Many companies try to optimize or redesign their supply chain or supply system, for a number of reasons. It might be competitive pressure that forces them to do this in an attempt to cut costs, or imitation of industry leaders (Dimaggio and Powell 1983). Alternatively, it may be motivated by the present "world view" of decision makers in the company (Bakker and Kamann 2007; Carter, Maltz, Yan and Maltz 2008). Regardless of the cause, the result is the same: purchasing managers have to act as supply base engineers and sometimes have to redesign major parts of the supply system. At the same time knowledge about the various types of supply systems that are possible has significantly increased over the past 10 years, leaving us with concepts such as lean and agile supply chains, leagile supply chains, dual supply systems or even multichannel supply systems based on portfolio approaches (Fisher 1997; Naylor, Nairn and Berry 1999; Christopher 2000; Slack and Lewis 2001; Lambert, Garcia-dastugu and Croxton 2005; Meixell and Gargeya 2005; Simchi-Levi 2005; Stadtler and Kilger 2005; Christopher, Peck and Towill 2006; Lambert 2008). Part of the complex set of questions to be resolved in this context, is the issue of outsourcing to low-cost countries. Sometimes, the question relates to outsourcing internal production to external suppliers (Ellram and Maltz 1995), including those in low-cost countries (Kumar and Arbi 2008).
Sometimes, the outsourcing decision has already been made. Both transaction cost economics (Williamson 1975, 2008) and the resource-based view (Wernerfelt 1984; Hunt and Davis 2008) describe and explain this decision process and the nature of its outcome. According to transaction cost economics, four economic governance structures can be distinguished and predicted, characterizing transactions in terms of the exogenous dimensions of frequency, transaction-specific investments and uncertainty (Williamson 1985, p. 79): (1) Market Governance: classical contracting; (2) Trilateral Governance: neo-classical contracting; (3) Bilateral Governance: relational contracting; (4) Unified Governance: relational contracting. To briefly discuss the two extremes: discrete contracts prevail in markets with free competition, where the identity of actors is irrelevant; even more: social relations between actors are not wanted. Relational contracts may have a limited time horizon but generally are for an infinite length of time. They focus on continuity. For this reason, they are termed durable contracts with labor contracts as an example. Characteristic for such a contract is that rules expected to be required and relevant to describe and regulate the desired relations between transaction parties involved receive much attention: rules to settle conflicts, describe expected behavior and to terminate the relation. Usually, after some time, the original relational contract and what has been arranged for in there moves to the background. The new point of reference becomes the total relation and the norms that have developed within and during the existence of the relationship (Macneil 1978, p. 890). While spot market transactions typically are subject of classical contracting, modern purchasing, employing supplier rating, auditing and evaluations has moved toward relational contracts. In particular when dealing with more strategic suppliers and long-term relations, "contacts"--subject to social governance--tend to replace "contracts"--subject to economic governance (Welling and Kamann 2001). As Williamson (2008, p. 5) observes, " as bilateral dependency builds up, the efficient governance of contractual relations progressively moves from simple market exchange to hybrid contracting (with credibility supports) to hierarchy." Hunt and Davis (2008, p. 10) go further in stating that "strategic purchasing needs to be grounded in a research tradition that provides a clean break from the neoclassical, equilibrium economics research tradition." They move the resource-based view toward "the resource-advantage research tradition." Cai and Yang (2008) support this in their empirical study, where they conclude, "in addition to
traditional governance approaches suggested by TCE, managers could employ cooperative norms as an effective governance form to manage buyer-seller relationships and improve organizational performance" (Cai and Yang 2008, p. 67).
Given the above, we propose a contingency approach: to explain some aspects, transaction cost economics is the best choice, to explain some other aspects, the resource-advantage research tradition is the best choice and for some aspects, using the concept of social governance is the best choice (Van de Ven 1976; Welling and Kamann 2001). Together, these approaches are able to describe the full phenomenon of the outsourcing decision and its outcome.
When the decision to outsource has been made, the issue is whether to substitute local or regional suppliers with suppliers from low-cost countries (Alguire and Frear 1994). With low-cost countries, we distinguish between the geographical proximity of countries like Mexico at close distance, in the case of the United States, and countries like Thailand, China or Chile, which are further away (Kaufmann and Carter 2002). For European companies, these two categories of countries would be countries in Central Europe like Poland, the Czech Republic and Turkey at a close geographical distance, and China and India further away.
Given the complexity of this issue, the question of which products should be outsourced to which countries, is far from trivial. Indeed, we found that many companies struggle with this question. Organizations are in need of a straightforward method that filters out unsuitable products and countries--a method, derived from concepts and theories that should clearly show the potential financial benefits of outsourcing certain products to certain countries.
We are aware that the benefits and risks of outsourcing to low-cost countries differ between companies with mass production characterized by a large series of uniform products with low complexity and a long life cycle containing high-labor components (Crnic, Kleeman and Seider 2006; Andersson, Kumar and Rheme 2007), and companies with the opposite characteristics. Literature (Christopher, Lowson and Peck 2004; Tyler, Heeley and Bhamra 2006) shows that companies with products that are more complex, with small series of items and meeting a rapidly changing demand or short lead times, have to be careful not to disturb their total throughput time, which may damage their reputation and reliability toward their customers. These experiences come from industries ranging from project-based industries to fashion in the retail industry (Mamic 2005; Barnes and Lea-Greenwood 2006). In all cases, companies became aware of the difference between low prices and low cost in terms of total cost of operations, total life cycle costs or total cost of ownership. Other performance criteria such as speed, reliability, flexibility and quality had to be taken into account, next to the low costs of wages or production (Ellram 1993; Ferrin and Plank 2002; Carter and Rogers 2008; Ellram, Tate and Billington 2008).
For this reason, we developed a method to estimate the best geographical area for certain items, in certain situations, given certain product characteristics, process characteristics, relational characteristics and demand characteristics. The proposed method takes all items of a company to be purchased into account and applies four filters to select the items that have to be sourced in (1) the direct vicinity of the sourcing company, (2) at a medium distance--"nearshoring": lower-cost countries in Central Europe or the Mediterranean basin for European companies or Mexico for U.S. companies and (3) "offshoring" to low-cost countries in the Far East (China, India, Indonesia, etc.), either directly or through a distributor (Frear, Metcalf and Alguire 1992). In addition, we propose a two-stage country selection procedure.
The proposed method is developed with--and used by--a European transport vehicle-manufacturing firm and results include a facts-based estimate of the price impact of the proposed offshoring results, based on a pilot test for two product families. Before actually presenting the method and its application, we will discuss the theoretical framework used to develop the method. We then discuss our findings and their potential application, and end by summarizing our findings and the contributions of our research.
THEORETICAL BASIS: THREE PERSPECTIVES
We employed theories and concepts from three different fields to develop our theoretical framework. Each has a specific perspective and deals with a particular aspect or level of analysis: (1) general trade theories about internationalization and globalization; (2) theories dealing with a company's strategies on the market of its end products; and (3) theories translating the market strategy into an appropriate supply management strategy and an optimal way of organizing the procurement function. The first set of theories will discuss why companies should go abroad or want to go abroad. The second set of theories deals with the type of market strategies adopted by a firm. This is relevant because the organization of the procurement function--including outsourcing decisions and the selection of proper sourcing areas--depends on the type of market strategy of a company. The third set of theories deals with the issue how a particular market strategy translates into an appropriate organization of the procurement function.
Theoretical Perspective 1: General Trade Theories
General trade theories, long described in global and international management textbooks (e.g., Daniels and Radebaugh 1989; Beamish, Killing, Lecraw and Morrison 1994; Daniels, Radebaugh, Erwee and Hough 2000), state that the competitive advantage of nations may be a reason for sourcing there or transferring activities to these areas (cf. Porter 1990). This may coincide with a country's advantages in terms of price, labor costs or innovativeness. Especially when competitors go there, imitation of this behavior is tempting (Dimaggio and Powell 1983).
When applying internationalization to sourcing, we find that Trent and Monczka (2002) describe five stages in the internationalization process. At the lowest level, local supply meets the criteria; there is no reason to go international. At level 2, internationalization occurs in an ad hoc manner and usually companies are forced to go abroad because of a lack of suitable local suppliers, or because competitors have a significant cost advantage since they source abroad. Of course, we may find other reasons, like having problems with current suppliers, home market inflation, exchange risks or increased worldwide competitive pressure. At level 3, international sourcing is part of the sourcing strategy. Purchasers have a global attitude when it comes to sourcing issues. Focus usually is on emerging economies to obtain cost advantages. At level 4, integration between global purchasing locations occurs. This requires advanced knowledge,

SOURCE:http://www.highbeam.com/doc/1G1-225384861.html

Many companies try to optimize or redesign their supply chain or supply system, for a number of reasons. It might be competitive pressure that forces them to do this in an attempt to cut costs, or imitation of industry leaders (Dimaggio and Powell 1983). Alternatively, it may be motivated by the present "world view" of decision makers in the company (Bakker and Kamann 2007; Carter, Maltz, Yan and Maltz 2008). Regardless of the cause, the result is the same: purchasing managers have to act as supply base engineers and sometimes have to redesign major parts of the supply system. At the same time knowledge about the various types of supply systems that are possible has significantly increased over the past 10 years, leaving us with concepts such as lean and agile supply chains, leagile supply chains, dual supply systems or even multichannel supply systems based on portfolio approaches (Fisher 1997; Naylor, Nairn and Berry 1999; Christopher 2000; Slack and Lewis 2001; Lambert, Garcia-dastugu and Croxton 2005; Meixell and Gargeya 2005; Simchi-Levi 2005; Stadtler and Kilger 2005; Christopher, Peck and Towill 2006; Lambert 2008). Part of the complex set of questions to be resolved in this context, is the issue of outsourcing to low-cost countries. Sometimes, the question relates to outsourcing internal production to external suppliers (Ellram and Maltz 1995), including those in low-cost countries (Kumar and Arbi 2008).
Sometimes, the outsourcing decision has already been made. Both transaction cost economics (Williamson 1975, 2008) and the resource-based view (Wernerfelt 1984; Hunt and Davis 2008) describe and explain this decision process and the nature of its outcome. According to transaction cost economics, four economic governance structures can be distinguished and predicted, characterizing transactions in terms of the exogenous dimensions of frequency, transaction-specific investments and uncertainty (Williamson 1985, p. 79): (1) Market Governance: classical contracting; (2) Trilateral Governance: neo-classical contracting; (3) Bilateral Governance: relational contracting; (4) Unified Governance: relational contracting. To briefly discuss the two extremes: discrete contracts prevail in markets with free competition, where the identity of actors is irrelevant; even more: social relations between actors are not wanted. Relational contracts may have a limited time horizon but generally are for an infinite length of time. They focus on continuity. For this reason, they are termed durable contracts with labor contracts as an example. Characteristic for such a contract is that rules expected to be required and relevant to describe and regulate the desired relations between transaction parties involved receive much attention: rules to settle conflicts, describe expected behavior and to terminate the relation. Usually, after some time, the original relational contract and what has been arranged for in there moves to the background. The new point of reference becomes the total relation and the norms that have developed within and during the existence of the relationship (Macneil 1978, p. 890). While spot market transactions typically are subject of classical contracting, modern purchasing, employing supplier rating, auditing and evaluations has moved toward relational contracts. In particular when dealing with more strategic suppliers and long-term relations, "contacts"--subject to social governance--tend to replace "contracts"--subject to economic governance (Welling and Kamann 2001). As Williamson (2008, p. 5) observes, " as bilateral dependency builds up, the efficient governance of contractual relations progressively moves from simple market exchange to hybrid contracting (with credibility supports) to hierarchy." Hunt and Davis (2008, p. 10) go further in stating that "strategic purchasing needs to be grounded in a research tradition that provides a clean break from the neoclassical, equilibrium economics research tradition." They move the resource-based view toward "the resource-advantage research tradition." Cai and Yang (2008) support this in their empirical study, where they conclude, "in addition to
traditional governance approaches suggested by TCE, managers could employ cooperative norms as an effective governance form to manage buyer-seller relationships and improve organizational performance" (Cai and Yang 2008, p. 67).
Given the above, we propose a contingency approach: to explain some aspects, transaction cost economics is the best choice, to explain some other aspects, the resource-advantage research tradition is the best choice and for some aspects, using the concept of social governance is the best choice (Van de Ven 1976; Welling and Kamann 2001). Together, these approaches are able to describe the full phenomenon of the outsourcing decision and its outcome.
When the decision to outsource has been made, the issue is whether to substitute local or regional suppliers with suppliers from low-cost countries (Alguire and Frear 1994). With low-cost countries, we distinguish between the geographical proximity of countries like Mexico at close distance, in the case of the United States, and countries like Thailand, China or Chile, which are further away (Kaufmann and Carter 2002). For European companies, these two categories of countries would be countries in Central Europe like Poland, the Czech Republic and Turkey at a close geographical distance, and China and India further away.
Given the complexity of this issue, the question of which products should be outsourced to which countries, is far from trivial. Indeed, we found that many companies struggle with this question. Organizations are in need of a straightforward method that filters out unsuitable products and countries--a method, derived from concepts and theories that should clearly show the potential financial benefits of outsourcing certain products to certain countries.
We are aware that the benefits and risks of outsourcing to low-cost countries differ between companies with mass production characterized by a large series of uniform products with low complexity and a long life cycle containing high-labor components (Crnic, Kleeman and Seider 2006; Andersson, Kumar and Rheme 2007), and companies with the opposite characteristics. Literature (Christopher, Lowson and Peck 2004; Tyler, Heeley and Bhamra 2006) shows that companies with products that are more complex, with small series of items and meeting a rapidly changing demand or short lead times, have to be careful not to disturb their total throughput time, which may damage their reputation and reliability toward their customers. These experiences come from industries ranging from project-based industries to fashion in the retail industry (Mamic 2005; Barnes and Lea-Greenwood 2006). In all cases, companies became aware of the difference between low prices and low cost in terms of total cost of operations, total life cycle costs or total cost of ownership. Other performance criteria such as speed, reliability, flexibility and quality had to be taken into account, next to the low costs of wages or production (Ellram 1993; Ferrin and Plank 2002; Carter and Rogers 2008; Ellram, Tate and Billington 2008).
For this reason, we developed a method to estimate the best geographical area for certain items, in certain situations, given certain product characteristics, process characteristics, relational characteristics and demand characteristics. The proposed method takes all items of a company to be purchased into account and applies four filters to select the items that have to be sourced in (1) the direct vicinity of the sourcing company, (2) at a medium distance--"nearshoring": lower-cost countries in Central Europe or the Mediterranean basin for European companies or Mexico for U.S. companies and (3) "offshoring" to low-cost countries in the Far East (China, India, Indonesia, etc.), either directly or through a distributor (Frear, Metcalf and Alguire 1992). In addition, we propose a two-stage country selection procedure.
The proposed method is developed with--and used by--a European transport vehicle-manufacturing firm and results include a facts-based estimate of the price impact of the proposed offshoring results, based on a pilot test for two product families. Before actually presenting the method and its application, we will discuss the theoretical framework used to develop the method. We then discuss our findings and their potential application, and end by summarizing our findings and the contributions of our research.
THEORETICAL BASIS: THREE PERSPECTIVES
We employed theories and concepts from three different fields to develop our theoretical framework. Each has a specific perspective and deals with a particular aspect or level of analysis: (1) general trade theories about internationalization and globalization; (2) theories dealing with a company's strategies on the market of its end products; and (3) theories translating the market strategy into an appropriate supply management strategy and an optimal way of organizing the procurement function. The first set of theories will discuss why companies should go abroad or want to go abroad. The second set of theories deals with the type of market strategies adopted by a firm. This is relevant because the organization of the procurement function--including outsourcing decisions and the selection of proper sourcing areas--depends on the type of market strategy of a company. The third set of theories deals with the issue how a particular market strategy translates into an appropriate organization of the procurement function.
Theoretical Perspective 1: General Trade Theories
General trade theories, long described in global and international management textbooks (e.g., Daniels and Radebaugh 1989; Beamish, Killing, Lecraw and Morrison 1994; Daniels, Radebaugh, Erwee and Hough 2000), state that the competitive advantage of nations may be a reason for sourcing there or transferring activities to these areas (cf. Porter 1990). This may coincide with a country's advantages in terms of price, labor costs or innovativeness. Especially when competitors go there, imitation of this behavior is tempting (Dimaggio and Powell 1983).
When applying internationalization to sourcing, we find that Trent and Monczka (2002) describe five stages in the internationalization process. At the lowest level, local supply meets the criteria; there is no reason to go international. At level 2, internationalization occurs in an ad hoc manner and usually companies are forced to go abroad because of a lack of suitable local suppliers, or because competitors have a significant cost advantage since they source abroad. Of course, we may find other reasons, like having problems with current suppliers, home market inflation, exchange risks or increased worldwide competitive pressure. At level 3, international sourcing is part of the sourcing strategy. Purchasers have a global attitude when it comes to sourcing issues. Focus usually is on emerging economies to obtain cost advantages. At level 4, integration between global purchasing locations occurs. This requires advanced knowledge,

SOURCE:http://www.highbeam.com/doc/1G1-225384861.html