Effective Global Sourcing and Supply for Superior Results

Transcription

1 Effective Global Sourcing and Supply for Superior Results Robert M. Monczka, Ph.D. Distinguished Research Professor of Supply Chain Management W. P. Carey School of Business Arizona State University Director Strategic Sourcing and Supply Chain Strategy Research Robert J. Trent, Ph.D. Associate Professor of Management and Supply Chain Program Director Lehigh University Department of Management and Marketing Kenneth J. Petersen, Ph.D. Associate Professor of Management Colorado State University Department of Management 2006

2 Effective Global Sourcing and Supply for Superior Results Robert M. Monczka, Ph.D. Distinguished Research Professor of Supply Chain Management W. P. Carey School of Business Arizona State University Director Strategic Sourcing and Supply Chain Strategy Research Robert J. Trent, Ph.D. Associate Professor of Management and Supply Chain Program Director Lehigh University Department of Management and Marketing Kenneth J. Petersen, Ph.D. Associate Professor of Management Colorado State University Department of Management Copyright 2006 Institute for Supply Management TM and the W. P. Carey School of Business at Arizona State University. All rights reserved.

3 Acknowledgments The lead researchers for this study would like to publicly acknowledge and thank the following individuals for their contributions to this effort. Kathleen A. Chester of the Institute for Supply Management (ISM) provided general administrative support for this report. Roberta Duffy, Director, Executive Programs and Publications,, provided critical editorial support for completion of the final report. Debbie Maciejewski, Research Manager,, managed the solicitation process for the Web survey and administered the ongoing communications with survey respondents. 2 Effective Global Sourcing and Supply for Superior Results

4 Author Biographies Robert M. Monczka, Ph.D., is Research Professor of Supply Chain Management at Arizona State University. He is also Director of Sourcing and Supply Chain Strategy Research at, where he focuses on sourcing and supply strategy development, innovation, and implementation and leadership of Project 10X. Dr. Monczka has researched, taught and consulted about strategic purchasing/ sourcing and supply chain management strategies and implementation processes. He has been principal investigator on two major National Science Foundation projects in the area of procurement and supply chain strategy and practice. He is a coauthor of a leading purchasing text titled Purchasing and Supply Chain Management. Dr. Monczka has consulted with more than 100 companies of the Fortune 500. Robert J. Trent, Ph.D., is an Associate Professor of Management and the Supply Chain Management Program Director at Lehigh University. He has authored or coauthored three previous CAPS studies and dozens of articles appearing in numerous journals, and is the coauthor of a textbook titled Purchasing and Supply Chain Management, now in its third edition. Prior to his return to academia, Bob spent seven years with Chrysler Corporation. Kenneth J. Petersen, Ph.D., is currently an Associate Professor of Management at Colorado State University. Previously, Dr. Petersen was on the faculty at Arizona State University and the University of Oregon, where he conducted research and taught in the graduate, honors undergraduate and undergraduate programs in the areas of supply chain management, operations management and e-commerce. Dr. Petersen received a Ph.D. from Michigan State University, where he studied operations and sourcing management and information systems. 3

5 Table of Contents Acknowledgments Author Biographies Table of Contents Index of Figures Executive Summary Background to the Research Key Findings Guidance for Senior Management Chapter 1: Introduction Research Objective and Focus Global Sourcing and Supply Defined Research Approaches Demographic Profile of Participants Report Structure Chapter 2: Current State of Global Sourcing and Supply Global Reach; Supplier and Procurement Center Locations Firm Performance Requirements Global Spend Profile Reasons to Source Globally Results Achieved From Global Sourcing Major Problems Encountered When Sourcing Globally Implementation of Requirements Important to Global Sourcing Effectiveness. 15 Conclusion Chapter 3: A Prescriptive Model for Global Sourcing and Supply Five-Level Model Global Sourcing and Supply Process Models Chapter 4: Critical Success Factors Impacting Global Sourcing and Supply Excellence Global Sourcing Performance Outcomes Global Sourcing and Supply Critical Success Factors Individual Features That Relate to Global Sourcing Excellence Using Scenario Comparisons to Identify Global Sourcing Drivers Summary of Key Performance Findings Chapter 5: Organization Decision Making and Governance Organizing for Integrated Global Sourcing Global Strategy Development Using Teams to Support Global Sourcing Case Discussions Effective Global Sourcing and Supply for Superior Results

6 Chapter 6: Cross-Enterprise Integration Integration Across the Organization Formal Improvement Processes and Information Sharing With Suppliers Integration Through Communication Technology and Information Systems.. 53 Human Resource Requirements for Integrated Global Sourcing Overall Observations Chapter 7: International Purchasing Offices and Sourcing in Emerging Markets.. 59 International Purchasing Offices Emerging Market/Lower-Cost Country Sourcing China Sourcing Chapter 8: Global Sourcing and Supply Trends and Strategic Directions Competitive Challenges Survey Respondent Suggestions for Improvement Global Sourcing and Supply Strategy Trends Assessment Questions Concluding Comment Appendix A: E-Survey Research Methodology Appendix B: Global Sourcing and Supply E-Survey Questionnaire

7 Index of Figures Figure 1: Global Spend Is Increasing Figure 2: Global Annual Spend by Purchase Family Figure 3: Reasons for Sourcing Globally Figure 14: Figure 15: Relating Specific Features to Global Sourcing Performance Outcomes Global Sourcing Leadership Council Responsibilities Figure 4: Results of Global Sourcing and Supply Figure 16: Separating Centralized and Decentralized Supply Activities Figure 5: Qualitative Rating Performance Results Figure 17: Typical Center-Led Sourcing/ Supply Organizational Structure Figure 6: Most Critical Factors Affecting Global Sourcing and Supply Performance Figure 18: Global Sourcing: One Company Leveraging With Commodity Leadership Figure 7: Figure 8: Figure 9: Degree of Critical Factor Implementation Current and Expected Worldwide Sourcing Levels, Current and Expected Worldwide Sourcing Levels, Figure 19: Typical Regional Structure Figure 20: Figure 21: Cross-Locational/Cross-Functional Teaming Cross-Locational/Cross-Functional Teaming Requirements for Success Figure 10: Global Sourcing and Supply Strategy Development and Implementation Figure 22: Global Sourcing Human Skill Requirements Figure 11: Common Global Sourcing Process Figure 12: Performance Factors Figure 13: Factors Related to Global Sourcing Performance Outcomes Effective Global Sourcing and Supply for Superior Results

8 Executive Summary Background to the Research Global sourcing and supply, combined with outsourcing, has been at the forefront of company thinking over the past five years. During the late 1980s and early 1990s, international purchasing was a key procurement strategy. The declining competitiveness of many Western firms, along with the belief that international purchasing could help reverse this decline, led many firms to turn to global sourcing. Substantial international purchasing research has examined the issues that firms must address and the outcomes that firms should expect to attain from sourcing offshore as they compete against aggressive and skilled foreign companies. However, little information and in-depth analysis concerning how firms should structure themselves to move beyond reactive international purchasing is available. Specifically, few accounts exist describing how firms globally coordinate their sourcing and supply activities or what factors support a globally integrated view of sourcing and supply. Although many executives have concluded that a need exists to develop global sourcing processes and strategies and to view global sourcing as a key strategic tool, available details concerning how to achieve these goals are few. The lack of detail concerning how to develop and implement global sourcing and supply strategies is a primary driver behind this research. The need to replace anecdotal insights into global sourcing with research-based insights is also critical. This research addresses the above issues by analyzing information from field research with 16 companies and the results of an e-survey of 167 sourcing and supply executives representing more than 25 industries. Key Findings The research showed that the magnitude of global sourcing is increasing. In 2000, firms in this study sourced between 21 percent and 30 percent of their total annual spend on a worldwide basis. In 2005, total nondomestic spend increased to between 31 percent and 40 percent. It is projected that in 2010 the total dollar amount of purchased items obtained from nondomestic sources will be between 41 percent and 50 percent. The primary reasons for sourcing globally are cost related. On average, respondents achieved cost reductions of 19 percent and a total cost-of-ownership reduction of 12 percent. The research revealed that the primary problems encountered when sourcing globally include the following: Lengthened material/components/service lead times Supplier delivery and quality Locating and evaluating qualified suppliers Lack of qualified business unit personnel to support the worldwide sourcing process However, these and other potential issues were at most considered a moderate problem. None of the issues were considered major. Overall, it appears that the issues can be overcome with focus and resources. The research determined that for the most critical factors affecting global sourcing and supply, implementation at responding firms was at best only partial. These factors are as follows: 7

9 1. Information availability 2. Personnel with required worldwide knowledge and skills 3. Knowledge of suppliers available worldwide 4. Time to develop worldwide strategies 5. Use of cross-functional teams 6. Effective logistics planning and execution 7. Availability of suppliers with worldwide capabilities The research determined that eight factors positively and statistically related to global sourcing performance outcomes. These eight factors were the following: 1. A defined global sourcing process 2. Centrally coordinated/centrally led decision making 3. Site-based control of operational activities 4. Information sharing with suppliers 5. Real-time communication tools 6. Availability of critical resources 7. Global sourcing and contracting systems 8. International purchasing office support Global sourcing and supply effectiveness will reflect how well these factors, in the aggregate, are implemented with continuous improvement. Finally, the research revealed that organizations are and will be further integrating and coordinating global sourcing strategies across functions and locations to achieve superior performance. Guidance for Senior Management Based on the findings from this and prior research, the research team recommends a focused investment in global sourcing and supply. The investment should cut across all factors identified as critical to performance, because they appear to be highly interrelated. Improvement in only one or two areas may limit continuous performance improvement. Any investment should provide a significant payback, not only in cost reductions but also in achieving best supplier performance and preferential treatment from suppliers worldwide. In addition, sourcing could enhance customer market penetration. The report discusses in detail the strategies and practices that companies have implemented and identifies those strategies and practices that are strongly related to performance, to provide a basis for selecting improvement priorities. 8 Effective Global Sourcing and Supply for Superior Results

10 Chapter 1: Introduction During the late 1980s and early 1990s, international purchasing was a key procurement strategy. The declining competitiveness of many Western firms, along with the belief that international purchasing could help reverse this decline, led many firms to turn to global sourcing. Substantial international purchasing research has examined the issues that firms must address and the outcomes that firms should expect to attain from sourcing offshore as they compete against aggressive and skilled foreign companies. However, little information and in-depth analysis concerning how firms should structure themselves to move beyond reactive international purchasing is available. Specifically, few accounts exist describing how firms globally coordinate their sourcing and supply activities or what factors support a globally integrated view of sourcing and supply. Although many executives have concluded that a need exists to develop global sourcing processes and strategies and to view global sourcing as a key strategic tool, available details concerning how to achieve these goals are few. The lack of detail concerning how to develop and implement global sourcing and supply strategies is a primary driver behind this research. The need to replace anecdotal insights into global sourcing with research-based insights is also critical. Looking across almost every industry points to one clear conclusion competitive and customer pressures to improve are relentless and severe. Firms must improve their cost structures, innovate, penetrate markets, reduce or manage risk and establish flexible global and regional suppliers and supply chains. Those firms that succeed will be the ones that understand how to leverage and coordinate their activities on a worldwide basis. For many, integrated global sourcing and supply may offer one of the best opportunities to achieve the kinds of performance breakthroughs and crossorganizational consistency required to compete in highly competitive markets. For companies that produce and sell worldwide, integrated global sourcing and supply should no longer be viewed as an emerging approach. The pursuit of competitive advantage will routinely require the development of global sourcing and supply strategies and a strategic planning process that supports them. Research Objective and Focus The analysis and conclusions presented throughout this report focus on the critical factors, benefits, progress, problems, strategy approaches, best practices, lessons learned, and results from the development of global sourcing and supply practices and strategies. The overall objective of this research is to identify the features and characteristics of organizations that excel in integrated global sourcing and supply. This study also generally addresses the growth in sourcing from emerging markets such as China and India. Specific research objectives are to identify the following: 1. How firms organize to pursue integrated global sourcing and supply 2. The critical processes that firms use to achieve superior results 3. Trends in global sourcing and supply 4. Future global sourcing and supply strategies that link to overall competitive performance The focus or emphasis of this research relates directly to the drivers that executive managers are experiencing as their firms progress toward greater globalization of sourcing and supply. These drivers include: 9

11 A continuous need to reduce material costs A need to better understand emergent and lowcost economies as viable sources of supply A movement toward greater globalization and expanding a firm s competitive presence worldwide Increased outsourcing of noncore requirements and activities Global Sourcing and Supply Defined Global sourcing and supply moves beyond international purchasing (where the focus is typically buying from a country to achieve lower unit prices, usually from one company to another). Global sourcing and supply includes the integration of sourcing, operations and, frequently, design/development and/or internal customers located in different countries. It includes the purchase of combined requirements of more than one of a company s business units/sites from outside the borders of the country where the purchased goods or services are used. Frequently, requirements are established on a cross-functional and cross-locational basis. Requirements may include goods and service specifications, using locations, volumes, quality, delivery, flexibility and so forth. Research Approaches This report is the result of a comprehensive study that investigated the development of global sourcing processes and strategies. The project included an extensive review of previous research, case study information obtained through site visits to 16 leading companies, and quantitative data collected via e-survey from executives who are responsible for the international and global sourcing activities at their firms. The quantitative portion of the research relied on survey data provided by supply executives who are part of databases maintained by the Institute for Supply Management (ISM), and various groups making up the International Federation of Purchasing and Supply Management. Of 850 requests to participate in the study that were forwarded electronically, 167 respondents agreed to enter a secure website to complete the global sourcing and supply survey, yielding nearly a 20 percent response rate. Data collection occurred from June to September of In the case study portion of this project, researchers visited firms that they believed demonstrate characteristics of effective global sourcing organizations. Field visits featured face-to-face interviews with sourcing team members and leaders, executive steering committee members, executive leaders and others who are closely involved with global sourcing, such as logistics representatives. Site visits provided insights and details that could not be gained from quantitative data alone. This information appears in the report as supporting examples, best practices and detailed case studies. Demographic Profile of Participants The quantitative data presented throughout this report include responses from 167 firms. More than threequarters of participants responded to the research questions from a companywide or strategic business unit perspective rather than from the point of view of a division, region or plant. Participating firms vary widely in size based on their 2004 sales: 2004 Sales Percent Cumulative in U.S. $ of Firms Percent Under $100 million 18% 18% $101 $500 million 10% 28% $501 million $1 billion 10% 38% $1.1 billion $3 billion 16% 54% $3.1 billion $5 billion 8% 62% $5.1 billion $10 billion 15% 77% $10.1 billion $15 billion 7% 84% $15.1 billion $20 billion 4% 88% Over $20 billion 12% 100% Participating firms also vary widely based on their 2004 total purchases: 2004 Purchases Percent Cumulative in U.S. $ of Firms Percent Under $100 million 21% 21% $101 $500 million 14% 35% $501 million $1 billion 16% 51% $1.1 billion $3 billion 18% 69% $3.1 billion $5 billion 11% 80% $5.1 billion $10 billion 11% 91% $10.1 billion $15 billion 3% 94% $15.1 billion $20 billion 4% 98% Over $20 billion 2% 100% Participating firms are headquartered primarily in the United States (66 percent) and Western Europe (26 percent). Almost all of the remaining participants are located in Canada, Mainland China and South America. 10 Effective Global Sourcing and Supply for Superior Results

12 Although no single industry dominates the pool of participating companies (the sample includes companies from more than 25 industries), respondents are predominantly from industrial (i.e., manufacturing oriented, both discrete and process) rather than nonindustrial (i.e., service oriented) firms. Service, healthcare and financial institutions, while represented in the study, comprise no more than 15 percent of the total sample. The qualitative examples and case studies presented throughout this report were compiled from information gained directly during site visits to leading companies. Company names are either omitted or altered throughout this report to protect the confidentiality requests of participating companies. The research team visited 16 firms from the following industries: Chemical (1) Oil exploration, refining and distribution (2) Consumer products (3) Telecommunications components (1) Automotive components and systems (2) Industrial transportation equipment (1) Computers and peripherals (1) Electronics (4) Industrial automation equipment (1) Report Structure The remainder of this report discusses the following topics and provides answers to the following questions: Chapter 2 Current State of Global Sourcing and Supply What is the global reach? What is the global spend? Where is it? Is it increasing? By how much? Why are firms sourcing globally? What are the results? What gaps are there to achieving results? Chapter 4 Critical Success Factors Impacting Global Sourcing and Supply Excellence What factors and specific elements are related to sourcing performance? What performance levels are achieved? Chapter 5 Organization Where are decisions made? What organization structures are implemented for global sourcing and supply? How are teams utilized? Chapter 6 Cross-Enterprise Integration How is internal and cross-enterprise integration achieved? What processes are used to improve integration? What is the role of e-systems? Chapter 7 International Purchasing Offices and Sourcing in Emerging Markets What are IPO roles, responsibilities and locations? What major problems are encountered in sourcing to lower-cost economies? What total cost considerations must be evaluated? What are some key considerations in sourcing from China? Chapter 8 Global Sourcing and Supply Trends and Strategic Directions What are the competitive trends? What global sourcing and supply trends are critical to achieving superior results? What key questions can managers and executives use to assess their firm s capabilities? Chapter 3 A Prescriptive Model for Global Sourcing and Supply What levels of global sourcing and supply maturity are firms achieving? What typical processes are firms using to source globally? What high-level factors are critical in sourcing and supply? 11

13 Chapter 2: Current State of Global Sourcing and Supply This chapter attempts to answer the following questions, primarily based on information from the e-survey: What is the global reach of responding companies? Where are suppliers and sourcing centers located? What performance improvements are required of firms overall? Is global sourcing increasing? If so, by how much? What are the reasons to source globally? What results are being achieved? What major problems do firms encounter when sourcing globally? To what degree have factors critical to effective global sourcing been implemented? Global Reach; Supplier and Procurement Center Locations Responding firms were clearly global in reach. Overall the firms sold, developed, produced, sourced and established supplier networks worldwide. At least 40 percent of firms served each of 18 markets worldwide. Major design/engineering locations were found worldwide: United States (91) Western Europe (91) Mainland China (29) Eastern Europe (23) India (22) Canada (19) Overall Asia/Pacific (79) Operating/manufacturing locations were also found worldwide: United States (100) Western Europe (98) Mainland China (62) Mexico (50) South America (49) Canada (49) Overall Asia/Pacific (225) Major supplier and procurement center locations were as follows: Major Supplier Locations Major Procurement Locations United States (118) United States (101) Western Europe (118) Western Europe (98) Mainland China (81) Mainland China (48) Eastern Europe (59) South America (30) Japan (59) Canada (29) Canada (57) Other Asia (26) India (52) Mexico (26) Other Asia (49) India (24) South America (47) Eastern Europe (24) Mexico (45) Australia (23) Taiwan (42) Japan (20) Australia (41) Hong Kong (17) South Korea (40) South Africa (12) Middle East (28) South Korea (8) South Africa (20) Central America (7) Hong Kong (20) Middle East (6) Other (17) Taiwan (6) Central America (13) Other (6) 12 Effective Global Sourcing and Supply for Superior Results

14 Firm Performance Requirements In addition to having a global reach, surveyed firms were expected to provide significant year-over-year performance improvements to stay competitive. On a scale from 1 to 5, with 1 being low, 3 being medium, and 5 being significant, expected annual improvement ratings were: Quality of goods/services 4.40 Price/cost 4.31 On-time delivery/perfect orders 4.01 Flexibility/responsiveness 3.95 Product/service technology 3.92 Collaborative working relationships with external customers 3.70 New product/service development time 3.54 Process technology 3.38 Friendliness to physical environment 2.99 Overall, quality, cost, delivery to schedule, responsiveness and product/service technology innovation improvements dominated the competitive pressures facing firms. Global Spend Profile Figure 1 shows the growth of the global annual spend from 2000 to 2010 (projected). During this period, 38 percent of firms will annually make over 60 percent of their expenditures on a global basis, up from 18 percent of firms in In addition, a separate question asked survey respondents the approximate percentage of annual spend sourced on a worldwide basis for 2000, 2005 and The total dollar value of goods sourced offshore, particularly from emerging markets, has increased dramatically over the last five years, and steady growth is projected to continue. In 2000, firms in this study sourced between 21 percent and 30 percent of their total annual spend on a worldwide basis. In 2005, total nondomestic spend increased to between 31 percent and 40 percent. It is projected that in 2010 the total dollar amount of purchased items obtained from nondomestic sources will be between 41 percent and 50 percent. The global annual spend is more focused on direct purchases than on other items, such as MRO, services and capital equipment/facilities; see Figure 2. These items are more likely to be sourced in-country or regionally. Reasons to Source Globally Consistent with supply management data collected annually throughout the 1990s as well as global sourcing research conducted in 2000, cost considerations continue to be the primary influence affecting the decision to source globally. Three of the top five reasons for sourcing worldwide are cost related: best price/cost, internal margin and profitability requirements, and labor cost and availability (see Figure 3). Best price/cost has by far the highest rating. Figure 1 Global Spend Is Increasing 13

15 Figure 2 Global Annual Spend by Purchase Family Global Annual Spend 0 20% 21 40% 41 60% 61 80% % Direct goods (i.e., materials that go directly into your end product/service) 35.3%* 19.2% 7.2% 18.6% 16.8% Maintenance, repair and operating supplies 67.7% 10.2% 6.6% 5.4% 4.8% Services 64.1% 16.2% 5.4% 4.2% 4.2% Capital equipment/ facilities 49.7% 20.4% 10.8% 5.4% 7.8% Finished goods (i.e., complete items for resale) 51.5% 7.2% 6.0% 12.0% 12.0% * Percent of firms Figure 3 Reasons for Sourcing Globally Interestingly, research conducted in 2000 found that access to technology was the second most important reason for sourcing globally. While access to technology certainly remains an important consideration for many firms (the sixth highest reason to source globally), costrelated reasons have become more widely cited. This shift reflects the growth in sourcing from emergent markets over the last five years, particularly sourcing from China. Emergent market sourcing is primarily cost focused rather than technology focused. Results Achieved From Global Sourcing Price, total cost of ownership, customer performance, quality, on-time delivery, responsiveness, flexibility and inventory held by buying firms are all improving. However, supplier-held inventory investment is growing, and transportation/logistics costs are increasing, although minimally. See Figure 4. The performance results based on qualitative ratings were similar. See Figure 5. Major Problems Encountered When Sourcing Globally Respondents encountered the following primary problems when sourcing globally: Lengthened material/components/service leadtimes Supplier delivery 14 Effective Global Sourcing and Supply for Superior Results

16 Figure 4 Results of Global Sourcing and Supply* Figure 5 Qualitative Rating Performance Results* Supplier quality Locating and evaluating qualified suppliers Lack of qualified business unit personnel to support the worldwide sourcing process However, these and other potential issues were at most considered moderate problems. None of the issues were considered major. Overall, it appears that the issues can be overcome with focus and resources. Implementation of Requirements Important to Global Sourcing Effectiveness Firms were asked to rate both the criticality of various requirements for success and the degree of implementation of a similar, but smaller, list of capabilities. Analysis of these two questions in combination shows that firms have, at best, only partially implemented the strategies, practices and resources necessary to maximize effectiveness of global sourcing and supply. Improvement in these areas is critical to longer-term success. Figures 6 and 7 show the results. 15

17 Figure 6 Most Critical Factors* Affecting Global Sourcing and Supply Performance Figure 7 Degree of Critical Factor Implementation* Conclusion With the globalization of firms and increasing competitive pressures, global sourcing spend is increasing annually. Currently, global sourcing is being driven by price/cost considerations and is achieving positive results. However, full implementation of the critical factors affecting performance still lags. Company resources must focus on making improvements in these important areas, especially once the initial primary price benefits of low-cost country sourcing are achieved. These findings demonstrate that firms have achieved a somewhat low level of maturity regarding integrated global sourcing and supply. Significant improvements will be driven by improving personnel, increasing available information and enhancing cross-locational and cross-functional teaming. 16 Effective Global Sourcing and Supply for Superior Results

18 Chapter 3: A Prescriptive Model for Global Sourcing and Supply Although the terms international purchasing and global sourcing and supply are often used interchangeably, the two concepts are fundamentally different. International purchasing refers to commercial purchase transactions between a buyer and a supplier located in different countries. This type of purchase is typically more complex than a domestic purchase. Organizations must contend with longer and more complex goods and service pipelines, increased use of third parties, currency fluctuations, customs requirements and a host of other variables, such as language and time differences. Global sourcing differs from international buying in scope and complexity. It involves integrating and coordinating common items and materials, processes, designs, technologies and suppliers across worldwide sourcing, engineering and operating locations. Five-Level Model International purchasing and global sourcing may be considered as a series of evolving levels or stages along a continuum (see Figures 8 and 9). An internationalization of the supply process takes place as firms evolve or progress from domestic purchasing to the coordination and integration of common items, processes, designs, technologies and suppliers across worldwide locations. The figures summarize this progression and indicate the current and future levels where firms expect to operate over the next three to five years. We define firms operating at Levels II and III as engaging in international purchasing and firms operating at Levels IV and V as practicing integrated global sourcing and supply. Figure 8 Current and Expected Worldwide Sourcing Levels,

19 Figure 9 Current and Expected Worldwide Sourcing Levels, 2005 An organization progresses (usually reactively) from Level I to Level II either because it is confronted with a requirement for which no suitable domestic supplier exists or because competitors are gaining an advantage from their international purchasing efforts, particularly from lower costs. First-level firms may also find themselves being driven toward the second level by supply disruptions, rapidly changing currency exchange rates, a declining domestic supply base, inflation within the home market or the sudden emergence of worldwide competitors. At this level, international purchasing is usually limited or performed on an ad hoc or reactive basis. Firms often make international purchasing a part of their sourcing strategy (i.e., move to Level III) when they recognize that this can lead to improved sourcing performance. Strategies at this level are not coordinated across worldwide buying sites or locations and usually focus on price improvements. Level III begins to define proactive rather than reactive worldwide sourcing. Level IV, the first of the two global sourcing and supply levels in our model, features integrated and coordinated sourcing strategies across worldwide buying or site locations. Operating at this level requires worldwide information systems, personnel with advanced knowledge and skill sets, extensive coordination and communication mechanisms, an organizational structure that supports global integration and executive leadership that clearly articulates a global vision. The strategy integration that occurs at this level is primarily across buying locations rather than across functional groups. Strategy development focuses primarily on the development of global agreements with suppliers. Within a Level IV organization, discrepancies may exist in the extent of coordination and integration. An organization may coordinate the sourcing of capital equipment requirements across worldwide locations quite well but fail to coordinate its raw material requirements. Another firm may be excellent at coordinating facility services on a worldwide basis but may not pursue opportunities within other service areas. For a company that has developed pockets of global excellence, the challenge becomes one of advancing to addressing global opportunities wherever they exist. Organizations operating at Level V, the highest global sourcing level, have achieved the cross-locational integration that firms operating at the fourth level have also achieved. However, Level V firms have achieved two primary distinctions from firms at Level IV. The first is that integration and coordination occur not only across worldwide buying locations but also across other functional groups, including operations, marketing, engineering, logistics and customers. This integration, which often involves the coordination of design/work scope and procurement activities, occurs during the development of new products, services and technology as well as during the sourcing of items or services to fulfill continuous demand or aftermarket requirements. The second distinction is that Level V participants focus on more than simply developing global agreements or contracts. These firms work to standardize supply management processes, practices and systems across worldwide units or sites. Over the last five years, we have witnessed real growth toward Level V global sourcing, although the improvement was not nearly as great as firms anticipated in In 2000, only 16 percent of firms operated at Level V, whereas almost 30 percent now indicate that they currently operate at Level V. While most firms, particularly larger firms with worldwide 18 Effective Global Sourcing and Supply for Superior Results

20 operations, expect to progress toward Level V sourcing within the next few years, the reality is that many organizations will lack the ability, the willingness and even the need to operate at these levels. For some, a progression toward Level IV would be a major accomplishment. For others, particularly smaller and medium-size firms with limited geographic reach and capabilities, Level III might be a realistic goal. The strategic sourcing planning process should include an assessment of the appropriate global sourcing level at which the firm should strive to operate. In addition, firms do not appear to achieve their forecasts. In 2000, 70.1 percent of firms indicated that they expected to be at Level IV or V in three to five years. In 2005, only 52.6 percent had achieved that status. Perhaps the journey is more difficult than imagined. Global Sourcing and Supply Process Models In addition to the five-level integration model, we have developed two process models. The first describes the overall company process for establishing global sourcing and supply effectiveness, as shown in Figure 10. Figure 11 shows a global sourcing process at the specific purchase family level. Overall Global Sourcing and Supply Strategy Development The model posits 12 steps, which are outlined in Figure 10 and should be self-explanatory. However, a number of additional implementation steps are critical to the success of global sourcing and supply. These include: 1. Firms of all sizes must recognize the need to perform at global levels of performance by outsourcing and globally sourcing to take advantage of labor, scale and proximity to market advantages. 2. Global sourcing and supply requires executivelevel understanding, consensus and resources for effective implementation. 3. Global sourcing and supply strategies must be aligned and linked with other manufacturing/operations, six sigma improvements and design/scope-of-work strategies to move toward Level IV V status. 4. Executives must recognize the need for and commit resources to improving and standardizing global sourcing and supply processes. 5. The firm must develop the best possible representation (people) on the global commodity/purchase family team. 6. Integrated and worldwide information systems must be developed. Figure 10 Global Sourcing and Supply Strategy Development and Implementation 19

21 Figure 11 Common Global Sourcing Process 7. Managers must measure performance to aggressive goals. Purchase Family/Category Sourcing Process Again, common processes should be established for all category teams to follow on a worldwide basis. Each purchase category should also have a documented strategy. The 11-step process in Figure 11 reflects the major elements of the sourcing process. Critical success factors include: 1. Building and maintaining purchase item and supplier performance databases 2. Acquiring significant knowledge about current and potential suppliers capabilities on local, regional and worldwide levels 3. Evaluating supplier proposals/quotations on a total cost or value basis rather than price alone 4. Strategy execution and continuous review of results and changing social, political and economic conditions The last factor is absolutely critical and significant when sourcing worldwide. Overall, as we will confirm later from the e-survey data, establishing global standard processes and a crosslocational/cross-functional perspective are critical to the effectiveness of global sourcing. Two good-practice company examples follows to illustrate the point. Good Practice: Global Engineering and Procurement Process One company that has actively pursued integrated global sourcing is Air Products and Chemicals, 1 a U.S.- based company that designs and operates industrial gas and chemical facilities worldwide. In 1999, company executives were surprised when an internal study concluded that the company would have to lower operating costs by 30 percent to remain competitive globally. Low-cost competitors had emerged in Asia/Pacific, and industrial buyers were increasingly viewing the company s products as commodity items, factors that together created extensive downward pricing pressures. In their effort to improve performance, Air Products managers concluded that global sourcing offered extensive and untapped opportunities. The company has historically operated in an engineer-to-order environment, using regional design and procurement centers. This has resulted in highly customized design and procurement efforts for each new project, as well as a lack of coordination between the company s North 1 Company name used with permission. 20 Effective Global Sourcing and Supply for Superior Results

22 American and European units. Competitive pressures compelled the company to coordinate design and sourcing activities across its worldwide locations. One of Air Products most significant actions was the development of a global engineering and procurement process. The design of each new facility now involves an extensive analysis between U.S. and European centers to identify areas of commonality, standardization and synergy in procurement and design. Crossfunctional teams, with members from the United States and Europe working jointly, develop common design specifications and contracts that satisfy each center s needs while supporting future replacement and maintenance requirements. After five years of global sourcing experience and with more than 100 global agreements in place, Air Products is averaging 20 percent in cost savings compared with regional sourcing and design practices. Furthermore, worldwide design and procurement centers have better aligned their sourcing philosophies and strategies among the centers and with the company s business strategy. Procurement managers now work with marketing to include expected savings from in-process global sourcing projects when responding to customer proposals. Integrated global sourcing is providing a new source of competitiveness to a company that operates in a mature industry. Good Practice: Deciding What Purchase Categories Will Be Global This large Japanese manufacturer in the transportation industry evaluates each new product it is designing to determine whether it is for global use or is country/region-specific. If the product is to be global, the manufacturer decides which internal plants and locations will be assigned for production. The company also determines which raw material (or component) suppliers will be the primary tier one suppliers. Both the internal plants and raw material (or other requirements) suppliers are evaluated on the basis of their ability to meet anticipated future needs on a worldwide basis. Based on this global sourcing decision, company engineers and procurement personnel focus on communizing design to meet worldwide requirements, standardizing material, meeting target prices and working with the internal sites and external suppliers to meet company goals. The overall process therefore has a global focus from the beginning of product development and includes establishing global suppliers to meet company needs. 21

23 Chapter 4: Critical Success Factors Impacting Global Sourcing and Supply Excellence Of particular interest to executive managers are factors that drive the performance outcomes sought from integrated global sourcing. This chapter identifies the factors that relate directly to high-performance outcomes. Chapter 4 is divided into five sections. The first section describes how respondents evaluated the benefits their organizations derive from global sourcing. The next three sections identify the factors and the specific elements that correspond to improved sourcing performance. The final section summarizes the key performance findings from the e-survey. Global Sourcing Performance Outcomes scale, respondents evaluated the results achieved across 19 performance areas from their organization s global sourcing and supply efforts. The scale ranged from significantly worse results to significantly improved results for each item assessed. Respondents next evaluated the quantitative results achieved across 10 performance areas from their global sourcing and supply efforts. Through factor analysis, a data simplification and reduction technique, we identified a set of nine performance factors, each of which includes one or more individual indicators. Figure 12 identifies the nine performance factors and details the items that comprise each factor. The performance outcomes from global sourcing were evaluated in two ways. Along a five-point perceptual Figure 12 Performance Factors Performance Factor 1: Lower Purchase Price/Cost This single-item factor includes the perceptual change in price/cost that resulted from the implementation of global sourcing and supply strategies. Performance Factor 2: Lower Total Cost of Ownership This single-item factor includes the perceptual change in total cost of ownership that resulted from the implementation of global sourcing and supply strategies. Performance Factor 3: Reduced Supply Chain Costs This three-item factor combines the quantitative changes in purchase price, transportation and logistics costs, and total cost of ownership that resulted from the implementation of global sourcing and supply strategies. 22 Effective Global Sourcing and Supply for Superior Results

24 Performance Factor 4: Improved Supply Chain Performance Other Than Price This 10-item factor combines the perceptual changes in supply chain performance indicators other than price that resulted from the implementation of global sourcing and supply strategies. The items in this factor include improvements in (1) material/component service quality, (2) access to product technology, (3) delivery reliability, (4) ordering cycle time from suppliers, (5) purchasing process transaction costs, (6) supplier responsiveness and flexibility to buying unit needs, (7) access to process technology, (8) transportation/logistics costs, (9) buying company inventory levels and (10) supplier inventory levels. Performance Factor 5: Improved Quality This single-item factor includes the quantitative change in supplier quality that resulted from the implementation of global sourcing and supply strategies. Performance Factor 6: Improved Sourcing Process This five-item factor combines the perceptual changes in a variety of sourcing process indicators that resulted from the implementation of global sourcing and supply strategies. The items in this factor include improved (1) standardization or consistency of the sourcing process, (2) early supplier involvement during new product/service development, (3) supplier relationships, (4) client and stakeholder satisfaction with sourcing and (5) executive satisfaction with sourcing. Performance Factor 7: Improved Supplier Cycle Time, Delivery Performance, and Flexibility and Responsiveness This three-item factor combines the quantitative changes in cycle time, delivery performance and flexibility/responsiveness that resulted from the implementation of global sourcing and supply strategies. The items in this factor include supplier order delivery cycle time, supplier on-time delivery and supplier responsiveness and flexibility. Performance Factor 8: Better Inventory Management across the Supply Chain This two-item factor combines the quantitative changes in inventory investment costs that resulted from the implementation of global sourcing and supply strategies. The items in this factor include changes in the respondent s inventory investment costs and changes in the supplier s inventory investment costs. Performance Factor 9: Improved Overall Performance to External Customers This single-item factor includes the quantitative change in overall performance to the business unit s external customers due to the implementation of global sourcing and supply strategies. Global Sourcing and Supply Critical Success Factors A primary objective of this research was to identify a set of factors that drive global sourcing performance. Factor analysis was first used to group dozens of individual features or elements into a reduced set of factors or categories. Next, we performed regression analyses to identify those factors that relate directly to the performance factors described in the previous section (see Appendix A for discussion). Our analysis found that the factors that drive global sourcing performance include a defined process to support global sourcing, centrally coordinated/centrally led decision making, site-based control of operational activities, real-time communication tools, information sharing with suppliers, availability of critical resources, sourcing and contracting systems and international purchasing office support. 23