Global Supply Chain Management is Becoming the Main Issue of Businesses Essay
Due to the globalization and increase in the offshore sourcing activities, global supply chain management is becoming one of the main issues of several businesses. Global supply chain gives importance to the company’s worldwide interest rather than concentrating on the local and national market place. There has been a considerable expansion in global supply chain especially in the field of automobile and computer industries (Taylor, 1997; Dornier et al., 1998). This growth in the globalization motivated the interest of various researchers in the field of global supply chain management. According to Joseph Carter, the global supply chain management has mainly three stages (World Class Supply): Stage 1: International Purchasing: In this stage, when an organization first enters into the global purchasing, some of the main areas were organizations focuses are on the cheaper prices, controlling the inventory costs and leveraging volumes. Stage2: Global Sourcing: In this particular stage, the organization starts giving importance to the supplier capability, production strategies and also concentrates on customer markets. Stage 3: Global Supply Management: The supply chain networks are optimized with the help of logistics and productive capacity management. At this stage, the organizations will be able to effectively minimise the risk in the global sourcing and achieve competitive advantage. Due to political and technological pressures and development, the whole trading is very much linked with the worldwide financial market. A small fall in a particular nation’s economy can affect the worldwide financial market. There are many firms which are increasingly sourcing from around the world, therefore in order to stabilise the negative effects in a nation’s economy International Monetary Fund and the World Bank are taking necessary steps. To know about the future of supply management, the Centre for Advanced Purchasing Studies (CPS) conducted a study, which supported the below conclusions (World Class Supply Management, : Global sourcing strategies will be considered as one of the main source of competitive advantage. There will also be a separation between the tactical sourcing and the strategic sourcing work. There will be an increase in the expectation of the supplier’s capability both, regionally and globally and a reduction in the number of suppliers to the firms, in order to maximize leverage globally. In order to increase the companywide leverage, the supply management will be integrated with the firm’s future plans. More Information system technologies and complex skills are required in order to cope with the global uncertain market. During 1980s and 1990s, many of the Western firms experience a decline in their competitiveness, which lead to the growth of research on the topic of International Purchasing (Robert J. Trent and Robert M. Monczka, 2003, Pg: 608). Purchasing processes are described by using different terms in various literatures, such as international sourcing, global sourcing, foreign sourcing and worldwide sourcing. According to Dobler and Burt, 1996, many of the firms are replacing the term ‘international sourcing’ with the term ‘foreign sourcing’ and some of the leading companies with more broader international term ‘global sourcing’ (Amy Zhaohui Zeng, 2000, Pg: 222). For the successful implementation of global sourcing, it is very important to get information about the overseas suppliers and to understand the stages in the development of strategies. According to Monczka and Trent; 1991, 1992, there are four phases for the international procurement (Amy Zhaohui Zeng, 2000, Pg: 223): Phase 1: Concentrating only on the domestic purchasing. Phase 2: Purchasing internationally only on the basis of need, designate the local and national buyers for global purchasing. Phase 3: Companies will start to establish offices globally, and considers international purchasing as a procurement strategy. Phase 4: Integration of international procurement strategies, in which firms starts sourcing to the different parts of the world by integrating with the world wide sourcing. With the help of global configuration, the firms can access to the cheap labour cost, raw materials, wide market, greater financing opportunities and many other additional inducements from the governments (AlHashim, 1980; Kogut and Kulatilaka, 1994). Distinct markets and variety sources of supply motivated the domestic competitors to target on the overseas market; the main objectives in their priority list for the international purchasing are the cost reduction, innovation, technology and risk spreading (Shan Rajagopal and Kenneth N. Bernard, 1994). pg4. According to Frear et al., 1992; Birou and Fawcett, 1993; Monczkaand Trent, 1991 and Swamidass, 1993 ,firms by employing international sourcing not only has reduced cost and increased quality, but also able to develop flexibility and reduce delivery lead times (Martin Fraering and Sameer Prasad, 1999, Pg :451) As a result of these advantages, many multinational firms started engaging in the global sourcing activities. There are some researches carried out in the field of global sourcing, relating to the main managerial issues and complexity of the global sourcing, reasons for the global sourcing and the also on the cost advantages and disadvantages. ( (Shan Rajagopal and Kenneth N. Bernard, 1994). pg4.(PARAPHRASE))))According to Paul Herbig and Brad O’Hara, 1996 (pg: 44), there are four main determinants for the global sourcing strategy, they are the capability and the resources of the company, suppliers and partners availability, volumes and variability of the sourcing and the degree of offshore integration with the operational activities. In order to reduce cost, some of the firms in Europe and Japan are less concentrating on the internal sourcing activities (Swamidass and Kotabe, 1993).According to Arnold, 1987 global outsourcing also helps in achieving good quality materials, economies of scale and also in obtaining experienced knowledge from the global purchasing activities (Martin Fraering and Sameer Prasad, 1999, pg: 452). From the research conducted by Caddick and Dale (1987) on the international purchasing strategies, it was proved that the materials were available for cheaper prices and of high quality in the international market, the research also suggested that the main concern of the purchasing people were the currency fluctuations and it should be handled by experienced purchasing official (Jaideep Motwani and Suraj Ahuja, 2000, Pg: 172). According to Novack and Simco (1991) sourcing is considered as a complex process, which highly contributes towards a firm’s competitive advantage (Tony Ching-Tung Chan, Kwai-Sang Chin and Ping-Kit Lam, 2007, Pg: 777). Nearly 50-70 % of the firm’s total production cost or sales revenue is used for the sourcing activities, which includes purchase of raw materials and components or any other goods or services (Presutti, 2003; Lo and Yeung, 2004 and Tayles and Drury, 2001). According to Chopra and Meindl (2003), by effective strategic sourcing, a company can save 10-20 times as much as it costs for their outsourcing activities. Through effective sourcing structure a firm can combine its core competencies with the supplier’s abilities and skills, which helps in gaining competitiveness. Purchasing/Outsourcing Decision: Managing the purchase decision making and the selection of suppliers is considered as a challenging tasks in the global supply chain. Purchasing has a good role to play in the new global business world; it is the most important strategic element in the supply chain (Morash et al., 1996; Markland et al., 1998). Many firms are engaging in the global purchasing activities, in order to achieve competitive advantage. Due to the strategic implications of the global purchasing, organisations are giving much more importance for outsourcing decisions (Ronan McIvor, 2000, Pg: 22). According to Yoon and Naadimuthu (1994) Outsourcing decision can contribute towards profitability, which helps in developing the financial position of the firm. According to Probert et al., (2000) the sourcing theories are of two different perspectives; the cost and strategic. Transaction Cost Economics (TCE) is considered as the conceptual basis model for the outsourcing decision, which is originated from Coase (1937). The logic behind TCE is the interaction of transactional and behavioural assumptions. According to Williamson (1975 and 1985), there are two behavioural characteristics which arises the transaction cost; Bounded rationality and Opportunism. The transaction characteristic also deals with two assumptions; asset specificity and uncertainty. Bounded Rationality: According to Simon (1957), “Human behaviour is intendedly rational but only limitedly so”. The rationality of an individual is limited to his ability to process information. Opportunism: Some people take advantage of the situations for their own gains. According to Williamson (1975), “Self-Interest seeking with guile”. Asset Specificity: It refers to the specialised assets, which are considered risky as the full value of the asset cannot be transferred to another supplier if the contract or relationship prematurely terminates. The asset specificity is divided into four types (Williamson); human asset specificity, site specificity, physical asset specificity and dedicated assets. Uncertainty: The future is uncertain, according to Williamson (1985), there are two types of uncertainty; Environmental uncertainties, as the future of demand or supply, technology cannot be predicted, and behavioural uncertainties, as it difficult to predict the behaviour of a relationship with the partners. The transaction characteristic and the behavioural characteristic, together determines the level of transaction cost. The costs incurred for planning, adapting, coordinating and safeguarding exchange are known as transaction cost. If the transaction cost level is ‘higher’, it is better for the firm to ‘make’ internally rather than buying (Strategic supply management). The main issue for the sourcing decision is to determine the boundaries between the two extremes; vertical integration and outsourcing. According to Williamson, the decision is made in relation to the scope of cost reduction and significance of asset specificity (Ronan McIvor, 2000, Pg: 23). There are many researchers, who focussed on the transaction cost and cost analysis; Ellram and Maltz (1995), Williamson (1991), Walker and Weber (1984) are some of the examples for this. According to Probert et al, there are strategic perspectives, which focus on other than the variable ‘cost’ for the sourcing decision. Many of the researchers focussed on more other aspects besides costs for sourcing decisions (Anette Brannemo, 2006, Pg: 549). Core competence is a term which is commonly used in connection with the sourcing decision, the work of Prahalad and Hamel (1990) gives an idea about the relationship of core competence to outsourcing, they argue core competency as the collective learning in an organisation to coordinate and integrate production skills and technologies. They also argue that, an organisation can develop core competencies by collaborative working and learning from their partners (Ronan McIvor, 2000, Pg: 23-27). According to David J. Collis (1991), the core competencies are the essential resources which are very much in need for the strategic position of the organisation. Developing strategies on the basis of core competencies, rather than only thinking on the dominating market, can benefit the organisation by segmenting the organisation in a different way. According to Jennings (1997), Quinn and Hilmer (1994); cost, supplier relationship, core activities and technologies are the issues to be considered while making sourcing decision, which will guide the organization in the process without following a particular framework (Ronan McIvor, 2000, Pg: 24). Even though there have been some researches carried out in this field, many of the sourcing decisions are made purely based on the cost. Many of the companies still lack a strong framework for evaluating their sourcing decision. McIvor has developed a framework model for the sourcing decision by connecting company’s overall strategies. He has given importance for three main aspects, they are (Ronan McIvor, 2000, Pg: 24): Value chain perspective: According to Porter (1985), the outsourcing decision should be considered as an activity within the company’s value chain. This aspect helps in recognising the value added activities, thus contributing towards the competitive position of the organisation. Core Competency: Core competency thinking helps the firm to focus on the core activities and reorganise their value chain, which helps in achieving and maintain a long term competitive advantage. Supply Base influences: According to Lau and Hurley, 1997; Ellram and Edis, 1996, the framework also considers the supply base for the outsourcing process, due to the increased outsourcing companies are developing collaborative relationship with the suppliers, which helps them in reducing the risk associated and maintain competitiveness. Supplier Selection: Supplier selection is also considered as one of the main issues in the supply chain management. According to Goffin et al (1997), it is considered as a key issue because of the cost of the raw materials and other essential components, which constitutes the overall cost of a product and also many of firms spent major share of their sales revenues for the purchasing activities. Selecting right suppliers helps in reducing the purchasing cost and maintaining firm’s competitiveness (Ferhan Cebi and Demet Bayraktar, 2003, Pg: 395) In order to cope with the worldwide challenges, the firm needs an approach for their supplier selection. There are number of models and techniques developed for the selection of domestic suppliers, but models for the selection of international suppliers are limited (Hokey Min, 1994, Pg: 24). According to Sarkis and Talluri, 2002, for the analysis of supplier selection decision strategic and operational factors should be considered, along with the tangible and intangible factors. Some of the important operations and strategic factors include quality, flexibility and delivery (Ferhan Cebi and Demet Bayraktar, 2003). According to Carter and Narasimhan (1990), even though quality is a main factor for the selection of international suppliers, there are other factors for evaluating the supplier such as the financial position of the firm, exposure of the foreign firm, communication, willingness for a long term relationship with the procuring firm (Jaideep Motwani, Mohamed Youssef, Yunus Kathawala and Elizabeth Futch, 1999). According to Dickson (1966) and Weber et al. (1991) the identification of the supplier selection criteria is one of the main issues for the assessment of the suppliers. Many researches have been carried out in the field of supplier selection, According to Dickson (1966); there are 23 supplier selection criteria, which should be considered while making decision for the supplier selection. After many other researches, multi-objective programming for the supplier selection was introduced by Weber and Ellaram (1993). Later, integrated Analytical Hierarchy Process (AHP) and Linear Programming (LP) approach was introduced by Ghodsypour and O’Brien (1998), which supported in the decision making process of supplier selection. Besides these reseraches, there were empirical studies conducted for the supplier selection by Choi and Hartley (1996), Verma and Pullman (1998), Humphreys et al. (2001) and Tracey and Tan (2001). There were other models proposed which increases the total utility of a supplier (Ferhan Cebi and Demet Bayraktar, 2003). Some of the models were developed with small changes and improvements from the existing models such as, Timmerman (1986), introduced weighted-total method and Soukup (1987) improved Gregory’s (1986) suppliers matrix approach, by introducing vendor performance matrix, which helps in evaluating the suppliers performance under different unexpected situations. Even though many of the models were developed, none of the models provided a systematic approach for measuring the quantitative and qualitative factors. In order to overcome these drawbacks Analytical Hierarchy Process (AHP), proposed by Saaty (1980) and Multi-Objective Programming (MOP) was used for supplier selection, among which AHP was common (Hokey Min, 1994). AHP is one of the commonly used methods for the supplier selection since the early 1990s. This method enables the decision maker to rate each potential suppliers on the basis of equally weighted criteria’s and factors, the rating will be given according to the importance of the decision and the decision maker will choose the supplier scored the highest score with their over all performance. AHP is designed in way that it can handle both tangible and intangible criteria’s. Even though this method is easy and simple to use, there is a chance for an error in the subjective decision made by the decision maker and also can equally weight the criteria’s which simplifies the selection scenario, it also cannot consider the risk and uncertainty factor for assessing the supplier performance (Strategic Supply Management). According to William Ho, Xiaowei Xu and Prasanta K. Dey (2009), after analysing seventy-eight supplier selection and evaluation articles, AHP-GP is considered as the most popular integrated approach and quality, delivery and cost, in this particular order, as the most popular criteria for selecting the supplier. In the integrated AHP-GP model, the AHP provides the weightings for the alternative suppliers and these weightings are integrated with the Goal-Programming (GP) model in order to determine the perfect set of the suppliers. Even though there are many models developed, many of them are limited to the domestic supplier selection problems; many important factors for the international supplier selection are not considered (Hokey Min, 1994, Pg: 25). Benefits and Problems of Global sourcing: Global sourcing helps in yielding more rewards and at the same time there are some potential problems in practising global sourcing. It needs additional efforts when compared to internal sourcing, but can help in increasing profit. According to Herbig and O’Hara (1996), some of the disadvantages for the global sourcing includes, transportation cost, brokerage fee, difference in the currency exchange rate, political risk, etc. International logistics is also a problem, as it covers a larger distance area than domestic logistics. A longer distance creates complexity and chances for the things to go wrong, like unexpected delays causing the flexibility of the inventory management. Cultural differences and government regulations are also considered as disadvantages of global sourcing. Cultural differences include the difference in the beliefs, values, languages, customs, manner, etc. The difference in the culture creates communication gaps and can effect the supplier evaluation and the relationship with the suppliers in the global sourcing. There are also many government regulations which should be faced by the buying firms, like tariffs, quotas and various kinds of trading bills, etc which are considered as one of the disadvantage for the global sourcing. (Jinsook Cho and Jikyeong Kang, 2000, Pg: 547). Apart from the cultural and language differences, there are chances for lower quality, infrastructural deficiencies, poor technology and equipments, etc (K.W. Platts and N. Song, 2010). The reasons for global sourcing can vary depending upon various industries and over time. There are many researches conducted in order to know about the reasons for global sourcing by various researchers like Monckza and Trent (1991); Gilibert (1998); Gregory (1999); Min and Galle (1991), etc. However, the main reasons for global sourcing are because of the cost reduction, quality and supplier availability. High quality with lower cost is what every customers want, cost for the products can be different in different countries, due to change in the labour cost , as the labour cost is comparatively less in developing countries than in developed countries (Zeng and Rossetti, 2004, pg: 786-792). According to Mol et al. (2005), global sourcing is a balance between the lower manufacturing cost in foreign countries and less transaction cost in the domestic countries. Quality of a product and service is nowadays a very important factor in the competitive business environment, which helps a firm to boost its competitiveness and product loyalty. There are high chances for obtaining the required level of quality for a product, through global sourcing. Availability is also one of the main reasons for global sourcing, if the desired product is not available in the domestic market, the domestic buyer relies on the foreign countries, from where the product is available(Jinsook Cho and Jikyeong Kang, 2000, Pg: 547). Some of the other benefits of global sourcing includes; better timelines, advanced technology and opportunity to select better suppliers. Apart from these benefits, the company can improve reputation and image, global competitiveness, better delivery time and expanded customer base, which helps the buying firm to sell their product to their foreign supplier’s country, as the trading restrictions will be minimum between those particular countries (World Class Supply Management).