Sourcing in emerging markets

Table of Contents

List of Abbreviations

List of Figures and Tables

1 Introduction
1.1 Problem Formulation and Objectives
1.2 Course of the Investigation

2 Characteristics of Sourcing
2.1 The Global Sourcing Theory
2.2 The Sourcing Process

3 Emerging Markets - Risks and Opportunities of Global Sourcing

4 Case Study in Global Sourcing - The Jungheinrich AG

Concluding Remarks and Outlook

Reference List

List of Appendixes

Appendix

Honourable Declaration

List of Abbreviations

illustration not visible in this excerpt

List of Figures and Tables

Figure 1: The Seven-Step Sourcing Process

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 sourc­ing process and consequently varying success amongst them. 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 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.

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.

2.2 The Sourcing Process

The sourcing process is a considerable element of the whole corporate strategy and is subdivided into several different parts.

In the literature, the general sourcing process is usually broken down into 5 to 7 stages, which are illustrated in Figure 1 below and generally include an analysis, implementation and control phase. In the majority of cases, company-specific sourcing process initiatives are led by a central sourcing group, namely a cross-functional project team of sourcing ana­lysts. (Handfield, 2006, p. 569)

The first three stages signify the investigation, assessment and analysis phases and take place before a universal sourcing strategy is adopted. As Zeng (2003, p. 368) points out, the company should at first conduct an internal assessment and determine its core and non-core activities. In the next step a product-related market screening is performed and mar­ket/customer requirements and trends are evaluated in order to determine objectives, target markets and positioning. According to Kerkhoff (2006, p. 49), the product analysis, which is a part of the data analysis, compares the relation between weight and value of the prod- uct, as well as the required quantities and the possibility of planning it, logistical require­ments, production requirements, duty rates, and required certificates. He further points out that the material group analysis, also a part of the entire data analysis, is recommended for the global sourcing approach as costs are reduced by breaking down a product into its stra­tegic components.

In the third stage, the firm should collect supplier information so as to find eligible and well-performing suppliers. First recommendations are laid down in an initial business plan and thereafter a sourcing strategy is developed in stage four. This implies developing speci­fications and endstate scenarios such as baseline criteria for quantifying improvements, which are checked upon in a process plan in order to refine the strategy throughout the process. The success of sourcing depends largely on the quality and integrity of those speci­fications. A clearer picture of a strategy can be obtained by considering the potential impact different strategies may have on costs and internal stakeholders. (Banfield, 1999, p. 223) Moreover, sourcing levers are identified and potential mega-supplier approaches are deter­mined.

The next step is the solicitation and evaluation phase, where request for proposal (RFP) evaluation criteria (i.e. the means of competitive negotiation to acquire a solution to a busi­ness need) are developed, which are used for the classification of a “short list” of potential suppliers. (Virginia Information Technologies Agency [VITA], 2006)

A “short list” is developed subsequent to biding proposals and a sampling process of sup­pliers which were selected in a “long list” beforehand. From the “short list” suppliers are evaluated on a checklist and later undergo an extensive testing phase with site visits being conducted and supply and logistics capacities being checked. With regard to efficient logis­tics, companies should work together solely with other companies that have proven their capability several times and have the necessary operating knowledge to ensure the smooth and punctual delivery of goods and a supply concept that actually guarantees supply and takes the incidental capital lockup costs into consideration. (Kerkhoff, 2005, p. 54) Reviewing all those criteria, the sourcing strategy is revised, cost models are finalised, and an estimation of the economic and operating benefits of finishing the task is carried out. (Zeng, 2003, p. 368-369)

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