Transcript (I) What is global sourcing?

International Business and Trade
GM0112, Global Sourcing (I)
What is global sourcing?
Global sourcing strategies
Bent Petersen
Visiting Professor
Global Sourcing - Fall 2010
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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
Global Sourcing - Fall 2010
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What is global sourcing?
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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).
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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)
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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.
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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.
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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).
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A value chain (Porter, 1985):
SUPPORT ACTIVITIES
PRIMARY ACTIVITIES
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Dispersed value chain configuration
(“multi-domestic MNC”)
Sweden (HQ)
Sales
US Subsidiary
Sales
Germany
Denmark
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Concentrated value chain configuration
(“globally integrated MNC”)
Denmark
Sweden
HRM
Norway
M&S
R&D
Manufacturing
IT
India
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China
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Concentrated value chain configuration
precipitates an integrated network (Bartlett &
Ghoshal, 1989)
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Some company examples…
….of mainly dispersed value chain configuration
 Carlsberg
 Isover
 Ikea
… of mainly concentrated configuration
 Logitech Inc
 GN Resound
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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).
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Sourcing
globallocs.jpg
(onshore-offshore)
Location 
Home
country
Foreign
country
Onshore
sourcing
FDI /Captive
offshoring
Operator 
Ourselves
J/V
Contractual
Partner
Onshore
outsourcing
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Offshore
outsourcing
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Global sourcing:
Overview and trends
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Offshoring of services– Global trends
 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 %.
Global Sourcing - Fall 2010
Source: McKinsey Global17
Institute, 2005
Offshoring – Global trends
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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
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Coordination of
value chain activities
Porter’s (1986) global value chain framework
High
Shrinking factor cost differentials
Lower coordination (I&CT) and transportation costs
Low
Market Integration
Dispersed
Oc
Concentrated
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Configuration of
value chain activities
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Resource commitment
to foreign sales effort
(The Establishment Chain phenomenon)
Equity
(FDI)
Contractual
(outsourcing)
Value chain specialization
(Global sourcing)
High (concentrated configuration
/ extensive coordination)
Arm’s length
(procurement)
Low (dispersed configuration
/ sparse coordination)
Local
Regional
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Global
Geographical expansion
of sales
(The Psychic Distance
phenomenon)
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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.
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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?).
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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.
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Global sourcing choices and
strategies:
The What, Where and How questions
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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 relocated to foreign destinations?
 Theory, literature streams: RBP, open
sourcing/innovation literature, information
economics.
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The WHERE question
 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.
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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
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Example: Different business models of
the Danish apparel industry
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