A Novel Framework for International Sourcing

A Novel Framework for International Sourcing Applied to the Emerging Chinese Supply Market Lutz Kaufmann and Fabian Hedderich WHU, Otto Beisheim Graduate School of Management 1. Introduction....................................................................................... 124 1.1 Global Sourcing........................................................................ 125 1.2 Global Integration..................................................................... 128 1.3 Internationalization Strategies for Sourcing ............................. 130 2. Application of the International Sourcing Framework to the Emerging Chinese Supply Market .................................................... 137 2.1 The Chinese Supply Market ..................................................... 138 2.2 Three Approaches to China Sourcing....................................... 141 3. Conclusion and Outlook .................................................................... 147 References................................................................................................ 148 124 Lutz Kaufmann and Fabian Hedderich 1. Introduction The idea of Global Sourcing is surely one of the most popular concepts in the field of supply management. Unfortunately, many applications of Global Sourcing are limited to a rather operational view focusing on the identification and utilization of foreign suppliers and thus ignore the poten- tial benefits of a more strategic and integrated approach (Samli/ Browning/Busbia, 1998). While there is a trend of using purchasing for strategic reasons as companies have to deal with intensifying global com- petition (Swamidass/Kotabe, 1993) and the need to address the strategic perspective of Global Sourcing has been identified a long time ago (Ar- nold, 1989), academic discussion has failed to deliver satisfying results concerning its implementation (Trent/Monczka, 2003). In the light of the ever increasing importance of global business strate- gies it should be welcomed that recently both academic research and in- dustry practice have begun to focus their attention not only on market- seeking international expansion strategies but also on resource- or effi- ciency-seeking strategies. Consequently, the interest in resource- and effi- ciency-seeking expansion strategies such as Global Integration is growing fast (Kaufmann/Panhans, 2004). When designing resource- and efficiency-seeking international expan- sion strategies companies have to consider the issue of Global Sourcing. We follow the definition of Global Sourcing by Monczka and Trent (1991, 2003). This view clearly distinguishes Global Sourcing from International Purchasing as well as from Local Sourcing for a foreign production site. We argue that Global Sourcing is an important cornerstone of the ongoing trend towards Global Integration. Furthermore, we will show that Global Sourcing represents an evolution of sourcing activities towards a truly stra- tegic and global level. The first level of internationalization in sourcing is coined by opportu- nity-seeking imports. The second level is dominated by the idea of adding Local Sourcing activities to foreign production sites. Global Sourcing, as we argue in this article, represents a step towards the globally integrated company, which according to Hedlund (1986), Barlett and Goshal (1989), and White and Poynter (1990) is characterized by globally distributed but interdependent sources and activities. The third level of internationaliza- tion of sourcing is thus one of consolidation and enhancement of existing international purchasing activities. A Novel Framework for International Sourcing 125 Following this introduction, we will briefly review the concept of Global Sourcing and then establish a conceptual foundation of the internationali- zation of sourcing as a key function for the global expansion of the com- pany. We will then discuss the options available for an effective organiza- tional design of Global Sourcing. For reasons of illustration we will apply our findings to the example of China Sourcing. The article concludes with a discussion of recommendations for future research. 1.1 Global Sourcing The discussion about the meaning of Global Sourcing has produced many more or less different positions which can be placed on a continuum be- tween two extreme poles: the one view characterizes Global Sourcing just as purchasing items from many different foreign suppliers, the opposite view sees Global Sourcing as an all-dominant business function similar to past developments in marketing (Arnold, 2002). We advocate the view of Global Sourcing as being an integral part of a company’s global strategy by enabling the company to leverage its own unique competencies and at the same time benefit from the locational advantages of various countries (Kotabe, 1998; Petersen/Frayer/Scannell, 2000). Global Sourcing is considered to be highly relevant for achieving com- petitive advantage (Carter/Narasimhan, 1996). Many researchers, espe- cially towards the end of the 1980s and in the beginning of the 1990s, made efforts to better understand the potential benefits of internationaliz- ing sourcing (Monczka/Trent, 1991; Birou/Fawcett, 1993). Commonly identified benefits of the internationalization of sourcing were reducing unit prices, gaining better access to product and process technology, higher quality, and introducing competition to the suppliers at home (Trent/ Monczka, 1998). According to Arnold (1990) Global Sourcing transfers the strategic tasks of sourcing to the international context. These strategic tasks include: strengthening the innovative power of the company, supplier development, standardization and modularization of items, and managing purchasing alliances. But how should this strategic quality that distinguishes Global Sourcing from International Purchasing be understood? Trent and Monczka (2003) argue that International Purchasing relates to the actual international pur- chase and the related difficulties whereas Global Sourcing surmounts this level of complexity: “Global Sourcing involves proactively integrating and coordinating common items and materials, processes, designs, technolo- gies, and suppliers across worldwide purchasing, engineering, and operat- ing locations”. The development of new supply markets and their integra- 126 Lutz Kaufmann and Fabian Hedderich tion into the existing supply management processes represent crucial ele- ments of comprehensive internationalization strategies for purchasing. However, just this task of integrating and coordinating the supply man- agement processes across geographically dispersed locations and functions turns out to be a major roadblock for most companies on their way to ap- plying truly strategic Global Sourcing. Naturally, Global Sourcing as defined in this article cannot be achieved over night. It represents a sophisticated level of Worldwide Sourcing ac- tivities that is reached only after going through some preceding lower lev- els. Monczka and Trent (2003) distinguish five levels of Worldwide Sourcing: Level I represents the base case of engaging in domestic pur- chasing exclusively. Reacting to changes in the business environment – e.g. supply disruptions or new competitive pressures – companies progress to level II, which can be characterized as International Purchasing per- formed on a reactive basis. Together with level II level III corresponds to what has been identified as International Purchasing. In level III World- wide Sourcing is treated more strategically but still rather isolated and thus lacks global coordination. Level IV has to be considered as an advanced level of sourcing strategy development. Single Global Sourcing strategies are coordinated and integrated across worldwide locations. As Monczka and Trent point out integration primarily has a cross-locational rather than a cross-functional character. The highest level of Worldwide Sourcing, level V, adds the aspect of coordinating and integrating “common items, processes, designs, technologies, and suppliers across worldwide purchas- ing centers and with other functional groups, particularly engineering”. This form of collaboration between functions allows to effectively involve suppliers early in the new product development phase. Figure 1 summa- rizes the possible levels of Worldwide Sourcing and shows the current po- sitioning of 162 mainly large companies (average annual sales of $1.5 bil- lion) who participated in the exploratory research carried out by Monczka and Trent (2003). A Novel Framework for International Sourcing 127 54.5 50 Currently In 3-5 Years Percent of Firms 40 31.0 30 21.3 20 18.2 13.4 14.3 15.6 16.1 10 7.8 7.