourcing decision matrix (Vitasek 2010)

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4.5. Offshoring

 Offshoring and outsourcing are two different

things.
 Offshoring is just moving something to an
offshore location whether you have made it before
or not.
 In contrast, outsourcing is moving something you
have made to an outside supplier whether
domestically or offshore.
 This gives rise to four possibilities.
 See Table below for all four possibilities.

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 Offshore is a term that refers to a product made in a
foreign country.
 It may not literally be made offshore (e.g., products
made in Mexico for export to the United States).
 A product that was made in-house before it was
outsourced to China is both outsourced and offshored
at the same time.
 There also are offshored products made from the start
in a foreign location, and thus never outsourced.
 For example, a U.S. clothing designer contracts with
a clothing manufacturer in Taiwan to make the spring
collection for sale in the U.S. (lower left-hand corner
in Table above)
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4.6. Reshoring

 Reshoring is bringing services or products back to the

home country after moving them earlier to offshore.
 This happens when the economic benefits of
producing offshore are no longer advantageous.
 Typically, wages increase much faster in the offshore
location than the home country.
 As the wage rates become more equal, the product
will be either moved to another lower wage country
or back to the home country.
 Currency differences, tariffs, and transportation costs
can also cause a company to reshore its products or
services.

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 Reshoring is occurring in some cases because
of increases in the supply chain risks
associated with quality or delivery.
 Some companies seek to shorten their supply
chain by moving products back onshore or
closer to the home market (i.e., near shoring)
thereby reducing stock in transit and risks
associated with a long supply chain.

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 There has been a progression of industries moving
offshore.
 The earliest example was the textile industry moving
from England to the U.S. in the 1800s.
 In the 1900s, textiles moved from the U.S. to Japan
and then from Japan to other Asian countries.
 Similar migration has occurred for television and
electronics.
 The latest migration is products and services moving
from China to other Asian countries and in some
cases back to the U.S or European countries.

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Chapter Summary

 Global sourcing refers to buying the raw

materials or components that go into a
company’s products from around the world,
not just from the headquarters’ country.
 It involves decision of channels of supply, in
addition to selection of suppliers.

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 When making sourcing decisions, companies
must decide whether to sole-source (i.e., to use
one supplier exclusively) or to use two or more
suppliers.
 Sole-sourcing can bring advantages of price
discounts based on volume and may give the
company greater influence over a supplier or
preferential treatment during times of constrained
capacity sole-sourcing can also bring advantages
of differentiation or high quality.
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 The disadvantages of sole-sourcing, however,
are that the company faces a higher risk of
disruption if something happens to that
supplier.
 Also, the supplier may hold more negotiating
power on price.

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 Few companies, especially ones with a global
presence, are self-sufficient in all of the
activities that make up their value chain.
 Growing global competitive pressures force
companies to focus on those activities they
judge as critical to their success and excel at-
core capabilities in which they have a distinct
competitive advantage-and that can be
leveraged across geographies and lines of
business.
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 Which activities should be kept in house and
which ones can effectively be outsourced
depends on a host of factors, most prominently
the nature of the company’s core strategy and
dominant value discipline.

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 Outsourcing is the act of purchasing goods
and services that were originally produced in-
house from an outside supplier.
 Many companies are outsourcing as a strategic
move so that they can focus more on their core
competencies, that is, what they do best.

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