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Transformational Outsourcing Strategy

 

The strategic view of global sourcing—called transformational outsourcing—suggests that a firm can achieve gains in efficiency, productivity, quality, and revenues much more effectively by leveraging offshore talent. Global sourcing can provide the means to speed up innovation, fund development projects that are otherwise unaffordable, or turn around failing businesses. Firms leverage global sourcing to free expensive analysts, engineers, and sales personnel from routine tasks so they can spend more time innovating and working with customers. Global sourcing can be a catalyst to overhaul outdated office operations and prepare for new competitive battles.
Often, both types of rationale—cost efficiency and achieving strategic goals are present and are not mutually exclusive in a particular global sourcing activity.
As with other international entry strategies, global sourcing offers both benefits and challenges for the firm.
In terms of challenges, firms should pay special attention to the concerns mentioned in the figure. Many of these challenges arise if the focal firm is sourcing from independent suppliers abroad. The low-control nature of global sourcing implies that the issues of identifying, screening, negotiating, and monitoring partner activities become highly critical to the success of the firm. An additional challenge is the vulnerability to adverse currency fluctuations. Potential cost savings from global sourcing can be offset by a weakening home currency. In this scenario, foreign sourced products cost more to import.
In terms of benefits of global sourcing to the focal firm, there are two primary reasons to pursue global sourcing: cost efficiency and the achievement of strategic goals.

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Whatever the primary motivation, the firm engaged in global sourcing can expect a variety of specific benefits, including:
• Faster corporate growth. By outsourcing various peripheral activities to
external suppliers, firms can focus their resources on performing more
profitable activities such as R&D or building relationships with customers.
For example, global sourcing enables companies to expand their
staff of engineers and researchers while keeping constant their cost of
product development as a percentage of sales.
• Access to qualified personnel abroad. Countries such as China, India, the
Philippines, and Ireland offer abundant pools of educated engineers,
managers, and other specialists. The ability to access a larger pool of
talented individuals, wherever they are located, helps firms achieve their
goals. For example, Disney has much of its animation work done in Japan
because some of the world’s best animators are located there.
• Improved productivity and service. Manufacturing productivity and other
value-chain activities can be improved by global sourcing to suppliers
that specialize in these activities. For example, Penske Truck Leasing
improved its efficiency and customer service by outsourcing dozens of
business processes to Mexico and India. Global sourcing enables firms to
provide 24/7 coverage of customer service, especially for customers who
need around-the-clock support.
• Business process redesign. By reconfiguring their value-chain systems or reengi-
neering their business processes, companies can improve their production
efficiency and resources utilization. Multinational firms see offshoring as a
catalyst for a broader plan to overhaul outdated company operations.
• Increased speed to market. By shifting software development and editorial
work to India and the Philippines, the U.S.-Dutch publisher Walters
Kluwer was able to produce a greater variety of books and journals and
publish them faster. As the opening vignette describes, big pharmaceuti-
cal firms get new medications to market faster by global sourcing of clini-
cal drug trials.
• Access to new markets. Firms can tap emerging markets and technologies in
other countries, which not only helps them better understand foreign cus-
tomers, but also facilitates their marketing activities there. Firms can also
use global sourcing to service countries that may be otherwise closed due
to protectionism. For example, by moving much of its R&D operations to
Russia, the telecommunications firm Nortel gained an important foothold
in a market that desperately needs telephone switching equipment and
other communications infrastructure.
• Technological flexibility. By switching suppliers at a time when new, less
expensive technology becomes available, firms are no longer as tied to
specific technologies as they would be if they produced the technology
themselves. Sourcing provides greater organizational flexibility and faster
responsiveness to evolving consumer needs.
• Improved agility by shedding unnecessary overhead. Unburdened by a large
bureaucracy and administrative overhead, companies can be more
responsive to opportunities and adapt more easily to environmental
changes, such as new competitors.

Combined, these benefits give firms the ability to continuously renew their
strategic postures. For example, Genpact, Accenture, and IBM Services are outsourc-
ing specialists that dispatch teams to meticulously dissect the workflow of other
firms’ human resources, finance, or IT departments. This helps the specialists build
new IT platforms, redesign all processes, and administer programs, acting as a vir-
tual subsidiary to their client firms. The contractor then disperses work among global
networks of staff from Asia to Eastern Europe and elsewhere.29
Industries that particularly benefit from global sourcing include those in labor-
intensive sectors such as garments, shoes, and furniture, those that use relatively
standardized processes and technologies such as automotive parts and machine
tools, and those that make and sell established products with a predictable pattern
of sales, such as components for consumer electronics. For example, diamond pro-
cessing is a labor-intensive industry that uses standardized processes that result in
diamond rings and equipment used for fine cutting. The diamond cutting industry
has been concentrated in Antwerp, Belgium, for the past five centuries. Recently,
however, diamond cutting is being outsourced to firms in India that perform the
work more cost-effectively and provide other advantages. China is also emerging
as an important participant in diamond cutting.

A major reason why sourcing products from distant markets has become a major
business phenomenon today is the efficiency with which goods can be physically
moved from one part of the globe to another. This efficiency is due to the sophisti-
cated processes and strategies involved in moving products from one point—such
as from manufacturer to intermediaries—to another point—such as intermedi-
aries to customers.
Global supply chainrefers to the firm’s integrated network of sourcing, produc-
tion, and distribution, organized on a worldwide scale and located in countries
where competitive advantage can be maximized. Global supply-chain management
involves both upstream (supplier) and downstream (customer) flows.

 

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