Global Sourcing Decisions Research Articles

A new dimension in global value chains: Control vs. delegation in input procurement

We study the optimal organizational structure of a firm in a sequential supply chain when investments are relationship specific and contracts are incomplete. The market structure for the final product is monopolistic competition. Production follows a preordered sequence and exhibits high complementarity between stages. There are three types of actors: upstream suppliers, downstream suppliers and final-good producers (firms). In designing their organizational structure, firms in each stage choose not only the ownership structure, i.e., vertical integration versus outsourcing, but also the input-procurement strategy, i.e., delegation versus control. The separation of asset ownership and input-procurement rights leads to a novel organizational mode, which we call ‘outsourcing with delegation.’ We determine the implications of this new organizational mode in firms’ global sourcing decisions.

Global sourcing decisions for a multinational firm with foreign tax credit planning

Various countries’ tax laws adopt certain forms of a so-called worldwide tax system which levy taxes on their countries’ multinational firms’ global incomes at home country tax rates. To avoid double taxation, they permit tax cross-crediting, i.e., a global firm can use excess foreign tax credits (the portion of foreign tax payments that exceed its home country tax liabilities) generated from a subsidiary (located in a high-tax country) to offset the tax obligations from another subsidiary (located in a low-tax country). This article studies a multinational firm’s global sourcing decisions at two subsidiaries located in low- and high-tax countries, respectively, with an objective of maximizing its expected worldwide after-tax profit. We characterize the optimal sourcing decisions under various decentralized and centralized after-tax profit-maximizing performance measures. We show that the global firm can devise an easily implementable incentive scheme to optimally coordinate the decentralized sourcing decisions made at the two subsidiaries. We also demonstrate that decentralized policies with after-tax performance measures are more advantageous than the traditional pretax policies when the “tax effects”, i.e., the impacts of certain features of the tax laws (such as tax cross-crediting) on supply chain decisions, are significant.

Incorporating Risks and Costs into Global Sourcing Decisions

The aim of this research paper is to develop a cost model that incorporates the minor cost factors that are often ignored while making major sourcing decisions. Literature review and excerpts have been studied in detail showing the progress in research over the years. An appropriate methodology was designed to do so. Several subjective factors were also quantified in order to calculate the costs. The DEA approach was used to calculate the weighted sums of inputs and outputs and hence the efficiency rate. Based on the rate, the beneficial supplier was chosen. The company allocated 200 million INR for outsourcing. The method figured out that even with the best choice being selected, approx 112 million INR would actually be consumed, taking into account many factors. A well developed approach and strategy for offshoring greatly affects the total cost of outsourcing.

Incorporating risks and costs into global sourcing decisions

Incorporating risks and costs into global sourcing decisions

The magnitude of a product recall: offshore outsourcing vs. captive offshoring effects

The escalation in product recalls in recent years is attributed to the rise of globalisation and associated challenges of offshoring. Extant SCM research suggests that product recalls have a significant negative impact on financial performance, but gaps exist relative to the managerial actions to minimise their impact. Recall response strategies have become more important in the press, given that a single recall may result in the mandatory withdrawal of millions of products from the market, with firms incurring enormous logistics costs and brand damage. In this study, we address this gap in the research, and using a measure of product recall defined as the volume of products withdrawn from the market due to product quality failure. We explore the scale of the recall in the context of pharmaceutical sector global sourcing strategies, exploring whether the variation in global sourcing decisions not only increases the likelihood of a recall, but also influences the capability to minimise the total cost of recall. Our results suggest that offshore outsourcing and captive offshoring have opposite effects in terms of their influence on the magnitude of product recall. We summarise the implications through a compelling set of insights for future global sourcing strategy research themes.

Integrating Spatial Analytics in Global Sourcing Decisions

The ability or inability to develop an effective, reliable supplier network can often play a major role in determining an organization’s competitive position. Especially in today’s era of a complex global economy, disruptions to an organization’s supply chain can drastically undermine its ability to compete. We analyze the interaction between density risk, or risk related to the proximal relationships between suppliers, and environmental risk, or risk arising from conditions affecting a supplier’s local business environment. We provide a powerful supply base risk mitigation strategy incorporating spatial analytics to enhance our analyses. We develop a multi-objective program to manage these factors and recommend minimal risk supply bases. We detail the interaction between objectives in an example and discuss the ramifications for managers. This work will assist managers in their efforts to build a supply base that meets the cost and efficiency demands of their organization.

The Margins of Global Sourcing: Theory and Evidence from US Firms

We develop a quantifiable multi-country sourcing model in which firms self-select into importing based on their productivity and country-specific variables. In contrast to canonical export models where firm profits are additively separable across destination markets, global sourcing decisions naturally interact through the firm's cost function. We show that, under an empirically relevant condition, selection into importing exhibits complementarities across source markets. We exploit these complementarities to solve the firm's problem and estimate the model. Comparing counterfactual predictions to reduced-form evidence highlights the importance of interdependencies in firms' sourcing decisions across markets, which generate heterogeneous domestic sourcing responses to trade shocks. (JEL D24, F14, F23, L14, L21)

Only Time Can Tell: Temporal Quality in Trade and Sourcing

Temporal quality is a dimension of quality that only time can tell. When firms scale down their investment in temporal quality, their blueprints are less able to stand the test of time, necessitating their replacement by even newer blueprints, and generating an illusion for observers that firms have speeded up their innovations. We also investigate when will Northern firms invest more in temporal quality than Southern firms do, and how their choices of temporal quality interact with their global sourcing decisions.

The role of critical incidents in the development of global sourcing-results of an in-depth case study

Since the early 1980s companies have tried to implement coherent global sourcing strategies. Research has identified many benefits and motives for global sourcing. However, it remains unclear how companies are reaching higher levels of global sourcing. We employed a single embedded case study at Royal Brinkman (leader in the Dutch horticulture industry) to explore the role of critical incidents in the development of global sourcing strategies. Company documents and interviews revealed which critical incident had a substantial impact on the development of global sourcing strategies. Apparently, critical incidents can initiate and further stimulate global sourcing. Global sourcing decisions were mainly an opportunistic response to unforeseen events. Reactive strategies appear to govern global sourcing despite stated intended strategies. A proactive strategy does not appear to be a requirement to make progress in the global sourcing stages model.

Rethinking Legal Services in the Face of Globalization and Technology Innovation: The Case of Radiant Law

In this teaching case, we challenge students to think about and discuss how the legal profession can adapt to disruptive forces caused by the globalization of skills and technology innovation. The case focuses on how one UK-based firm – Radiant Law – completely rethought the delivery of legal services. This ‘new age’ law firm continually tested the boundaries of new ways to leverage the value of global talent and technology. For example, it changed its pricing and sourcing models, adopted new technologies, hired freelance IT professionals globally to develop software to streamline its legal work, engaged outsourcing providers in India and (subsequently) in South Africa. After nearly 3 years in South Africa, Radiant Law contemplated switching its sourcing model again. The Radiant Law story supports discussion about challenges associated with global sourcing decisions and the present and future shape of professional work and services in an increasingly technology-enabled, globalized world.

Global Operations Sourcing Strategy: A Chinese Perspective

We report on a survey of global manufacturing sourcing decisions that were made by multi-national companies operating in China. Based on responses from Chinese managers, the survey explored explicit sourcing and technology company decisions. The analysis provided insights into what these firms are doing with respect to global sourcing and why they are doing so. Analysis of the responses also shed light on how these decisions were made. Our results tested the validity of various arguments that have been put forward to predict or explain the pattern of global sourcing shifts that is taking place. The key takeaways from this paper are 1) the observed pattern of decision making, which can be grouped into dominant flows, indicates that re-shoring to the developed economies is not happening on a large scale and that shifting in and out of and within China is occurring with direction and reasons dependent on the particular industry, and 2) insight into the fact that that firms are evaluating complex tradeoffs when making both technology and sourcing decisions and thus a single dominant driver, such as labor cost, does not adequately explain the observed patterns.

Global Sourcing and Foreign Knowledge Seeking

We develop and test a rigorous theoretical account of firm global sourcing decisions, distinguishing the antecedents of offshore integration from those of offshore outsourcing. Although traditional theories of global sourcing focus on lowering costs, we argue that as high-performing firms seek to develop new capabilities by tapping into foreign knowledge, they will increasingly turn to offshore integration to reap colocation benefits and overcome expropriation challenges. By contrast, offshore outsourcing will be preferred by less profitable firms seeking to tap into low-cost inputs, especially as investments in information technology lower monitoring costs. Empirical analysis of a comprehensive panel of cross-border product transfers by U.S. manufacturing multinational corporations from 1989 to 2004 reveals support for these arguments. Our study thus highlights the effect of foreign knowledge seeking on global sourcing and helps explain recent trends in this increasingly important phenomenon, especially the increasing reliance on offshore integration in technology intensive industries. This paper was accepted by Bruno Cassiman, business strategy.

The Margins of Global Sourcing: Theory and Evidence from U.S. Firms

This paper studies the extensive and intensive margins of firms' global sourcing decisions. We develop a quantifiable multi-country sourcing model in which heterogeneous firms self-select into importing based on their productivity and country-specific variables. The model delivers a simple closed-form solution for firm profits as a function of the countries from which a firm imports, as well as those countries' characteristics. In contrast to canonical models of exporting in which firm profits are additively separable across exporting markets, we show that global sourcing decisions naturally interact through the firm's cost function. In particular, the marginal change in profits from adding a country to the firm's set of potential sourcing locations depends on the number and characteristics of other countries in the set. Still, under plausible parametric restrictions, selection into importing features complementarity across markets and firms' sourcing strategies follow a hierarchical structure analogous to the one predicted by exporting models. Our quantitative analysis exploits these complementarities to distinguish between a country's potential as a marginal cost-reducing source of inputs and the fixed cost associated with sourcing from this country. Counterfactual exercises suggest that a shock to the potential benefits of sourcing from a country leads to significant and heterogeneous changes in sourcing across both countries and firms.

An Evolving Landscape: The Reconfiguration of Global Value Chain Activities

Received wisdom has it that the forces of globalization are inevitably leading to significant reconfiguration of value chain activities at both the macro (regional) and the micro (firm) levels. Some of the key trends associated with this process include rapid changes in comparative and firm-specific advantage, increased geographic diversity in innovation activity and output, and vertical disintegration of industrial and organizational structures. This symposium brings together new papers from experts in the field to probe key aspects of this global reconfiguration of value chain activities, examining such issues as (i) how multinational firms’ global sourcing and supplier selection decisions are responding to changes in the innovative landscape; (ii) how these changes impact the role of regional clusters in global value chains; and (iii) what this all means for the development (or erosion) of capabilities at both the firm and regional level. Vertical De-Integration and Innovation in Regional Clusters Presenter: Juan Alcacer; Harvard U. Presenter: Gordon Hanson; U. of California, San Diego Presenter: Haris Tabakovic; Harvard U.

An interaction approach to global sourcing: A case study of IKEA

This study explores the process of global sourcing through a case of the Swedish furnishing retailer IKEA from an interaction perspective. With a point of departure in the streams of existing research on global sourcing and the internationalization process of firms through networks, a research question is proposed concerning supply network interactions as an influence in the global sourcing process. The study uses an in-depth qualitative case study methodology, focusing on IKEA and its development of a supply network for the PAX wardrobe system during the years 2003–2009. The findings draw on 29 interviews in Sweden and China, ranging from interviews with the supply management function of IKEA to interviews with Swedish and Chinese suppliers and sub-suppliers. The findings show that the global sourcing process is influenced by interactions and network effects between supply network actors. In particular, we find that relationships between suppliers were identified and set up by IKEA, but cascaded into deeper interactions amongst suppliers at different supply network tiers. Our study contributes to global sourcing research in indicating the importance of interaction amongst supply network actors, showing how the global sourcing strategy of one actor may significantly influence the sourcing strategies of other actors. Global sourcing decisions therefore need to be understood and coordinated across global supply networks.

Patent Laws, Product Lifecycle Lengths, and the Global Sourcing Decisions of U.S. Multinationals

This paper investigates the impact of patent laws on firms’ global sourcing decisions. I develop a theoretical model of multinational firms’ location and production decisions in the presence of cross-country differences in intellectual property rights and cross-sector differences in the length of product lifecycles. I show that patent reforms are irrelevant to firms’ sourcing decisions in industries with rapid product turnover. By contrast, strong patent laws attract affiliate activity in industries with longer product lifecycles, because products in these industries are more likely to be imitated prior to obsolescence and are thus more reliant on patent enforcement to protect revenues. These effects are more pronounced for less-productive firms. Using comprehensive panel data on the sales, assets, and employment of U.S. multinationals and their affiliates abroad and a new measure of product obsolescence, I find robust empirical support for these predictions. Effects are significant along all margins of multinational activity, including multinational presence by country and sector, total affiliate sales conditional on presence, the number of affiliates, and affiliate-level sales. In addition, I find that stronger patent rights tilt the balance of cross-border activity away from exports and toward multinational activity. Finally, my identification strategy allows me to isolate the causal effect of patent reforms on multinational operations, which the prior literature has struggled to establish because of concurrent policy reforms.

On risk and cost in global sourcing

The benefits of global sourcing as part of a firm’s purchasing strategy have been widely discussed in the academic literature, yet so there are few models that provide a comprehensive risk and cost assessment to guide managerial decision-making. In particular, few models capture the dynamic nature of many cost drivers, such as transportation and energy cost, labour cost inflation, or carbon offset costs, in their calculations. In this paper, we define three basic cost elements in global sourcing: static, dynamic and hidden cost, and use this framework to assess the costs and risks inherent in global sourcing scenarios from three different points of view: conceptually, analytically and empirically. We highlight the key learning points from each perspective and propose a total cost model of how to make informed global sourcing decisions, which we test by applying it to three exploratory case studies of global sourcing arrangements.

Style goods pricing with demand learning

For many industries (e.g., apparel retailing) managing demand through price adjustments is often the only tool left to companies once the replenishment decisions are made. A significant amount of uncertainty about the magnitude and price sensitivity of demand can be resolved using the early sales information. In this study, a Bayesian model is developed to summarize sales information and pricing history in an efficient way. This model is incorporated into a periodic pricing model to optimize revenues for a given stock of items over a finite horizon. A computational study is carried out in order to find out the circumstances under which learning is most beneficial. The model is extended to allow for replenishments within the season, in order to understand global sourcing decisions made by apparel retailers. Some of the findings are empirically validated using data from U.S. apparel industry.

Global Sourcing Decisions and Firm Productivity: Evidence from Spain

We investigate the link between productivity of firms and their sourcing behavior. Following Antras & Helpman (2004) we distinguish between domestic and foreign sourcing, as well as between outsourcing and vertical integration. A firm’s choice is driven by a hold-up problem caused by lack of enforceable contracts. We use Spanish firm-level data to examine the productivity premia associated with the different sourcing strategies. We find strong empirical support for the predictions of the model.

Limits to global sourcing?: Strategic consequences of dependency on international suppliers: Cluster theory, resource-based view and case studies

This paper argues for the inclusion of an analysis of industry clusters when making decisions about global or local sourcing. Suppliers are viewed as valuable resources that can contribute to a firm's competitive advantage. Two contrasting case studies illustrate that, contrary to common expectations, a high global sourcing quota does not necessarily improve a firm's competitiveness. Rather, there may be limits to global sourcing, if a firm is unable to become a preferred customer of its strategic suppliers. Achieving preferred customer status is easier for firms located in the same regional or national cluster than it is for foreign firms attempting to access a remote supplier. This paper contributes a new and more differentiated approach to global sourcing decisions by integrating the cluster concept. Furthermore, our findings enrich the discourse of strategic management by supporting the view that resources which enable a firm to achieve sustainable competitive advantages can be located beyond its legal boundaries.