global sourcing in international operating companies

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Global sourcing in international operating companies “Why do international operating companies deploy global sourcing strategies?” Date: 11-06-2010 Supervisor: Dr.ir. J.S. Small Author: Robert-Jan Boonstra University: Tilburg University ANR: 537482 Department: Organization and Strategy Number of words: 6,558

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Global sourcing in international operating companies

“Why do international operating companies deploy global sourcing strategies?”

Date: 11-06-2010 Supervisor: Dr.ir. J.S. Small

Author: Robert-Jan Boonstra University: Tilburg University

ANR: 537482 Department: Organization and Strategy

Number of words: 6,558

Why do international operating companies deploy global sourcing strategies?

2

Abstract Due to globalization, international operating companies have to shift their sourcing strategies.

Customers all over the world are more demanding and expect that companies fulfill their demands

quickly. International operating companies have to implement strategies that support flexibility and

quick response to customers.

This thesis was formed to explain the phenomenon global sourcing and explain the opportunities and

risks regarding global sourcing. Combining these subjects and explain the recent trends in global

sourcing strategy. The main research question of this study is: Why do international operating

companies deploy global sourcing strategies?

In chapter two of this thesis the differences between global sourcing and single sourcing was studied.

It seems that there are differences between these strategies and moreover that it do matter in which

industry a company operates. In this chapter a framework is given of the differences between global

sourcing and single sourcing.

To implement a global sourcing strategy, it is important to which degree a company wants to expand

their market. Furthermore, the degree of product innovation and process innovation plays a significant

role of implementing a global sourcing strategy.

In contrast to this sourcing strategy, companies can implement a single sourcing strategy. Companies

who carefully select their suppliers and want to achieve a long-term relationship with these suppliers

may implement a single sourcing strategy. Although, it is important in which industry a company

operates.

Opportunities and risks of global sourcing was discussed in chapter three. To explain the opportunities

of global sourcing a framework is given over the recent years. This framework provide that there is a

shift from qualitative decisions to select suppliers, to a more cooperation and partnerships alliances.

To carefully explain the risks of implementing global sourcing, case studies were presented in this

chapter. The main conclusion was that the political environment, tariffs barriers and exchange rates

tend to be the most important risks.

To select appropriate suppliers for a company’s global sourcing strategies, determinants of the supplier

selection was provided. Based on literature the conclusion was that companies have to select their

products into categories. After providing the categories, companies can adequately select their

suppliers.

Why do international operating companies deploy global sourcing strategies?

3

In chapter five the relationship between global sourcing and competitive advantage was discussed. To

provide evidence, case studies were investigated. It seems to be important that competitive advantage

can be explained in two ways and moreover that it the results in the two industries were different from

each other.

In the last chapter, discussions, limitations and recommendations for further research were discussed.

Why do international operating companies deploy global sourcing strategies?

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Table of contents

Chapter 1 Research proposal _______________________________________________________ 5

1.1 Problem indication ___________________________________________________________ 5

1.2 Problem statement ____________________________________________________________ 6

1.3 Research questions ___________________________________________________________ 6

1.4 Research design and data collection ______________________________________________ 6

1.5 Demarcation ________________________________________________________________ 6

1.6 Structure ___________________________________________________________________ 6

Chapter 2 global sourcing strategies are different from single sourcing strategies ___________ 8

2.1 Global sourcing in general _____________________________________________________ 8

2.2 Different global sourcing strategies _______________________________________________ 9

2.3 Single sourcing in general _____________________________________________________ 10

2.4 Framework of differences between global sourcing and single sourcing _________________ 11

2.5 Conclusion _________________________________________________________________ 12

Chapter 3 Opportunities and risks of deploying global sourcing strategies ________________ 13

3.1 Opportunities and reasons to deploy global sourcing strategy _________________________ 13

3.2 Risks to deploy global sourcing strategy __________________________________________ 14

3.3 Conclusion _________________________________________________________________ 15

Chapter 4 Determinants of supplier selection in global sourcing _________________________ 16

4.1 The relation between supply chain management and global sourcing ___________________ 16

4.2 Selection criteria of suppliers __________________________________________________ 17

4.3 Trends in selection methods of suppliers _________________________________________ 18

4.4 Conclusion _________________________________________________________________ 18

Chapter 5 The relationship between global sourcing and competitive advantage ___________ 19

5.1 Competitive advantage in general _______________________________________________ 19

5.2 Global sourcing and competitive advantage in the automotive and apparel industries _______ 20

5.2.1 Global sourcing at Toyota in the automotive industry ____________________________ 20

5.2.2 Global sourcing at Zara fashion in the apparel industry ___________________________ 21

5.4 Conclusion _________________________________________________________________ 23

Chapter 6 conclusion and recommendations _________________________________________ 24

6.1 Summary of findings _________________________________________________________ 24

6.2 Discussion _________________________________________________________________ 25

6.3 Limitations and recommendations ______________________________________________ 25

References _____________________________________________________________________ 27

Why do international operating companies deploy global sourcing strategies?

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Chapter 1 Research proposal

1.1 Problem indication

For many decades, researchers in supply chain management have investigated the effects of global

sourcing on the performance of companies. Franko (1978) was among the first authors, who stated that

United States companies were not so dominated anymore, Western Europe and Japanese companies

were also trying to dominate the international market. Buckley and Pearce (1979) state in their

research that major international oriented companies focus on global sourcing and producing in

foreign countries. Moreover the researchers state that not only firm characteristics play an important

role, but also industry characteristics and national traits. Building on the research of Buckley and

Pearce, two researchers have integrated sourcing in the value chain theory (Kogut, 1985; Porter,

1986). These authors state that sourcing into foreign countries became more and more important to be

competitive.

In the literature, a separation can be made between global sourcing strategies and single sourcing

strategies. According to Burke, Carrillo and Vakharia (2007) single sourcing is different from global

sourcing, since companies search for a single supplier to for the components of their products.

However, global sourcing can be described as a close collaboration between the global business

activities of companies (Kotabe & Murray, 2004).

In the last decades there is growing support that global sourcing leads to competitive advantage for

the firm (Porter, 1980). Porter suggests that firms can gain competitive advantage by primarily

focusing on structural characteristics of a firm, (e.g., relative bargaining power, barriers to entry, and

so on). Another view on how to gain competitive advantage is the resource-based view. Barney

(1991) state that to gain competitive advantage it is necessary that only assets that are valuable, rare,

inimitable and imperfectly sustainable can create competitive advantage and in this way lead to higher

performance.

Because of the growing literature on global sourcing, this study analyses the relationship between the

different global sourcing strategies and the competitive advantages international operating companies

have. The statement discussed is: why international operating companies search for global sourcing

strategies.

Why do international operating companies deploy global sourcing strategies?

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1.2 Problem statement

• Why do international operating companies deploy global sourcing strategies?

1.3 Research questions

• What are global sourcing strategies and how do they differ from single sourcing strategies?

• What are the opportunities and risks of deploying global sourcing strategies?

• What are the determinants of supplier selection in global sourcing?

• What is the relationship between global sourcing and competitive advantage?

1.4 Research design and data collection

This thesis is a descriptive study based on literature reviews. The literature review is based on the

phenomenon global sourcing, achieving competitive advantage and differences in strategies in

different countries. The data collection for this thesis is based on key word searching and citation

analysis. The key words of this thesis are global sourcing, competitive advantage, sourcing strategies

and opportunities and risks of sourcing.

The following databases are used for this thesis: Catalogue Tilburg University: Contains all titles of

books, reports, conference proceedings and journals. ABI/Inform Global: Contains bibliographic

information and abstracts from articles from over 2000 journals in the area of business economics and

management, and Web of Science: These databases should provide all the literature information for

this thesis.

1.5 Demarcation

In this thesis the focus is on different global strategies in international operating companies. This

thesis investigates the relationships between global sourcing strategies and gain (sustainable)

competitive advantage.

1.6 Structure

The first research question is discussed in chapter two. The term ‘sourcing is expounded and the

difference between global sourcing and single sourcing is explained. The relatedness between business

activities and sourcing policy is also discussed.

Chapter three gives an answer to the second research question. It deals with the opportunities and risks

of global sourcing strategies in international operating companies.

Why do international operating companies deploy global sourcing strategies?

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The next chapter, gives an answer to the third research question of this paper. The determinants of the

selection of suppliers for global sourcing is discussed.

The fifth chapter deals with the relationship between global sourcing strategies and competitive

advantage.

Chapter six discusses why international operating companies deploy global sourcing strategies. In this

chapter the problem statement is answered. Concluding, the final chapter mentions the limitations of

this research and recommendations for further research.

Why do international operating companies deploy global sourcing strategies?

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Chapter 2 global sourcing strategies are different from single sourcing strategies

2.1 Global sourcing in general

In the last decades, many researchers have found that, due to global competition and customer service

activities, firms are critically evaluating their business activities. Therefore firms are extensively

sourcing from all over the world to response to customer demands.

Hudson, (1971) was among the first author who states that the focus was too much on the seller

market and not on the buyer market. Hudson (1971) suggested to integrate the buyer and supplier

relation. To support this research, Kotler and Levy, (1973) investigated the selling patterns of

international operating companies. The main conclusion of their research was that these companies

have to focus on effective input processes and output processes. According to Kotler and Levy (1973)

this results in better coordination and firm performance.

To focus more on sourcing strategies and explaining which sourcing strategies there are, it is necessary

to define sourcing:

“Sourcing generally refers to those decisions determining how components will be supplied for

production and which production units will serve which particular markets” (Davison, 1982 p. 23)

Sourcing strategies have become more and more important issues for firms. Due to global competition

and upcoming markets, international operating companies have focused more on global sourcing

strategies. Sourcing strategies are diverse and includes many factors, such as production locations,

phases of production, internal versus external components sourcing and internal versus external

assembly locations, (Kotabe & Omura, 1989). Firms have to consider were to put production locations

and firms have to distinguish how to source materials and components. These strategic decisions are

included in the global sourcing strategy of a firm. Hefler (1981) investigates the main reasons to

carefully develop a global sourcing strategy. He states that firms must consider the manufacturing

costs, industrial and cultural environments.

In support of the findings of Hefler (1981), Monczka and Giunipero, (1984) added other significant

determinants for international operating companies to consider global sourcing. They investigated that

distance, nationalism and a lack of working knowledge are the major concerns for firms to adopt a

global sourcing strategy. In the literature there are also other determinants which plays an important

role in global sourcing. Buckley and Pearce, (1979) developed other parameters to describe global

sourcing. These variables according to Buckley and Pearce, (1979) were; the degree of production; the

degree of sales and the export behavior of the company. To support the theory of Buckley and Pearce,

Kotabe and Murray, (1990) stated that sourcing strategies are based on three factors; 1. the modes of

Why do international operating companies deploy global sourcing strategies?

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international component sourcing, 2. the degree of product innovation and 3. the degree of process

innovation.

2.2 Different global sourcing strategies

Companies can adopt different kind of sourcing strategies for their business activities. The traditional

strategy, companies follow is to manage efficient the input activities and acquire operational efficiency

(Porter, 1986). Another approach is that firms should focus more on collaboration with their suppliers.

Quinn, (1992) argues that outsourcing is not suitable for most international operating companies.

Firm’s should focus on unbundling activities into multiple businesses. According to Kotabe and

Murray (2004) firms have to make several basic choices in deciding how to serve foreign markets. The

first choice firms have to make, relates to the use of imports, assembly, or production within the

country to serve a foreign market. Another decision a company has to make is the use of internal or

external supplies of components or finished goods. Therefore, the term ‘sourcing’ is used to describe

management by multinational companies of the flow of components and finished products in serving

foreign and domestic markets.

For this thesis global sourcing is based on the explanation of Kotabe and Murray (2004). To explain

visually the different sourcing strategies, a summary is given in the figure below.

Domestic Foreign

Internal sourcing Onshore in sourcing Offshore in sourcing

External sourcing Onshore outsourcing Offshore outsourcing

Figure 1: Different sourcing strategies, (Kotabe & Murray, 2004)

International operating companies can procure components and products either domestically (i.e.,

domestic sourcing) or from abroad (i.e., offshore sourcing). In developing viable sourcing strategies

on a global scale, companies must consider manufacturing costs, the costs of various resources, and

exchange rate fluctuations (Chen, Paulraj & Lado, 2004). On the other hand firms also need to

consider the availability of infrastructure (including transportation, communications, and energy),

industrial and cultural environments and the political environment in foreign countries (Monczka &

Giunipero, 1984).

To summarize, researchers have indicated several issues international operating companies have to

deal with. Logistics, inventory management, distance, nationalism, and lack of working knowledge

about foreign business practices, among others, are the major operational problems identified by

international operating companies in implementing global sourcing.

Some studies have shown, that operational problems, for example where to source major components

seems less important than how to source them (Murray, Kotabe & Wildt, 1995).

Why do international operating companies deploy global sourcing strategies?

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2.3 Single sourcing in general

Single sourcing is different from global sourcing. According to Burke, Carrillo and Vakharia (2007)

single sourcing can be described as a relationship between the firm and one supplier which is the only

supplier for a particular product. In the same study Burke et al. (2007) argue that firms striving toward

a single sourcing strategy, enable benefits for both parties to be achieved.

Swift (1995) investigated single sourcing strategies and multiple sourcing strategies in American

companies. The research was conducted in the chemical industry, electronical industry and

transportation industry. The aim of this study was to find evidence to support why companies in these

industries use single sourcing strategies or multiple sourcing policies.

The results of this study are interesting for this thesis, since a comparison can be made between

companies that focus on global sourcing and companies that focus on single sourcing.

Swift (1995) concluded that companies that implemented single sourcing strategies are focusing on the

long-term. They are not interested in low initial price, they are more interested in the total life cost of

the product. Furthermore, indicators for single sourcing were, technical support ability and the

reliability of the product.

Swift (1995) stated that the results of this study cannot be generalized to other industries. It cannot be

concluded that other industries focusing on the same reasons. Another limitation is that this study

contains questionnaires for the purchasing managers of the firms and not for example to marketing

managers.

In contrast to the investigation of Swift (1995), Larson and Kulchitsky (1998) investigated single

sourcing strategies, with respect to the marketing and sales department of companies. Larson and

Kulchitsky (1998) support the findings of Swift (1995) and moreover, they state that selecting a

supplier has to be done with utmost care. Industrial managers have to ask several critical questions

before they select suppliers.

Why do international operating companies deploy global sourcing strategies?

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2.4 Framework of differences between global sourcing and single sourcing

In this section the differences between global sourcing and single sourcing are explained. As

mentioned in the previous sections, there are differences between both types of sourcing strategies.

In the figure below a summary is given from authors who discus global sourcing and authors who

discus single sourcing.

Global sourcing Single sourcing

Author Main factors Author Main factors

Buckley and

Pearce, 1979

Degree of sales

Degree of production

Export behavior of company

Swift, 1995 Determination of long-

term relationships

Hefler, 1981 Determination of manufacturing

costs

Determination of industrial and

cultural environment

Larson and Kulchitsky,

1998

Careful determination

of selecting suppliers

Kotabe and

Omura, 1989

Determination of production

facilities

Determination were to source

Burke et al., 2007 Determination of long

term relationship with

supplier

Kotabe and

Murray,

1990

Modes of international sourcing

Degree of product innovation

Degree of process innovation

Chen et al.,

2004

Determination of manufacturing

costs

Determination of exchange rate

fluctuations

Figure 2: Main factors of global sourcing and single sourcing

In the figure there is a separation between authors who described global sourcing and authors who

described single sourcing.

Buckley and Pearce (1979) state that firm with a large export behavior are also interested in global

sourcing implementation. In support of the theory of Buckley and Pearce (1979), Hefler (1981) stated

that companies have to consider the manufacturing costs and the industrial and cultural environment.

In addition to these findings, Kotabe and Omura (1989) and Kotabe and Murray (1990) investigated

the production facilities and the degree of product and process innovation. Chen et al. (2004) argue

that firms who implements global sourcing strategy, have to take into account the manufacturing costs

and the exchange rate fluctuations.

Why do international operating companies deploy global sourcing strategies?

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2.5 Conclusion

In this chapter there is a separation made between global sourcing and single sourcing. In the sections

an explanation is given of global sourcing and single sourcing. It can be concluded that companies

who wants to implement global sourcing strategy are usually interested in foreign markets and want to

expand their export market.

Companies that carefully consider a long-term relationship with a supplier, implement single sourcing

strategies. However, the industry which companies are operating in have to be appropriate for this

sourcing strategy.

Companies that want to expand their products to foreign markets, strive towards a global sourcing

strategy. Furthermore the degree of product innovation and process innovation is also a main factor to

implement global sourcing.

On the other hand, companies that want to build long-term relationships with suppliers and are not

focusing on price, implement single sourcing strategies.

Why do international operating companies deploy global sourcing strategies?

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Chapter 3 Opportunities and risks of deploying global sourcing strategies In this chapter the advantages and disadvantages are discussed of global sourcing strategies.

Furthermore there are case studies of different authors that explain which advantages there are and in

which branches.

3.1 Opportunities and reasons to deploy global sourcing strategy

As mentioned in chapter two, there are different views on global sourcing for different branches.

According to Sheth and Sharma, (1994) companies have to shift from a transaction strategy to a more

relationship oriented strategy. A transaction strategy can be explained as, one in which there is a

primary focus on transactions and exchanges between companies, (Sheth & Parvatiyar, 1995). A

relationship oriented strategy can be described as, a focus on important suppliers to gain a strong

position with long-term contract in the competitive market (Genesan, 1994).

Different researchers investigated the reasons why companies are going abroad. Monckza and

Giunipero (1984) investigated in 26 large American firms why companies were sourcing in foreign

countries. The results showed that the motives for global sourcing were: lower prices abroad,

international orientation, better quality abroad and technological advantages. In a later study of Min

and Galle, (1991), they reinvestigated the results of Monckza and Giunipero, (1984). The results of

their study were also lower prices of products in foreign countries, better quality of products and more

advanced technology. More interesting in their research was the fact that reliability of delivery and

willingness to solve problems were also important reasons to implement global sourcing strategies.

Both studies were based on American companies who were sourcing abroad. In contrast to these

studies Rexha and Miyamoto (2000) investigated the sourcing policy in Australian companies. The

most interesting and important results were that Australian companies depend heavily on overseas

suppliers, due to a small domestic market. In another study by Lye and Hamilton, (2000) the

researchers investigated also the reasons to search abroad, in 36 companies that operates in four

countries (New Zealand, Australia, Japan and U.S). The results of this study supported the results of

earlier studies. Mutual trust, knowledge, dependable deliveries and dependable long-term supply were

very important reasons for these companies to implement global sourcing. In the figure below a

summary is given of the most important studies and their results in recent years.

Why do international operating companies deploy global sourcing strategies?

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Figure 3: Reasons to implement global sourcing strategies

This figure represent the most important reasons for international operating companies to implement

global sourcing strategies. It is interesting to see that factors like price, availability of the materials and

quality of the products are global wide, in different countries the most important factors.

In support to the investigations, Trautmann, Bals and Hartmann (2009) argue that international

operating companies do not only implement global sourcing strategies for economy of scale, but also

sharing knowledge and information.

In the research of Trautmann et al. (2009) some limitations about implementing global sourcing were

made, for example some reasons for implementing global sourcing were not accurate. In a case study

in hybrid purchasing companies, the conclusion was that the motives for implementing global

sourcing are insufficient and missing implementation guidance. This research provides evidence that

the reasons to search abroad, depends on the forces for global integration and local responsiveness.

Moreover Trautmann et al. (2009) argued that companies should coordinate better between the

suppliers, make a separation between local responsiveness and global responsiveness to successful

implement global sourcing strategies.

3.2 Risks to deploy global sourcing strategy

In the previous section an explanation is given of the opportunities and reasons why companies

implement global sourcing strategies. In this section the focus is mainly on the risks of global sourcing

strategies. In this section there are case studies that provides evidence in practice.

Min, Latour and Williams (1995) argue that today’s competing markets have an enormous impact on

the sourcing strategies of companies. They state that in selecting international suppliers, many risks

have to be encountered. The authors conclude that the political circumstances, tariff barriers,

communication obstacles, trade regulations and exchange rates are important risks in for global

Why do international operating companies deploy global sourcing strategies?

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sourcing. Furthermore, Min et al. (1995) investigated the risks of global sourcing in practice. For this

investigation the researchers selected seven criteria and selected five foreign suppliers to evaluate what

foreign supplier was the best one to choose.

The seven criteria were; financial terms, quality assurance, perceived risk, service performance, buyer-

supplier relationship, cultural and communication barriers and trade restrictions. These criteria were

examined in Mexico, Taiwan, Korea, Japan and United States. The conclusion of the research was that

Japan turned out to be the best with respect to the seven criteria.

In addition to the investigation of Min et al. (1995), Dunford (2009) researched a case study of FIAT

Auto. They found that globalization and the global sourcing policy resulted in slow growth and

economic crisis in countries as mentioned before.

The consequence for the FIAT Group was a large debit in annual sales and therefore FIAT Group has

to restructure their business units.

For companies it is important what countries are possible options to move production facilities to and

which countries are possibilities for global sourcing.

In addition to the risks Dunford (2009) described, Tsiakis and Papegeorgiou (2008) developed an

integrated model that addresses complex decisions companies have to make in their sourcing strategy.

In this model the authors take production allocation, purchase of raw materials and network

configuration into account. The main results of this study was that companies have to use their data in

APS (Advanced Planning Scheduling) not in a short-term, but in a longer period to address strategic

and tactical supply design aspects.

3.3 Conclusion

In this chapter the opportunities and risks of global sourcing have been discussed. In recent years

researchers have identified reasons why international operating companies implement global sourcing

strategies. It can be concluded that several reasons to implement global sourcing, do not change in

time.

The main reasons for international operating companies to implement global sourcing strategies are

the price of the products, availability and the quality of the products.

In the last few studies it can be concluded that other reasons play an important role for international

operating companies. Reliability of deliveries, mutual trust and sharing information between supplier

and firm are important reasons for going abroad. The assumption was that this play a significant role

in long-term relationship between supplier and firm.

The risks of implementing global sourcing strategies are defined in the previous section. The main

conclusion was that the political environment, tariff barriers, communication difficulties and exchange

rates are the risks for implementing global sourcing.

Why do international operating companies deploy global sourcing strategies?

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Chapter 4 Determinants of supplier selection in global sourcing In this chapter the determinants of supplier selection in global sourcing strategy are discussed. To give

detailed information about the effects and consequences, some case studies are described in this

chapter. Before describing the determinants the relation between supply chain management and global

sourcing is described.

4.1 The relation between supply chain management and global sourcing

Supply chain management can be described as an integrative approach for planning and control of

materials and information flows to suppliers and customers, (Minner, 2003). Due to globalization and

a more global view of managers of companies, more and more practitioners and researchers are

interested in the phenomenon supply chain management.

To support the interest in supply chain management, Prasad and Babbar (2000) documented in their

literature review the different views on supply chain management by different researchers. In this

study the authors made a classification between topics in supply chain management. Supply chain

management is not just for a domestic market, but an international wide phenomenon, which deal with

the challenges of globalization on managers who designs the supply chains for new and existing

products (Minner, 2003). To identify which suppliers have to be selected, the supply chain network is

illustrated.

Figure 4: Supply network and supply chain management, (Slack et al., 1997)

The focus in this study is mainly on the left hand of this figure, to illustrate which suppliers influence

global sourcing strategies.

In the recent years, there is a shift from the traditional ‘make-to-stock’ to ‘build to demand’. For

global sourcing, this means that it leads to a de-centralized supply chain management and without the

costs of owning the players in the supply chain (Chung, Yam and Chan, 2004).

Why do international operating companies deploy global sourcing strategies?

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4.2 Selection criteria of suppliers

Weber, Current and Benton (1991) were among the first authors that described the latest trends in the

global sourcing strategies and selecting suppliers for companies. In this research the authors stated that

supplier selection was based on several criteria like; quality, delivery, price of the products and

production facilities and capacity. Furthermore it is interesting that in this research a recommendation

is made to use multi-objective techniques, to adequately measure the performance of each supplier. In

connection with the research of Weber et al. (1991), Dowlatshahi (2000) investigated the sourcing

strategies and selection patterns of companies. In this investigation the focus was on long-term,

medium term and short-term relationships with suppliers. To measure the performance in these time

horizons, Dowlatshi (2000) developed nine statements to test the significance between the supplier and

the company, when the contributions and constraints from supplier and buyer are known.

The most important conclusion of this research was, that in practice the shift from short-term

relationships to long-term relationships was not implemented in most of the companies. Dowlatshi

(2000) states that the main reason for this is that the purchase department is not so dominated as it

should be.

These papers provide information about the shift from qualitative decisions, like quality and price to

building relationship with suppliers. In the article of Talluri and Narasimhan (2004) evidence is

available to support this shift. The authors proposed a framework for (global) strategic sourcing. They

suggested that previous supplier selection methods are no longer appropriate.

Figure 5: A framework for (global) strategic sourcing, (Talluri and Narasimhan, 2004)

In this framework the authors visualize a shift from traditional selection to a framework that creates

strategic partners. The advantages of this framework is that it considers the supplier capabilities and

performance metrics to evaluate the efficiency of the suppliers. The most important findings of this

Why do international operating companies deploy global sourcing strategies?

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research were the identification of suppliers for strategic partnerships, selecting targets for

improvement for supplier and identifying the issues suppliers are working inefficiently.

4.3 Trends in selection methods of suppliers

To build on the conclusions and recommendations of Talluri and Narasimhan (2004), Araz and

Ozkarahan (2007) proposed a supplier evaluation and management methodology. The authors stated

that if companies wantto gain competitive advantage, they have to collaborate with their suppliers.

More interesting is that there is a shift from selection of suppliers to involvement of supplier into

product design (Araz and Ozkarahan, 2007). It is important that there is a separation between the

suppliers. Furthermore the authors distinguish four types of suppliers. For strategic partnerships the

company selects ‘perfect suppliers’, for supplier development programs ‘good’ suppliers, for

competitive partnership ‘moderate’ suppliers and pruning ‘bad’ suppliers.

To explain the trends in global sourcing, related to supply chain management, a summary is given in

the following figure.

Figure 6: Trends in global sourcing for supply chain management

4.4 Conclusion

In this chapter the research question was to investigate the determinants of supplier selection in global

sourcing.

In the first section an explanation is given of the supply chain network. This supply chain network

provides information about the influence of suppliers on the firm.

Traditionally, companies select their suppliers based on qualitative decisions, like the quality of the

products, price and delivery. In the recent years a trend can be indentified how to select suppliers. The

determinants of supplier selection is more focused on improvement of the products and creating

strategic partnerships with suppliers. Moreover, it can be concluded that international operating

companies select their suppliers based on product level. This means that companies have to distinguish

the importance of the products and then adequately select the suppliers based on strategic partnerships

or supplier development programs.

Why do international operating companies deploy global sourcing strategies?

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Chapter 5 The relationship between global sourcing and competitive advantage In this chapter the relationship between global sourcing and competitive advantage is explained. This

chapter provides definitions of competitive advantage and the link with global sourcing for companies

in the automotive industry and apparel industry. Moreover there are case studies that provide examples

in these industries

5.1 Competitive advantage in general

Competitive advantage is a phenomenon that is explained is many ways. In the literature, two ways

often used explain competitive advantage.

The first way is an industry structured view,

according to Porter (1980) firms have to primarily

focus on the firm structure itself. To focus on the

firms structure Porter (1980) developed the five

forces model. He concluded that firms attractiveness

was a function of five forces; the treat of entry new

competitors; the threat of substitutes; the bargaining

power of suppliers; the bargaining power of buyers

and the rivalry between excising companies. In

addition to the five forces model, Brandenburger and

Nalebuff (1995) state that there is also another force,

which explains the firm’s attractiveness. According

to Brandenburger and Nalebuff (1995), this force is even a larger force than substitutes. The authors

state that complementary products is the sixth force of the existing model of Porter (1980).

As mentioned there is also another approach to explain competitive advantage in the literature. Porter

(1980) describes the firm structure and that firms have to focus on five forces.

Another way to explain competitive advantage arises from Barney (1991). Barney (1991) argues that

when a company wants to achieve competitive advantage, it has to pose certain resources. These

resources includes all assets, information, capabilities and firm attributes a company have. Barney

(1991) states that to gain competitive advantage, the resources have to be;

Valuable, the resources are valuable asset to the firm’s strategy; Rare, the firm’s strategy is unique to

competitors and potential competitors; Inimitable, this contains that the firm’s strategy is different

from competitors and they cannot implement the same strategy; Non-substitutable, this means that it is

Figure 7: Five forces model (Porter, 1980)

Why do international operating companies deploy global sourcing strategies?

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impossible to have substitutes that have the same attributes. Barney (1991) states that the focus on

these resources, can be called the resource-based view.

In contrast to the research of Barney (1991), Priem and Butler (2001) investigate the generalizations of

the resource-based view. Priem and Butler (2001) argue that the resource value in the resource –based

view is vague and therefore does not meet the empirical content criterion, that is required for

theoretical systems. However, Priem and Butler (2001) state that the resource-based view has the

potential to have a theoretical status in the future.

Moreover, Barney (2001) reviewed his own theory in the last ten years. Barney (2001) states that the

resource based view is still a good approach to gain competitive advantage. Nevertheless, Barney

(2001) argued that the critique of Priem and Butler (2001) about the value of the resources is correct.

Barney (2001) states that the term valuable could be more simplified and explained as tangible and

intangible assets for a firms strategy.

In this section an explanation of competitive advantage is been given about the two ways firms can

adopt. For this thesis it is important to make clear what competitive advantage is with respect to the

automotive industry and apparel industry.

For this thesis, Barney’s approach for describing competitive advantage is used, included the

arguments of Priem and Butler (2001).

5.2 Global sourcing and competitive advantage in the automotive and

apparel industries

In this section an explanation of competitive advantage in the automotive and apparel industries is

described. To provide a framework and explain the competitive advantage of global sourcing in these

industries some case studies are shown.

5.2.1 Global sourcing at Toyota in the automotive industry In the research of Pfaffman and Stephan (2001), the authors examined the investments of foreign

automotive suppliers in the German market and why automotive suppliers focus their strategies more

on global sourcing.

Due to globalization and a more competitive international market, companies have to reconsider their

strategies to be competitive. Pfaffman and Stephan (2001) state that the automotive industry can

develop three different sourcing strategies to achieve competitive advantage. Automotive companies

can implement global sourcing strategies, single sourcing strategies and module sourcing strategies.

This thesis focuses on global sourcing and single sourcing, therefore module sourcing is taken out of

the equation.

Why do international operating companies deploy global sourcing strategies?

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In support of the findings of Pfaffman and Stephan (2001),Ahmadjian and Lincoln (2001) investigated

global sourcing strategies in the Japanese automotive industry. They investigated the sourcing strategy

of Toyota.

To evaluate the sourcing strategy, Ahmadjian and Lincoln (2001) state that the main competitors for

Toyota are Nissan, Mitsubishi and General Motors.

The authors state that Toyota implemented a global sourcing strategy for their components.

Ahmadjian and Lincoln (2001) describe that Toyota was searching for a long-term relationship for

components for their cars. In their research, the authors investigate that Toyota and Denso, a company

in automotive electronics, have derived a long-term partnership for the components. According to the

authors, Toyota produces cars in many countries in the world, like United States, Japan and in

Germany. All production locations were supplied by Denso. This means that Toyota implemented a

global single sourcing strategy for most of the components.

Interesting to see is that Toyota implemented a global single sourcing strategy, with Denso as main

supplier for their components.

Furthermore Ahmadjian and Lincoln (2001) state that this kind of sourcing strategy for Toyota, means

that it helps to achieve a competitive price and cost reductions in the sourcing process of components.

However, Toyota did not purchase Denso outright, because Denso has also partnerships with other car

manufacturers. Advantages of these partnerships could help Toyota to improve innovative concepts

for sourcing strategies.

Referring to Barney, the sourcing strategy of Toyota is valuable, because Toyota has created a long-

term partnership with Denso for their components. The sourcing strategy is not rare, because more

competitors, like Nissan have implemented a long-term partnership with Denso.

The strategy of Toyota was not inimitable, however the strategy was, according to Ahmadjian and

Lincoln (2001) not implemented yet by other car manufacturers.

It is difficult to say if the strategy is non-substitutable, the information does not provide a clear answer

to that question.

5.2.2 Global sourcing at Zara fashion in the apparel industry An example of a company who implements a global sourcing strategy is Zara. As described in a case

study of Ghemawat and Nueno (2003) Zara has purchasing offices in Europe and Asia. They describe

that due to the growth of clothes globally, Zara expanded their sourcing to China.

Interesting to see is that one-half of the garments of Zara purchased is ‘gray’, this because Zara can

easily change their finished goods in the right color. Ghemawat and Nueno (2003) state that this

process of purchasing one-half of the garments in ‘gray’, creates maximum flexibility in the supply

chain for Zara.

Why do international operating companies deploy global sourcing strategies?

22

Furthermore the authors describe that Zara deals with 200 external suppliers for their raw materials.

The process of dying, patterning and finishing of the semi-finished clothes is managed by Comditel.

Comditel also distributes the finished garments to in-house manufactures of Zara.

Due to the fact that Zara want to create a flexible and fast supply chain, Zara want to react fast on a

customer demands.

Ghemawat and Nueno (2003) describe that the most riskiest fashion items for Zara, were sourced and

produced in small batch size and close to the market, because Zara can react fast on customer demands

and the garments can reordered if they sell well.

To support the findings of Ghemawat and Nueno (2003), Tokalti (2008) investigated in a case study

the benefits of the sourcing strategy for the company Zara. He states that Zara moved several

manufacturing facilities to Morocco, Turkey and India, since these countries work with high-quality

garments with the required responsiveness and flexibility.

To evaluate the strategy implemented at Zara and to investigate whether Zara gains competitive

advantage to their competitors, an explanation is given of the key competitors of Zara in the apparel

industry.

Ghemawat and Nueno (2003) describe that the main competitors of Zara fashion are; The Gap (USA),

Hennes & Mauritz (Sweden) and Benetton (Italy).

To refer to Barney, Zara fashion has created competitive advantage to their competitors in their supply

chain.

The global sourcing strategy of Zara has created value for the entire supply chain. Flexibility and fast

response to customer demand in every country. To reflect this to the competitors of Zara, Ghemawat

and Nueno (2003) state The Gap, Hennes & Mauritz and Benneton have a too long supply chain to

react to the customers fast.

Moreover the strategy is also rare, because Zara outsourced the processes of dying and patterning to

Comditel.

The sourcing strategy is inimitable, because Zara has 200 external suppliers, most of these suppliers

are long-term suppliers of Zara. This minimized formal contractual commitments for the external

suppliers.

It is difficult to say that the sourcing strategy is non-substitutable. There is no evidence that provides a

solid answer to that question. It can be concluded that the sourcing strategy of Zara may be

implemented in The Gap, Hennes & Mauritz and Benneton.

Why do international operating companies deploy global sourcing strategies?

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5.4 Conclusion

In this chapter an overview of two views of competitive advantage has been given. These ways are not

similar to each other. The first view is the industry focused view and Porter (1980) developed the five

forces model to position international operating companies in his framework.

According to this framework, companies can measure the competitive rivalry. Another way to express

competitive advantage is the resource-based view of Barney (1991). He developed four resources for

companies to measure their strategy in comparison with competitors.

To find a relationship between global sourcing strategies in different industries and competitive

advantage, some case studies in the automotive industry and apparel industry have been investigated.

It can be concluded that in the automotive industry the competitive advantage of global sourcing is

low. This because many car manufacturers implemented global sourcing strategies to react on

customers’ demands.

In the apparel industry the relationship between global sourcing strategy and competitive advantage is

more significant. In case of Zara, it can be concluded that external suppliers, long-term contract with

suppliers, creates a flexible supply chain to response to customers demands.

Figure 8: Competitive advantage in different industries

Why do international operating companies deploy global sourcing strategies?

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Chapter 6 conclusion and recommendations In this chapter a summary is given of the most important findings of this thesis. In the second section

deals with the research question and the complete research. In the final chapter limitations and

recommendations are given for further research.

6.1 Summary of findings

There are differences between global sourcing and single sourcing for international operating

companies. To implement a global sourcing strategy, companies have to consider their export market

and the degree of process and product innovation. Single sourcing can be characterized by long-term

relationships with suppliers.

It is commonly agreed that the opportunities to implement a global sourcing strategy are the price of

the products, the availability of the products and the quality of the products. In recent years researchers

state that more priorities play a significant role in implementing a global sourcing strategy. These

priorities are the reliability of deliveries, mutual trust between supplier and firm and sharing

knowledge and information.

In contract to the opportunities of global sourcing, risks of implementing a global sourcing strategy is

discussed. Researchers state that political environment of a country, tariff barriers, communication

difficulties and exchange rates are the most important risks of implementing a global sourcing

strategy.

Traditionally, companies select their suppliers on qualitative decisions, like quality, price and delivery.

In recent years a trend can be indentified how to select suppliers. Researchers investigated the main

determinants of supplier selection. It is commonly agreed that supplier selection at this moment is

focused on improvement of the products and creating strategic partnerships with their suppliers and

select suppliers for different product levels.

Two case studies of Toyota in the automotive industry and Zara fashion in the apparel industry show

the competitive advantage of implementing global sourcing. Both case studies represent other results.

In the case study of Toyota, the competitive advantage, according to the resource-based view seems to

be low.

In the case study of Zara, the competitive advantage is significant compared to the key competitors in

the apparel industry. More external suppliers en developing a long-term relationship with many

suppliers over the world, creates competitive advantage for Zara.

Why do international operating companies deploy global sourcing strategies?

25

6.2 Discussion

This research tried to give a answer to the following research question: Why do international

operating companies deploy global sourcing strategies? Researchers have presented the advantages of

global sourcing and the disadvantages of global sourcing. Literature on this subject proved that

international operating companies deploy global sourcing, because of the price of the products, the

quality and the availability of the products. Literature proved that the ‘traditional’ decisions to

implement global sourcing are still important, although sharing information and knowledge and

creating long-term contracts with suppliers is becoming more important.

In order to create an overview of different views of global sourcing the opportunities and risks of

implementing global sourcing are compared.

Many researchers investigate the opportunities and risks in global sourcing strategies. The

opportunities of global sourcing gets more attention in recent years, so studies were found on this

subject specifically. Interesting to see is that a trend can be indentified in the recent years, regarding

the opportunities of global sourcing.

Some studies investigated the risks of implementing global sourcing strategies. The author of this

thesis compare the opportunities and risks based on the studies in both subjects.

To provide a link between competitive advantage and implementing a global sourcing strategy, case

studies are investigated. These case studies provides evidence, that tell us that it do matter in which

industry a company operates.

Nevertheless, it is important for companies to adopt a global sourcing strategy, that enable competitive

advantage. As discussed in this thesis, a global sourcing strategy is the sourcing strategy that deploys

opportunities and sharing information and knowledge.

6.3 Limitations and recommendations

A limitation in this research, is the fact that, there is a lack of scientific sources on the competitive

advantage, related to global sourcing strategies. In the literature few studies have been done to

investigate the competitive advantage in different industries.

This study investigates two specific industries , to measure competitive advantage. The results of these

case studies cannot be generalized to other industries.

Why do international operating companies deploy global sourcing strategies?

26

Another possible aspect is that, global sourcing is not specified in global single sourcing and global

multiple sourcing. The literature provides not enough evidence to separate these sourcing strategies.

Nevertheless, both strategies have a great influence on the same decisions companies have to make in

order to implement a global sourcing strategy. Therefore, this research does not give a clear answer to

specific industries or companies. This thesis is explains why companies deploy global sourcing

strategies.

There are not many studies who investigated global sourcing in different industries, specifically the

comparison between global sourcing and competitive advantage. Therefore, there is no observational

data that provide the differences between the industries.

It is advisable to study the differences between the industries of implementing global sourcing

strategies. Observational data would provide evidence to support the theoretical findings in this thesis.

Besides, some of the discussed case studies are narrowly studied, and can be an opportunity for further

research.

Furthermore, it would be interesting to investigate the difference between global single sourcing and

global multiple sourcing. Since, there are differences between these strategies, it is recommended to

separate these strategies and compare the results of for example empirical data that can be provided in

case studies.

Why do international operating companies deploy global sourcing strategies?

27

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