Globalization &

Outsourcing

Lecture 9
Course Instructor: Arslan Haider
Email: arslan.haider@lbs.uol.edu.pk
 Global Purchasing

• Purchasing provides the inputs into global supply chains.

Global Purchasing Strategy

•Global Purchasing Strategy:

• The means to acquire raw materials, component parts, work in process, goods, and services necessary
for an organization's value-added activities and customer satisfaction.

•Related Terms:
• Purchasing
• Procurement
• Sourcing
• Strategic Sourcing
• Supply Management

•Procurement:

• The process of acquiring goods or services, typically in the context of business spending.
•Sourcing :
• Aims to find, evaluate, and engage suppliers for raw materials, component parts, or products and services,
elevating the nature of purchasing.
•Strategic Sourcing:
• Involves determining long-term supply requirements, finding suitable suppliers, negotiating purchase
agreements, and managing supplier performance in alignment with the expected long-term relationship.
•Supply Management:
• Involves identifying, acquiring, accessing, positioning, and managing resources and capabilities needed for
an organization to achieve its strategic objectives.
•Global Purchasing:
• Part of global supply chain management, it encompasses functions associated with worldwide procurement of
goods, services, and/or information.

•Strategic Nature of Global Purchasing:

• Emphasizes that global purchasing is inherently strategic, with the use of corporate buying centers being a
common strategic decision.

•Corporate Buying Center:

• The buying center consists of the group of people within the organization that makes business purchasing
decisions. It typically consists of users of what is bought, influencers of what should be bought.
• Global purchasing involves the following: worldwide management of a company’s evolution from
international to global purchasing, various types of purchasing strategies, outsourcing and offshoring, global
supplier selection, and global supplier networks.
From Domestic to International to Global Purchasing
•Level I: Domestic Purchasing
• Companies engage in domestic purchasing activities only.
• Characteristics:
• Proximity to home base in the domestic market.
• Primarily sourcing raw materials and component parts locally.
•Level II: International Purchasing as Needed
• Companies engage in international purchasing activities on an as-needed
basis.
• Characteristics:
• Reactive and uncoordinated approach to international purchasing.
• No consistent strategy across buying locations.
•Level III: International Purchasing Strategy
• Companies recognize the effectiveness of a well-formulated worldwide
international purchasing strategy.
• Characteristics:
• Understanding the impact on the firm's competitive edge.
• Strategic approach to international purchasing.
•Level IV: Integrated Global Purchasing
• Global purchasing activities are integrated across worldwide locations.
• Characteristics:
• Coordination of purchasing strategies globally.
• Integration across the firm's buying locations worldwide.
•Level V: Global Purchasing Integration Across Functions
• Companies engage in global purchasing activities integrated across
worldwide locations and functional groups.
• Characteristics:
• Integration and coordination of purchasing for common items.
• Coordination of purchasing processes and supplier selection efforts
globally.
• Emphasis on integrating logistics, operations, purchasing, and market
channels for effective global supply chain management.
 Types of Purchasing Strategy
•Basic Choices in Purchasing Strategy:
• Involves decisions related to imports, product assembly, or complete production within a country to serve
the global marketplace.
•Choices in Supplier Selection:
• Focuses on deciding between internal or external suppliers for component parts or finished products used
in the firm’s production operations.
•Purchasing Decision-Making Process:
• Step 1: Internal vs. External Purchasing
The initial decision on whether to procure internally or externally.
• Focus: Determining "how to purchase."
• Step 2: Domestic or Global Sourcing
• The subsequent decision on whether to source domestically or globally.
• Focus: Identifying "where to purchase."
• Step 3: Types of Purchasing Strategy
• The ultimate choices in purchasing strategy based on "where" and "how."
• Options:
• Domestic Internal Purchasing
• Global Internal Purchasing
• Domestic External Purchasing
• Global External Purchasing
•Domestic Internal Purchasing:
• A multinational corporation buys components from its own affiliates,
which produce them domestically in one of the firm’s factories.
• Alternate Term: Domestic in-house sourcing.
•Global Internal Purchasing:
• A multinational corporation buys components from its own
subsidiaries, which produce them in one of the firm’s global factories.
• Alternate Term: Offshore subsidiary sourcing.
•Domestic External Purchasing:
• A multinational corporation buys components from suppliers
producing them in the firm’s home country.
• Alternate Term: Purchasing from vendors.
•Global External Purchasing:
• A multinational corporation buys components from suppliers
producing them in one of its global factories.
• Alternate Terms: Outsourcing, offshore outsourcing.
Imports
 Outsourcing, Offshoring, and Their Derivatives

• outsourcing and offshoring, along with many derivatives and other similar yet quite different options,
exist in the purchasing world today.

• it is important to go over the outsourcing-related terms and options that companies have: outsourcing,
insourcing, offshoring, offshore outsourcing, nearshoring, crowdsourcing, multisourcing, homesourcing,
and co-sourcing.

• Outsourcing occurs when a multinational corporation buys products or services from one of its suppliers
that produces them somewhere else, whether domestically or globally.

• Insourcing occurs when a multinational corporation decides to stop outsourcing products or services
and instead starts to produce them internally; insourcing is the opposite of outsourcing.

• Offshoring occurs when a multinational corporation buys products or services from one of its suppliers
that produces them somewhere globally (outside the MNC’s home country).
• Offshore outsourcing refers to a multinational corporation buying products or services from one of its
suppliers in a country other than the one in which the product is manufactured or the service is developed.

• Nearshoring happens when a multinational corporation transfers business or information technology

processes to suppliers in a nearby country, often one that shares a border with the firm’s own country.

• Crowdsourcing refers to a multinational corporation outsourcing tasks to a distributed group of people;

this process can occur both online and offline. The difference between crowdsourcing and typical
outsourcing is that the task is outsourced to an undefined entity rather than to a specific firm or person.

• Multisourcing occurs when a multinational corporation buys parts of its business and information
technology services from the optimal set of internal and external providers in the pursuit of business goals;
the term is typically applied to information technology services, but it can be used for any business area.

• Homesourcing (sometimes called homeshoring) refers to a multinational corporation transferring service

industry employment from the firm’s physical offices to home-based employees with appropriate
communication technology, who can be located anywhere in the world.
Co-sourcing occurs when a multinational corporation uses both its own employees from inside the firm and
an external supplier to perform certain tasks, often in concert with each other.

Global Supplier Selection

Seven-step plan works well when selecting a global supplier for a new purchasing scenario or selecting a
new or existing global supplier for an existing purchasing category.

1. Identify the main dimensions for global supplier evaluation.

2. Assign weights to the main dimensions for evaluation.
3. Identify subdimensions for global supplier evaluation.
4. Assign weights to the subdimensions for evaluation.
5. Define the scoring system for the main dimensions and subdimensions.
6. Evaluate each global supplier (initially screened as acceptable).
7. Make the decision as to which global supplier to select.
 Landed cost/Supply Chain Cost formula:
Product + shipping + customs + risk + overhead = landed/SC cost

After accounting for product and shipping costs, add customs, which includes all tariffs, taxes, and duties
required by the country’s regulations. Then, risk is the cost of protecting your investment, which might be
insurance, compliance, and quality assurance. Additionally, overhead covers various fees like currency
conversion, payment processing, and bank charges etc.

Landed/SC cost calculation example:

Below is a hypothetical example of this formula. Suppose you’ve purchased 500 items from a supplier at $20
per unit. The duty is 2%, or $.40 per item ($20 x. 0.02). Shipping is $1,000, or $2 per item ($1000/500
items). Plus, insurance is $5200 , which means your insurance cost per unit is ($5200/500) $10.40. There’s
also a $2 payment processing fee per unit.

Total landed/SC cost = $20 (product) + $2 (shipping per item) + $.40 (duties) + $10.40 (insurance) + $2
(processing fee) = $34.80 per unit

Compare different global suppliers on the basis of landed/SC cost and choose accordingly.
Global Supplier Networks
•Global Supplier Networks:
• Associations or networks of global suppliers involved in firm-based or non-firm-specific
alliances, elevating purchasing to a strategic level beyond transactional relationships.
•Strategic Importance:
• Global supplier networks play a crucial role in creating and maintaining a competitive
global supplier base for the firm, emphasizing a higher strategic approach.
•Organizational Responsibilities:
• Identification of supplier opportunities in the global marketplace.
• Selection of global suppliers for partnerships.
• Coordination of input from various stakeholders involved in specific global sourcing
situations:
• Buyers
• Deciders
• Gatekeepers
• Influencers
• Users
•
•Centralized Purchasing:
• The core of global supplier network activities, involving integration and
coordination across strategic business units and functional departmental units.

•Historical Example: Toyota's Supplier Association:

• Toyota pioneered the formation of a supplier association in 1939, with over

200 members today.
• Benefits:
• Cost reduction
• Sharing best practices
• Training and development
• Strengthening trust and mutual benefit among members.
 Critical Success Factors for Purchasing in Global Supply Chains
•Organizational Support Structure:
• Cross-functional/cross-locational teams.
• Internal buy-in and cross-functional support.
• Globalization manager.
• Staff to oversee the process.
• International and global purchasing offices.
•Executive Commitment:
• Support for the development of a rigorous and well-defined process.
• Providing budget and staff availability.
• Developing performance measures reported to executives.
• Promoting gains achieved throughout the organization.
• Participation on an executive steering committee to guide the process.
•Organizational Resource Availability:
• Personnel with the required knowledge, skills, and abilities.
• Systems with the required information and data.
• Time for personnel to develop global strategies.
• Overall budget support.
•Information Systems and Technology:
• Common coding for commodities and suppliers.
• Information on historical usage and pricing.
• Visibility concerning performance scorecards.
• Worldwide data availability.

•Well-Defined Global Sourcing Process:

• Evaluation of whether the firm has a rigorous and well-defined approach to global purchasing, a key
differentiator between effective and highly effective efforts.

•Availability of Global Suppliers:

• Assessment of whether the firm has access to global suppliers supporting global purchasing, with a
focus on suppliers capable of meeting the buying firm's worldwide requirements competitively.

•Performance Measurement Systems:

• Evaluation of the firm's ability to measure performance in support of global purchasing, including
recognizing, measuring, and rewarding the contributions of teams and individuals. Additionally,
measuring and reporting the performance gains achieved through global purchasing agreements.
•Communication and Coordination Mechanisms:

• Assessment of whether the firm has appropriate communication and coordination

mechanisms in place to support global purchasing. This includes elements such as regular
review meetings, postmortem review meetings, center-led strategy development efforts, web
pages and chat rooms, co-location of personnel, and the use of various communication tools
like email, phone, and videoconferencing.

•Overall Investment in Key Areas:

• Recognition that investing in these eight areas increases the likelihood of overall success in
the global purchasing effort.