Global Sourcing in International Operating Companies

Global sourcing in international operating companies
Why do international operating companies deploy global sourcing strategies?

Date: 11-06-2010 Supervisor: Dr.ir. J.S. Small
Author: Robert-Jan Boonstra University: Tilburg University
ANR: 537482 Department: Organization and Strategy
Number of words: 6,558

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Abstract
Due to globalization, international operating companies have to shift their sourcing strategies.
Customers all over the world are more demanding and expect that companies fulfill their demands
quickly. International operating companies have to implement strategies that support flexibility and
quick response to customers.

This thesis was formed to explain the phenomenon global sourcing and explain the opportunities and
risks regarding global sourcing. Combining these subjects and explain the recent trends in global
sourcing strategy. The main research question of this study is: Why do international operating
companies deploy global sourcing strategies?

In chapter two of this thesis the differences between global sourcing and single sourcing was studied.
It seems that there are differences between these strategies and moreover that it do matter in which
industry a company operates. In this chapter a framework is given of the differences between global
sourcing and single sourcing.
To implement a global sourcing strategy, it is important to which degree a company wants to expand
their market. Furthermore, the degree of product innovation and process innovation plays a significant
role of implementing a global sourcing strategy.
In contrast to this sourcing strategy, companies can implement a single sourcing strategy. Companies
who carefully select their suppliers and want to achieve a long-term relationship with these suppliers
may implement a single sourcing strategy. Although, it is important in which industry a company
operates.

Opportunities and risks of global sourcing was discussed in chapter three. To explain the opportunities
of global sourcing a framework is given over the recent years. This framework provide that there is a
shift from qualitative decisions to select suppliers, to a more cooperation and partnerships alliances.
To carefully explain the risks of implementing global sourcing, case studies were presented in this
chapter. The main conclusion was that the political environment, tariffs barriers and exchange rates
tend to be the most important risks.

To select appropriate suppliers for a companys global sourcing strategies, determinants of the supplier
selection was provided. Based on literature the conclusion was that companies have to select their
products into categories. After providing the categories, companies can adequately select their
suppliers.


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In chapter five the relationship between global sourcing and competitive advantage was discussed. To
provide evidence, case studies were investigated. It seems to be important that competitive advantage
can be explained in two ways and moreover that it the results in the two industries were different from
each other.

In the last chapter, discussions, limitations and recommendations for further research were discussed.

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Table of contents

Chapter 1 Research proposal _______________________________________________________ 5
1.1 Problem indication ___________________________________________________________ 5
1.2 Problem statement ____________________________________________________________ 6
1.3 Research questions ___________________________________________________________ 6
1.4 Research design and data collection ______________________________________________ 6
1.5 Demarcation ________________________________________________________________ 6
1.6 Structure ___________________________________________________________________ 6
Chapter 2 global sourcing strategies are different from single sourcing strategies ___________ 8
2.1 Global sourcing in general _____________________________________________________ 8
2.2 Different global sourcing strategies _______________________________________________ 9
2.3 Single sourcing in general _____________________________________________________ 10
2.4 Framework of differences between global sourcing and single sourcing _________________ 11
2.5 Conclusion _________________________________________________________________ 12
Chapter 3 Opportunities and risks of deploying global sourcing strategies ________________ 13
3.1 Opportunities and reasons to deploy global sourcing strategy _________________________ 13
3.2 Risks to deploy global sourcing strategy __________________________________________ 14
3.3 Conclusion _________________________________________________________________ 15
Chapter 4 Determinants of supplier selection in global sourcing _________________________ 16
4.1 The relation between supply chain management and global sourcing ___________________ 16
4.2 Selection criteria of suppliers __________________________________________________ 17
4.3 Trends in selection methods of suppliers _________________________________________ 18
4.4 Conclusion _________________________________________________________________ 18
Chapter 5 The relationship between global sourcing and competitive advantage ___________ 19
5.1 Competitive advantage in general _______________________________________________ 19
5.2 Global sourcing and competitive advantage in the automotive and apparel industries _______ 20
5.2.1 Global sourcing at Toyota in the automotive industry ____________________________ 20
5.2.2 Global sourcing at Zara fashion in the apparel industry ___________________________ 21
5.4 Conclusion _________________________________________________________________ 23
Chapter 6 conclusion and recommendations _________________________________________ 24
6.1 Summary of findings _________________________________________________________ 24
6.2 Discussion _________________________________________________________________ 25
6.3 Limitations and recommendations ______________________________________________ 25
References _____________________________________________________________________ 27

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Chapter 1 Research proposal
1.1 Problem indication
For many decades, researchers in supply chain management have investigated the effects of global
sourcing on the performance of companies. Franko (1978) was among the first authors, who stated that
United States companies were not so dominated anymore, Western Europe and Japanese companies
were also trying to dominate the international market. Buckley and Pearce (1979) state in their
research that major international oriented companies focus on global sourcing and producing in
foreign countries. Moreover the researchers state that not only firm characteristics play an important
role, but also industry characteristics and national traits. Building on the research of Buckley and
Pearce, two researchers have integrated sourcing in the value chain theory (Kogut, 1985; Porter,
1986). These authors state that sourcing into foreign countries became more and more important to be
competitive.
In the literature, a separation can be made between global sourcing strategies and single sourcing
strategies. According to Burke, Carrillo and Vakharia (2007) single sourcing is different from global
sourcing, since companies search for a single supplier to for the components of their products.
However, global sourcing can be described as a close collaboration between the global business
activities of companies (Kotabe & Murray, 2004).
In the last decades there is growing support that global sourcing leads to competitive advantage for
the firm (Porter, 1980). Porter suggests that firms can gain competitive advantage by primarily
focusing on structural characteristics of a firm, (e.g., relative bargaining power, barriers to entry, and
so on). Another view on how to gain competitive advantage is the resource-based view. Barney
(1991) state that to gain competitive advantage it is necessary that only assets that are valuable, rare,
inimitable and imperfectly sustainable can create competitive advantage and in this way lead to higher
performance.
Because of the growing literature on global sourcing, this study analyses the relationship between the
different global sourcing strategies and the competitive advantages international operating companies
have. The statement discussed is: why international operating companies search for global sourcing
strategies.


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1.2 Problem statement

1.3 Research questions
What are global sourcing strategies and how do they differ from single sourcing strategies?
What are the opportunities and risks of deploying global sourcing strategies?
What are the determinants of supplier selection in global sourcing?
What is the relationship between global sourcing and competitive advantage?

1.4 Research design and data collection
This thesis is a descriptive study based on literature reviews. The literature review is based on the
phenomenon global sourcing, achieving competitive advantage and differences in strategies in
different countries. The data collection for this thesis is based on key word searching and citation
analysis. The key words of this thesis are global sourcing, competitive advantage, sourcing strategies
and opportunities and risks of sourcing.
The following databases are used for this thesis: Catalogue Tilburg University: Contains all titles of
books, reports, conference proceedings and journals. ABI/Inform Global: Contains bibliographic
information and abstracts from articles from over 2000 journals in the area of business economics and
management, and Web of Science: These databases should provide all the literature information for
this thesis.

1.5 Demarcation
In this thesis the focus is on different global strategies in international operating companies. This
thesis investigates the relationships between global sourcing strategies and gain (sustainable)
competitive advantage.
1.6 Structure
The first research question is discussed in chapter two. The term sourcing is expounded and the
difference between global sourcing and single sourcing is explained. The relatedness between business
activities and sourcing policy is also discussed.
Chapter three gives an answer to the second research question. It deals with the opportunities and risks
of global sourcing strategies in international operating companies.

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The next chapter, gives an answer to the third research question of this paper. The determinants of the
selection of suppliers for global sourcing is discussed.
The fifth chapter deals with the relationship between global sourcing strategies and competitive
advantage.
Chapter six discusses why international operating companies deploy global sourcing strategies. In this
chapter the problem statement is answered. Concluding, the final chapter mentions the limitations of
this research and recommendations for further research.


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Chapter 2 global sourcing strategies are different from single
sourcing strategies
2.1 Global sourcing in general
In the last decades, many researchers have found that, due to global competition and customer service
activities, firms are critically evaluating their business activities. Therefore firms are extensively
sourcing from all over the world to response to customer demands.
Hudson, (1971) was among the first author who states that the focus was too much on the seller
market and not on the buyer market. Hudson (1971) suggested to integrate the buyer and supplier
relation. To support this research, Kotler and Levy, (1973) investigated the selling patterns of
international operating companies. The main conclusion of their research was that these companies
have to focus on effective input processes and output processes. According to Kotler and Levy (1973)
this results in better coordination and firm performance.
To focus more on sourcing strategies and explaining which sourcing strategies there are, it is necessary
to define sourcing:
Sourcing generally refers to those decisions determining how components will be supplied for
production and which production units will serve which particular markets (Davison, 1982 p. 23)
Sourcing strategies have become more and more important issues for firms. Due to global competition
and upcoming markets, international operating companies have focused more on global sourcing
strategies. Sourcing strategies are diverse and includes many factors, such as production locations,
phases of production, internal versus external components sourcing and internal versus external
assembly locations, (Kotabe & Omura, 1989). Firms have to consider were to put production locations
and firms have to distinguish how to source materials and components. These strategic decisions are
included in the global sourcing strategy of a firm. Hefler (1981) investigates the main reasons to
carefully develop a global sourcing strategy. He states that firms must consider the manufacturing
costs, industrial and cultural environments.
In support of the findings of Hefler (1981), Monczka and Giunipero, (1984) added other significant
determinants for international operating companies to consider global sourcing. They investigated that
distance, nationalism and a lack of working knowledge are the major concerns for firms to adopt a
global sourcing strategy. In the literature there are also other determinants which plays an important
role in global sourcing. Buckley and Pearce, (1979) developed other parameters to describe global
sourcing. These variables according to Buckley and Pearce, (1979) were; the degree of production; the
degree of sales and the export behavior of the company. To support the theory of Buckley and Pearce,
Kotabe and Murray, (1990) stated that sourcing strategies are based on three factors; 1. the modes of

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international component sourcing, 2. the degree of product innovation and 3. the degree of process
innovation.
2.2 Different global sourcing strategies
Companies can adopt different kind of sourcing strategies for their business activities. The traditional
strategy, companies follow is to manage efficient the input activities and acquire operational efficiency
(Porter, 1986). Another approach is that firms should focus more on collaboration with their suppliers.
Quinn, (1992) argues that outsourcing is not suitable for most international operating companies.
Firms should focus on unbundling activities into multiple businesses. According to Kotabe and
Murray (2004) firms have to make several basic choices in deciding how to serve foreign markets. The
first choice firms have to make, relates to the use of imports, assembly, or production within the
country to serve a foreign market. Another decision a company has to make is the use of internal or
external supplies of components or finished goods. Therefore, the term sourcing is used to describe
management by multinational companies of the flow of components and finished products in serving
foreign and domestic markets.
For this thesis global sourcing is based on the explanation of Kotabe and Murray (2004). To explain
visually the different sourcing strategies, a summary is given in the figure below.

Domestic Foreign
Internal sourcing Onshore in sourcing Offshore in sourcing
External sourcing Onshore outsourcing Offshore outsourcing
Figure 1: Different sourcing strategies, (Kotabe & Murray, 2004)
International operating companies can procure components and products either domestically (i.e.,
domestic sourcing) or from abroad (i.e., offshore sourcing). In developing viable sourcing strategies
on a global scale, companies must consider manufacturing costs, the costs of various resources, and
exchange rate fluctuations (Chen, Paulraj & Lado, 2004). On the other hand firms also need to
consider the availability of infrastructure (including transportation, communications, and energy),
industrial and cultural environments and the political environment in foreign countries (Monczka &
Giunipero, 1984).
To summarize, researchers have indicated several issues international operating companies have to
deal with. Logistics, inventory management, distance, nationalism, and lack of working knowledge
about foreign business practices, among others, are the major operational problems identified by
international operating companies in implementing global sourcing.
Some studies have shown, that operational problems, for example where to source major components
seems less important than how to source them (Murray, Kotabe & Wildt, 1995).


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2.3 Single sourcing in general
Single sourcing is different from global sourcing. According to Burke, Carrillo and Vakharia (2007)
single sourcing can be described as a relationship between the firm and one supplier which is the only
supplier for a particular product. In the same study Burke et al. (2007) argue that firms striving toward
a single sourcing strategy, enable benefits for both parties to be achieved.
Swift (1995) investigated single sourcing strategies and multiple sourcing strategies in American
companies. The research was conducted in the chemical industry, electronical industry and
transportation industry. The aim of this study was to find evidence to support why companies in these
industries use single sourcing strategies or multiple sourcing policies.
The results of this study are interesting for this thesis, since a comparison can be made between
companies that focus on global sourcing and companies that focus on single sourcing.
Swift (1995) concluded that companies that implemented single sourcing strategies are focusing on the
long-term. They are not interested in low initial price, they are more interested in the total life cost of
the product. Furthermore, indicators for single sourcing were, technical support ability and the
reliability of the product.
Swift (1995) stated that the results of this study cannot be generalized to other industries. It cannot be
concluded that other industries focusing on the same reasons. Another limitation is that this study
contains questionnaires for the purchasing managers of the firms and not for example to marketing
managers.
In contrast to the investigation of Swift (1995), Larson and Kulchitsky (1998) investigated single
sourcing strategies, with respect to the marketing and sales department of companies. Larson and
Kulchitsky (1998) support the findings of Swift (1995) and moreover, they state that selecting a
supplier has to be done with utmost care. Industrial managers have to ask several critical questions
before they select suppliers.

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2.4 Framework of differences between global sourcing and single sourcing
In this section the differences between global sourcing and single sourcing are explained. As
mentioned in the previous sections, there are differences between both types of sourcing strategies.
In the figure below a summary is given from authors who discus global sourcing and authors who
discus single sourcing.

Global sourcing Single sourcing
Author Main factors Author Main factors
Buckley and
Pearce, 1979
Degree of sales
Degree of production
Export behavior of company
Swift, 1995 Determination of long-
term relationships
Hefler, 1981 Determination of manufacturing
costs
Determination of industrial and
cultural environment
Larson and Kulchitsky,
1998
Careful determination
of selecting suppliers
Kotabe and
Omura, 1989
Determination of production
facilities
Determination were to source
Burke et al., 2007 Determination of long
term relationship with
supplier
Kotabe and
Murray,
1990
Modes of international sourcing
Degree of product innovation
Degree of process innovation

Chen et al.,
2004
Determination of manufacturing
costs
Determination of exchange rate
fluctuations

Figure 2: Main factors of global sourcing and single sourcing
In the figure there is a separation between authors who described global sourcing and authors who
described single sourcing.
Buckley and Pearce (1979) state that firm with a large export behavior are also interested in global
sourcing implementation. In support of the theory of Buckley and Pearce (1979), Hefler (1981) stated
that companies have to consider the manufacturing costs and the industrial and cultural environment.
In addition to these findings, Kotabe and Omura (1989) and Kotabe and Murray (1990) investigated
the production facilities and the degree of product and process innovation. Chen et al. (2004) argue
that firms who implements global sourcing strategy, have to take into account the manufacturing costs
and the exchange rate fluctuations.

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2.5 Conclusion
In this chapter there is a separation made between global sourcing and single sourcing. In the sections
an explanation is given of global sourcing and single sourcing. It can be concluded that companies
who wants to implement global sourcing strategy are usually interested in foreign markets and want to
expand their export market.
Companies that carefully consider a long-term relationship with a supplier, implement single sourcing
strategies. However, the industry which companies are operating in have to be appropriate for this
sourcing strategy.
Companies that want to expand their products to foreign markets, strive towards a global sourcing
strategy. Furthermore the degree of product innovation and process innovation is also a main factor to
implement global sourcing.
On the other hand, companies that want to build long-term relationships with suppliers and are not
focusing on price, implement single sourcing strategies.

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Chapter 3 Opportunities and risks of deploying global sourcing
strategies
In this chapter the advantages and disadvantages are discussed of global sourcing strategies.
Furthermore there are case studies of different authors that explain which advantages there are and in
which branches.
3.1 Opportunities and reasons to deploy global sourcing strategy
As mentioned in chapter two, there are different views on global sourcing for different branches.
According to Sheth and Sharma, (1994) companies have to shift from a transaction strategy to a more
relationship oriented strategy. A transaction strategy can be explained as, one in which there is a
primary focus on transactions and exchanges between companies, (Sheth & Parvatiyar, 1995). A
relationship oriented strategy can be described as, a focus on important suppliers to gain a strong
position with long-term contract in the competitive market (Genesan, 1994).
Different researchers investigated the reasons why companies are going abroad. Monckza and
Giunipero (1984) investigated in 26 large American firms why companies were sourcing in foreign
countries. The results showed that the motives for global sourcing were: lower prices abroad,
international orientation, better quality abroad and technological advantages. In a later study of Min
and Galle, (1991), they reinvestigated the results of Monckza and Giunipero, (1984). The results of
their study were also lower prices of products in foreign countries, better quality of products and more
advanced technology. More interesting in their research was the fact that reliability of delivery and
willingness to solve problems were also important reasons to implement global sourcing strategies.
Both studies were based on American companies who were sourcing abroad. In contrast to these
studies Rexha and Miyamoto (2000) investigated the sourcing policy in Australian companies. The
most interesting and important results were that Australian companies depend heavily on overseas
suppliers, due to a small domestic market. In another study by Lye and Hamilton, (2000) the
researchers investigated also the reasons to search abroad, in 36 companies that operates in four
countries (New Zealand, Australia, Japan and U.S). The results of this study supported the results of
earlier studies. Mutual trust, knowledge, dependable deliveries and dependable long-term supply were
very important reasons for these companies to implement global sourcing. In the figure below a
summary is given of the most important studies and their results in recent years.

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Figure 3: Reasons to implement global sourcing strategies
This figure represent the most important reasons for international operating companies to implement
global sourcing strategies. It is interesting to see that factors like price, availability of the materials and
quality of the products are global wide, in different countries the most important factors.
In support to the investigations, Trautmann, Bals and Hartmann (2009) argue that international
operating companies do not only implement global sourcing strategies for economy of scale, but also
sharing knowledge and information.
In the research of Trautmann et al. (2009) some limitations about implementing global sourcing were
made, for example some reasons for implementing global sourcing were not accurate. In a case study
in hybrid purchasing companies, the conclusion was that the motives for implementing global
sourcing are insufficient and missing implementation guidance. This research provides evidence that
the reasons to search abroad, depends on the forces for global integration and local responsiveness.
Moreover Trautmann et al. (2009) argued that companies should coordinate better between the
suppliers, make a separation between local responsiveness and global responsiveness to successful
implement global sourcing strategies.

3.2 Risks to deploy global sourcing strategy
In the previous section an explanation is given of the opportunities and reasons why companies
implement global sourcing strategies. In this section the focus is mainly on the risks of global sourcing
strategies. In this section there are case studies that provides evidence in practice.

Min, Latour and Williams (1995) argue that todays competing markets have an enormous impact on
the sourcing strategies of companies. They state that in selecting international suppliers, many risks
have to be encountered. The authors conclude that the political circumstances, tariff barriers,
communication obstacles, trade regulations and exchange rates are important risks in for global

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sourcing. Furthermore, Min et al. (1995) investigated the risks of global sourcing in practice. For this
investigation the researchers selected seven criteria and selected five foreign suppliers to evaluate what
foreign supplier was the best one to choose.
The seven criteria were; financial terms, quality assurance, perceived risk, service performance, buyer-
supplier relationship, cultural and communication barriers and trade restrictions. These criteria were
examined in Mexico, Taiwan, Korea, Japan and United States. The conclusion of the research was that
Japan turned out to be the best with respect to the seven criteria.
In addition to the investigation of Min et al. (1995), Dunford (2009) researched a case study of FIAT
Auto. They found that globalization and the global sourcing policy resulted in slow growth and
economic crisis in countries as mentioned before.
The consequence for the FIAT Group was a large debit in annual sales and therefore FIAT Group has
to restructure their business units.
For companies it is important what countries are possible options to move production facilities to and
which countries are possibilities for global sourcing.
In addition to the risks Dunford (2009) described, Tsiakis and Papegeorgiou (2008) developed an
integrated model that addresses complex decisions companies have to make in their sourcing strategy.
In this model the authors take production allocation, purchase of raw materials and network
configuration into account. The main results of this study was that companies have to use their data in
APS (Advanced Planning Scheduling) not in a short-term, but in a longer period to address strategic
and tactical supply design aspects.
3.3 Conclusion
In this chapter the opportunities and risks of global sourcing have been discussed. In recent years
researchers have identified reasons why international operating companies implement global sourcing
strategies. It can be concluded that several reasons to implement global sourcing, do not change in
time.
The main reasons for international operating companies to implement global sourcing strategies are
the price of the products, availability and the quality of the products.
In the last few studies it can be concluded that other reasons play an important role for international
operating companies. Reliability of deliveries, mutual trust and sharing information between supplier
and firm are important reasons for going abroad. The assumption was that this play a significant role
in long-term relationship between supplier and firm.
The risks of implementing global sourcing strategies are defined in the previous section. The main
conclusion was that the political environment, tariff barriers, communication difficulties and exchange
rates are the risks for implementing global sourcing.

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Chapter 4 Determinants of supplier selection in global sourcing
In this chapter the determinants of supplier selection in global sourcing strategy are discussed. To give
detailed information about the effects and consequences, some case studies are described in this
chapter. Before describing the determinants the relation between supply chain management and global
sourcing is described.
4.1 The relation between supply chain management and global sourcing
Supply chain management can be described as an integrative approach for planning and control of
materials and information flows to suppliers and customers, (Minner, 2003). Due to globalization and
a more global view of managers of companies, more and more practitioners and researchers are
interested in the phenomenon supply chain management.
To support the interest in supply chain management, Prasad and Babbar (2000) documented in their
literature review the different views on supply chain management by different researchers. In this
study the authors made a classification between topics in supply chain management. Supply chain
management is not just for a domestic market, but an international wide phenomenon, which deal with
the challenges of globalization on managers who designs the supply chains for new and existing
products (Minner, 2003). To identify which suppliers have to be selected, the supply chain network is
illustrated.

Figure 4: Supply network and supply chain management, (Slack et al., 1997)
The focus in this study is mainly on the left hand of this figure, to illustrate which suppliers influence
global sourcing strategies.
In the recent years, there is a shift from the traditional make-to-stock to build to demand. For
global sourcing, this means that it leads to a de-centralized supply chain management and without the
costs of owning the players in the supply chain (Chung, Yam and Chan, 2004).

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4.2 Selection criteria of suppliers
Weber, Current and Benton (1991) were among the first authors that described the latest trends in the
global sourcing strategies and selecting suppliers for companies. In this research the authors stated that
supplier selection was based on several criteria like; quality, delivery, price of the products and
production facilities and capacity. Furthermore it is interesting that in this research a recommendation
is made to use multi-objective techniques, to adequately measure the performance of each supplier. In
connection with the research of Weber et al. (1991), Dowlatshahi (2000) investigated the sourcing
strategies and selection patterns of companies. In this investigation the focus was on long-term,
medium term and short-term relationships with suppliers. To measure the performance in these time
horizons, Dowlatshi (2000) developed nine statements to test the significance between the supplier and
the company, when the contributions and constraints from supplier and buyer are known.
The most important conclusion of this research was, that in practice the shift from short-term
relationships to long-term relationships was not implemented in most of the companies. Dowlatshi
(2000) states that the main reason for this is that the purchase department is not so dominated as it
should be.
These papers provide information about the shift from qualitative decisions, like quality and price to
building relationship with suppliers. In the article of Talluri and Narasimhan (2004) evidence is
available to support this shift. The authors proposed a framework for (global) strategic sourcing. They
suggested that previous supplier selection methods are no longer appropriate.

Figure 5: A framework for (global) strategic sourcing, (Talluri and Narasimhan, 2004)
In this framework the authors visualize a shift from traditional selection to a framework that creates
strategic partners. The advantages of this framework is that it considers the supplier capabilities and
performance metrics to evaluate the efficiency of the suppliers. The most important findings of this

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research were the identification of suppliers for strategic partnerships, selecting targets for
improvement for supplier and identifying the issues suppliers are working inefficiently.

4.3 Trends in selection methods of suppliers
To build on the conclusions and recommendations of Talluri and Narasimhan (2004), Araz and
Ozkarahan (2007) proposed a supplier evaluation and management methodology. The authors stated
that if companies wantto gain competitive advantage, they have to collaborate with their suppliers.
More interesting is that there is a shift from selection of suppliers to involvement of supplier into
product design (Araz and Ozkarahan, 2007). It is important that there is a separation between the
suppliers. Furthermore the authors distinguish four types of suppliers. For strategic partnerships the
company selects perfect suppliers, for supplier development programs good suppliers, for
competitive partnership moderate suppliers and pruning bad suppliers.
To explain the trends in global sourcing, related to supply chain management, a summary is given in
the following figure.

Figure 6: Trends in global sourcing for supply chain management

4.4 Conclusion
In this chapter the research question was to investigate the determinants of supplier selection in global
sourcing.
In the first section an explanation is given of the supply chain network. This supply chain network
provides information about the influence of suppliers on the firm.
Traditionally, companies select their suppliers based on qualitative decisions, like the quality of the
products, price and delivery. In the recent years a trend can be indentified how to select suppliers. The
determinants of supplier selection is more focused on improvement of the products and creating
strategic partnerships with suppliers. Moreover, it can be concluded that international operating
companies select their suppliers based on product level. This means that companies have to distinguish
the importance of the products and then adequately select the suppliers based on strategic partnerships
or supplier development programs.

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Chapter 5 The relationship between global sourcing and
competitive advantage
In this chapter the relationship between global sourcing and competitive advantage is explained. This
chapter provides definitions of competitive advantage and the link with global sourcing for companies
in the automotive industry and apparel industry. Moreover there are case studies that provide examples
in these industries
5.1 Competitive advantage in general
Competitive advantage is a phenomenon that is explained is many ways. In the literature, two ways
often used explain competitive advantage.
The first way is an industry structured view,
according to Porter (1980) firms have to primarily
focus on the firm structure itself. To focus on the
firms structure Porter (1980) developed the five
forces model. He concluded that firms attractiveness
was a function of five forces; the treat of entry new
competitors; the threat of substitutes; the bargaining
power of suppliers; the bargaining power of buyers
and the rivalry between excising companies. In
addition to the five forces model, Brandenburger and
Nalebuff (1995) state that there is also another force,
which explains the firms attractiveness. According
to Brandenburger and Nalebuff (1995), this force is even a larger force than substitutes. The authors
state that complementary products is the sixth force of the existing model of Porter (1980).
As mentioned there is also another approach to explain competitive advantage in the literature. Porter
(1980) describes the firm structure and that firms have to focus on five forces.

Another way to explain competitive advantage arises from Barney (1991). Barney (1991) argues that
when a company wants to achieve competitive advantage, it has to pose certain resources. These
resources includes all assets, information, capabilities and firm attributes a company have. Barney
(1991) states that to gain competitive advantage, the resources have to be;
Valuable, the resources are valuable asset to the firms strategy; Rare, the firms strategy is unique to
competitors and potential competitors; Inimitable, this contains that the firms strategy is different
from competitors and they cannot implement the same strategy; Non-substitutable, this means that it is
Figure 7: Five forces model (Porter, 1980)

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impossible to have substitutes that have the same attributes. Barney (1991) states that the focus on
these resources, can be called the resource-based view.
In contrast to the research of Barney (1991), Priem and Butler (2001) investigate the generalizations of
the resource-based view. Priem and Butler (2001) argue that the resource value in the resource based
view is vague and therefore does not meet the empirical content criterion, that is required for
theoretical systems. However, Priem and Butler (2001) state that the resource-based view has the
potential to have a theoretical status in the future.
Moreover, Barney (2001) reviewed his own theory in the last ten years. Barney (2001) states that the
resource based view is still a good approach to gain competitive advantage. Nevertheless, Barney
(2001) argued that the critique of Priem and Butler (2001) about the value of the resources is correct.
Barney (2001) states that the term valuable could be more simplified and explained as tangible and
intangible assets for a firms strategy.

In this section an explanation of competitive advantage is been given about the two ways firms can
adopt. For this thesis it is important to make clear what competitive advantage is with respect to the
automotive industry and apparel industry.
For this thesis, Barneys approach for describing competitive advantage is used, included the
arguments of Priem and Butler (2001).
5.2 Global sourcing and competitive advantage in the automotive and
apparel industries
In this section an explanation of competitive advantage in the automotive and apparel industries is
described. To provide a framework and explain the competitive advantage of global sourcing in these
industries some case studies are shown.
5.2.1 Global sourcing at Toyota in the automotive industry
In the research of Pfaffman and Stephan (2001), the authors examined the investments of foreign
automotive suppliers in the German market and why automotive suppliers focus their strategies more
on global sourcing.
Due to globalization and a more competitive international market, companies have to reconsider their
strategies to be competitive. Pfaffman and Stephan (2001) state that the automotive industry can
develop three different sourcing strategies to achieve competitive advantage. Automotive companies
can implement global sourcing strategies, single sourcing strategies and module sourcing strategies.
This thesis focuses on global sourcing and single sourcing, therefore module sourcing is taken out of
the equation.

21
In support of the findings of Pfaffman and Stephan (2001),Ahmadjian and Lincoln (2001) investigated
global sourcing strategies in the Japanese automotive industry. They investigated the sourcing strategy
of Toyota.
To evaluate the sourcing strategy, Ahmadjian and Lincoln (2001) state that the main competitors for
Toyota are Nissan, Mitsubishi and General Motors.
The authors state that Toyota implemented a global sourcing strategy for their components.
Ahmadjian and Lincoln (2001) describe that Toyota was searching for a long-term relationship for
components for their cars. In their research, the authors investigate that Toyota and Denso, a company
in automotive electronics, have derived a long-term partnership for the components. According to the
authors, Toyota produces cars in many countries in the world, like United States, Japan and in
Germany. All production locations were supplied by Denso. This means that Toyota implemented a
global single sourcing strategy for most of the components.
Interesting to see is that Toyota implemented a global single sourcing strategy, with Denso as main
supplier for their components.
Furthermore Ahmadjian and Lincoln (2001) state that this kind of sourcing strategy for Toyota, means
that it helps to achieve a competitive price and cost reductions in the sourcing process of components.
However, Toyota did not purchase Denso outright, because Denso has also partnerships with other car
manufacturers. Advantages of these partnerships could help Toyota to improve innovative concepts
for sourcing strategies.
Referring to Barney, the sourcing strategy of Toyota is valuable, because Toyota has created a long-
term partnership with Denso for their components. The sourcing strategy is not rare, because more
competitors, like Nissan have implemented a long-term partnership with Denso.
The strategy of Toyota was not inimitable, however the strategy was, according to Ahmadjian and
Lincoln (2001) not implemented yet by other car manufacturers.
It is difficult to say if the strategy is non-substitutable, the information does not provide a clear answer
to that question.

5.2.2 Global sourcing at Zara fashion in the apparel industry
An example of a company who implements a global sourcing strategy is Zara. As described in a case
study of Ghemawat and Nueno (2003) Zara has purchasing offices in Europe and Asia. They describe
that due to the growth of clothes globally, Zara expanded their sourcing to China.
Interesting to see is that one-half of the garments of Zara purchased is gray, this because Zara can
easily change their finished goods in the right color. Ghemawat and Nueno (2003) state that this
process of purchasing one-half of the garments in gray, creates maximum flexibility in the supply
chain for Zara.

22
Furthermore the authors describe that Zara deals with 200 external suppliers for their raw materials.
The process of dying, patterning and finishing of the semi-finished clothes is managed by Comditel.
Comditel also distributes the finished garments to in-house manufactures of Zara.
Due to the fact that Zara want to create a flexible and fast supply chain, Zara want to react fast on a
customer demands.
Ghemawat and Nueno (2003) describe that the most riskiest fashion items for Zara, were sourced and
produced in small batch size and close to the market, because Zara can react fast on customer demands
and the garments can reordered if they sell well.
To support the findings of Ghemawat and Nueno (2003), Tokalti (2008) investigated in a case study
the benefits of the sourcing strategy for the company Zara. He states that Zara moved several
manufacturing facilities to Morocco, Turkey and India, since these countries work with high-quality
garments with the required responsiveness and flexibility.
To evaluate the strategy implemented at Zara and to investigate whether Zara gains competitive
advantage to their competitors, an explanation is given of the key competitors of Zara in the apparel
industry.
Ghemawat and Nueno (2003) describe that the main competitors of Zara fashion are; The Gap (USA),
Hennes & Mauritz (Sweden) and Benetton (Italy).
To refer to Barney, Zara fashion has created competitive advantage to their competitors in their supply
chain.
The global sourcing strategy of Zara has created value for the entire supply chain. Flexibility and fast
response to customer demand in every country. To reflect this to the competitors of Zara, Ghemawat
and Nueno (2003) state The Gap, Hennes & Mauritz and Benneton have a too long supply chain to
react to the customers fast.
Moreover the strategy is also rare, because Zara outsourced the processes of dying and patterning to
Comditel.
The sourcing strategy is inimitable, because Zara has 200 external suppliers, most of these suppliers
are long-term suppliers of Zara. This minimized formal contractual commitments for the external
suppliers.
It is difficult to say that the sourcing strategy is non-substitutable. There is no evidence that provides a
solid answer to that question. It can be concluded that the sourcing strategy of Zara may be
implemented in The Gap, Hennes & Mauritz and Benneton.


23

5.4 Conclusion
In this chapter an overview of two views of competitive advantage has been given. These ways are not
similar to each other. The first view is the industry focused view and Porter (1980) developed the five
forces model to position international operating companies in his framework.
According to this framework, companies can measure the competitive rivalry. Another way to express
competitive advantage is the resource-based view of Barney (1991). He developed four resources for
companies to measure their strategy in comparison with competitors.

To find a relationship between global sourcing strategies in different industries and competitive
advantage, some case studies in the automotive industry and apparel industry have been investigated.
It can be concluded that in the automotive industry the competitive advantage of global sourcing is
low. This because many car manufacturers implemented global sourcing strategies to react on
customers demands.
In the apparel industry the relationship between global sourcing strategy and competitive advantage is
more significant. In case of Zara, it can be concluded that external suppliers, long-term contract with
suppliers, creates a flexible supply chain to response to customers demands.

Figure 8: Competitive advantage in different industries


24

Chapter 6 conclusion and recommendations
In this chapter a summary is given of the most important findings of this thesis. In the second section
deals with the research question and the complete research. In the final chapter limitations and
recommendations are given for further research.
6.1 Summary of findings
There are differences between global sourcing and single sourcing for international operating
companies. To implement a global sourcing strategy, companies have to consider their export market
and the degree of process and product innovation. Single sourcing can be characterized by long-term
relationships with suppliers.

It is commonly agreed that the opportunities to implement a global sourcing strategy are the price of
the products, the availability of the products and the quality of the products. In recent years researchers
state that more priorities play a significant role in implementing a global sourcing strategy. These
priorities are the reliability of deliveries, mutual trust between supplier and firm and sharing
knowledge and information.
In contract to the opportunities of global sourcing, risks of implementing a global sourcing strategy is
discussed. Researchers state that political environment of a country, tariff barriers, communication
difficulties and exchange rates are the most important risks of implementing a global sourcing
strategy.

Traditionally, companies select their suppliers on qualitative decisions, like quality, price and delivery.
In recent years a trend can be indentified how to select suppliers. Researchers investigated the main
determinants of supplier selection. It is commonly agreed that supplier selection at this moment is
focused on improvement of the products and creating strategic partnerships with their suppliers and
select suppliers for different product levels.

Two case studies of Toyota in the automotive industry and Zara fashion in the apparel industry show
the competitive advantage of implementing global sourcing. Both case studies represent other results.
In the case study of Toyota, the competitive advantage, according to the resource-based view seems to
be low.
In the case study of Zara, the competitive advantage is significant compared to the key competitors in
the apparel industry. More external suppliers en developing a long-term relationship with many
suppliers over the world, creates competitive advantage for Zara.

25

6.2 Discussion
This research tried to give a answer to the following research question: Why do international
operating companies deploy global sourcing strategies? Researchers have presented the advantages of
global sourcing and the disadvantages of global sourcing. Literature on this subject proved that
international operating companies deploy global sourcing, because of the price of the products, the
quality and the availability of the products. Literature proved that the traditional decisions to
implement global sourcing are still important, although sharing information and knowledge and
creating long-term contracts with suppliers is becoming more important.

In order to create an overview of different views of global sourcing the opportunities and risks of
implementing global sourcing are compared.
Many researchers investigate the opportunities and risks in global sourcing strategies. The
opportunities of global sourcing gets more attention in recent years, so studies were found on this
subject specifically. Interesting to see is that a trend can be indentified in the recent years, regarding
the opportunities of global sourcing.
Some studies investigated the risks of implementing global sourcing strategies. The author of this
thesis compare the opportunities and risks based on the studies in both subjects.

To provide a link between competitive advantage and implementing a global sourcing strategy, case
studies are investigated. These case studies provides evidence, that tell us that it do matter in which
industry a company operates.
Nevertheless, it is important for companies to adopt a global sourcing strategy, that enable competitive
advantage. As discussed in this thesis, a global sourcing strategy is the sourcing strategy that deploys
opportunities and sharing information and knowledge.

6.3 Limitations and recommendations
A limitation in this research, is the fact that, there is a lack of scientific sources on the competitive
advantage, related to global sourcing strategies. In the literature few studies have been done to
investigate the competitive advantage in different industries.

This study investigates two specific industries , to measure competitive advantage. The results of these
case studies cannot be generalized to other industries.


26
Another possible aspect is that, global sourcing is not specified in global single sourcing and global
multiple sourcing. The literature provides not enough evidence to separate these sourcing strategies.
Nevertheless, both strategies have a great influence on the same decisions companies have to make in
order to implement a global sourcing strategy. Therefore, this research does not give a clear answer to
specific industries or companies. This thesis is explains why companies deploy global sourcing
strategies.

There are not many studies who investigated global sourcing in different industries, specifically the
comparison between global sourcing and competitive advantage. Therefore, there is no observational
data that provide the differences between the industries.
It is advisable to study the differences between the industries of implementing global sourcing
strategies. Observational data would provide evidence to support the theoretical findings in this thesis.
Besides, some of the discussed case studies are narrowly studied, and can be an opportunity for further
research.

Furthermore, it would be interesting to investigate the difference between global single sourcing and
global multiple sourcing. Since, there are differences between these strategies, it is recommended to
separate these strategies and compare the results of for example empirical data that can be provided in
case studies.


27

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