INTERNATIONAL SOURCING: BEYOND SHOPPING AND FRANCHISING

1. INTERNATIONAL SOURCING: BEYOND SHOPPING AND FRANCHISING

2. PAST INTERNATIONAL SOURCING PATTERNS BY US-BASED COMPANIES • TWO MAIN PATTERNS • INTERNATIONAL CATALOG SOURCING • sourcing from independent foreign vendors • transactions handled by purchasing • contracts awarded on cost, specifications, delivery reliability • INTERNATIONAL FRANCHISING • core manufacturing dispersed internationally • located close to customers • local managers focus on serving local customers • MOTIVATING FACTORS • CATALOG SOURCING: Low cost production of components • FRANCHISING: Proximity to customers in industrialized countries

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4. BUT THE WORLD CHANGED IN THE LATE 1980’s • INTERNATIONAL COST DIFFERENTIALS IN A DECLINING TREND • JAPAN AND WESTERN EUROPE EQUALLY IMPORTANT SOURCES OF TECHNOLOGY AS U.S. • TRAVEL, COMPUTATIONAL AND COMMUNICATION TECHNOLOGIES ALLOW GREATER COORDINATION AMONG MFG. SITES

5. DIMINISHING INTERNATIONAL LABOR DIFFERENTIAL (1970-1985) Ratio of wages in a country to those in the US

6. THE RISE OF THE INDUSTRIAL TRIAD • DEMAND SIDE: • markets similar in size and buying power • global products • SUPPLY SIDE • diminishing cost differentials • no individual company operating in one region can expect to be self-sufficient and world competitive for long, regardless of how much it invests in R&D • EXAMPLES • Specialty chemical company • manufacturing network of six plants • West German plant: enhanced product formula and process improvement for cost reduction • Japanese plant: waste management techniques and efficient material utilization • Sunbeam Appliance Company • iron that automatically shuts off when no movement (idea from Austrialian subsidiary) • Oshar, small food processor (hear about its unsuccessful introduction to Europe

7. REQUIREMENTS FOR TRIAD-WIDE INNOVATION high Multidomestic or National innovation Triad-wide innovation Innovation Rate National and Little Innovation Little Innovation and International Coordination low Degree of International Competition low high

8. NEW INTERNATIONAL MANUFACTURING CONFIGURATIONS • FOR GLOBAL PRODUCTS • exploitation of economies of scale • central design and manufacturing for a product family • dispersed location due to the use of different facilities for different product families • FOR GLOBAL CUSTOMERS • Two alternatives • geographic dispersion of the plants, high coordination across plants • a fixed assignment (one-to-one) of customers to plants • FOR HIGHER ACCESS TO INNOVATION • geographic dispersion of plants • joint engineering, design and development projects

9. WHY SHARING OF INFORMATION, TECHNOLOGY AND KNOWLEDGE IN INTERNATIONAL MANUFACTURING NETWORKS HAS BEEN DIFFICULT • ESTABLISHED REGIONAL ORGANIZATIONS AND COMPENSATION SYSTEMS • NOT INVENTED HERE (NIH) SYNDROME • ETHNIC, LANGUAGE AND NATIONAL DIFFERENCES • SUBSTANTIAL TRAVEL BUDGETS AND ROTATION OF EMPLOYEES

10. OFFSHORE SOURCING, SUBCONTRACTING AND MANUFACTURING

11. US BUYER US BUYER US BUYER US BUYER Investment, capital, mgme, technology, materials payment Products &/or parts; profits &/or fees FOREIGN SOURCE FOREIGN SOURCE FOREIGN SOURCE FOREIGN SOURCE DIFFERENT FORMS OF OFFSHORE SOURCING • OFFSHORE PURCHASING • OFFSHORE SUBCONTRACTING • JOINT-VENTURE OFFSHORE MANUFACTURING • CONTROLLED OFFSHORE MANUFACTURING Offshore subcontracting Controlled offshore mfg. Offshore purchasing JV offshore mfg. Investment, capital, mgme, technology, materials payment Technology, materials payment Products &/or parts; profits &/or fees payment Products &/or parts Products &/or parts

12. SELECTION CRITERIA FOR THE FORM OF OFFSHORE SOURCING • COMPANY CAPABILITIES AND RESOURCES • Investment capital requirements • Management time investment • Offshore Experience • AVAILABILITY AND CAPABILITIES OF SUPPLIERS OR PARTNERS • Availability of partners depends on: country, complexity of production, size of operation • Apparel vs. electronics • PROJECTED SOURCING VOLUME AND VARIABILITY • Large volumes, fixed investments • Small volumes, independent suppliers • Variability favors purchasing or contracting • DEGREE OF INTEGRATION OF OFFSHORE AND DOMESTIC OPERATIONS • High level of integration, controlled offshore manufacturing

13. PRODUCTS SUITABLE FOR OFFSHORE SOURCING • LABOR INTENSIVE PRODUCTS (low skilled labor) • STANDARDIZED PRODUCTS (design, specifications and production technology do not change) • PRODUCTS WITH A PREDICTABLE SALES PATTERN (as opposed to products with abrupt shifts in demand) • PRODUCTS THAT ARE EASY TO SHIP AND FACE LOW IMPORT DUTIES

14. PRODUCT LIFECYCLE AND THE CHOICE OF TECHNOLOGY AND LOCATION OF PRODUCTION FACILITIES • START-UP PHASE LOCATE: • near technology • where production is easily controlled • near material suppliers (if product not well defined) • RAPID GROWTH • concentrate in one location to gain from learning and economies of scale • move towards markets • MATURITY • low cost labor • offshore facilities

15. EVALUATING PRODUCTION SITES • LABOR FACTORS • labor costs • labor availability (of the right kind) • labor productivity • labor reliability and unions • INFRASTRUCTURE FACTORS • Industrial sites • Transportation • Local suppliers of goods and services • GOVERNMENT POLICY FACTORS • General attitudes (for export-oriented foreign investment) • Government regulations • Government incentives (favorable tax treatment, subsidized service, freedom of movement of goods, tax holidays, interest subsidies, etc. • STABILITY FACTORS • Economic stability (inflation, currency) • Political stability

16. COMMUNICATION PROBLEMS (AND SOLUTIONS) FOR OFFSHORE SOURCING • TIME ZONES ANDDISTANCE • limit quality of communication • create distrust • LANGUAGE • CULTURE • particularly for labor and government relations’ • LACK OF INTERNATIONAL EXPERIENCE • SOLUTIONS • right people • frequent visits between US and offshore sites

17. SELECTION MATRIX: OFFSHORE VS. FDI

18. SELECTION MATRIX: continued

19. TO FULLY AUTOMATE YOUR OFFSHORE PLANT , OR NOT :THIS IS THE QUESTION!

20. USUAL MOTIVATIONS FOR FULL AUTOMATION • LOCAL GOVERNMENT (LDC COUNTRY) AND/OR PARTNER WANTS IT • COMPANY HAS EXPERIENCE WITH IT • TURNKEY PLANT, PROBLEM FREE (at least not labor problems)

21. AUTOMATED vs. SEMI-AUTOMATED • Better government relations (local labor employment) • Better process design, same result (labor controlled quality) • Absenteeism and turnover is always a problem. • Training can be a serious expense • Profitable investments • Guadual introduction of technology • Development of management skills and useful process experience • Avoids short-term management headaches • Guarantees product quality (machine controlled quality) • Lack of skilled labor may cause maintenance & set-up problems • Absenteeism and turnover might be equally a serious problem (competitors hiring away skilled workers) • Unprofitable substitution of labor for capital • Untested technology for primitive environments • Management finds it easier to operate (habit or experience)

22. POLICY GUIDELINES IN DEVELOPING THE PROPER MIX OF AUTOMATION & LABOR • CONTROL THE ENGINEERING BIAS • LOOK AT LOCAL TECHNOLOGIES • CONSIDER SECOND-HAND MACHINERY AND EQUIPMENT FROM LESS DEVELOPED COUNTRIES • REQUIRE JUSTIFICATION FOR ALL EXPENDITURES ON MATERIALS HANDLING EQUIPMENT • ELIMINATE THE BIASES IN REPORTING SYSTEMS • CHECK WHETHER THE COMPANY’S “STANDARD” PLANTS ARE APPROPRIATE FOR LOW WAGE COUNTRIES