INTERNATIONAL SOURCING: BEYOND SHOPPING AND FRANCHISING

PAST INTERNATIONAL SOURCING PATTERNS BY US-BASED COMPANIES

TWO MAIN PATTERNSINTERNATIONAL CATALOG SOURCING

• sourcing from independent foreign vendors• transactions handled by purchasing• contracts awarded on cost, specifications, delivery reliability

INTERNATIONAL FRANCHISING• core manufacturing dispersed internationally• located close to customers• local managers focus on serving local customers

MOTIVATING FACTORSCATALOG SOURCING: Low cost production of componentsFRANCHISING: Proximity to customers in industrialized countries

Insert scanned diagram

BUT THE WORLD CHANGED IN THE LATE 1980’s

INTERNATIONAL COST DIFFERENTIALS IN A DECLINING TREND

JAPAN AND WESTERN EUROPE EQUALLY IMPORTANT SOURCES OF TECHNOLOGY AS U.S.

TRAVEL, COMPUTATIONAL AND COMMUNICATION TECHNOLOGIES ALLOW GREATER COORDINATION AMONG MFG. SITES

DIMINISHING INTERNATIONAL LABOR DIFFERENTIAL (1970-1985) Ratio of wages in a country to those in the US

Electrical Shoes

1970 1985 1988 1970 1985 1988

Canada .84 .87 .97 .75 .90 1.0

France .44 .42 .50 .44 .62 .74

Ireland N/A .43 .49 .49 .63 .72

Japan .22 .48 .92 .26 .70 1.3

Korea .06 .13 .15 .06 .16 .19

Mexico N/A .13 N/A .25 .26 N/A

Singapore .07 .15 .16 .09 N/A N/A

U.K. .45 .50 .69 .60 .80 1.11

W.Germany

.45 .53 .90 .52 .76 1.29

THE RISE OF THE INDUSTRIAL TRIAD

DEMAND SIDE:• markets similar in size and buying power• global products

SUPPLY SIDE• diminishing cost differentials• no individual company operating in one region can expect to be self-

sufficient and world competitive for long, regardless of how much it invests in R&D

EXAMPLESSpecialty chemical company

• manufacturing network of six plants• West German plant: enhanced product formula and process improvement

for cost reduction• Japanese plant: waste management techniques and efficient material

utilizationSunbeam Appliance Company

• iron that automatically shuts off when no movement (idea from Austrialian subsidiary)

• Oshar, small food processor (hear about its unsuccessful introduction to Europe

REQUIREMENTS FOR TRIAD-WIDE INNOVATION

Multidomesticor National innovation

Triad-wide innovation

National and LittleInnovation

Little Innovationand InternationalCoordination

InnovationRate

high

high

low

lowDegree of International

Competition

NEW INTERNATIONAL MANUFACTURING CONFIGURATIONS

FOR GLOBAL PRODUCTSexploitation of economies of scalecentral design and manufacturing for a product familydispersed location due to the use of different facilities for different product families

FOR GLOBAL CUSTOMERSTwo alternatives

• geographic dispersion of the plants, high coordination across plants• a fixed assignment (one-to-one) of customers to plants

FOR HIGHER ACCESS TO INNOVATIONgeographic dispersion of plantsjoint engineering, design and development projects

WHY SHARING OF INFORMATION, TECHNOLOGY AND KNOWLEDGE IN INTERNATIONAL MANUFACTURING NETWORKS HAS BEEN DIFFICULT

ESTABLISHED REGIONAL ORGANIZATIONS AND COMPENSATION SYSTEMS

NOT INVENTED HERE (NIH) SYNDROME

ETHNIC, LANGUAGE AND NATIONAL DIFFERENCES

SUBSTANTIAL TRAVEL BUDGETS AND ROTATION OF EMPLOYEES

OFFSHORE SOURCING, SUBCONTRACTING AND MANUFACTURING

DIFFERENT FORMS OF OFFSHORE SOURCING

OFFSHORE PURCHASINGOFFSHORE SUBCONTRACTINGJOINT-VENTURE OFFSHORE MANUFACTURINGCONTROLLED OFFSHORE MANUFACTURING

Offshore purchasing

Offshore subcontracting JV offshore mfg.

Controlled offshore mfg.

US BUYER

FOREIGNSOURCE

US BUYER

FOREIGNSOURCE

US BUYER

FOREIGNSOURCE

payment

Products&/or parts

Technology,materialspayment

Products&/or parts

Products&/or parts;profits &/or fees

US BUYER

FOREIGNSOURCE

Investment,capital, mgme,technology,materialspayment Products

&/or parts;profits &/or fees

Investment,capital, mgme,technology,materialspayment

SELECTION CRITERIA FOR THE FORM OF OFFSHORE SOURCING

COMPANY CAPABILITIES AND RESOURCESInvestment capital requirementsManagement time investmentOffshore Experience

AVAILABILITY AND CAPABILITIES OF SUPPLIERS OR PARTNERS

Availability of partners depends on: country, complexity of production, size of operationApparel vs. electronics

PROJECTED SOURCING VOLUME AND VARIABILITYLarge volumes, fixed investmentsSmall volumes, independent suppliersVariability favors purchasing or contracting

DEGREE OF INTEGRATION OF OFFSHORE AND DOMESTIC OPERATIONS

High level of integration, controlled offshore manufacturing

PRODUCTS SUITABLE FOR OFFSHORE SOURCING

LABOR INTENSIVE PRODUCTS (low skilled labor)

STANDARDIZED PRODUCTS (design, specifications and production technology do not

change)

PRODUCTS WITH A PREDICTABLE SALES PATTERN (as opposed to products with abrupt shifts in demand)

PRODUCTS THAT ARE EASY TO SHIP AND FACE LOW IMPORT DUTIES

PRODUCT LIFECYCLE AND THE CHOICE OF TECHNOLOGY AND LOCATION OF PRODUCTION FACILITIES

START-UP PHASELOCATE:

• near technology• where production is easily controlled• near material suppliers (if product not well defined)

RAPID GROWTH• concentrate in one location to gain from learning and

economies of scale• move towards markets

MATURITY• low cost labor• offshore facilities

EVALUATING PRODUCTION SITES

LABOR FACTORSlabor costslabor availability (of the right kind)labor productivitylabor reliability and unions

INFRASTRUCTURE FACTORSIndustrial sitesTransportationLocal suppliers of goods and services

GOVERNMENT POLICY FACTORSGeneral attitudes (for export-oriented foreign investment)Government regulationsGovernment incentives (favorable tax treatment, subsidized service, freedom of movement of goods, tax holidays, interest subsidies, etc.

STABILITY FACTORSEconomic stability (inflation, currency)Political stability

COMMUNICATION PROBLEMS (AND SOLUTIONS) FOR OFFSHORE SOURCING

TIME ZONES ANDDISTANCElimit quality of communicationcreate distrust

LANGUAGECULTURE

particularly for labor and government relations’

LACK OF INTERNATIONAL EXPERIENCESOLUTIONS

right people

frequent visits between US and offshore sites

SELECTION MATRIX: OFFSHORE VS. FDI

COUNTRY ENVIRONMENT LOW HIGH

ECONOMIC FACTORS

Market Size and Growth OP FDI

Labor Cost FDI OP

Labor Skill OP FDI

Local Managerial Capacity FDI OP

Infrastructure Adequacy OP FDI

POLITICAL FACTORS

Risk FDI OP

Government Receptivity to FDI FDI OP

Import Controls OP FDI

Capital Controls FDI OP

Price Controls FDI OPCULTURAL FACTORS

Compatibility OP FDI

SELECTION MATRIX: continued

LOW HIGH

COMPETITIVE SITUATION

Industry Concentration OP FDIRelative Competitive Strength OP FDILocal Barriers To Entry FDI OPCannibalization Risk OP FDI

PRODUCTMaturity FDI OPBrand Differentiation OP FDILine Diversity FDI OPService Intensity OP FDI

TECHNOLOGYMatutity FDI OPStability OP FDIComplexity OP FDIPatentability FDI OP

GLOBALIZATIONTransnational Strategy OP FDI

TO FULLY AUTOMATE YOUR OFFSHORE PLANT , OR NOT :

THIS IS THE QUESTION!

USUAL MOTIVATIONS FOR FULL AUTOMATION

LOCAL GOVERNMENT (LDC COUNTRY) AND/OR PARTNER WANTS IT

COMPANY HAS EXPERIENCE WITH IT

TURNKEY PLANT, PROBLEM FREE (at least not labor problems)

AUTOMATED vs. SEMI-AUTOMATED

Avoids short-term management headachesGuarantees product quality (machine controlled quality)Lack of skilled labor may cause maintenance & set-up problemsAbsenteeism and turnover might be equally a serious problem (competitors hiring away skilled workers)Unprofitable substitution of labor for capitalUntested technology for primitive environmentsManagement finds it easier to operate (habit or experience)

Better government relations (local labor employment)Better process design, same result (labor controlled quality)Absenteeism and turnover is always a problem.Training can be a serious expense

Profitable investments

Guadual introduction of technology

Development of management skills and useful process experience

POLICY GUIDELINES IN DEVELOPING THE PROPER MIX OF AUTOMATION & LABOR

CONTROL THE ENGINEERING BIAS

LOOK AT LOCAL TECHNOLOGIES

CONSIDER SECOND-HAND MACHINERY AND EQUIPMENT FROM LESS DEVELOPED COUNTRIES

REQUIRE JUSTIFICATION FOR ALL EXPENDITURES ON MATERIALS HANDLING EQUIPMENT

ELIMINATE THE BIASES IN REPORTING SYSTEMS

CHECK WHETHER THE COMPANY’S “STANDARD” PLANTS ARE APPROPRIATE FOR LOW WAGE COUNTRIES