Question

Using a diagram,illustrate and describe the four basic sourcing strategies that businesses use to procure goods in an international environment.

Answer 1

Global Sourcing: Procurement must define global sourcing as a strategic alternative to benefit from the advantages of internationalization. International purchasing has to be developed into global sourcing by using a strategic focus. This means: realizing competitive advantage. In fact, globalization refers to two aspects.

(1) Operating in international marketplaces: Here, globalization means systematically extending procurement policy towards sources in foreign markets at least worldwide.

(2) Strategic orientation: Here, globalization means an overall orientation of purchasing activities in order to secure the profit base of a firm.

The figure combines these two dimensions and creates four sectors of purchasing activities: Besides traditional procurement and a just operative-oriented ‘going international’ there is the field of strategic supply management and the field of global sourcing which integrates high degrees in both aspects of globalization.

One of the most important instruments in the strategic planning process is portfolio technique. Portfolios help to formulate an adequate strategy. For defining the right global sourcing strategy, purchasing has to analyse.

(a) the goods and services to be sourced:

Therefore, the object portfolio distinguishes four types of goods depending on their specificity and their strategic importance. Strategic importance refers to the contribution of the good or service sourced to the competitive advantage of the company on its sales markets. Specificity refers to the degree of individuality of the object - highly specific goods are produced for one customer only. As a result, there is a range of goods from uncritical products with low specificity and low strategic importance to customer-tailored focus products with both high importance and specificity. In between, there are strategic and individual products as shown in the object portfolio below.

(b) the markets where to be sourced.

While the object portfolio is primarily internal oriented, the market portfolio has a closer look on the external market situation. The buying market situation is described best by looking on suppliers and their capabilities. As a result, the market portfolio has two dimensions: The number of domestic suppliers and the technological advantages of foreign suppliers. Often, companies are forced to source internationally due to the fact that some high-tech products are just not available from domestic suppliers, e.g. microelectronics/semiconductors. As a result, we distinguish between the know-how based global sourcing-situation, where buyers make use of the technological advantage of foreign suppliers, and the market-based global sourcing-situation, where buyers just look for international supplying alternatives. The worst situation from a buyer’s point of view is called ‘critical global sourcing-situation’. In this case, the number of domestic suppliers is low and the technological advantage of foreign suppliers is high.

The four product types and the four market situations can be brought together in the so-called ‘global sourcing strategy type portfolio’. This portfolio identifies three major types of global sourcing strategies:

Technology-oriented global sourcing is a strategy which is closely connected with high-tech sourcing outside domestic markets.

Cost-oriented global sourcing is the strategy pattern that helps to increase competition. As its name says, the major goal is not to get one step ahead in technology but to save cost. It is useful for standardised products where suppliers are easily available in domestic and international markets.

Competition-oriented global sourcing differs from cost-oriented global sourcing not in the goal to reinforce competition - but it does not have a single cost reduction focus. Instead, it tries to gain new product ideas and developments in uncritical market situations by addressing foreign suppliers (type 1) or it looks for a wider range of supply markets and suppliers for less critical products (type 2).

These three strategy patterns for global sourcing show the direction in which global sourcing goes regularly. Supply management has to observe the dimensions of the pre-portfolios mentioned above carefully before they can formulate an adequate global sourcing strategy. Sometimes, the reason for going internationally in purchasing differs from the three strategies mentioned above. The following case study shows an example of a mainly sales-driven global sourcing which led in the end to cost-oriented global sourcing.

Global sourcing alone is not a total supply strategy - but it is an important part of it. The following ‘sourcing toolbox’ gives an overview about the sub-strategies, which form together an integrated sourcing strategy.

We see global sourcing as an alternative to local and domestic sourcing in the area sub-strategy. On the other hand, supply management has to decide (a) the number of suppliers (one, two, or more than two leads to single, dual, or multiple sourcing), (b) the kind of object to buy (simple parts or complex modules leads to unit or modular sourcing), (c) the time when to deliver (long-term delivery on stock sourcing or just in-time), (d) the number of buyers to buy with (only one or as a purchasing consortium leads to individual or co-operative sourcing), and (e) the place where to add value by suppliers (on their own supplier plant or in the plant of the buyer leads to external or internal sourcing).