Global Sourcing is the procurement of goods and services from independent suppliers or subsidiaries from multinational companies which are located abroad and are made for further development of consumption in the multinationals’ home country or a third country (Cavusgil et al, 2007).
International companies are increasingly looking to maintain their competitive advantage in their industry, and are therefore internationalising their supply-chain activities such as engineering, procurement, logistics, and even marketing.
For understanding the issues or risks managers face nowadays in global sourcing one has to divide the activities in two main segments, which is the flow of goods and information. The first reason for a company to source an activity of their value chain globally is generally perceived because of cost saving. Trent and Monczka (2003) noted a saving of 15 percent when successfully implementing global sourcing strategies of material cost, comparing to local and regional sourcing practices.
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Levy (1995) uses the term ‘disruptions’ for the issues in the global sourcing activities of a firm, and thus within the supply chain. Levy argues that the disruptions in the flow of goods are primarily caused by unstable demand, defective and late deliveries and internal production problems. Furthermore, there are challenges in language, culture, inventory management, lack of technology, trade regulations, currency fluctuations, and quality assurance. All these disruptions result in the extension of costs, which was the reason to source globally in the first place. Cavusgil et al (2007) identifies risks in global sourcing such as environmental factors, weak legal environment, risk of creating competitors, over-reliance on suppliers, and the erosion of morale amongst home-country nationals.
Managers of the supply-chain are according to Levy (1995) underestimating the cost of global sourcing, which means they do not include the disruptions when making a decision on to outsource or not. Secondly, managers often view the supply-chain as a static flow of controls instead of a complex and dynamic one. Thirdly, managers tend to outsource when a company is on its maturity but then neglect the demand volatility. And lastly, managers tend to treat supply-chain crises as one-time events instead of part of the instability of the supply-chain.
Learning the hard way
For example, Boeing is facing major delays in manufacturing its new 787. The aircraft manufacturer is in its never ending race with Airbus to present its new passenger aircraft. Boeing has its suppliers all over the world and with Boeings’ specific needs and design some suppliers were given a far greater responsibility for design, and there was no control on their work from our side (Weitzman, 2009). Or even a more compelling example of supply-chain failure is the near extinction of Land Rover in 2002 than owned by Ford that almost had to stop production because the supplier of its chassis had gone bankrupt. It said that it needed six to nine months to find an alternative supplier, putting 11,000 jobs at risk. It is mentioned in the Financial Times article that having dual-suppliers will cost around £12m just for the chassis (Milne, 2008).
Critical Success Factors Global Sourcing
In the study of Trent et al (2009) the critical success factors of global sourcing were identified. These factors are personnel with the right skills and knowledge, the availability of information, the awareness of potential global suppliers, time, and global capabilities of the supplier, interested in global contracts, global sourcing support, and direct visits. These critical success factors seem logical, and thus a firms’ global supply chain might seem water proof, but there will always be disruptions. Imagine the sharp fluctuations a firm can come across; when the firm is importing its goods from Singapore for example per ship, and the fluctuations demands the firm to use an air-freight to deliver the goods and meet the demands, the transportation costs can run ten times higher than the sea-freight deliveries, thus totally eroding the cost-advantage of manufacturing the goods in a lower-cost labour country (Levy, 1995).
Disruptions will always be part of the supply-chain of any firm in any industry. However, a careful planning of every step in the supply-chain should be routine. When sourcing globally, one has to think carefully of what to source and what to keep on board. When sourcing globally just for the cost advantage, one will find a lot of challenges along the way. Global sourcing should be part of the firms’ strategy, not an emergent strategy, but a proactive attitude. When implementing new supply-chain activities, disruptions should be taken into account, in order to reduce the chance of errors. This should include flexibility of suppliers’ payment, a back-up for the JIT (just-in-time) deliveries, a well-managed inventory system, excellent training activities for maintaining quality, and continuous improvements to keep the competitive advantage over other firms.
Businesses operating in an international context encounter different issues than firms operating solely in their home market, the domestic businesses. International firms enter new economical conditions, different political systems, laws and regulations and different cultures (Cavisgil et al, 2007). Cavusgil et el (2007) note that international firms find themselves in uncontrollable variables – factors of which the firm has little control. Most companies internationalise at a certain stage, the point at which they are going international has several reasons. The motivations can be reactive and proactive. These can be named push-, pull-, and drift factors. Push factors indicate the firms’ position in a saturated market, meaning declining demand, increasing fierce competition, or products that reached maturity and need a little push. Pull factors are proactive movements of the firm to move across borders because foreign markets promise faster growths, higher profits or less legal restraints and less competition. Drift factors are rather ad hoc or accidental. Firms that operate first solely in their domestic market receive large orders from international firms, which makes them decide to pursue an international adventure.
Advantages and disadvantages
For domestic firms to go international it means they have to take lots of new aspects into account. The risks are substantial. The commercial risk concerns the risk of weak partners, poor timing of entry and underestimation of the operational scale. Secondly, the currency risk which includes currency fluctuations and taxations. Thirdly, the country risk involves the legal issues, political stability and economical situations. Fourth is the cross-cultural risk, which basically means the lack of understanding each others’ cultures. These four main topics indentify the risk of the international business, or rather should be taken into account when going international.
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The advantages are rather attractive as well. The firm can expect substantial increases of sales, market share and higher profits. Also, the firm increases its economies of scale and can therefore expect to reduce their cost-per-units. It enters more diversified markets, and can therefore learn from new markets and adapt and adopt accordingly. By being an international firm, it bolsters itself against fluctuations in the economy and becomes a stronger player throughout their domestic market and internationally.
The disadvantage of the firm exporting is the lack of understanding of the foreign markets, fewer opportunities to learn about the new customers, their competitors, and the lack of communication (Cavusgil, 2007).
Illustrations of domestic to international business and back
Johanson and Vahine (1977, lecture slides) designed the Uppsala Internationalisation model in which stages firms go across borders. This starts from exporting, to licensing production, than to joint ventures and eventually sole ventures, illustration the steps firms undertake gradually.
Through this model Wal-Mart, using the push method, entered several markets by jumping to sole ventures, without the necessary research to succeed in a country. In its domestic market, it is a successful concept made for the American lifestyle. When it entered Mexico, it built massive parking lots like in the US, but only to found out later that most Mexicans do not have a car. In Brazil, where most families do their shopping once a month on their payday, Wal-Mart built the aisles to narrow to establish havoc (Cavusgil et al, 2007). These are the examples of jumping, literally, into new markets without understanding of what is going on. Would it team-up by licensing to a local supermarket chain its success rate would have been much higher. In contrast with these Wal-Mart examples Carrefour, a French supermarket chain, spent 12 years understanding the Chinese market just to become the largest foreign retailer with presence in 25 countries; which is a much more gradual entry.
In its domestic market, General Motors is facing serious competition and a declining market share which it is losing to Japanese carmakers and others. Its reason to maintain Vauxhall and Opel seems like their lifeline for developing solid competition for smaller fuel-efficient cars in its domestic market. Both Ford and Chrysler now with Fiat have the technology to develop these engines, had General Motors sold Vauxhall/Opel it would have lost its part of its knowledge in small fuel-efficient cars in its domestic markets and its presence in the European Market. On the contrary, Honda, with its sole focus on its engine, entered the US with small cars after the push from a high level of competition in Japan. It started however with export to the US and moved in manufacturing Honda in 1982, being already superior in quality in every auto market segment, better fuel efficiency, and better priced. Honda moved after being ready to move, and had time to study the US-market and it needs. The oil crises in the eighties helped significantly in US customers in persuading buying fuel efficient smaller cars (Klier, 2008).
Nowadays, the world is getting flatter and flatter (Friedman, 2005), meaning that the worlds’ resources are within an arm length for nearly all firms, provided they need the right network, skilled labour force and strategy to enter foreign markets. Collaboration between companies is often used to harness themselves against more intensifying competitors, who are obtaining knowledge, and cost advantages as well through collaboration. This continuous cycle makes the world a smaller place to do business in. Eventually all domestic businesses have some international activities, either in exporting, importing or knowledge. The world nowadays is too small to be comfortable in your own market, where you will face saturation and perhaps even decline.
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