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Pursuing Competitive Advantage through Integrated Global SourcingAuthor(s): Robert J. Trent and Robert M. MonczkaSource: The Academy of Management Executive (1993-2005), Vol. 16, No. 2, Theme: AchievingCompetitive Advantage (May, 2002), pp. 66-80Published by: Academy of ManagementStable URL: http://www.jstor.org/stable/4165843 .

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Academy of Management Executive, 2002, Vol. 16, No. 2

Pursuing competitive

advantage through integrated

global sourcing

Robert J. Trent and Robert M. Monczka

Executive Summary As organizations search for new ways to gain competitive advantage, the development

of progressive global strategies and approaches becomes an increasingly attractive option. Perhaps more than any other area in business today, integrated global sourcing strategies offer the potential for major performance gains. Since most organizations do not have well-developed global sourcing processes or strategies in place, improvement opportunities are indeed attractive and largely unrealized. This article enhances our understanding of global sourcing by identifying the differences between international purchasing and global sourcing within a five-level framework that highlights the progression from domestic purchasing only to the coordination and integration of global requirements. The primary focus of this article is a presentation of the factors that differentiate successful from less successful global sourcing efforts. The article concludes with a brief discussion of lessons learned and future global sourcing enhancements and improvements.

......................................................................................................................................................................

Today's competitive environment, more than at any other time in history, demands continuous improvement at increasingly dramatic levels.' Firms that excel must implement strategies to achieve cost reduction, quality and delivery improvement, cycle-time reduction, and improved responsive- ness to customer, competitive, and financial market demands. As organizations search for new ways to gain competitive advantage, the development and execution of progressive global strategies and approaches become an increasingly attractive option.

Increased globalization is clearly on the minds of most executive leaders. A survey by the Foun- dation for the Malcolm Baldrige National Quality Award revealed that three of the top five challenges facing CEOs involve globalization. Almost 95 percent of CEOs indicated that becoming more global was their top challenge as they looked across a three- to five-year planning horizon.2 Re- ducing the cost and improving the performance of their global supply chains was mentioned by almost 80 percent as a top priority and challenge. Given the importance that CEOs place on global-

ization, understanding how to define and opera- tionalize this topic is a major concern.

Increased globalization is clearly on the minds of most executive leaders.

Perhaps more than any other area in business today, integrated global sourcing offers the potential for breakthrough performance gains. Since most organizations do not have well-developed global sourcing processes or strategies in place, improvement opportunities are indeed attractive and largely unrealized. In fact, our research reveals that successfully executed integrated global strategies can result in material cost savings of 15 to 25 percent compared with local or regional sourcing practices and agreements. Unfortunately, the topic of integrated global sourcing has not received much attention within the academic com- munity or from executive leadership.3 It is a topic, however, that will gain increasing attention as progressive organizations pursue new sources of competitive advantage.

66



2002 Trent and Monczka 67

The purpose of this article is to enhance executive management's understanding of global sourcing by addressing a number of critical topics. The first section briefly describes the research effort that supports this discussion. Next, we summarize the growth in international purchasing over the last thirty years. Third, we identify the differences between international purchasing and global sourcing within a five-level framework that highlights the progression from domestic purchasing to the total coordination and integration of global requirements. The next section, which is the primary focus of our discussion, presents those factors that most differentiate successful from less successful global sourcing efforts. The article concludes with a brief discussion of lessons learned and future global sourcing directions.

The Global Sourcing Research Project

The findings and examples presented in this article were developed as part of a global sourcing research project conducted in 2000-2001. The purpose of the research was to identify the critical factors, benefits, results, risks, and methodology of global sourcing strategy development and execution. The discussion and examples presented are based on the results of a comprehensive mail survey as well as detailed site visits and interviews with team members, team leaders, team analysts, executive steering committee members, and executive managers who were closely involved with the global sourcing process at their respective companies. Unless otherwise referenced or noted, all presented data, examples, and conclusions are from this research project.

Of the 2,000 surveys forwarded worldwide, 169 surveys were returned (yielding an 8 percent response rate). Many firms elected not to participate because of their inexperience with international purchasing. Most respondents were vice presi- dents or global managers working at the corporate level rather than at a division or site. Field visits involved leading firms in the chemical, electronic, computer, consumer product, transportation equipment, and image acquisition industries. Each firm requested that its name be kept confidential.

While surveys were distributed worldwide, the vast majority of respondents were U.S. based (86 percent). Remaining firms were distributed across Canada, Latin America, Western Europe, and Asia- Pacific. As expected, the average sales of partici- pating companies revealed a sample of larger companies. The average participant had annual sales of $1 billion to $3 billion. While 40 percent of the respondents ha[d satles of $500 million or less,

almost one-third of the respondents had annual sales greater than $3 billion. Companies also rep- resented various types of industries, including industrial products (40 percent of the sample), consumer products (15 percent), high-technology companies (8 percent), service providers (9 percent), and basic materials and utilities (each at 3 percent of the responses).

Growth in International Purchasing

The number of U.S. companies that practice international purchasing has increased dramatically over the past three decades.4 (The next section explains the fundamental differences between international purchasing and global sourcing.) Be- tween 1973 and 1975, the percentage of companies purchasing internationally doubled from 21 percent to 45 percent. The oil embargo of the 1970s coupled with shortages of other basic materials forced purchasing departments to search overseas for suppliers. Also, many foreign producers were becoming quality and cost leaders across a number of industries. The most sought-after foreign items by U.S. companies in 1975, for example, were production machinery and equipment followed by chemicals and mechanical/electrical components.

The number of U.S. companies that practice international purchasing has increased dramatically over the past three decades.

The percentage of U.S. companies engaged in international purchasing increased from 45 percent to 56 percent from 1975 to 1982. This increase reflected the continuing inability of domestic suppliers and manufacturers to compete in terms of price, quality, and even delivery. Foreign suppliers could often provide higher-quality parts at a lower total cost. For some, survival against foreign competitors required sourcing from the same suppliers who supported the competition.

The period from 1982 through 1987 saw a sharp rise in the number of companies looking internationally to meet some or all of their purchase requirements-from 56 percent to 71 percent. During this time the value of the U.S. dollar increased dramatically against other currencies. As a result, U.S. imports became less expensive while U.S. firms found it difficult to export and compete in world markets. The huge trade imbalances of the 1980s reflected the strength of the U.S. dolla r in



68 Academy of Management Executive May

world currency markets along with a continued lack of competitiveness of many U.S. companies.

Since 1987 the level of international purchasing and trade has accelerated rapidly. The end of the Cold War led to the opening of trade with emerging markets in Russia, Eastern Europe, and China, which in turn has led to the development of new markets and new sources of supply. Also, import and export restrictions are lessening, partly as a function of the GATT agreement on free trade signed in Uruguay. The North American Free Trade Agreement (NAFTA), passed in 1993, has also resulted in a dramatic increase in trade between the U.S., Canada, and Mexico. Finally, trade talks between the U.S. and other countries, such as Japan and China, have reduced trade restrictions.

Since 1987 the level of international purchasing and trade has accelerated rapidly.

The average amount of total purchases from non-U.S. sources by larger U.S. firms has increased from 9 percent of total annual dollar purchases in 1993 to over 25 percent in 2000. The trend toward increased international purchasing activity is clear. What is not clear, however, is whether U.S. firms have the capability to evolve from basic international purchasing to a more complex global focus that involves coordinating worldwide purchasing activities and integrating them with other supply-chain processes.

Evolving from International Purchasing to Integrated Global Sourcing

While many practitioners and academics inter- change the terms, fundamental differences exist between international purchasing and global sourcing. Arnold noted these differences in 1989 when he argued that global sourcing means globalization in two respects-internationalization of purchasing activities versus adopting a strategic orientation of the sourcing process.5

International Purchasing and Global Sourcing Defined

As defined here, international purchasing refers to a commercial transaction between a buyer and supplier located in different countries. This type of purchase is typically more complex than a domestic purchase. Organizations must contend with lengthened material pipelines, increased rules

and regulations, currency fluctuations, customs requirements, and a host of other variables such as language and time differences.

Global sourcing, which differs from international purchasing in scope and complexity, involves proactively aggregating volumes and coordinating common items, practices, processes, designs, technologies, and suppliers across worldwide procurement, design, and operating locations. In addition, global sourcing requires hori- zontal integration between product design and development groups as well as between supply and demand planning activities. Vertical integration is also required with primary and secondary suppliers.

Given these differences, an internationalization of the sourcing process takes place as firms develop worldwide experience. They evolve or progress from domestic purchasing only to the global coordination and integration of common items, processes, designs, technologies, and suppliers across worldwide locations. Figure 1, a multi-level framework that is supported by previous research, summarizes this progression along with current levels and levels that firms expect to be at within the next three to five years.6

Level I Purchasing

Companies classified as Level I engage in no di- rect worldwide purchasing activities, either because they perceive no need for buying internationally or lack the expertise to do so. Domestic sources fulfill all their purchase requirements. This does not mean, however, that a firm does not use foreign goods. Many companies purchase from domestic suppliers or distributors that are involved in international purchasing. The supplier or distributor, however, is responsible for managing any international transactions.

During the 1960s and 1970s, most U.S. firms, small and large, operated at this level. Although the trend was toward increased international business on the marketing side, the global emphasis characterizing today's supply chain was not yet a factor. Firms could successfully operate at this first level and, depending on the industry, some can still choose to do so today.

Level II Purchasing

An organization progresses (usually reactively) toward basic international purchasing (Level II) because it is confronted with a requirement for which no suitable domestic supplier exists, or because competitors are gaining an advantage due to




Expected Expected Current 3-5 Years Change

Level I n Engage in Domestic 13.4% 7.8% -42% LeveI | Purchasing Only

a Engage in International Level II Purchasing As-Needed 21.3% 7.8% -63%

International Purchasing

Level III International Purchasing as

3% 1.%-4 Part of Sourcing Strategy 31% 14.3% 54%

_ Integration and Coordination of

Level IV ~~Globaxl Sourcing Strategies 18.1% 15.6% -14%

Global L Across Worldwide Buying Soucin Locations

m Integration and Coordination of

Level V | Global Sourcing Strategies with 16.1% 54.5% +238% Other Functional Groups

% = Percent of companies indicating a particular level

N= 169

FIGURE 1 Current and Expected International Purchasing and Global Sourcing Levels

worldwide sourcing. First-level firms may also find themselves being driven toward the second level because of triggering events in the supply market. Such events could be a supply disruption, rapidly changing currency exchange rates, a declining domestic supply base, inflation within the home market, or the sudden emergence of worldwide competitors. International purchasing at this level is usually limited or performed on an ad hoc basis.

Level III Purchasing

Strategies developed in Level III approach the supply market from a worldwide perspective. Firms operating at this level recognize that a properly executed international purchasing strategy can result in major performance improvements. However, procurement strategies are not well coordinated across worldwide buying locations, operating centers, or business units. Each major buying center operates independently of the others. The progression to the third level occurs because purchasers realize that lower purchase prices and other performance improvements may result from worldwide sourcing. During this shift, a purchaser develops a worldwide attitude and an awareness of

alternate sources that can support the attainment of business goals. Frequently, purchasing focuses on emerging markets for price reductions.

A properly executed international purchasing strategy can result in major performance improvements.

Third-level participants often designate certain buyers to manage international purchasing, solicit international help from worldwide subsidiaries, or rely on international purchasing offices to support purchasing activities. As Figure 1 implies, Level III is where many firms begin an organizational ma- turing process that enables them to evolve toward true global sourcing. Companies in intensely competitive industries should exhibit behavior that is characteristic, at a minimum, of the third level.

Level IV Purchasing

Higher levels of the internationalization process occur when an organization integrates and coordi- nates material and service requirements, usually




through central coordination, across worldwide di- visions or business unit locations. Level IV represents a highly sophisticated level of strategy development. Operating at this level requires worldwide information systems, personnel with advanced skills and knowledge, worldwide coordination and communication mechanisms, an organizational structure that features central coordination of global activities, and executive leadership that endorses globally integrated sourcing. Organizational designs begin to resem- ble a matrix approach where sourcing personnel report directly to their buying center but also have a dotted-line reporting relationship to a central coordinating group.

Level V Purchasing

Organizations operating at Level V, which are rel- atively few, have achieved the cross-locational purchase integration that firms operating at the fourth level have achieved. The primary distinc- tion is that Level V participants proactively in- tegrate and coordinate common items, processes, designs, technologies, and suppliers across worldwide purchasing centers and with other functional groups. This integration occurs during new product development as well as during the fulfillment of customer orders.

Level V global sourcing strategy is also linked horizontally with other functional groups, particularly engineering, operations, and increasingly marketing. Furthermore, designing, building, and sourcing responsibilities are often assigned to the most capable units around the world. Only those firms that have worldwide design, development, production, and global procurement capabilities can, by definition, progress to this level.

U.S. Firms: Some Study Results

A recent study supports our finding that U.S. firms are not maximizing the potential offered by higher- level global sourcing. This study concluded that the prevailing inclination of U.S. firms is primarily toward opportunistic (i.e., Level II) rather than strategic global sourcing (i.e., Levels IV and V). It further concluded that if U.S. firms were to raise the current status of global sourcing from simply an occasional cost-cutting or quality-improvement activity to a critical factor in developing global strategy, they would achieve a long-range strategic posture that would most likely improve their global competitive edge.7 Another study found that U.S. companies typically follow a traditional approach to international purchasing, concentrating

on a search for the lowest-cost source of supply.8 Other research indicates that international purchasing decisions tend to be made independently of decisions in other units and at lower organizational levels.9

The Primary Benefit: Cost Savings

Given the relentless pressure to achieve cost reductions, and with excess capacity now appearing in many industries, it is understandable that the primary reason for pursuing sophisticated and complex global agreements is to realize cost savings. A number of studies have concluded that price reductions are the primary benefit realized from global sourcing.'0 In our research, price reductions from successful global projects range from 15 percent to more than 30 percent when sourcing in emerging markets. Cost savings result from the aggregation of worldwide purchase volumes, aggressive searches for best-in-class suppliers, effective management of currencies, coordination of design requirements, and reduced duplication as multiple regional agreements are consolidated into single agreements.

Furthermore, a strong correlation exists between the level of international purchasing or global sourcing pursued and the performance benefits realized. Firms that successfully operate at Level IV or V (global sourcing) achieve greater purchase-price and total-cost-of-ownership reductions, greater quality improvement, shorter cycle times, and greater delivery improvement compared with firms that operate at Levels II and III (international purchasing)."

A strong correlation exists between the level of international purchasing or global sourcing pursued and the performance benefits realized.

An Example: Santek Chemicals

Consider the case of Santek Chemicals, which actively pursues and succeeds at Level V global sourcing. This U.S.-based firm designs and operates chemical facilities worldwide and competes in an industry that can best be described as a marketer's nightmare. Industrial buyers view the company's products as commodity items, making it hard to differentiate product offerings beyond delivery and price. This perception, along with in- tense global competition, has created extensive downward price pressures. Three years ago, with




strong performance-improvement commitments made to financial analysts, executive management concluded that the company must lower costs by 30 percent to meet competitive operating targets.

In its search for improved performance, Santek determined that global engineering sourcing offered extensive and untapped opportunities. His- torically the company has operated in an engineer- to-order environment with regional design and procurement centers. This approach resulted in design and procurement efforts customized to each new project along with a lack of coordination between North American and European units. Exec- utive management now recognizes that remaining competitive requires the company to better coordinate its efforts across its worldwide units. Santek's objective has become one of entering the global marketplace as a single integrated company. This has demanded the development of a centrally coordinated global sourcing process, which Santek refers to as its global engineering and procurement process.

The primary driver behind Santek's global process is cost reduction. Each global project involves an extensive analysis between U.S. and European centers to identify areas of commonality and synergy in procurement and design. Cross-functional teams, with members from the U.S. and Europe working jointly, develop design specifications and contracts that satisfy each center's requirements while supporting future global operating needs. An executive manager who has budget authority and high corporate visibility is responsible for managing the process with help from a cross-functional executive steering committee. While Santek's process began with very focused commodities, global sourcing projects became broader in scope once the cost- saving possibilities became obvious. This breadth includes, for example, pursuing global projects for services and telecommunications.

After three years of global sourcing experience, Santek reports that global agreements are averaging 20 percent in cost savings compared to doing business regionally. Furthermore, worldwide design and procurement centers have better aligned their philosophies and strategies between themselves and with the company's business strategy. And what makes Santek's global process provide additional value is the fact that global engineering and procurement managers now work with marketing to include expected savings from in-process global projects when responding to end-customer bid proposals. Integrated global sourcing is helping a company that operates in a mature industry to become more competitive worldwide.

Santek reports that global agreements are averaging 20 percent in cost savings compared to doing business regionally.

Figure 1 reveals that many firms, like Santek Chemicals, expect to progress toward Level V global sourcing. While most firms desire a higher level of globalization over the next three to five years, the reality is that many will lack the understanding to pursue these higher levels successfully. Given the expected movement toward Level V, the need to better understand what differenti- ates successful from less successful global sourcing efforts becomes critical.

Differentiating Between Successful and Less Successful Global Sourcing Efforts

In our research, respondents compared their most and least successful global sourcing experiences across 22 factors. These factors were thought to be relevant based on prior global sourcing research and experience over the last 25 years. Table 1 identifies the average difference between these experiences. This table, sorted by descending order of the largest differences between the means for each statement, provides a valuable way to segment those factors that differentiate global sourcing success. Only those factors with a difference greater than 2.0 are presented here. An understanding of these factors is critical if the expected progression toward Level V global sourcing is to become a reality. The following discussion of each factor includes examples to support the points being made and to provide managerial guidance when pursuing global sourcing excel- lence.

Create a Well-Defined Global Sourcing Process or Approach

The development of a rigorous and well-defined approach or process is critical to global sourcing success. A previous research project concluded that global sourcing structures and processes were extremely important to the development of global sourcing business capabilities.12 Some organizations have taken their commodity or regional strategy development process and adapted it for global sourcing. When this occurs, the global process will likely weigh certain factors differently (for example, more emphasis placed on risk factors and total landed cost) compared with a regional commodity development process.




Table 1 Global Sourcing Strategy Development and Execution: Key Success Factors

Most Least Global Sourcing Strategy Development and Successful Successful

Execution ... Experience Experience Difference

Followed a well-defined process or approach 2.68 5.09 2.41 Involved the right individuals as participants or 2.49 4.82 2.33

team members Featured well-established communication methods 2.65 4.92 2.27

among participants Featured regular strategy review sessions with 3.04 5.26 2.22

worldwide purchasing or other functional managers

Provided complete information and data to 2.68 4.86 2.18 participants

Involved users or operating personnel throughout the 2.87 4.97 2.10 process

Featured site visits to evaluate supplier performance 2.83 4.93 2.10 capability

Effectively measured the results achieved from the 2.57 4.66 2.09 global sourcing process

This table reports on the factors with a difference between the means of the most and least successful global sourcing experience of at least 2.0. A total of 22 factors were compared. The numbers presented under the most and least successful experiences represent the average across all respondents. The last column is the difference between the averages.

Scale: 1 = strongly agree, 4 = agree somewhat, 7 = strongly disagree. N = 104 (Only Level II-V firms responded to this question.)

The development of a rigorous and well- defined approach or process is critical to global sourcing success.

Santek Chemicals provides a good example of how to develop and support a progressive global sourcing process. Santek's global engineering and procurement process began as senior engineering managers expressed their belief that savings from standardizing component designs and leveraging company-wide purchase volumes with global suppliers could be significant. Recognizing the important linkage between engineering and procurement eventually resulted in the development of Santek's global engineering and procurement process.

An executive manager at Santek assembled a leadership team to develop, sell internally, and launch the process. This leadership team has evolved into a corporate steering committee with a full-time manager assigned to oversee global projects. A major part of process development involved several procurement managers working to- gether to define the concept of globalization and creating the global engineering and procurement process, a task that required four months. The result is a well-defined process that is being successfully applied to worldwide sourcing opportu-

nities. Figure 2 summarizes Santek's approach to integrating worldwide engineering and procurement centers (Level V strategy development from Figure 1).

Santek managers have reached consensus about global sourcing based on three years of experience. First and foremost, global sourcing success requires a well-thought-out process. It is necessary to create the process, adhere to the process, and then speak as one voice throughout the company when adopting the process. Success also requires assigning the right people to develop the process and then to pursue global projects. Acceptance and buy-in require leadership to sell the process and educate internal customers. Finally, a defined process facilitates closer working relationships and understanding between worldwide units while helping to align regional and site-based per- spectives and cultures.

A defined process helps overcome many of the differences inherent in global sourcing. Social culture and laws, personnel skills and abilities, and business culture are three of the top areas where differences are the greatest across different geographic units. A global sourcing process helps align very different participants and practices around the globe. The lack of a process and its enforcement leads to the self-interests of individual sites and operating locations, rather than




Step 1: Identify Global Sourcing Opportunities

When identifying specific opportunities, an executive steering committee and globalization manager consider the following criteria:

* What business units require the largest cost reductions? * What does the company currently buy? * How is the commodity currently specified? * How much effort will it take to create a worldwide set of specifications?

Step 2: Establish and Charter a Global Sourcing Development Team

The executive steering committee forms cross-functional/cross-locational (CF/CL) teams with worldwide members to pursue specific global opportunities.

Step 3: Propose Global Strategy

A team charter provides project teams with significant responsibility, including proposing a global strategy. Teams validate the original assumptions underlying the project, verify current volumes and expected savings, determine if global suppliers exist, evaluate the current set of specifications between design centers, and propose a global engineering and procurement strategy.

Step 4: Develop Request-for-Proposal (RFP) Specifications

Teams are responsible for developing the proposal (RFP) that suppliers receive. This step consumes a large portion of the global engineering and sourcing process time.

Step 5: Release RFPs to Suppliers

On average six suppliers receive an RFP during a global project. Project teams are responsible for following up with suppliers and answering any questions.

Step 6: Evaluate Bids or Proposals

A commercial and technical evaluation of supplier proposals occurs here. Project teams will ask suppliers for their best and final offer and conduct site visits as required. Face-to-face negotiation occurs after analyzing the RFPs returned from suppliers.

Step 7: Negotiate with Suppliers

A smaller team negotiates with suppliers to finalize contract details. All negotiations are conducted at the buying company's U.S. headquarters and can last up to three days. The negotiation process lengthens if the buying company does not achieve its price and service targets.

Step 8: Award Contracts

Information concerning the awarded contract is communicated throughout the company via email distribution. The steering committee calculates expected savings and maintains the agreements in a corporate database.

Step 9: Implement Contracts and Manage Suppliers

This step involves loading global agreements into the appropriate corporate systems. It also involves managing the transition if the supplier and/or part numbers changed from previous agreements or designs.l

FIGURE 2 Santek Chemical's Global Engineering and Procurement Process




broader corporate interests, being the central focus.

Involve the Right Individuals as Participants or Team Members

One theme that consistently emerges when working with companies is the importance of qualified personnel to support the global sourcing process. In fact, responding companies provide many insights into the importance of this topic. The highest-rated global sourcing success factor from a list of over thirty choices, for example, is access to personnel with the right knowledge, skills, and abilities. When asked to rank the seriousness of problems that may affect global success, a lack of qualified personnel to support the sourcing process emerges as the most serious of a dozen potential problems. Having personnel with different skills and abilities across geographic locations is also identified as a major issue, which becomes a problem when forming cross-locational teams.

Given the importance of having the right personnel participate in the process, what knowledge and skills does global sourcing require? A partial list certainly includes advanced cost analytic skills, an understanding of worldwide supply markets, the ability to negotiate and develop global contracts, effective communication and presentation skills, an understanding of the global sourcing strategy development process, and the ability to think holistically beyond a site or region. Working effectively with other cultures is also important.'3

Why are cost analytic skills so important? Con- sider, for example, that a number of leading companies require their project teams to evaluate sourcing decisions using total-cost models with data collected from suppliers and other sources. One company requires its team members to develop a hypothetical "best" material cost with potential savings identified in three areas: material savings, currency savings, and savings due to opening the purchase requirement to competition. The hypothetical "best" cost becomes the bench- mark against which final negotiated prices are compared. Another organization requires its teams to identify supply-chain cost drivers upstream from the buying company, which are then targeted for improvement. Sophisticated cost analysis has become an integral part of the global sourcing process.

Interestingly, an earlier study found that a firm's level of international language capabilities has a large effect on the development of global sourcing capabilities.'4 These authors argue that many U.S. firms hold fast to the notion that English is the

universal language of business. It becomes difficult, however, to develop insights into cross- cultural business practices; risk and uncertainty; core information, experience, and competencies; and the nuances of negotiation without the capability to communicate in the language of the firm with which one is dealing.

Many U.S. firms hold fast to the notion that English is the universal language of business.

The ability to recruit qualified personnel to participate actively in global sourcing projects is often a difficult barrier to overcome in the short term. The knowledge and skills required for global sourcing differ dramatically from those required of day-to-day operational purchasing. Most companies have created decentralized procurement organizations that are proficient at tactically managing transactions and material flows. In addition, Level V global sourcing requires close collaboration between engineering and procurement. Unfortu- nately, a level of mistrust created by different objectives, knowledge, and skills has often char- acterized the relationship between these two groups.

Staffing the global process with personnel having the right skills likely requires the internal development of high-potential individuals, recruitment of talent from other functional groups or companies, and recruitment of promising college graduates. Furthermore, managers must become progressive in their human resource actions. To encourage support, executive managers must view participation on global sourcing projects as a valuable part of an employee's leadership and career-development path. Detailed and regular as- sessments of employee knowledge and skill sets must also occur, with training tailored to the needs of the employee. Companies may also have to create teams with responsibility for recruiting and other relationship-building activities with academic institutions. All of this is done to satisfy one primary objective: ensuring that qualified participants are available to support a global approach to sourcing.

Develop Well-Established Communication Methods

A primary difference between regional and global sourcing is a dramatic increase in communication complexity. Global sourcing participants are usu-




ally located around the world, making real-time and face-to-face communication difficult. Further- more, participants may speak several languages while adhering to different business practices, social cultures, and laws.

A primary difference between regional and global sourcing is a dramatic increase in communication complexity.

One area that makes global sourcing more complex compared with local or regional sourcing is that team members (most companies use cross-functional teams to develop higher level global strategies) meet infrequently face- to-face. Global sourcing is one organizational process where participants rely extensively on electronic linkages and data to accomplish their objectives.

VCI/Ellison, which represents the consolida- tion of the heavy transportation equipment units of two previously separate and regional companies, recognized early that coordinating the efforts of global project teams with members from two continents would present some major communication challenges. The company has taken a number of steps to ensure that its teams communicate continuously during global strategy development.

Every global project features European and U.S. team members meeting face-to-face early in the process to analyze the Requests for Information (RFIs) returned by suppliers. At this meeting the teams also determine which suppliers will receive formal proposals. Project team members then communicate extensively via video and audio conferencing to review the proposals submitted by suppliers. Complex purchase requirements may require teams to meet face-to-face for a second time.

Every six-month project also features a negotiation workshop that takes place at VCI's European learning center. This session has several objectives: team members receive training in negotiation, project teams work face-to-face to develop their negotiating strategy, and the teams select a negotiation leader. Throughout the global sourcing process, team leaders provide weekly progress updates to an executive committee via an audio conference call.

The effort required for processing vast amounts of project data and information across two continents is extensive. VCI/Ellison created a full-time business analyst position to coordinate global

sourcing operational tasks. Analysts coordinate the information and proposal packages sent to suppliers, track and report response rates, input supplier information into a sourcing software system and database, and follow up with suppliers who are late with their submission. The business analyst also answers any questions that suppliers have or acts as a liaison by forwarding inquiries to the appropriate procurement or engineering repre- sentative. The analyst also provides feedback to suppliers concerning the competitiveness of their initial quotation or proposal. Finally, analysts have responsibility for forwarding an updated project database to their counterpart team across the ocean on a regular basis. VCI/Ellison under- stands the importance of communication and coordination during the development and execution of global sourcing strategies.

Our research identified over twenty communication and coordination approaches that participants use when pursuing global sourcing agreements. Examples of these approaches include regular review meetings, joint training sessions involving worldwide team members, regularly reported project updates through an intranet, and collocation of functional personnel. A common approach for coordinating team efforts is to rely on phone conferencing with a scheduled time for conference calls, usually on a weekly basis. The use of video conferencing is more limited due to the expense and availability of satellite uplink and downlink facilities. The two most common forms of communication practiced by global teams are electronic mail and phone conferencing.15 Presumably teams will take advantage of evolving web-based communication tools in the near future. One conclusion is quite clear: successful global sourcing efforts feature well-established and systematic communication methods to help overcome the inherent complex- ities of the process.

Conduct Regular Strategy Review Sessions with Worldwide Managers

Leading firms conduct strategy review and coordination sessions with worldwide procurement and other functional managers on a regular basis. These meetings allow managers to fully understand the global strategies that a team or group is pursuing. These meetings also help reduce redundancy by creating a common global "language" coordinated at the highest levels of a[n orgatnizattion.




Leading firms conduct strategy review and coordination sessions with worldwide procurement and other functional managers on a regular basis.

A best-practice example of using strategy review sessions involves a major U.S. consumer products company. This historically decentralized company has over 100 operating companies that are man- aged as profit centers. While it pursues decentralized decision-making due to the unique nature of its separate businesses, it also realized that until 1992 it had no expertise in coordinating its purchase requirements across the company. For example, the procurement of most services and equipment for building and managing facilities, including facility services, capital equipment, and design and construction, was handled independently at each unit.

To counteract the inefficiencies of this approach, the company has assigned to corporate managers the responsibility of coordinating worldwide facility integration. The company has also divided facilities into ten categories, each with an assigned group that has responsibility for a different aspect of facility management. While first applied only to North America, facilities coordination has now expanded to include European operations.

This company has also formed a number of leadership groups that identify major project opportunities involving facilities. Each group has a facilitator who develops an agenda for coordination meetings that are held three times a year. These groups search for worldwide opportunities in services, capital equipment, and design and construction. Leadership groups also have responsibility for establishing the core project teams that pursue specific opportunities.

Core teams consist of a dozen operating companies/profit centers that have agreed to participate and represent the interests of other business units. These core teams meet face-to-face twice a year to coordinate global strategy. Subsequent meetings involve audio and video conferencing. These teams have primary responsibility for establishing master agreements with global suppliers, often with 30 to 40 contract attachments that reflect the requirements of individual sites. As this example illustrates, leading companies understand the value of coordinating worldwide strategy through regular review meetings.

Provide Access to Complete Information and Data

It is hard to imagine a successful global sourcing effort without access to reliable and timely information. Examples of such information include a listing of existing contracts and suppliers, reports on supplier capabilities and performance, pro- jected worldwide volumes by commodity and location, and information about potential new suppliers. The ability to provide the data and information that global sourcing requires demands the development of global information technology systems and data warehouses.

While access to a common coding system and real-time data is a major facilitator, the reality is that many firms lack essential IT capabilities. Many companies have historically grouped their procurement and engineering centers by region (Asia, Europe, and North America). The groupings of other companies are the result of merger and acquisition. These newly combined firms almost always feature different legacy systems, processes, and part numbers across locations. These differences force firms to spend time and money to standardize and commonize their systems and coding schemes. Part number and commodity coding schemes have the second-lowest level of similarity from a list of twenty items when looking across all company-wide locations.

Progressive firms use their intranet to educate internal participants and provide access to information and data. The steering committee at a leading company, with the support of the information technology group, has placed its global sourcing process and manual on the company's intranet. Part of the on-line manual is an "inqui- ry" that defines what the company expects to achieve from global sourcing. Other available information includes a procurement strategy development template, contract terms and conditions checklist, global status report (a report on the status of completed, in-process, authorized, and future global projects and ideas), a Re- quest for Proposal template, and currency risk management guidelines. This company fully recognizes the value of providing easy access to information.

Involve Users or Operating Personnel Throughout the Process

A major issue whenever activities and strategies are coordinated across a company involves gaining buy-in to centrally coordinated or centralized decisions. Since local sites have to live day-to-day with the outcome of globail sourcing projects, it




makes sense to gain their buy-in to any agreement. Furthermore, site personnel are the supplier's true customer, making it important to represent their interests throughout the development process.

The question of how to involve users is important, and different models exist to gain that involvement. One leading company designates an individual to represent the interests of multiple sites and to act as a liaison between the team and buying centers. This individual has responsibility for understanding the operating requirements of the sites or centers, being part of a global sourcing project team, conveying internal requirements to the team, and providing feedback to the local sites or centers.

Another model features representation through executive steering teams, which provide leadership and guidance to the global sourcing process. Here, functional executives participate on the steering committee and represent the needs of various internal groups, such as operations, marketing, or engineering. Steering team members communicate with regional or site managers throughout the development of global projects.

A creative way to involve users is to provide them with the ability to specify their requirements through an electronic contract template. Here, sites convey their requirements-perhaps in delivery, service, or warranty-electronically to a negotiating team. The team then factors in these requirements when crafting global agreements.

Creating global project teams comprised entirely of site personnel is also possible. The only support a central group provides involves training, data, and budget. A variation of this features a single member, often acting as team coordinator or leader, from a corporate office working with project team members from buying centers or sites. Regardless of the model used, gaining buy-in to worldwide agreements is essential for justifying the time spent developing these agreements. Buy-in is also essential or else site locations may be hesitant to use global agreements, thereby negating any cost savings these agreements may provide. Even if the use of global contracts is mandatory, it is important to gain buy-in so that the focus is on making the strategy work rather than avoiding its failure.

Conduct Site Visits to Evaluate Supplier Performance Capabilities

Just as global sourcing makes communication among participants more complex, the process also makes supplier evaluation and selection decisions more complex. Consider the case of a U.S.-based company that has six worldwide facilities producing simila[r products. A key ob-

jective during each global project is to identify suppliers that can competitively satisfy the material, service, and equipment requirements of each facility. By entering the sourcing market as a single global player, this company expects suppliers, who also have multiple locations, to provide uniform standards, specifications, con- sistent quality and delivery, and drastically reduced and uniform pricing to each using location. The company also expects suppliers to maintain electronic linkages with each location.

Given the high performance requirements demanded of global suppliers, and the extremely high cost of switching suppliers after selection, the use of site visits to evaluate supplier capabilities becomes an important part of the process. These worldwide site visits, however, require a major commitment of time, cross- functional support, and budget for travel and living. Furthermore, global suppliers almost always provide material from more than one ship- ping point or facility. This makes the process even more complex as teams evaluate a supplier's multiple sites around the world. These teams may have to visit sites at more than one supplier since these visits may determine which suppliers are invited to final negotiations.

The cost to conduct worldwide site visits is often a barrier to involvement with global sourcing projects. Simply stated, most functional managers are not interested in funding the activities required to support global sourcing projects. One company has overcome this barrier by allocating a budget specifically for travel and living expenses, particularly supplier site visit expenses incurred by team members during the development of global agreements. An ISO 9000 proce- dure and internal support documents guide these visits, with four team members visiting a supplier at a time. Furthermore, teams meet face- to-face on a monthly basis to coordinate their findings. Although functional groups are still responsible for each member's salary, travel and living expenses have been removed as a barrier.

Simply stated, most functional managers are not interested in funding the activities required to support global sourcing projects.

While the cost of worldwide supplier site visits is high, the cost of making a poor supplier selection decision is even higher. Site teams should eva lu-




ate a potential supplier's financial condition, global capacity and capability, logistic networks, supply management practices, process and technical capabilities, and willingness to work with the buyer. In short, a firm should perform due dili- gence by acting as if it were purchasing the supplier rather than purchasing the supplier's output. Site visits, while time consuming and expensive, should be used to validate supplier-provided information and prevent poor selection decisions.

Measure Global Sourcing Results

A major debate centers on the reality of reported savings from local, regional, and global sourcing practices. As purchasing groups continue to report millions of dollars saved year after year from their efforts, finance groups at some organizations question why many of those dollars do not "make it to the bottom line." Unfortunately, quantifying the savings from globalization is not an easy task. However, those that can effectively measure savings can compare new actual prices against prior prices and can also compare actual price changes to market price changes, with savings being reported and credited.

Unfortunately, quantifying the savings from globalization is not an easy task.

A vice president at a major industrial company says one of his group's greatest failures has been an inability to articulate to the CEO the savings that confirm the value of global sourcing. Early in the process, procurement managers developed ta- bles with user locations listed horizontally and various global sourcing projects listed vertically for easy reporting of savings. The sourcing group expected to forward these numbers to finance for validation and then for use in budgeting and planning purposes. Unfortunately, finance did not show much interest in validating the numbers. Internal debate continues to occur at this company regard- ing how to measure true savings. Currently, individual commodity managers track what they be- lieve they are saving, but this involves many variables that are subject to question. The company expects to pursue Internet-based reporting using a structured format and agreed-to defini- tions of cost savings that allow operating units to enter the savings they realize from global agreements.

Not all the benefits from global sourcing are quantifiable. A transportation equipment company

argues that in addition to material savings, global sourcing has resulted in a number of less tangible benefits. This company maintains that transaction-cost savings are being realized due to fewer suppliers and that three-year agreements have resulted in less competitive bidding and proposal analysis. Also, the development of common specifications between design centers has resulted in engineering design savings. Furthermore, part specifications are better known as they are communicated across the company, allowing users to order requirements directly from suppliers without procurement involvement.

The coordination and communication required throughout the global process has also changed for the better the perspective of this company's European units. The European design and procurement centers now examine proposals in terms of cost reduction, supplier accountability, and procurement process productivity. Previously, the Eu- ropean center assumed only a more limited cost- reduction focus.

While there is no best way to quantify global sourcing results, effective measurement is critical for sustaining process momentum. Measurement is also essential for showing that a continuous stream of benefits outweighs the cost of developing and managing global agreements. Measure- ment is essential for ensuring that team members receive adequate recognition and reward for par- ticipating or verifying that global suppliers are supporting the buyer's worldwide locations.

Although many factors can affect a specific global initiative, the factors presented here are those that most differentiate successful and less successful efforts. Executive leaders are advised to understand how to manage these differentiating factors before they can realistically expect any advantages from a globally integrated approach to sourcing. Firms will also want to avoid the disad- vantages that result from poorly developed or executed global agreements.

Lessons Learned and Future Directions

After studying many companies and meeting face- to-face with dozens of global sourcing participants, we have developed a summary of global sourcing lessons learned and best practices. Figure 3 seg- ments these lessons and practices for executive managers to consider when evaluating the progress and effectiveness of their global strategies. Each item in this figure is supported by research, either survey results or conclusions reached during the ten field visits. Managers should assess their organization's progress a[gainst the items presented in this




RESOURCE COMMITMENT

* Executive management commits formal budget and other resources to support sourcing initia- tives and activities.

* Global project teams receive support from others external to the team, particularly those who are responsible for executing global strategies or must use global suppliers during operations.

PROCESS ? Global sourcing strategy development follows a

rigorous and well-defined approach or process. * The global process involves individuals with the

right skill set who are capable of taking a global rather than local or regional sourcing perspective.

* Lessons-learned sessions are conducted at the conclusion of each project with results distributed worldwide for continuous process improvement.

* Global sourcing contracts are continuously man- aged, reviewed, and reestablished as required.

ORGANIZATIONAL DESIGN

* The global sourcing process relies extensively on cross-functional/cross-locational teams with support from functional and executive managers.

* An executive steering committee provides leadership and guidance to the process.

? Users or other internal customers are involved during global sourcing projects.

* Sourcing support personnel are (1) collocated with technical and marketing personnel during product design and development projects and (2) linked to the appropriate global sourcing team.

Source: Global Sourcing Research Project: Survey and Field Research, 2000

INFORMATION TECHNOLOGY SUPPORT

* Participants have access to a wide range of data and information, ideally through a global data warehouse.

* Support documents, guidelines, templates, and progress updates are maintained on a firm's intranet for easy access by participants.

COMMUNICATION AND COORDINATION * Well-established communication methods and

mechanisms are in place to coordinate worldwide activities among participants.

. Worldwide strategy review and coordination sessions occur involving managers, team leaders, and other participants.

* Project teams develop plans to manage the risks associated with global sourcing and supply.

* Global strategy development efforts align directly with business objectives as well as the objectives of technology and new product development groups.

MEASUREMENT

* Expected savings from global sourcing initia- tives are considered during the calculation of a firm's financial projections.

* Global supplier evaluation features site visits to assess and measure the worldwide performance capabilities of suppliers.

* The ability to quantify and report savings from global sourcing activities and individual projects routinely occurs.

FIGURE 3 Global Sourcing Lessons Learned and Best Practices

figure to identify where they stand in relation to these characteristics.

Progressive leaders recognize that globalization is a continuous journey of development and improvement. Foremost in this journey is the need to develop or obtain human resources that have the skills and willingness to evaluate the supply network from a worldwide perspective. Other developments will include the need to agree on global performance mea- sures, establish integrated systems between worldwide units and with suppliers, and continued development and refinement of a Level V global process. We also anticipate greater integration between marketing, engineering, and sourcing groups as firms evolve toward higher globalization levels.

There will also be a growing trend toward doing business with suppliers that have global capabilities. In addition, the focus of global sourcing will shift from part (i.e., component) sourcing to sub- systems, systems, and services. Cost-reduction pressures will also result in an increased willingness to source in emerging supply markets. The ability to manage these changes will begin to separate leading from average firms.

One conclusion from almost every industry is clear: pressure to improve is relentless and severe. Those firms that succeed will be the ones that understand how to leverage and coordinate their activities on a worldwide basis and how to manage those factors that are critical to global success.




For many, maintaining a competitive advantage means pursuing higher-level global sourcing- perhaps one of the last untapped and uncoordi- nated areas capable of providing breakthrough performance improvements.

Endnotes ' Based on data collected annually from firms attending the

Executive Purchasing and Supply Chain Management Seminar, Michigan State University, East Lansing Michigan, 1990-2000.

2 Bovet, D., & Martha, J. 2000. Value nets: Breaking the supply chain to unlock hidden profits. New York: John Wiley and Sons.

3 International purchasing is a well-researched topic from many other dimensions besides the discussion presented here. For a sample of research related to this topic and not cited elsewhere in this article, see Rajagopal, S., & Bernard, K. N. 1991. Global procurement: Motivations and strategy. Marketing Intelligence and Planning, 12(9): 4-17; Fraering, M. & Prasad, S. 1999. International sourcing and logistics: An integrated model. Logistics Information Management, 12(6): 451; Birou, L. M., & Fawcett, S. E. 1993. International purchasing: Benefits, requirements, and challenges. International Journal of Purchasing and Materials Management, 29(2): 27; Handfield, R. B. 1994. U.S. global sourcing: Patterns of development. International Journal of Operations & Production Management, 14(6): 40-51; and Kotabe, M. 1994. Global sourcing strategy: R&D, manufacturing, and marketing interfaces. Journal of Global Marketing, 7(3): 157.

4The information in this section comes from a variety of sources, including data collected at the Executive Purchasing and Supply Chain Management seminars, Michigan State Uni- versity, East Lansing, Michigan, 1990, 1993, 1997, and 1999; In- ternational buying-The facts and foolishness, Purchasing, June 1987; and MAPI survey on global sourcing as a corporate strategy-An update, Machinery and Allied Products Institute, February 1986.

'Arnold, U. 1989. Global sourcing: An indispensable element in worldwide competition. Management International Review, 29(4): 14-28.

6 Monczka, R. M., & Trent, R. J. 1991. Global sourcing-a development approach. International Journal of Purchasing and Materials Management, 27(2): 2-8. Other research that presents an internationalization model of strategic procurement is Ra- jagopal, S., & Bernard, K. N. 1993. Globalization of the procurement process. Marketing Intelligence & Planning, 11(7): 44-56.

7Samli, A. C., Browning, J. M., & Busbia, C. 1998. The status of global sourcing as a critical tool of strategic planning. Journal of Business Research, 43(3): 177-187.

8Alguire, M. S., Frear, C. R., & Metcalf, L. E. 1994. An exami- nation of the determinants of global sourcing. The Journal of Business and Industrial Marketing, 9(2): 62-74.

9 Giunipero, L. C., & Monczka, R. M. 1990. Organizational approaches to managing international sourcing. International Jour- nal of Physical Distribution & Logistics Management, 20(4): 3-12.

10 Petersen, K. J., Frayer, D. J., & Scannel, T. V. 2000. An em- pirical investigation of global sourcing strategy effectiveness. Journal of Supply Chain Management, 36(2): 29-38; and Trent, R. J., & Monczka, R. M. 1998. Purchasing and supply management: Trends and changes throughout the 1990s. International Journal of Purchasing and Materials Management, 34(4): 2-11.

" Almost one-quarter of the price savings realized from worldwide sourcing (on average) disappear when comparing unit-cost savings to total costs. This is due to hidden costs associated with longer cycle times and increased administra- tive and budget costs incurred during strategy development and execution. The time required to analyze and execute a global agreement is usually months longer than the time required for domestic or regional agreements.

2 Petersen, et al., op. cit. 13 For a complete discussion of this topic, see the research

monograph by Giunepero, L. C. 2000. A skills-based analysis of the world class purchaser. Tempe, AZ: Center for Advanced Purchasing Studies.

14 Petersen, et al., op. cit. O50n a scale of 1 to 7 where 1 = do not use, 4 = rely on

somewhat, and 7 = rely on extensively, the use of electronic mail is rated 6.22/7, and phone conferencing is rated 5.51/7. The next-highest-rated communication tool or mechanism is face- to-face meetings, rated 4.69/7.

Robert J. Trent is the Supply Chain Management Program Director and Eugene Mercy As- sociate Professor of Manage- ment at Lehigh University. His research interests include procurement and supply strategy development, global sourcing, and organizational design is- sues. Prior to entering aca- demia, he spent seven years with Chrysler Corporation in various operations and supply chain-related areas. Contact: [email protected].

Robert M. Monczka is the Dis- tinguished Professor of Supply Chain Management at Arizona State University. He was for- merly on the Michigan State University faculty for 25 years. His research interests include procurement and supply strategy development and how to achieve future performance breakthroughs in supply chain- related areas. He has consulted with over 100 of the Fortune 500 companies. Contact: rmonczka@ asu.edu.



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