global outsourcingtest guide

8/12/2019 Global OutsourcingTest Guide

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Role of Outsourcing in the Global Economy

What are the main triggers of globalization?

o technical informational revolutions

The internet revolution (made the world connected)

o liberalization of tradeso -Breaking down of geographic and intra-industry barriers

What are the main impact of globalization

o Convergence of tastes

More demanding with increased knowledge

Value seeking (high quality at low price)

Increasingly specialized consumer preferences

o Changing patterns of competition

Increased private labels

Increased global sourcing

Retail concentration/consolidation

Due to increased competition from globalization, only large,

competitive players can survive

Define retail concentration/consolidation.

How does retailing affect the globalization?

What is outsourcing? What roles does it play?

o the contracting out of a business function

(commonly one previously performed in-house) toan external provider

Outsourcing vs offshoring vs. insourcing vs. global sourcing

o Global Sourcing

The orientation of the procurement activities of

companies to available sourcing markets worldwide

Offshore outsourcing

o Offshoring

Occurs when a company moves or expands some of its

operations and jobs to overseas locationso insourcing

Incorrectly used by media to describe foreign firms that

set up or expand operations in the U.S.

Correct usage: It occurs when a company brings work

that was previously purchased from an external supplier

in-house.



What are the major drivers of outsourcing? (Figure 1.1)

o What are the benefits (competitive advantages) of outsourcing?

o cost reduction

o Improved focus on core competences

o Increased flexibility

Due to the internal focus shifts towards areas of unique competitive

advantage

o Increased speed

Due to the reduced production cycle and the additional capacity brought by

the external supplier

o More adaptive in responding to changing market conditions

o Access to better technology, better skills and expertise

o Access to innovation and creativity

Outsourcing Decision Factors

What becomes most important in outsourcing decisions?

o Determining the most cost efficient vendor of materials, production, and/or

finished goods at the specified quality and service level

with delivery within an identified time frame.

o No longer is outsourcing just about doing things more cheaply. It is about doingthem better and faster as well.



Make-buy decisions: how companies make decisions for core vs. non-core activities?

Outsourcing decision steps

o Decision Stage 1

What to outsource (product selection)

o Decision Stage 2

Where to outsource (country selection)

o Decision Stage 3

To whom to outsource (vendor selection)

Differences of basic vs. fashion products

o Fashion Products

Product characteristics

– Individualized

(differentiated)

– hedonic/symbolic

– frequent changes in

styling

• Inventory control

– ever changing stock

– zero to zero

inventory

• Selection process

– value, fashion image

– impulse buying

• Firm characteristics

– small size

– labor intensive work

Basic Products

o Product characteristics

Standardization

utilitarian/ functional

infrequent changes in

styling

o Inventory control

steady predictable

demand

automated

replenishment

o Selection process

price is major factor

comparative shopping

o Firm characteristics

large size

automated process



Advantages and Potential Problem Areas of Global Sourcing (by Sanuwar)

Drivers of global sourcing

o Globalization

Development of an increasingly integrated global economy marked

especially by free trade, free flow of capital, and the tapping of cheaper

foreign labor market. Foster interconnection through the world.

o Textile Complex

Interconnectedness of firms across the globe to accomplish fiber and

textile production and manufacturing, apparel manufacturing, retailing

and consumption.

Developed, developing, and newly developing countries play a role within

textile complex

(consumption versus production)

o Hyper competition

The competitive pressure from markets and consumers forces firms toincrease the value of products by reducing cost and/or improving quality.

Companies go global to find the supplier who can produce the quality

product in cheap price.

o Cultural Diffusion_

Ways in which cultural traits-ideas, beliefs, material items- are spread

from one society to another.

o Rapid commoditization_:

Almost total lack of meaningful differentiation in the manufactured

goods. Commoditized products have thin margins and are sold on the

basis of price, not brand. This situation is characterized bystandardization, ever cheaper, and common technology that invites more

suppliers who lower the prices even further.

Definition of rapid commoditization



Advantages of global sourcing

o Cost reduction

In the apparel industry, wages constitute a large part of production costs.

In developing countries, wages are significantly lower than in the USA.

Therefore, exploiting cheap labor cost, apparel brands from USA go

global. Better equipment and process

Improves the factory, thus reducing the price.

Exchange rate

When dollar is strong, cheaper to buy foreign goods

Low pricing for export goods

Government subsidy for exports

o Artificially lower price for export products

o Quality

Japan and Germany are considered as high quality sources in the area of

consumer electronics and automobiles.

Highly quality and brand conscious consumers in the US are satisfied with

the products from England and Italy even at higher prices.

The quality of service is no longer obstructed by global sourcing due to

the advancement of information technology

o Availability

Global sourcing is compulsory sometimes simply because the desired

products or raw materials are not available in the USA.

To ensure wider availability of products, many retail firms chose global

sourcing.

Domestic buyers’ foreign sourcing may drive out domestic suppliers,which, in turn, may decrease the availability of the domestic products,

resulting in further dependence on foreign sources.

o Additional source of supply:

“Don’t put all your eggs in one basket”

Broad supplier base ensures that supply chain disruption in one factory or

region can be absorbed by suppliers in another region.

H&M sources its products from 800 independent supplier all over the

world and Nike contracts with more than 700 factories in 52 nations.

Cost reduction: Ways or sources to achieve low prices (or cut costs) from globalsourcing

o See above



Potential problem areas of global sourcing

o Logistics support:

Controlling the timely flow of materials into, through and out of the

international corporation is challenging while the basic goal is maximizing

cost-effectiveness with minimum service requirements. longer distance covered by international logistics causes higher lead time.

International logistics attribute may be different from those experienced

at home.

Many researchers have identified logistics problem as number-one

challenge that domestic buyers face in global sourcing.

o Cultural differences

Differences in values, attitudes, manners, customs, religion and language

can cause miscommunication and create further problems in supplier

evaluation, contracting, product inspection and maintaining relationships

in global sourcing.o language_

Language is the mirror of culture and it is very important in information

gathering and evaluation.

Assistance from language experts may not even convey the subtle aspect

of meaning.

National pride and negative stereotypes about foreign suppliers can be a

problem for a buying firm in global sourcing.

o regulations_

Several government regulations including tariffs and quotas from buyers’

country and supplier’s country influence global sourcing and often makeit complicated.

Non-tariff restrictions, such as complicated documentation requirement

for border crossing processes, and various kind of international trade bills

are also challenges which buying firms face.

o Source location and evaluation

o Political and labor problems

o Currency fluctuations

o Difference in payment method

o Quality control

o Rejects/reorder

o Paper work costs



Product types/characteristics that are more suitable for global sourcing

o Labor intensive products

o Standardized products

Design, specifications and production technology is the same of its type.o Low complexity material

o Clarity of drawing and technical specifications

The simpler and clearer the drawings and technical specifications, the

better the supplied quality.

o Products with high shelf life

o Product with a predictable sales pattern

As opposed to products with abrupt shifts in demand

o High purchase volume

The benefit should be greater than necessary costs (travel cost, research

cost, production costs, transportation costs, etc.)o Products that are easy to ship and face no/low import dues.

o Consider multiple suppliers to reduce supply risk and to ensure supply in terms

of strike, political unrest, and natural catastrophes.

Factors to consider in new product development

o Specification buying

o Exclusivity

o Pricing/mark-up opportunity

o Merchandising mix (compatibility of product lines)

Theories of International Trade

What is autarky?

o An economy that limits trade with the outside world (= closed economy)

- Not affected by influences from its outside

- Relies on its own resources

- Self- Sufficient

What is protectionism? What is the purpose of it?

o Practice of regulating imports and exports with the purpose of protecting

domestic industries from foreign competitors

o Protection from the cheaper labor and lower cost of production in many foreigncountries.

What are the three major tools of protectionism?

o Tariff- tax on imported merchandise

o Import Quotas- quantity control on imported merchandise

o Export Subside



What is free trade? Which theory is it based on?

o Trade carried on without such restrictions as import duties, import quotas,

import licenses, export bounties or domestic production subsides.

o Basic argument for free trade is based on the economic theory of comparativeadvantage

What does the roundabout way to wealth mean?

o Making products that can be traded to a foreign country for a different product

Ex) Making televisions by producing something else such as drug and

trading the drugs for Tv’s more cheaply.

o A country does better by specializing in few things rather than trying to do

everything.

Define economic efficiency. Explain production and consumption efficiencies.

o Production Efficiency Countries can produce more goods and services with the same amount of

resources

Ex) In the last ten years, freer trade has helped raise US GDP (Gross

Domestic Product) by nearly 40%.

o Consumption Efficiency

Consumers will have a more satisfying collection of

goods and services from which to choose

Explain the theories of absolute advantage and comparative advantage. Who made

which theory?

o Theory of Absolute Advantage (Adam Smith, 1776)

Different countries can produce some products more efficiently than

other countries.

Thus, global efficiency can be increased through free trade.

Each country would specialize in those products that resulted in an

absolute advantage for it.

o Theory of Comparative Advantage (David Ricardo, 1817)

There may still be global efficiency gains from trade if a country

specializes in those products that it can produce more efficiently than

other products

without regard to absolute advantage

Although a country may be good at making a product, they may be better

at making others—creating a comparative advantage for that product.

Therefore, a country gives up or reduces the production of the first

product



Exercises related to these two theories (e.g., which country specializes what).

Is Trade Good for America

What are the major factors influencing global/international trade?

o General economic conditions

growth rate

o Stages of economic conditions

Developed vs. Developing countries

o Types of economy

market vs planned economy

o Shifts in exchange rate

Strong vs. Weak currency

o Differences in natural resources

o Differences in traditions of specialization

o Differences in technology development

o Political objectives

What are the measures/indicators of the wealth?

o per capita GDP

o wages

o product price

o assortment o standard of living

o leisure activity

What are the expected consequences of restricted outsourcing for apparel items?

o What if America has no imports?

o Global Patterns of Textile and Apparel Activities

What are the five levels of development? List them in order of the development.

o 1.Least developed country (LDCs)

o 2. Newly developing country

o 3. Developing country

o 4. Newly industrialized country

o 5. Developed country



Measurement for the level of development: GNP, per capita GNP, GDP, and per capita

GDP; GDP PPP

o Gross National Product (GNP)

The value of the output of products and service produced by domestic

residents of a nation

o Gross National Product Per Capita (GNPPC)

GNP divided by number of citizens in the population

o Gross Domestic Product (GDP)

The value of the output of products and service produced within a

country

Includes the contribution of migrant workers and foreigners

o Gross Domestic Product Per Capita (GDPPC)

GDP divided by number of people in the population

Top 10 the largest economies in the world –know the

top four for 2014.

o The key characteristics of each level of development

and country examples of each level. For the county

examples for each level, refer to my lecture slides.

o 1. Least Developed Country (LDCs)

GDP per capita: The lowest in the world(<2,000)

The lowest Human Development Index

(life expectancy, literacy, education,

income)

Hardly involved in industrial

development via apparel

Ex) Mostly in Africa: Zambia (1800), Sierra Leone (1200),

Madagascar (980), Malawi (900), Togo (960), Congo (380), etc.

Central America: Haiti (1400) Asia: Nepal (1400)o 2. Newly Developing Countries

Poverty

GDP per capita:

Low income

High levels of unemployment, illiteracy, and infant mortality



Comparatively low life expectancies

Increased participation in the production of textiles and apparel for

industrial development

Ex) Lesotho (2100), Mauritania (2300), Cambodia (2500), Pakistan (2900),

Vietnam (3700), India (3800), Bangladesh (2100) etc.

o 3. Developing Countries

Lower level of well-being (GDP PC: 4K~10K)

Fully embraced the production of textiles and apparel production as a

means to compete in the global marketplace

In a transition phase between focusing primarily on production for

export and increasing focus on opportunities related to domestic

consumption

Ex) Philippines (4300), Indonesia (5200) Swaziland (5300) Jordan (6100),

Sri Lanka (6600), Egypt (6700), etc.

o 4. Newly Industrialized Countries (NICs)

Rapid development and rising level of well being

Have open trade policies

Ex) In the 90s:

Hong Kong, S. Korea, Taiwan, Singapore

Used to be called “Dragon”, “East Asian Tigers”, or ”Big

Four”**** (know for test)

Hong Kong (53000) and Singapore (63000) shifted to the

developing country stage Issues-increasing labor and production costs*

New NICs- China (10,000), Thailand (10,000), Peru (11,200), South Africa

(11,700), Chile (18800), Mexico (15800), Russia (18700), Turkey (15300)

o 5. Developed Countries

High level of well-being

Progressed from full industrial production to other stages of product

development or even other formsof less labor-intensive work (e.g.)

Technology, communications, services

Shifted their primary emphasis from producing textiles and apparel toconsuming them.

Ex) Western Europe, UK (37600), Netherlands (43000)

The US (51000), Canada (42000), Hong Kong (53000), Singapore (63000),

Japan (37000), Taiwan (41000), Australia (43000), etc



How do newly developing countries benefit from staring an apparel industry?

o Production of textile and apparel products for export is a vehicle for industrial

development and participation in the global marketplace.

o The apparel industry requires:

Comparatively low startup costs Labor-intensive production

o Short training time

o These countries’ most available resource is:

Human labor

What are the main characteristics of the apparel manufacturing industry?

What are the major issues in trading with newly industrialized countries?

Why are developed countries more likely to have trade deficits in apparel?

o Consumers in developed countries have more money to spend

o Seeking more variety

o Production costs and labor costs are higher in developed countries

o Stronger currency value in developed countries

Key characteristics of each stage of development in the textile complex and country

examples for each stage

o 1. The Embryonic Stage The poorest and least-developed countries

Products are produced for domestic consumption

Ex) Sub-Saharan areas in Africa

o 2. Early Export of Apparel Stage

Low wage labor is used for labor-intensive operations

Products are exported for the low-end of the market in the developed

nations

Price is the primary appeal.

Ex) Sub-Saharan areas in Africa, Bangladesh, several Latin American and

Caribbean countries

o 3. More Advanced Production of Fabric and Apparel Stage

Improvement in volume, quality, and sophistication

Fabrics may be exported to other countries

Develop own fiber production



Large manufacturers and retailers in more developed countries provide

assistance to foster advancement.

Ex) India, Vietnam, Sri Lanka, Philippines, Indonesia

o 4. The Golden Age Stage

Increasingly enlarged and sophisticated textile and apparel production

Run large trade surpluses

Depend less on the textile complex for industrial development

Start to favor other industries

Make investment in other countries

Ex) Turkey, some of China

o 5. Fully Maturity Stage

Employment in the textile complex starts to decline

Products and process: fairly advanced

The industry becomes more concentrated

Fairly capital intensive

Ex) some of China, S. Korea

o 6. Significant Decline Stage

The number of firms and employment in the textile complex decline

significantly

Trade deficit in many segments

Significant increases in off-shore production

Ex) US, UK, Germany, France, Belgium, Netherlands Explain how the stage of development for textile and apparel production is related to

the developmental stages of a nation.

o The stages of development for textile and apparel production generally parallel

the developmental stages of a nation or region.

Global patterns of textile and apparel activities in terms of production, employment,

consumption and global trade.

o Global shifts for the following activities:

Production

US

Japan

The Dragons

China

S.E Asia

S. Asiao Employment

Decline for the more-developed countries

Growth for the less-developed countries

o Consumption

Increased

o Trade

Increased



Does Trade Deficit Hurt America?

What is the BOT? How is the BOT related with economic factors or exchange rates?

o BOT = Exports- Imports

o Positive (trade surplus)

Export > Import

o Negative (trade deficit)

Import > Export

o BOT is the result of economic factors, not the cause .

o BOT is highly reflective of the value of the dollar against other currencies – that

is, exchange rate

o A strong currency is usually a significant factor in producing a trade deficit.

Do tariff deficits hurt the US economy? If not, what is the logic behind it?

o One of the causes of American’s trade deficit is that foreigners want to hold

American assets, not because foreign nations do not want American products.

o When America is running a trade deficit, it is almost always running a capital

account surplus**.

o A trade deficit means:

Import > Export

USD is stronger in value than local currency

o Cheaper for the US to import

A strong dollar means:

American assets are valuable for foreigners to hold.

More capital flowing into the U.S.

What is current account?

What is capital account? How is the US trade deficit related with the capital account

balance?

o A capital account surplus means that foreigners buy more American assetsthan Americans buy of foreign assets.

o Therefore, when America is running a trade deficit, it means that the US runs a

deficit in goods

What is balance of payment?

o BOP= record of all monetary transactions between

a country and the rest of the world



Is trade surplus always good? Why or why not?

o Running a favorable balance of trade is not necessarily a beneficial situation

o Nor it is necessarily disadvantageous to run a trade deficit

o Trade surplus means your currency is low/weak

Tools of Protectionism: Tariff and Non-Tariff Barriers

Two purposes of tariffs

o 1) To protect the domestic industry by restricting trade

o 2) to accumulate revenue for the government

o The tariff revenue is captured by the American Government

The effects of tariffs on the price of domestic and foreign products. Explain the logicbehind it.

o Drives up the prices for BOTH domestic and foreign products

o The tariffs will raise the price of the foreign goods.

Price of foreign goods > price of domestic goods

Increased demand for domestic goods (b/c they are cheaper)

o The demand placed on the ‘cheaper’ domestic goods will eventually drive those

prices up.

Supply-demand theory

Demand(up) price goes up (up)

Production capacity expansion due to growing demand Additional

costs for production

Price (up)

The increased price for domestic products

raises the manufacture's profits and the wages of their workers.

However, they are paid for out of American consumer’s pockets

Can be a form of extortion

The harm to consumers is larger than the benefits to producers

and their workers.



Examples of non-tariff barriers. Explain each barrier.

o Import Quotas- Quantity control on imported merchandise for a certain period

of time

Often administered by a government that issues import licenses up to the

quantity of imports that will be allowed.

The import licenses may be given away or sold.

When sold, it does generate governmental revenue.

it limits what he can sell at the old price. How come?

o Anti-dumping duties (ADD)

Dumping happens when a company uses a foreign market to sell off

goods at prices lower than the fair market value.

A form of price discrimination

Foreign exporters can penetrate the US market

American manufacturers can be injured

Due to the lack of price competitiveness.

Beneficial for American consumers

Due to lower prices

Unfair if selling below home market price (i.e., normal price charged in

the exporter’s country)

An antidumping fine is equal to the difference between the ‘fair’ price

and the price that was being charged in the US.

Eventually, the anti-dumping order encourages foreign exporters to raise

their prices their prices to avoid the anti-dumping duties

o Countervailing duties (CVD)

Duties to counter the effects of subsidies provided by foreign

governments on the price of products exported to the U.S.

o Import license requirement

Importers are required to obtain a license for each shipment they bring

into the country.

When used in a discriminatory manner, these licenses can become a non-

tariff trade barrier.

o Quality standards

To protect health, safety, and product quality for domestic consumers

o Domestic Content Requirement

Requires government or sometimes private companies to buy

domestically produced products to restrict imports.



Typically specify the percentage of a product’s total value that must be

produced in order for the product to be sold in the domestic market.

Often used for developing countries to foster agricultural, automobile,

and textile production

o Exchange Rate Management Policies

Exchange rate: the ratio at which one currency trades for the other

Currency devaluation

Some countries manage the exchange rates to restrict imports

and encourage exports.

Ex) china japan

o Environmental standard

o Working condition regulations

o Employment regulations

Use of child labor

o Packaging/labeling requirements

What are the effects of quotas?

Quotas reduce the number of foreign goods. This limited supply results

in:

The price will increase for the foreign goods

The demand increase for the cheaper domestic products, in turn driving

up the price of domestic products

Increases in the price of both domestic and imported goods

Quotas cause American customers to pay higher prices.

Quotas are the most regressive among the various types of trade

barriers.



What are the similarities and differences between quotas and tariffs? Who captures

the revenue?

o o Tariffs o Quotas

Difference It forces the exporter to raise

the price.

It does not force the exporter t

raise the price.

The tariff revenue is captured

by the American government

The quota revenue could be

captured by the foreign

government/ exporters or

American importers

Similarity o The end results of both are higher prices and fewer varieties for

consumers.

o National welfare falls

o Standard quota vs. voluntary quota: compare who determines the recipients of

licenses and who captures the revenue?

o Standard Quotas

The US government gives licenses to

American importers

Import licenses: the right to import a particular amount of the

good.

Distribution of import licenses is not done randomly.

The quota revenue is captured by American government or American

importers.

They enjoy higher profits from the higher prices paid by by

American consumers.

o Voluntary Quota = VER (Voluntary Export Restraints)

A foreign country agrees ‘Voluntarily ’ to restrict its exports to the U.S. to

a fixed number.

The foreign government determines who gets to export the goods to the

US.

Common in the textiles, clothing, steel, agriculture, and automobile

industry

The quota revenue is captured by foreign governments or foreign

exporters

Quotas drive up the price



because American importers compete to buy the scarce supply of foreign

goods.

The foreign exporters enjoy the profits from the higher prices paid by

American consumers.

Why would exporters agree to voluntary quotas?

o If they don’t, they will likely face more restrictive quotas.

Voluntary quotas are more flexible.

Bilateral trade agreement no need to go to Congress

o To avoid a trade war

Consequences of tariffs and quotas

o The end result of both is higher prices and fewer choices for consumers.

o Encourage foreign manufacturers to set up plants here.

Advantages: create jobs increases in GDP

Increases in the capital account

Disadvantages:

Increased threat for the domestic industry; market dominance

Profits go to foreign companies

Environmental damage

o Because this decision is NOT based on true economic criteria they often FAIL.

What is exchange rate? What are the effects of currency depreciation?

o Exchange rate: the ratio at which one currency trades for the other

o Currency devaluation

Some countries manage the exchange rates to restrict imports and

encourage exports.

When is protectionism justified?

o It is considered as

infant or crucial industry

o There is a concern for national defense and national security

o There is a potential for unemployment

o There is a presence of foreign monopoly



Where does public stand on free trade?

o US consumers

In favor of free trade

o US retailers

In favor of free trade

o US manufacturers Against free-trade

o US labor unions

Against free-trade

*Bring a blue scantron.

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