GLOBAL SOURCING GLOBAL SOURCING STRATEGY:STRATEGY:

R%D, MANUFACTURING, AND R%D, MANUFACTURING, AND MARKETING INTERFACESMARKETING INTERFACES

I - IntroductionI - Introduction• Global Sourcing Strategy: Logistical Global Sourcing Strategy: Logistical

interfaces of R&D, manufacturing, and interfaces of R&D, manufacturing, and marketing activities on a global basismarketing activities on a global basis

• Marketing managers should understand Marketing managers should understand and appreciate the important roles that and appreciate the important roles that product designers, engineers, production product designers, engineers, production managers, and purchasing managers play managers, and purchasing managers play in marketing decision making.in marketing decision making.

• This interaction will determine a This interaction will determine a company’s competitive strengths and company’s competitive strengths and consequently its market performanceconsequently its market performance

II - Trends in Global Sourcing StrategyII - Trends in Global Sourcing Strategy

a) The decline of Exchange Rate Determinism of a) The decline of Exchange Rate Determinism of SourcingSourcing

Strictly based on the price factor.Strictly based on the price factor.

Foreign sourcing occurs for noncost reasons (long Foreign sourcing occurs for noncost reasons (long term relationships with suppliers, quality, term relationships with suppliers, quality,

See Figure 10-1.See Figure 10-1.

b) New Competitive Environment Caused by b) New Competitive Environment Caused by Excess Worldwide CapacityExcess Worldwide Capacity

There has been a strategic shift form price and There has been a strategic shift form price and quantity to quality and reliability of products as a quantity to quality and reliability of products as a

determinant of competitive strengthdeterminant of competitive strength

Five Trends in global sourcing are identified:Five Trends in global sourcing are identified:

c) Innovations in and Restructuring of c) Innovations in and Restructuring of International Trade Infrastructure International Trade Infrastructure

Advances in structural elements of international Advances in structural elements of international trade have made it easier for companies to trade have made it easier for companies to

employ sourcing for strategic purposes.employ sourcing for strategic purposes.

d) Enhanced Role of Purchasing Managersd) Enhanced Role of Purchasing Managers

e) Trend Toward Global Manufacturinge) Trend Toward Global Manufacturing

III - Value Chain and Functional InterfacesIII - Value Chain and Functional Interfaces

The design of global sourcing strategy is based The design of global sourcing strategy is based on the interplay between a company’s on the interplay between a company’s

competitive advantage and the comparative competitive advantage and the comparative advantage of various countries. advantage of various countries.

Competitive Advantage influences the decision Competitive Advantage influences the decision regarding what activities and technologies a regarding what activities and technologies a

company should concentrate its investment and company should concentrate its investment and managerial resources in, relative to its managerial resources in, relative to its

competitorscompetitors

Comparative Advantage affects the company’s Comparative Advantage affects the company’s decision on where to source and market, based decision on where to source and market, based

on the lower cost of labor and other resources in on the lower cost of labor and other resources in one country relative to another.one country relative to another.

The Value Chain concept offers a general framework The Value Chain concept offers a general framework for understanding what it takes to manage the for understanding what it takes to manage the

interrelated value-adding activities of a company on a interrelated value-adding activities of a company on a global basis. global basis.

The value chain can be divided into two major The value chain can be divided into two major activities performed by a company: activities performed by a company:

a) Primary Activities: inbound logistics, manufacturing, a) Primary Activities: inbound logistics, manufacturing, outbound logistics, and after-sales serviceoutbound logistics, and after-sales service

b) Support activities: human resource management, b) Support activities: human resource management, technology development, and other activitestechnology development, and other activites

See Figure 10-4See Figure 10-4

Competing companies constantly strive to create value Competing companies constantly strive to create value across various activities in the value chainacross various activities in the value chain

Global sourcing strategy encompasses Global sourcing strategy encompasses management of: management of:

1) the interfaces among R&D, manufacturing, and 1) the interfaces among R&D, manufacturing, and amrketing on a global basis, and amrketing on a global basis, and

2) Logistics identifying which production units 2) Logistics identifying which production units will serve which particular markets and how will serve which particular markets and how components will be supplied for production. components will be supplied for production.

- R&D/Manufacturing Interface- R&D/Manufacturing Interface

- Manufacturing/Marketing Interface- Manufacturing/Marketing Interface

- Marketing/R&D Interface- Marketing/R&D Interface

IV - Logistics of Sourcing StrategyIV - Logistics of Sourcing Strategy

Sourcing strategy includes a number of basic Sourcing strategy includes a number of basic choices companies make in deciding how to serve choices companies make in deciding how to serve foreign marketsforeign markets

A – Imports, assembly or production within the A – Imports, assembly or production within the country to serve a foreign marketcountry to serve a foreign market

B – Internal or external supplies of components or B – Internal or external supplies of components or finished goodsfinished goods

Sourcing Decisions: a) intra-firm sourcing and Sourcing Decisions: a) intra-firm sourcing and outsourcingoutsourcing

Where to source major components seems much Where to source major components seems much less important than how to source themless important than how to source them

V - Costs and Consequences V - Costs and Consequences of Global Sourcingof Global Sourcing

A - Need for CoordinationA - Need for Coordination

B - Functional MismatchB - Functional Mismatch

C - Long-Term ConsequencesC - Long-Term Consequences

C.1. Development of Strategic AlliancesC.1. Development of Strategic Alliances

C.2. Dependence on suppliers, leading to C.2. Dependence on suppliers, leading to difficulty for the company to keep abreast difficulty for the company to keep abreast of constantly evolving design and of constantly evolving design and engineering technologies. engineering technologies.

C.3. Hollow corporationsC.3. Hollow corporations

VI - Transfer PricingVI - Transfer Pricing

MNCs should consider the following criteria when MNCs should consider the following criteria when making transfer pricing decisions: making transfer pricing decisions:

a) Tax regimesa) Tax regimes

b) Local Market conditionsb) Local Market conditions

c) Market Imperfectionsc) Market Imperfections

d) Joint-venture partnerd) Joint-venture partner

e) Morale of local country managerse) Morale of local country managers

Key drivers behind transfer pricing: Key drivers behind transfer pricing:

a) Market conditions in the foreign a) Market conditions in the foreign countrycountry

b) Competition in the foreign countryb) Competition in the foreign country

c) Reasonable profit for foreign affiliatec) Reasonable profit for foreign affiliate

d) U.S. federal income taxesd) U.S. federal income taxes

e) Economic conditions in the foreign countrye) Economic conditions in the foreign country

f) Import Restrictionsf) Import Restrictions

g) Customs Dutiesg) Customs Duties

h) Price Controlsh) Price Controls

i) Taxation in the foreign countryi) Taxation in the foreign country

j) Exchange Controlsj) Exchange Controls

Setting Transfer PricesSetting Transfer Prices

a) Arm’s length prices: use of market a) Arm’s length prices: use of market mechanism as a cue for setting transfer mechanism as a cue for setting transfer prices. prices.

b) Cost-based pricing (adds a mark-up) b) Cost-based pricing (adds a mark-up)

VII - Global Pricing and VII - Global Pricing and Antidumping RegulationAntidumping Regulation

DumpingDumping: imports are being sold at an “unfair”price: imports are being sold at an “unfair”price

ProtectionismProtectionism

- To minimize risk exposure to antidumping - To minimize risk exposure to antidumping actions, exporters might pursue any of these actions, exporters might pursue any of these strategies: strategies:

- Trading-up (move away from low-value to high-- Trading-up (move away from low-value to high-value products) value products)

- - SService Enhancement: differentiate your ervice Enhancement: differentiate your product by adding support services to the core product by adding support services to the core productproduct

- Distribution and Communication: strategic - Distribution and Communication: strategic alliancesalliances

VIII - Price Coordination VIII - Price Coordination

When developing a global pricing strategy, one of When developing a global pricing strategy, one of the thorniest issues is how much coordination the thorniest issues is how much coordination should exist between prices charged in different should exist between prices charged in different countriescountries

In deciding how much coordination, several In deciding how much coordination, several considerations matter: considerations matter:

a) Nature of customersa) Nature of customers

b) Nature of channelsb) Nature of channels

c) Nature of competitionc) Nature of competition

d) Market integrationd) Market integration

e) Internal organizatione) Internal organization

f) Government regulationf) Government regulation

IX - Countertrade IX - Countertrade Countertrade is an umbrella term used to describe Countertrade is an umbrella term used to describe unconventional trade-financing transactions that unconventional trade-financing transactions that involve some form of noncash compensation.involve some form of noncash compensation.

A – Forms of CountertradeA – Forms of Countertrade

BarterBarter

Buy BackBuy Back

OffsetOffset

B – Motives Behind CountertradeB – Motives Behind Countertrade

- Gain access to new or difficult markets- Gain access to new or difficult markets

- Overcome exchange rate controls or lack of hard currency- Overcome exchange rate controls or lack of hard currency

- Overcome low country credit worthiness- Overcome low country credit worthiness

- Increase sales volume- Increase sales volume

- Generate long-term customer goodwill- Generate long-term customer goodwill

C – Shortcomings ofC – Shortcomings of CountertradeCountertrade

- No in-house use for goods offered by customers- No in-house use for goods offered by customers

- Timely and costly negotiations- Timely and costly negotiations

- Uncertainty and lack of information on future prices- Uncertainty and lack of information on future prices

- Transaction costs- Transaction costs