International purchasing and global sourcing--what are the differences?
Increased globalization is clearly on the minds of most executive leaders. A survey of CEOs by the Foundation for the Malcolm Baldrige National Quality Award revealed that nearly 95 percent of CEOs indicated that becoming more global was their top challenge as they looked across a three- to five-year planning horizon. Nearly 80 percent of CEOs mentioned reducing cost and improving global supply chains as a top priority and challenge. Given the importance that CEOs place on globalization, understanding how to define and operationalize this topic should be a major concern.
Since most organizations do not have in place well-developed global sourcing strategies, improvement opportunities are indeed attractive and largely unrealized. As will be discussed, global sourcing involves proactively integrating and coordinating common items and materials, processes, designs, technologies, and suppliers across worldwide purchasing, engineering, and operating locations. While integrated global sourcing has yet to receive the attention it deserves from executive leadership or the academic community, this topic will receive increased scrutiny as organizations search for new ways to compete.
Looking across most industries results in one clear conclusion--competitive and customer pressure to improve is relentless and severe. Those firms that succeed will be the ones that have learned how to leverage and coordinate their activities on a worldwide basis. For many, integrated global sourcing may well offer one of the best opportunities to achieve the kinds of performance breakthroughs and consistency required to compete in highly competitive markets.
The objective of this article is to replace anecdotal perceptions and accounts of global sourcing with research-based findings. These findings will help supply managers better understand what it takes to shift from basic international purchasing activities to integrated global sourcing strategies and approaches. Without this understanding, it is unlikely that a shift toward integrated global sourcing will occur at predicted levels.
Satisfying this objective requires addressing global sourcing from various perspectives. The first part of this article presents a literature review and concludes there is a need for a greater understanding of integrated global sourcing. The second section describes the research that supports the presented conclusions. Third, a model is introduced that identifies international purchasing and global sourcing as progressive levels along a continuum. The fourth section describes the primary differences between firms that practice international purchasing and those that have matured toward higher sourcing levels. Next, managerial implications arising from the research findings are discussed. The article concludes with a discussion of future research opportunities.
A REVIEW OF WORLDWIDE SOURCING RESEARCH
During the late 1980s and early 1990s, a great deal of research focused on various aspects of international purchasing. The growth in this topic related directly to the declining competitiveness of many U.S. firms along with the belief that international purchasing could help reverse this decline. A major portion of international purchasing research has addressed the benefits that U.S. firms should expect to attain from sourcing offshore as they competed against aggressive and skilled foreign companies (Rajagopal and Bernard 1994; Birou and Fawcett 1993; Handfield 1994; Kotabe 1994).
Most researchers have concluded that unit price reduction (although not necessarily total cost reduction) is the primary benefit realized from international purchasing (Petersen, Frayer, and Scannel 2000; Trent and Monczka 1998). Contradictory views exist, however, concerning the overall cost and benefit of international purchasing (Levy 1995). One view maintains that technological and organizational advances have reduced the cost and increased the speed of transportation and communication, thereby facilitating international purchasing. A second view counters that distance remains a significant barrier to conducting business and that the true costs of international purchasing are often underestimated or unknown. Other international purchasing benefits cited in the literature include greater access to product and process technology, higher quality, and the ability to introduce competition to the domestic supply base (Trent and Monczka 1998).
Another focus of international purchasing research has centered on risk management. Risk can increase due to additional inventory across extended material pipelines, longer material ordering leadtimes, relying on new and unfamiliar sources of supply, total costs that may exceed unit costs, and managing different currencies, languages, and business practices (Vickery, Carter, and D'Itri 1993; Min 1994; Murphy and Daley 1994; Howell and Soucy 1991; Das and Handfield 1997; Carter, Vickery, and D'Itri 1993). International risk management is a well-researched topic from many operational and functional perspectives.
Other research has applied the efficiency focus of transaction cost analysis (TCA) theory (Williamson 1979) to predict the exchange or structure that governs international purchasing (Fraering and Prasad 1999). When high asset specificity is required, such as the assets that are required to produce a complex item, TCA theory predicts that global internal sourcing (hierarchies) will be the preferred method to minimize transactions costs (Murray 2001). However, a new stream of research has emerged that questions the reliance on TCA and its ability to predict the international purchasing exchange or structure that buyers will employ (Walker and Poppa 1991; Murray 2001). One view contends that it is now time to extend international purchasing research by integrating different perspectives with variables drawn not only from TCA but also from inter-organizational relationships, organizational capabilities, and country-specific factors (Murray 2001). The argument is made that reliance on either markets or hierarchies to facilitate exchange is an outdated way to view sourcing. Strategic alliance-based international sourcing, for example, is a viable option to achieve competitive advantage, even when major components require supplier-specific assets (Murray 2001).
Throughout the international purchasing debate, there has been minimal discussion about how to apply a strategic perspective to international purchasing, or what is termed and will be more fully defined as global sourcing. This is due partly to the fact that few Western firms actively engaged in strategic global sourcing, particularly during the period when an intense interest in international purchasing began to take place. This absence was addressed as far back as the late 1980s when the differences between international purchasing as an operational activity and international (i.e., global) purchasing as a strategic activity were noted. International purchasing means globalization in two respects--internationalization of purchasing activities, which researchers have addressed quite well, as well as adopting a strategic sourcing orientation, which is not addressed as well (Arnold 1989).
A recent study concluded that U.S. firms are not maximizing the potential benefit offered by higher-level global sourcing. Prevailing behavior has focused on opportunistic rather than strategic global sourcing. If these firms were to raise the status of worldwide sourcing from an occasional cost-cutting or quality improvement activity to a critical factor when developing global strategy, they would likely gain a long-range strategic posture that would improve their global competitive edge (Samli, Browning, and Busbia 1998). Unfortunately, most companies typically follow a reactive approach to international purchasing, concentrating on a search for the lowest price sources of supply (Alguire, Frear, and Metcalf 1994). It is also known that international purchasing decisions tend to be made independently of other units and at lower organizational levels, making the decisions more operational or tactical rather than integrated or coordinated (Giunipero and Monczka 1990).
A review of the literature fails to identify any in-depth analysis concerning how firms should pursue integrated global sourcing, or what are the operational differences between international purchasing and global sourcing. In other words, wide researchers have concluded there is a need to develop global sourcing processes and strategies and to view global sourcing as an important strategic rather than tactical tool, details concerning how to achieve this are few. Previous research also fails from a conceptual basis to differentiate between international purchasing and global sourcing. This lack of detail concerning how to differentiate these terms or how to develop a strategic orientation has been the primary driver behind this research.
The findings and examples presented throughout this article are part of an exploratory research project that investigated the critical success factors, benefits, progress, risks, methodologies, best practices, and lessons learned from the development of global sourcing processes and strategies. This research includes survey data from 162 respondents along with detailed case findings from 10 leading companies.
The Global Benchmarking Initiative (GBI), a research consortium of 150 companies located at Michigan State University from 1993 to 2000, provided funding for this research. Before the end of the consortium in 2000, member companies identified what they thought were critical areas requiring future study. Members identified global sourcing, strategic outsourcing, and the use of electronic business systems as important research areas. Given the desire by many leading companies to enhance their understanding of global sourcing, along with an absence of research detailing how to operationalize this important topic, the need for research in this area became evident. The second phase of this research, which is taking a more detailed look at issues and research questions identified during the first phase, commenced in early 2003 as part of the Center for Advanced Purchasing Studies Project10X initiative.
Random selection from a comprehensive database maintained by the Global Benchmarking Initiative identified the companies that received surveys. Of 1,800 surveys forwarded worldwide, 162 were returned (yielding a 9 percent response rate). A number of firms returned the surveys unanswered and indicated they elected not to participate because of their inexperience with worldwide sourcing activities. Furthermore, the response rates for surveys sent outside the United States were disappointingly low. Of the 100 surveys forwarded to Asia-Pacific, for example, the researchers received three usable surveys, yielding a 3 percent response rate.
Responding companies were headquartered in the United States (86 percent), Canada (2 percent), Latin America (1 percent), Western Europe (6 percent), Asia-Pacific (2 percent), and locations described as other (3 percent). Represented industries included industrial products (39 percent), consumer products (15 percent), high-technology companies (8 percent), service providers (9 percent), basic materials, utilities, and energy providers (each at 3 percent), retailing (1 percent), and other diverse companies that could not self-classify into one of the above categories (19 percent). Most respondents (91 percent) in the final sample were vice presidents or managers working at the corporate level rather than at the division or site level. Although most respondents were physically located at their corporate headquarters in North America, the firms they worked for typically had worldwide operations.
Participating companies were primarily large--the average participant had annual sales of $1.5 billion. Thirty-eight percent of the respondents had sales of $500 million or less, 31 percent had sales of $500 million to $3 billion, 15 percent had sales of $3 billion to $10 billion, and 16 percent had sales greater than $10 billion annually.
Industry experts and GBI consortium members who were familiar with leading-edge global sourcing practices helped identify the companies visited during the field portion of the research. Visited firms competed in the chemical, electronic, computer, consumer products, and transportation equipment industries. Field research featured extensive face-to-face interviews with cross-functional team members, team leaders, sourcing and engineering representatives, executives and executive steering committee members, mad others who were closely involved with global sourcing at their company. The conclusions presented throughout this article, as well as the examples and discussion that support these conclusions, all result from the survey research and the detailed site visits unless otherwise noted.
The researchers make no claims about the external generalizability of study results to a broader population of firms, particularly small and medium-sized firms, or firms headquartered outside the United States. The participants in this study were primarily large, North American-based multinationals involved in manufacturing rather than services. Researchers intentionally selected names from a database comprised of larger rather than smaller firms because experience suggested that larger firms would be more likely to pursue worldwide sourcing activities.
THE WORLDWIDE SOURCING CONTINUUM
While many researchers and practitioners interchange the terms, fundamental differences exist between international purchasing and global sourcing. International purchasing relates to a commercial purchase transaction between a buyer and a 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 buying in scope and complexity, involves proactively integrating and coordinating common items and materials, processes, designs, technologies, and suppliers across worldwide purchasing, engineering, and operating locations (Monczka and Trent 1991). In the figures and tables, the more generic term "worldwide sourcing" will be used to describe international purchasing and global sourcing.
Figure 1 presents international purchasing and global sourcing as a series of evolving levels or steps along a continuum. An internationalization of the sourcing process takes place as firms evolve or progress from domestic purchasing only to the global coordination and integration of common items, processes, designs, technologies, and suppliers across worldwide locations. This figure summarizes this progression along with the current and future levels that firms expect to operate at over the next three to five years. As defined in this figure, firms that operate at Levels II and Ill practice or exhibit behaviors characteristic of international purchasing while firms that operate at Levels IV and V practice integrated global sourcing.
An organization progresses (usually reactively) from Level I to 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 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 in this level is usually limited or performed on an ad hoc or reactive basis.
Strategies and approaches developed in Level III begin to at least recognize that a properly executed worldwide sourcing strategy can result in major improvements. However, strategies at this level are not well coordinated across worldwide buying locations, operating centers, functional groups, or business units.
Level IV, which represents the integration and coordination of sourcing strategies across worldwide buying locations, represents a sophisticated level of strategy development. Operating at this level requires worldwide information systems, personnel with sophisticated knowledge and skills, extensive coordination and communication mechanisms, an organizational structure that promotes central coordination of global activities, and executive leadership that endorses a global approach to sourcing. While worldwide integration occurs in Level IV, which is not the case with Level III, the integration is primarily cross-locational rather than cross-functional.
Organizations that operate at Level V have achieved the cross-locational integration that firms operating at the fourth level have achieved. The primary distinction is that Level V participants integrate and coordinate common items, processes, designs, technologies, and suppliers across worldwide purchasing centers and with other functional groups, particularly engineering. This integration occurs during new product development as well as during the sourcing of items or services to fulfill continuous demand or aftermarket requirements. Furthermore, design, build, and sourcing responsibilities are often assigned to the most capable units around the world.
Only those firms that have worldwide design, development, production, logistics, and procurement capabilities can progress to this level. While many firms expect to advance toward Level V over the next three to five years, as Figure 1 indicates, the reality is that many will lack the understanding or the willingness to achieve this level of sophistication.
Consider the case of Air Products and Chemicals, a U.S.-based company that designs and operates industrial gas and chemical facilities worldwide. In 1999, company executives were surprised when an internal study concluded the company must lower operating costs by 30 percent to remain competitive globally. This was due to the emergence of low-cost competitors in Asia-Pacific along with industrial buyers increasingly viewing the company's products as commodity items, both of which have created extensive downward pricing pressures.
In their search for improved performance, Air Products managers concluded that global sourcing offered extensive and untapped improvement opportunities. The company has operated historically in an engineer-to-order environment using regional design and procurement centers. This has resulted in highly customized design and procurement efforts for each new project as well as a lack of coordination between the company's North American and European units. Remaining competitive demanded that the company coordinate design and sourcing activities across its worldwide locations.
A major action taken by the company was the development of a Level V global sourcing process, which the company refers to as its global engineering and procurement process. Each newly designed facility now involves an extensive analysis between U.S. and European centers to identify areas of commonality, standardization, and synergy in procurement and design. Cross-functional teams, with members from the United States and Europe working jointly, develop common specifications and contracts that satisfy each center's needs while supporting future replacement and maintenance requirements.
After three years of global sourcing experience and nearly 100 global agreements in place, Air Products is averaging 20 percent in cost savings compared with regional sourcing and design practices. Furthermore, worldwide design and procurement centers have better aligned their philosophies and strategies between themselves and with the company's business strategy. What makes this process add additional value is the fact that procurement managers now work with marketing to include expected savings from in-process global sourcing projects when responding to customer proposals. Integrated global sourcing is providing a new source of competitiveness to a company that operates in a mature industry.
DIFFERENTIATING BETWEEN INTERNATIONAL PURCHASING AND GLOBAL SOURCING
The previous section presented a five-level model that described the differences between international purchasing and global sourcing. This model provides the foundation to extend the analysis to better understand the differences between firms engaged in international purchasing and those engaged in global sourcing. The firms within tire various levels in Figure 1 were divided into two segments. Level II and III respondents represent the international purchasing segment (83 firms) while Level IV and V respondents represent the global sourcing segment (55 firms). Twenty-four firms indicated they practiced domestic purchasing only and were not included in the analysis. Using t-tests to compare the average differences between the segments reveals a variety of insights regarding the scope, benefits, and complexity of global sourcing.
Some of the differences between the segments appear intuitive, particularly when considering that global sourcing firms are larger on average than firms that practice international purchasing. However, the replacement of intuitive beliefs with research-based findings allows researchers and practitioners to further their confidence and understanding regarding what they believe to be true. Furthermore, what is intuitive to one observer may not be as intuitive to another. Some of the differences cited here provide insights that are far less intuitive. These differences begin to highlight the inherent complexity of global sourcing compared to international purchasing.
Because the research involved cross-sectional rather than longitudinal data, the authors are reluctant to draw conclusions regarding precedence of activities or causality. While cause and effect cannot be established, the meaningful differences between the segments can be described and value-added discussion can be provided based on the data, their relationships, and field-visit findings.
Difference #1: Firms that engage in global sourcing are larger and are more likely to have competitors that are multi-regional or global compared with firms that engage in international purchasing.
While this finding should come as no surprise, firms that pursue global sourcing initiatives are clearly larger (average $3 billion in annual sales) compared with firms that engage in international purchasing (average $900 million in annual sales). Larger firms are more Likely to have worldwide production facilities, design centers, and marketing and sales activities. It should be expected that the pursuit of global sourcing opportunities becomes a fundamental extension of a larger firm's sourcing philosophy given its worldwide scope in other areas.
The level of competition that a firm faces can also affect its sourcing response. The global sourcing segment faces greater competition from companies that are multiregional or global compared with firms in the international purchasing segment. Previous research concluded that extensive worldwide competition partly drives the progression toward integrated global sourcing--global sourcing should be a logical response when facing intense worldwide competitive pressure (Monczka and Trent 1991). Size and the extent of competition are two factors that differentiate the international purchasing segment from the global sourcing segment.
Difference #2: Firms that engage in global sourcing perceive their strategy implementation progress to be further along compared with firms that engage in international purchasing.
Early in the research survey and well before respondents identified the sourcing level that corresponds to their firm, participants provided their perception regarding the progress of their worldwide sourcing strategy implementation. Progress was a subjective term subject to the interpretation of the respondent. The international purchasing segment averaged 4.49/10 while the global sourcing segment averaged 6.23/10 (where 1 = no progress and 10 = total implementation). This finding helps validate the continuum presented in Figure 1 by revealing that the two segments agree their progress differs on a one to 10 scale as well as along the five-level continuum.
Both segments recognize they have a long way to progress before they have a fully developed global sourcing process in place, although Level IV and V firms know they have made greater progress compared with Level II and III firms. The international purchasing segment appears to understand that many sourcing opportunities are possible beyond what it is currently pursuing.
Difference #3: Firms that engage in global sourcing perceive that performance improvement and cost reduction opportunities are more widely available from theft sourcing efforts compared with firms that engage in international purchasing.
This difference highlights the mind-set that respondents in each segment have regarding worldwide sourcing opportunities. On a seven-point scale where 1 = limited improvement opportunities exist from worldwide sourcing, 4 = moderate improvement opportunities exist, and 7 = extensive improvement opportunities exist, the international purchasing segment averages 4.9/7 while the global segment averages 5.5/7. This perceptual difference can be due to a number of factors. Firms that engage in global sourcing are larger, which may indicate they have more worldwide experience in non-sourcing areas. Participants at these firms may be predisposed to believe that performance improvement and cost reductions are more widely available from global efforts compared with firms that are smaller or less experienced.
An example from the field research provides another explanation for the difference between the segments. One company that is rapidly gaining global sourcing experience has found that local or site-based participants usually have a performance improvement expectation that is formed (and limited) by what can be attained by local or regional practices. Site personnel may perceive that a 5 percent price reduction is quite significant. The potential cost improvements available from global sourcing far exceed what these participants are willing to commit to or believe are available. However, participants begin to recognize the difference between international purchasing and global sourcing outcomes once they become involved with global projects. The international purchasing segment, on the other hand, has yet to appreciate the dynamics of operating within a global context, which limits its perception regarding potential performance improvement and cost reduction opportunities.
Difference #4: Firms that engage in global sourcing indicate that the development of global strategies is more important to their executive management compared with firms that engage in international purchasing.
After considering the differences between international purchasing and global sourcing presented in an earlier section, one can easily conclude that international purchasing is best described as a functional activity while global sourcing represents a strategic direction and organizational process. Executive support and leadership are critical to a process as organizationally complex and important as global sourcing.
An example from a high-technology company illustrates the important relationship between executive commitment and global sourcing progress. In 2001, this company's CEO announced that the development of a global sourcing process was one of his three strategic objectives for that year. Procurement managers soon found that once the CEO made his pronouncement, non-procurement groups quickly made resources available, including human and informational resources, to support global sourcing projects. Site locations also quickly "bought into" this new strategic direction.
Field research reveals that executive managers who stress the importance of global sourcing back that belief with direct commitment--commitment that is not as necessary or as visible with international purchasing. Examples of executive commitment include funding the development of a global sourcing process, participating on an executive steering committee that oversees global activities, and providing budget and staff to support global project teams. Executive managers may also work to secure site- and plant-level buy-in to global processes and agreements. Executive managers who recognize the importance of global sourcing must be willing to support global initiatives, something that is not critical with international purchasing.
Difference #5: Firms that engage in global sourcing indicate they face more rapid changes to product and process technology compared with firms that engage in international purchasing.
Survey respondents assessed the annual rate of change they face across seven competitive factors: quality improvement, product and process technology development, price/cost reduction, new product development cycle times, responsiveness to customer improvement requirements, on-time delivery improvement, and overall customer service improvement requirements. The two segments rate each competitive factor, statistically the same except for the rate of product and process technology. International purchasing firms indicate their rate of product and process technology change is stable to moderate while global sourcing firms indicate their rate of change is moderate to dynamic. Furthermore, the global sourcing segment indicates it faces greater competitive and customer pressure to improve continuously in the introduction of new product and process technology. While cost improvement will remain a primary driver behind worldwide sourcing activities, the need for new sources of technology will drive some firms to pursue higher sourcing levels.
Difference #6: Firms that engage in global sourcing realize greater and varied benefits compared with firms that engage in international purchasing.
Perhaps one of the most revealing and interesting differences between the international purchasing and global sourcing segments is the perception each has regarding the benefits it realizes from its sourcing efforts. Table I presents these benefits sorted by the difference between the averages for the two segments. Firms that engage in global sourcing indicate they realize all 16 benefits at a statistically higher level than firms that engage in international purchasing. In fact, the overall average across all benefit areas is 30 percent higher for global sourcing firms compared with the overall average for international purchasing firms.
One benefit that both segments rate highly is the ability to achieve a lower purchase price or cost through worldwide sourcing. It is concluded that the initial benefits from international purchasing are price focused and are often available from basic international purchasing activities. However, many non-price benefits are only realized once a firm has taken steps to integrate its sourcing activities. In particular, this includes greater access to product and process technology, an outcome that is particularly critical given the more dynamic technology changes that global sourcing firms face. Also, better management of supply chain inventory is a benefit that global sourcing firms enjoy at higher levels. This is critical given the emphasis that many firms place on managing costs and inventory investment across the supply chain.
Other important benefits more readily available from global sourcing include greater supplier responsiveness, greater sourcing process consistency, improved supplier relationships, and improved sharing of information with suppliers. The different benefits between the segments are revealing and help explain why so many Level II and III firms hope to evolve toward Levels IV and V over the next three to five years.
Difference #7: Firms that engage in global sourcing rely on a wider array of communication tools to support their efforts compared with firms that engage in international purchasing.
It should be expected that global sourcing firms rely on a more extensive array of communication tools when coordinating their efforts. Global sourcing firms rely on groupware, video conferencing, and phone conferencing at significantly higher levels compared with firms that pursue international purchasing. The global sourcing segment averages 5/7 for using groupware, video conferencing, and phone conferencing while the international purchasing segment averages 3.78/7 (where 1 = do not use, 4 = rely on somewhat, and 7 = rely on extensively). Level IV and V firms must coordinate activities and share information across worlwide purchasing and design locations, something that is not an issue in a less coordinated environment. Global participants will presumably take advantage of evolving Web-based communication tools in the future.
Examples of other communication and coordination approaches identified during the field research include regular strategy review meetings between locations and joint training sessions involving worldwide team members. Project updates reported through an intranet, negotiation planning sessions, and collocation of functional personnel to facilitate face-to-face interaction were also identified as effective approaches. Well-established and systematic communication methods help overcome the inherent complexities of coordinating a process that often involves participants from different continents. International purchasing efforts, typically focused at the site level, are usually not as complex in terms of communication requirements.
Difference #8: Firms that engage in global sourcing have in place more organizational features to support their sourcing efforts compared with firms that engage in international purchasing.
A critical difference between the international purchasing and global sourcing segments relates to the respondent's perception of how extensively each has put in place various features to support their sourcing efforts. Of 18 features evaluated, the global sourcing segment has implemented 17 features at a statistically higher level than the international purchasing segment.
Table II reveals that global sourcing requires a wide array of features to support the complexity that is inherent to the process. Managers who are serious about moving toward higher global sourcing levels are advised to review this table closely. This data, more than any other in the research, illustrate the profound differences in the scope and complexity between international purchasing and global sourcing. The items in this table also identify the various organizational features required to operationalize global sourcing.
Consider several items that show the highest difference between the segments and why these differences are important. Global sourcing firms conduct regular strategy review and coordination sessions with worldwide procurement and other functional managers on a regular basis, a feature showing the largest average difference between the groups. Review sessions promote consistency by creating a common sourcing language and approaches coordinated at higher organizational levels.
Another differentiating feature is the greater likelihood that firms pursuing global sourcing will have access to the services provided by international purchasing offices (IPOs). These offices help identify potential suppliers, solicit quotations, support negotiations, obtain product samples, conduct supplier site visits, and manage technical and commercial concerns. These offices also support many of the operational issues that are part of global sourcing.
A formal process for developing global agreements is also an important differentiating feature. In another part of the study respondents indicated that social culture and laws, personnel skills and abilities, and business culture are three of the top four areas where differences are the greatest across their geographic units. A formal process helps align different participants and practices around the globe, develop consistency and understanding among participants, and affords the opportunity to build best practices into the process. A lack of a known process and its enforcement leads to the self-interests of individual sites and operating locations rather than broader corporate interests becoming a priority.
The sourcing features presented in Table II illustrate very real differences between the international purchasing and global sourcing segments. Evolving from Levels II and III to Levels IV and V demands new systems, processes, tools, coding schemes, procedures, and organizational structures. The issue becomes whether Level II and III firms will have the commitment, resources, or expertise to put the necessary features in place.
Difference #9: Firms that engage in global sourcing rate key aspects of their sourcing process as more similar across geographic locations and buying units compared with finns that engage in international purchasing.
Survey respondents rated the degree of similarity or difference across their geographic locations and buying units for twenty items. Eleven of the 20 items were rated as statistically more similar across locations by the global sourcing segment, which Table III reports. The remaining nine items demonstrated no statistical differences in their average rating between the two segments. Items such as business culture, operating standards and procedures, language, and social culture and laws received similar ratings in terms of similarity.
In the longer term, one of the most important outcomes from global sourcing may be the sourcing consistency created by this process--a consistency that most firms now lack. Firms engaged in international purchasing, which is typically an uncoordinated activity across buying units or sites, are unlikely to ever achieve the sourcing consistency that global sourcing firms achieve. Most of the items in Table III relate to sourcing approaches, practices, and beliefs consistency, which in the final analysis may be the most powerful benefit that firms realize from global integration.
One U.S. firm that had autonomous worldwide design and procurement centers discovered how an integrated global process leads to greater sourcing consistency. This company's Level V process requires each design and procurement center to work together to evaluate sourcing initiatives in terms of cost reduction, supplier accountability, and procurement process productivity, which are the three evaluative criteria favored by executive supply managers. Previously, these centers considered primarily their own set of factors when evaluating supplier agreements. Global sourcing has resulted in a welcome consistency across this company's design nd procurement centers.
Difference #10: Firms that engage in global sourcing rate certain factors as more critical to their sourcing efforts compared with firms that engage in international purchasing.
Table IV presents the critical success factors that have a statistically different rating between the two segments (23 of 32 critical success factors evaluated were rated statistically the same). This table shows that a set of factors exist that are more critical to those firms engaged in global sourcing than to firms engaged in international purchasing.
An executive mandate or commitment to source globally along with the right organizational structure that features central coordination, cross-functional teams, and plant-level participation all show significant differences between the segments. The availability of required information and data and the ability to identify common requirements, also differentiating factors, reveals the importance of information as a success factor.
The importance of globally capable suppliers who are interested in global contracts, two other factors from Table IV, becomes evident when examining a worldwide producer of transportation equipment. From almost the first day that a European producer assumed ownership of a U.S. producer, both companies sought top leverage the commonality between them on a global basis. Unfortunately, most original equipment manufacturers (OEMs) in the transportation equipment industry operate regionally, which the supply base is structured to support. Much to its disappointment, a majority of this company's global projects have resulted in regional agreements due to a lack of qualified suppliers. Furthermore, some companies indicated their suppliers simply are not willing to participate due to the intense demands placed on global suppliers. While global sourcing is often thought of as an internal process or strategy, support from external suppliers is critical to success.
Although most firms in this study expect to progress toward higher levels of global sourcing over the next three to five years, many will likely fall short. It is critical for executive managers to understand not only the conceptual differences between international purchasing and global sourcing but also the actual differences between the firms that reside within each segment.
Supply professionals must recognize that global sourcing, as defined in this article, is not a well-researched topic. While this study provided some important insights, its exploratory nature means that some areas lack the depth that would increase our confidence and understanding. The section on future research directions presents various areas where more insight and detail would benefit supply managers who expect to pursue integrated global sourcing.
Supply managers need to be realistic concerning the level of worldwide sourcing that will best satisfy their organizational requirements. While most firms expect to pursue Level V global sourcing, that may not be the most appropriate action. Many factors affect the sourcing level that firm should pursue. These include the intensity of worldwide competitive, customer improvement requirements, available skills and resources, the location of buying and engineering centers, the location of worldwide suppliers, and the performance impact that global sourcing can have on firm performance. Managers need to assess realistically the worldwide sourcing level their firm should operate at and then identify what level they currently operate. If a gap exists, plans to narrow that gap must become part of the strategic planning process.
Supply professionals should also view global sourcing as a process rather than as a set of discrete activities or approaches. As a process, global sourcing should become an integral and imbedded part of supply planning and execution. Developing a systematic global sourcing process makes sense for a number of reasons. Well-developed and understood processes accelerate learning as participants become familiar and experienced with a defined process. Furthermore, defined processes can "build-in" best practices and knowledge that enhance the likelihood of success. Perhaps most importantly, organizations can document, measure, and continuously improve their global sourcing process.
It is important for managers to recognize that global sourcing is significantly more complex than international purchasing. Table II highlighted the kinds of features put in place to support global efforts, which are certainly not trivial. The process requires executive vision, leadership, and an intense commitment of time and resources. Furthermore, firms that are highly decentralized will face obstacles if they try to pursue a process that requires extensive coordination and integration.
Supply managers must also recognize that the definition of global sourcing will change. In fact, while most firms that practice global sourcing today view it as way to integrate global strategies across functional groups and locations, leading firms are beginning to move beyond that perspective. Some supply managers now view global sourcing in terms of not only strategy development and contracts, but also as a way to develop common supply processes that incorporate best practices and efficiencies. Examples where firms will begin to converge on common processes or practices globally involve supplier evaluation and selection, cost management, supplier development, and early supplier involvement. As mentioned earlier, sourcing process consistency may be the most powerful benefit that firms eventually realize from global integration.
FUTURE RESEARCH DIRECTIONS
While this research provided many insights into integrated global sourcing, its exploratory nature limits the depth of findings. Furthermore, the research findings themselves lead to future research opportunities and questions.
The important relationship between human resource capabilities and global sourcing success was evident throughout the field and survey research. Besides being the highest-rated success factor, survey respondents cited the lack of qualified personnel to support global sourcing as the highest-rated problem impending their sourcing efforts. While this research identified general knowledge areas, organizations, will require greater insight concerning the specific knowledge and skills required by global sourcing, often with participants from different cultures.
A common frustration expressed by executive managers during the field research was their inability to calculate the objective value of global initiatives. Future research should focus on identifying a set of performance measures that quantitatively reports the value created by successful global efforts. Further study could also investigate how leading firms link these measures to important business-level measures such as return on investment (ROI) or economic value-add (EVA).
While this research revealed an important relationship between the availability of information and global success, many questions remain unanswered in this area. For example, what types of information and data are most important to global participants, and how do they gain access to this data and information? What role do information technology systems play within the global sourcing process? The relationship between IT and global success is an area that requires focused study.
Future research should also investigate whether a robust global sourcing process exists, interviews revealed that firms differ widely in their approaches to global strategy development and implementation. While field visits revealed various global processes that are comprehensive and rigorous, there was not enough information to develop a genetic or prescriptive model applicable beyond a single case.
The relationship between organizational design and global sourcing efforts also warrants further study. Organizational design refers to the process of assessing and selecting the structure and formal system of communication, division of labor, authority, control, coordination, and responsibility necessary to achieve global sourcing objectives. Specific research questions related to design are varied and broad. For example, what is the role of site- or plant-level personnel during the development of global organization as firms create increasingly complex inbound supply networks? How can firms use their organizational design to integrate across functional groups?
The research areas highlighted here, along with the questions they raise, provide new opportunities to further our knowledge about integrated global sourcing. The findings presented throughout this article, while providing the breadth of coverage that exploratory studies typically provide, lacked depth across a number of areas. Future research must focus on some important issues before begins to match our understanding of other important supply chain topics.
Companies that produce and sell worldwide should no longer view integrated global sourcing as an emerging approach to sourcing. The pursuit of competitive advantage routinely requires the development of global processes and strategies that become an integral part of a firm's supply management efforts. Understanding the critical differences between international purchasing and integrated global sourcing is essential before supply managers can begin to realize the benefits that this complex approach to sourcing potentially offers.
Table I WORLDWIDE SOURCING BENEFITS Global International Sourcing Benefit Sourcing Purchasing Difference Better management of total supply chain inventory 4.29 2.74 1.55 Greater supplier responsiveness to buying unit needs 4.47 3.08 1.39 Greater standardization or consistency to the sourcing process 4.25 3.01 1.24 Greater access to product technology 4.69 3.49 1.20 Improved supplier relationships 4.61 3.46 1.15 Greater access to process technology 4.54 3.46 1.08 Improved sharing of information with suppliers 4.10 3.04 1.06 Greater early supplier involvement during new product/ service/development 3.86 2.80 1.06 Lower purchase price/cost 5.98 5.04 0.94 Shorter ordering cycle time 3.61 2.76 0.94 Higher material/component/ service quality 4.16 3.25 0.91 Improved delivery reliability 3.90 3.04 0.86 Improved environmental compliance 3.24 2.39 0.85 Greater appreciation of purchasing by internal users 4.25 3.44 0.81 Lower purchasing process transactions costs 3.67 2.87 0.80 Higher user satisfaction with the purchasing process 4.10 3.36 0.74 Average across all benefits 4.23 3.20 N = 55 N = 83 Scale: 1 = Not a realized benefit 4 = Moderately realized benefit 7 = Extensively realized benefit All differences are significantly different at the 0.05 level of significance or lower Table is sorted by the difference between segment averages Table II WORLDWIDE SOURCING FEATURES Global International Sourcing Feature Sourcing Purchasing Difference Regular sourcing strategy review meetings with worldwide purchasing managers 4.64 2.54 2.10 Use of international purchasing offices 4.75 2.85 1.90 Formally established process for developing global sourcing strategies 4.88 3.01 1.87 Worldwide purchasing data- bases or data warehouses 4.24 2.48 1.76 Development of global suppliers 5.04 3.27 1.76 Worldwide integration of technical design specialists, operations personnel, and sourcing personnel 3.75 2.10 1.65 Formal information sharing through electronic information systems across worldwide buying units 4.45 2.81 1.64 Coordinated sourcing strategy development efforts across regions 5.15 3.51 1.64 Cross-functional/cross- locational commodity management teams 4.96 3.55 1.41 Sourcing analysis tools available electronically 3.92 2.53 1.39 Centralized sourcing strategy development 5.15 3.89 1.26 Common worldwide part or commodity coding schemes 4.04 2.79 1.25 Worldwide supplier performance measures and measurement systems 4.22 3.00 1.22 Worldwide buyer-supplier executive councils 3.24 2.06 1.18 Post-selection site visits to suppliers 4.80 3.64 1.16 Pre-selection site visits to suppliers 4.94 3.84 1.10 Procurement engineers used for supplier visits 3.60 2.63 0.97 N = 55 N = 83 Scale: 1 = Not used 4 = Moderately used 7 = Extensively used All differences are significantly different at the 0.05 level of significance or lower Table is sorted by the difference between segment averages Table III AREAS OF SIMILARITY ACROSS LOCATIONS OR BUYING UNITS Global International Similarity Area Sourcing Purchasing Different Strategy development process 4.90 3.68 1.22 Supplier assessment practices 4.90 3.75 1.15 Purchasing or sourcing philosophy 5.04 3.96 1.08 Current purchasing strategies 4.96 3.96 1.00 Problem resolution techniques with suppliers 4.90 3.90 1.00 Contracting approaches 4.54 3.58 0.96 Reporting level of purchasing/ sourcing 5.45 4.57 0.88 Similarity of purchase requirements 5.27 4.43 0.84 Organizational reporting structures 5.02 4.23 0.79 Supplier performance measures used 4.33 3.58 0.75 Business ethics 5.67 4.99 0.68 N = 55 N = 83 Scale: 1 =Very different 4 = Somewhat similar 7 = Very similar All differences are significantly different at the 0.05 level of significance or lower Table is sorted by the difference between segment averages Table IV WORLDWIDE SOURCING CRITICAL SUCCESS FACTORS Global International Critical Success Factor Sourcing Purchasing Difference Centralized procurement structure 5.43 4.58 0.85 Suppliers that are interested in global contracts 5.92 5.08 0.84 Availability of required information and data 6.20 5.57 0.63 Plant-level participation during global contract development 4.90 4.28 0.62 Executive commitment or mandate to source worldwide 5.57 4.97 0.60 Ability to identify common requirements across buying units 5.86 5.26 0.60 Use of cross-functional teams to develop global strategies 5.66 5.10 0.56 Availability of suppliers with global capabilities 5.94 5.49 0.45 Ability to measure performance improvements from global sourcing 5.49 5.07 0.42 N = 55 N = 83 Scale: 1 = Not a critical factor 4 = Moderately critical factor 7 = Extremely critical factor All differences are significantly different at the 0.05 level of significance or lower Table is sorted by the difference between segment averages
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Robert J. Trent, Ph.D. is the Eugene Mercy Associate Professor of Management and director of the Supply Chain Management Program at Lehigh University in Bethlehem, Pennsylvania.
Robert M. Monczka, Ph.D. is distinguished professor of supply chain management at Arizona State University and director of strategic sourcing and supply chain research for CAPS Research in Tempe, Arizona.
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|Author:||Trent, Robert J.; Monczka, Robert M.|
|Publication:||Journal of Supply Chain Management|
|Date:||Sep 22, 2003|
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