INTRO TO gLOBAL sOURCING

Introduction to Sourcing
Areej Aftab Siddiqui
Global Sourcing: Shopping the World
Along with competitors Reebok and Adidas, Nike contracts out

nearly all of its athletic shoe production to foreign suppliers.
These firms are best described as brand owners and marketers,
not as manufacturers.
Apple Computer sources some 70% of its production abroad

while focusing its internal resources on improving its operating
system and other software platforms. This approach allows
Apple to use its resources optimally and focus on its core
competences.
Boeing and Airbus rely extensively on global manufacturing

networks, composed largely of independent suppliers.
International Business: Strategy, Management, and the New Realities
Global Sourcing
Global sourcing: the procurement of products or services

from suppliers located abroad for consumption in the
home country or in a third country.
Also called global outsourcing, global procurement or
global purchasing; it amounts to importing.
Involves a contractual relationship between the buyer and
the foreign supplier, in which the performance of a
specific value-chain activity is subcontracted to the firm's
own subsidiary or to an independent supplier.
Drivers of Global Sourcing
Technological advances, including instant Internet

connectivity and broadband availability
Declining communication and transportation costs
Widespread access to vast information including

growing connectivity between suppliers and the
customers that they serve; and
Entrepreneurship and rapid economic

transformation in emerging markets.
Decision 1: Outsource or Not?
Managers must decide between internalization and

externalization -- whether each value-adding activity
should be conducted in-house or by an independent
supplier.
Known as the make or buy decision: Should we conduct
a particular value-chain activity ourselves, or should we
source it from an outside contractor?
Firms usually internalize those value-chain activities they
consider a part of their core competence, or which involve
the use of proprietary knowledge and trade secrets they
want to control.
Business Process Outsourcing (BPO)
The outsourcing of business functions to independent

suppliers such as accounting, payroll, and human resource
functions, IT services, customer service, and technical
support.
BPO includes:
Back-office activities, which includes internal, upstream
business functions such as payroll and billing, and
Front-office
activities, which includes downstream,

customer-related services such as marketing or technical
support.
Decision 2: Where in the World Should ValueAdding Activities Be Located?
Configuration of value-adding activity: The pattern or

geographic arrangement of locations where the firm
carries out value-chain activities.
Instead of concentrating value-adding activities in the

home country, many firms configure these activities
across the world to save money, reduce delivery time,
access factors of production, and extract maximal
advantages relative to competitors.
This helps explain the migration of traditional industries

from Europe, Japan, and the U.S. to emerging markets
in Asia, Latin America, and Eastern Europe.
An Example of Worldwide Configuration of Value Chain
The German automaker BMW employs 70,000 factory personnel at 23

sites in 13 countries to manufacture its vehicles.
Workers at the Munich plant build the BMW 3 Series and supply
engines and body components to other BMW factories abroad.
In the United States, BMW has a plant in South Carolina, which makes
over 500 vehicles daily for the world market.
In NE China, BMW makes cars in a joint venture with Brilliance China

Automotive Holdings Ltd.
In India, BMW has a manufacturing presence to serve the needs of the

rapidly growing South Asia market.
BMW must configure sourcing at the best locations worldwide, in

order to minimize costs (e.g., by producing in China), access skilled
personnel (by producing in Germany), remain close to key markets
(by producing in China, India and the United States).
Contract Manufacturing:
Global Sourcing from Independent Suppliers
An arrangement in which the focal firm contracts
with an independent supplier to manufacture
products according to well-defined specifications.
Nike is a leading example.
Examples
Patheon, a leading contract manufacturers in the pharmaceutical

industry, provides drug development and manufacturing for
pharmaceutical and biotechnology firms worldwide. Patheon
operates 11 factories in North America and Europe, producing
over-the-counter drugs and several of the world's top-selling
prescription drugs for most of the world's largest pharmaceutical
firms.
Benetton employs contract manufacturers to produce

clothing.
IKEA uses contract manufacturers to produce furniture.
10
Magnitude of Global Sourcing
In 2005, India alone booked $22 billion worth of

business in answering customer phone calls, managing
computer networks, processing invoices, and writing
custom software for MNEs from around the world.
Global sourcing has created more than 1.3 million jobs

during the past decade for India.
Meanwhile, between 2000 and 2004, some 100,000

service jobs were outsourced each year from the United
States to other countries.
In 2006, IT and business-process outsourcing exceeded

$150 billion worldwide.
12
India remains the preeminent destination for offshore

services, with excellence in IT, BPO, and voice services.
The undisputed leader in the field for the past decade,
India is still unrivaled in both scale and skills.
According to the National Association of Software and
Service Companies (NASSCOM), the sector today employs
one million people and represents 25 percent of India's
total exports.
The IT services sector dominates the industry with
exports of $40 billion, followed by BPO exports of $20
billion. In addition to a continually evolving service
portfolio within their core business, leading IT services
firms are expanding their traditional offerings to include
R&D, product development, and other niche services,
drawing on their extensive experience and highly skilled
Benefits of Global Sourcing
Cost
efficiency
Improved
productivity
Technological
Improved
Access
agility to redesign company activities
to skilled personnel
Increased
Access
flexibility
speed to market
to new markets
16
Challenges of Global Sourcing
Vulnerability to exchange rate fluctuations
Partner selection, qualification, and monitoring costs
Complexity of managing a worldwide network of partners and a global supply

chain
Limited influence over suppliers manufacturing processes
Vulnerability to opportunistic behavior by suppliers
Limited ability to safeguard intellectual assets
17
Global Supply Chain Management
Global supply chain: the firms integrated network of

sourcing, production, and distribution, organized on a
world scale, and located in countries where competitive
advantage can be maximized.
Sourcing from numerous suppliers scattered around the

world requires efficient supply-chain management.
Third party logistics providers (3PLs) as well as

independent logistics service providers such as FedEx,
TNT, and UPS are useful facilitators.
18
Case Study 1 Buying Components in Global Markets

Ford differentiate between key and non-key parts in terms of whether they are sourced locally
or globally. Thus there is no point shipping low unit cost items such as brackets, but critical
and more expensive items such as an injection pump are sourced globally. Prices would be
obtained from various suppliers, converted into dollars at current exchange rates, costs of
freight etc. added, to give a delivered price to several plants. Commitments may be made for 34 years, but decisions about parts for new models could have implications for up to 15 years,
so risk factors would be subjected to sensitivity analysis to test the effect of future changes, for
instance, in exchange rates.
Ford do not buy much from Japan as it is very expensive. However there is now a tendency for
Japanese parts suppliers to locate in Europe. Thus, just as Bosch are making starter controls in
South Wales, Nippondenso have set up a plant to make electronic controls in Portugal.
Source: Interview, Lead Buyer, Ford UK
Features of Global Supply Chain Management
Costs associated with physically delivering a product to an

export market may account for as much as 40% of total
cost.
Experienced firms use information and communications

technologies (ICTs) to streamline operations, reducing
costs and increasing distribution efficiency.
Logistics involves physically moving goods through the

supply chain. Incorporates information, transportation,
inventory, warehousing, materials handling and similar
activities associated with the delivery of raw materials,
parts, components, and finished products.
22
Transportation Modes
International logistics typically involves multiple

transportation modes.
Land transportation is handled via highways and railroads
Ocean transportation is handled via large container ships.
Air transportation involves commercial or cargo aircraft.
Ocean and air transport are common in international business

because of long shipping distances. Ocean transport is the
most common and cheapest transportation mode.
Ocean transport was revolutionized by the development of

20- and 40-foot shipping containers.
23
Risks in Global Sourcing

1. Less-than-expected cost savings. Conflicts and problems
arise from various sources.
2. Environmental factors. Examples include exchange rate
fluctuations, trade barriers, macroeconomic events, high
energy costs, labor strikes
3. Weak legal environment. Can affect protection of
intellectual property, eroding key strategic assets.
4. Risk of creating competitors
5. Inadequate or low-skilled workers
6. Erosion of morale and commitment among home-country
employees due to outsourcing jobs
24
Strategies for Minimizing Risk

1. Go offshore for the right reasons. The best rationale is strategic, such as enhancing the
quality of offerings, improving productivity, and freeing up core resources.
2. Get employees on board. Poorly planned sourcing projects creates unnecessary tension
with existing employees.
3. Choose carefully between a captive operation and a contract with outside
specialists. Strike the right balance between what to make, and what to buy.
4. Choose countries and suppliers carefully. There are many options to choose from; A
sourcing broker can help.
5. Invest in supplier development and collaboration
6. Proactively safeguard interests, such as key assets and the firms reputation
25
Potential Harm and Ethical Issues
Global sourcing can lead to three major problems in

the home country:
Job losses
Reduced national competitiveness
Declining living standards
MNEs may be ineffective or indifferent about:

protecting the environment
promoting human rights
labor practices and working conditions abroad
26
Public Policy Towards Global Sourcing
It is impractical to adopt a unilateral policy against global sourcing.
Rather, it is usually better to mitigate the harm that global sourcing can
cause.
Offshoring is a process of creative destruction. It creates new advantages

and opportunities, while eliminating certain types of jobs and adversely
impacting particular economic sectors and segments of the economy.
27
Helpful Public Policy Initiatives

Guiding employment towards higher value-added jobs
(e.g., by stimulating innovation)
Keep the cost of doing business low (e.g., via
appropriate economic and fiscal policies,
encouraging innovation, keeping cost of capital low)
Ensure a strong educational system, including
technical schools and well-funded universities that
supply engineers, scientists, and knowledge
workers.
Maximize worker flexibility to help those who lose
jobs find other positions.
28
Definitions
International purchasing
Commercial purchase transaction between buyer and supplier in different

countries
Global sourcing
Proactively integrating and coordinating common items and materials,

processes, designs, technologies, and suppliers across worldwide purchasing,
engineering, and operating locations
Purchasing & Supply Chain Management, 5e
29
Why Source Worldwide?
30
Barriers to Worldwide Sourcing
31
Lack of Knowledge and Skills
Ignorance of intricacies of global sourcing
How to identify potential sources of supply
Documentation issues
32
Documentation Requirements
Letters of credit
Inspection certificates
Multiple bills of lading
Certificates of insurance coverage
Dock receipts
Packing lists
Import licenses
Commercial invoices
Certificates of origin
33
Resistance to Change
Established, routine sourcing patterns
Shifting from longstanding suppliers
Domestic market nationalism
34
Longer Lead Times
Extended material pipelines
Forecasting over longer time horizons
Need to more closely manage delivery dates
Possibility of transit and/or customs delays
Greater logistical, political, and financial risks
35
Other Barriers
Offshore business practices
Language
Culture
More difficult negotiations
Need to more closely manage delivery and engineering changes
More difficult interpersonal relationships
36
Currency Fluctuations
Daily or hourly fluctuations
Need to understand highly complicated financial options
How to price purchases
37
Increased Supply Risks
Need for critical assessment
Prior to sourcing
Look at more than just price
Types of risks vary between different countries
38
Overcoming Barriers to Worldwide Sourcing
Education and training
Publicizing success stories
Globally linked technologies
Supplier providing U.S.-based support personnel
Measurement and reward systems
Third-party intermediaries or agents
Top management support
39
Developing a Worldwide Sourcing Program
No suitable domestic supplier exists
Competitors are gaining competitive advantage from overseas suppliers
Triggering events in supply markets
40
Developing a Worldwide Sourcing Program
Information about worldwide sources
Supplier qualification and selection issues
Understanding cultural issues
Language and communication differences
Logistical issues
41
From Domestic to International
Legal systems
Countertrade requirements
Costs associate with international purchasing
Managing currency risks
42
Triggering Events
Supply disruption
Rapidly changing currency exchange rates
Declining domestic supply base
Inflation within home market
Sudden emergence of worldwide competitors
43
Information about Worldwide Sources
Worldwide sourcing directories
Trade shows
Intermediaries and organizations
Trading companies
Third-party support
Trade consulates
Foreign nationals
International purchasing offices (IPOs)
44
Role of IPOs
Identify potential suppliers
Solicit quotes or proposals
Expedite and trace shipments
Negotiate supply contracts
Obtain product samples
Manage technical and commercial

concerns
Represent the buyer to suppliers
Manage counter-trade
requirements
Perform supplier site visits
45
Understanding Cultural Issues
Culture is sum of all understandings that govern human interaction in

society
Language
Religion
Values and attitudes
Customs
Social institutions
Education
46
Values vs. Behavior
Values
Shared beliefs or group norms that are internalized
Affect the way people think
Behavior
Based on values and attitudes
Affect the way people act
47
Language Differences
Communicating purchase requirements clearly and effectively
Not everyone speaks and understands English the same way Americans do
Message speed
Level of content
48
Recommendations from An Expert
If supplier is using English as second language, buyer should be responsible

for preventing communication problems
To aid in communication
Speak slowly
Use more communication graphics
Eliminate jargon, slang, and sports and military metaphors
49
Recommendations from An Expert
Bring interpreter to all but the most informal meetings
Allow extra day to educate interpreters on your issues and vocabulary
Document, in writing, conclusions and decisions made in a meeting before

adjourning
50
Logistical Issues
Extended pipelines
Additional planning and management required
Shipping delays are to be expected
Often less capable transportation infrastructure
Role of INCOTERMS
51
INCOTERMS 2010
Location
Seller
Premise
Export
Formalities
Named
Place or
Terminal
Loading
Port of
Shipment
On Board
Ship/Rail/
Plane
Discharge
Port of
Arrival
Named
Place or
Terminal
Import
Formalities
Buyer
Premise
Ex Works
(EXW)
Seller
***
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Free Carrier
(FCA)1
Seller
***
Seller
Seller
***
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Free
Alongside
Ship
(FAS)
Seller
Seller
Seller
Seller
***
Buyer
Buyer
Buyer
Buyer
Buyer
Free on
Board
(FOB)
Seller
Seller
Seller
Seller
Buyer
***
Buyer
Buyer
Buyer
Buyer
Cost &
Freight
(CFR)
Seller
Seller
Seller
Seller
Buyer
***
Buyer
Buyer
Buyer
Buyer
Cost,
Insurance,&
Purchasing & Supply Chain
Management,Seller
5e
Seller
Freight
(CIF)
Seller
Seller
Buyer
***
Buyer
Buyer
Buyer
52Buyer
Freight
Responsibilit
y
INCOTERMS 2010
Location
Seller
Premise
Export
Formalities
Named Place
or Terminal
Loading Port
of Shipment
On Board
Ship/Rail/
Plane
Discharge
Port of
Arrival
Named Place
or Terminal
Import
Formalities
Buyer
Premise
Carriage Paid
to
(CPT)2
Seller
***
Seller
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Carriage &
Insurance to
(CIP)2
Seller
***
Seller
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Buyer
Delivered at
Terminal
(DAT)
Seller
Seller
Seller
Seller
Seller
Seller
***
Buyer
Buyer
Buyer
Delivered at
Place
DAP)
Seller
Seller
Seller
Seller
Seller
Seller
Seller
***
Buyer
Buyer
Delivered
Duty Paid
(DDP)
Seller
Seller
Seller
Seller
Seller
Seller
Seller
Seller
Seller
***
Freight
Responsibility
Notes:
*** Where risk passes
1 Delivery can occur at seller premise or place of departure
2 Risk passes from seller to buyer when the goods are delivered to the first carrier
53
Legal Issues
Common law vs. codified or civil law
Different levels of protection for the buyer
Role of trust and personal relations
Intellectual property issues
U.N.s Convention on Contracts for the International Sale of Goods (CISG)
World Trade Organization (WTO)
54
U.S. Foreign Corrupt Practices Act
Designed to prevent companies from making questionable or illegal

payments to foreign officials, politicians, and political parties to secure or
retain business
Applies to U.S. citizens and their agents
Requires accurate recordkeeping and adequate controls
55
U.S. Foreign Corrupt Practices Act
Also applies to foreign nationals who make such payments while in U.S.
No dollar threshold amount
Enforcement focuses on intent
56
Countertrade Requirements
Refers to all international trade where there is full or partial exchange of

goods for goods
Purchasing is often responsible for negotiating and managing countertrade

agreements
57
Reasons for Countertrade
Some countries lack hard currency
Countertrade provides means to sell products in that country
Factors
Typically involve large dollar amounts
Found in countries with perceived low or non-differentiated (commodity-like)

goods
58
Types of Countertrade
59
Barter
Straight exchange of goods for goods with no exchange of currency
Involves single contract
Usually relates to specific transaction and covers shorter period of time
60
Counterpurchase
Requires selling firm to purchase specified amount of goods from country that
purchases its products
Generally percentage of original sale
Involves products unrelated to companys primary business
Issue of disposition of goods
61
Offset
Closely related to counterpurchase
Generally percentage of original sale over specified period
Allowed to offset its countertrade requirements with any company or industry

more flexible
62
Buy-Back
Sometimes called compensation trading
Occurs when
Building a plant in third world country or
Providing services, equipment, or technology to support a plant
Building company agrees to buy back some or all of plants output as

payment
63
Switch Trading
Occurs when selling company agrees to accept goods from buying country as
partial payment
Company may decide to utilize third-party to sell or market goods
64
Costs Associated with International

Purchasing
Comparable costs
Similar to costs in domestic sourcing
Purchase price
Tooling charges
Transportation from supplier to buyer
International transaction costs
Additional costs over and above domestic sourcing
65
International Transaction Costs
Base price
Port terminal and handling fees
Tooling
Customs brokers fees
Packaging
Taxes
Escalation
Communication costs
Transportation
Payment and currency fees
Customs duty
Inventory carrying costs
Insurance premiums
Payment terms
Fees and commissions
66
Letters of Credit
Assure supplier that it will be paid for shipment
Issued by the buyers bank to suppliers bank when LOC terms are fulfilled
Paid when accurate and appropriate documents are presented to buyers bank
Revocable vs. irrevocable
67
Port Terminal and Handling Fees
Unloading of cargo
Administrative services of port authority personnel
General use of port
Temporary storage for goods awaiting customs and/or documentation

clearance
68
Measures to Deal with Currency Risk
Purchase in U.S. dollars
Sharing currency fluctuation risk
Currency adjustment contract clauses
Delivery-triggered vs. time-triggered
Currency hedging
Finance department expertise
Tracking currency movements
69
Currency Hedging
Form of risk insurance that can protect both parties
Option
Seeks risk aversion, not monetary gain
Buy or sell foreign currency at certain future rate
Forward exchange contract
Agreement to pay pre-established rate for currency in future
70
Moving to a Global Sourcing Philosophy
Domestic purchasing
Level I no foreign purchases
International purchasing
Level II foreign purchases as needed
Level III part of strategic sourcing
71
Moving to a Global Sourcing Philosophy
Global sourcing
Level IV integration and coordination of global sourcing strategies across

worldwide business units
Level V integration and coordination of global sourcing strategies with other

functional groups
72
Global Sourcing Success Factors
73
Future Trends in Global Sourcing
Development of higher level skill sets
Need to reach agreement on global performance measures
Need to establish integrated systems
Continued development and refinement of global sourcing strategies
Greater internal integration
74
Future Trends in Global Sourcing
Seeking suppliers highly capable of conducting global business
Shift from component sourcing to subsystems, systems, and services sourcing
Continued cost reduction pressures
More suppliers in low-cost, emerging markets
75

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INTRO TO gLOBAL sOURCING

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Introduction to Sourcing

Areej Aftab Siddiqui

Global Sourcing: Shopping the World

Along with competitors Reebok and Adidas, Nike contracts out

Apple Computer sources some 70% of its production abroad

Boeing and Airbus rely extensively on global manufacturing

International Business: Strategy, Management, and the New Realities

Global sourcing: the procurement of products or services

International Business: Strategy, Management, and the New Realities

Drivers of Global Sourcing

Technological advances, including instant Internet

Declining communication and transportation costs

Widespread access to vast information including

Entrepreneurship and rapid economic

International Business: Strategy, Management, and the New Realities

Decision 1: Outsource or Not?

Managers must decide between internalization and

International Business: Strategy, Management, and the New Realities

Business Process Outsourcing (BPO)

The outsourcing of business functions to independent

activities, which includes downstream,

International Business: Strategy, Management, and the New Realities

Decision 2: Where in the World Should ValueAdding Activities Be Located?

Configuration of value-adding activity: The pattern or

Instead of concentrating value-adding activities in the

This helps explain the migration of traditional industries

International Business: Strategy, Management, and the New Realities

An Example of Worldwide Configuration of Value Chain

The German automaker BMW employs 70,000 factory personnel at 23

In NE China, BMW makes cars in a joint venture with Brilliance China

In India, BMW has a manufacturing presence to serve the needs of the

BMW must configure sourcing at the best locations worldwide, in

International Business: Strategy, Management, and the New Realities

Patheon, a leading contract manufacturers in the pharmaceutical

Benetton employs contract manufacturers to produce

International Business: Strategy, Management, and the New Realities

Magnitude of Global Sourcing

In 2005, India alone booked $22 billion worth of

Global sourcing has created more than 1.3 million jobs

Meanwhile, between 2000 and 2004, some 100,000

In 2006, IT and business-process outsourcing exceeded

International Business: Strategy, Management, and the New Realities

India remains the preeminent destination for offshore

Benefits of Global Sourcing

agility to redesign company activities

International Business: Strategy, Management, and the New Realities

Challenges of Global Sourcing

Vulnerability to exchange rate fluctuations

Partner selection, qualification, and monitoring costs

Complexity of managing a worldwide network of partners and a global supply

Limited influence over suppliers manufacturing processes

Vulnerability to opportunistic behavior by suppliers

Limited ability to safeguard intellectual assets

International Business: Strategy, Management, and the New Realities

Global Supply Chain Management

Global supply chain: the firms integrated network of

Sourcing from numerous suppliers scattered around the

Third party logistics providers (3PLs) as well as

International Business: Strategy, Management, and the New Realities

Case Study 1 Buying Components in Global Markets

Features of Global Supply Chain Management

Costs associated with physically delivering a product to an

Experienced firms use information and communications

Logistics involves physically moving goods through the