MGMT 524Global Sourcing

Class two

AgendaOutsourcing as a business strategyDefinitions and conceptsRationales for outsourcingThe outsourcing processRisk assessmentSuccess factorsMurphy, Ernst & Kim, Friedman, Monzcka

& Trent readingsCompletion of Scott’s case

Globalization• Globalization – Interdependent and integrated

world economy• All firms export and import – 97% of firms in US

<500 employees• 2006 over 2,500 trade treaties have been signed

vs. 181 in 1980. • Globalization of Production – low-cost factors of

production: China; “Weapons of Mass Production”

Tax Incentives and Benefits..Economic stimulation –

Emerging MarketsTax holidaysLocal content

Government InvestmentIndustrial ParksFree Trade ZonesSubsidizing R & D or other

development

Globalization’s behavioral characteristics

• Has Moore’s law has “hit the wall?”• Low-Cost Labor was initial enabler• Manufacturing “pulls” Engineering:• TTM key to maximize GM%• Access to Markets, talent, & “value chain”

Global is not local…

Effective Communication – remotelyMethods

PhoneEmailPaper – Fax, Mail, etc.

Pace and ContentTime zones

Is there ever a good time for a truly global meeting? It is always midnight for someone…

Advanced prep is VERY importantEnsure they know what you want

or you could lose another 24 hours….

LanguageBest case is dialog in local dialect (multilingual is

key skill in global companies today)English second best but need to keep crisp,

concise and avoid slangGive time for interpretation

Responsibilities of Sourcing ProfessionalsBeyond just continuity of supply..

Labor rightsChild laborWorking conditionsBenefits and hoursEmployee safety considerations

Environmental considerationsPollution/emissions/utilization of scare or

protected resources Recycling/ReclaimUtilization of hazardous materials (IE: ozone

depleting substances, lead, etc.)Who is responsible? What is produced via mfg

process? What is included in the finished product? Have we disclosed to end customer?

What is the impact to the company? (CSRs, tracking. Expensive)

Impacts of Ethical Excursions…..

Brand name erosionsCustomer Loyalty Diminished

Key customers lose confidence and will disassociate

Sales/Revenue ImpactLarger customers have Code of Ethics that

would prohibit interactionStock Price Impact

Key stockholder groups release holdings causing ripple effect in stock market

Indirect issuesDifficult to recruit talent to work at the

companiesSmaller companies lose credibility with key

supply chain players (operational and financial)

Employee Moral is diminished by the “bad press”

Towards sourcing excellenceWorld class supply base management

Intensify relations with suppliersDatabase with supplier informationDetailed audits with important suppliers

Develop and manage supplier relationshipsContinuous improvementsClassification of suppliers:

Commercial suppliersPreferred suppliersSupplier partners

Integration of suppliers in product developmentSuppliers with proved competencesUsing specific knowledge

Risk Management

What might cause disruption in supply?

Risk Mitigation plans to address

Cost Vs Risk consideration

What could happen?

Labor disputes – carriers, mfg., etc.Terrorist event Infectious disease - SAR’s, Bird Flu, etc.Military conflict – Iraqi, Korea, etc.Natural Disasters – Tsunami, earthquake,

fire, etc.Limitations of resources – Rolling blackouts

in ChinaCorruption and Political unrestPoor performance – unqualified…

Some ideas to offset the risk…Multiple Sources in Multiple Geo’sAlternate or substitute strategiesInventory strategy

HubsSafety StockOn site consignment/VMI

(Vendor Managed Inventory)Strong qualification process or

evaluationVerify capabilities directly or via

customer referralsAsk for certifications, audit

results, endorsements, etc.

Cost Vs Risk..Global Source Vs Local Source

Transportation costStorage costPotential recovery costAgility of supply lineLoss, etc…

Should consider risk from source to proximity of useUnderstand the flow of the materials in the

supply chainManufacturing location through finished

good distributionValue add should increase as

you get closer to the end customer

Ensure you understand ALL of the costs and understand the Risk What happens if the lines go down? Cost

per minute? Loss of revenue or sales?

Global Production Networks (Ernst & Kim)Questions:1)What are the largest hurdles the “Flagship”

and the “network must overcome to streamlining the GPN?

2)What are the characteristics of the GPN, examples of MNCs that fit this profile?

3)How does knowledge transfer play a part and how might it affect the transfer or outsourcing of a factory?

Virtually through ‘linkages’

The concept of global production network (GPN)

Source: Ernst & Kim, 2001

Towards sourcing excellence

Supplier integration into order fulfillment processOutsource logistic and administrative tasksConnect suppliers with information systems and production planningDevelop plans to increase value for customer through purchasing

Supplier development and quality managementSuppliers are invited to participate in suggestions for improvementSuppliers are a source of new ideas

Strategic cost managementDetailed cost models Supply chain analysis and measures to decrease supply chain costs

together with suppliersSharing of advantages is necessary

Outsourcing as a sourcing strategyPreviously:

mainly outsourcing of manufacturing activitiesTrend was for low-cost labor

Currently: complete business functions are outsourcedCommon viable business strategyInnovation & design are now includedSee Friedman article: Made in the World

Definition of outsourcing

Characteristics of outsourcing:“Normal” In-house activities performed are

transferred to a third party Assets, knowledge and sometimes employees

are sent to the external partyExtended and long term embedded relationshipBoth parties experience new costs and risk

profiles

Forms of outsourcing services

Labor outsourcingMixed & consigned

outsourcingComplete turnkey

outsourcing

Contractor provides…

Facilities Some employees

Some or all of the following:

EmployeesMaterialsProcess and SystemsTechnology and

Equipment

Facilities

Management

Employees Materials Process and Systems Technology and

Equipment Facilities Management Decision rights Codified knowledge

Host firm provides…

Some employees Materials Process and Systems Technology and

Equipment Management

Some or all of the following:

EmployeesMaterialsProcess and SystemsTechnology and

Equipment

Facilities

Management

Program management Tacit knowledge

Chandrashekar, 2000

Definitions Off-shoring: Off-shoring relates to the commissioning of

work and ownership to another country. Maintain ownership.

Partial outsourcing: only a part of an integrated function is outsourced. The coordination of the function, activities, and decision rights still lie with the client (the buyer).

Turnkey outsourcing: applies when the responsibility for the execution of the entire function (or activities) lies with the external provider. This includes not only the execution of the activities, but also the coordination of these activities. May also include decision rights and design.

Rationales for outsourcing

Strategic reasons for outsourcing

1. Improve company focus2. Gain access to world class capabilities & Markets3. Get access to resources that are not available

internally4. Accelerate reengineering benefits5. Improve customer satisfaction6. Increase flexibility7. Sharing risks

Tactical reasons for outsourcing

1. Reduce control costs and operating costs2. Free up internal resources3. Receive an important cash infusion (next slide)4. Improve performance5. Ability to manage functions that are out of control

All these reasons underlie one overall objective: to improve the overall performance of the outsourcing firm

Cash-to-Cash Cycle Time0ENLI009

Inventory days + Days sales outstanding – Average payment of supply period for materials

Inventory0OPPLAN012

Forecast Accuracy

0OPPLAN008

Production Lead Times

0OPMAKE017

Perfect Order Fulfillment

0OPDEL061

Faultless Invoices

0OPDEL023

Scheduled Achievement

0OPMAKE022Delivery

Performance to Scheduled Commit Date

0OPDEL019

Returns0OPDEL067

Scrap0OPMAKE023

Fill Rates0OPDEL025

Order Fulfillment Lead Time

0OPPLAN030

Machine wait time0OPMAKE007

Yield0OPMAKE033

Number of Supply

Sources0OPSO012Total Source

Lead Time0OPSO041

0ENLI015

Sales0ENPR026

0ENLI0030OPPLAN017

One example of why to outsource

Four phase modelPhase 1

•Market search•Preliminary assessment•Potential supplier list

Phase 2•Detailed audit•Confidentiality agreement•Approved supplier list

Phase 3•Contract negotiation•Order issue•Kick-off meeting•Execution

Phase 4•Supplier report card•Post contract review•Continuous improvement•Supplier validation

CustomerFocus

Marketbenchmark

Continuous improvement opportunities

Identification and assessment

Project execution

Audit and approval

Adapted from Momme, 2002

Three phases:Strategic phase (why, what, who?)Transition phase (how?)Operational phase (how to control?)

Figure 8.4

The outsourcing process

Competenceanalysis

Assessment & approval

Contractnegotiation

Project execution & transfer

Managingrelationship

Contracttermination

Strategic phase Transition phase Operational phase

Adapted from Momme, 2002

Strategic phase1. Motives for outsourcing

Focus on core competencesFocus on cost efficiency/ effectivenessFocus on service

2. Which activities or functions are outsourced

Transaction cost approach Core competence approach

3. Qualifications of the supplierTechnical and managerial qualities to achieve

demanded level of performance

The Transition phase

Contract negotiation Contract forms a legal basis for relationshipContracts depends on characteristics of outsourced activityThe contract type has a great impact on the success of the joint

operation

Project execution and transfer Outsourcing transition can be very complexThe transfer should be conducted using project management

principlesTest phase before going ‘life’

The operational phaseIt is in the operational phase that the outsourcing will deliver

its expected resultsSuccessful outsourcing depends heavily on close cooperation

with the supplierSix core values as being critical to a successful outsourcing

relationship

Core values Supporting factorsShared goals and objectivesMutual dependenceOpen lines for communicationConcern for the other’s profitabilityMutual commitment to customer satisfactionTrust

•Developing a personal relationship•Having professional respect•Investment of effort by top management•Commitment to continuous improvement

McQuiston (2000)

Critical success factors of outsourcing

Understanding company goals and objectivesInclusion of outsourcing in the strategic vision and planSelecting the right supplierA properly structured contractOpen communication with the individual groups involvedOngoing management of the relationship (not embeddedness)Senior executive support and involvementCareful attention to personnel issues & resourcesConstant reflection on core competencies and IP versus

outsourcing, including decision and alienable rights

www.theoutsourcinginstitute.com

Understanding integrated global sourcing (Trent & Monczka)

Questions:1) What is the difference in your and the authors

minds regarding international purchasing and global sourcing?

2) Do you agree with the levels of domestic basic sourcing to global? How does a strategy achieve this? Why are orgs moving to this level of dedication?

3) Describe two of the critical success factors of global sourcing and describe why these are the most critical?

Current and expected Sourcing Levels as a %

Murphy ArticleQuestions:1) In your opinion, can fuel prices (or

another phenomena) alter the significant momentum towards outsourcing?

2)Is there a tipping point in any strategy that makes changing inefficient? Why?

3) How would you mitigate rising fuel costs if outsourcing was essential to your strategy?

Scotts Miracle Gro Case

In-House, Outsource, or Off-Shore?

Scotts Case - AssignmentSee word document on questions to be

answered from handoutDefend your answers in detailYour conclusion should be based on both

hard and soft data, all three options can be supported