Essay: Global sourcing

Global sourcing is a phenomenon tentatively studied by scholars. During these studies, global sourcing is a widely used term in the area of purchasing. In other words, the definitions of global sourcing differ widely. ‘International purchasing’ (Motwani & Ahuja, 2000), ‘worldwide sourcing’ (Monczka & Trent, 1992) ‘import sourcing’ (Swamidass, P., 1993), ‘offshore sourcing’ (Frear et al., 1992), ‘international procurement’ (Scully & Fawcett, 1994), ‘low-cost-country sourcing’ (Lockst??m, 2007) and ‘low-wage-country sourcing’ (Schiele et al., 2011a) are terms often used as equivalents to ‘global sourcing’.
Global sourcing also involves setting up production operations in different countries to serve various markets, or buying and assembling components, parts or finished products worldwide (Murray et al.,1995, p. 181). In the literature of Monczka et al., (2008, p. 38) sourcing refers to ‘the process used to identify user requirements, evaluate the need effectively and efficiently, identify suppliers, ensure payment occurs promptly, ascertain that the need was effectively met, and drive continuous improvement’. There are many definitions of global sourcing but specifically one definition catches the eye; global sourcing is an automatic expectation to respond to competition’ (Carter et al., 2008, p.225). This makes us question whether the motives to global sourcing are rather externally than internally focused. To research this question behind global sourcing, we extend this chapter by reviewing existing literature about the history, trends and motives of global sourcing.
Global business transactions have been reported to be growing three times stronger compared to domestic economies during the last decades and this trend continues (Rodrigues et al., 2005; Kusaba et al., 2011). Since 1851, the world’s industrial and economic landscape started to change. Companies engaged increasingly more in international sourcing activities and have the expectation to reap substantial competitive advantages from it (Horn et al., 2013). Nevertheless, in contrast to domestic supply chains, the complexity of global supply chains is often underrated (Maccarthy & Atthirawong, 2003). The past 30-35 years, we identified three waves of global sourcing. The first wave, starting around 1980, focused primarily on the global sourcing of manufacturing activities. As a result, research also focused on such activities of firms, with Kotabe & Omura (1989) study as a pioneer in the examination of global sourcing. Large manufacturing firms increasingly set up their operations globally and began to use suppliers from many countries to exploit best-in-world sources (Quinn & Hilmer, 1994). As a consequence, supply chains became more global and complex, with manufacturing firms sourcing from suppliers in many countries for raw materials, intermediate and final products.
The second wave arose in the beginning of 1990 when firms realized information technology departments were growing but not value adding (Cross, 1995; Loh & Venkatraman, 1992). IT commoditized and firms started outsourcing these activities as they did not perceive new in-house information systems to be beneficial to their core business activities. Global sourcing particularly comprised of labor-intensive and standardized programming activities. These could be conveniently sourced from locations such as India. The occurrence of the IT wave spawned the growth of specialist providers such as EDS and Accenture.
A third wave, identified as the offshoring movement, commenced not too long ago. We are currently living in the era where firms outsource their IT activities alone. The outsourcing of business processes has been extended beyond IT services to a range of other activities such as finance, accounting, human resource management, sales and after-sales services. Similar to the period portrayed as the second wave, also during this period firms seized the benefits of the upcoming trend. Also, the round-the-clock availability of sources by having different time zones were beneficial. Business-process providing firms became the real deal. However, this third wave is receiving much publicity. While the market for business-process providers saturates, academics are concerned that foreign suppliers may be moving up the knowledge chain more rapidly than expected by sourcing firms. This knowledge transfer could in the long run be a risk to the sourcing firms’ ability to differentiate themselves from their foreign suppliers. Such ”hollowing-out” concerns have previously been raised about the outsourcing of manufacturing activities before (Bettis et al., 1992; Markides & Berg, 1988; Kotabe, 1998). The recent waves of global sourcing are summarized in table 1.
Table 1: Recent waves in global sourcing (Kotabe, Mol, & Murray, 2009).
According to Mol et al., (2005) the drift towards global sourcing has been powered by two fundamental changes in both managerial and scholarly thinking about the costs of global sourcing. First, there is a core competency strategy which leads to lower vertical integration followed by increased outsourcing (Bettis et al., 1992; Quinn & Hilmer, 1994). It can be observed that the depth of value added has decreased, e.g. to 25% in the automotive industry compared to around 80% in the 1980s (Heberling, 1993; Verband der Automobilindustrie, 2004). In line with that development, the direct labor cost decreased to approximately 10% in the majority of companies (Birou & Fawcett, 1993).
Secondly, global sourcing is driven by the idea of the exploitation of lower factor costs by allocating activities in the value chain to regions with a lower comparative price level (Hartmann et al., 2008) (Kogut, 1985; Porter, 1980; Steinle & Schiele, 2008). In other words, these factor costs (e.g. materials, labor, tax rates, etc.) are lower in comparison to the location where the buying organization is situated (Kotabe & Mudambi, 2009, p.122). Figure 1 is an exemplary representation of a case in which capital is relatively cheap in country II, whereas labor is comparably cheap in country I. In most cases, firms engaging in global sourcing will find themselves in a second type country, whereas country I more represents a typical sourcing region. Following the logic, capital intensive process steps are undertaken in country II and labor intensive work is more likely to be done in country I (Kogut, 1985). Therefore, the potential comparative advantage is assumed to influence the decision where to source and where to market, particularly when the respective cost factor is intensively used (Horn et al., 2013, p. 28). As the graph indicates, global sourcing enables companies to use efficiently worldwide distributed resources by decoupling them from their regional economies and countries of origin (Birou & Fawcett, 1993).
Figure 1: Value-added chain of comparative advantages
(Kogut, 1985, p. 19).
The trend of global sourcing has been set by the core competence strategy and comparative advantage. The scope of global sourcing however, has evolved over time. Whether to procure components or products from abroad was determined strictly on price and thus strongly influenced by the fluctuating exchange rate. The appreciation of the dollar encouraged companies to intensify offshore sourcing, while the depreciation of the dollar prompted domestic sourcing. Today, many companies consider not simply factor costs but also other motives as a basis for sourcing abroad (Kotabe & Murray, 2004).
The access to valuable technologies and highly innovative products has been shown as one of the motives to source from outside country borders. This particular occurrence has also been referred to as global technology sourcing, meaning the identification of foreign suppliers offering superior products or technologies that are otherwise not available in the domestic markets. (Steinle & Schiele, 2008). Quintens et al. (2006b) also stress the importance of assessing the advantages of global sourcing on a functional level. Hartmann, Bals & Kaiser (2008) argue in a similar way, stating that resources and capabilities accessed in the sourcing regions might lead to market advantages through being able to sell differentiated products.
Also, many regions with comparably low labor costs have been identified by fast economic growth and large markets in absolute terms. Sourcing firms thrive to set foot into those markets by allocating purchasing volumes to those regions (Barney, 1999; Bozarth, et al., 1998; Handfield, 1994; Monczka et al., 2008; Smith, 1999; Spekman R., 1991; Trent & Monczka, 2003b). In this context, Arnold (1989, p. 22) argues that by establishing a presence in the market through purchasing activities, a company can systematically and carefully prepare an entry into the sales market at a later stage. Sometimes firms also have to fulfill local content requirements, that is, sales activities are bound to sourcing activities in the respective countries (Bartlett & Ghoshal, 1999).
Institutional reasons have been argued to be another pedestal for the initiation of global sourcing activities. Global sourcing in that sense are the collective mindset, acting as a ‘dominant logic’ or ‘industry recipe’ (Matthyssens, 2007; Spender, 1989). Therefore, psychological leader-follower effects (Kotabe & Mol, 2006, p.393; Horn et al., 2013, p.28; Lewin & Volberda, 2011, p.247) also referred to as the ‘bandwagon effects’ (Schweller, 1994) in which firms copy other firms’ behavior in an occurrence of isomorphism, might be a valuable explanation for global sourcing initiation.’
However, the core driver of the latest form of global (i.e., both onshore and offshore) outsourcing is the heightened organizational and technological capacity of firms in decoupling and coordinating a network of remotely located external suppliers performing an intricate set of activities (Levy, 2005). The superior exploitation and selection of suppliers can result in strategic and competitive advantages for the firm engaging in global sourcing (Kogut, 1985).
Following up on the exploitation and selection of suppliers, Kotabe et al. (2009) state that the approach to how sourcing should be done has become a critical strategic decision, that is influenced by the capabilities needed to compete and help sustain a firm’s competitive advantage. In recent literature, scholars frequently contradict the shallow, conservative perspective on global sourcing where the activity of buying from a foreign country to achieve lower unit prices, global sourcing and supply also moves beyond international purchasing. Although these two terms are used interchangeably, global sourcing and supply includes the integration of sourcing, operations and, frequently, design/development and/or internal customers located in different countries. It includes the purchase of combined requirements of more than one of a company’s business units/sites from outside the borders of the country where the purchased goods or services are used’ (Monczka et al.,2006). In that sense, global sourcing does not purely focus on the operational purchasing perspective but indeed has a rather strategic character and covers a broad range of activities (Trent & Monczka, 2003b).
Scholars have gone through different definitions of global sourcing and the necessity of having a fully integrated purchasing department. One of many definitions of integration states that integration is a process of interdepartmental interaction and interdepartmental collaboration that brings departments together into a cohesive organization (Kahn & Mentzer, 1998, p. 56).
According to Monczka & Trent (2002), the movement along a continuum containing domestic sourcing, international purchasing and global sourcing, goes through five phases. In comparison to international sourcing, domestic sourcing (level I) is a very straightforward activity, whereas in international purchasing (level II), organizations have to deal with increased regulations, longer distances and delivery time, currency fluctuations, customs, cultural aspects and time differences. Level II is frequently performed on a reactive or ad hoc basis. When the necessity of international purchasing becomes a routine, organizations make the international procurement activity as part of their sourcing strategy. The activity in level III however is not coordinated and performed well until their sourcing strategy is coordinated and integrated with their global buying and site locations (level IV). Operating at level IV requires worldwide information systems, personnel with advanced knowledge and skill sets, extensive coordination and communication mechanisms, an organizational structure that supports global integration and an executive leadership that can clearly articulate a global vision (Trent & Monczka, 2003). The last phase comprise of a full integration and coordination system among worldwide locations including functional groups (e.g. operations, sales, R&D departments). In the next subsections, we will divide the five phases into internal and external integration. As Monczka & Trent (2002) state, internal and external integration is a necessity for global sourcing and therefore, essentially forms the definition of global sourcing in this study.
2.1.1. Internal integration
Internal integration refers to the extent to which a firm can structure its organizational procedures, behaviors and practices into collaborative, synchronized and manageable processes in order to satisfy customer requirements (Cespedes, 1996; Chen & Paulraj, 2004; Kahn, 1996).
Internal integration largely involves cross-functional cooperation, or working together across different functions in process improvement or new product development. It also involves data and information system integration by the use of real-time searching of inventory and operating data, enterprise resources planning (ERP), and the integration of activities in distinct functional areas. Internal integration recognizes that different functions within a firm should not act as functional silos, but instead as part of an integrated process (Zhao et al., 2011). Internal integration fundamentally refers to working together, strategic cross-functional cooperation, and information sharing between internal functions.
Prior to supply chain management thinking, companies relied on internal integration to gain competitive advantage and company performance (Zhao et al., 2011). Therefore, we stress the importance of internal integration as it enables external integration. Organizations must first develop internal integration capabilities through system-, data-, and process-integration, before they can engage in meaningful external integration (Zhao et al.,2011). Scholars have also highlighted the importance of intra-firm integration, e.g. in terms of knowledge transfer and cooperation within the firm, e.g. for new product development (Kahn, 1996), make-or-buy decisions (Moses & Ahlstroem, 2009), organizational learning (Huber, 1991), and general performance of the firm (Maltz & Kohli, 1996). However, for many firms there is still considerably much space for improvements (Ireland & Bruce, 2000), e.g. mutuality, information exchange and a collaborative culture (Baratt, 2004).
As far as integration is concerned, Narashiman and Das (2001) showed that the internal integration of strategic purchasing practices with the firm’s objective enables superior operational performance; however they did not address external buyer-supplier integration. Flynn et al. (2010) found that internal integration is the main enabler of business performance. In the context of global sourcing however, the coordination of suppliers is also a necessity. This will be discussed in the following section.
2.1.2. External integration
External integration is defined by the extent to which a firm can partner with its key supply chain members (customers and suppliers) to structure their inter-organizational strategies, procedures, practices and behaviors into synchronized, collaborative and manageable processes in order to fulfill customer requirements (Chen & Paulraj, 2004; Stank et al., 2001b). External integration embraces a strategic alliance with customers and suppliers. The firm builds strategic partnerships with its customers and suppliers in an attempt to jointly develops strategies facing market opportunities (Narasimhan & Kim, 2002). Working together, synchronized planning and information sharing suppliers and customers to facilitate operations and jointly resolve problems are also key to external integration. External integration enables companies to form collaborative relationships with trading partners, and leverage their core competency while reducing transaction costs (Zhao et al., 2008). External integration is often described as the higher level of supply chain management (Stevens, 1989; Stevens, 1990; Flynn et al., 2010).
Within the global sourcing context, organizations generally struggle to integrate internal functions as well as the entire supply chain (Pagell, 2004). According to (Sheth & Sharma, 1997), there are several focal reasons why firms should be externally integrated with suppliers. Having a relationship with suppliers will enable firms to receive enhanced service and therefore be more efficient in procurement. Second, firms are aware that supplier relationships will allow them to be more effective. It is easier to implement strategies (e.g. new market entrance), if firms have relationships with their suppliers. Third, there are enabling technologies that permit firms to select their best suppliers and customers. Computer applications allow firms to calculate profitability associated with each supplier and customer. Lastly, competition and the growth of alliances will force firms to develop better supplier relationships to maintain a competitive edge. (Frohlich & Westbrook, 2001) also showed that external integration has a positive impact on the improvement of the buying firm’s performance. According to Flynn et al. (2010), external integration is positively related to operational performance, given the positive relationship between internal integration and operational performance. The importance of external integration is also reflected by some influential SCI studies that only investigated external integration, but not internal integration (Frohlich & Westbrook, 2001; Petersen et al., 2005; Das et al., 2006; Devaraj et al., 2007; Devaraj et al., 2007).
However, there are some critical elements in order to have a successful transition from a traditional buyer-seller relationship to a more collaborative one (See Figure 2). Successfully collaborating by means of cross-functionality, joint-decision making, process-alignment and true supply chain metrics is necessary (Baratt, 2004). According to Spekman & Carraway (2006) the critical elements are called facilitating capabilities, which consists of the integration of people (mindset (Liedtka, 1996), and skill sets (Davis & Spekman, 2002)), processes (Izquierdo & Cillan, 2004), structures, and information technology (Ryssel et al.,2004) across buyer and seller (in actuality across the entire supply network). As it relates to performance, two points become quite salient; Firstly, benefits need to be considered system-wide such that what is good for one partner is good for all. Second, beyond the changes in behavior and attitudes needed to collaborate, performance metrics must also change. Without these two drivers, firms often simply lack the motivation to employ their facilitating capabilities effectively.
Current literature discusses two opposing views of the long-term implications of external integration. One school of thought argues that many successful companies have developed a dynamic inter-organizational network through increasing cross-border joint ventures, subcontracting and licensing activities (Miles & Snow, 1986). This flexible network system, also known as supply-chain alliances, allows each participant to pursue its particular competence with each network participant complementing rather than competing against the other participants for the common goals. Such alliances are often formed by competing companies in pursuit of complementary abilities (e.g., new technologies or skills) from one another, thus helping the sourcing firm to acquire a competitive advantage by sourcing major components that involve high asset specificity from its alliance partners (Murray, 2001).
The other school of thought argues that while a firm may gain short-term advantages, there could also be negative long-term consequences. As the firm becomes more reliant on its independent suppliers, it may not be able to keep abreast of constantly evolving design and engineering technologies without engaging in those developmental activities (Kotabe, 1998). Consequently, the firm encounters the inherent difficulty in sustaining its long-term competitive advantages. In other words, over time a firm’s technical expertise and capability surplus vis-a-vis its foreign suppliers may diminish to the point that its value added is limited, and it may become more like a trading company. Combining the two schools of