Professional Documents
Culture Documents
www.sagepublishers.org
Abstract
Globalization has a significant effect on how firms produce and deliver products to their
customers versus the desire to achieve competitive sustainability through continually increasing
profit margins. It is evident that role of procurement within global companies has changed
dramatically over the past 25 years from that of simply buying goods and services to overseeing
an integrated set of management functions which brings new challenges and opportunities to
procurement. Off shoring and the increased emphasis on specialization and fragmentation of
production enhance the strategic character of procurement decisions. To achieve Best-in-Class
performance, companies thus, measure key operational and customer-facing metrics, adopt
global common practices, reporting structures, and metrics and centralize knowledge
management across service operations. Earlier research has demonstrated mixed results when
sourcing globally in that some companies experience favorable performance outcomes while
others do not. This research, will seek to discuss the changes in procurement from the
perspective of global sourcing and how globalization has influenced the procurement function at
KTDA in relation to these subject. A qualitative research design was undertaken of which the
research population based on KTDA, both male and female employees. Since it was a case
study, the research was limited to KTDA only. A census consisting of 2 administrator, 4
supervisors heads of department and 18 other employees participated in the study which totaled
to manageable population of 18 subjects; subject to consideration of the Procurement profession
and Engineering demographics, the instrument were distributed accordingly. The research
instruments used were questionnaires and interviews. Data was collected using an initial pilot
questionnaire to ascertain its validity to gather relevant information to the study, which was later
modified and sent electronically to obtain more data from the earlier identified research sample.
Face to face and telephone interviews then followed to clarify the responses given in the
questionnaires. These data was scored, tabulated and, analyzed using SPSS computer software.
Percentages and frequencies were calculated according to the categories. Procurement is a
dynamic function in an organization as it describes, organizes and combines the activities that
acquire goods and services. KTDA Holdings move to penetrate international markets
successfully requires a seamless procurement policy that is both dynamic to address both local
and international supply chain requirements. The key recommendation were that a global
sourcing company should constantly monitor and control, forecasting demand against lead times
and costs, and heavily investing in good relation with its service providers by mapping out the
current supply chain helps measure the potential risks as each of this may in the long run
adversely affect its performance.
Keywords: Globalization; Sourcing; Global sourcing; Offshoring; Procurement; Performance;
Client; Effective; Efficiency.
76
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
Introduction
Organizations are exposed to global forces of demand, supply, and international market
competition, their relevance to global issues concerns, demographic changes and political
developments instead of remaining protected by local environment. Stakeholders' interests are
accordingly affected also by the net impact of the same set of factors instead of being merely
subject to local situations and trends (Wikipedia, 2010); Those who cannot adapt to the global
forces sooner or later lose their relevance and struggle to survive. Those who adjust and change
as the globalization proceeds convert global opportunities into strategies that strengthen them
and make them continuously relevant and deal with the threats from the environment more
effectively. Global sourcing concerns issues central to any supply chain strategy: what
constitutes the key elements of a supply chain strategy, where to locate factories, where to source
components and how to configure products, strongly impacted on any globalization effort. (Hill,
1985). Zenz (1994) defines sourcing as the strategic philosophy of selecting vendors in a manner
that makes them an integral part of the buying firm for a particular component or part they are to
supply.
To paraphrase this definition, sourcing can therefore be interpreted as a strategic decision of a
company to build up close relationship with its suppliers as a means of improving competitive
advantages, a notion discussed at length with respect to the distinction between adversarial and
collaborative supplier relations (Merli, 1991; Lamming, 1993; Hines, 1994; MacBeth and
Ferguson, 1994; Helper and Sako, 1998). In general, international sourcing is the the
acquisition of raw material components and subassemblies from international sources for use in
fabrication, assembly or for resale, regardless of whether the import source is internal or external
to the company (Kotabe and Omura, 1989). Liu and McGoldirck (1996) further distinguish
international sourcing from traditional importing. They posit that International sourcing implies
that retailers tend to be more proactive in the acquisition of sources of supply and their own
strategies dominate decision making as to where, when, what, how much, and from whom to
buy. Traditional importing is designed in such a way that, retailers often play a passive role in
obtaining merchandise, with suppliers taking the initiative of providing the goods. Off shoring on
the other hand is the creative and careful leveraging of new and available pools of skilled labour
abroad, while exploiting communication technologies to link these to domestic demand
(Venkatraman, 2004). Companies that are considering offshore sourcing will investigate which
of their processes are location independent and if its the best location. Bronfenbrenner and Luce
(2004), says that the number and extent of production shifts out of the United States has
increased significantly since 2001, as companies are shifting production to multiple offshore and
near shore destinations at the same time. In that sense, offshoring refers primarily to decisions
related to manufacturing rather than sourcing strategy, although the former will have secondary
effects on the sourcing of components and materials.
Kenya Tea Development Agency Ltd is the Leading Management agency for the small scale tea
farmers in Kenya. It was founded upon the privatization of Kenya Tea Development Authority
and now manages a total of 65 tea processing factories located across all of Kenyas tea growing
counties. These factories are owned by 54 Tea Factory Companies, whose shareholders are the
more than 560,000 small-scale tea farmers who are also the suppliers of the leaf. KTDA
77
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
Holdings has the following subsidiaries: KTDA (Management Services) Ltd, Chai Trading
Company, Majani Insurance Brokers, Greenland Fedha Microfinance Company, KTDA Power
Company Ltd, KETEPA and the KTDA Foundation The Kenya Tea Development Agency
(Holdings) Ltd has today announced record earnings by smallholder tea farmers of Ksh. 61.4
Billion, a 12.5 per cent rise from the last financial year. The total payout to farmers from this
revenue rose to Ksh45.3 billion, which is the highest ever. This is the fourth year in a row of
record-breaking performance, with revenue surpassing the Ksh54.6 Billion record achieved in
the 2010-2011 financial year and payout to farmers increasing by Ksh4.8 Billion from the
Ksh40.5 Billion paid last year. The results are.......attributed the impressive results to better tea
prices, favorable exchange rates, effective cost management by the tea factories, efficient
management and higher tea production (Daily Nation, 2012)
The cost of operation increased by 15 per cent to Ksh77.71 per kg of made tea from Ksh67.47
recorded in the previous year and KTDA has embarked on a number of initiatives aimed at
reducing energy costs, such as development of small hydro power stations, and others to
diversify revenue streams (Daily Nation, 2012). To remain competitive and to increase its market
share, KTDA has offices in Dubai and Kigali where it has expanded business with fully
operational SC structures who are subject to implementing policies and regulation of the head
offices and help the KTDA Holdings penetrate international markets successfully.
For years companies have been transforming their domestic supply chains and have harvested
double digit reductions in cost per unit handled in areas like transportation (Bob .H., July 2010).
Supply chains that were once purely domestic have now gone international as an increasing
number of shipments flow across borders and supply and demand imbalances increase. But the
harvested reductions from supply chain transformation are largely tapped. What companies are
realizing is that many of the benefits derived from their finely tuned or optimized domestic
supply chains are being cancelled out by their poorly performing global supply chain (Bob .H.,
January 2011).The globalization of business is the best thing to happen to supply chain
management (SCM) in the last 30 years. This seemingly bold statement is made not because
globalization has made SCM any easier quite the contrary. Driven by overwhelming market
forces, globalization has forced countries and companies to become more efficient, creating the
infrastructure and competitive advantage necessary to survive the early rounds of a brawl that
will undoubtedly go beyond the last bell (L. Gardner, 2004).
In increasing Procurement Spend in LCC, leading companies expect to double the spend volume
in LCC over the next 3 years; from 14% to 28% resulting to an increase in overall savings to
10% of total procurement spend in an organization through cost reductions averaging 19% from
14% to 28% and total cost of ownership reductions averaging 12%. Unfortunately, global
sourcing is not without risks i.e. lengthened supply lead times, increased transportation and
logistics costs, supplier delivery concerns, supplier quality, intellectual property, lack of supplier
responsiveness and language issue. This ultimately results to increase inventory Investment up to
3% and Increased Transportation / Logistics cost of up to 2% (Spear, 2010).
78
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
Global sourcing creates challenges for retailers, considering that no one has figured out how to
make the Pacific Ocean smaller, KTDA mostly uses sea transport especially when it come to the
procurement of heavy machinery like steam pipes and boilers for its factories and other
machinery used in the construction of hydropower generating projects. As sea transport is the
most appropriate means of transporting such bulky materials, but slow considering its impact on
lead times, which usually affects the timely completion of projects (Bob, 2010). Sourcing for
potential suppliers at times can be a strenuous experience especially instances where the local
market cannot supply key materials. For instance, the packaging materials and paper sacks are
globally sourced due to the nature of their specification of which the local market is yet to meet.
The challenge here is that the sources are limited against the international need which threatens
the ability of the SC to enjoy the effect of economies of scale despite purchasing in bulk and
negotiating for better offers (Bob, 2010).This approach does not only omit the additional supply
chain costs incurred due to reduced flexibility and inefficiencies in responding to demand
changes, but it doesnt, consider additional risks such as currency fluctuations or political
instability. Many are the times when shipment delays due to unforeseen supply chain
interruptions result to escalation of clearing charges, a way higher than anticipated despite the
careful planning and forecast. Moreover there is stiff competition for the same resources from
other buyers in the global market which complicate supplier relations, cultural differences and
legal issues that always threaten to break the smooth operation of the SC (Bob , 2010). This
study shall be guided by two objectives; the general and specific objective. The general objective
of the study shall be to assess the effect of globalization on sourcing. The specific objectives of
the study will be:
i.
ii.
iii.
iv.
Theoretical Review
Transaction Cost Economics
The transactional cost economics (TCE) school has been widely used in management research,
and seems particularly suited to the analysis and evaluation of global sourcing and
manufacturing strategies. For example, Dunning (1980) evaluated the significance of ownership
and location specific variables in international production. He investigated that the basic
incentive of a firm to internalize its capital, technology, management skills itself to produce
goods rather than externalize their use by engaging in portfolio investment, licensing and so on.
It was to avoid the disadvantages of external mechanisms and market imperfections, which arises
whenever negotiation or transaction costs are high.
Product Life Cycle
A second theory closely related to global sourcing and manufacturing is the life cycle theory, as
the decision where to manufacture products varies considerably over its life span. Nokia, the
Finnish mobile phone manufacturer for example will manufacture the early series of its products
79
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
in Finland at product launch, and once established, will hand volume production to contract
manufacturers located in the Baltic and in China, and at the end of the life span (in some cases)
even taking production back in-house as they become close to withdrawing the product from the
market.
Firm competitive advantage
The competitiveness of high-technology and knowledge-intensive firms is greatly affected by the
globalization phenomena. First, due to the often high R&D costs, it is of utmost importance to
spread these over a large number of markets, including the rapidly emerging markets. Second,
the ongoing global trade liberalization and regional integration into different trading blocks
around the world has further decrease trade and investment-related restrictions. Third,
technological advances and technical standardization have indeed resulted to the drive in
globalization (Levitt, 2010). The impact of globalization is based on the industry technology lifecycle phase, such as whether the industry is in an era of fermentation and rapid growth or an era
of incremental growth and maturity (Anderson and Tushman, 2009.
The resource based view
The resource-based theory deepens our understanding of how resources are applied and
combined to achieve a sustainable competitive advantage, which is crucial in global competition.
Barney (2010) has postulated that the firm should go beyond the traditional analysis of internal
and external environment and analyze the potential of its resources to generate sustainable
competitive advantage.
The eclectic model
Economics-based literature can help us to understand the suitability of the response strategies
based on efficiency considerations. One of the most common approaches is the eclectic model
or the OLI (ownership, location and internalization) model by Dunning (199 2a, 199 8). It
stipulates that multinational companies (MNCs) have a competitive resource or ownership
advantage as compared with their competitors; they utilize it when establishing production
facilities in locations (i.e. target countries) that are attractive due to their location advantage.
Ownership advantage is equivalent to competitive advantage in Porters terminology.
Conceptual framework
The conceptual framework, deals with the dependent and independent variables. The
independent variable is globalization, while the dependent variable is sourcing.
Organizational factors
Sourcing- supply chain
performance (Dependent variable)
Delivery reliability (time)
Quality
Asset management
Profitability
Responsiveness
Cost factor
Service factor
Physical factor
Competition
80
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
81
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
Outcome
Customer service
Operations related costs
Improved supply chain visibility
Increased market share
Financial year
201000/2011
(In %)
58
70
72
79
2011/2012
(In %)
69
60
75
85
2012/2013
(In %)
80
52
85
90
It is important to note that over the past 3 financial years, KTDA has been able to achieve its
objective activities in a continually gradual manner as presented in the graph below on Figure.3.
A clear indication of how much the company has been able to achieve.
Figure 2: Objective Activities Performance over past 3 financial years
83
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
To
small
extent
a To a
moderate
extent
Analyzing current
costs and performance
Exploring the strategic implications
Compiling the request for proposal
Visiting providers site
Checking reference on the provider
Negotiating terms and condition of contract
Developing exit provision
Developing service level agreements
Developing guidelines to
resolve issues/disputes
Managing new relationships
To a
large
extent
To a
large
extent
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
Geographical/global responsiveness
Historical performance
Technology advancement
Security and safety
Maintenance policies and procedure
Management/employee expertise and effectiveness
Cost of service and discounts
Total organization involvement
Range of services offered
Mutual trust and cooperation
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
Competitive Drivers
More countries are becoming key competitive battlegrounds; this far Kenya (KTDA) is ranked 3
largest tea exporting country in the world. To be able to successfully compete they have to
constantly monitor market needs versus constantly improving supply chain visibility. KTDA as a
firm now has had to be international oriented rather than nationally centered hence the opening
of offices/ Factories at Rwanda and the United Emirates.
Government drivers
Market liberalization and privatization of KTDA has so far enabled it efficiently manage the
supply chain, ensuring efficient procurement and production of tea and supply to Europe, Asia,
North Africa and the Middle East. By ensuring quality high production the firm has been able to
comply at least 95% with international recognized environment and social standard.
The effect of globalization to Kenya Tea Development Agency
Cost reduction: KTDA today is the largest single producer and exporter of made tea in the
country accounting for 28% of Kenyas exporting earnings and also the second largest exporter
of black tea in the world. Being in the manufacturing industry, KTDA through global sourcing
has redoubled its efforts to become more efficient and innovative, both to stay competitive in
mature markets, and to capitalize on growth opportunities in the emerging world.
As a result it has deepened its relationships with its global manufacturer achieve 40% cost
saving. The cost saving is also a result of purchasing large quantities of quality machinery as
better rate opposed to purchasing them locally.
Transfer of skills & competencies: More overseas supplier partnership have enabled the firm
acquire high tech machinery for its factories and used the same outsources skills to install
successful and in the long run train its own human capital to be as competent.
Competitive advantage and access to new technologies: For instance, KTDA has been able to
source and procure economically packaging materials and even move economically from 2 ply to
3ply packing bags which are of high quality and durable hence offering the necessary protection
to product. Initially the packaging materials were purchased from local suppliers who could not
maintain the required quality and efficiently meet the required target without compromising the
quality aspect.
86
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
Immerging issues
On a scale of 1-10 (1-being less problematic and 10- extremely problematic), the following
challenges cited by the procurement staff were rated as follows:
Table 5: Challenges experienced rating
Potential problems
Long delivery times for materials
components or service
Fluctuations in supplier performance
Risks of exchange-rate fluctuations
No local presence in the sourcing region
Inability to source from local markets
Finding suitable suppliers
Lack of the knowledge and organization to
determine the total costs of a Global Sourcing
project
Political uncertainties
Availability of information about Global
Sourcing from other business units
Spoilage/natural wastage of goods during
transport
Average rating
4.80
4.44
4.28
4.19
3.99
3.82
3.77
3.50
2.44
1.91
87
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
threats or supplier knock-offs that might be in the works and, lastly, see that their products are
being made to their specifications.
Source to a country where you can understand the language-: Communication is crucial
when dealing with global supply sources as details matter and thats what quality is all about.
KTDA doesnt take chances especially when doing business in foreign countries where language
could be a barrier. They not only have invested in training its staff foreign languages, but have
successfully managed to employ a pool proficient in foreign languages or expatriates.
Source from a country that upholds human right and general trading laws-: KTDAs
strategy is based on a thorough analysis of the pros and cons of its sourcing alternatives e.g.
sources from countries where legal protection is available and the laws are clear, easy to comply
with and enforced if broken.
Success factors
Various factors that have made a positive contribution to the success of a Global Sourcing
strategy at KTDA have been as a result of maintain a high level of standardization of the product
sourced. In the research among procurement target sample, the respondents confirmed that their
critical success factors are as follows:
Sufficiently qualified staff to support the Global Sourcing process
KTDA has heavily invested in training locally and oversees, and exposing their support and
technical staff, and equipped them with various skills. They possess include: analytical skills, an
understanding of, and the ability to deal with, a global economy, and skills in negotiating with
people from different cultures for instance, some of the respondents are proficient in foreign
languages while others are expatriates from the souring countries.
Availability of all the required information
An important aspect here is that KTDA has created a good relations with its existing oversees
suppliers & clients making it easy for them to readily access information required for the
negotiations. They have maintained a good purchasing database that is well structured and
contains all the relevant information i.e. a list of all the existing contracts and suppliers, reports
about the capabilities and performance of suppliers, consolidated purchasing volumes at
company level, information about potential new suppliers, and the demands placed by internal
customers on the products/goods to be purchased.
Identifying suppliers on a worldwide scale
In the research, the purchasing manager stated that identifying the right suppliers is one of the
most difficult tasks for purchasers. This is particularly difficult in regions such as Eastern Europe
and Asia. KTDA has had often tend to maintain their relationships with existing suppliers when
they are looking for suitable sourcing partners.
Well defined plan that supports the Global Sourcing process
88
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
A clear and carefully formulated sourcing process is undoubtedly one of the most important
factors influencing the success of a Global Sourcing project. KTDA has a well defined process
that has helped the organization to overcome social, cultural and legal differences between the
various locations. In addition, it has helped it to align the efforts of all staff within an
organization, and it avoids duplication of work.
Centrally coordinated/managed decision-making processes.
KTDA strategic decisions are taken at a central level. This has resulted in the following
advantages: standardization and consistency of the sourcing process, greater involvement of
suppliers in the development phase of a product or service, better relationships with suppliers,
and higher satisfaction of customers, stakeholders and managers with the sourcing process.
Conclusions
It takes time to effectively implement a global sourcing initiative, and even longer to do it
correctly to positively impact on the supply chain performance of an organization. Undertaking
the initiative diligently and thoroughly is tedious and difficult but not optional if effective
outsourcing relationships are to be achieved. It is not a panacea for all supply chain problems in a
company, and thus the company ought to clearly identify and address problems, then, seek to
source those specific problematic activities, with definite and precise reasons and goals.
Global sourcing is complex and requires all the necessary input from the heads of the logistics
department, IT, production, procurement, finance and top management for the purpose of better
decision making. It is critical for the initiative to yield positive results that, it has the support of
senior and junior managers.
In addition, it is important that an organization realizes that global sourcing be considered a long
term initiative whereby, together with the service provider, they share risks and expertise for the
common good of the organization, that is, building relationships on a relational model rather that
transactional.
Recommendations
Based on the research, the following recommendations were made:
It does not matter the success rate achieved over the years and good relations with the service
providers. A global sourcing company should not at any time forget its role of constantly
monitoring and controlling, forecasting demand against lead times and costs, and heavily
investing in good relation with its service providers as each of this may in the long run adversely
affect its performance.
As a strategic initiative that requires full support of all parties, the sourcing organization should
ensure that in the event of globally sourcing some of the its key staff members will be affected
in their positions and for them to execute their roles efficiently, they constantly need training and
exposure to other global markets to expand their ability to. After all, they are part and parcel of
the performance of the company.
89
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
References
CIPS, (2012), Operations Management in supply chains, Advanced Diploma in Procurement
and supply; CIPS, Profex Publishing
CIPS, (2013), Operations Management in supply chains, Advanced Diploma in Procurement
and supply; CIPS, Profex Publishing
Gardner, D.L. (Ed.). (2004) Suppy Chain Vector: Methods for Linking the Execution of Global
Business.
Bob Heaney June 9, 2010, International Transportation Cost & Service
Daniel L. Gardner, (2004) Supply Chain Vector: Methods for Linking the Execution of Global
Business Models with Financial Performance Copyright J. Ross Publishing, Inc.
Hines, P. (1994). Creating world class suppliers, Unlocking Mutual Competitive Advantage.
Financial Times Management Series.
Kent, D., (2010), Trying to keep up with Globalization and its effects on Supply chain
management
Kent, D., (2012), Supply chain: Its still risky business but not impossible
Kotabe, M. &Omura, G.S. (1989).Sourcing Strategies of European and Japanese Multinationals:
A Comparison.
June 200 Bronfenbrenner, K. (2004). The Changing Nature of Corporate Global Restructuring:
The Impact of Production Shifts on Jobs in the US, China, and Around the Globe,
Massachusetts: Cornell University
Lambert, D., Garca-Dastugue, S. &Croxton, K. (2005). An evaluation of process-oriented
supply chain
Lamming, R. (1993). Beyond Partnership: Strategies for Innovation and Lean Supply
management frameworks. Journal of Business Logistics, 26, (1), 25-51
90
Nyanchoka & Namusonge Int. J. Social Sciences Management and Entrepreneurship 1(3):76-91, November 2014
Liu, H., &McGoldrick, P J. (1996). International Retail Sourcing: trend, nature and process.
Journal of International Marketing.
Macbeth, D.K. & Ferguson, N. (Ed.). (1994). Partnership Sourcing: An integrated supply chain
management approach. Financial Times Series.
Monczka, R.M. & Trent, R.J. (1991). Evolving Sourcing Strategies for the 1990s
Sako, M. & Helper, S. (1998). Determinants of trust in supplier relations: Evidence from the
automotive industry in Japan and the United States. Journal of Economic Behaviour and
Organization.
Venkatraman, (2004). Offshoring in the global economy: Management practices and welfare
implications.
Zenz, G.H. (Ed.). (1994). Purchasing and the Management of Materials, International Edition
91