Process of Sourcing in Emerging Markets Particularities and Challenges  

Table of Contents

  List of Abbreviations  i

  List of Figures and Tables  ii

1  Introduction  1

1.1  Problem Formulation and Objectives  1

1.2  Course of the Investigation  2

2  Characteristics of Sourcing  3

2.1  The Global Sourcing Theory  3

2.2  The Sourcing Process  4

3  Emerging Markets Risks and Opportunities of Global Sourcing  7

4  Case Study in Global Sourcing The Jungheinrich AG  11

  Concluding Remarks and Outlook  13

  Reference List  15

  List of Appendixes  19

Appendix   20

  Honourable Declaration  22

Process of Sourcing in Emerging Markets – Particularities and Challenges i  

List of Abbreviations

EME … Emerging Market Economy  

EU … European Union  

FDI … Foreign Direct Investment  

IMF … International Monetary Fund  

LCC … Low-Cost Country Sourcing  

MNC … Multi-National Company  

MNE … Multi-National Enterprise  

RFP … Request for Proposal  

WTO … World Trade Organization  

Process of Sourcing in Emerging Markets – Particularities and Challenges ii

List of Figures and Tables

Figure 1: The Seven-Step Sourcing Process………………………………………………4

Process of Sourcing in Emerging Markets – Particularities and Challenges 1

1 Introduction

1.1 Problem Formulation and Objectives

Global sourcing or sourcing in emerging markets per se is becoming more and more influential, and is a crucial factor of success in many companies. Globalisation is certainly one of the most outstanding phenomena in our today’s world. The ever-changing environment, like Chinas’ membership in the World Trade Organisation (WTO) and the European Union (EU) enlargement makes the whole sourcing procedure extensive, but at the same time generates the possibility of a competitive advantage in relocating to emerging countries and developing a clearly defined sourcing process. Some of the key factors, which promoted this development were improved communication methods and technologies (e.g. the increased use of the Internet) (Zeng, 2003, p. 367), facilitated financial transfers (Stiglitz, 2003, pp. 505-524), as well as the opening of markets for foreign companies, such as China with its Open Door Policy (Yun Wing Sung, 1991, pp. 61-91). Especially German companies are facing a multitude of obstacles in their domestic market: High salaries and non-wage labour costs, market saturation and elevated production costs, associated with rising product prices, as well as increasing market dynamism and competitiveness forcing the companies to constantly adapt to those changes. Many companies have thus seen an opportunity in global sourcing and moved to emerging market economies (EMEs) in the search for reducing their costs (Heakal, 2003). The foremost reason why those companies move to aspiring markets like China, India, South-East Asia, Eastern Europe or Latin America are the lower wholesale prices in those countries (Kalkowsky, 2006). However, most firms have a different approach to the sourc-

ing process and

The right choice of a global supplier in an emerging market has an immense impact on the competitiveness of a company and it is therefore of substantial importance to be acquainted with the mostly diverse countries and the use of those markets by other companies. (Van Weele, 2005, p. 49) Nevertheless, the relocation to emerging countries for sourcing activities can have other causes such as the opening up of foreign markets, and tied to this the

Process of Sourcing in Emerging Markets – Particularities and Challenges 2

construction of production sites in this country as a consequence of Local Content Obligations. In China, for example, this involves an inevitable transfer of a certain part of the value chain in order to add value to this economy. (Monczka & Trent, 2003, pp. 26-37) Subsequently, companies pursue local sourcing activities there and are then able to export the goods sourced from the emerging markets to their domestic markets in the ensuing stage.

This study investigates the strategic challenges of German retail companies in conducting and balancing their sourcing activities in order to respond to the particularities and challenges of specific emerging markets. At the same time an analysis on sourcing process operations and structures, together with risks and opportunities of different markets is carried out.

1.2 Course of the Investigation

In the remainder of this seminar paper, the characteristics of the sourcing process are initially analysed in section two and insights into the global sourcing theory are given. The sourcing process is subdivided in its different stages and the detailed characteristics of each phase are evaluated. Chapter three then approaches the topic of emerging markets, answering questions as to their significance in a worldwide economy and thereupon comes back to the global sourcing process with its particular challenges and opportunities. In the fourth section a practical case study of a German company, operating in emerging markets is reported, and individual practices and strategies in low cost country sourcing are summarised. The concluding chapter five subsumes all relevant findings and presents an outlook of potential future developments. Altogether, this paper focuses, due to the limited scope, only on the general global sourcing and sourcing process differentia as well as emerging markets and their risks and chances, rather than giving an in depth analysis on sourcing strategies or the factors that set apart global sourcing from other sourcing strategies.

Process of Sourcing in Emerging Markets – Particularities and Challenges 3

2 Characteristics of Sourcing

2.1 The Global Sourcing Theory

Global sourcing in general cannot be clearly defined, but one can say that it is an alignment of procurement strategy aimed at exploiting global efficiencies in production or even a systematic, global market-oriented and border-crossing procurement activity (Kerkhoff, 2005, p. 52). According to Zeng (2003), the strategy that “companies develop their products in Europe and the USA, manufacture in Asia and Latin America, and sell worldwide . . . is known as global sourcing and is defined by Monczka and Trent (1991) as the integration and coordination of procurement requirements across worldwide business units, looking at common items, processes, technologies and suppliers.” (p. 367) Hence, global sourcing is more than a simple relocation and exploitation process of crossgeographic arbitrages. The right knowledge of foreign markets and suppliers makes it possible for companies, which operate in various countries and engage in Foreign Direct Investment (FDI), so-called multi-national enterprises (MNEs) (Waters, 2001, p. 46) or multinational companies (MNCs), to foresee trends and profit from a previously identified strategy and a potential choice of suppliers on a global scale. This option can guarantee the company the choice of the most desirable and cost-efficient suppliers in a country with a competitive advantage in specific technologies and manufacturing practices. In the long term, cost reductions can be achieved through the resulting economies of scale as global sourcing allows easier purchasing control and coordination (e.g. instead of several batch requirements from different suppliers, only one single purchase batch is sufficient) (Lysons & Farrington, 2006, p. 168), particularly via more effective long-term planning, technical standardisation and exploitation of suppliers and new components, respectively. (Howells & Wood, 1993, pp. 142-155) Altogether, the MNC has to develop a global sourcing strategy and align it with its utilisation of internal resources (McIvor, 2000, p. 27) in order to create a solid foundation and make it a profit driver.