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

25 Next, we discuss each of the factors most related to improved global performance outcomes. Defined Process to Support Global Sourcing A rigorous and well-defined global process is, without question, a primary determinant of global sourcing success. A defined process helps the organization to overcome many of the differences that are present across worldwide locations, including social culture and laws, personnel skills and abilities, and business culture. A defined process helps to align very different participants and practices around the world while reducing duplication of efforts. Without a process and its enforcement, the self-interests of individual sites and operating locations often take precedence over broader corporate interests. Firms that have a well-established global process to guide their sourcing activities report achieving a wide range of positive outcomes, including reduced price and lower total cost of ownership, reduced supply chain costs, improved supply chain performance other than price, improved sourcing process outcomes, better management of inventory across the supply chain and improved overall performance to external customers. Thus, a well-defined process that builds in best practices is a major driver of successful global sourcing. A thorough global sourcing process contains certain features. These include regular strategy coordination and review meetings with worldwide managers; a formally defined process for developing global strategies; and the integration of technical specialists, operations, logistics and sourcing personnel across worldwide locations. Other features include the use of cross-functional/cross-locational teams to develop and manage worldwide sourcing strategies, fully trained and experienced global sourcing personnel who view sourcing requirements from a worldwide perspective, executive leadership that communicates a clear global sourcing and supply vision, and suppliers who are interested in worldwide contracts. Internal customer support with buy-in to worldwide agreements is also critical, as is an ability to measure the benefits attained from global sourcing. Although this research did not identify an optimal stepby-step process to follow (firms often take very different approaches when pursuing global opportunities), we can identify some critical characteristics that advanced processes and organizations have in common: Advanced organizations will have in place a defined global sourcing process that is communicated and understood throughout an organization. This process becomes the foundation for pursuing integrated global sourcing. These organizations will also have a process owner who has responsibility for reviewing and improving the process; conducting lessonslearned sessions at the end of each project; forwarding results to all global team members; and assuming ownership for managing, reviewing and reestablishing global agreements as required. Executive leaders will practice subtle control throughout the global sourcing process by requiring teams to provide updates and to achieve process milestones. Centrally Coordinated/Centrally Led Decision Making An important distinction in global sourcing is between those activities that are maintained at a centrally coordinated or centrally led level and those that are maintained at a decentralized or site level. Maintaining central control and leadership over activities that are strategic in nature enhances the probability of achieving a range of improved sourcing process outcomes. These include: 1. Improved standardization or consistency of the sourcing process 2. Improved early supplier involvement during new product/service development 3. Improved supplier relationships 4. Improved client, stakeholder and executive satisfaction with sourcing The central leadership s activities include developing purchase family strategies, locating potential supply sources, evaluating and selecting suppliers, negotiating and establishing contracts, managing supplier relationships, managing supplier development activities, establishing specifications, developing supplier performance measurement systems and providing supplier performance feedback. Site-Based or Decentralized Control of Operational Activities Although most industries are seeing a shift toward centrally led, centrally coordinated and/or centralized global sourcing, the reality is that this applies primarily to strategy planning and development. Firms that also decentralize operational activities during global sourcing are likely to realize lower total cost of ownership, better inventory management across the supply chain and improved overall performance to external customers. Operational activities that are managed at a decentralized level include issuing material releases to 24 Effective Global Sourcing and Supply for Superior Results

26 suppliers, expediting goods when necessary, resolving performance problems with suppliers, developing and executing requirements schedules, planning inventory levels, developing logistics plans and providing input for measuring supplier performance. Chapter 5 discusses the separation of operational and strategic activities in greater depth. Real-Time Communication Tools A process as complex as integrated global sourcing cannot succeed without effective communication tools, particularly when participants are located across geographically dispersed locations. These tools allow real-time sharing of information and coordination of global sourcing activities. Firms that rely extensively on real-time communication tools to support their global efforts are likely to realize a wide range of desirable performance outcomes. These outcomes include lower purchase price, cost and total cost of ownership; reduced supply chain costs; improved supply chain performance other than price and an improved sourcing process. Real-time communication tools include Web-based meeting software, electronic mail, video conferencing, telephone conferencing and face-to-face meetings. Chapter 6 discusses real-time communication tools in more detail. Information Sharing With Suppliers Successful global sourcing requires both access to a range of critical information and the willingness to share that information with important suppliers on a worldwide basis. Firms that share information with worldwide suppliers realize a variety of positive sourcing outcomes. In particular, firms that share performance information with their most important worldwide suppliers realize lower purchase price and cost. Performance information that should be shared includes details about supplier quality, delivery, cycle time, flexibility and cost performance. Shared information might also include rankings of supplier performance against other suppliers. A second aspect of information sharing, and one that relates to a broader list of performance outcomes, involves the sharing of other types of information besides performance data. Sharing of nonperformance information relates directly to reduced supply chain costs, improved supply chain performance other than price and improvements to the sourcing process. Examples of nonperformance information that might be shared include an assessment of a supplier s technology contribution, future technology plans and future demand and investment plans. Supplier feedback about the buying company s performance is also included in this category. Chapter 6 discusses further the types of information that successful organizations share with important worldwide suppliers. Availability of Critical Resources Important but often overlooked variables include the resources that promote the development of global strategies. The commitment of needed resources has the potential to separate marginal from exceptional global initiatives. Insufficient resources can cause participants to question the importance of global sourcing as well as management s commitment to the process. Firms that provide critical resources to their global sourcing participants increase the probability of realizing lower price and cost, reduced supply chain costs, better inventory management across the supply chain and improved overall performance. Examples of the resources that affect global success include budget support for travel, access to qualified personnel, time for personnel to develop global strategies and the availability of required information and data. An earlier study of cross-functional sourcing teams found that time was the least available of all organizational resources. This study also found that the availability of time correlated higher with team effectiveness than any other resource category. In other words, teams that had the time to pursue their assigned tasks were more effective, on average, than those that did not have the time. The importance of time also applies to global sourcing, since most firms use teams to coordinate their global efforts. A special resource category includes the personnel who are required to be a part of the global process. A concern that was often cited during this research was a lack of personnel with the necessary knowledge, skills and abilities to understand and support global sourcing objectives. Chapter 6 addresses this topic further. Sourcing and Contracting Systems It is hard to imagine a process as complex as global sourcing being successful without access to required information. As mentioned earlier, the availability of information is a critical resource category that differentiates successful from less successful initiatives. One way to ensure access to information is to develop technology systems that make critical information available on a worldwide basis. Firms that have systems that provide access to relevant information are more likely to report lower total cost of ownership and improved sourcing process outcomes from global sourcing. Examples of system features and the information they provide include a worldwide database of purchased goods and services; common part coding schemes; contract 25

27 management modules; systems for measuring contract compliance, worldwide goods and service usage by location and purchase prices paid by location; and electronic system interfaces across sites and businesses. Systems that manage supply chain transactions are also important. Firms with transactional capabilities are more likely to report improved supplier delivery during the performance of global contracts. Transactional capabilities include electronic material releasing, invoicing and funds transfers; receiving advanced shipping notices; and providing visibility to goods across the supply chain. International Purchasing Office Support Over the last five years, a growth in international purchasing offices (IPOs) corresponds to an increase in higher-level global sourcing. Many firms rely on their IPOs to provide operational support during the development of global agreements as well as throughout the life of an agreement. Firms that rely on IPOs to support operational (rather than strategic) aspects of global sourcing are likely to realize supply chain performance improvements, including greater access to product and process technology, improved delivery reliability, reduced ordering cycle time from suppliers, reduced purchasing process transaction costs and increased supplier responsiveness and flexibility. The operational activities that IPOs support include facilitating import and export requirements; measuring supplier performance; resolving quality, delivery and other problems with suppliers; coordinating technology plans with suppliers and performing logical coordination. Chapters 5 and 7 further discuss the use of international purchasing offices. Figure 13 summarizes the areas where the eight factors just presented statistically relate to specific performance outcomes. Please refer to Figure 12 (pp ) for a full definition of each performance outcome. Individual Features That Relate to Global Sourcing Excellence A second way to determine what elements relate to global sourcing performance involves identifying the individual features (rather than the broader factors identified above) that relate to specific outcomes. Figure 14 identifies the individual items or features that relate to specific sourcing outcomes. The findings presented in this table are consistent with those presented in the previous section. In addition, they provide a checklist of strategies and practices that, if implemented well, will improve global sourcing and supply performance. Items that are important here but that did not uniquely appear in the factor analysis include an executive requirement or mandate to source worldwide, an executive steering committee to guide the process, suppliers who are interested in worldwide contracts, availability of suppliers with worldwide capabilities and effective logistics planning and execution. Using Scenario Comparisons to Identify Global Sourcing Drivers A third method for evaluating global sourcing drivers involves making scenario comparisons. Respondents considered a least and most successful global sourcing experience and evaluated how much they agreed or disagreed with a set of statements, along a five-point scale that ranged from strongly disagree to strongly agree. Sample statements were: For your worst or least successful global sourcing experience, please indicate your level of agreement that it followed a rigorous and well-defined approach or process. and For your best or most successful global sourcing experience, please indicate your level of agreement that it followed a rigorous and well-defined approach or process. By observing which items have the greatest differences between the ratings for the best and worst experience, we can see where gaps exist that could affect global sourcing success. The top five items those that have the largest gap between the most and least successful global sourcing experience are, in rank order beginning with the largest gap: 1. Involved the right individuals as participants or team members 2. Relied on cross-functional teams to develop a global sourcing strategy 3. Followed a rigorous and well-defined approach or process 4. Featured regular strategy and review coordination sessions between worldwide functional or sitebased managers 5. Received support from executive champion(s) or leader(s) The findings from the scenario comparisons are consistent with those presented in the previous two sections. People, teams, processes and executive support are important elements of integrated global sourcing strategies. 26 Effective Global Sourcing and Supply for Superior Results

28 Improved Improved Improved Lower Lower total Reduced supply chain Improved Improved supplier cycle Better overall Global Sourcing Factor purchase cost of supply chain performance supplier sourcing time, delivery, inventory performance price/cost ownership costs other than quality process flexibility and management to external price responsiveness customers Shaded areas represent a statistically significant relationship at the.05 level or lower between the global sourcing factor and the performance outcome. Figure 13 Factors Related to Global Sourcing Performance Outcomes Defined global sourcing process Centrally coordinated/centrally led decision making Site-based control of operational activities Information sharing with suppliers Real-time communication tools Availability of critical resources Sourcing and contracting systems International purchasing office support 27

29 Figure 14 Relating Specific Features to Global Sourcing Performance Outcomes Item or Feature Related Performance Outcomes Budget support Lower purchase price/cost Improved sourcing process Time for personnel to develop worldwide Lower purchase price/cost strategies Improved sourcing process Availability of required information and data Lower purchase price/cost Improved sourcing process Common goods/services coding system Lower purchase price/cost across buying units Improved supply chain performance other than price Improved sourcing process Executive requirement or mandate to Reduced supply chain costs source worldwide Improved overall performance Improved supply chain performance other than price Decentralized procurement structure Lower purchase price/cost Reduced supply chain costs Better inventory management across the supply chain Improved supplier cycle time, delivery performance and flexibility/ responsiveness Improved supply chain performance other than price Personnel with required knowledge, Lower purchase price/cost skills and abilities Improved sourcing process Information systems compatible across Better inventory management across worldwide units the supply chain Improved supplier cycle time, delivery performance and flexibility/ responsiveness Improved supply chain performance other than price Improved sourcing process Information systems compatible with suppliers Reduced supply chain costs Better inventory management across the supply chain Improved quality Improved supplier cycle time, delivery performance and flexibility/ responsiveness 28 Effective Global Sourcing and Supply for Superior Results

30 Use of cross-functional teams to develop Lower purchase price/cost worldwide strategies Reduced supply chain costs Improved quality Improved supplier cycle time, delivery performance and flexibility/ responsiveness Improved overall performance Improved supply chain performance other than price Improved sourcing process An established process to guide worldwide Reduced supply chain costs contract development Better inventory management across the supply chain Improved supplier cycle time, delivery performance, and flexibility/ responsiveness Improved supply chain performance other than price Suppliers who are interested in worldwide Improved supply chain performance contracts other than price Improved sourcing process Internal customer buy-in to worldwide sourcing Reduced supply chain costs contracts Improved supplier cycle time, delivery performance and flexibility/ responsiveness Improved supply chain performance other than price Improved sourcing process Availability of suppliers with worldwide Reduced supply chain costs capabilities Improved supplier cycle time, delivery performance and flexibility/ responsiveness Improved supply chain performance other than price An executive steering committee to guide the Improved supply chain performance process other than price International/global purchasing office support Lower purchase price/cost Improved supply chain performance other than price Improved sourcing process Improved quality Effective logistics planning and execution Lower purchase price/cost Improved sourcing process 29

31 Summary of Key Performance Findings The following summarizes the major findings from the survey and overall research: Executive vision and leadership are essential components of successful global sourcing. An executive requirement or mandate to source worldwide and an executive committee to guide the process are visible ways to demonstrate this leadership. A well-defined process that includes best practices and features is a major driver of global sourcing success. Firms that have a well-established process to guide their global sourcing activities achieve a wide range of beneficial outcomes. Effective global sourcing processes share some common characteristics: They are communicated and understood throughout an organization and become the foundation for pursuing integrated global sourcing. They also feature a process owner who is responsible for reviewing and improving the process; conducting lessons-learned sessions at the end of each project; forwarding results to all global participants; and continuously managing, reviewing and reestablishing global agreements as required. Effective processes also feature executive leaders who practice subtle control by requiring teams to provide updates and to achieve process milestones. Qualified participants are a critical part of a formal global process as well as a critical resource category. A lack of fully trained personnel is one of the most widely cited global sourcing problem areas. Cross-functional teams are used extensively to develop and manage global agreements and relationships; hence, the effective use of teams is a critical global sourcing enabler. The present study is one of the few that have identified a direct link between the use of teams and sourcing effectiveness. Maintaining a centrally controlled or centrally led perspective on strategic planning activities enhances the probability of achieving a range of improved sourcing process outcomes. While strategic planning and development are shifting toward centrally led or centralized global sourcing, firms that decentralize operational activities during global sourcing are more likely to realize lower total cost of ownership, better inventory management across the supply chain and improved overall performance to external customers. Relying extensively on real-time communication tools to support global initiatives increases the likelihood of achieving lower purchase prices and costs, lower total cost of ownership, reduced supply chain costs, improved supply chain performance other than price and improvements to the sourcing process. These communication tools are essential to global sourcing success. Information sharing with important suppliers is a key predictor of global sourcing success. Firms that share performance information with suppliers (such as supplier quality and delivery performance) are likely to see the benefit of that sharing in lower purchase prices and costs. Firms that share nonperformance information with suppliers (such as future technology plans) are likely to realize reduced supply chain costs, improved supply chain performance other than price and improvements to the sourcing process. Making critical resources available throughout the global sourcing process increases the probability of achieving lower prices and costs, reduced supply chain costs, better inventory management across the supply chain and improved overall performance. Critical resources include budget for travel, time for personnel to develop worldwide strategies, the availability of required information and data and access to qualified personnel. Relying on international purchasing offices to support both strategic and operational rather than primarily strategic aspects of global sourcing increases the likelihood of achieving supply chain performance improvements, including better access to product and process technology, improved delivery reliability, reduced ordering cycle times from suppliers, lower purchasing process transaction costs and increased supplier responsiveness and flexibility to buying unit needs. Utilizing systems technology to make critical information available to global sourcing participants enhances the probability of realizing lower total cost of ownership for globally sourced 30 Effective Global Sourcing and Supply for Superior Results

32 goods and services as well as the likelihood of realizing improvements to the sourcing process. Firms that experience fewer problems across certain areas when sourcing and managing key items worldwide are more likely to achieve improved supply chain performance and process outcomes; improved supplier quality, delivery and inventory management across the supply chain and improved overall performance to external customers. The problem areas that affect global sourcing success if their difficulty is not minimized include evaluating nondomestic supplier capabilities, locating qualified worldwide suppliers, maintaining consistency of supplier performance across locations and maintaining supplier quality and delivery levels. This observation highlights the importance of having a qualified supply base that is willing to participate in global agreements and the ability of the buying company to locate and then manage that supply base across worldwide locations. Managing logistical issues is becoming an integral part of global sourcing. Effective logistics planning and execution are essential for ensuring delivery performance and consistency across worldwide buying and using locations. 31

33 Chapter 5: Organization The organizational design that a firm creates to support its sourcing and supply effort is a critical global sourcing enabler. Organizational design refers to the structure and formal system of communication, division of labor, coordination, control, authority and responsibility required to achieve sourcing and supply goals. Most designs including those created to coordinate sourcing efforts across worldwide operating sites and locations reflect a pattern of interaction and coordination that links technology, tasks and human resource elements. This chapter discusses global sourcing design issues from various perspectives: the placement of sourcing decision making, organizing for integrated global sourcing, global strategy development and the use of crosslocational/cross-functional teams and groups. Decision Making and Governance This research reveals an emphasis on centrally led or centralized sourcing governance, coordination and decision making. Consider the following results, which show the emphasis that firms place on center-led or centralized authority and governance: Almost 60 percent of respondents say their overall business unit is structured and governed centrally, 39 percent say the business unit is decentralized with some coordination, and only 2 percent indicate their business unit is decentralized. Over 51 percent say their business unit s strategy decisions are made from a worldwide perspective, while 33 percent take a regional perspective. Almost three-quarters of respondents indicate that their most important purchases are coordinated by a center-led or headquarters group. Over 70 percent indicate that purchasing and supply management decision-making authority is centralized or highly centralized. What distinguishes this emphasis on center-led authority or centralization from previous historical periods is intense cost pressure brought about by global competition. An inability to raise prices demands the coordination of sourcing activities and the consolidation of purchase volumes in an effort to minimize total supply costs. The challenge becomes one of effectively coordinating and leveraging worldwide sourcing requirements while remaining responsive to the needs of business units and operating sites. When firms are obtaining goods and services, the planning and execution levels are often different. In all purchase categories, planning decisions tend to be more center-led or more highly centralized than execution decisions. The following table gives the percentage of firms indicating that their most important purchases within each purchase category are center-led or highly centralized. Planning Execution Decisions Decisions Direct goods or 78% 42% materials Finished goods for 58% 38% resale Capital equipment 57% 44% and facilities Maintenance, repair 40% 27% and operating supplies Services 40% 30% Although a majority of firms indicate that they are highly centralized in their sourcing and governance, not all tasks or responsibilities are managed at a central level. This combination of centralized and decentralized decision making, particularly as it relates to execution, 32 Effective Global Sourcing and Supply for Superior Results

34 helps maintain responsiveness to internal customer requirements at lower organizational levels. Certain activities are largely coordinated or managed at a centrally led or centralized level for the most important purchases, whereas other activities remain the responsibility of sites or operating units. Centralized activities include developing category or commodity purchase family strategies (78 percent of firms centralize this activity), negotiating and establishing contracts (74 percent), evaluating and selecting suppliers (64 percent), locating potential supply sources (60 percent), managing supplier relationships (55 percent) and managing supplier development activities (54 percent). Responsibilities that remain decentralized or highly decentralized include executing schedules and inventory plans (55 percent of firms decentralize this activity), expediting goods and services (55 percent), issuing releases or purchase orders (52 percent), planning inventory levels (48 percent) and developing requirements schedules (43 percent). Other activities, such as resolving supplier performance problems, providing supplier performance feedback and developing and implementing logistics strategies and plans, are somewhat more evenly distributed between centralization, decentralization with some coordination, and decentralization of responsibilities. Continued movement toward centralized, centrally coordinated and center-led purchasing will affect the kinds of design features that supply organizations put in place. The terms centrally coordinated and centrally led do not necessarily refer to large corporate procurement staffs. Coordination can occur among regions, business units, sites and other functional groups depending on the formal design features that a firm establishes. It is difficult for a firm to achieve its global objectives without an executive leader who has the authority and resources to translate a global vision into a global reality. At each firm visited during the qualitative portion of this research, a higher-level executive is responsible for promoting a global sourcing vision. This executive is usually the Chief Procurement Officer, but engineering and finance executives may also assume a leadership role in promoting a coordinated approach to worldwide sourcing. Companies that are realizing performance advantages from their global sourcing efforts have established a higher-level executive officer who has responsibility for global sourcing results. These organizations have also positioned global sourcing as an organizational rather than functional process. While the need for an executive position to champion global efforts seems intuitive, the importance of this position should not be underestimated. Executive interviews reveal that it is important for the Chief Procurement Officer to make regular strategy and performance review presentations to the President, CEO or Board of Directors. An earlier study found that regular strategy and performance presentations by the CPO to the President or CEO as a design feature correlated highly with firms that said their organizational design promoted the achievement of their sourcing and supply objectives. 2 The visibility and resources that come with having a corporate position that is on par with other functional executives are critical. Since every functional group can argue the need for a higher-level executive position, sourcing executives must make the business case why they should have a senior executive with resources to match those of other functional executives. A successful global sourcing process that demonstrates consistent results helps make that case. In addition to the presence of a higher-level chief procurement officer, firms should consider other design features that support an expected movement toward centrally coordinated, centrally led or centralized global sourcing. Examples of design features that support this shift include: Centrally coordinated or managed commodity and global sourcing teams Formal separation of strategic and operational/tactical supply responsibilities Lead buyers who manage noncentrally coordinated items with reporting linkages to a central group Worldwide strategy review and coordination sessions between functional groups and locations An executive committee or group responsible for overseeing global initiatives and strategy development The responsibilities that a global sourcing leadership council or committee may assume include those listed in Figure 15. This committee should comprise executive managers from functional groups besides procurement, including operations, engineering, logistics and finance. Figure 16 shows how one organization separates its centralized and decentralized responsibilities. Separation implies separation of reporting as well as physical separation. Organizational models featuring 2 Trent, R.J. The Use of Organizational Design Features in Purchasing and Supply Management, The Journal of Supply Chain Management, vol. 40 no. 3 (Summer 2004), pp

35 Figure 15 Global Sourcing Leadership Council Responsibilities Figure 16 Separating Centralized and Decentralized Supply Activities positions that assume both a longer-term (planning) and a short-term (operational) focus appear more often in decentralized organizations. Unfortunately, in a decentralized model, operational activities must be satisfied first, leaving the individual less time for longerterm planning and strategy development. Decentralized models also feature minimal coordination of strategies, procedures and operating best practices across worldwide locations. Certain design features are recommended as means to gain a centrally coordinated view of worldwide supply chain management. These include an executive buyer supplier council that coordinates supply chain activities with worldwide suppliers and an executive position responsible for coordinating worldwide supply chain activities. From previous research we know that these features correlate highly with firms that say their current organizational design promotes the attainment of sourcing and supply objectives. 3 For firms that are not comfortable with a centralized approach to sourcing, executive managers should plan their organizational design so as to coordinate global activities without having to group purchasing professionals in a central location. These firms will maintain some purchasing activities at a decentralized level, particularly those involved with day-to-day materials and supply management, while creating organizational models that facilitate coordinated discussions between business units or operating locations. In fact, as mentioned earlier, this research 3 Trent, pp Effective Global Sourcing and Supply for Superior Results

36 found support for centrally coordinating global sourcing planning activities along with strong support for decentralizing the operational aspects of global sourcing execution. The following Good Practices highlight the important relationship between executive leadership and global sourcing success. Good Practice: Creating an Executive Position to Support Globalization This leading global company in the high-volume process industry established an executive position to oversee its global sourcing process. This manager, who is also the leader of the company s global operating steering committee, is a well-respected engineer, not a procurement manager, with 25 years of experience. He reports to the vice presidents of engineering in Europe and the United States. This is an important consideration, since this company s two major design and procurement centers must work together to commonize component designs, specifications and sources. The manager has located his office with the procurement group at U.S. headquarters, which promotes teamwork and trust between engineering and procurement. The manager commits 100 percent of his time to supporting the global procurement process. His duties include the following: Working with the operating steering committee to identify future projects Monitoring the status and progress of current projects Determining where to spend budgeted funds Approving all operating steering committee expenditures Identifying and recruiting team members for project teams, including working with other managers to gain their support and member time Working with teams to establish project milestones Making other decisions affecting projects or the global sourcing process The manager s staff includes an individual who manages the day-to-day efforts of the department and maintains part specifications, contracts and other activity in a central location; an individual who assumes responsibility for several high-volume and high-dollar commodities; and a part-time clerk. The manager s salary, along with that of his staff, is charged directly to the global manager s departmental account number. The account also pays team member travel and living expenses incurred during global strategy development projects. The budget to support the global process has doubled as the number of global opportunities pursued by project teams has increased dramatically. Good Practice: Linking CEO Support and Global Sourcing Success The CEO at this high technology company elevated the importance and visibility of the company s global sourcing process by stating publicly that successfully launching this process was one of his three primary initiatives. The organizational importance of the new global sourcing process, which is working its way into the business objectives of nonprocurement groups, has helped ensure support throughout the corporation. This visibility reflects the importance of effectively managing global purchases, but it has also created an expectation that the process will deliver savings that enhance the company s financial performance. Global sourcing is receiving executive support and visibility in other ways. At a recent quarterly business meeting, the vice president of purchasing presented a formal overview of the global sourcing process to worldwide managers. Managers across the company eventually viewed a videotape of the presentation. In addition, the CEO forwarded a memo to all salaried members announcing the new global sourcing process. This company has an executive management committee comprised of the company s top executives. The vice president of purchasing reports to this committee monthly, further illustrating the visibility that global sourcing efforts are achieving throughout the company. This company enjoys a culture in which major initiatives are successful when executive leadership and commitment are present. Organizing for Integrated Global Sourcing Although an organization s design is much more complex and detailed than what a series of lines and boxes on a chart can ever illustrate, organizational charts do help identify the formal reporting relationships that support the attainment of global sourcing and supply objectives. Figure 17 illustrates a structure identified during site visits that features global commodity directors who are responsible for coordinating sourcing requirements on a worldwide basis. The use of commodity management teams (CMTs) to coordinate global sourcing responsibilities is increasingly common, particularly for larger firms. In fact, a separate study that focused on supply management design features revealed the use of CMTs to be the second most emphasized organizational design 35

37 Figure 17 Typical Center-Led Sourcing/Supply Organizational Structure feature for larger firms. 4 The use of CMTs also correlates highly with firms that say their organizational design is helping them achieve their supply management objectives. The widespread use of centrally coordinated, centrally led or centralized commodity teams to develop and implement companywide supply strategies is predictable given the emphasis placed on centralized sourcing. Figure 18 depicts how CMTs are responsible for leveraging common requirements across sectors or business units. Closely aligned with the use of CMTs is the use of lead buyers to manage noncentrally coordinated items. Figure 19 highlights an organizational structure with a regional sourcing focus. This structure features a centrally coordinated approach rather than a center-led approach to sourcing. A frequent design feature in such a model is the use of cross-locational buying teams to coordinate worldwide requirements that have commonalities across regions. The following Good Practice and the next section discuss the use of teams in greater detail. Figure 18 Global Sourcing: One Company Leveraging With Commodity Leadership 4 Trent, pp Specific individuals assigned responsibility for managing supplier relationships is the most emphasized design feature. 36 Effective Global Sourcing and Supply for Superior Results

38 Figure 19 Typical Regional Structure Good Practice: Organizing for Worldwide Indirect Purchasing This Good Practice illustrates how one company has extended its global sourcing process to manage indirect items. Previous efforts at managing indirect purchases at this U.S.-based company were U.S. focused, even though this company has a manufacturing presence in Europe, Mexico, the United States and Asia. The question facing procurement executives was how to create an organizational structure and process to manage worldwide indirect purchases, including the human resources that are involved with indirect purchasing. The answer to this question suggested a need to change the existing organizational structure supporting indirect purchasing. The seeds for an indirect sourcing structure had been planted when the director of raw materials purchasing proposed to executive management to create a global raw materials team. (This company refers to all direct materials as raw materials). As part of that effort, the director established a biweekly conference call to procurement managers worldwide to coordinate raw materials strategies. The need to apply a global approach to indirect purchases became apparent. In response, this company created a structure and process to coordinate worldwide sourcing strategies for indirect purchases. Indirect procurement was previously organized regionally, with movement toward decentralization. Recognizing that a regional perspective would not support worldwide procurement efforts, the company has reorganized itself so that an indirect purchasing director the individual who had served as director of raw materials purchasing has global responsibility for all indirect purchases. The director has people reporting directly to him who are also part of the new structure. Also supporting the global indirect purchasing effort are international procurement offices in Europe and at each manufacturing site. Global Strategy Development A primary feature of global sourcing is the crossfunctional nature of strategy development. In many respects, global sourcing strategy development is an organizational rather than functional process. This organizational perspective is reflected in the finding that almost two-thirds of firms extensively involve different functional groups during the development of worldwide sourcing strategies. Only 10 percent of survey respondents indicated that different functional groups are largely not involved in worldwide sourcing strategy development. Integrated strategy development occurs in a number of ways. The use of commodity teams with crossfunctional representatives is the most common approach. (The next section discusses the use of teams.) Integration can also occur through a global sourcing steering committee and through strategy coordination and review sessions. Almost 50 percent of participating firms rely on regular sourcing strategy coordination and review meetings with worldwide managers. Just over 20 percent of firms indicated minimal or no reliance on worldwide coordination sessions. 37

39 The development of worldwide commodity strategies often involves participants from different sites or locations, particularly when a small central group exists or the need for buy-in from sites is essential to sourcing success. In this research, over 50 percent of respondents said representatives from different locations are extensively involved. Almost a third of respondents indicated that representatives from different locations are somewhat involved in the development of worldwide sourcing strategies. The question of how to involve users is important, and organizations have developed a variety of models to gain that involvement. One leading company designates an individual to represent the interests of multiple sites and to act as a liaison between the team and buying centers. Another model features representation through executive steering team members. Here, steering committee members represent the needs of various locations and are required to communicate with regional or site managers during the development of global projects. An efficient way to involve users is to enable them to specify their sourcing requirements through an electronic contract template. Sites convey their requirements electronically with the expectation that a negotiating team will factor in these requirements when crafting global agreements. It is also possible to create global project teams composed entirely of site personnel. A central group provides only training, data and budget support. A variation of this model features a single member, often acting as team coordinator or leader, from a corporate office working with project team members from buying centers or sites. Regardless of the model used, gaining buy-in to worldwide agreements is essential for justifying the effort required to develop them. A key resource supporting global strategy development is access to relevant and timely data. Earlier research revealed that during the early days of aggregating purchase volumes, it was not unusual to spend six months simply trying to identify total purchases for a given commodity. 5 Now, almost two-thirds of respondents say that relevant data, such as total spend, volume requirements and using locations, are available for important goods and services that are sourced worldwide. Only 12 percent indicate that they lack access to required data for important goods and services. The remainder of the sample reports that the required data are somewhat available. Chapter 6 addresses the specific types of information and systems capabilities available to participating firms. An important issue in global strategy development is the authority that commodity teams or sourcing managers have to develop contracts that lower-level buying organizations and sites will be required to use. During the 1990s, compliance to contracts developed by commodity teams was often voluntary. In fact, many business units and sites used corporate contracts as a benchmark to compare against their own agreements. Furthermore, national suppliers (the agreements developed during this period were rarely worldwide) complained that they were not receiving the volumes they expected. This adversely affected the suppliers cost and pricing structure. The issue of voluntary versus mandatory contract compliance by sites and operating units appears to have been resolved. Over 70 percent of firms indicate that lower-level buying organizations and locations are required to comply with companywide purchase agreements. Furthermore, site visits reveal that leading firms use their contract repository system as a means to verify and report to executive levels compliance to global agreements. Good Practice: Coordinating Worldwide Facilities Management This Good Practice illustrates how global sourcing applies in a setting where business units have minimal commonality in their direct purchases. This historically decentralized consumer-products company has more than 100 operating companies that are managed as profit centers. While company executives have maintained decentralized decision making due to the unique nature of the company s separate businesses, they also realized that the company had no expertise in coordinating its companywide purchase requirements. For example, each unit independently handled the procurement of most services and equipment for building and managing facilities, including facility services, capital equipment, and design and construction. To counteract the inefficiencies of this approach, corporate managers were given responsibility for coordinating worldwide facility integration. The company also divided facilities into 10 categories, each with an assigned group that has responsibility for a different aspect of facility management. 5 Monczka, R.M. and R.J. Trent. Purchasing and Sourcing Strategy: Trends and Implications, Center for Advanced Purchasing Studies, Tempe, AZ, Effective Global Sourcing and Supply for Superior Results

40 A number of newly formed leadership groups identify sourcing opportunities that involve facilities. For each group, a facilitator develops an agenda for coordination meetings, which are held three times a year. These groups search for worldwide opportunities in services, capital equipment, and design and construction. Leadership groups also have responsibility for establishing the core project teams that pursue specific opportunities. Each core team consists of a dozen companies that have agreed to participate and to represent the interests of other business units. These core teams meet face to face twice each year to coordinate global strategy. Additional meetings take place via audio and video conferencing. Other parties throughout the organization receive the minutes of these meetings and can participate in the audio conferences. These teams have primary responsibility for establishing master agreements with global suppliers agreements that often have 30 to 40 attachments reflecting the requirements of individual sites. Using Teams to Support Global Sourcing A major finding of this study involves the continued and growing use of teams, groups and executive committees to develop strategies and to coordinate worldwide sourcing and supply activities. Almost 50 percent of participating firms have broadly implemented cross-functional/cross-locational global category management teams. Another 30 percent have partially implemented these teams. Furthermore, the use of cross-functional teams to develop worldwide strategies correlates with many of the positive performance outcomes companies seek from global sourcing. To support their global objectives, some organizations have retooled their commodity management teams to assume a worldwide rather than regional sourcing perspective. This approach is consistent with a high level of centralization or the presence of a strong centrally led sourcing group. Another popular model, and one that presents a unique set of challenges, is the use of cross-locational teams. Cross-locational teams enlist members from various sites or business units participating on global sourcing project teams. Figure 20 illustrates the relationships across different levels of sourcing teams, based on interviews with executive managers. We encourage executive managers to use global teams selectively and with careful attention to the issues that affect successful teaming. Teams will remain popular as a design feature, but a clear connection between teaming and higher corporate performance is not guaranteed. Cross-locational teams that are attempting to develop global strategies encounter a number of challenges that central commodity management teams or regional teams may not face. First, and perhaps foremost, crosslocational teams often operate virtually, so that communication and coordination tools are critical to their success. In fact, members of these teams at some companies visited during this research have never met face to face. These teams rely on Web-based meeting tools to coordinate their activities. When teams and selected team members do meet in person, the firm must be committed to achieving high performance goals to justify the time and expense required. A second challenge to using this type of team is that when analyzing global supply markets, cross-locational Figure 20 Cross-Locational/Cross-Functional Teaming 39

41 team members may favor suppliers from their respective regions. This tendency can become a major obstacle when the team is identifying potential global suppliers, particularly in emerging regions such as China or India. (The discussion on international purchasing offices addresses this issue further.) Most companies are quite familiar with their local or domestic suppliers but are much less familiar with worldwide sources, and team members often have a high degree of comfort with and loyalty to their existing supply base. A third challenge is that team members from sites or business units often do not appreciate the magnitude of savings available from globally sourced agreements, which affects their willingness to establish aggressive savings targets. Whereas a site representative may perceive a 3 percent to 5 percent purchase price improvement as significant, global sourcing agreements often result in savings of 20 percent or more. Site-based representatives who participate on cross-locational teams may have a difficult time, at least initially, visualizing and committing to double-digit savings targets. It is important to remember that global sourcing teams are susceptible to the same types of problems and issues that affect all organizational groups and teams. Teams can yield the kinds of benefits envisioned by their executive sponsors, but they can also waste the time and energy of members, enforce lower performance standards, engage in poor communication and conflict, and make poor decisions. The quality of their decision making is especially a concern when the decisions relate to worldwide supplier selection and therefore have unusually high switching costs. Executive managers should plan for and use global sourcing teams selectively, always keeping in mind the barriers to their effective use as well as the factors affecting team success. Figure 21 identifies issues managers should consider as they use teams to support global sourcing and supply initiatives. Good Practice: Global Support From Executive Steering Committees This Good Practice highlights the importance of executive steering groups and the support that they can provide to a firm s global sourcing objectives and to teams, to achieve center-led sourcing. Two steering committees support the worldwide engineering and procurement process at this U.S.-based company: an executive steering committee and an operating steering committee. The executive steering committee consists of senior managers from engineering, procurement and operations. Financial representatives support the group as required. The executive committee, while not as active as the operating steering committee, brings higher-level commitment and support to worldwide activities. The committee also allocates the budget that supports travel and some staff salaries. The core operating steering committee includes a globalization manager, a project procurement manager and the director of Asian sourcing, who commits a part of his effort to support the global process. This core group is joined weekly in a teleconference by a capital equipment supervisor from the United States, a control systems (instrumentation) supervisor from the United States, a capital equipment supervisor from Europe and the globalization manager s counterpart in Europe. The operating steering committee reaches consensus concerning the commodities to assign to global project teams. The process to identify opportunities is continuous. The committee also asks internal participants for ideas regarding future projects, which typically involve the largest commodity categories of spend. An operating steering committee member maintains these ideas in an online spreadsheet. While engineering design centers are responsible for achieving cost savings (including savings from initiatives other than global engineering and procurement projects), the Figure 21 Cross-Locational/Cross-Functional Teaming Requirements for Success Best commodity/purchase family strategy one voice to suppliers Choice of qualified team members Proper team authority and commitment of resources Executive support for local/regional/global strategy execution mandatory contracts Established goals with linkages to the performance reward system Regular report-out of results to executive committee Global information systems/technology support global database, spend analysis tools, reverse auctions, catalogues, invoicing/payment, etc. 40 Effective Global Sourcing and Supply for Superior Results

42 steering committee is responsible for reporting and achieving savings from global activities. The operating steering committee assumes some important responsibilities: To identify and prioritize global project opportunities To establish teams and set or reinforce project targets To remove hurdles that affect the process (For example, the steering committee may have to resolve differences in work processes between the United States and Europe, such as who signs letters of intent. The operating steering committee commits perhaps 30 percent to 50 percent of its time to addressing internal issues between design and procurement centers.) To maintain an online global sourcing process manual and revise or update the manual as required To receive reports on the status of projects To conduct closeout sessions with teams at the end of each project, examining what went right, what went wrong, and any lessons learned The operating steering committee has a regular conference call meeting every Tuesday. Global project teams do not meet with the committee at this time this is an internal steering committee meeting only. Although the group meets formally every Tuesday, informal communication occurs daily to address a broad range of issues. Good Practice: Using Teams to Move Toward Centrally Coordinated Sourcing This global company, which has historically taken a decentralized approach to sourcing, successfully developed a worldwide commodity approach to global strategy development, with personnel from different sites assuming leadership roles. The company has developed short-term, medium-term and longer-term sourcing opportunity lists. Each opportunity has an expected completion date, an estimated probability of success and assignments of members to the corresponding commodity team. This centrally coordinated commodity management approach differs dramatically from the company s previous decentralized approach to sourcing. It requires purchasing and technical personnel from different locations or sites to work jointly on centrally coordinated commodity management teams. The materials purchasing director is de-emphasizing individual sites and stressing a common commodity focus through cross-locational/cross-functional teaming. Wherever synergy exists across product lines or facilities, the procurement group attempts to capitalize on shared resources and knowledge. The company has also established lead buyers at sites for items that are not part of the coordinated commodity approach. One individual at each plant has become the company s resident expert for a particular purchase category. Commodity teams meet face to face quarterly. Each team has a formally designated leader, who acts as the primary liaison to executive management and technical support personnel. These teams, whose assignments are ongoing rather than finite, are responsible for making commodity strategy recommendations and managing the transitions required for new global contracts. A coordinated approach to commodity management has necessitated that some purchasing resources be physically located at corporate headquarters to oversee the process. Case Discussions The cases in this and the following chapters are more extensive than the Good Practices presented earlier. They are meant to provide additional insights into the strategies firms are using to achieve global sourcing and supply results. Focus Case: Aligning a Globally Diverse Company This case reports on the sourcing and logistics efforts of a worldwide consumer products company. This company s Global Sourcing and Logistics Organization expects to be the best global procurement and logistics organization in the world as it pursues its mission of providing a competitive advantage through reducing total business costs, creating value through innovation and customer service, improving efficiencies by implementing global best practices, and improving supplier and supply chain quality. This company s informal culture and historically local and regional approach to decision making run counter to many of the other companies featured in this research. We feature this company because of its extensive efforts to use common practices, systems, processes and coordination mechanisms across its many diverse sourcing locations. These efforts include adherence to common business objectives and mandates, use of a seven-step strategic sourcing process, effective use of systems and data warehouses and extensive use of strategy coordination and review sessions, when necessary, to take a globally aligned view of sourcing. 41

43 This case is divided into the following sections: Company Overview Seven-Step Strategic Sourcing Process Developing Consistency through Systems Global Materials Management Processes and Approaches An Emerging Focus on Indirect Spending Global Alignment of Objectives across Divisions Company Overview The company spends approximately $6.5 billion to $7.5 billion annually, with thousands of direct and indirect suppliers. Given the unique tastes and preferences of local markets for the company s extensive array of products, most suppliers have historically supported a specific country or region. Of the $6 billion annual procurement expenditure, 60 percent is for direct materials and 40 percent is for indirect items and services, including advertising and media, temporary services, automotive fleets, laboratory supplies and global relocation expenses. Although this company has sourcing and production operations in more than 80 countries and sells in more than 200 countries (over 75 percent of this company s sales are outside the United States), very diverse regional (i.e., divisional) and local operating units actively align their activities across a set of objectives, mandates, key initiatives, deliverables, practices, specifications and key performance indicators. Exhibit 1 presents the business mandates that drive this company s operating divisions. The company relies on three primary levels of sourcing when evaluating sourcing opportunities. The first relates to truly global items, which are sourced at the corporate level through a seven-step strategic sourcing process (a later exhibit details this process). For first-level items, the divisions and sites generate material releases and issue purchase orders against centrally led negotiated contracts. Responsibility for issuing payment to suppliers rests with the divisions and sites. Second-level sourcing features the use of lead buyers. A lead buyer represents the interests of various locations within a region for items that do not have global applicability. The third sourcing level involves items that are unique or sourced strictly at a local or site level. The corporate sourcing organization manages highdollar and critical items, while regional procurement centers handle noncentrally coordinated goods and services. For example, raw materials, which this company purchases in large quantities, are candidates for centrally coordinated sourcing. Many items, however, particularly packaging supplies, are obtained at a regional or local level. Most of the directors at the corporate level have few direct reports. Instead, they work closely with directors and managers at the regional and site levels through a Exhibit 1 Global Sourcing and Logistics 42 Effective Global Sourcing and Supply for Superior Results

44 Exhibit 2 Global Sourcing and Logistics Organization Vice President Global Materials Directors Product Director Packaging Director Raw Materials Director Division Materials Directors Asia Pacific CE/Russia Latin Am. Africa Europe North Am. Technical Support Staff\ Finance Director Information Manager Sr. Application Developer Purchasing Strategy Director of Purchasing Strategy Indirect Purchasing Directors Global Sourcing Sourcing Director Strategic Sourcing Director Strategic Supply Chain Director Global Logistics Global Logistics Director Director of Logistics Strategies Supply Chain Manager matrix-type organization. Exhibit 2 illustrates the organizational design that supports the sourcing, logistics, supply chain and materials efforts at this company. Executive management expects its sourcing groups at all levels to help fund and drive corporate growth. The funding of growth occurs primarily through supplier relationships that provide cost savings, while the driving of growth occurs primarily through relationships that feature integration and innovation. Exhibit 3 shows the company s model for segmenting its sourcing approaches and strategies. According to procurement managers at the company, the majority of sourcing efforts are directed at funding growth. Seven-Step Strategic Sourcing Process To support its global efforts and create consistency across its regions, the company s sourcing leaders have developed a seven-step sourcing process that extensively involves finance (see Exhibit 4). Finance is involved early in the strategic sourcing process due to the need to identify and eventually to validate the savings that executive management mandates must be achieved from the sourcing process. Early involvement also allows the finance department to review contracts early in the process and, hence, to maximize its value-add. The strategic sourcing process is one example of how this company is developing common processes and approaches that can be applied not only at the corporate level but also across distinct regions and locations. This process is employed not only for crafting companywide strategies but also for developing regional or country-specific sourcing strategies. The indirect sourcing group also applies this process when it is evaluating worldwide sourcing opportunities. Research findings show clearly that adherence to a well-defined process is a critical factor in global sourcing success. Exhibit 3 Segmenting Supplier Relationships 43

45 Exhibit 4 Strategic Sourcing Process Local representatives engage directly in this process for the development of regional and global strategies. This is important, since our research also reveals that site involvement in the global sourcing process is critical to successful global initiatives. The involvement of local representatives helps to ensure their buy-in to agreements that move beyond a country or region. Developing Consistency Through Systems Another way this company aligns its divisions and locations is through the use of systems technology. A global ERP system provides visibility to worldwide contracts for direct and indirect items. Systems technology enables the identification of items and commodities across divisions that have global sourcing application. Increasingly, the robustness of systems enable them to collect data in order to identify indirect sourcing opportunities. All six geographic divisions within the company are now part of the ERP system. The last division to become ERP-capable was Central Europe/Russia. To support the companywide objective of funding growth, each division employs a common e-auction platform. The company expects to source, at all levels, 10 percent of its total purchases via electronic auctions. Some divisions are even beginning to apply e-auctions to capital equipment purchases. The company is accelerating the use of e-auctions within countries that previously were unfamiliar with this technology. The company has also developed a worldwide packaging and specification system that supports package standardization and simplification, price visibility, real-time price comparisons, supplier expenditures and historical usage worldwide. Prior to the development of this system, most packaging had no formalized packaging specification process. The packaging and specification system also supports the development of packaging cost models by individual country. Software breaks out package build up costs at every major supplier. A business team spent two years developing the cost software, which requires regular cost factor updates. Exchange rate fluctuations, for example, require frequent updates to the cost model. Suppliers understand that cost modeling is critical for doing business with this company. Participants in one country can now model the cost of doing business with a supplier located in another country. The system has supported a broader view of sourcing across country and regional boundaries and has helped the company reduce not only total packaging costs but also the total number of suppliers. Global Materials Management Processes and Approaches This section addresses the process and approaches put forth by two of the company s corporate materials management groups packaging and raw materials. Packaging. The company spends over 10 percent of its annual revenues on packaging materials, making this a major spend category. Before it began to take a companywide view of packaging procurement, the company suffered from a proliferation of sizes, materials and small, country-based suppliers. The corporate packaging director works with divisional directors to map out packaging procurement strategies and to solicit new ideas from around the world. The 44 Effective Global Sourcing and Supply for Superior Results

46 corporate director has few direct reports, instead interacting extensively with managers worldwide through a matrix organizational structure. The company extensively coordinates its packaging strategies and innovations across its geographic divisions. At least two or three times each year, divisional packaging procurement managers meet to review a list of improvement opportunities, develop packaging sourcing strategies and identify the lead country or region for each initiative. An example of an improvement opportunity involves package tubes. In 1996, the company purchased 27 different diameters of package tubes. Today, the company relies on six diameters to satisfy its worldwide requirements. A primary objective of the corporate packaging director is to develop personal relationships with a small group of carton and packaging suppliers, particularly suppliers in developing countries. Suppliers have even been willing to build new plants to support business inquiries from company sites in new countries or regions. To support expansion, the company has developed suppliers by advancing funds to start operations. Interestingly, the company uses few contracts to obtain packaging materials. This allows flexibility to reconfigure the packaging sourcing network. Some decisions related to packaging are made at the corporate level, while other decisions are made at lower levels. The company still maintains an informal corporate culture, with a fair amount of autonomy at the regional, country and site levels. For example, each site has an individual who is responsible for package engineering. If a site sees an opportunity to work with a supplier that supports another location, the inquiring site can contact the location that currently uses the supplier to agree on shipment schedules. A future goal for both packaging and raw materials sourcing is to move toward supplier-managed inventory. Under this approach, suppliers will be able to view the company s demand, physically manage consigned inventory and automatically replenish stocks according to pre-established minimum and maximum levels. Raw Materials. Of the two corporate materials groups discussed here, raw materials is the more centrally coordinated/centrally led. This group focuses on 26 major items selected by the amount of spend, worldwide availability and the ability of suppliers to provide material competitively on a worldwide basis. A central group conducts the negotiations for global items, and representatives from the divisions help develop RFQs. Technical representatives are also involved in the development of material specifications. Items that are not candidates for centrally led attention, as with the other materials groups, are managed at lower organizational levels. The central group is also responsible for developing models that identify the total cost of obtaining a raw material across different locations and regions. A primary objective of the raw materials group is to simplify or optimize the number of specifications for raw materials globally. For example, this company previously had 12 different specifications for a particular raw material. Now, the target is to have three specifications worldwide. For each item that is managed globally, the company has a plan to reduce (i.e., commonize) specifications, which are defined by R&D, and to simplify the procurement process. Suppliers are involved in the process of determining whether specifications can be simplified. Although the process to review specifications is not formally defined, participants around the world understand the objective and the steps for reviewing specifications. A second objective of this group is to develop similar best practices to be applied across all operating locations. This is no small challenge, considering that this company has operating sites in 80 countries. Furthermore, some regions are more difficult to conduct business in compared to others. For example, African countries require extensive documentation to complete a transaction. As with the other materials groups, this group relies extensively on communication and coordination sessions involving representatives from worldwide locations. A key part of the sourcing process is the logistics activities associated with obtaining raw materials (recall that the global materials director reports to the vice president of global sourcing and logistics). Historically, logistics considered only the movement of outbound finished goods, but the development of global logistics contracts that address both ends of the supply chain has become a focus of the raw materials group. Once a logistics contract is in place, a cross-functional group reviews the contract quarterly to identify continuous improvement opportunities. Participants in these reviews include representatives from the various divisions. Currently these review meetings are conducted electronically. An Emerging Focus on Indirect Spending As with many industrial companies, this company s emphasis on managing indirect spending has not been as strong as its focus on direct spending. For example, the company has developed a companywide coding system for indirect items, but this system is not as 45

47 advanced as the direct coding system. The indirect system requires manual entry into the system when an indirect item is sourced. Virtual work teams comprised of representatives from different locations help evaluate sourcing opportunities with indirect suppliers. Although 300 people worldwide support the sourcing of direct items, only 30 to 40 support indirect spending. Efforts to better manage indirect items across the company began in earnest in However, indirect items are still provided by thousands of suppliers, with only about 25 percent to 35 percent of indirect spending procured through a contract or purchase order. Corporate staff becomes involved if an indirect item has global sourcing possibilities. At that point the sevenstep strategic sourcing process identified in Exhibit 4 is applied. The indirect group has been following this process for several years, but it has taken almost three years to establish a worldwide indirect sourcing process featuring corporate leadership. Some analysis and commodity management are now occurring, primarily with the marketing services, telecom and fleet management groups. A challenge in managing indirect spending is to locate true global suppliers. The initiative to support indirect sourcing involved the formation of a worldwide indirect procurement council. This council meets every two months via Web-enabled software and conference calls to coordinate indirect sourcing strategy. The council has 16 to 18 members who have a dotted-line reporting relationship to the corporate group and also features the active involvement of finance. Finance involvement is critical for validating the savings achieved through the coordinated sourcing of indirect items. Global Alignment of Objectives Across Divisions As mentioned, this company has operations in 80 countries. It is not surprising, therefore, that over time a strong country-regional structure has evolved. Each region or division still has profit and loss responsibility, with specific material savings targets established annually. While each division is given autonomy regarding how to run its business, the corporate sourcing group promotes consistency across divisions through its support of the objectives of funding growth, driving growth and making the company the best place to work. Each division develops sourcing plans that align directly with these objectives. The diversity of locations invariably means a diversity of sourcing approaches. For example, the Asia/Pacific division, which has a sizeable procurement support staff, features a lead buyer model for items that are under divisional control and the use of cross-functional sourcing teams. The sites in this region are encouraged to use e-auctions and other electronic tools, even though suppliers in some of the emerging countries (Vietnam, for example) may be unfamiliar with them. The Asia/Pacific division also has responsibility for maintaining online supplier scorecards and a supplier certification program. Conversely, the Central Europe/Russia division faces a different set of sourcing challenges. All of the countries in this division except Turkey were at one time under communist rule. As a result, this division has had limited access to trained purchasing professionals, so that on-the-job training is a way of life. The Central Europe/Russia division was the last to implement the company s ERP system. Part of the Central Europe/Russia division s strategy is to rely on the Western European division to help accelerate its progress. Like the other divisions, the Central Europe/Russia division holds strategy review and coordination meetings among its country representatives at least once a year, but a recent meeting featured participants from the European division. With European support, the Central Europe/Russia division has started to use cross-divisional lead buyers and e-auctions. Moreover, given the challenge of locating qualified suppliers, the European group provides many of the material inputs that the Central Europe/Russia division requires. Divisional managers maintain that they still have a great deal of authority to operate their business, especially at the transaction and execution stage of the materials management process. They also have authority for sourcing items that are unique to the site, country or region. Each region has technical centers with personnel that work directly with local suppliers. For example, the Asia/Pacific centers are located in China, India and the Philippines. Thus, a strong companywide focus at this company has not meant a diminished role for regions or their representatives. Concluding Thoughts This case illustrates how a diverse organization, traditionally focused on countries and regions, has introduced global coordination into its sourcing operations. Even when regions maintain autonomy for decisions, managers actively work to align the divisions across a common set of objectives. This company is striving to maintain the best of both worlds permitting responsiveness at the country and regional level while leveraging worldwide global opportunities. 46 Effective Global Sourcing and Supply for Superior Results

48 Focus Case: Operating Globally With a Complex Organization Structure This large multidivisional global firm in the transportation industry was establishing global sourcing and supply strategies as part of the firm s overall competitive strategy. The focus was both direct (primary) and indirect (emerging) purchases. Sales were more than $10 billion worldwide, and the products ranged from mechanical to electro-mechanical to hightechnology electronics. Annual purchase spend was also in the billions of dollars, and effectiveness of spend was critical due to the significant competitive pressures in the industry. Supply personnel numbered in the hundreds and were located worldwide. Primary global sourcing and supply objectives included: 1. The establishment of common processes worldwide 2. Significant year-over-year cost reduction 3. A smaller world-class supply base 4. Continuous supplier development with lean manufacturing processes implemented at suppliers In addition, sourcing and supply strategy focus areas included: Strategic sourcing Cost management Supplier development and relationship enhancement Internal/external communication Quality New product development and launch Common system infrastructure Human resource development Selected goals included: Annual cost improvements greater than 5 percent adjusted for inflation/deflation Product to product cost reduction exceeding 25 percent Acquiring supplier technologies leading to endproduct differentiation Driving correct communications and behaviors with core suppliers Faster design cycles with early supplier selection Organization Strategy and Structure The global organization strategy included a focus on major purchase categories for both direct and indirect purchases, led by companywide divisional and regional purchasing executives. The intent was to focus on global purchase categories, which would be center-led and coordinated to achieve scale volumes worldwide. Regional category supply management would work with suppliers in the region. The divisional purchasing manager would represent the needs of the business units in purchase category and supplier strategies. These needs could be technology, speed, cost or some combination of these. In addition, process experts were in place to help drive global sourcing and supply process improvements and standardization on a worldwide basis. The overall organization structure is shown in Exhibit 5. The key to success in this organizational approach is the interaction of the global, divisional and regional team leaders. Regular communications (teleconferences, Web conferences and face-to-face meetings) were required to map out category and supplier strategies. Even with strong corporate and supply leadership, differences persisted between scale benefits and unique divisional product requirements, which required trade-offs involving cost, speed and technology. To gain overall corporate benefit, the firm recognized the need for a center-led supply organization. Driving Cost Improvement and Lean Through IPOs This company established international purchasing offices (IPOs) in Eastern and Central Europe, North Africa, Asia/Pacific and Latin America. The overarching goals were to achieve effective and efficient manufacturing in best cost regions of the world and to achieve the firm s three- to five-year cost reduction plan, which was measured in billions of dollars. The strategic direction for the IPOs involved developing a common process and executable strategy for the three regions, which included: Finding suppliers and technologies to meet business and customer needs Determining suppliers current and future capabilities Supplier development as required Providing recommendations to global commodity teams Providing operating support In addition, the IPOs actions were to be aligned with overall global commodity team strategy. Strongly believing that to be most effective, the company had to speak with one voice to suppliers, the company created its category and supplier strategies through the intersection of three groups: 47

49 Exhibit 5 Global Supply Organization Global Commodity Directors European Commodity Managers Asia/Pacific Commodity Managers S. American Commodity Managers Division/Business Unit Focus: - Budget - Early sourcing - Quality - Manufacturing Global Commodity Teams Focus: - Budget - Strategic sourcing - Supply base structuring Regional IPO Focus: - Best cost country - Local sourcing By discussing the interests of all three groups and finalizing strategies by purchase category, the company s groups could agree to one course of action and present one voice to suppliers. Typical IPO Organization Exhibit 6 shows a typical IPO structure, including a regional director, country manager and staff consisting of procurement specialists, procurement engineers, product engineers, supplier quality and logistics. The purchasing specialists and procurement and product engineers focus their attention on purchase categories and suppliers to meet companywide and business unit goals. Overall Results This company s center-led organizational structure and strategy, including providing holding commitment authority to purchasing, has yielded significant benefits: New product developments Savings of between 15 percent and 45 percent Resourcing to best cost countries Establishing presence and ear in regions/countries Opportunities for future savings 48 Effective Global Sourcing and Supply for Superior Results

50 Exhibit 6 Asia/Pacific IPO Organization Conclusion This firm was attempting to achieve significant cost reduction and other goals through sourcing globally, while refocusing a decentralized, divisionally focused organization into a center-led and coordinated global sourcing and supply group. Although the focus in this case study has been on structure, the roles of information, improved processes and leadership were also critical to the success of the effort. 49

51 Chapter 6: Cross-Enterprise Integration At leading companies, global sourcing has become an organizational initiative rather than a narrowly defined functional activity. This implies a high level of integration between functional groups as well as with external suppliers. As defined here, integration involves bringing together different groups, functions or organizations, either formally or informally, physically or by information technology, to work jointly and often concurrently on a common or business-related assignment or purpose. This chapter addresses integrated global sourcing and supply from several perspectives: Integration across the organization Formal improvement processes and information sharing with suppliers Communication tools and information systems capabilities that support global sourcing and supply integration efforts Human resource requirements for integrated global sourcing Integration Across the Organization A key characteristic of global sourcing is its crossfunctional nature. Firms with successful global sourcing initiatives frequently integrate their worldwide sourcing activities with other functional groups. The following table reveals that 88 percent of respondents said their worldwide sourcing and supply activities are somewhat or highly integrated with operations, internal users and/or manufacturing groups. As discussed in Chapter 4, a high reliance on cross-functional teams promotes integration between sourcing and other functional areas. Only 12 percent of responding firms said that their worldwide sourcing activities are not integrated or coordinated with operations, internal users and/or manufacturing groups. Somewhat Minimally or Highly or Not Integrated Integrated with with Functional Area Sourcing Sourcing Operations, internal users 88% 12% and/or manufacturing groups Technology and engineering 87% 13% groups Logistics and transportation 78% 22% groups Finance groups 74% 26% Marketing and sales 63% 37% We would expect an emphasis on integration with operations and technical groups, particularly during new product, process and service development. In fact, a key characteristic of Level V global sourcing is the integration and coordination of global sourcing activities with other functional groups (refer to Chapter 3 for a discussion of the five global sourcing levels). Since most firms expect to evolve toward higher global sourcing levels, we expect integration with operations, internal users and technical and manufacturing groups to increase. Five years ago, it was unusual to find a high level of integration between global sourcing and logistics groups. Increased supply chain risk due to emergent market sourcing, particularly in India and China, has raised awareness of the relationship between sourcing and logistics. Furthermore, capacity constraints with carriers, delays resulting from Homeland Security regulations, the need to manage logistics costs, severe weather disruptions and bottlenecks at major ports all 50 Effective Global Sourcing and Supply for Superior Results

52 point to the importance of logistics. Integration with logistics and transportation groups will continue to increase as firms develop globally sourced agreements. Working closely with finance is important because this group has the authority and capability to validate and report usually to executive and site-based managers the savings achieved from global activities. A producer of automation equipment has developed a system that reports ongoing companywide material savings, comparing current prices paid worldwide against the last price paid during the previous year, which serves as the base price for the current year. (Please see the case at the end of this chapter.) Finance has agreed that the system calculates actual savings that should be reported directly to executive management. As a result, global sourcing is receiving widespread attention within this firm, particularly at the executive management level. Finance groups should also help calculate the impact of global sourcing on key organizational measures such as return on assets (ROA) or economic value-add (EVA). Some firms calculate how savings from global agreements affect the financial performance indicators of individual buying or operating sites, which helps create buy-in to the global sourcing process. Best practice firms also incorporate current and expected global savings into the firm s financial projections. During field interviews, some respondents voiced frustration over the inability to quantify the savings achieved from global sourcing. A chief procurement officer at a worldwide consumer products company stated that one of his group s most notable shortfalls has been an inability to validate the savings that would confirm the organizational value of global sourcing. This failure is due partly to a lack of support from finance, particularly when finance receives no budget authorization to validate savings figures. The inability to quantify savings has caused some executive managers to view global sourcing as an expense rather than an investment. Quantifying and then approving the direct benefits from global sourcing, particularly in areas such as reduced unit costs and better inventory management across the supply chain, is a challenging task when finance is not part of the process. The following Good Practice examples illustrate how sourcing personnel may creatively integrate and support other functional groups across the organization. Good Practice: Linking Global Sourcing With Technology Development This company has created a Futures Group a future technology development group that meets weekly to address technology development and trends. This group, created by the CEO, has the broad charter to develop a medium- to long-range product strategy. Driven by research and development and headed by a vice president, the Futures Group includes R&D, marketing, finished products outsourcing (procurement) and operations. One indication of this group s importance is that it reports directly to the CEO. As part of the Futures Group, the outsourcing director gains early insight into worldwide product and technology requirements. Furthermore, one of this director s key objectives is to promote supplier involvement in technology and product development. Participation in the Futures Group is one way the outsourcing director pursues greater integration both internally and with worldwide suppliers. Good Practice: Integrating Supply Chain Planning Activities This U.S.-based company has taken steps to integrate the various groups that are involved in worldwide demand estimation and supply planning. The director of production purchasing has been assigned broad responsibilities his staff is responsible for sourcing all direct materials and components worldwide accountable for achieving annual cost reductions. His group also has responsibility for finished goods planning, a process that includes aggregate product planning. The management of finished goods requires close interaction between purchasing and marketing, which has responsibility for sales forecasting and demand planning. The purchasing director s primary responsibilities involve participating in higher-level monthly sales and operations planning meetings. At these meetings, the executives review sales forecasts and inventory levels to determine each plant s (along with each supplier s) ability to support the forecast while managing material costs. Managers who have responsibility for inventory and materials worldwide participate in these monthly planning meetings. Due to the seasonal nature of this company s primary products, almost all production is driven by forecasts. A staff member, who reports directly to the purchasing director, has responsibility for day-to-day issues involving finished goods inventory management. Good Practice: Supporting Worldwide Marketing Operations At a major global company, a sourcing manager has been assigned to marketing strategy teams to support their efforts when developing worldwide contracts. Examples of areas where the marketing team requires contract support include the sourcing of printing services, conventions and meetings, promotional displays and trade shows, marketing research services 51

53 and advertising and promotion. Sourcing involvement has resulted in, for example, a reduction of worldwide printing suppliers from more than 500 to five. The sourcing manager adds value to the marketing and promotion process in a number of areas. The sourcing manager and her staff perform the following functions: Verify that every unit within the corporation is charged at the same and best rate from suppliers Reserve the right to audit advertising job jackets and costs Work to gain most favored customer status with media suppliers Control the process of buying advertising and media support Maintain confidentiality through control of the sourcing process Work to retain the company s ownership of intellectual property Assume a major part of the process (contracting) that marketing simply does not want to perform Formal Improvement Processes and Information Sharing With Suppliers One purpose of integrated global sourcing should be to enhance formal improvement processes with worldwide suppliers. Among the many areas where formal improvement processes can be established, improvement efforts cluster into three categories: efforts related to supply chain planning (SCP), efforts related to communication and collaboration (CC) and efforts related to joint investment and risk sharing (JIRS). The following table highlights specific areas where improvement processes have been most and least established with worldwide suppliers. Target of Formal Somewhat Minimally Improvement Processes or or Established With Extensively Not Worldwide Suppliers Established Established Most established Problem identification 86% 14% between buyer and supplier (SCP) Overall communications (CC) 81% 19% Product/service design or 79% 21% specification (SCP) Scope of work definition for 78% 22% products, processes or services (SCP) Protection of buyer s intellectual 77% 23% property (CC) Protection of supplier s 72% 28% intellectual property (CC) Demand planning (SCP) 71% 29% Least Established Visibility of goods across the 56% 44% supply chain (SCP) Supplier rating of your business 48% 52% unit s performance (SCP) Development of joint 39% 61% investments (JIRS) Commitment of buying 33% 67% company investment on supplier s behalf (JIRS) A second area of supplier integration involves information sharing. Specific areas of information sharing fall primarily into two categories: traditionally measured supplier performance areas, such as supplier quality, delivery and cost performance, and nontraditional information areas, such as supplier technology contribution, physical environment compliance and future demand plans. The information most widely shared between buyers and sellers relates to traditional areas of supplier performance, indicating that opportunities exist for greater sharing of information that is not strictly performance focused. The following table highlights the most and least extensive areas of shared information between firms and suppliers. Somewhat Minimally Information Shared With or or Important Suppliers on a Extensively Not Worldwide Basis Shared Shared Most shared information Supplier delivery performance 88% 12% Supplier quality performance 85% 15% Supplier cost performance 84% 16% 52 Effective Global Sourcing and Supply for Superior Results

54 Supplier responsiveness and 76% 24% flexibility Least shared information Future technology plans 64% 36% Future investment plans 57% 43% Supplier physical environment 55% 45% compliance Supplier feedback about 48% 52% buying company performance Enhanced formal improvement processes and increased information sharing with suppliers should lead to higher levels of trust between buyers and suppliers. Perhaps the most critical predictor of successful relationships, trust, is the belief in the character, ability, strength or truth of a party. When referring to trust with global suppliers, we can consider two types of trust: character-based trust and competency-based trust. Character-based trust is a concern when sharing technology and product development plans with suppliers. It is particularly a concern with suppliers based in China, notorious for the piracy of intellectual property. In fact, previous research reveals that the protection of proprietary information is the most commonly cited factor working against closer involvement of suppliers during new product development. 6 (Chapter 7 addresses sourcing in emerging markets.) Competency-based trust becomes an issue, for example, when assessing the capacity of suppliers that will support worldwide production and buying centers. Trust can be enhanced through open and frequent communication, following through on promises and commitments, and acting legally and ethically in all dealings. Parties to trust-based relationships act on behalf of the relationship rather than self-interest, publicize success stories and personal narratives (especially those that enhance the standing of the other party) and treat information and data confidentially. Although trust is a critical predictor of successful relationships, respondents indicate that they put forth just over a moderate effort to create and enhance trust with their most important worldwide suppliers. Integration Through Communication Technology and Information Systems Companies rely on a variety of communication tools and information system capabilities to support their global sourcing efforts. As we discussed in Chapter 4, communication tools are essential for supporting integrated global sourcing. The following table highlights the communication tools that participants use when developing global sourcing and supply strategies. The four most extensively used communication tools provide real-time or near real-time information sharing. Somewhat Minimally or or Extensively Not Communication Tool Used Used Electronic mail 99% 1% Telephone conferencing 93% 7% Face-to-face meetings 91% 9% Web-based meeting tools 68% 32% Intra-company mail 57% 43% Express mail service 54% 46% Groupware 53% 47% Video conferencing 50% 50% Traditional postal mail 31% 69% The use of video conferencing has increased over the last several years, but this approach requires extensive uplink and downlink connections that will continue to limit its use compared to other approaches. The fact that traditional mail lacks speed and real-time capabilities suggests that this communication method will decline further over the next several years. Companies find a variety of information systems capabilities available to support their global sourcing and supply activities. Statistical analysis reveals that individual capabilities fall into one of three categories: capabilities related to sourcing and contract management support (SCM), capabilities related to supply chain electronic systems (SCE) and capabilities related to supplier performance measurement (SPM). The following table identifies the extent to which a specific capability is available. 6 Monczka, R.M. and R.J. Trent. Purchasing and Sourcing Strategy: Trends and Implications, Center for Advanced Purchasing Studies, Tempe, AZ,

55 Somewhat Minimally or or Information System Extensively Not Capability Available Available Identify purchase price for 76% 24% goods and services by location (SCM) Supplier quality 72% 28% performance (SPM) Worldwide database of 70% 30% purchased goods/services (SCM) Common coding 70% 30% identification for purchased goods/services (SCM) Supplier delivery 66% 34% performance (SPM) Electronic funds transfer 65% 35% with suppliers (SCE) Cross-site/location/business 64% 36% unit E-system interfaces (SCM) Worldwide goods and services 63% 37% usage information by location (SCM) Receive advanced shipping 61% 39% notices (SCE) E-system for releasing 55% 45% requirements schedule (SCE) Design and specification 54% 46% management (SCE) E-systems for invoices (SCE) 54% 46% Visibility of goods across the 54% 46% supply chain (SCE) Contract management system 54% 46% (SCM) Information system to measure 46% 54% contract compliance (SCM) It is hard to imagine a successful global sourcing effort that does not have access to complete, reliable and timely information, including data pertaining to existing contracts and suppliers, supplier capabilities and performance, projected worldwide volumes and demand by commodity or category, ipotential new suppliers and their global performance capabilities, internal customer requirements, purchase prices paid and common requirements across buying units. The following Good Practice highlights how one leading company uses systems technology to support its global engineering and procurement efforts. Good Practice: Using an Intranet to Support Global Sourcing With the support of information technology personnel, the operating steering committee at this chemical company has made its global engineering and procurement manual and supporting documents available on the company s Intranet. The online manual includes an inquiry section defining what the company expects to achieve from global sourcing. Additional documents available online to project team members and other interested internal participants include: A global process kickoff document This document introduces and describes the global process. It includes the vision and mission, a definition of global strategy and a simplified global sourcing process flow. Global engineering and procurement guidelines and procedures A global sourcing strategy development template Project teams are responsible for completing this template, which requires the teams to consider contract terms and conditions, potential bidders, currency risk management strategies and the team s global sourcing recommendation. The template serves as the basis for a proposed strategy, which is distributed to engineering and procurement directors for comment. Contract terms and conditions checklist This list suggests 50 possible contract items and serves as a resource for those developing global contracts. It also serves to ensure that the negotiating team has visibility to user requirements. Project status report This report highlights the status of projects ( Completed, In-Process, Authorized or Future Idea ). A steering committee member is responsible for maintaining this report. 54 Effective Global Sourcing and Supply for Superior Results

56 Request for proposal template Global project teams develop requests for proposal from a standard document that each team customizes to fit its requirements. Currency risk guidelines These guidelines provide direction for managing currency risk when formulating global strategies. Human Resource Requirements for Integrated Global Sourcing A consistent theme that emerged from this research is the importance of employing qualified personnel to support global sourcing. Access to personnel with the right knowledge, skills and abilities ranks as one of the most important global sourcing success factors. Unfortunately, respondents indicated that the personnel who are engaged in global sourcing have only a moderate level of the knowledge and skills required for effective global sourcing. Previous research revealed that the lack of qualified personnel was the most serious problem that organizations faced as they pursued global opportunities. This earlier research also revealed that the skills and abilities of supply personnel operating across geographic locations varied more than any other factor evaluated by respondents. Hence, in crosslocational teams formed to pursue global opportunities, team members possess widely differing skills, abilities and cultural perspectives. The knowledge and skills required for global sourcing differ dramatically from those required for day-to-day operational purchasing. Personnel from buying sites or locations are usually proficient at tactically managing transactions and material flows. They are also usually quite comfortable with local sources of supply, although a bias toward familiar sources is changing as companies increasingly aggregate their purchase volumes through companywide agreements. More advanced levels of global sourcing require close collaboration between engineering and procurement as well as an awareness of worldwide suppliers. What knowledge and skills do global sourcing professionals require? The list would certainly include advanced cost analytic skills, an understanding of worldwide supply markets, the ability to negotiate and develop global contracts, effective communication and presentation skills, an understanding of the global sourcing strategy development process and the ability to think holistically beyond a site or region. Using information gathered during extensive field visits, we have developed a profile outlining the skill requirements for integrated global sourcing. Although a single individual is unlikely to be proficient in each skill area listed in Figure 22, the groups and teams that support global sourcing initiatives should have these competencies. Understanding how to conduct business with suppliers on a worldwide basis is important to global sourcing success; however, companies report that they provide less than a moderate level of training and development to their global sourcing personnel. Staffing the process with qualified personnel will require the internal development of high-potential individuals, the recruitment of talent from other functional groups or companies and the recruitment of promising college graduates. Detailed and regular assessments of employee knowledge and skill sets must also occur, and training tailored to the individual needs of the employee must be provided. Companies may find it advisable to recruit at and build relationships with leading academic institutions. By undertaking these efforts, the firm can ensure that qualified participants are available to support a globally integrated approach to sourcing. Figure 22 Global Sourcing Human Skill Requirements Strategic or holistic focus rather than operational or transactional focus Ability to work in or support non-traditional procurement areas Process management knowledge and understanding Ability to manage critical supply relationships worldwide Overall Observations Ability to understand the competitive business model Understanding of and competency in electronic business Ability to understand statistical analysis and fact-based decisions Strong knowledge of strategic cost management Global sourcing cannot succeed without a high level of integration across a variety of functional groups and with suppliers. Early global sourcing efforts involved operations and engineering, and the involvement of logistics and finance is now becoming more commonplace. Logistics groups help manage the risks associated with taking a worldwide view of sourcing, while finance provides the much-needed ability to 55

57 report and validate global savings. Finance groups will also be instrumental when calculating the impact of global initiatives on corporate performance indicators. Integrated global sourcing requires extensive information sharing with suppliers. The information most widely shared between buyers and sellers continues to relate to traditional areas of supplier performance, such as cost, quality and delivery performance, indicating that opportunities exist for greater sharing of information that is not strictly performance focused. The human resources that are required to support integrated global initiatives offer another area of opportunity. Although this is consistently noted as one of the most important factors affecting global success, survey participants reveal that the personnel who are engaged in global sourcing possess only a moderate level of the knowledge and skills required for effective global sourcing. It is unwise to assume that site-based personnel or other cross-functional representatives, who are often called upon to be active participants, are willing and prepared to support a global sourcing process. The following Good Practice highlights how one progressive company created a new position to provide human resource support to its global sourcing teams. Good Practice: Providing Human Resource Support This company, comprised of operating units in the United States and Europe, actively pursues global synergies across its procurement and design centers. The work required for managing RFIs and RFPs during the development of global sourcing strategies is extensive. To address this concern, the company created the position of full-time business analyst to manage the time-consuming tasks required of global teams. A business analyst is assigned to each team that works on a global sourcing project. The analyst is responsible for recording and reporting all data collected throughout the first four steps of the company s nine-step global sourcing process. The analyst attends all team meetings and is present at negotiations to provide information or data as required. A key part of the analyst s responsibilities is maintaining a database developed in conjunction with an external consultant. The analyst inputs the sourcing categories and subcategories that the team is analyzing, establishes RFI and RFP records and eventually inputs individual part numbers as they are received from engineers located in the United States and Europe. Analysts are central to the success of the global sourcing process. They compile and send RFI and RFP packages to suppliers, track and report response rates, input RFI and RFP responses into the database and follow up with those suppliers whose submissions are late. The business analysts also answer any questions that suppliers have or forwards their inquiries to the appropriate procurement or engineering representative. The analyst often acts as a liaison between the sourcing team and the supply base. The analyst is also responsible for providing feedback to suppliers concerning the competitiveness of their initial quotes and may invite a supplier to resubmit its quotation. (The company s software system is able to compare each supplier s quote to the best quote received.) This company fully recognizes the intensive engineering and procurement effort required to develop and implement a global sourcing strategy. By creating the business analyst position, the company has largely unburdened team members, most of whom serve parttime on a sourcing team in addition to their regular job responsibilities. Focus Case: Using Information to Support Worldwide Strategic Sourcing This case features a company that provides power, control and information solutions through its major business units to a wide range of customers and industries. With $4 billion in annual revenue and $1.4 billion in sourcing expenditures, the company maintains a vast network of 5,600 distributors, systems integrators and agents serving customers in 80 countries. The company has faced sourcing challenges that are similar to those of other producers with worldwide business units, many of which are the result of acquisitions. With more than 40 production sites worldwide, the company must contend with a variety of procurement processes and contracts, product lines, business models, supply chain relationships and information systems, as well as the varying languages, currencies and cultures of its units. This case focuses on the company s leading use of information technology to support its global sourcing and integration efforts. Strategic Sourcing Information Systems The company s early global sourcing strategy development efforts featured manual data compilation and analysis. This process yielded significant savings, but it was labor intensive, time consuming and costly. Executives recognized that a better way to access data was critical to future sourcing efforts and developed a system designed specifically to support the operating needs of the strategic sourcing organization. 56 Effective Global Sourcing and Supply for Superior Results

58 The resulting spend and supplier analysis system is a complete system and interface solution that provides the information required by the Strategic Sourcing Organization and the other organizations relevant to supply chain management. Its components include a relational database and server, a file staging server, a web and application server, a document server, an authentication server and an application source code. Exhibit 1 identifies the systems applications that are available through the spend and supplier analysis system as well as through the company s intranet and extranet. One of the most important features of this system is its ability to capture all expenditures for direct items across operating units. (Indirect items still require manual calculation of savings.) The system compares the prices paid at each location against a baseline price, which is the last price paid from the previous year. The system captures all transactions over a 12-month period, compares them against the baseline, aggregates across commodities and reports the results to executive management. While certainly not a perfect system, it is one of the more thorough, efficient and advanced reporting systems observed during this research. The system also serves as a contract repository. Most contracts contained in the system have a supporting formal agreement that includes contract language, terms and conditions, and clauses that are specific to suppliers and the company. Previously, each supply manager stored hard-copy documents in personal filing cabinets, which made references and inquiries burdensome and prohibited companywide visibility to supply contracts and agreements. The new system allows uploading and viewing of electronic copies of contract documents. Initiating a database search for a part number, supplier or contract will yield a list of matches, with links to the detail page for each item with a match. A detail page is a single page that displays as much relevant information as possible without cluttering the screen. Users across the company access this system for complete supply information and reports. Internal system development costs, which were just over $300,000, fell into four categories: planning and administration (11 percent of total development costs), application development and testing (54 percent), savings reporting feature (22 percent) and additional enhancements (13 percent). Hardware costs were minimal, since this company had excess server capacity available at a relatively low cost. To appreciate the financial payback from this system, consider the following data collection times required for developing a sourcing strategy for printed circuit boards before and after the development of the spend and supplier analysis system: Change Data collection time 40 days 1 day 39 days (workdays) Data cleansing time 20 days 7 days 13 days (workdays) Total team members Analysts required Data accuracy 85% 99% +14% Strategy development $384,000 $15,000 $369,000 costs Other commodities demonstrate similar strategy development cost savings. A decrease in the time Exhibit 1 Information Technology Applications Intranet Spend and Supplier Analysis System Extranet 57

59 required to compile commodity savings reports also yields major cost savings. Sourcing managers identified factors that were critical to the successful development, launch and widespread use of the system: An internally designed and developed system, which was cost effective and flexible according to specific company requirements Sourcing personnel who understood the objectives of strategic sourcing and the features required of the system Senior management focus on the value of strategic sourcing and support of system development efforts Availability of clean data to incorporate into the system A system design that included user needs beyond strategic sourcing, such as the needs of supply chain functions System design independence major changes to other systems not required System friendliness and usability A phased approach to system launch A dedicated information technology team using project management tools Future enhancements will include capturing indirect spend, tracking total spend with diverse and disadvantaged suppliers, tracking tooling and dies required to produce a part, expansion of supplier scorecard metrics and incorporating spend data from European and Asia/Pacific facilities. Systems that provide efficient and easy access to worldwide supply data and contracts are an important global sourcing enabler. While many companies are struggling due to a lack of data and information, this company has developed a system that is rapidly becoming an indispensable tool for global commodity managers and users across the company. 58 Effective Global Sourcing and Supply for Superior Results

60 Chapter 7: International Purchasing Offices and Sourcing in Emerging Markets This research found that international purchasing offices (IPOs, sometimes referred to as global purchasing offices or GPOs) have played an important role in sourcing in worldwide regions and countries. Companies have established these offices in both developed and emerging or low-cost economies. In this chapter we discuss the role of IPOs and their degree of success with regard to doing business in emerging markets. We present four cases to illustrate the considerations involved in sourcing in emerging markets. International Purchasing Offices In Chapter 4 we said that the formal establishment of international purchasing offices is a critical factor in global sourcing performance. IPOs represent a formal part of a firm s organizational design, and they are expected to increase in importance as the scope of integrated global sourcing expands. In this research, just under half of the participating firms have at least one formally established IPO. The data presented here apply only to those firms that have established one or more international purchasing offices. Over 85 percent of the firms that have IPOs say they are extremely important to global sourcing success, and 10 percent say IPOs are moderately important. Only 5 percent say IPOs are less than moderately important, and no firm indicated that they are limited in terms of importance. Very convincing agreement exists among respondents regarding the important role that IPOs play in supporting global sourcing objectives. Most firms agree as to the ability of IPOs to meet or exceed performance expectations or goals. Almost half of the firms with IPOs say their IPO is more than meeting or exceeding expectations and goals. Almost one-third indicate their IPO is meeting expectations, and only 20 percent express the belief that their IPO performs at a level that is below expectations. While the most common number of IPOs is one, most firms that use IPOs have more than one, and many have six or more. The following table indicates the number of IPOs among firms with at least one IPO. Number of Established Percent of IPOs Firms 1 26% 2 10% 3 15% 4 16% 5 13% 6 or more 20% No relationship exists between a firm s size or total annual purchases and the number of IPOs that the firm establishes. A positive relationship does exist between the number of IPOs that a firm relies on and the percentage of total purchases that are sourced on a worldwide basis. In other words, as worldwide purchases increase as a percentage of total purchases, the likelihood of having more than one IPO also increases. The following table highlights the regions where IPOs are established for U.S.- and Western European based firms. (Over 90 percent of the firms participating in this study are headquartered in the United States or Western Europe, and almost all firms with IPOs are U.S.- or European-based.) Again, the data apply only to those firms that have one or more IPOs established somewhere in the world. 59

61 Percent of Percent of U.S. European Firms Firms with an with an IPO IPO Located in a Located in a Region or Region or IPO Location Country Country USA 32% Western Europe 58% China 50% 28% Hong Kong 20% 24% Eastern Europe 18% 16% Asia/Pacific 14% 24% India 18% 12% Mexico 24% 0% Canada 22% 0% Japan 10% 16% Latin America/ 16% 4% South America Singapore 12% 12% Korea 4% 12% Middle East/Africa 4% 8% Taiwan 6% 12% N = 50 N = 25 This table reveals an important point. Although Asian countries are primary locations for IPOs, U.S. firms appear to be more heavily concentrated in China compared to European-based firms. European firms have a wider Asian IPO presence outside of mainland China. The following table identifies the functions that IPOs take on as they support international purchasing and global sourcing. Somewhat or Minimally or Extensively Do Not IPO Functions Perform Perform Identify potential suppliers 96% 4% Evaluate supplier capabilities 94% 6% Resolve supplier quality problems 87% 13% Resolve other problems or issues directly with suppliers 87% 13% Negotiate and execute contracts with suppliers 83% 18% Resolve supplier delivery problems 81% 19% Develop supplier capabilities 75% 25% Measure supplier performance on a continuous basis 75% 25% Evaluate product/service designs and samples 74% 26% Facilitate import/export activities 72% 28% Perform logistical coordination 70% 30% Develop/coordinate technology plans with suppliers 62% 38% 60 Effective Global Sourcing and Supply for Superior Results

62 The data indicate that IPOs provide a wide range of support, essentially acting as a full-service procurement center within a geographic region. The importance of IPOs is expected to increase as firms expand their use of integrated global sourcing. However, the challenges will also increase as new IPOs are staffed with foreign nationals hired away from other international purchasing offices. Anecdotal case evidence reveals that firms are already seeing undesirable turnover due to the hiring away of staff by other companies. This practice will likely increase the cost of maintaining IPOs and affect overall performance. Emerging Market/Lower-Cost Country Sourcing Although this research did not focus on determining the percentage of sourcing that is conducted globally with low-cost regions or countries, it is clear from the case studies, discussions with other organizations and regular business and other press releases that low-cost country sourcing is a key strategy that companies use to reduce cost. To provide insight into the magnitude of the primary issues that companies face when they source to lowercost regions, we asked survey respondents to rate the extent of 12 potential problems they might encounter when doing business with suppliers in five countries/regions. The countries or regions were as follows: Mainland China India Eastern Europe Mexico/South America Southeast Asia We established the potential problems as: 1. Adherence to contract terms and conditions 2. Actual achievement of prices quoted 3. Total cost exceeding projections 4. Protection of intellectual property 5. Government interference 6. Logistical movement 7. Tariffs/taxes 8. Leadtime stability 9. Implementation of work transferred 10. Supplier quality 11. Supplier flexibility/responsiveness to needs 12. Language/culture The problems and countries with the highest average ratings were: Average Country/ Rating Problem Type Region 1.97 Language/Culture China 1.96 Protection of Intellectual Property China 1.88 Logistical Movement India 1.86 Logistical Movement China 1.84 Leadtime Stability China 1.80 Leadtime Stability India 1.73 Supplier Flexibility/Responsiveness Eastern to Needs Europe Note: Rating scale was 1 low/minimum problem, 2 moderate problem, and 3 high. The number of responses for each measure ranged from 76 to 112. For seven of the problem categories, China had the highest average rating, and it had the second-highest average rating in four more categories. India was rated first or second in problems encountered in nine of the categories. The average ratings for problems encountered ranged from 1.40 to 1.96, which corresponds to a low to moderate score. However, the rating scores ranged from 1 to 3, with standard deviations indicating variability. We ranked the potential problem areas across all five countries/regions, based on a simple average of the country/region rating. Results are as follows: Average Problem Area Rating 1. Leadtime stability Logistical movement Supplier quality Supplier flexibility/responsiveness Protection of intellectual property Implementation of work transferred Language/culture Adherence to contract terms and conditions Actual achievement of prices quoted Tariffs/taxes Total cost exceeding projections Government interference 1.46 This analysis suggests key risk factors and countries or regions where the challenges to achieving sustainable results may be significant. For example, China s ratings are high on numerous factors, including the highest rating on government interference. Next, we focus on selected considerations in doing business in China, based on field research and other sources. 61

63 China Sourcing During the case study field research, we focused an open-ended question on sourcing in China. Following are a number of observations made by interviewees: Transportation issues can be significant. It may be difficult to obtain the required outbound shipping containers, and cost appears to be increasing at least 5 percent per year. Doing business with U.S. and Western European firms with operations in China presents significant differences from doing business with local Chinese suppliers. Local Chinese suppliers are characterized by: Somewhat limited exposure to international companies Communication difficulties with non- Chinese speaking firms (conducting business therefore takes more time) Difficulty in understanding the ownership and financial health of their own firms Due to manufacturing cost pressures and increasingly high spend in China, it is conceivable that the supply chains of developed countries firms will be run out of China. Chinese firms prices will be lower, but dealing with these firms will not be without risks. To develop local Chinese supplier capabilities fully will likely require investment in supplier development (buying companies). When transferring work to new local suppliers in China, it may be quite important to put people on the ground at the supplier to oversee the transition of work and to achieve required startup and ongoing performance. Developed-country purchasers find it difficult to allow China suppliers to leverage the local Chinese supply market; they tend to maintain too much control. Relationships are crucial, particularly in China. Furthermore, over time, the increased volume that can be leveraged helps to strengthen those relationships even more. Suppliers in Asia want to work with our company because we treat them fairly, equitably and ethically. These three elements are the major pedestals on which trust with suppliers is established and maintained. Suppliers in Asia are quick to walk away from an agreement. They attempt to disqualify themselves by lowering their quality and through other tactics when the conditions of the contract no longer suit them. The majority of Chinese suppliers are Hong Kong businessmen who are U.S.-educated. Sourcing in China provides both opportunity and risk. McKinsey & Company has suggested a total cost of ownership model to help make the case for or against sourcing in China. The assumptions underlying the model must be continually evaluated and alternative scenarios and changing company needs consistently re-evaluated. Suggested model components and special requirements are as follows: Typical Components of Model Cost of goods at factory gate Packaging costs Impact on working capital for inventory Transportation costs Duties Cost of after-sales service arrangements Licensing and branding arrangements, where appropriate Special Requirements Inventory assumptions require product-byproduct information on where title is taken (factory gate, Chinese port, end-country port, end-country distribution center) Transportation cost calculations are heavily influenced by volumes and weight per unit; require product-by-product assumptions on the basis of forecast volumes Transportation cost scenarios must be built to cover different possible volumes and modes of transportation (such as ocean freight vs. air freight) Customs classifications require expert knowledge of products and laws, such as localcontent rules for favored export classification from China Adjustments for risk require assessment of problems that could arise (such as delays in shipment), probability of their occurrence and potential cost to company 62 Effective Global Sourcing and Supply for Superior Results

64 The following cases provide additional insight into the use of IPOs and sourcing in emerging markets and China. Focus Case: Using IPOs to Support Global Outsourcing This case highlights the sourcing objectives and organization at a privately owned consumer products company with approximately 25,000 employees worldwide and annual revenues of over $4 billion. The company sells its line of products through franchises and company-owned retail outlets. This company also has 13 subsidiaries worldwide with locations in North America, the Netherlands, the United Kingdom, Japan, New Zealand and Australia. These subsidiaries, usually obtained through acquisition, either operate under the company s primary brand or retain their original brand identity. The company s primary business platforms include keepsake gifts, correspondence products, party items, family entertainment and personal development products. The correspondence products are produced in the United States, and almost all of the other products sold through the retail outlets are sourced overseas. This company is facing intense customer and competitive pressure to manage costs. Furthermore, technological innovations, specifically Web-based and PC-generated entertainment products, threaten the growth of its core businesses. Computer-based and electronic activities for children are a direct threat to its mature personal development products for children. As a result, the company has become more aware of the need to remain competitive in its worldwide markets by focusing on three critical areas: process improvements, business simplification and worldwide outsourcing. Executive managers ask three fundamental questions as they assess outsourcing opportunities: If you were starting today, would you do this internally? Would someone else pay you to do this? Is our next CEO coming from this area? Many initiatives are underway that affect process improvement, business simplification and outsourcing; this case focuses on the company s approach for sourcing outsourced finished goods for resale in its franchise and company-owned retail stores. The Global Procurement Organization The company s various procurement organizations manage an annual spend between $1.9 billion and $2.3 billion. An array of information and data-tracking systems across the company and its 13 subsidiaries makes exact procurement expenditures difficult to determine. In fact, a primary objective of the global procurement organization is to develop an information technology system that captures total spend data across the company s primary operating units and businesses. The procurement organization employs more than 300 employees worldwide, with about half working in North America, primarily at the corporate headquarters. The other half are located primarily in the United Kingdom and Asia. The company s global procurement organization is structured on the philosophy of globally led, globally managed and locally executed. A chief procurement officer leads the sourcing organization and reports to the vice president of North American Operations, who reports directly to the CEO. The global procurement organization comprises procurement teams (headed by global procurement directors), subgroups within teams (headed by global procurement managers), and categories within subgroups (headed by category managers). Commodity groups, each managed by a buyer, further subdivide the categories. Increasingly, these teams rely on the company s international purchasing offices when developing global sourcing strategies. Indirect Goods and Services Team MRO and Capital Equipment MRO 33 commodity groups Capital Equipment 17 commodity groups Technical Acquisitions 15 commodity groups Advertising Direct Mail/Catalogs Integrated Marketing/Promotions Contract Services Consulting/Risk Management 5 commodity groups Professional Services 9 commodity groups Facilities Management 9 commodity groups Human Resource Services 6 commodity groups Finished Goods Team Hong Kong Buying Office Corporate Marketing All Printed/2D Product 7 commodity groups All Gifts 3D Product 4 commodity groups 63

65 Production Materials and Services Team Printing and Print Consumables Non-Product Printing/Merchandise 18 commodity groups Product Printing and Print Consumables 11 commodity groups Folding Cartons/Corrugate 7 commodity groups Chemicals and Contract Manufacturing Chemicals 23 commodity groups Contract Manufacturing 9 commodity groups Facilities Management 9 commodity groups Paper All 23 commodity groups Global Transportation Team North American Transportation International Transportation Manager Transportation Administration A Strategic Approach to Finished Goods Outsourcing A major portion of total company expenditures is devoted to finished goods outsourcing through a Hong Kong based IPO. This group is responsible for sourcing finished goods for resale in the company s retail outlets. These items simply are not available from North American suppliers. A key aspect of this company s IPO organizational structure is that it resembles a mini-business, with many of the same functions and skills that are present in the company s U.S. headquarters. The company s total workforce in Asia, including those outside of procurement, is about 250 people; six expatriates serve in key managerial roles. The majority of staff work in the Hong Kong office. Smaller field offices are located in Thailand, Sri Lanka and mainland China. This company has had a sourcing presence in Asia since the 1970s. In China, which has become the center of sourcing activity in Asia, the company s approach has been to develop a support structure of local or in-country agents. These agents have leveraged their knowledge of the market and the cultural nuances, and to some degree have compensated for the company s lack of experience in this region. As their confidence and understanding of Asian sourcing quickly matured, executive leaders recognized the importance and opportunity of establishing a stronger local presence. The company accomplished this with the establishment of an IPO staffed with highly skilled expatriates and local employees who brought skills that could quickly support corporate objectives. The majority of the sourcing activity in Asia involves finished goods (i.e., three-dimensional products for retail sale). To optimize these often seasonal, highvolume and short life cycle products, the company established a fully equipped cross-functional team to make timely business decisions. Today, the IPO in Hong Kong, which is a separate company called Hong Kong Finished Goods, consists of personnel working in the following groups: Quality management and assurance Engineering Procurement Creative design Transportation and logistics Supplier code of conduct governance and compliance A unique aspect of the cross-functional structure is that the entire organization reports directly to the chief procurement officer in the United States, although only a small percentage of the IPO staff is aligned to traditional procurement/supply chain activities. This organization has much greater responsibilities than traditional IPOs, and company managers have described it as a mirror image operation of the corporate group. IPO personnel conduct supplier audits, identify new suppliers, approve finished good designs, negotiate supply agreements and manage supplier quality and performance directly from the Hong Kong office. The Hong Kong Finished Goods company also helps with contracts with Asian suppliers that provide direct materials. Any currency risk management issues are handled by the corporate treasury group. A continuous objective of procurement leaders is to replace the expatriate presence with highly skilled local leadership. An expatriate, typically a U.S. citizen assigned to the Hong Kong office, costs the company several hundred thousand dollars annually. Because of the significant cost of supporting expatriates in places like Hong Kong and Singapore, moving more local nationals into key leadership roles should provide significant cost benefits. IPO Lessons Learned For this company, a primary lesson learned over 30 years of doing business in Asia is that developing a cross-functional IPO staff, consisting primarily of country nationals, ensures that local suppliers and other support entities can easily interact with company personnel. The interactions may range from quickly addressing tactical issues to collaborating in finished goods design. A growing risk is that the demand for the nationals who staff Asian IPOs will build as U.S. and 64 Effective Global Sourcing and Supply for Superior Results

66 European firms increasingly establish their Asian sourcing presence. The company has committed considerable energy and resources to ensure that suppliers are continuously improving their processes with support from IPO personnel. Establishing a long-term commitment through a regional footprint has been an important component of success in this company s Asian sourcing strategy. This commitment has required patience and perseverance. From a human resource perspective, this company is finding that about half of the expatriates that return to the United States do not stay with the company. Sourcing leaders believe this is due primarily to their inability to adapt to an environment that does not have the same independence and power they had on their overseas assignment. Considerable scrutiny is now given to the selection of individuals for expatriate assignments. Critical Success Factors The way this company has built its organization in Hong Kong and the neighboring regions is central to its success. The mirror concept essentially having each of the core business functions represented within the IPO has allowed the IPO to engage in a more progressive way with the Asian supply base instead of dealing strictly with sourcing or operational issues. The role and representation of the IPO extend beyond the bounds of the procurement organization to add value in areas such as quality, creative design, transportation, code of conduct and other important functions. Creating a strong local presence with minimal expatriate support reduces the necessity of key leadership returning to the United States and struggling to return to often less autonomous roles with a perceived lower positional status. Again, the cost of supporting expatriates can be a significant component, and cost therefore is often one of the essential determinants for the business case of supporting expatriate employees. Conclusion This company understands firsthand the value that can be gained by developing IPOs that have similar skills, capabilities and objectives to those of the corporate sourcing group. Creating an IPO that eventually requires minimal expatriate support will reduce expenses as well as minimize the human resource issues that are often associated with sending personnel overseas. Corporate executives feel they have established an effective way to manage suppliers in Asia: using local nationals to manage market changes, cultural sensitivities and the political subtleties of doing business across this region. With the objective of managing their three-dimensional finished goods business, this company s structure has provided a solid platform that is meeting or exceeding quality, cost, time to market and other critical business metrics. As commodity teams develop global sourcing strategies for direct and indirect items, such as ink, paper and other categories, the ability to leverage skills already in place in Asia will provide important support for these emerging global strategies. Focus Case: Global Sourcing and Migration to Lower-Cost Region This large global electronics and service company has annual sales in the billions of dollars and more than 200,000 employees. The firm produces goods and provides services from worldwide locations. It focuses on achieving the lowest possible cost structures while remaining extremely responsive to customer requirements. It has been increasing its use of outsourcing since the late 1990s, especially to lowercost regions. Global Sourcing The company established global sourcing councils in the mid-1990s, creating approximately 30 councils for both direct and indirect purchases. These councils, which included representation from worldwide business units and geographies, were charged with finding the best suppliers worldwide and achieving the lowest possible prices and overall costs while meeting customer and business unit needs. Examples of councils include services, facilities, technology products and software on the indirect side and contract manufacturing, electronic components and mechanicals on the direct side. The councils were characterized by the following structure: European Leader Global Council Chair Person Asia/Pacific Leader Rest-of-World Leader Each of the councils interfaced closely with individual business units to identify needs across the world, regularly asking, Why can t we source globally rather than regionally? In addition, the members of the councils received training focused on strategic sourcing 65

67 and effective teaming. Information systems provided quality supply and demand information by category on a regular basis. E-systems effectively linked the company to its suppliers, providing requirements data, supplier performance information and financial transaction linkages. The global councils performance was regularly evaluated on the basis of cost reductions and performance in support of the business units and customers. Outsourcing Trends The firm recognized that to be most competitive on a worldwide basis, it would have to determine its true core competencies and increase its use of outsourcing. Internal studies concluded the following: 1. Core competencies were becoming more focused and narrowly defined, which would affect the future structure of the company, resulting in outsourcing and business divestiture. 2. The company could not do all business in highcost geographies and would have to follow cost advantages in the form of prices, country and supplier cost structures, and tax incentives. 3. Suppliers were becoming more capable. As the firm increased its outsourcing, the global councils assisted in internal consolidation of requirements and resolving internal process problems. The focus was to aggregate, consolidate, improve and take action such as to outsource or resource. The firm s approach was to outsource items simple to design and manufacture while focusing internally on complex and unique products and system integration. Each business unit decided which items to outsource. If the risk was considered to be too high, the business unit might not outsource a particular item, even if it was a simple product. Overall, one approach to the outsourcing decision was to evaluate the comparative cost to produce and the cost to exit, as follows: High Comparative Cost to Produce Low First Move Choice Choice Last Move Low High Cost to Exit Role of Global Councils The most price-competitive supply bases for many purchase categories were moving from higher-cost developed countries to lower-cost regions. As the supply base continued to shift to these regions, the global commodity councils and procurement had to react. The role of the councils has increasingly included the following functions: Working with suppliers in transitioning of outsourced business Finding capable suppliers worldwide with competitive cost structures in countries offering tax incentives. Examples of countries where sourcing was increased were India, China, the rest of Asia/Pacific, Eastern Europe, Hungary, Ukraine, Romania and Ireland. Cultivating new emerging regions Working with suppliers as part of extended supply chains Moving offices and personnel to the center of the supply base. For example, the firm increased the number of key sourcing personnel, including executives, in China. Ensuring that U.S.-based personnel are paid to oversee offshore suppliers Ensuring that emerging market suppliers are meeting minimum labor/working condition standards Ensuring that suppliers have been embedded in the emerging market country and can perform rather than just moving to the region to attract business Learning from initial sourcing strategies in Japan, Malaysia, and other countries where similar problems were earlier encountered (such as language, customs, responsiveness and so forth) Establishing single global contracts Developing supplier performance information from internal customers and clients for 70 percent to 80 percent of spend Being able to sell global sourcing as the best price and business solution Ensuring necessary resources are available in emerging markets to work with suppliers and customers Ensuring that global commodity team leaders are able communicators worldwide and across cultures and languages, with the ability to evaluate trade-offs Developing global vs. regional cost improvement targets and roll-up performance data These factors, combined with cross-business unit and functional strategy development, increased the complexity of the buy and required greater personnel 66 Effective Global Sourcing and Supply for Superior Results

68 capabilities. Each performance area required a specific improvement focus. Focus Case: Migrating a Supply Base to China This major division of a global electronics firm sold products to other internal divisions and to external customers worldwide. Sales exceeded $1 billion. Products included power solutions for multiple end products sold to final consumers. In the late 1990s, competitive pressures compelled the company to reduce overall costs. To achieve cost reductions, the firm relocated significant internal manufacturing to China and Malaysia. It also determined to migrate the supply base to China for cost and logistics reasons. Initially about 15 to 20 suppliers were established in China. Annual spend was about 90 percent with six or seven suppliers (between $325 million and 375 million). Purchases included semiconductors, cells, plastics, mechanicals and electronics. Functional activities included sourcing, supplier quality and development, logistics planning and operational purchasing at the manufacturing plants. As the spend in China increased, the company determined that the supply chain should be led out of China. Staff in the United States was reduced by 80 percent, while 20 to 25 individuals were positioned in China and 10 remained in the United States to interface with product and process engineering. The China-based staff were all nationals, with the exception of one Malaysian. As this move was taking place, the following realities surfaced and had to be managed: U.S. suppliers were far more mature than China suppliers, resulting in much more time having to be spent in working with the Chinese suppliers. The process to develop the supply base began with an audit team to identify gaps from needed capabilities. Typically, a 50 percent cost improvement was found, but investment was needed to develop the suppliers. The approach was to grow one supplier at a time due to the required focus. Development time was almost immediate for stable, lower-technology items such as mechanicals, but development was longer for leading-edge technology. Four categories of suppliers were established: High Technology Low Shorter Critical Focus to Build Relationship Longer Elapsed Time to Develop Low-cost leaders (40 percent to 60 percent of spend) Security blanket (availability with established suppliers; 15 percent to 20 percent of spend) Cost challenges (10 percent to 30 percent of spend) Technology leader (5 percent to 10 percent of spend) Given short product life cycles with demand fluctuations, the goal was to focus suppliers on getting product ready for launch and then to manage shortages and excesses with a very operational and agile focus. It was necessary to establish aggressive payment and delivery terms with JIT hubs. The company had to work with speed to develop the Asia supply base to gain benefits. The company needed to put people at the supplier plant to ensure quality and timely production. In one major buy, a number of professionals were put at the supplier for 12 months. In addition, it was found to be best not to move business to a second supplier, if at all possible, due to the variability of supplier capabilities. The company discovered that the Chinese suppliers caught up fast and performed effectively. It was learned that in China, relationships with Chinese suppliers are critical, as contracts do not always appear to be binding. It is also important to recognize that power, frequently in the form of continuing business volume, is one key element to a good relationship. It is very difficult for U.S.-based firms to relinquish control of Chinese suppliers in order to 67

69 leverage the Chinese tier two supply market. For best results, the company must relinquish control to take advantage of what can be done in China (for example, to achieve speed and agility without oversight). The biggest challenge may be managing the extended supply chain, which requires effective e-system and logistics planning and execution. Overall results from the Chinese suppliers have been positive in terms of price and performance. In fact, the Chinese suppliers have required some Japanese suppliers to improve various elements of their technical performance regarding product performance to stay competitive. Focus Case: Initializing Global Sourcing This high-technology process company assessed its procurement and logistics group with the assistance of an external consultant. It found that it was far too U.S.- centric. The firm believed that it had to transform its sourcing from local to regional to global. However, the company was not driven by need to achieve immediate cost reductions and to source to as many suppliers in low-cost countries as possible. It did have important cost reduction targets of 3 percent to 5 percent annually. Thus, the company took a more deliberate approach to grow its global sourcing for cost and overall performance results. The company employed more than 200 purchasing and logistics professionals at corporate and plant locations. The plant buyers reported to plant manufacturing and also had solid lines to corporate. Corporate procurement controlled performance appraisal and salary increases. In 2002, the firm began to implement its global strategy. At that time, limited manufacturing was taking place at one location in Asia/Pacific. Europe had major operations, but purchases were not significantly leveraged for scale economies, nor were significant purchases made from low-cost markets. The company s initial steps were to move manufacturing from Western to Eastern Europe for cost-reduction purposes. In addition, a degree of outsourcing and resourcing to low-cost country suppliers achieved savings between $3 million and $5 million. These initial savings resulted from shifting lower-risk, lowertechnology business. However, the firm faced two major issues. First, it did not have sufficient human resources to establish far distant purchasing offices in order to find and qualify new suppliers and then transition the business and problem solve with the new suppliers. Second, the firm did not want to take any significant risks in its higher-technology, high-profit businesses. In addition, the company s specification-setting process at the design engineering level frequently resulted in the design-in of U.S. suppliers. To develop a more global approach to sourcing and supply, the company took the following actions: 1. First, a consulting firm with experience in lowcost countries was hired to find suppliers for selected production and nonproduction items. 2. In addition, the firm reviewed about 10 commodity families and specific items by passing them through the two screens shown below, to establish what would be sourced worldwide to achieve significant cost reduction. Screen 1 Profit by Business Screen 2 High Low High Technology & Intellectual Property Requirements Low No Focus High Cost of Commodity in the United States No Focus Future Potential Primary Target Area Future Potential Primary Target Area High Global Sourcing Cost Reduction Opportunity Overall, the focus was to source globally those items from business/product areas with both low margins and lower technology requirements, where alternative lowercost suppliers could be found somewhere in the world. The consulting firm helped to source the selected items, for significant cost reductions. At this time, the company also had headcount restrictions on hiring and was focused on minimizing overhead costs. Therefore, staff could not be added based on justifying an IPO 68 Effective Global Sourcing and Supply for Superior Results

70 given the level of sourcing in particular regions. Rather than being driven by a major corporate dictate, business movement was being driven by cost improvement opportunities on a systematic basis. IPOs would grow based on actual business and opportunity. In addition, global procurement and logistics would have to enhance their working relationship with company R&D so as to increase the pool of suppliers who could be qualified early in the product development process. Otherwise, traditional suppliers would be designed in, which would constrain the global reach of sourcing and potential opportunities. Observations This case reflects the complexity of finding, qualifying and gaining the acceptance of potentially highperforming suppliers on a global basis. When the organization also faces constrained overhead cost-torevenue ratios, hiring limitations and an appropriate concern about the risk associated with new and distant suppliers, there are no easy answers. The company must base its strategies on facts and appropriate risk-to-return ratios. 69

71 Chapter 8: Global Sourcing and Supply Trends and Strategic Directions In Chapter 3, we presented the five-level global sourcing and supply model. Firms clearly are moving toward Level IV and Level V, signaling the need for more integration across business units and functions to achieve superior and sustainable performance results. This need for increased integration is being driven by increased global competition and customer demands for better value, including price, responsiveness and overall customer service and satisfaction. In this chapter, we briefly discuss selected emerging business and resulting global sourcing and supply strategy trends, improvement suggestions from survey respondents, and a set of assessment questions to help you establish your firm s journey to leading-edge global sourcing and supply. Competitive Challenges The following observations are drawn from our research and work done by McKinsey, Economist/KPMG, IBM Business Consulting Services and Joan Magretta of the Harvard Business School. A number of critical trends that are impacting business strategies and are considered important to business executives have been identified, including: Increasing affluence in emerging economies Faster pace of technological innovation Growth of low-cost manufacturing in emerging economies Aging population in the developed world Economic liberalization Disruption in supply of natural resources Geopolitical instability Greater capital mobility These factors, coupled with threats of increased competition from established and new firms, rising oil and raw material prices, the threat of product service commoditization, opportunities in emerging markets, new technologies, and trade liberalization require a worldwide view of company and sourcing and supply strategy. In addition, both the need for innovation and seniorlevel expectations that supply must provide more value creation (rather than taking a singular cost reduction focus) require that the firm find and work with the best suppliers, anywhere in the world. Clearly, the need to improve global sourcing and supply and achieve Level IV and Level V status is being driven by worldwide competitive and customer environments and global business strategies of the firm, which compel firms to achieve superior worldwide sourcing and supply performance. Survey Respondent Suggestions for Improvement To help provide insight into actions firms need to take to enhance their global sourcing and supply performance, survey participants were asked an open-ended question: What are the most important changes at your company that would enable global sourcing and supply to deliver significantly superior results to overall company competitive performance? We received 318 responses to this question. These responses were placed into the appropriate Critical Strategy Area of the 10X Leadership Model. 7 Based on this classification, the categories with the highest numbers of responses were: 7 The 10X Leadership Model is available to sponsoring companies as part of the Knowledge Management System (KMS.2). 70 Effective Global Sourcing and Supply for Superior Results

72 Achieving globally integrated sourcing and supply Developing effective organization structures, governance and teaming Establishing effective worldwide e-sourcing and supply systems Improving measurement and evaluation and data Enhancing human acquisition development and retention These findings, although qualitative and judgmental in category placement, are aligned with the findings based on the quantitative data and past studies (discussed earlier). Selected quotes are shown below to illustrate the major ideas from the five strategy areas. Globally Integrated Sourcing and Supply More cross-global coordination meetings Strengthen and add International Procurement Centers International logistics knowledge Total expansion to Global Category Management Less silo mentality, more global Organization Structure/Governance and Teaming Full engagement at parent (group) level to use leverage across business units Knowledgeable leadership (knowledge of procurement competencies) at group level with engagement by all business units Continued improvement in global, crossfunctional strategy teams Clear communication infrastructure between headquarters and affiliates Fully trained and qualified global sourcing teams Organizational shift to a more centralized model Executive sponsorship of global sourcing to be managed centrally Removal of organizational barriers to crossbusiness unit sourcing Integration between purchasing and other functional areas (especially engineering) for efficient qualification process Engage stakeholders to accept longer supply chains vs. comfort (local) suppliers Global (Europe/Middle East/Africa) supply chain management coordination with cross-country commodity teams E-Sourcing and Supply Web-based end-to-end sourcing process (electronic) Centralized (global) information technology systems for information sharing Common purchasing spend database Data systems that give visibility of the spend Worldwide databases Compatible enterprise resource planning/information systems worldwide Establish a cross-enterprise information database: contract, supplier information, prices and specification Technology procurement tool: data analytics, RFX, contract, contract compliance Measurement and Evaluation, Including Companywide and Cross-Enterprise Linkages for Total Value Competitive Analysis Obtain robust understanding of competitive market and industry analysis Better tracking methodology/system of the realizations of the sourcing and supply group Improve ability to track savings for nonrecurring purchases (capital, services) Better clarity of spend Monitoring of results and performance worldwide in the same format Spend data warehouse for all sites (we are 75 percent there) Meticulous data analysis and reporting tools Better understanding of market demands in the future Better info/data to make better sourcing decisions Human Resource Acquisition, Development and Retention Hire local resources in the region Upgrading local purchasing managers and teams Additional trained staff to focus on this activity Qualified and trained personnel Hiring of qualified personnel in identified countries People need to have the right talents (procurement/financial/language) More experienced personnel in the area of global sourcing Not only do these findings reflect case study observations, but they also reflect a number of overall business trends. Global Sourcing and Supply Strategy Trends The following 10 emerging trends were developed from the field and survey research and prior related research. These strategic directions should be compared to your firm s global sourcing and supply initiatives, as they will likely impact the overall performance results achieved. 71

73 Strategy Trend 1: Expand Worldwide Search Global sourcing and supply achieved initial cost reduction benefits from sourcing in Mexico and Asia/Pacific countries such as China, Malaysia and India. Eastern European countries were then sourced. Benefits were clearly achieved from low-cost labor. The search for suppliers now widens to all low labor cost countries worldwide and into regions of these countries where wages are still low, while wages have increased in larger cities. Strategy Trend 2: Supplier Development Labor arbitrage was the source of initial cost reductions achieved through global sourcing. As manufacturing and service suppliers become established in low-cost regions worldwide, the opportunity exists to improve operations and apply lean processes at low-cost country suppliers. However, this may be somewhat more difficult than in North America and Europe, based on available skills, time to implement and general resistance. However, the opportunity exists to improve productivity and quality significantly. Strategy Trend 3: Total Cost/Value Decision- Making Total cost/value decision-making in the supplier evaluation and selection process should be enhanced at many organizations. Initial global sourcing initiatives chased price, and frequently the total cost, including major risks or supplier selection impact on cost elements other than price (e.g., inventory, transportation, quality), were ignored. In addition, valid identification of all nonprice cost elements of a global sourcing decision can result in strategies for improvement in actionable performance areas (e.g., fix a quality problem through process improvement at the supplier). An example is reducing the line rejection rate for electronic items that are frequently repaired or scrapped versus correcting the fundamental process problems and producing a quality product the first time. Strategy Trend 4: Risk Mitigation Since global sourcing and supply requires the creation of networks of suppliers and using locations worldwide (i.e., multiple supply chains are created across firms and geographies), exposure to many categories of risk increases dramatically. As firms are increasing global sourcing and will continue to do so, critical risk areas across the supply chains must be identified and specific risk identification and mitigation strategies put in place. For example, to what extent could the rapid buildup of unit production at Chinese factories limit assurance of supply? To what extent could long supply lines cause significant increases in obsolescence in products with a short product life cycle? What can be done to eliminate quality problems at the source when evidence suggests a 30 percent defect rate? What geopolitical risks are we likely to encounter next year? Strategy Trend 5: Worldwide Leading-Edge Category Strategy Development Category strategy development processes resulting in documented sourcing and supply strategies require enhancement. The process model should minimally include: 1. Current strategy definition and results 2. Category/strategy general goals 3. Fact finding regarding requirements, market conditions and suppliers 4. Specific strategy objectives 5. Strategy alternatives and selection 6. Implementation plan 7. Results measurement In addition, given global sourcing, the strategies should: (a) emphasize total supply chain considerations, (b) include Tier 2 and 3 supplier and market analysis and strategies, and (c) place significantly more emphasis on physical supply chain/logistics issues, risk mitigation, and total cost/value considerations, both short and longer-term. Strategy Trend 6: Functional Integration Global sourcing decisions must be made on a crossfunctional/cross-locational basis. Even though the percentage of firms achieving and moving toward such intra-company integration has grown, opportunities for improvement are significant. This integration requires close coordination, information sharing and a common focus on business unit and corporate objectives. Furthermore, organizations need to make sourcing and supply decisions based on product/service and business unit needs while leveraging the scale and capabilities of the company overall. For example, lower unit prices based on scale economies at the expense of increasing time to market or creducing ustomer responsiveness cannot be the goal without careful analysis of the trade-offs. If the business unit and its products and services are competing on technology, new products and speed, cost may have a lower priority. Strategy Trend 7: Establish Close Linkages With Thought Leaders and Universities in Regions and Countries Worldwide Our research suggests that nationals (versus expatriates) will make up the most significant percentage of the workforce in countries and regions. 72 Effective Global Sourcing and Supply for Superior Results

74 Therefore, hiring, developing, retaining and providing promotion opportunities for highly qualified people will be critical. By establishing close working relationships with leading universities and thought leaders in the country/region with supply centers of expertise, the company can identify the best people for hiring and development. Thought leaders also provide emerging ideas and trends affecting sourcing and suppliers in a country, such as political change, legal and investment directions, and so forth. Strategy Trend 8: Locate Sourcing and Supply Leadership Close to Worldwide Centers of Supply An example of this strategy is IBM s moving its CPO and key staff to China to be near the supply base for electronics, assembly and services. Being near the center of expertise and available competitive resources enables a firm to develop strong relationships with suppliers to achieve buyer/supplier development, gain preferential treatment, and better understand the supply markets. Strategy Trend 9: Link Global Sourcing and Supply Closely to Outsourcing and Supply Chain Integration Strategies Frequently firms may outsource to low-cost regions for a price advantage of 15 percent to 45 percent. However, the requirements of effectively operating long physical supply chains may be overlooked, along with the need to achieve the cross-locational and cross-functional integration earlier discussed. Unless these decision areas are tied together, performance can suffer. For example, firms have encountered extended leadtimes, poor quality, inventory accumulation and obsolescence; poor start-ups costing sales volume; and lack of acceptance of low-cost region sourcing decisions by key internal locations and functions. In addition, customer-focused reasons for sourcing globally must be considered. Strategy Trend 10: Develop More Fully Integrated Supply Chains Through Supply and Demand Information Transparency Information such as customer demand, inventory levels, production schedules, capacity and so forth will have to be shared in order to achieve high(er) levels of supply chain performance. Compatible enterprisewide e-systems across the supply chain will have to be developed. In addition, key person-to-person contacts between firms in extended supply chains will have to be enhanced to achieve needed coordination. Assessment Questions Firms are on a journey to achieve most effective global sourcing and supply. The following 10 high-level assessment questions can help organizations determine their progress on the journey. In addition, by combining the rating scores for each question, the organization can find its current position in a basic three-stage maturity model. For each question, the scale shown indicates a level of overall maturity. 1. The business unit has established and implemented companywide global business strategies, and global sourcing and supply is engaged in developing and implementing these strategies because of its importance to the overall performance of the business unit. Not at all Somewhat Completely An executive (CPO) is part of the executive team and can implement, with the support of business leaders, global sourcing and supply strategy across the business unit on a center-led basis. Not at all Somewhat Completely A common global sourcing and supply process has been implemented, including global category strategy development. Not at all Somewhat Completely Global cross-functional and cross-locational category sourcing teams have been implemented. These teams are staffed with highly qualified members trained in category strategy development and effective teaming processes, and they are provided necessary financial and other required resources. Not at all Somewhat Completely International (or global) purchasing offices are operational in key geographies worldwide, or a business unit site performs all of the critical work of an IPO. Not at all Somewhat Completely A global database has been implemented showing annual spend by identifiable purchase categories, volume requirements by location and supplier performance. Not at all Somewhat Completely

75 7. Compatible e-systems and valid information have been implemented worldwide within the business unit and with suppliers/customers, including global contracting and total cost evaluation systems. Not at all Somewhat Completely The research reveals that there is no single silver bullet firms are using to achieve global sourcing and supply success. The research also indicates that the journey to global sourcing and supply excellence is only partially completed given the degree of implementation of critical strategies, based on company interviews and the e-survey. More work is required by firms worldwide. 8. A critical mass of human resources to plan for and execute global sourcing and supply strategies, as well as performance measures to determine overall contribution to the business unit, are in place. Not at all Somewhat Completely Global sourcing and supply operations are executed at using site/geographical locations (versus company headquarters). These operations include purchase releases, expediting, resolving problems, scheduling, inventory management and so forth. Not at all Somewhat Completely Focused logistics planning and execution on a worldwide basis is implemented. Not at all Somewhat Completely Although subjective, this high-level self-assessment of selected critical success factors is based on the research findings. Overall rating scores suggest a level of global sourcing and supply maturity. Rating Points Maturity Level Excellent/Mature. Improve a key area Developmental. Look for major gaps and prioritize improvements Very early stage. Establish strategy. Concluding Comment As firms continue to outsource and extend both their internal and external supply chains, focused investment in global sourcing and supply should be a key company strategy to exploit performance opportunities. To increase the likelihood of achieving superior global sourcing and supply performance over time, firms will need to ensure high capability across multiple enabling factors, because these factors appear to work together in affecting performance. The factors, earlier discussed, include common sourcing process, centrally coordinated decision making, information availability, IPOs and so forth. 74 Effective Global Sourcing and Supply for Superior Results

76 APPENDIX A E-Survey Research Methodology Description of Data Analysis Methodology A variety of statistical techniques were used to evaluate the data collected during this research project. The following paragraphs provide a basic description of these techniques. Basic Descriptive Statistics First, the data were examined using descriptive data analysis, including a review of the central tendency (mean) and dispersion (standard deviation) of each variable (survey question). 1 The purpose of this analysis was to gain a basic appreciation of the characteristics of the data. Underlying Data Structure The data were then examined to determine whether questions, when grouped together, represented a higher-order construct. The purpose of this analysis was to reduce the question-level data to a fewer number of more meaningful/insightful factors (constructs). The technique used in this analysis was a principal components factor analysis with varimax rotation. This technique is often referred to as exploratory factor analysis or EFA. 2 The result of this analysis did, in fact, allow us to group questions into more meaningful factors (constructs). 1 For instance, the performance factors were developed through this approach. These performance factors included (1) lower purchase price/cost, (2) lower total cost of ownership, (3) reduced supply chain costs, (4) improved supply chain performance other than price, (5) improved quality, (6) improved sourcing process, (7) improved supplier cycle time, delivery performance, and flexibility and responsiveness, (8) better inventory management across the supply chain and (9) improved overall performance to external customers. Reliability Reliability addresses the question: Did we measure something well? More specifically, reliability is the question of whether the survey questions included in a factor (construct) are relatively consistent and stable. The reliability of each factor (construct) was evaluated by a Cronbach alpha test. 3 All factors (constructs) used in the analysis demonstrated a sufficient degree of reliability. Convergent and Discriminant Validity Convergent validity is the notion that the questions that represent a factor (construct) represent the notion of that factor (construct) well. 4 Discriminant validity examines whether the questions that represent a factor (construct) do not also represent other factors. 5 Each factor (construct) was examined for convergent and discriminant validity. 1 Cohen, J., et al. Applied Multiple Regression/Correlation Analysis for the Behavioral Sciences, third ed Mahwah, NJ: Lawrence Erlbaum Associates, Publishers. 2 Ibid. 3 Cronbach, L. Coefficient Alpha and the Internal Structure of Tests Psychometrika, 16: Cook T., and D. Campbell. Quasi-Experimentation: Design & Analysis Issues Chicago: Rand McNally. 5 Ibid. 75

77 A APPENDIX Only those factors (constructs) that demonstrated sufficient convergent and discriminant validity were used in the statistical analysis. Causal Modeling In Chapter 4, we relate the performance factors identified above to a variety of drivers of these performance factors (see Chapter 4, Figure 13). The drivers included (1) defined global sourcing process, (2) centrally coordinated/centrally led decision making, (3) site-based control of operational activities, (4) real-time communication tools, (5) information sharing with suppliers, (6) availability of critical resources, (7) sourcing and contracting systems and (8) international purchasing office support. We conducted this causal modeling using a multiple moderated regression approach. 76 Effective Global Sourcing and Supply for Superior Results

78 APPENDIX Global Sourcing and Supply E-Survey Questionnaire B 77

79 B APPENDIX CAPS RESEARCH/PROJECT 10X The Center for Advanced Purchasing Studies Arizona State University Robert M. Monczka, Ph.D., Director INTRODUCTION Welcome to the /Project 10X Global Sourcing Strategies and Practice Research Initiative. We appreciate your willingness to take about 60 minutes to complete this survey. We will combine your and other company responses with our field research to provide your business unit with results important to current and future global sourcing and supply initiatives. This research is focused on determining those strategies and processes leading companies are using to achieve competitive advantage through integrated global sourcing and supply. In addition, we want to better understand which worldwide sourcing and supply approaches are most effective for achieving superior results. To be most effective, we need participation by a person(s) at your organization who has considerable insight into company-wide competitive and global sourcing supply strategies and their integration across businesses (as appropriate), functions, geographies and sites. In addition, all individual responses will be confidential and not attributed to any specific company. Global Sourcing Defined - Global sourcing includes the sourcing of requirements combined from two or more of your business unit s location/sites outside the country borders where purchased goods or services are used. For purposes of this research, we are requesting that you respond for your business unit s most important purchases. These purchases will typically make up 70%-80% of your business units annual spending. RESPONDANT PROFILE 1. Name of Person Completing Survey: 2. Title of Person Completing Survey: 3. Company Name: 4. Street Address: 5. City: 6. State: 8. Postal Code: 7. Country: 9. Telephone: 10. Fax: 11. Address: 78 Effective Global Sourcing and Supply for Superior Results

80 GLOBAL SOURCING & SUPPLY STRATEGY AND PRACTICE APPENDIX B 12. Please indicate the organizational level of the business unit for which you are responding. Company-wide/Corporate Strategic Business Unit (SBU) Division Region Plant/Site Other (please specify): Note: When responding to the following questions please answer using the reference point of the organization you checked in question 12. Also, please respond for your most important purchases which make up 70-80% of your business unit s annual spend. 13. Business unit name (the business unit could be any of the above shown in question 12): 14. Business unit headquarters location (country or region) Canada Middle East South Korea Mexico South Africa Taiwan United States Australia Other Asia/Pacific country South America Mainland China Other (specify): Central America/ Caribbean Hong Kong Eastern Europe India Western Europe Japan 15. Please indicate the primary industry of the business unit for which you are responding Aerospace Automotive Chemical Components and Systems Construction Consumer Non-Durables Distributor Education Electronics Engineering Services Financial Institutions Food and Nutrition Healthcare Heavy Machinery High-tech Network Infrastructure Other (please specify): Hospitality & Tourism Household and Cosmetics Media and Entertainment Metals and Glass Processing Mining Pharmaceuticals Professional and Information Services Pulp and Paper Retail Technical Appliances and Equipment Telecommunications Services Transportation Equipment Transportation Services Utilities White Goods 16. Please indicate the approximate 2004 annual REVENUE for your business unit (in US Dollars) Under $100 million $101 - $500 million $501 million - $1 billion $1.1 billion - $3 billion $3.1 billion - $5 billion $5.1 billion - $10 billion $10.1 billion - $15 billion $15.1 billion - $20 billion Over $20 billion 79

81 B APPENDIX 17. Please indicate the approximate 2004 total annual PURCHASES (SPEND) for your business unit (in US Dollars) Under $100 million $101 - $500 million $501 million - $1 billion $1.1 billion - $3 billion $3.1 billion - $5 billion $5.1 billion - $10 billion $10.1 billion - $15 billion $15.1 billion - $20 billion Over $20 billion 18. Please indicate the locations where your business unit conducts some form of business. Markets Design/ Operating/ Major Procurement Served Engineering Manufacturing Supplier Centers Locations Locations Locations Canada Mexico United States South America Central America/ Caribbean Eastern Europe Western Europe Middle East South Africa Australia Mainland China Hong Kong India Japan South Korea Taiwan Other Asia/Pacific Country Other (please specify): 19. Approximately what percentage of your business unit s annual spend was sourced on a worldwide basis in 2000? 1-10% 41-50% 81-90% 11-20% 51-60% % 21-30% 61-70% 31-40% 71-80% 20. Approximately what percentage of your business unit s annual spend is currently sourced on a worldwide basis? 1-10% 41-50% 81-90% 11-20% 51-60% % 21-30% 61-70% 31-40% 71-80% 21. Approximately what percentage of your business unit s annual spend will be sourced on a worldwide basis over the next five years? 1-10% 41-50% 81-90% 11-20% 51-60% % 21-30% 61-70% 31-40% 71-80% 80 Effective Global Sourcing and Supply for Superior Results

82 APPENDIX 22. Compared to your total spend for each of the following categories, approximately what percent is sourced on a worldwide basis? B 0-20% 21-40% 41-60% 61-80% % Direct Materials (i.e., materials that go directly into your end product) Maintenance, Repair, and Operating Supplies Services Capital Equipment/ Facilities Finished Goods (i.e., complete items for resale) 23. What are the characteristics of the goods/services being sourced to low cost countries? (Please check all that apply) Goods/services with higher labor content Goods/services with low level skills requirements Goods/services with moderate to high skills requirements Goods/services with high technology content/requirements Other (please specify): COMPETITIVE SITUATION 24. What degree of annual performance improvement is required to stay competitive for the following at your business unit? Low Moderate Significant Price/Cost Product/Service Technology Process Technology On-Time Delivery/Perfect Orders Goods/Service Quality Flexibility/Responsiveness Collaborative Working Relationships with External Customers New Product/Service Development Cycle-Time Friendliness to Physical Environment 25. Please indicate the degree of emphasis you place on each of the following competitive strategies for your most important goods/services and customers. Limited Moderate Most Emphasis Emphasis Significant Emphasis Product/Service Innovation Operational Excellence/Low Cost Producer Customer Intimacy/Total Customer Solution Other (1) Other (2) 26. If you answered other in the previous question, please indicate the competitive strategy/strategies for which you are responding. Other (1): - Other (2): - 81

83 B APPENDIX 27. Overall, how is your business unit primarily structured/governed? Decentralized Decentralized with some coordination Centralized 28 At what level are most of the important business unit s overall strategy decisions made? Locally (site level) Regionally Worldwide 29. When considering the executive leadership that purchasing and supply directly reports to at your business unit, how involved or engaged is this leadership in the development of global sourcing and supply strategies? Not Involved Somewhat Extensively Involved Involved How are important purchases coordinated across your business unit? No coordination Informal communication and sharing of information Lead plant/business group By a lead region Center led group coordinates and performs the sourcing A central headquarters group coordinates and performs the sourcing 31. Please identify the current purchasing and supply management decision making authority within your business unit. Highly Decentralized Highly Decentralized with Some Centralized Coordination Please indicate the degree to which the following activities or decisions are decentralized or centralized for important purchases at your business unit. Highly Decentralized Highly Decentralized with Some Centralized Coordination Develop category or commodity purchase family strategies Locate potential supply sources Evaluate and select suppliers Negotiate and establish contracts Manage continuous supplier relationships Manage supplier development activities Issue goods/services releases or purchase orders Expedite goods/services when necessary Resolve performance problems with suppliers Execute schedules/inventory plans Plan inventory levels Establish goods/services specifications Develop requirement schedules for goods/services Develop and implement logistics strategies and plans Measure supplier performance Provide supplier performance feedback 82 Effective Global Sourcing and Supply for Superior Results

84 APPENDIX 33. Please identify the level of centralization/decentralization when developing sourcing strategies and plans for your most important purchases at your business unit. B Highly Limited Moderate Center- Highly Decentralized Coordination Coordination Led Centralized Direct Materials (i.e., items that go directly into your end product) Maintenance, Repair and Operating Supplies Services Capital Equipment/ Facilities Finished Goods (i.e., complete items for resale) 34. Please indicate where the execution of purchases/services for your business unit primarily occurs. (Please select only one per line) Plant/Site Geographic Business Company- Centralized Region Unit Wide Location Center-Led Center-Led Direct Materials (i.e., items that go directly into your end product) Maintenance, Repair and Operating Supplies Services Capital Equipment/ Facilities Finished Goods (i.e., complete items for resale) 35. How extensively has your organization aligned and coordinated worldwide sourcing and supply activities with the following groups? Not Somewhat Completely Integrated Integrated Integrated At All Finance Technology/Engineering Operations/Manufacturing Marketing/Sales Logistics/Transportation 36. To what degree are sourcing performance goals established, measured and reported on a worldwide basis? Goals are not Clearly Goals are Somewhat Goals are Clearly Established, Measured Established, Measured Established, Measured and Reported on a and Reported on a and Reported on a Worldwide Basis Worldwide Basis Worldwide Basis

85 B APPENDIX 37. To what extent does your business unit have a comprehensive process that requires documented sourcing strategies for important categories of goods and services? No Formal Strategy A Formal Strategy A Formal Development Process Development Process Development Process Requiring Requiring Requiring Documentation Exists Documentation Exists Documentation Exists but is not Well Followe and is Followed To what degree are business unit purchase volumes aggregated on a worldwide basis for important categories of goods and services? Not Aggregated Somewhat Aggregated Fully Aggregated If business unit or company wide purchase agreements exist, are lower-level buying organizations/locations required to comply with these agreements? Not Required Somewhat Required Required to Comply to Comply to Comply To what degree are worldwide sourcing strategies developed with representatives from different functional groups for important purchases? Not at All Somewhat Extensively To what degree are worldwide sourcing strategies established for important purchases by representatives from different locations? Not at All Somewhat Extensively To what extent are relevant data (i.e. total spend, prices, volume requirements, using locations, specifications, scope of work) available for important goods and services that are sourced worldwide? Data Not Available Data Somewhat Available Data Completely Available Does your firm have formally established International/Global Purchasing Offices (IPO/GPO)? Yes No 44. How many IPOs/GPOS are established? One (1) Four (4) Two (2) Five (5) Three (3) Six or more (6) 84 Effective Global Sourcing and Supply for Superior Results

86 45. Where are the IPOs/GPOS located? (Please check all that apply) APPENDIX B USA Eastern Europe India Canada Japan Middle East/Africa Mexico Korea TaiwanOther (please specify) Latin/South America Singapore Mainland China Hong Kong Western Europe Asia/Pacific Other 46. To what degree do your IPO/GPOs perform the following functions to support your global sourcing efforts? Do Not Somewhat Extensively Perform Perform Perform Identify potential suppliers Facilitate import/export activities Evaluate supplier capabilities Develop supplier capabilities Measure supplier performance on a continuous basis Negotiate and execute contracts with suppliers Resolve supplier quality problems Evaluate product/service designs and samples Resolve supplier delivery problems Resolve other problems or issues directly with suppliers Develop/coordinate technology plans with suppliers Perform logistical coordination 47. To what degree are your business unit s IPOs/GPOs meeting your expectations and goals? Not Meeting Meeting Expectations Exceeding Expectations and Goals and Goals Expectations and Goals How important are your business unit s IPOs/GPOs to the success of global sourcing and supply performance? Limited Importance Moderate Importance Significant Importance

87 B APPENDIX 49. To what degree have formal improvement processes been established with your business unit s most important suppliers on a worldwide basis for each of the following? Not At All Somewhat Extensively Scope of work definition for products, processes or services Demand planning Capacity planning External or end customer order fulfillment Problem identification between buyer and supplier Product/service design or specification Process design Technology development and roadmapping Joint risk sharing Overall communications Forward schedule visibility E-systems communication/ information Trust development Obtain supplier suggestions and evaluation approaches Develop innovative solutions to meet end-customer needs Protect intellectual property of supplier(s) Protect intellectual property of buyer(s) Development of joint investments Commit buying company investment on suppliers behalf Decision-making consistency Supplier rating of your business unit s performance Inbound logistics Visibility of goods across the supply chain 50. To what degree does your business unit share information with your important suppliers on a worldwide basis for each of the following? Not At All Somewhat Extensively Supplier quality performance Supplier delivery performance Supplier cost performance Supplier responsiveness/flexibility Supplier technology contribution Supplier cycle-time performance Supplier physical environment compliance Supplier feedback about buying company performance Ranking of supplier performance against other suppliers Future technology plans Future demand plans Future investment plans 86 Effective Global Sourcing and Supply for Superior Results

88 APPENDIX 51. To what extent has your organization established sourcing practices that take into account or try to understand the varying cultures and business practices of important suppliers globally? B Not At All To a Moderate Extent To a Great Extent To what extent do personnel who are engaged in worldwide sourcing have the required knowledge and skills to perform effectively? Not At All To a Moderate Extent To a Great Extent To what extent are personnel who are engaged in global sourcing provided training and development about how to conduct business with suppliers on a worldwide basis? No Training and Moderate Level of Training Extensive Training and Development Provided and Development Provided Development Provided To what extent does your business unit work to create and enhance trust with your most important suppliers on a worldwide basis? Not At All Moderately Extensively To what extent have the following influenced your business unit s decision to source globally? Not At All Moderately Significantly Best price/cost Availability of technology Tax considerations Labor considerations (cost, availability) Your business unit s market penetration Countertrade/offset Supply base availability/ leadership Supplier quality Supplier availability Supplier responsiveness Demands/suggestions from your major customers Other significant factor 56. If you answered other in the previous question, please describe. 87

89 B APPENDIX 57. Please indicate the degree to which each of the following issues presents a problem when sourcing key items worldwide. Not A Moderate Major Problem Problem Problem Managing currency exchange risks Lengthened material/component/ service ordering lead times Lack of qualified business unit personnel to support the worldwide sourcing process Difficulty evaluating non-domestic supplier capability and performance Obtaining appropriate duty drawbacks Ability to determine the total cost of a non-domestic sourcing decision Users not utilizing worldwide contracts or sources Locating qualified suppliers Inconsistency of supplier performance across using locations Availability of cross-business unit information Internal culture-based resistance Political uncertainty Requirements to buy in the local market Supplier quality Supplier delivery Obsolescence of in-transit inventory Management of in-transit inventory Transfer of work to new supplier(s) 58. When pursuing the development and execution of global sourcing and supply strategies, what communication tools and integrating mechanisms does your firm use? Do Not Use Use Use Somewhat Extensively Web-based meeting tools (LiveMeeting, Webex, etc.) Electronic mail Groupware (Lotus Notes, Microsoft Share Point, etc.) Traditional postal mail Next Day or Second Day express mail service Intra-company mail Video conferencing Telephone conferencing Face-to-face meetings 88 Effective Global Sourcing and Supply for Superior Results

90 59. Do your information systems provide for each of the following on a worldwide basis? APPENDIX B Not At All Somewhat Extensively Worldwide database of purchased goods/services Common coding identification for purchased goods/services Information system to measure contract compliance Actual worldwide goods and services usage information by location Purchase price for goods and services by location Supplier delivery performance Supplier quality performance E-systems for releasing requirements schedule E-systems for invoices Cross-site/location/business unit E-system interfaces Contract management system Electronic funds transfer with suppliers Receive advanced shipping notices Visibility of goods across the supply chain 89

91 B APPENDIX 60. Please identify how critical each of the following items are to the effectiveness of your business unit s global sourcing and supply strategies. Not A Moderately Extensively Critical Critical Critical Factor Factor Factor Budget support (travel for example) Time for personnel to develop worldwide strategies Availability of required information and data Common goods/services coding system across buying units Executive requirements or mandate to source worldwide Centralized procurement structure Decentralized procurement structure Ability to identify common requirements across buying units Personnel with required worldwide knowledge, skills and abilities Awareness of potential suppliers on a worldwide basis Compatible information systems across worldwide business units Compatible information systems with suppliers Use of cross-functional teams to develop worldwide strategies Having an established process to guide worldwide contract development Suppliers who are interested in worldwide contracts Internal customer buy-in to worldwide sourcing contracts External support (such as consultants) Availability of suppliers with worldwide capabilities Availability to measure worldwide supplier performance Cultural compatibility with worldwide supplier Language similarity with worldwide suppliers An executive steering committee to guide the process International/global purchasing office support Effective logistics planning and execution Please indicate the average change in performance due to your worldwide sourcing efforts for your business unit s most important purchases for each of the following categories: (Please check the one percentage which best reflects your organization s average change in performance for each category) 61. Unit purchase price: No Change Average Performance Change Reduced By Increased By 1-10% 1-10% 11-20% 11-20% 21-30% 21-30% 31-40% 31-40% 41-50% 41-50% 51-60% 51-60% 61-70% 61-70% 71-80% 71-80% 81-90% 81-90% % % 90 Effective Global Sourcing and Supply for Superior Results

92 62. Quality: No Change Average Performance Change Improved By Decreased By 1-10% 1-10% 11-20% 11-20% 21-30% 21-30% 31-40% 31-40% 41-50% 41-50% 51-60% 51-60% 61-70% 61-70% 71-80% 71-80% 81-90% 81-90% % % 63. Supplier order delivery cycle time: No Change Average Performance Change Shortened By Lengthened By 1-10% 1-10% 11-20% 11-20% 21-30% 21-30% 31-40% 31-40% 41-50% 41-50% 51-60% 51-60% 61-70% 61-70% 71-80% 71-80% 81-90% 81-90% % % 64. Supplier on-time delivery: No Change Average Performance Change Improved By Worsened By 1-10% 1-10% 11-20% 11-20% 21-30% 21-30% 31-40% 31-40% 41-50% 41-50% 51-60% 51-60% 61-70% 61-70% 71-80% 71-80% 81-90% 81-90% % % 65. Supplier responsiveness/flexibility: No Change Average Performance Change Improved By Worsened By 1-10% 1-10% 11-20% 11-20% 21-30% 21-30% 31-40% 31-40% 41-50% 41-50% 51-60% 51-60% 61-70% 61-70% 71-80% 71-80% 81-90% 81-90% % % APPENDIX B 91

93 B APPENDIX 66. Your business unit s inventory investment costs: No Change Average Performance Change Decreased By Increased By 1-10% 1-10% 11-20% 11-20% 21-30% 21-30% 31-40% 31-40% 41-50% 41-50% 51-60% 51-60% 61-70% 61-70% 71-80% 71-80% 81-90% 81-90% % % 67. Suppliers inventory investment costs: No Change Average Performance Change Decreased By Increased By 1-10% 1-10% 11-20% 11-20% 21-30% 21-30% 31-40% 31-40% 41-50% 41-50% 51-60% 51-60% 61-70% 61-70% 71-80% 71-80% 81-90% 81-90% % % 68. Transportation/logistics costs: No Change Average Performance Change Decreased By Increased By 1-10% 1-10% 11-20% 11-20% 21-30% 21-30% 31-40% 31-40% 41-50% 41-50% 51-60% 51-60% 61-70% 61-70% 71-80% 71-80% 81-90% 81-90% % % 69. Total cost of ownership: No Change Average Performance Change Decreased By Increased By 1-10% 1-10% 11-20% 11-20% 21-30% 21-30% 31-40% 31-40% 41-50% 41-50% 51-60% 51-60% 61-70% 61-70% 71-80% 71-80% 81-90% 81-90% % % 92 Effective Global Sourcing and Supply for Superior Results

94 70. Overall performance of your business unit to your external customer(s): No Change Average Performance Change Improved By Worsened By 1-10% 1-10% 11-20% 11-20% 21-30% 21-30% 31-40% 31-40% 41-50% 41-50% 51-60% 51-60% 61-70% 61-70% 71-80% 71-80% 81-90% 81-90% % % APPENDIX B 71. Please indicate the results achieved by your business unit from implementing global sourcing and supply strategies for each of the following: Significantly No Change Significantly Worse Improved Material/component/service quality Access to product technology Purchase price/cost Delivery reliability Ordering cycle time from supplier Purchasing process transaction costs Supplier responsiveness/ flexibility to buying unit needs Access to process technology Transportation/logistics costs Total cost of ownership Standardization or consistency of the sourcing process Early supplier involvement during new product/service development Supplier relationships Client/stakeholder satisfaction with sourcing Executive satisfaction with sourcing Penetration of new markets Buying company inventory levels Supplier inventory levels Overall performance to your external customer 93

95 B APPENDIX 72. Please indicate the degree to which your business unit currently has implemented the following global sourcing and supply capabilities or features: Not Partially Broadly Implemented Implemented Implemented Company-wide contracts in place with suppliers worldwide Regular sourcing strategy coordination and review meeting with worldwide managers Formal required process for developing global sourcing strategies Worldwide purchasing databases or data warehouses that provide visibility to a wide range of information Integration of technical design specialists, operations, logistics and sourcing personnel across worldwide design, specification and buying locations Cross-function/cross-location global ` category management teams International/global purchasing offices Common worldwide item or commodity coding schemes Supplier performance measures and measurement systems worldwide Personnel who view sourcing requirements from a worldwide perspective Executive leadership that communicates a clear global sourcing and supply vision Fully trained and experienced global sourcing personnel Integrated and common sourcing and supply information systems across locations/business units Global logistics 94 Effective Global Sourcing and Supply for Superior Results

96 APPENDIX 73. Please identify the extent of problems encountered by your business unit when sourcing from each of the following countries or regions if sourcing in these locations (low=minimal problem, high=significant problem) B Mainland India Eastern Mexico/ Southeast China Europe South Asia America Moderate Moderate Moderate Moderate Moderate Low High Low High Low High Low High Low High Adherence to contract terms and conditions Actual achievement of prices quoted Total cost exceeds projections Protection of intellectual property Government interference Logistical movement Tariffs/taxes Lead time stability Implementation of work transferred Supplier quality Supplier flexibility/ responsiveness to needs Language/culture 74. Consider a least successful and most successful global sourcing strategy effort for a purchase category at your business unit when responding to the following items. Please check the appropriate response for the worst and best case scenario for each statement. For Our Worst or For Our Best or Least Successful Most Successful Global Sourcing Global Sourcing Experience Experience Strongly Somewhat Strongly Somewhat Disagree Agree Disagree Agree Followed a rigorous and well-defined approach or process Relied on cross-functional teams to develop a global sourcing strategy Involved users or operating personnel throughout the process Effectively measured and reported the results achieved from the global sourcing process Received support from executive champion(s) or leader(s) Featured regular strategy review and coordination sessions between worldwide functional or site-based managers Involved the right individuals as participants or team members Featured direct site visits to evaluate supplier performance capabilities Identified an adequate pool of potential suppliers worldwide Accurately measured the total sourcing cost to each using or site location Identified and managed global sourcing risks Featured complete and available information to participants Featured well-established communication methods among participants Integrated logistics considerations in sourcing decisions 95

97 B APPENDIX 75. Please describe any other factor (for an important purchase category) that significantly affected your global sourcing results in a positive or negative way. 76. From the following descriptions please identify the one that best describes your business unit s current level of worldwide purchasing or sourcing efforts. Engage in domestic purchasing only Engage in worldwide purchasing or sourcing as needed (i.e., reactive worldwide sourcing) Proactively pursue worldwide sourcing as part of a site or location s purchasing strategy (but not coordinated between buying sites or locations) Integrate and coordinate worldwide purchasing or sourcing strategies and processes across buying locations or sites (but not with other functional groups) Integrate and coordinate worldwide purchasing or sourcing strategies and processes across global buying locations and with other functional groups (operations, engineering, design, marketing, etc.) 77. From the following descriptions please identify the one that likely describes your business unit s level of worldwide purchasing or sourcing efforts in three to five years. Engage in domestic purchasing only Engage in worldwide purchasing or sourcing as needed (i.e., reactive worldwide sourcing) Proactively pursue worldwide sourcing as part of a site or location s purchasing strategy (but not coordinated between buying sites or locations) Integrate and coordinate worldwide purchasing or sourcing strategies and processes across buying locations or sites (but not with other functional groups) Integrate and coordinate worldwide purchasing or sourcing strategies and processes across global buying locations and with other functional groups (operations, engineering, design, marketing, etc.) 96 Effective Global Sourcing and Supply for Superior Results

98 was established in November 1986 as the result of an affiliation agreement between the W. P. Carey School of Business at Arizona State University and the Institute for Supply Management TM. It is located at the Arizona State University Research Park, 2055 East Centennial Circle, P.O. Box 22160, Tempe, Arizona , telephone The Mission Statement: CAPS contributes competitive advantage to organizations by delivering leading-edge research globally to support continuous change and breakthrough performance improvement in strategic sourcing and supply. Research published includes more than 70 focus studies on purchasing/materials management topics ranging from purchasing organizational relationships to CEOs expectations of the purchasing function, as well as benchmarking reports on purchasing performance in 26-plus industries. CAPS, affiliated with two 501(c)(3) educational organizations, is funded solely by contributions from organizations and individuals who want to make a difference in the state of purchasing and supply chain management knowledge. Policy guidance is provided by the Board of Trustees, consisting of: Jean Baderschneider, ExxonMobil Global Services Craig Brown, Intel Corporation Phillip L. Carter, D.B.A., Ken Carty, The Coca-Cola Company Harold E. Fearon, Ph.D., C.P.M., (retired) Kathleen R. Fuller, IBM James Hart, Rockwell Automation Bradley Holcomb Judith Hollis, Wendy s International, Inc. Cecil House, Southern California Edison Company Vince Hrenak, Raytheon Network Centric Systems Daniel Krouse, Hallmark Cards, Inc. Donald Klock, Colgate-Palmolive Company Mary McDaniel, FedEx Corporation Maureen Merkle, AT&T Services, Inc. Robert Mittelstaedt, Jr., W. P. Carey School of Business at Arizona State University Robert Monczka, Ph.D., C.P.M., /ASU Anthony Nieves, C.P.M., Hilton Hotels Corporation Paul Novak, C.P.M., Institute for Supply Management Jim Scotti, Fluor Corporation, Chair, David Sorensen, General Mills, Inc., Former Chair, Terry Sueltman, Temple-Inland Inc. Vic Venettozzi, LORD Corporation 97

99 2055 E. Centennial Circle P.O. Box Tempe, AZ Telephone (480) is jointly sponsored by the W. P. Carey School of Business at Arizona State University and the Institute for Supply Management