Sourcing: Global, Local or Both?
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Kotabe (1992) suggests that the processes that Levitt (1983) describes on the output side of the firm, are occurring on the input side as well. In this view buyers, drawing from a broad base of suppliers from all around the world, including developing countries, are adopting global sourcing practices. They are integrating their supplies across borders and in doing so are creating a more efficient supply chain. By combining the best possible sources of supply, which may be located anywhere, firms are able to create world-class products (Quinn & Hilmer, 1994).
Other authors support the local responsiveness view. Uzzi (1997) describes how a predominantly local network of suppliers is operated among owners of knitwear firms in New York, and this local network revolves around trust and embedded relations. Nishiguchi (1994) discusses the network of suppliers that Toyota has created in and around Toyota City, which allows Toyota to be very innovative in product development and flexible in its production system. In the local responsiveness view cooperation with suppliers is best achieved if they are not located on the other side of the world and integration is mainly a process of getting to know each other in person. However, it does not suggest there should be no international suppliers, merely that benefits can often be obtained from operating within the confines of a region.
What can existing empirical evidence tell us about global sourcing? Two distinct arguments have been put forward to substantiate the claim of globalization (Bartlett & Ghoshal, 1989): an increase in internationalization of firms' activities and the functional integration of activities across borders. For sourcing to be defined as global, a high degree of internationalization of the supply base is a necessity. As Monczka and Trent (1991b: 8) stated: "A firm is said to have implemented worldwide sourcing strategy if it devotes some significant systematic amount to offshore sourcing." What constitutes a significant amount is debatable however. One might be inclined to use 50% of the total sourcing volume as the cutoff point, with more than 50% being significantly international. This is an arbitrary measure at best, given large differences in country size as well as geographical constraints. Furthermore, what may seem a large percentage of international sourcing, could be a small percentage when compared to competitors in the same industry, so a relative measure would be more appropriate in any case.
The functional integration is also seen as a necessity to distinguish an international activity from a global one. This is demonstrated by another Monczka and Trent quote (1991a: 2): "Global sourcing ...... refers to the integration and coordination of procurement requirements across worldwide business units, looking at common items, processes, technologies and suppliers." Moving from international to global sourcing requires the firm to start integrating sourcing processes in different countries. In order to achieve functional integration across borders, a firm needs to construct some spatial organization of sourcing, in the form of an interrelated sourcing network. We will now discuss previous research results on sourcing along the two dimensions of degree of internationalization of the supply base and functional integration across borders of the sourcing function. The aim of this review is to find out, as far as sourcing is concerned, how multinational corporations balance global integration and local networks.
Internationalization of the Supply Base
To what extent do firms use international suppliers? The number of empirical studies assessing the degree of internationalization of sourcing is small (Levy & Dunning, 1993), and our own scanning of the ProQuest database led to few additions (see below). Some of these studies are based on data at the national level (Wyckoff, 1993), whereas others employ firm-level data (Kotabe, Murray & Javalgi, 1998). Table 1 summarizes the findings of a number of studies that assess the degree of internationalization.
| From | Study | Firms and location | Home | Intern. | Local |
|---|---|---|---|---|---|
| 1 | Input-output tables of national economies | US at home | 87% | 13% | x |
| Japanese at home | 93% | 7% | x | ||
| French at home | 62% | 38% | x | ||
| German at home | 66% | 34% | x | ||
| British at home | 63% | 37% | x | ||
| Canadian at home | 50% | 50% | x | ||
| 2 | Public data of 2,000 firms with 18,000 affiliates | US at home (1977) | 93.8% | 6.2% | x |
| US at home (1982) | 92.2% | 7.8% | x | ||
| US at home (1989) | 89.7% | 10.3% | x | ||
| 3 | Survey of 156 firms | Japanese at home | 97.6% | 2.4% | x |
| French at home | 92.0% | 8.0% | x | ||
| Swiss at home | 8.4% | 91.6% | x | ||
| Benelux at home | 29.3% | 70.7% | x | ||
| 4 | Survey of 43 European and 28 Japanese firms | European in US [†] | 37.2% | 14.0% | 48.8% |
| Japanese in US [†] | 53.6% | 3.6% | 42.6% | ||
| European in US [‡] | 46.5% | 11.6% | 41.9% | ||
| Japanese in US [‡] | 78.6% | 3.6% | 17.9% | ||
| 5 | Survey of 43 European and 28 Japanese firms | European and Japanese in US | 29.9% | 5.8% | 64.3% |
| European and Japanese at home | 88.5% | 11.5% | x | ||
| 6 | Survey of 73 European and 21 Japanese firms | European and Japanese in US [†] | 85.7% | 6.4% | 7.9% |
| European and Japanese in US [‡] | 15.9% | 10.3% | 73.7% | ||
| 7 | Survey of 149 firms | US at home | 87% | 13% | x |
| 8 | Survey of 40 firms | US at home | 85% | 15% | x |
| 9 | Survey of 100 firms | US at home [#] | 90.2% | 9.8% | x |
| 1: Wyckoff 1993 | |||||
| 2: Kotabe & Swann 1994 | |||||
| 3: Buckley & Pearce 1979 | |||||
| 4: Kotabe & Omura 1989 | |||||
| 5: Swamidass & Kotabe 1993 | |||||
| 6: Murray, Kotabe & Wildt 1995 | |||||
| 7: Birou & Fawcett 1993 | |||||
| 8: Monczka & Trent 1991b | |||||
| 9: Kotabe et al. 1998 | |||||
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[†]Assembly;
[‡]Components;
[#]Sourcing of services | |||||
These data aggregates do not match the high internationalization associated with global sourcing but instead reveal mainly low (0 to 10%) to moderate (10-20%) degrees of internationalization. The single study that provides a longitudinal comparison (Kotabe & Swann, 1994) suggests a considerable increase of internationalization of the supply base over time. The table shows there is no homogeneous, worldwide distribution of sources. Home countries are strongly favored as a source for companies operating within their own borders and for foreign affiliates a mix of host country and home country sourcing is applied. The larger countries by GDP standards (U.S., Japan) seem to rely on domestic sourcing to a larger degree, a result that confirms our intuitions. Min and Galle (1991) demonstrated that firms tend to look first for suppliers in countries with a small cultural distance from the home country. If we compare the outcomes across nations, it appears that Japanese firms in the U.S. use Japan as an important source, much more than European firms in the U.S. use Europe. This supports the notion that Japanese firms abroad primarily rely on their existing network of Japanese suppliers and only start to use local sources if the latter fail to provide (Kenney & Florida, 1995). That European firms to a larger extent source locally is in line with Bartlett and Ghoshal (1989). They predicted that U.S. firms operate on a global basis, Japanese firms try to replicate their existing operations in other regions, and European firms apply a multi-domestic strategy.
Functional Integration of Sourcing
Functional integration of the sourcing function across borders implies that there are coordinated efforts to find and manage suppliers across multiple countries. Table 2 summarizes some studies that address the extent to which firms integrate these efforts.
| Authors | Sample | Findings on mode of sourcing |
|---|---|---|
| Giunipero and Monczka, 1990 | Survey of 24 large MNCs from the United States | All 24 operate some corporate purchasing staff Only 8 operate an international purchasing department Others operate on a more decentralized basis |
| Frear, Metcalf, and Alguire, 1992 | Survey of 135 US purchasing managers | 66%: user organization (decentralized) 35%: corporate purchasing (centralized) 10%: company-owned trading operation 11%: purchasing department of subsidiaries 8%: purchasing department of JV partners |
| Min and Galle, 1991 | Survey of 141 US purchasing managers engaging in international sourcing | 38.1 %: assigned buyer in purchasing unit 34.1%: manufacturer's representative 10.3%: foreign buying office 10.3%: import broker 7.9%: trading company 7.1%: foreign subsidiary 4.8%: import merchant 0.8%: state trading agency |
| Handfield 1994 | Survey of 97 US purchasing managers of which 56 used foreign sources | 49.1%: directly between buyer and supplier 41.8%: supplier's US representative 5.5%: external trading company 3.6%: international procurement office 4.1%: face to face 1.9%: automatic order system |
Spatial integration of sourcing can be achieved through a centralized international sourcing department, regional international purchasing offices (IPOs) or a globally integrated sourcing network. None of these three seems to be very prominent and it appears that most firms treat their international sourcing operations as an extension of their existing domestic sourcing.
Overview
This review suggests sourcing is not as global as is commonly suggested. Although some inputs of some firms are sourced from remote parts of the world, an international supply base is not the dominant situation. Furthermore, integration across borders has not really taken off. Birou and Fawcett (1993: 37) conclude in their analysis of the extent to which there is such integration:
"To date, relatively few firms have implemented truly global sourcing strategies; however, study results show that the international sourcing practices of some firms are directed at obtaining a systemwide competitive advantage."
There are certain firms and industries that actively engage in global sourcing while others refrain from it. For example the electronics industry is particularly advanced in global sourcing (Kenney & Florida, 1995) while machine building is much more oriented towards local networks (Lane & Bachmann, 1996). Obviously the costs and benefits of global sourcing vary greatly per product or service and for instance transporting heavyweight, low value products to the other side of the world cannot lead to competitive outcomes. Similarly it makes little sense to coordinate the supplies of local temporary labor across borders.
What conclusions can be drawn, given that some of the data in this sample are relatively old? The lack of recent data on global sourcing does not seem to be related to the state of global sourcing in practice. However, scholars have shifted their focus from global sourcing as such to the way it can be put into effect, and to the conditions for effective global sourcing (Kotabe, 1998). It seems this shift cannot be interpreted as the total domination of global sourcing over other forms. Although global sourcing has obviously become more important, global sourcing and local sourcing networks continue to co-exist. Perhaps this does not come as a big surprise to many observers, but what is surprising is that scholars have rarely focused on global and local processes simultaneously. Instead of discussing global sourcing with no thought for local networks, we should be asking what balance between global and local sourcing is achieved, how this balance is maintained and what processes are likely to shift this balance over time. This raises an intriguing question: what is it that determines the extent to which firms practice global sourcing.
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EAN: 2147483647
Pages: 207