Agenda The Concept of Global Sourcing Barriers to Worldwide Sourcing

1. Future Development in Global Sourcing and Logistics26.09.2011 - 27.09.2011Professor Dr. Dr. h.c. Ulli ArnoldUniversity of Stuttgartulli.arnold@bwi.uni-stuttgart.de

2. Agenda • The Concept of Global Sourcing • Barriers to Worldwide Sourcing • Organisational Buying Behaviour • Global Sourcing Analysis • Organisation of Global Sourcing • Sourcing Strategies • Vertical and Horizontal Cooperation • Sourcing Processes • Controlling of Procurement • Logistics as an Enabler • Supply Chain Management

3. Chapter 1 The Concept of Global Sourcing

4. 1. Global mega trends Corporate Social Responsibility will be of greater importance as organizations face changes in consumption patterns with regards to green, social and health Increase of environmental and social responsibility Information technologies and innovations will become a key success factor Demographic change will be highly impact availability of skilled and also low cost labor Fundamental market changes will be more frequent and access to raw materials will become more critical Demand in traditional industries (and mature markets) will slow down, but developing markets will experience strong growth

5. 1. Structure and development of the world trade capacity 2000 - 2006 (Source: WTO, International Trade Statistics 2007)

6. 1. Structure and development of the world trade capacity World trade flows Selected intra- and inter-regional merchandise trade flows, 2006 (Source: WTO, International Trade Statistics 2007)

7. 1. Structure and development of the world trade capacity World exports of goods (detailed), 2000-2006 Logarithmic scale (Source: WTO, International Trade Statistics 2007)

8. 1. Structure and development of the world trade capacity World exports of goods and commercial services, 2000-2006 World commercial services exports by category, 2000 and 2006 World exports of goods and commercial services, 2000-2006 (Source: WTO, International Trade Statistics 2007)

9. 1. Sourcing Tasks in International Business Activities Activities Domestic Production Overseas Production Direct Investment Indirect Imports Direct Imports No Direct Investment Joint Venture Own Production Licensing (Sourcing Consulting) Contract Production (Supply) Management Contract (Sourcing) International Production Coordination

10. What is Global Sourcing? The business process of identifying, evaluating, negotiating and configuring supply chains across multiple suppliers and geographies Common reasons for Global Sourcing Reducing overall cost structure Availability of new technology and capacity. Often domestic suppliers lack capacity and / or are not making the necessary investments to stay competetive Establishing alternative sources of supply- reduced risk Access to new designs or specialized intellectual capital Superior quality. This is typically due to supplier investment in technology and capacity to attract global businesses 1. Global Sourcing - Definition

11. Chapter 2 Barriers to Worldwide Sourcing

12. 2. Barriers to World Wide Sourcing • Economical barriers e.g. Tarriffs, duties, hidden costs • Political conditions • e.g. Legal system, political stability, protectionismetc. • Cultural conditions • e.g. flexibility, values, opennessetc.

13. 2. Barriers to World Wide Sourcing (economical) • total cost in international purchasing is also called • landed costs • international purchasing may include many additional • cost components compared with domestic purchasing:

14. 2. Barriers to World Wide Sourcing (political) Trade and currency policy State/ Suprastates foreign trade regimes • Contractual trade barrier: Duty, dues • fiscal policy to suppress foreign provider • Non-contractual barriers : • - building specifications - national safety regulations • - terms of use - ecological demand • Currency control: • Contrary: complete convertibility of the currency • Laws/restrictions: • - Kriegswaffenkontrollgesetz - Narcotics law • Industrial policy • - grants - export promotions • - risk taking

15. 2. Barriers to World Wide Sourcing (political) Free trade zones ordered by regions (members) Africa : 1. Communaute Economique de l´Afrique de l´Quest (7) 2. Communaute Economique de Pays des Grans Lacs (3) 3. Economic Community of West African States (16) 4. Indian Ocean Commission (5) 5. Mano River Union (3) 6. Preferential Trade Area for Eastern and Southern Africa (18) 7. Southern African Customs Union (4) 8. Southern African Development Coordination Conference (10) 9. Union Douaniere et Economique de l´Afrique Centrale (6) Asia und Pacific: 10. Australia-New Zealand Closer Economic Relations Trade Agreement (2) 11. Association of South Asian Nations (ASEAN) (5) 12. Asiatic Pacific Economic Cooperation (APEC) (18) Middle East: 13. The Arab Common Market (7) 14. Economic Cooperation Organization (3) 15. Gulf Cooperation Council (6) North and South america: 16. North America Free Trade Area (NAFTA) (3) 17. Andean Pact (5) 18. Central American Common Market (5) 19. Caribbean Community (13) 20. Mercosur (4)

16. 2. Barriers to World Wide Sourcing (political) Free trade zones in Africa (Source: unctad.org)

17. 2. Barriers to World Wide Sourcing (cultural) Transparency International – Corruption Perception Index 2009 (1)

18. 2. Barriers to World Wide Sourcing (cultural) Transparency International – Corruption Perception Index 2009 (2) The Corruption Perception Index(CPI) is published since 1995. In the CPI every country is classified for their degree of corruption, percieved by the governement and civil service. The CPI is based on several surveys and research from different independent institutions. (Source: www.transparency.ch)

19. Chapter 3 Organisational Buying Behaviour

20. 3. Organisational Buying Behaviour N Environment Characteristics of the procuring organization Purchase type Organizationalprocurementprocess Buying Center/ Buying Network Selling Center/ Selling Network Selling Center/ Selling Network A K

21. Multi-personality Problem-solving and decision-making process Active information behavior Intensive personal interactions Organizational purchasing behavior takes place in a multi-personal problem-solving and decision-making process that is characterized by interactive information and behavior through frequent interactions. 3. Organisational Buying Behaviour

22. Buying-Center: Theoretical summary of the decision making unit The idea of the Buying-Center Problem-oriented group of interacting members within an organisation, the group is established for purchasing an industrial good. The Buying-Center is often institutionally established in „investement comissions“ Problem for suppliers: Who is involved at which time and with which part in decisions (identification according to persons/ roles / functions)? The range (number of participants) and the structure cannot be defined precisely. Marketingimplication for the provider: Analysing the range and structure of the Buying-Center. 3. Buying Center Concepts Source: Backhaus/Voeth, 2007, S. 46-75

23. 3. Buying Center Concept (Webster/Wind) Buyer Decider Purchase decision Gatekeeper User Influencer

24. The rolemodel is widened by Bonoma with the role of an initiator Witte`s promoter-/ opponent-model Subject- and powerpromoter Subject- and poweropponent Promoter-Team 3. Buying Center Concept (Extension according to Bonoma)

25. 3. Structure of power and behaviour in buying-centers Promoters Opponents Handicap and delay decision processes Differentiation into : Power opponents Knowledge opponents • Promote and influence the purchasing process • Differentaiotion into: • Subject promoters • Power promoters Buying-Center Decision behaviour Information behaviour Risk behaviour steers decision behaviour 1. Decision oriented 2. Fact oriented 3. Security oriented • Typesofinformationserachbehaviour: • literal-scientifical • Objective-evaluative • Spontaneous/ passive • Typesofinformationtreatment: • Facts-reactor • Image-reactor • Neutral reactor

26. High hierarchicposition Competence ofexperts Organisational skills Internal organisational potentialsofcommunication 3. The promoters and opponnents model Sources of power Barriers Performance Power promoter • Provides organisational resources • Defines goals • Grants incentives • Sanctions actors • Blocks opponents • Evaluates new und complex problems • Evaluates und develops solutions • Realises solutions • Initiates and promotes specific subject didactic processes • Collects, filters, translates and interprets informations und forwards them to according actors • Promotes communication relationship und coalitions among actors • Will barriers • Hierarchy barrierrs • Subject oriented skill barriers • Organisational and administrative barriers Subject promoter Process promoter

27. Chapter 4 Global Sourcing Analysis

28. 4. Selection of sourcing countries Portfolio approach Market attractiveness All considered markets are being evaluated for their market attractiveness and market barriers. Afterwards a matrix-structure is beeing set-up. Based on that structure four market types can be differentiated. Target markets Promising markets high low Occasional markets No Go markets low high Market barriers (Source: Backhaus et al., 2003, S. 124-125)

29. 4. Selection of sourcing countries Portfolio approach (Source: Albaum/ Duerr/ Strandskov, 2005, S. 188)

30. 4. Selection of sourcing countries BERI-Index (1)  Business Environment Risk Information (BERI) • Established1966; Headquarters in Friday Harbor, State of Washington, U.S.A • Evaluates country specific risks in a multidimensional model • One year and five year forecast • Examines 50 countries • Two simultaneous panels examining political and economic conditions (Source: www.beri.com, 2010)

31. 4. Selection of sourcing countries BERI-Index (2) Final Evaluation consists of the aggregation of three subindizes: BERI ORI Operation Risk Index PRI Political Risk Index R-Factor Remittance & Repatriation Factor (Source: www.beri.com/brs.asp, 2010)

32. Chapter 5 Organisation of Global Sourcing

33. 5. Centralization vs. decentralization • Structural alternatives in an overview: • Realizing supply economies of scale, economies of process, • economies of information Degree of centralization centralizedstructure high hierarchical coordination supply economies of scale supply economies of process and information mix of centralized and decentralized (lagrest $ volume centralized) mix of centralized and decentralized (lagrest $ volume decentralized) hybrid coordination decentralizedstructure market coordination low Homogeneity of demand high low

34. 5. International Purchasing Offices • What do International Purchasing Offices (IPOs) do tosupport • international purchasing • Identifyforeignsuppliers • Solicitquotes • Expediteandtraceshipments • Negotiatesupplycontracts • Obtainproductsamples • Manage technicalproblems • Representthebuying firm tothesuppliers • Manage countertrade • Performsitevisits

35. 5. Determinants of the International Purchasing System (IPS) Independent Dependent Level of IPS Situational Factors Extentof International Supply Base/Program Complexityof Business Environment Value-Adding Services Providedby International Suppliers Dynamics in Purchasing Environment Importanceof International Purchasing Worldwide Information Systems Lack of Alternative Source E-Commerce CapabilitiesofPurchasingPersonnel International Purchasing Motives CostDriven Non-costDriven

36. 5. Structural Relationship in a Strategic Network Ultimate Customers Distributor Partners Logistic Partners Sourcing Firm Logistics Partners Supplier Partners Supplier Suppliers‘

37. 5. Structure of a virtual organization Designer Producer Virtual Organization Supplier Marketer

38. 5. Lead Buyer Strategy: Example BASF Lead buyer system for Product Focus Groups • Lead Buyer coordinates product / product group • Supported by Regional Buyers • Each product / product group with dedicated strategy Lead Buyer System (Source: Britt, 2011)

39. 5. Procurement Hubs: Example BASF Procurement hubs for non-focus products • Decentralized / delegated products • Local demand • Local hub buyer responsible for procurement Procurement Hubs (Source: Britt, 2011)

40. Chapter 6 Sourcing Strategies

41. 6. Sourcing Strategies: Tasks of Procurement (Source: Arnold 1997)

42. 6. Sourcing Strategies: Sourcing-Toolbox Supply Strategy as a Combination of Sourcing Concepts (Source: Arnold 1997)

43. 6. Sourcing Strategies Different origins of specificity(see Williamson 1989) • sitespecificity • physicalassetspecificity • human assetspecificity • dedicatedassetspecificity • brandnamespecificity • time specificity • ………………………………………………………………. • informationspecificity (UA) • Processspecificity (releaseprocessincludingqualitymanagement) • selectedsupplierspecificity / relationshiprelatedspecificity Input specificity

44. 6. Sourcing Strategies Transaction costs consist of • Coordinating costs • Control costs • Opportunity costs ex ante transaction costs ex post transaction costs Transaction costs define different governance modes (between markets, hierarchy and hybrid forms). Specificity and strategic value are the main factors which define the characteristic of a transaction.

45. 6. Sourcing Strategies How can be achieved completeness of contracts between buyer and supplier? explanation by agency theory Complete means: All possible elements which influence the relationship between benefits and costs are clearly defined and operationalized. • Information problemscause • Ex ante: • Hidden characteristics • Problem: the well performingsuppliers will beignored (≙ adverseselection) • B. Ex post: • hiddenactionmoralhazard • hiddeninformation • hiddenintention • hold up

46. 6. Sourcing Strategies • Howtosolveinformationproblems? • signalling (supplier´sactivity)(e.g. open bookpolicy) • screening (buyer´sactivity)(e.g. auditing) • selfselection (offeringhiddeninfromationbychoosingspecificcontractmodalities) • incentivedrivencontractelementstostimulateconvergenceofinterests

47. 6. Sourcing Strategies (Source: Krause/Handfield, 2000)

48. 6. Sourcing Strategies (Source: Krause/Handfield, 2000)

49. 6. Sourcing Strategies Development of a World Class Supply Base • Identify, assess and rationalize the supplier base • Objective: Create a pool of potentially capable suppliers. • 1st step: Identify strategic global supply chain needs • - end customers requirements • - product development targets • - improvement of market position and competitiveness in • product lines and market areas. • All these requirements directed to supplier potentials and abilities are • steered by the general sourcing objectives like • cost reduction • quality / value improvement • technology road maps • business expansion plans. (Source: Krause/Handfield, 2000)

50. 6. Sourcing Strategies Development of a World Class Supply Base 2nd step: Search for competitive suppliers. 3rd step: Establish controlling system for global sourcing activities: - performance metrics - supplier assessment model - tracking system for supplier performance - reporting of total cost of ownership figures establish immediate feedback to internal customers and suppliers. 4th step: Supplier base fit Eliminate suppliers which are not able to fulfil companys requirements; identify already fully capable suppliers; identify suppliers which can be developed in the future. (Source: Krause/Handfield, 2000)