What are the reasons for sourcing globally, and what options are available to a firm that wishes to engage in global sourcing?

Question

What will be an ideal response?

Answer 1

Answers may vary but could have elements such as the following: Although the primary reason for sourcing globally is to obtain lower prices, there are other reasons. Perhaps certain products the company requires are not available locally and must be imported. Another possibility is that the firm's foreign competitors are using components of better quality or design than those available in the home country. To be competitive, the company may have to source these components or production machinery in foreign countries. The term offshoring is commonly used for a company's decision to relocate activities to foreign locations. When deciding to source internationally, companies can either set up their own facilities or outsource the production to other companies. Outsourcing has become an increasingly common option for companies, as they try to focus scarce resources on their core competencies and leverage the skills of other companies to reduce costs and capital investments, improve flexibility and speed of response, enhance quality, and provide other strategic benefits. The activities can be outsourced either to another company in the same country or to a company in another country (the latter would constitute "offshore outsourcing"). Any part of the value chain can be outsourced, including product design, raw material or component supply, manufacturing or assembly, logistics, distribution, marketing, sales, service, human resources, or other activities. Outsourcing decisions, including the decision to use global sources of supply, are extensions of the make-or-buy decisions of earlier eras. The pros and cons of these decisions usually include comparisons of costs as well as managerial control of confidential product design specifications, delivered quantity, quality, design, and delivery time and method. Other considerations include the manufacturing expertise required to make the raw material or components as well as the added cost of not being able to take advantage of the scale or larger volumes a vendor may have. In global purchasing, these issues are exacerbated by such factors as distance, different languages of buyers and sellers, and different national laws and regulations. Over time, many organizations have developed the ability to manage these obstacles fully or in part, thus enabling global outsourcing to become a viable option for an increasing number of firms. When possible, it is better for companies to initially outsource simple activities and gradually outsource more complex activities as both the outsourcer and the service provider gain experience. The lure of global sourcing is the existence of suppliers with improved competitiveness in terms of cost, quality, timeliness, and other relevant dimensions. For example, certain nations may provide access to lower-cost or better-quality minerals or other important raw materials or components compared to what might be available domestically. In addition, the existence of industrially less developed countries with inexpensive and abundant unskilled labor may provide an attractive source of supply for labor-intensive products with low skill requirements. This helps explain why many relatively standardized and labor-intensive operations have moved away from the more industrialized countries, where labor is more expensive. The international product life-cycle theory helps explain this migration of operations from the developed to the developing areas of the world. These emerging economies have moved on the product and process continuum from high labor-content products made with light, unsophisticated process equipment, to sophisticated processes and more complex, lower-labor-content machinery, or skill-intensive engineering and design services. The ability to effectively and efficiently use global sources has been enhanced by the plummeting cost of communications, widespread use of standardized interfaces such as web browsers, and the increasing pace at which companies are automating and digitizing data. As more of a company's operational activities are automated, it becomes easier and more economical to outsource these activities. Increasing numbers of companies have begun to compete for outsourcing business, and customers have become more accustomed to using these services.

Any of the following arrangements can provide a firm with foreign products:

1. Wholly owned subsidiary. May be established in a country with low-cost labor to supply components to the home country plant, or the subsidiary may produce a product that either is not made in the home country or is of higher quality.
2. Overseas joint venture. Established where labor costs are lower, or quality higher, than in the home country to supply components to the home country.
3. In-bond plant contractor. Home-country plant sends components to be machined and assembled or only assembled by an independent contractor in an in-bond plant.
4. Overseas independent contractor. Common in the clothing industry, in which firms with no production facilities, such as DKNY, Nike, and Liz Claiborne, contract with foreign manufacturers to make clothing to their specifications with their labels.
5. Independent overseas manufacturer.