July 13, 2011

A DECISION-MAKING FRAMEWORK FOR GLOBAL SOURCING

Overview of case study: Global sourcing is at the heights in the period from 1980s to 1990s when manufacturers realize that that it is cheaper to outsource than to own all stages of the production process. Global sourcing has become a key strategic competitive tools in firms. A 1986 survey of manufacturers in the machinery and allied products industry found that the dollar amounts spent on offshore purchases grew from 11% in the early 1980s to more than 15% in 1986. Similarly, in the automobile industry, during the 1980s, General Motors externalized about $4 billion worth of parts and components manufactured in-house, subsequently, declined from 60% to 45% by the end of the decade. An increasing number of US companies have discovered that it is cheaper to outsource than to own all stages of the production process outsourcing can provide immediate cost reductions without the usual capital investments. Global sourcing is increasingly used as a proactive strategy to gain competitive advantages. Situations, Issues and Problems (PETELS): Political challenges to satisfy government requirements such as local content, countertrade offset requirements, dealing with regularly government policies for development in various sectors. Economic challenges such as fluctuations in inflation and interest rates, deteriorating balance of payment accounts as well as political risks arising from exchange controls, currency transfer restrictions and government requirements can also prove as adverse condition during global outsourcing. Technological challenges to having research & development activities, latest technology, well developed infrastructure, positive attitude & eagerness to achieve mission/vision in off-shore vendor, so that we can achieve high quality & timely delivery with minimum lead times. In deciding where to source offshore, focus is on the benefits that are expected to be derived from offshore procurement compared to those derived from sourcing domestically. Outsourcing from offshore locations increases both the number and complexity of costs to be evaluated; while certain costs such as taxes, transportation, and insurance are relatively easy to evaluate, others are difficult to evaluate. Environmental Factors: Outsourcing from offshore locations increases both the number and complexity of costs to be evaluated. Offshore sourcing locations which offer differential procurement benefits over other sourcing locations in both qualitative and quantitative terms are preferred. Locations may constitute: y Local onsite This category includes contractors and other service provider personnel co-located with the IT organization. In the case of contractors, they may supply unique skills or short-term assistance to internal IT staff. Other service providers may maintain an onsite team to perform highly interactive tasks and serve as an interface to offsite resources.

CHIRAG ARORA, JOHN DEERE-EPGDBM

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July 13, 2011

A DECISION-MAKING FRAMEWORK FOR GLOBAL SOURCING

y Local offsite Offsite locations in lower cost areas of the host country are the first level of a distributed sourcing strategy. For example, a service provider may locate an application development center in a rural area to take advantage of lower salaries and less expensive facilities. This differential can be significant when comparing costs in Manhattan against rural Iowa. While more expensive than offshore alternatives, by operating in the same country, local offsite avoids many cultural, legal and logistical issues. y Near shore Near shore sourcing uses facilities in nearby countries with lower operating costs. For example, US companies use near shore facilities in Canada, Mexico and the Caribbean and Western European companies send work to Ireland, Russia and other Eastern European countries. Near shore resources tend to be less expensive than local offsite and remain within convenient travel distance from the host organization.

y Offshore Offshore sourcing relies on facilities in developing countries, such as India, Russia, Philippines and China that offer a combination of highly skilled resources and significant wage differentials. These facilities offer excellent price performance for their services and by being located in other time zones, enable multi-shift development. The trade off is less convenient travel, cultural differences, logistical issues, and a variety of business, legal and infrastructure risks.

Key Challenges: Sourcing Markets Dynamic environment with growing complexity: y y y Manufacturing, infrastructure and labor developments. Political and regulatory environment. Rising cost levels in some markets.

Customer Markets Retailers aiming for efficiencies and control: y y y Improved price/quality/customer service. Customer focus and speed to market. Compliance of sourcing base.

Alternative Solution: To make global sourcing more effective as soon as the firm decides to source globally, it has to think and act globally i.e. it must marshal the necessary resources, commit management time and strategic focus, and learn to make decisions about production and supply locations, phases of manufacturing and assembly, and prudent use of internal as well as external suppliers. Senior Management Output: Management should be involved at both the strategic (top) and the tactical (middle) levels. while top management may be primarily concerned with optimal product configurations in light of

CHIRAG ARORA, JOHN DEERE-EPGDBM

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July 13, 2011

A DECISION-MAKING FRAMEWORK FOR GLOBAL SOURCING

corporate policy variables, middle management may be more involved in the basic economic determinants of sourcing decisions such as determining the optimal set of sourcing locations that will yield the highest expected returns in light of an array of constraints. When management has established the firms global sourcing needs, policies and procedures which will guide the companys international purchasing task need to be developed. Sourcing configuration Whether for final products or for components, the most significant global sourcing decisions center around the sourcing configuration. This decision involves a choice between adopting a centralized or decentralized approach to global sourcing. Sourcing for Final Products Efficient utilization of productive assets around the globe. Products of high-intrinsic value with sophisticated or special processing requirements and relatively short product lives which are subjected to frequent technological upgrading are generally sourced internally enroute to final assembly. Nature of industry must also be considered that whether the industry in which the firm competes, global or multidomestic. Sourcing For Components When sourcing for components, the critical decision variable centers around whether and to what extent the firm should outsource the components. The decision is usually a function of two key determinants: the nature of technology and the product, process specification requirements of the product. Supplier Relationships Many firms have chosen to work with a narrow range of supply sources that willingly enter into long-term cooperative relationships with them. This has become necessary as JIT manufacturing has become a norm in many industries. Long-lasting relationships between a firm and its suppliers depends upon reliability and timeliness of delivery, managerial competency and the fit between the suppliers component inputs or processes and the firms value-added chain. Success stories: Global sourcing will become a requisite for competing. This is in response to the increased integration of North America, Europe, and the Pacific Rim as well as other development such as standardization of products and production processes at increasingly faster rates, material shortages, and adjustments to the international monetary framework. Five-point strategy for making your first global sourcing foray successful. 1. Source to a country with low labor costs and good quality control. 2. Source to a country where you can take a plane ride with comfort and ease. 3. Source to a country where you can understand the language. 4. Source to a country where you can respect and abide by the laws. 5. Source to a country where you can trust the people you do business with.

Key learning points as respect to Global Sourcing & Vendor Management:

CHIRAG ARORA, JOHN DEERE-EPGDBM

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A DECISION-MAKING FRAMEWORK FOR GLOBAL SOURCING

To do offshore sourcing one must know about Global Sourcing Enabling Factors The most important ones are: y Growing pools of highly skilled resources Jobs in Information Technology are considered prestigious and are highly sought after in most developing countries. While wage scales in those countries are significantly lower than in North America and Western Europe, they are quite high by local standards, attracting well-trained professionals. Candidates with doctorates and other high-level degrees are common and larger service providers typically offer extensive additional training to their staff. State-of-the-art facilities The work environments in today's offshore service providers are a far cry from the "sweatshop" images that plagued them in their early days. The high-end organizations have facilities, equipment, tools and processes that rival, and often exceed, their US and European counterparts. India, for example, has more facilities rated at Level 5 on the Software Engineering Institute's Capability and Maturity Model than any other country. Eager to attract foreign capital, many governments offer considerable support to services firms providing facilities, infrastructure upgrades and tax incentives.
y y Advances in telecommunications Recent advances in international telecommunications capabilities have improved the reliability and quality of communications. Cost-effective infrastructure options are available from wired, landline communication services to wireless, satellite services. The standards introduced by the Internet have also fostered quick deployment and inter-operability of networks and communications in virtually every country and company around the globe. y Improvements in collaborative tools and platforms The emergences of robust, high quality collaborative tools, platforms and processes have permitted dispersed project teams to work together as though co-located. Work units are easily assigned and synchronized between team members, and work products are controlled and shared in a central manner. y Maturing delivery models Service providers have learned that physically situating project liaisons at the client site helps facilitate strong communication and interaction both with the client and with offshore teams. Service provider personnel are responsible for handling the logistics of communications -including time zone differences, protocols and cultural nuances -- insulating the client from these facets of global sourcing.

CHIRAG ARORA, JOHN DEERE-EPGDBM

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