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8/3/2019 International Contract Manufacturing
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Made by:-Nikhil chabraPriyank vaish
Saumya tripathi1contract manufacturing or global sourcing5/5/2012
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What is contract manufacturingDefinition
the procurement of products or services from independentsuppliers or company-owned subsidiaries located abroad for
consumption in the home country or a third country. also
called global procurement or global purchasing, global
purchasing, global sourcing amounts to importing-an inboundflow of goods and services.
2contract manufacturing or global sourcing5/5/2012
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Key drivers especially responsible for the growth of globalsourcing in recent years
Technological advances
Widespread access to vast information includinggrowing connectivity between suppliers and the
customers
Declining communication and transportation costs
Entrepreneurship and rapid economic transformation in
emerging markets.
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Sourcing for the dell inspiron notebook
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One should outsource or notManagers must decide whether each value-adding activity
should be conducted in-house or by external, anindependent supplier. i.e. between internalization and
externalization
Should we make a product or perform a particular value-
chain activity ourselves or should we source it from outside manufacturers
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Why firms outsource: firms generally are not superior at performing all primary and
support activities.
Most value adding activities(manufacturing , marketing, after
sales service) candidates for outsourcing
Historically outsourcing involved the acquisition of raw material,parts and components now it has extended to include the
procurement of services as well.
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Different types of sourcingBusiness Process Outsourcing (BPO) .
The outsourcing of business functions to independent suppliers such as
accounting, payroll, and human resource functions, IT services, customerservice, and technical support.
Back-office activities Front-office activitiesCaptive SourcingCaptive sourcing refers to sourcing from the firms own production
facilities located abroad. Production is carried out at a foreign facility that
results from the focal firm FDI activities. Fr eg : genpactcontract manufacturing or global sourcing 75/5/2012
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The nature of outsourcing and global
sourcing Value adding activity isinternalized Value adding activity isexternalized(outsourced)
Value adding activity keptin home country
Akeep production in house ,in
home country
BOutsource production to
third party provider at home
Value adding activity
conducted abroad(global
sourcing)
C
Delegate production to
foreign subsidiary oraffiliate(captive sourcing)
D
Outsource production to a
third-party providerabroad(contract
manufacturing or global
sourcing from independent
suppliers)
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These decisions depend largely on the strategic importance of theparticular activity to the firmR&D design Componentmanufacturing
Manufacturing orassemblyMarketingand branding Salesdistributionand logistics
Customerservice
Imp. Of this
activity to the
firm as a
strategic asset
Very imp. Low imp. Low-medium
imp.
Very imp. Medium imp. Medium imp.
Likelihood of
internalizing
rather than
outsourcing
this activity
high low Low-medium high Low-medium Low-medium
Geographic
config. : overall
tendency tolocate activity
at home or
abroad
Usually
concentrated at
home
Usually
dispersed across
various market
Usually
concentrated at
few markets
Branding
concentrated at
home ;marketing
concentrated or
dispersed to
individual
markets
Dispersed to
individual
markets
Dispersed to
individual
markets, exceptcall centers,
which are often
concentrated
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Whos the more popular global source? INDIA or CHINA
ChinaManufacturing
Large amount of skilled, low cost labor
350,000 engineers graduate each year
Huge domestic market with rapid, sustainable growth
Government attitude changing toward probiz
Weak on IP
Language and culture are challenging Lacks quality infrastructure
Government bureaucracy
IndiaServices (e.g., backshop)
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Key players in global sourcing by regionsCentral & easterneurope Chiana & southasia Latin america &the caribbean Middle east Andafrica
Top-rankedcountries
Czechrepublic,bulgaria,
slovakia,poland,h
ungary
India,chiana,malaysia,philippines,si
ngapore,thailand
Chile,brazil,mexico,costa Rica,
Argentina
Egypt,jordan,united Arab
emirates,ghana,tu
nisia,dubai
Up-and-comers Romania,russia,u
kraine,belarus
Indonesia,vietna
m,sri lanka
Jamaica,panama,
nicaragua,colombi
a
South Africa,
israel,turkey,moro
cco
Emerging local
providers
Luxoft(russia),E
PAM
systems(belarus),s
oftline(ukraine),d
ata art(russia)
NCS(singapore),bl
uem,neusoft
group,broadengat
e systems(chiana)
Softek(mexico),ne
oris(mexico),polict
ec(brazil),DBA
acess(venezuela)
Xceed(egypt),ness
technologies
(israel)
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Offshoring The relocation of a business process or entire manufacturing facility to a
foreign country.
The 2005 Offshore Location Attractiveness Index by A.T. Kearney Identifies 9 emerging markets in its list of the 10 most attractive offshoring
suppliers: India, China, Malaysia, Philippines, Singapore, Thailand, CzechRepublic, Chile, Canada, and Brazil.
In addition to Canada, the other advanced economy in the top 20 destinations isthe U.S. (11 th ).
The index emphasizes various criteria: Countrys financial structure (compensation costs, infrastructure costs, tax and
regulatory costs); Availability and skills of people (cumulative business-process experience and skills, labor
force availability, education and language, and worker attrition); and
Nature of the business environment (the countrys political and economic environment,physical infrastructure, cultural adaptability, and security of intellectual property).
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Benefits of global sourcing: Cost efficiency is the traditional rationale for sourcing abroad. The
firm takes advantage of labor arbitrage the large wage gap
between advanced economies and emerging markets. One study found that firms expect to save an average of more than
40% off baseline costs as a result of offshoring.
These savings tend to occur particularly in R&D, product design
activities, and back-office operations such as accounting and dataprocessing.
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Risk in global sourcing: 1. Less-than-expected cost savings . Conflicts and misunderstandings arise
because of differences
2. Environmental factors . Environmental challenges e.g., exchange ratefluctuations, labor strikes, adverse macro-economic events, high tariffs andother trade barriers, and high energy and transportation costs.
3. Weak legal environment . Many popular locations have weak laws andenforcement regarding intellectual property, which can lead to erosion ofkey strategic assets.
4. Risk of creating competitors . As firms share its intellectual property andbusiness-process knowledge with foreign suppliers
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Continued.. 5. Inadequate or low-skilled workers . Employees may lack
KSAs or high rapid turnover of skilled employees.
6. Over-reliance on suppliers . Unreliable suppliers may putearlier work aside when they gain a more important client.
7. Erosion of morale and commitment among home-countryemployees . Global sourcing can create a situation in whichemployees are caught in the middle between their employerand their employers clients.
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Minimizing risks: Firms ought to go offshore for the right reasons . The best rationale is strategic. Cost-cutting
is often a distraction from more beneficial, long-term goals such as enhancing the quality ofofferings, improving overall productivity, and freeing up knowledge workers and other coreresources that can be redeployed to improve long-term performance.
Need to get employees on board . Global sourcing tends to invite opposition from employeesand other organizational stakeholders. Disaffected middle managers can undermine projects.Poorly planned sourcing projects can create unnecessary tension and harm employee morale.
Choose between a captive operation and a contract with outside specialists carefully .Strike the right balance between the organizational activities that it retains inside the firm,and those that are sourced from outside.
Choose countries and suppliers carefully . A common reason for global sourcing failure isthat both buyers and suppliers tend not to spend enough time upfront to get to know eachother well.
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Continued The focal firm needs to invest in supplier development and collaboration . The
parties need to exchange information, transfer knowledge, troubleshoot, coordinate,and monitor.
Managers need to proactively safeguard interests:
Encourage the supplier to refrain from engaging in potentially destructive actsthat jeopardize the firms reputation.
Escalate commitments by making partner-specific investments (such as sharing
knowledge with the supplier), allowing for ongoing review, learning, andadjustment.
Share costs and revenues by building a stake for the supplier so that, in case offailure to conform to expectations, the supplier also suffers costs or foregoesrevenues.
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For Exampleparting out 787
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