Global Sourcing Strategies

Global Sourcing Strategies

Introduction to global sourcing,production, and export strategies

 

As the Sunset Flowers case demonstrates, there is more to export profitability than a good idea. Once an entrepreneur has identified a product, he needs to determine if there is a market somewhere, a process that involves a significant amount of market research, which may or may not be supported by the home country government. Then the entrepreneur needs to develop a production strategy, prepare the goods for market, determine the best strategy for getting the goods transported to market, sell the product, and receive payment.

 

Introduction to global sourcing,production, and export strategies

 

As the Sunset Flowers case demonstrates, there is more to export profitability than a good idea. Once an entrepreneur has identified a product, he needs to determine if there is a market somewhere, a process that involves a significant amount of market research, which may or may not be supported by the home country government. Then the entrepreneur needs to develop a production strategy, prepare the goods for market, determine the best strategy for getting the goods transported to market, sell the product, and receive payment.
All of these steps require careful planning and preparation. The production strategy for Sunset Flowers was relatively easy, because all production took place in New Zealand. In the case of industrial products, the strategy can be very complex as different countries are evaluated, using labor costs and so on, as possible production sites.
Sunset Flowers also demonstrates that a firm has limits of ability. Freight forwarders are used to move goods from one country to another, and banks are needed to collect payment. Thus export, as well as import, strategies require the utilization of experts to move ideas to finished products to final sales.
In a study of European and Japanese MNEs, for example, it was found that the MNEs use a mix of sourcing strategies simultaneously when market-
ing the product in the United States. Fifty-nine percent of the firms reported using a single sourcing strategy. All of the product was either exported from the home country or manufactured in the United States for the U.S. market. Japanese firms were more likely to export to the United States, whereas European firms were more likely to manufacture in the United States. Some of the European firms used production facilities in other European countries— and in some cases, Japan and Canada—to service the U.S. market. In this study, firms did not service the U.S. market from production facilities in developing countries.
Global Sourcing and Production Strategies
Most firms have the option of where they want to source (locate) production for worldwide sales. As is the case in industries such as automobiles, for any given market the MNE can manufacture the product itself, or it can buy the product from someone else. If it decides to manufacture the product itself, it can either manufacture it in the local market or manufacture it in another country and import it into the market.
Obviously, the true MNE is involved in fairly sophisticated forms of production sharing, in which it may produce and/or assemble components in one or several countries for markets all over the world. In its simplest form, the MNE might manufacture goods in the home country and export them to final markets. Or the MNE could establish production in different countries to service those particular markets. However, the past decade has shown an increase in intermediate goods, such as components, being produced in many countries and shipped to other countries for assembly and sale. The production and exporting functions are much more complex than they used to be under the simpler forms.
Global Sourcing and Production Alternatives
For each particular market being serviced by an MNE, the idea of global sourcing implies that firms need to determine where parts and components will be manufactured and where the final products will be assembled.
Historically, firms tended to operate on a country-by-country basis. However, as firms have become more global in orientation, they have found that they can develop a definite competitive advantage by coordinating and integrating their operations across national borders.
From an international standpoint, this global production and sourcing strategy can be better understood by looking at Fig. 14.1, which illustrates the basic options available by country (the home country or any foreign country) and by stage in the production process (sourcing of components and sale of products).
For example, one of Ford Motor Company’s strategies is to assemble cars in Hermosillo, Mexico, and ship them into the United States. The cars are
designed by the Japanese company Toyo Kogyo Co. (Mazda) and use some Japanese parts. Ford can purchase components manufactured in Japan and ship them to the United States for final assembly and sale in the U.S. market, or it can have the Japanese- and U.S.-made components shipped to Mexico for final assembly and sale in the United States and Mexico. In the case of Mexican assembly, some of the components would come from the United States, some from Japan, and a small percentage from Mexico. If the components are manufactured in Japan, many of the raw materials were probably imported.
An expansion of Fig. 14.1 would show 64 different combinations for manufacturing components and assembling them into final products for different markets. This expanded model would account for the facts that components can be manufactured internally to the firm or purchased from external (unrelated) manufacturers and that final assembly can also be done internal to the firm or by external firms. Manufacture of components and final assembly may take place in the home country of the firm, the country where the firm is trying to sell the product, a developed third country, or a developing third country.
The study of Japanese and European MNEs mentioned in the introduction revealed different sourcing strategies. First, major components were generally sourced from the same location as the final assembly. Second, in the case of manufacturing in the United States, Japanese firms are more likely to source components from their home country than European firms. Third, components can be sourced from various locations. In the case of one Japanese firm in the study, 17 percent of the components came from Japan, 7 percent from European countries, 8 percent from developing countries, and the rest from the United States. Obviously, this multiple sourcing requires a high level of coordination between the parent company and related companies around the world.