Chapter 4 Global Sourcing Strategy RD Manufacturing and

Chapter 4 Global Sourcing Strategy R&D, Manufacturing, and Marketing Interfaces

Key Words § Value Chain, Supply Chain § JIT—Just in time, Inventory Management § LP—Lean Production(0 -stock) Jack Welch: 6 -sigma Management

Key Words § Up-stream, Down-stream High Present Middle-stream 1970 s Value Added Up-stream Down-stream Low R&D Manufacturing Assembling Marketing After-sales Service Proceture 施振荣(Stan Shih, 1944~）

Outline § International Product Cycle Theory § Global Sourcing Strategy Ø Advantages and disadvantages Ø Trends Ø Potential Pitfalls Ø Value Chain § Functional Interfaces: R&D/Manufacturing; Manufacturing/Marketing; Marketing/R&D Ø Long-Term Consequences

International product cycle theory

International Product Cycle Theory § Global competition suggests a drastically shortened life cycle for most products, and no longer permits companies a polycentric, country-by-country approach to international business. § A frequently used framework to describe crossnational business practices is the international product cycle theory. § According to theory, changes in inputs and product characteristics toward standardization over time determine an optimal production location at any particular phase of the product’s life cycle.

Limitations of International Product Cycle Theory 1. Increased pace of new product introduction and reduction in innovational lead time, which deprive companies of the age-old polycentric approach to global markets, 2. Predictable sourcing development during the product cycle, which permits a shrewd company to outmaneuver competition, and 3. More active management of locational and corporate resources on a global basis, which gives a company a preemptive first-mover advantage over competition.

Extent and Complexity of Global Sourcing Strategy ▲Global Sourcing Strategy: the logistical management of the interfaces of R&D, manufacturing, and marketing activities on a global basis, which determins a company's competitive strengths and, consequently, its market performance. Global Sourcing Strategy Competitive Advantage Comparative Advantage What activities and technologies Where to source and market

Common examples of globally sourced products or services § Majority of companies today strive to harness the potential of global sourcing in reducing cost. Hence it is commonly found that global sourcing initiatives and programs form an integral part of the strategic sourcing plan and procurement strategy of many multinational companies: § Labor-intensive manufactured products produced using lowcost Chinese labor § Call centers staffed with low-cost English speaking workers in the Philippines and India, § IT work performed by low-cost programmers in India and Eastern Europe.

Firms heading home as benefits wane in China § More companies from Europe and the United States that outsourced production to China are returning home as price gaps narrow. Ø Philips NV, the Dutch engineering and electronics conglomerate, improved automation and smarter robots meant it made more sense financially to build a new factory in Drachten last year than extend its operations in China. Ø General Electric Co took arguably a bigger gamble by opting to reshore some production from China to its Appliance Park in Louisville, Kentucky, also in 2012. • Such cases have become more common over the past five years as more European and US companies find it attractive to return jobs and production home, a strategy known as reshoring.

Advantages and disadvantages of global sourcing ▲Some advantages of global sourcing: Low cost; Learning how to do business in a potential market; Tapping into skills or resources unavailable domestically; Developing alternate supplier/vendor sources to stimulate competition; Increasing total supply capacity. ▲Some key disadvantages of global sourcing: Hidden costs associated with different cultures and time zones, Exposure to financial and political risks in countries with emerging economies, Increased risk of the loss of intellectual property Increased monitoring costs relative to domestic supply. For manufactured goods, some key disadvantages include long lead times, the risk of port shutdowns interrupting supply, and the difficulty of monitoring product quality.

Trends in Global Sourcing Strategy Trend 1: The Decline of the Exchange Rate Determinism of Sourcing △Reasons: 1. It takes time to develop overseas suppliers for noncost purpose. 2. Domestic suppliers are to increase prices to match rising import prices following exchange rate changes. 3. Many companies are developing long-term relationships with international suppliers.

Trends in Global Sourcing Strategy Trend 2: New Competitive Environment Caused by Excess Worldwide Capacity Key factors for Sourcing from Abroad There has occurred a strategic shift from price and quantity to quality and reliability of products as a determinant of competitive strength: Very Important 1. Better quality 2. Lower price 3. Unavailability of items in the western country Important 4. More advanced technology abroad 5. Willingness to solve problems 6. More on-time delivery 7. Negotiability 8. Association with foreign subsidiary Neutral 9. Geographical location 10. Countertrade requirements 11. Government assistance

Trends in Global Sourcing Strategy Trend 3: Innovations in and Restructuring of International Trade Infrastructure ☆The innovations and structure changes that have important influence on sourcing strategy are: improvements made in transportation and communication the increased number of purchasing managers experienced in sourcing new financing options, including countertrade, offering new incentives and opportunities for exports from countries without hard currency ④ manufacturing facilities diffused throughout the world by globally minded companies ⑤ neighboring country souring opportunities

Trends in Global Sourcing Strategy Trend 4: Enhanced Role of Purchasing Managers △In the past, just-in-time productions requires close working relationships with component suppliers and places an enormous amount of resposibilities on purchasing managers. △Now, purchasing managers are increasingly making long-term commitments to foreign suppliers, direct dealings with suppliers is justified. A survery shows that the dominant form of purchasing from abroad was to buy directly from foreign sources.

Trends in Global Sourcing Strategy Trend 5: Trend toward Global Manufacturing l During the 1980 s, while U. S. companies continued to locate their operations in various parts of the world, companies from other countries such as Japan, Germany, and Britain expanded the magnitude of their foreign manufacturing operations at a much faster pace. l In the late 1980 s, U. S. companies increased sourcing from abroad, which represents a strategic expansion and rationalization over time. l Foreign affiliates have developed more independent R&D activities to manufacture products for the U. S. markets in addition to expanding local sales.

Potential Pitfalls in Global Sourcing △Conflict between unification and fragmentation - a close-knit operational strategy with similar foreign units versus a loosely related, highly variegated family of activities. △Dilemma revisited in such terms as: “standardization versus adaptation” (1960 s) “globalization versus localization” (1970 s) “global integration versus local responsiveness” (1980 s) “scale versus sensitivity” (1990 s) △However, ability and willingness of companies to integrate have changed due to competitive urgency.

by Douglas Mc. Gregor (1960 s)

The Value Chain △ The value chain: The collection of activities that are performed by a company to design, manufacture, market, deliver, and support its product. △The value chain can be divided into two major activities performed by a company: (1) primary activities consisting of inbound logistics (procurement of raw materials and components), manufacturing operations, outbound logistics (distribution), sales, and after-sale service, and (2) support activities consisting of human resource management, technology development, and other activities that help promote primary activities.

The Value Chain ▲Five continuous and interactive steps are involved in developing such a global sourcing strategy along the value chain. 1. Identify the separable links (R&D, manufacturing, and marketing) in the company’s value chain 2. In the context of those links, determine the location of the company’s competitive advantages, considering both economies of scale and scope 3. Ascertain the level of transaction costs between links in the value chain, both internal and external, and selecting the lowest cost mode 4. Determine the comparative advantages of countries (including the company’s home country) relative to each link in the value chain and to the relevant transaction costs 5. Develop adequate flexibility in corporate decision making and organizational design so as to permit the company to respond to changes in both its competitive advantages and the comparative advantages of countries.

Functional Interfaces ◆Management of the interfaces, or linkages, among these value-adding activities is a crucial determinant of a company’s competitive advantage. ◆Global sourcing strategy encompasses management of ~The interfaces among R&D, manufacturing, and marketing on a global basis and ~Logistics identifying which production units will serve which particular markets and how components will be supplied for production.

R&D/Manufacturing Interface • Product innovation • Designing for manufacturability • Manufacturing process innovation • Components sourcing Manufacturing Marketing/R&D Interface • New product development • Product positioning Marketing Manufacturing/Marketing Interface • Product and component • Product modification

Manufacturing/Marketing Interface Standardized, low-cost production Diverse needs of consumers Four different ways of developing a global product policy are generally considered an effective means to streamline manufacturing: Core Components Standardization Product Design Families Universal Product with All Features ④ Universal Product with Different Positioning

Marketing/R&D Interface ▲Consumers accept improved product more quickly than very different products. ▲R&D and marketing divisions are on the lookout for use of emerging technologies initially in existing products to satisfy customer needs, such as Japanese companies. ▲The marketplace should become a virtual R&D laboratory to gain production and marketing experience as well as to perfect technology.

Logistics of Sourcing Strategy ▲”Sourcing” is used to describe the management by multinational companies of the flow of components and finished products in serving foreign markets. ▲ In developing viable strategies on a global scale, companies must consider not only manufacturing costs, the costs of various resources, and exchange rate fluctuations, but also availability of infrastructure, industrial and cultural environments, the ease of working with foreign host governments, and so on.

Types of Sourcing Strategy Where to Source How to Source Domestic Type of Sourcing Domestic in-House Sourcing A company produces major components in-house by producing them domestically Intrafirm Sourcing Abroad Offshore Subsidiary Sourcing A company procures major components from its foreign subsidiary Sourcing Domestic Purchasing Agreement A company buys major components from independent suppliers at home Outsourcing Abroad Offshore Sourcing A company procures major components from independent suppliers overseas

Long-Term Consequences § Two opposing views of the long-term implications of offshore outsourcing: ☆Strategic Alliance: Many companies have developed a dynamic flexible network system through use of joint ventures, subcontracting, and licensing activities across international borders. ☆Dependence: A nagative long-term consequences resulting from a company's dependence on independent suppliers and subsequently the inherent difficulty for the company to keep abreast of constantly evolving design and engineering technologies without engaging in those developmental activities.

Advantages of strategic alliances § A company can concentrate on performing the task at which it is most efficient. § A relatively easy option can be provided to access the world markets and to combine complementary. § An increasing number of companies have funneled out manufacturing functions to independent partners.

Shortcomings of strategies alliances ▲Dependence Companies that rely on independent external sources of supply of major components tend to forsake part of the most important value-creating activities, and also become dependent on, independent operators for assurance of component quality, for example IBM.

Shortcomings of strategies alliances ▲Gradual loss of design and manufacturing abilities ☆Those multinational companies that depend heavily on independent suppliers also tend in the long run to lose sight of emerging technologies and expertise, which could be incorporated into the development of new manufacturing processes as well as new products. E. g. Apple-Sony and IBM-Intel-Microsoft alliances may be illustrative of such possibilities. ☆Continual sourcing from independent suppliers is likely to forebode those companies' long-term loss of the ability to manufacture at competitive cost and, as a result, loss of their global competitiveness.