The
MBA program in Supply Chain Management
at NC State University is unique among business
schools. With the support of the Supply Chain
Resource Consortium, an industry/university
partnership, the program brings the industry into
the classroom, involving students, faculty and supply
chain professionals in finding solutions to the
real industry problems. This project-based approach
to education reflects the new model for business
schools described by Peter Drucker.
For
more information...
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Peter
Drucker...
"Management is a practice, like medicine;
and the model should have been the medical school,
where the bulk of the teaching, especially the most
important teaching of the M.D. in his or her residency,
is performed by practitioners. Unlike medicine,
where you can bring sick patients into the classroom,
business education does not allow you to bring an
organization into the classroom. You can, however,
bring experience in through your faculty and students.
Business educators should be out as practitioners
where the problems and results are."
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3/19/03
Global
Sourcing:
Levels and risks
Compiled
by:
Scott Frahm, SCRC |
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Global
sourcing is an issue that executive management
needs to be cognizant of these days because the
repercussions of ignoring global sourcing could
be devastating to the future health of an organization.
The opportunities to strengthen an organization’s
position are there for the taking if the company
will invest in them.
Where should one begin, though? There are so many
things to consider when evaluating where your
organization stands in terms of its global reach,
not just to its customers, but also with its suppliers.
Issues that management should be aware when it
comes to global sourcing include:
| • |
The
distinction between Global Sourcing vs. Global
Procurement |
| • |
Levels
of Global Sourcing |
| • |
Risks
|
Global Sourcing vs. International Purchasing
First, a distinction needs to be made between global
sourcing and international purchasing. Global sourcing
places an emphasis on identifying opportunities
to “improve quality, lower prices, or gain
efficiencies on a worldwide or regional basis. Global
sourcing helps identify opportunities, coordinate
initiatives and make programs available to merchants
worldwide (1).” Global sourcing is very complex
in its nature, because it aims at integrating the
purchasing function as a vital role. This emphasizes
working closely with suppliers to ensure that the
needs of the customer are being fulfilled.
On the other hand, international purchasing can
be viewed as a function within global sourcing,
where product is imported for sale within a country
and there is little involvement with the company
supplying the product. This is more difficult than
purchasing domestically. However, international
purchasing can be viewed as more of a tactical function
than as a strategic function.
Wal-Mart has been actively pursuing a strategy that
emphasizes global sourcing. For example, Wal-Mart
identifies common products used throughout the world
and “determines whether there is an opportunity
to improve quality, reduce costs and, by working
with a best-in-class supplier, achieve better replenishment
and new item introductions (1).” For instance,
Wal-Mart has worked with its copy-paper sales supplier
to offer new products and more value to customers
throughout the world. By actively working with these
suppliers, Wal-Mart has realized sales increases
of 46 percent in England, 94 percent in Germany,
38 percent in Canada, and 25 percent in U.S. discount
stores, and a 13 percent increase at Sam’s
Club stores (1).
Levels of Global Sourcing
Knowing where your organization stands in terms
of its global network of suppliers influences how
much improvement your company can achieve. According
to Robert Trent and Robert Monczka -- leading academics
who have done extensive business consulting -- there
are five different levels of purchasing that an
organization can operate:
| Level
I |
identified
by domestic purchases only |
| Level
II |
described
by purchases internationally on an as needed
basis |
| Level
III |
represents
a shift in sourcing strategy to include international
purchasing |
| Level
IV |
involves
central coordination of purchasing across
global business locations |
| Level
V |
achieved
through worldwide integration and coordination
with other functional groups (2) |
Recognizing where your organization stands within
these levels will provide the opportunity to capitalize
on improving your company’s long-term performance.
With this information, you are now equipped to make
informed decisions about how the organization should
improve its performance.
One organization that has capitalized on global
sourcing is U.S.-based Santek Chemicals. Caught
in an extremely competitive market with little chance
to differentiate, Santek re-evaluated its sourcing
strategy to lower its operating costs by 30 percent
to remain competitive. Previously, Santek operated
its global facilities with a customized approach
that did not utilize any coordination between facilities.
Recognizing the need for better integration, Santek’s
executive management initiated a centrally coordinated
global sourcing process.
Santek now carefully examines each global project
“to identify areas of commonality and synergy
in procurement and design.” This process of
review has progressed from focused commodities to
other areas of the business to include Santek’s
global projects for services and telecommunications.
After three years, the result for Santek was, on
average, a 20 percent savings on its global initiatives
compared to the regional approach previously employed
(2). Effectively, Santek realized a shift from a
Level 3 organization to a Level 5 organization.
Risks
When considering risks, one needs to identify the
hurdles that can impede progress toward quickly
and smoothly integrating an offshore supplier. In
an offshore destination these hurdles include inadequate
government support, unorthodox country laws, and
cultural differences. Proactive involvement with
the government and strong understanding of the laws
of the land can mitigate the headaches associated
with outsourcing (3).
It is also strongly recommended that an organization
hire an outsourcing advisor to guide the organization
through the sourcing process. This can dramatically
reduce the costs associated with outsourcing. According
to a study conducted by Ross Research, a market
research firm, 62 percent of respondents claimed
that using an external advisor helped shorten the
sourcing process by one to six months. Eight percent
indicated a seven to 12 month reduction, and eight
percent realized a time saving of one to two years
(4).
Another dangerous path organizations often follow
is the road to low prices. “You get what you
pay for” is a phrase often used to describe
the incredible “bargains” that some suppliers
offer to win business contracts. Though the price
per part may in fact be low, the price paid in quality
issues can quickly exceed what an organization can
handle financially. A company should conduct site
visits to ensure that the supplier is competent,
even though it is expensive to visit worldwide locations.
The cost of not making these trips could begin to
snowball out of control due to sub-par quality.
Therefore, when conducting these reviews, an organization
“should perform due diligence by acting as
if it were purchasing the supplier rather than the
supplier’s output (2).”
If a company performs due diligence, it can minimize
risks. According to David Cowell, chief procurement
officer at bottling company Coca-Cola HBC, it is
more important to identify whether a potential supplier
was low-risk rather than how competitive it was
in terms of price. In addition, ensuring that suppliers
are not consumed with all the risks will help to
secure a more stable supply chain (5). In the long
run, organizations will realize significant savings,
without damaging customer service, by performing
detailed analyses of global outsourcers.
References:
(1) Anonymous. (2002). Sourcing Synergies Facilitate
Cost-Effective Expansion. Chain Store Age, August,
2002, 79-80.
(2) Monczka, R. M. and Trent, R. J. (2002). Pursuing
Competitive Advantage through Integrated Global
Sourcing. Academy of Management Review, vol. 16
no. 2, 66-80.
(3) Verma, Nishant. (2003). Risk
Management for Offshore Deals. NeoIT.com
(4)
Ross, Lisa M. (2002). Getting
an Outsourcing Deal That Works: Buyers’ Perceptions
on the Value of Using External Sourcing Advisors.
NeoIT.com
(5) Parker, Robin. (2001). Manage Risks in Emerging
Markets. Supply Management, October 18, 2001, 13.
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