A Novel Framework for International Sourcing
Applied to the Emerging Chinese Supply Market
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
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 potential
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 competition
(Swamidass/Kotabe, 1993) and the need to address the strategic
perspective of Global Sourcing has been identified a long time ago (Arnold,
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 strategies
it should be welcomed that recently both academic research and industry
practice have begun to focus their attention not only on marketseeking
international expansion strategies but also on resource- or efficiency-
seeking strategies. Consequently, the interest in resource- and efficiency-
seeking expansion strategies such as Global Integration is growing
fast (Kaufmann/Panhans, 2004).
When designing resource- and efficiency-seeking international expansion
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 strategic
and global level.
The first level of internationalization in sourcing is coined by opportunity-
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 internationalization
of sourcing is thus one of consolidation and enhancement of existing
international purchasing activities.
Following this introduction, we will briefly review the concept of Global
Sourcing and then establish a conceptual foundation of the internationalization
of sourcing as a key function for the global expansion of the company.
We will then discuss the options available for an effective organizational
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 between
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 competitive
advantage (Carter/Narasimhan, 1996). Many researchers, especially
towards the end of the 1980s and in the beginning of the 1990s,
made efforts to better understand the potential benefits of internationalizing
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 purchase
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, technologies,
and suppliers across worldwide purchasing, engineering, and operating
locations”. The development of new supply markets and their integra
-tion into the existing supply management processes represent crucial elements
of comprehensive internationalization strategies for purchasing.
However, just this task of integrating and coordinating the supply management
processes across geographically dispersed locations and functions
turns out to be a major roadblock for most companies on their way to applying
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 activities
that is reached only after going through some preceding lower levels.
Monczka and Trent (2003) distinguish five levels of Worldwide
Sourcing: Level I represents the base case of engaging in domestic purchasing
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 performed
on a reactive basis. Together with level II level III corresponds to
what has been identified as International Purchasing. In level III Worldwide
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 purchasing
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 summarizes
the possible levels of Worldwide Sourcing and shows the current positioning
of 162 mainly large companies (average annual sales of $1.5 billion)
who participated in the exploratory research carried out by Monczka
and Trent (2003).
Percent of Firms
N = 162
0
10
20
30
40
50
13.4
7.8
21.3
7.8
31.0
14.3
18.2
15.6
16.1
54.5
Currently
In 3-5 Years
Level I
Engage in
Domestic
Purchasing Only
Level II
Engage in
International
Purchasing as
Needed
Level III
International
Purchasing as
Part of Sourcing
Strategy
Level IV
Integration and
Coordination of
Global Sourcing
Strategies across
Worldwirde Buying
Locations
Level V
Integration and
Coordination of
Global Sourcing
Strategies with Other
Functional Groups
International
Purchasing
Global Sourcing
Figure 1: Current and Expected Worldwide Sourcing Levels (Trent/
Monczka, 2003, p. 29)
The need for Global Sourcing differs across companies and industries.
According to Porter (1986) global industries are characterized by the need
to coordinate and integrate activities on a worldwide basis in order to
achieve competitive advantages. Thus, each company must determine the
appropriate level of internationalization of its businesses’ sourcing processes,
preferably at firm level within a specific industry (Monczka/Trent,
1992).
1 Traditionally, internationalization strategies were clearly marketing-driven. Considering the perceived weakness of some local commodity
sources and growing worldwide shortages this fact may be surprising (Arnold,
1990). Already in 1980 Davidson stated that “sourcing activities will
play a dominant role in a company’s global strategy”. Equally, Pausenberger
(1984) discussed the possibility that sourcing issues could be drivers
for overall internationalization of companies.
The relationship between the company’s approach to international expansion
and the internationalization of sourcing is not part of Monczka and
Trent’s framework. We think that examining this relationship in more
depth will further benefit the discussion about the internationalization of
sourcing by clarifying its outstanding role for the realization of internationalization
benefits.
In order to better understand the role of Global Sourcing for internationalization
strategies at the business and/or firm level we will briefly discuss
a novel framework of international expansion strategies developed by
Kaufmann and Panhans (2004). Based on this framework and our understanding
of Global Sourcing we will then present a framework that shows
strategies for the internationalization of sourcing and how these support
the overall internationalization of the firm.
1.2 Global Integration
As was mentioned in the introduction the interest in global business strategies
and especially in resource- or efficiency-seeking strategies such as
Global Integration is growing fast. Global Integration is characterized by
foreign operations that have strong resource-interdependencies with the
parent or other corporate group members. In order to exploit locational
advantages the value chain is deconstructed and each process step is placed
at the ideal location and the entire volume is processed there. Thereby
firm-specific and country-specific advantages are combined (Rugman/
Verbeke, 2003). Locational advantages may be low factor costs,
qualifications and externalities, or proximity to natural resources, suppliers,
and other strategic resources.
Kaufmann and Panhans (2004) argue that Global Integration represents
a third wave of internationalization. A first wave was dominated by market-
seeking exports: Highly national production systems were squeezed
for efficiency and learning effects. These scale effects allowed aggressively
priced exports. Toyota’s production system and export strategy to
Europe and the U.S. is a typical example of this approach, which could
mainly be observed in the 1980s. The market-seeking transfer of businesses
coined the second wave of internationalization: Largely independent
businesses were created by replicating entire business processes in foreign
markets in order to exploit firm-specific core competencies. The
business transfer strategy was helpful in overcoming trade barriers and ef
ANovel Framework for International Sourcing 129
fective in assuring customization to local needs. The third wave is Global
Integration as described above.
These three internationalization strategies can be classified using two
approaches to international expansion: exports and foreign value creation.
2As figure 2 shows a simple base case called National Focus is added to the
three international expansion strategies: Export Orientation, Business
Transfer, and Global Integration.
Business Transfer
– Market expansion
– Economies of scope
National Focus Export Orientation
– Market expansion
– Economies of scale
– Economies of scope
Global Integration
– Economies of location
– Economies of scale
– Market expansion
– Economies of scope
Local
Home Abroad
Value
creation
Sales
Exports
Figure 2: Framework for International Expansion Strategies
The actual internationalization strategy of any firm can be a mix of the
above four pure strategies. The rationale behind applying one or more of
these strategies is to expand the potential sales market and exploit advantages
of internationalization such as economies of scope, economies of
scale, and economies of location. All three approaches give access to
economies of scope. Different markets share common competencies
and/or overhead. Reducing unit costs by realizing economies of scale is a
characteristic of Export Orientation and Global Integration as with Business
Transfer only national volume is processed. By definition, economies
of location can only be exploited by Global Integration as this means performing
steps of the value creation at the place of the absolute locational
advantage.
Every company has to choose the internationalization strategy (or mix)
most appropriate for reaching its goals. As we have pointed out, we consider
sourcing to be a crucial function for implementing international expansion
strategies. Depending on the overall internationalization strategy
sourcing must be adapted accordingly. In the following chapter we will
develop a similar framework for the internationalization of sourcing as was
developed for the business-level by Kaufmann and Panhans (2004).
1.3 Internationalization Strategies for Sourcing
Two approaches to international expansion are used to construct our
framework: Foreign value creation from a global business strategy perspective
and imports from a sourcing perspective. Foreign value creation
can be performed through franchises, joint ventures, and subsidiaries. Imports
include intra- and extra-firm trade.
Figure 3 shows the four resulting sourcing strategies: Domestic Local
Sourcing, Import Orientation, Local Sourcing Abroad, and Integrated
Global Sourcing. Domestic Local Sourcing is characterized by low to no
imports for home-based value creation. Although it represents a more or
less trivial base case, it serves well as a starting point for strategy development.
Local Sourcing Abroad
– Supply market expansion
(to a lesser degree)
Import Orientation
– Supply market expansion
Integrated Global Sourcing
– Supply market expansion
– Maximize purchasing power
Domestic
Domestic Abroad
Location of
Own Value
Creation to
be
supported
by
Sourcing
Location of Supply Sources
Abroad
Hurdles
Barriers to Foreign Value
Creation
– Coordination complexities
– Knowledge stickiness
Trade Barriers
– Tariffs, quotas
– National
regulations
– Transportation
and
communication
costs
– Heterogeneous
market
preferences
Domestic Local Sourcing
– Facilitated early supplier
integration
Figure 3: Benefits and Hurdles of International Sourcing Approaches
The case of Import Orientation reflects an international expansion of the
target supply market: As described by Monczka and Trent (1991) companies
are often driven towards increasing their international purchasing volume
in the form of imports by triggering events, such as supply disruptions,
etc. So to say international purchases are mostly a reaction – a “defensive
measure” – to increasing competitive pressure with the goal of realizing
short-term cost reductions, quality improvements, access to technology,
and delivery enhancement. Imports may be managed through different
supply channels, e.g. interaction with a foreign supplier (Kaufmann,
2001). Imports may also be supported by setting up IPOs in key supply
markets (Leenders et al., 2002). In the case of Import Orientation the
company does not source from own intra-firm offshore sources as can be
seen from the lack of foreign value creation activities.
Local Sourcing Abroad is characterized by low intra- and extra-firm imports:
As it is integrated with foreign value creation activities it can be regarded
as a replication of Domestic Local Sourcing in a foreign market.
Strictly spoken, Local Sourcing Abroad is not Global Sourcing as crossborder
flows of inputs do not play a prominent role here. It is thus lacking
the extensive need for coordination of global purchasing requirements.
Nevertheless, setting up sourcing activities in a foreign market is part of
the internationalization of sourcing. Local Sourcing Abroad is often
driven by local opportunities such as low labor cost. Moreover, in many
foreign sales markets local content requirements make Local Sourcing a
mandatory prerequisite for profitable operations. However, it has been a
difficult task in many industries until today. Developing sourcing strategies
that “fit” foreign investment as well as local business strategies represents
a challenge not to be neglected (Kotabe/Zhao, 2002). Foreign supply
markets often were and in some cases still are not capable of meeting quality
or quantity requirements of foreign companies, which fuelled a development
of bringing along known suppliers from home markets (Kaufmann,
1995). In many cases Local Sourcing remains limited to the purchasing
of basic components and indirect materials. Technologically
complex purchasing items were or are still sourced and shipped from established
supply markets to foreign production and assembly facilities
(Kaufmann/Carter, 2000).
Finally, high levels of imports and foreign value creation require the
strategy of Integrated Global Sourcing: Globally dispersed value creation
and purchasing locations must be integrated and coordinated in the context
of Global Sourcing to unfold the full potential of Global Integration. The
key challenge is to coordinate company-wide demand to maximize purchasing
power while simultaneously addressing all relevant supply markets
in order to solicit the best possible quotes (Hausmann/Kaufmann,
2002). The integration of different functional requirements in the course
of the Integrated Global Sourcing process addresses the need for a crossfunctional
perspective on sourcing.
Arnold (2002) underlines the importance of viewing Global Sourcing
not as an isolated strategic concept but combined with organizational implementation.
He approaches the question of organizing Global Sourcing
from a transaction cost perspective and proposes three distinct organizational
designs: a hierarchy approach, a market approach, and a hybrid approach.
The hierarchy approach requires to centralize control over purchasing
spend in order to reduce internal coordination and transaction cost.
However, Arnold recommends this approach only to companies that have
little international activities, which is not the case for Global Integration.
The market approach may be especially attractive for highly internationalized
companies with a low degree of centralized control. For companies
that need to exercise central control while leveraging their global capabilities
Arnold recommends a hybrid approach, which is designed to combine
the benefits of hierarchal control and autonomy (market) for the best of
global coordination. This approach is needed to overcome the challenge of
concurrently pooling demand (central control) and assuring global supply
market reach (autonomy).
The next question is then how to create processes that support such a
hybrid-coordinative approach to Global Sourcing. Hausmann and Kaufmann
(2002) recommend a flexible but disciplined Global Sourcing process,
which consists of four main steps:
− First step: Local Purchasing Teams (LPTs) are appointed to specific regions
(or purchasing items).
− Second step: Lead Buyers or Corporate Supply Management pool demand
for pre-determined items.
− Third step: The information on purchasing requirements is transferred to
LPTs, who sent out Requests-for-Quotation (RFQs) to suppliers in their
respective regional supply markets. In the course of a competitive bidding
process offers are compared to quality and cost targets.
− Fourth step: A Central Sourcing Committee (CSC) makes the final decision
concerning supplier selection. Before this decision is reached several
negotiation loops may take place.
Figure 4 illustrates the structure of the Global Sourcing process.
Corporate SCM
(CSCM) or Lead Buyers
(LB)
pool demandacross plants/divisions
Info transferred to LPTs
who send out
RFQs intheir region
Corporate Sourcing
Committee
(CSC)decides final supplier
selection
Local Purchasing
Team
(LPT) appointedfor each region
CSCM/LB
CSC
LPTs LPTs
Corporate
demand
Figure 4: Generalized Global Sourcing Process
At Germany’s prominent carmaker Volkswagen (VW) such a Global
Sourcing process was successfully installed. Through process standardization
and obligatory participation, weekly meetings of the CSC, and joint
decision-making it was possible to improve the effectiveness of Global
Sourcing. Purchasing responsibility was given to production locations,
which are assisted by the LPTs. These locations and the LPTs were integrated
into the sourcing processes across the entire group. The LPTs were
established in key sourcing areas and used their local procurement skills
also for analyzing trends and innovations, carrying out surveys, establi-
shing the supply base, and acting as the first point of contact for new suppliers.
The importance of the cross-functionality of the Integrated Global
Sourcing process must be clear to all parties involved. Only by integrating
other functional groups, such as research and development, logistics, production,
etc. early in the sourcing process, will it be possible to realize
many of the potential benefits of Global Sourcing (Arnold, 1990). Setting
up cross-locational sourcing teams is a common practice to improve coordination,
which is the central prerequisite for the pooling of purchasing
demand. Cross-functional teams improve the integration of purchasing
needs across functions, which is the prerequisite for supplier involvement
in the new product development process and thus a key to managing purchasing
cost as long as they are not fixed in a final design. Furthermore,
teams also create continuity in buyer-supplier relationships and thus help
to build trust as the potential negative effects of fluctuation can be reduced
(Kaufmann/Carter, 2000). Other approaches to supporting the integration
of supply management with other functional groups and suppliers are: extensive
top management support, i.e. in the form of regular meetings with
all parties involved in the cross-functionally integrated process (Petersen/
Frayer/Scannell, 2000), the use of sophisticated purchasing-related ITsystems,
which lower the costs of communication and transaction (Kaufmann/
Carter, 2000), and the proactive development of capabilities that enable
the persons involved in the process to work together efficiently and
effectively, e.g. job rotation programs, intercultural and language trainings
(Menze, 1992).
Typically, the main focus of sourcing strategies is still on cost reduction.
The internationalization of sourcing assists this goal in different
ways. Expanding the supply market gives access to more and usually also
cheaper suppliers. However, applying a total cost perspective may reveal
that fewer international sources than expected offer really advantageous
conditions. Supply market expansion may also reduce cost by introducing
competition to the local supply base or by giving access to better quality
purchasing items. Import Orientation and Integrated Global Sourcing benefit
from this effect. Local Sourcing Abroad may lead to finding cheaper
suppliers as compared to the home market but the expansion of the supply
market is by definition limited to one additional market. The second approach
to cost reduction is the worldwide coordination and pooling of purchasing
volumes which leads to higher purchasing power and – hopefully
When talking about cost we refer to purchasing cost and not the cost of performing
purchasing.
– better negotiation results. This second effect can only be realized by Integrated
Global Sourcing.
Certainly, there are not just potentially positive effects of internationalization.
There are two kinds of hurdles that correspond to the dimensions
of the framework as depicted in figure 3. The first, trade barriers, includes
such frictions as tariffs, quotas, national regulations, transportation, communication
costs, and search cost as well as specificity in terms of heterogeneous
market preferences. The second hurdle, barriers to foreign value
creation, includes the difficulties of transferring knowledge and complexity
of managing a dispersed organization.
It is important to understand that the supply management function is not
independent in shaping its International Sourcing Strategy. Focusing on
Domestic Local Sourcing or expanding the supply market by following the
Import Orientation approach represent decisions that are mainly driven by
supply management considerations. But when corporate management decides
to replicate or disperse value creation steps, supply management will
need to accommodate such a change. Some of the following examples will
show that any upward movement in the framework as depicted in figure 4
is originally determined by decisions outside supply management. On the
other hand this close connection of international expansion strategy and international
sourcing strategy shows the importance of involving supply
management in this kind of strategic decision-making.
Approaches to international sourcing mainly driven by supply management
decisions:
− Domestic Local Sourcing may support a National Focus approach by assuring
proximity or even co-location between buyer and supplier(s),
which can foster innovation success in R&D-intensive businesses.
− Import Orientation may help to counter limited capacities in the domestic
supply market or price pressures in the domestic sales market, which
may be obstacles for a successful National Focus approach.
− Domestic Local Sourcing in combination with Export Orientation offers
the buying company to potentially benefit from economies of scale realized
by the supplier.
− Import Orientation may be needed to fulfill countertrade agreements or
natural hedging needs, which can be a result of Export Orientation (for
an overview of possible countertrade agreements please refer to Monczka/
Trent/Handfield, 2002, p. 357-360).
International sourcing approaches mainly driven by corporate management
decisions related to the positioning of value creation steps:
− Local Sourcing Abroad becomes necessary, when a Business Transfer
strategy is pursued.
− Supply management will need to implement an Integrated Global Sourcing
approach, when corporate management decides to disperse value
creation steps while establishing close links between these steps.
So far, we have discussed two important dimensions of the international
expansion of sourcing activities: (1) the location of value creation steps to
be supported by and integrated with sourcing activities and (2) imports,
which represent resource-interdependencies between different locations.
Now we would like to raise the issue of ownership. As figure 5 shows,
adding ownership to our framework provides us with four variations of the
described sourcing strategies.
Local Sourcing Abroad
Domestic Local Sourcing Import Orientation
Integrated Global Sourcing
Domestic
Domestic Abroad
Supply Sources
Abroad
Procurement Process
Outsourcing Abroad
Domestic Procurement
Process Outsourcing
Import Partnering
Global Sourcing Spin-off
100 %
Ownership
0 %
100 %
Ownership
0 %
100 %
Ownership
0 %
100 %
Ownership
0 %
Location of
Value
Creation to
be
supported
by
Sourcing
Figure 5: International Sourcing Framework
Outsourcing Domestic Local Sourcing to a third party creates the case of
Domestic Procurement Process Outsourcing (PPO). Domestic PPO is feasible
when processes can be standardized and do not relate to the sourcing
of strategic items. Companies that apply outsourcing free up resources to
A Novel Framework for International Sourcing 137
focus on strategic sourcing projects and may benefit from economies of
scale realized by a third party procurement service provider.
Import Partnering corresponds to the strategy of Import Orientation outside
the firm. Experienced import agents take over the main part of the international
sourcing activities. In this case we also speak of indirect imports.
Although sourcing through an import agent may actually represent a
national purchase for the buyer – which is the case if the agent is located in
the same country – it is different in terms of supply risk, which is a result
of the underlying cross-border trade. Import Partnering may be an attractive
alternative to Import Orientation in the early phases of foreign supply
market development as required management capacity is reduced and external
know-how is provided by the agent (Leenders et al., 2002).
Procurement Process Outsourcing Abroad is again a replication of the
domestic case. Outsourcing the local procurement function or procurement
processes in a foreign country to a (local) third party service provider
may give access to crucial market know-how and accelerate the build-up
of foreign value creation activities.
Taking into account the complexity of outsourcing of Global Sourcing
this option may seem infeasible at first. How could the tasks of coordinating
and integrating be handed over to a third party? A possible way of
outsourcing Global Sourcing (or parts of it) is to create a spin-off of the
Global Sourcing function. Global Sourcing activities would then be
“bought” by the firm’s businesses. By spinning-off and not simply outsourcing
to a “regular” third party some of the complexity involved in such
a procurement outsourcing decision could be eliminated, as a spin-off is
more likely to understand the specific needs of coordination and integration
(Kaufmann/Buchholz, 1998). Siemens Procurement & Logistics Services
(SPLS) is a well-known example of a spin-off that today serves customers
within and outside the Siemens corporation.
2. Application of the International Sourcing Framework
to the Emerging Chinese Supply Market
In this chapter we will first give a brief overview about the development of
the Chinese supply market in general before applying the International
Sourcing Framework and deriving requirements for the implementation of
different forms of China Sourcing.
2.1 The Chinese Supply Market
The popularity of China as a location of export processing facilities and a
source for both components and finished goods bound for overseas markets
is well known. According to the Federal Statistical Office German
imports from the People’s Republic of China (PRC) grew by 17.3 percent
in 2003 as compared to the previous year to reach an annual total worth of
€25 billion. Since 1998 imports from the PRC to Germany have been
growing on average by 17 percent per year, which made the PRC the biggest
low cost country importer into Germany. The Chinese government
reported that overall exports grew by 35 percent in 2003 to approximately
$438 billion. This development of exports shows that Chinese manufacturers
continue to improve their capability of accommodating the needs of
foreign buyers. One third of U.S. imports come from low cost countries
such as China, whereas in Germany only about a sixth of total imports can
be attributed to low cost countries.
4 This gap shows the high probabilityof a further increase of China-related sourcing activities of German companies.
As these figures only give a first, general impression of the dynamism
in the Chinese supply market a more detailed analysis is required.
When evaluating the attractiveness of the Chinese supply market four
main criteria have to be taken into account: cost structures, performance
characteristics, structure of competition, and market specific risks:
2.1.1 Cost
Cost is the one all-important factor that gives China its advantageous position.
The low labor costs, which have attracted significant foreign direct
investment (FDI) in the past, seem to remain sufficiently attractive to
guarantee investments in the future. High estimated unemployment rates,
as well as strong migration movements from the interior parts of China to
the industrialized coastal areas and overcapacities in some industries, slow
down the convergence of salaries. The current wage level ranges around
4-8 percent of the German wage level. However, well-educated engineers
and managers receive much higher salaries. Labor productivity in China is
competitive due to high technological standards and more working days
per year as well as lower levels of absenteeism. Non-wage labor costs and
taxes are lower than in Germany. Anecdotal evidence showed savings of
up to 45 percent for purchases of electronics, ceramics, and castings.
2.1.2 Performance
Chinese factories are now steadily producing export-quality electronics,
machinery, and appliances. The educational level of the Chinese work
force is constantly increasing. The annual number of graduates in engineering
is far higher than in the U.S. The high amount of FDI and the
well-qualified but relatively cheap manpower make China increasingly attractive
for the offshoring of production and product development.
5Knowledge and competencies in several special industries – among them
automotive, high technology, apparel, and consumer products – add to
China’s advantageous position. The accession of the World Trade Organization
(WTO) and investments in infrastructure and electronic communication
systems (e.g. Enterprise Resource Planning systems) create the
foundation for a further positive development in the future. Nevertheless,
supplier and quality management were identified as two of five main problem
areas for manufacturing companies in a cross-case analysis carried out
by Zhang and Goffin (1999). The importance of the quality issue is also
reflected by the order of selection criteria applied by foreign manufacturers
in China: First quality, then delivery and only then price. Especially variability
of quality posed significant problems. The absence of competent
suppliers sometimes renders it impossible to meet local content requirements
(Kaiser, 1998).
2.1.3 Competition
The intensification of competition in most Chinese markets is another
widely known fact. However, as a the booming Chinese economy is characterized
by high capacity utilization rates in many industries some suppliers
are in the comfortable situation of having immense bargaining power
and thus refuse to negotiate volumes below a certain minimum level. The
WTO accession has fuelled another interesting development: A virtual
flood of medium and small foreign manufacturers is moving capacity to
the PRC in order to cut costs and follow the relocation moves of their major
customers. Issues of intellectual property protection and supply reliability
are increasingly solved by means of acquiring high quality Chinese
suppliers. As a result the number of capable suppliers is growing quickly
in many industries. Consequently, the intensity of competition in the Chinese
supply market, which impacts on the relative bargaining power of the
buying organization, has to be analyzed on a case-by-case basis. The in-
fluence of state-owned-enterprises is another important aspect that has to
be taken into account.
2.1.4 Risks
Kaufmann (2001) recommends analyzing the additional risks of sourcing
from a foreign market along four axes: economic, communication, sociocultural,
and political-regulatory risks. Discussing all risks of sourcing
in and from China in depth would certainly surpass the possibilities of this
article. Hence, we content ourselves with briefly naming the most prominent
risks involved:
− Lead time extension, e.g. it takes six weeks on average to overcome the
distance between Shanghai and Hamburg,
− the underdeveloped Chinese infrastructure still leads to logistics delays,
− unforeseen increases in transportation cost, e.g. ocean freight container
prices have surged in recent months,
− integrated Supply Chain Management is often not applicable due to the
lack of IT-Infrastructure,
− long term currency risk (currently the Renminbi is pegged to the Dollar),
− intellectual property protection is hardly enforceable, therefore extensive
due diligence and ongoing monitoring become necessary,
− missed quality standards (as described above),
− language barriers (although English is the business language spoken in
China),
− higher search costs due to lacking information infrastructure, e.g. market
data about potential suppliers,
− cultural problems, difficult access to Chinese decision-makers due to
lacking Guanxi
6,− regulatory system is at times opaque, if not even arbitrary,
− and intervention by authorities, e.g. pressure to collaborate with a specific
supplier (Zhang/Goffin, 1999).
2.2 Three Approaches to China Sourcing
In order to determine the appropriate international sourcing approach for
China we have to determine the underlying driving factor. Is it an importbased
expansion of the supply market, primarily initiated by supply management?
Or is a corporate level decision of implementing a Business
Transfer strategy that requires the build-up of local sourcing within China?
Or is the corporate decision about applying Global Integration, which requires
the build-up of China Sourcing activities and their integration into
group-wide sourcing activities?
This last possibility of addressing China in the context of Global Integration
is far from being hypothetical: China’s importance as a sales market
is beyond question. Because of the lowering of trade and investment
regulations – e.g. in the course of the WTO accession – China has become
a more attractive candidate for locating value creation steps and hence, inclusion
in Global Integration strategy. Moving assembly or manufacturing
activities to China has proven to be an effective way to reduce cost for
many companies by exploiting locational advantages. With the increasing
capabilities of human resources new opportunities to relocate steps of the
value chain to China arise. Especially the offshoring of R&D-intensive activities
is becoming increasingly attractive.
Figure 6 shows the three possible approaches to China Sourcing and
highlights four transition steps.
Local Sourcing within China
(Intra-China Sourcing)
Imports from China
(Sourcing ex China)
Integrating China
Sourcing into Groupwide
Global Sourcing
Activities
Domestic
Domestic Abroad
Location of
Own Value
Creation to
be
supported
by
Sourcing
Location of Supply Sources
Abroad
Domestic Local Sourcing
A
B
Y
Z
Figure 6: Three Approaches to China Sourcing and Transition Steps
We will explore the requirements that have to be fulfilled in order to progress
from the case of Domestic Local Sourcing to Imports from China (A)
and/or Local Sourcing within China (Y) as well as to progress from these
cases to integrating China Sourcing into group-wide Global Sourcing activities
(B, Z). The focus will be on transition steps B and Z, because establishing
this level of China Sourcing supports the implementation of
Global Integration. We will describe the transition steps by three categories
of requirements for designing sourcing activities in China: organizational
infrastructure, purchasing information systems, and personnel capabilities
(Monczka/Trent, 1992; Kaufmann/Carter, 2000).
2.2.1 Case A – the build-up of Sourcing ex China
Using China as a supply source is especially interesting for items with a
high labor cost content and low demand variability (e.g. used in many
product lines). Technologically mature items are also interesting as maturity
reduces the potential detrimental effects of the violation of intellectual
property rights. Sourcing high volumes that appeal to high quality suppliers
facilitates leveraging the potential of the Chinese supply market. In order
to communicate with suppliers and send out RFQs the buyer will need
to formulate purchasing requirements and specifications that match the
technical and language standards in the Chinese supply market.
The requirements concerning the organizational infrastructure depend
on the chosen supply channel for importing. The three main alternatives
for importing from China are: using direct suppliers, setting up International
Purchasing Offices (IPOs), or outsourcing to a service provider
(Burt/Dobler/Starling, 2003). Appointing a domestically located buyer for
importing directly from Chinese suppliers offers the cost reduction potential
of cutting out middlemen but requires investment in travel, communication,
and logistics. Considering the significant risks involved in working
with suppliers from emerging markets across long distances without means
of control or assistance, this option can only be recommended for uncritical,
standard purchasing items. To respond to this problem of lacking control
and communication with the local Chinese supply base an IPO can be
set up. The proximity of the IPO to the supply base should improve the
flow of information and help to build up local market expertise in terms of
optimal purchasing processes and reliable suppliers and thus benefit the
sourcing process through continued learning. IPOs may engage in supplier
development efforts if necessary. However, anecdotal experiences show
that Chinese suppliers may be very reluctant to accept the offer of participating
in supplier development programs, as they fear knowledge leakage.
Although it is common practice that IPOs charge a markup of around two
percent on purchase price, additional corporate funding will be necessary
to cover the cost of operating in the Chinese supply market (Goh/Lau,
2002). Search cost, staff training, and quality inspection cost are likely to
be higher than in more developed supply markets. Outsourcing the actual
China Sourcing activity to service providers such as import merchants,
commission houses, agents, import brokers, or trading companies may add
significant cost but in return eliminate unforeseen problems or mitigate
risk, especially concerning logistics.
Import Orientation activities in China can be effectively supported by
IT-systems and E-Commerce applications such as an own purchasing website
in English and Chinese language, which enables Chinese suppliers to
contact the potential importer proactively. Moreover, use should be made
of B2B-plattforms for China Sourcing. IT is also needed to support the
complex logistics within China and overseas shipments. The demands on
personnel capabilities depend on the purchased items. If imports are limited
to uncritical standard items, the need for highly specialized personnel
is low. On the other hand complex purchasing items result in complex negotiations,
which can only be mastered by competent staff that is able to
handle cultural challenges, language barriers, risk management, business
and technical issues.
2.2.2 Case Y – the build-up of Intra-China Sourcing
The start of manufacturing activities in China to exploit factor cost advantages
may require the build-up of local sourcing activities. Especially standard
direct and indirect materials need to be sourced locally to avoid high
cost of transportation. The big difference as compared to Sourcing ex
China is that Local Sourcing within China aims at supplying operations
with all required inputs, whereas Sourcing ex China represents “cherrypicking”.
The scope of purchasing activities to be covered by the local
purchasing staff is thus broader than for an IPO for Sourcing ex China.
Kaiser (1998) describes the gradual implementation of local sourcing activities:
In the case of Braun Electric (Shanghai) Co. Ltd in the beginning
of operations sand had to be imported from Germany to perform sandblasting
for molding. Volkswagen Shanghai required about ten years to move
from importing standard kits to close to one hundred percent local content.
This was achieved by establishing precise standards, bringing in home
country suppliers, choosing adequate locations, and monitoring logistics
closely (Story, 2003). In terms of organizational infrastructure this means
that a local purchasing function is established that works closely with suppliers
and other functions such as engineering. IT-systems are needed for
market research and order tracking. Electronic data interchange (EDI)
technology is becoming more common with Chinese suppliers and may
thus be used to implement optimal delivery frequencies. Proximity with
Chinese suppliers opens up new possibilities for close collaboration. For
example Zhang/Goffin (1999) report of positive examples of successful
Western-Sino collaboration on innovation projects. Consequently, purchasing
staff needs a high level of technical expertise and cross-functional
skills. The local purchasing function has to be able to dedicate a significant
part of its time to careful supplier evaluations. Apart from quality and
reliability issues, the analysis of suppliers must focus on their potential to
achieve or sustain cost leadership. Suppliers that may develop into competitors
must be identified and eliminated from the selection process.
2.2.3 Case B and Case Z – the integration of existing
approaches to China Sourcing into the group-wide
Global Sourcing process
Managing this transition needs top management commitment, e.g. in the
form of regularly scheduled meetings of corporate and business unit executives
with purchasing managers, which represent an excellent opportunity
to jointly discuss the progress of implementing Global Sourcing. Issues
of coordination and integration thus receive high visibility and sup
ANovel Framework for International Sourcing 145
port, which is crucial for successful transition (Palaniswami/Lingaraj,
1994).
The prerequisite for the integration of a new supply market into an existing
Global Sourcing process is the systematic stabilization of the existing
sourcing process in that market. Stabilization means that LPTs must be in
place that have a sound understanding of the local supply market and that
dispose of sufficient resources to carry out the important tasks of supplier
pre-selection, quality control, and supplier development (including monitoring).
Existing IPOs and/or Local Sourcing staff take over the role of LPTs in
the Global Sourcing process. The Chinese LPT should report directly to
corporate purchasing. Its major tasks apart from representing the “one
face to the supplier” include: spotting adequate suppliers in the assigned
regional supply market, manage the RFQ process, keep track of shipments,
carry out or assist negotiations, support information exchange between
buyer and seller, dedicate resources to problem solving related to engineering,
design and quality (Monczka/Trent, 1991). A representative of China
Sourcing has to be included in the Central Sourcing Committee (CSC). In
the CSC representatives of the different global purchasing locations get together
and jointly define a strategy for the commodity, product group, etc.
and decide on appropriate suppliers. Thus, knowledge about the Chinese
supply market is exchanged and taken into account when selecting items
for Global Sourcing initiatives.
Acting as a gatekeeper to the group-wide sourcing network, the Chinese
LPT needs technical equipment for quality control, e.g. laboratories. Carrying
out reliable quality control locally represents an enormous advantage.
The risk of discovering quality problems only at the manufacturing
site and thus incurring significant costs of delay or even downtime can
thus be eliminated or at least reduced significantly. Quality standards for
purchasing items must be tested with the same reliability across all purchasing
locations before these items enter the Global Sourcing process.
Costly duplication of quality control efforts could thus be avoided, too.
The existing (local) IT-systems must be integrated with the worldwide
purchasing information system in a way that international purchasing locations
become interlinked and thus able to efficiently share information
concerning material requirements among each others, functions, and suppliers.
Setting up such a sophisticated information system is problematic
due to several obstacles, e.g. the high set-up cost involved may be regarded
as reducing the independence of the buyer (Kaufmann/Carter, 2000), compatibility
of diverse software standards, the lack of reliable data input in
many intransparent supply markets, and data protection issues. Due to the
underdeveloped IT-infrastructure of some Chinese suppliers this element
of integration may represent a major challenge. However, investments in
appropriate IT-systems by Chinese companies have been rising constantly
through recent years.
The need for sophisticated international sourcing skills increases with
the complexity of the item-related purchasing process which is reflected in
more complex negotiations including, co-development projects, incoterms,
etc. (Kaufmann/Carter). Furthermore, LPT members need to develop more
profound strategic capabilities. They have to develop the local supply base
in the context of a global supply strategy. Training programs and employee
reward systems are considered to be a way to develop the necessary skills
(Petersen/Frayer/Scannell, 2000). Job rotation may be applied to foster the
ability to work in cross-functional teams.
In order to give the LPT the necessary time to establish a stable and
transferable sourcing process it seems recommendable to initially keep
China Sourcing out of the Global Sourcing process and manage it separately.
One-time projects on selected purchasing items can be used to test
the transferability and gradually approach full integration. Such projects
will allow learning effects at relatively low risk.
Figure 7 summarizes the main requirements for the four transition steps.
Transition
steps
Transition
requirements
A
From Domestic
Local Sourcing
toImporting
from China
Y
From Domestic
Local Sourcing
to Local
Sourcing within
China
B, Z
From Importing
from China/
Local Sourcing
within China to
integrating
China in the
Global
Sourcing
process
Organizational
infrastructure
IT-Systems/
E-commerce
Personnel
capabilities
I. Buy directly from suppliers
II. Set up IPO in China
III. Source through 3rd party
service providers
English/Chinese Website
B2B-Plattforms
Track shipments
Development of Chinaspecific
skills (culture,
language, risk mgmt.)
depending on complexity of
purchases/need for
interaction
Set up local purchasing
function that collaborates
with other local functions
and suppliers
Closer collaboration
requires technical and
relationship-building skills
as well as sophisticated
supplier selection
Set up LPTs or transform
existing IPOs/local
purchasing function
Install China representative
in Corporate Sourcing
Committee
Regular review meetings
with top management to
assure progress of transition
If necessary, adapt China
Sourcing data base to
group-wide standard for
purchasing information
Integrate Chinese data base
with group-wide purchasing
information system
Process RFQs
Focus on cross-functional
skills
Provide resources for
reliable quality inspection
Ability to develop local
supply base in the context of
global strategic perspective
English/Chinese Website
B2B-Plattforms
Track shipments/ Use EDI
to coordinate deliveries
Figure 7: Requirements for Transition of China Sourcing Approaches
3. Conclusion and Outlook
In this article we have presented a novel framework for the classification
of internationalization strategies for sourcing and how these sourcing
strategies relate to the overall internationalization approach of the company.
Thereby we have identified Integrated Global Sourcing as the most
promising way of supporting the current trend of Global Integration. Challenges
of implementing Global Sourcing were addressed with the example
of the emerging Chinese supply market.
The presented framework provides top management and purchasing executives
with a helpful tool to clarify their approach to the internationalization
of sourcing. If they can identify the appropriate way of supporting the
overall internationalization of the company, they will be able to determine
the necessary sourcing processes and capabilities to be developed. Management
should try to anticipate the future need and path of international
expansion and include these analyses in their planning.
When developing an emerging supply market executives should take
into account the specific challenge of “enabling” this market to become
part of the Global Sourcing process. Stabilizing the sourcing process in
this emerging market is the key task to be addressed.
Research concerning the internationalization of sourcing activities is in
a development stage. Empirical research is much needed to further explore
the issues raised in this article. The most urgent research topics include the
empirically founded verification of the proposed framework of international
expansion strategies for sourcing and further exploratory research on
the design of Global Sourcing processes. Especially mid-size MNCs seem
to be attractive for empirical research as many of them are in a current
move towards Global Integration and Global Sourcing, whereas big MNCs
may have completed these moves already and interview partners are likely
to have changed positions.
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