Global Sourcing: Benefits, Cost

and Risks

October 13, 2006

Andrew Palmer
Centre for Logistics and Supply Chain Management
Cranfield School of Management
The Global Product Sourcing Project

A 1 year project sponsored by the Department for Transport

1. Systematic review

2. Conduct case studies

3. Develop a global product sourcing model

Sourcing Alternatives

GLOBAL PRODUCT SOURCING

Global

Global Offshore
Local or Global Decision

Manufacturing Outsourcing
Local

Local Production/
Outsourcing
Insourcing

Make Buy
Make or Buy decision
 A Systematic Literature Review

Supply chain
management Global sourcing
Risk outsourc* Suppl* management
Unpredict* offshor*
International sourcing
Hidden
Global Suppl* network
Vulnerab* Risk sourcing
Resilience
Security
Reliability
Environment
Infrastructure
Environment &
sustain* Transport*
Transport
pollution Emissions
Infrastructure
shipping Freight
World GDP vs. Global Exports

30

25

20

15

10

0
1950 1960 1970 1980 1990 2000

World GDP Exports Volume

Source: WTO 2005

Scenarios in 2020

• Globalisation unbound 10%

– trade barriers progressively dismounted; accelerated technological
progress; integrated financial markets

• Controlled globalisation 65%

– further gradual trade liberalisation constrained by security concerns
and protectionist pressures

• Globalisation in retreat 20%

– protectionist sentiment thrives in a climate of insecurity

• Globalisation sunk 5%
– global markets disrupted, stagnant consumption; technical advances
dwindle; restrictions on trade, migration and investment

Source: Economist Intelligence Unit (2006) Foresight 2020: Economic, industry and corporate trends
Positive Aspects of Global Sourcing
• COSTS + EFFICIENCY
– Lower overall cost
– Lower labour cost
– Lower land and facility costs
– Lower taxes
– Greater standardisation
• STRATEGIC
– Penetration of growth markets
– Introduce competition between
suppliers
– Improve environmental
compliance
• VALUE
– Improved quality
– Improved delivery reliability
– Improved new product
introduction
– Improved sharing of information
– Uniqueness
Negative Aspects of Global Sourcing

• STRATEGIC
– Loss of Knowledge • VALUE
– Piracy / Abuse of IPR – Quality problems
– Unknown long term impact on – Lower responsiveness
demand / supply
– Language, cultural and time
issues
• ENVIRONMENT AND CSR
– Longer distances (effects on
• COSTS + EFFICIENCY pollution and congestion)
– Hidden costs (transport, travel, – Abuse of the environment
corruption, order processing, – Abuse of employees
translation, legal fees)
– Loss of jobs
– Bureaucracy
– Customs requirements
– Complex coordination
– Risk of supply disruptions
– Risk of currency fluctuations
– Long lead-times, higher inventory
– Security issues
Case Study Outcomes

• Global sourcing strategy is a combination of right location, for right quality

at the right price
• Global sourcing has affected risk profile of companies in a positive way-
more awareness of risk management (RM)
• However, there are no risk departments – project/strategic risk
management are conducted by sourcing departments or people involved
in the decision
• Various tools are used for (RM) – process mapping, critical paths, 3x3
matrix but needs more development
• Product lead is biggest risk to both as well as exposure of NPI, product
liability, IPR
• Hence much of design is done in UK, and video conferencing and close
collaborative relationships to mitigate risks
Case Study Outcomes

• Company A have incorporated transportation risk into their critical

path mgt & work closely with their logistics team. Together they have
lots of transparency in their supply chain – they know exactly when
products are docked, at customs, etc
• Company B have strong ethical trading policies which have been
developed by themselves. They are very concerned/aware about
chemical usage on their products. They are shipping products, only
flying in emergency supply.
• Company C’s 3PL’s take accountability of freight from factories to
destination, port congestions etc
• Company D’s relationship with 3PL needs more development for
better visibility as lead time is their biggest problem area
Risks of Global Product Sourcing
• SUPPLY RISK
– Supply disruptions
– Longer lead-times
– Lower responsiveness
– Quality problems
• PROCESS RISK
– Communication problems
– Quality problems post-
manufacture
• DEMAND RISK
– Indirect effects on corporate
social responsibly can affect
demand
• ENVIROMENTAL RISK
– Natural disasters
– Terrorism
– Global pandemic
– Strikes and demonstrations
– Currency fluctuations
– Travel longer distances (effects
on pollution and congestion)
• CONTROL RISK
– Loss of knowledge
– Piracy / abuse of IPR
Examples of Global Risk

• Supplier Disruptions
– Fire at Phillips plant
(Albuquerque) affecting Nokia
+ Eriksson
– Bankruptcy at UPF-Thomson
affecting Land Rover
• Process Risk
– Vulnerabilities of IT: eg.
Viruses Love Bug, Melissa or
denial of service attacks
• Demand Risk
– Nike reputation affected by
alleged practices at suppliers
Examples of Global Risk

• Environmental
– Kobe earthquake affected
major port
– Global pandemic: Motorola
closed a plant in Singapore
due to one worker being
infected with SARS
– Strikes and demonstrations:
eg. Protest in France

• Control Risk
– General Motors (GM) lawsuit
against China's Chery
Automobile Co. for alleged
piracy of a mini car
Examples of Global Risk

• Transportation
– 10,000 containers a year are
lost overboard
– Heavy seas can damage
containers and contents
The impact of supply chain glitches
on shareholder value

•• Sample
Sampleofof1,100
1,100glitches
glitches(USA)
(USA)
•• Average
Average drop percent in stock7.5%
drop percent in stock 7.5%
when the glitch was announced
when the glitch was announced
•• Average
Averagedropdropofof18.5
18.5% %when
whenstock
stock
price
priceisismeasured
measuredstarting
startingtwo
two
quarters
quarters before and endingtwo
before and ending two
quarters after the glitch
quarters after the glitch

Source: Singhal and Hendriks (2002) "How Supply Chain Glitches Torpedo Shareholder Value." Supply
Chain Management Review
Model Overview

• Developed using Excel spreadsheet with macros

• Global sourcing input parameters
• Local sourcing input parameters
• Database of fixed values being developed
• Analysis to show
– total costs, time, emissions for manufacturer to
DC flow – tabular and graphical
– cost of stock in transit and stockholding
implications
– risk assessment
 Offshore Sourced Costs

International shipping

Inland Inland
Carrier Carrier

Port Customs Customs Port

Manufacturer
terminal terminal Buyer

{
Manufacturing Cost of freight Port costs International Port costs Freight cost Sourcing /
costs freight cost to DC procurement
Inter state taxes Export Import
Cost of documentation documentation Quality control
Cross border tariffs
financing
Export duty Import duties & DC space costs
manufacturing
Taxes
Stock financing
costs
Plus Cost of supporting offshore sourcing

Raw materials Cost of setting up terms of payment

Import and Cost of compliance – security requirements
export duties such as audit trail and official regulatory
Transportation documents
Environmental Implications

Air
(medium Air (long Road (40
Gms CO2 per metric tonne km Air (short haul 452 haul > Sea Sea tonne Rail Rail
haul < to 1600 1600 (inland (ocean HGV - (Diesel (Electric
452kms) kms) kms) ship) ship) diesel) loco) loco)

WRI-WBCSD GHG Protocol

1,580 800 570 35 10 30 20 40
Initiative, June 2003

NTM, Sept 2005 1,925 867 633 - 15 33 17 1

INFRAS/Univ. of Karlsruhe
(TRENDS1 database) - External 673 31 91 38 19
Costs of Transport, Oct 2004

AP Calc based on 2.7kgs CO2/litre

28
& 8 mpg (29.4 l/100km)

AP Calc based on 2.7kgs CO2/litre

38
& 6 mpg (29.4 l/100km)

Values to be used in GSP model 1,580 800 570 33 13 30 20 -

The Model…
Conclusions from the study so far..

• Risk prevention and management should be central to the

sourcing decision

• Lack of consensus on positive and negative aspects or

outsourcing
– Many contradictions
– Likely to be differences across industries

• Limited consideration of environmental and transport

factors in sourcing decisions

• Limited knowledge of the true cost of global product

sourcing
Global Sourcing: Benefits, Cost
and Risks

October 13, 2006

Thank you.
Any questions?