INTERNATIONAL SOURCING: BEYOND SHOPPING AND FRANCHISING

PAST INTERNATIONAL SOURCING PATTERNS BY US-BASED COMPANIESTWO MAIN PATTERNSINTERNATIONAL CATALOG SOURCINGsourcing from independent foreign vendorstransactions handled by purchasingcontracts awarded on cost, specifications, delivery reliability

INTERNATIONAL FRANCHISINGcore manufacturing dispersed internationallylocated close to customerslocal 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 1980sINTERNATIONAL 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 TRIADDEMAND SIDE:markets similar in size and buying powerglobal productsSUPPLY SIDEdiminishing cost differentialsno 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&DEXAMPLESSpecialty chemical companymanufacturing network of six plantsWest German plant: enhanced product formula and process improvement for cost reductionJapanese plant: waste management techniques and efficient material utilizationSunbeam Appliance Companyiron 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 INNOVATIONMultidomesticor National innovationTriad-wide innovationNational and LittleInnovationLittle Innovationand InternationalCoordinationInnovationRatehighhighlowlowDegree of InternationalCompetition

NEW INTERNATIONAL MANUFACTURING CONFIGURATIONSFOR 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 alternativesgeographic dispersion of the plants, high coordination across plantsa 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 DIFFICULTESTABLISHED 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 SOURCINGOFFSHORE PURCHASINGOFFSHORE SUBCONTRACTINGJOINT-VENTURE OFFSHORE MANUFACTURINGCONTROLLED OFFSHORE MANUFACTURINGOffshore purchasingOffshore subcontractingJV offshore mfg.Controlled offshore mfg.paymentProducts&/or partsTechnology,materialspaymentProducts&/or partsProducts&/or parts;profits &/or feesInvestment,capital, mgme,technology,materialspayment

SELECTION CRITERIA FOR THE FORM OF OFFSHORE SOURCINGCOMPANY CAPABILITIES AND RESOURCESInvestment capital requirementsManagement time investmentOffshore ExperienceAVAILABILITY AND CAPABILITIES OF SUPPLIERS OR PARTNERSAvailability of partners depends on: country, complexity of production, size of operationApparel vs. electronicsPROJECTED SOURCING VOLUME AND VARIABILITYLarge volumes, fixed investmentsSmall volumes, independent suppliersVariability favors purchasing or contractingDEGREE OF INTEGRATION OF OFFSHORE AND DOMESTIC OPERATIONSHigh level of integration, controlled offshore manufacturing

PRODUCTS SUITABLE FOR OFFSHORE SOURCINGLABOR 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 FACILITIESSTART-UP PHASELOCATE:near technologywhere production is easily controllednear material suppliers (if product not well defined)RAPID GROWTHconcentrate in one location to gain from learning and economies of scalemove towards marketsMATURITYlow cost laboroffshore facilities

EVALUATING PRODUCTION SITESLABOR FACTORSlabor costslabor availability (of the right kind)labor productivitylabor reliability and unionsINFRASTRUCTURE FACTORSIndustrial sitesTransportationLocal suppliers of goods and servicesGOVERNMENT 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 SOURCINGTIME ZONES ANDDISTANCElimit quality of communicationcreate distrustLANGUAGECULTUREparticularly for labor and government relationsLACK OF INTERNATIONAL EXPERIENCESOLUTIONSright peoplefrequent 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

OP

CULTURAL FACTORS

Compatibility

OP

FDI

SELECTION MATRIX: continued

LOW

HIGH

COMPETITIVE SITUATION

Industry Concentration

OP

FDI

Relative Competitive Strength

OP

FDI

Local Barriers To Entry

FDI

OP

Cannibalization Risk

OP

FDI

PRODUCT

Maturity

FDI

OP

Brand Differentiation

OP

FDI

Line Diversity

FDI

OP

Service Intensity

OP

FDI

TECHNOLOGY

Matutity

FDI

OP

Stability

OP

FDI

Complexity

OP

FDI

Patentability

FDI

OP

GLOBALIZATION

Transnational Strategy

OP

FDI

TO FULLY AUTOMATE YOUR OFFSHORE PLANT , OR NOT :

THIS IS THE QUESTION!

USUAL MOTIVATIONS FOR FULL AUTOMATIONLOCAL 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-AUTOMATEDAvoids 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 & LABORCONTROL 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 COMPANYS STANDARD PLANTS ARE APPROPRIATE FOR LOW WAGE COUNTRIES