China Global Sourcing

Global Sourcing China — Sat, 02 Jun 2007 15:49:00 +0000

There is an increasing trend for firms to use a portfolio approach to govern their business processes using multiple sourcing mechanisms involving multiple firms and geographic sites. Managers need guidance and frameworks to select the right sourcing mechanisms for different business processes. This article develops two research-driven conceptual frameworks to help managers meet the challenges: (1) a framework for classifying and analyzing different sourcing mechanisms, and (2) a staged-model of major decisions involved in sourcing projects. In the first framework, two major factors that capture underlying strategic intents of sourcing mechanisms, namely governance mode and geographic location are described. Firms may strategically benefit, but may also expose themselves to several vulnerabilities. Second, the article develops a 4-stage model of sourcing choice process. This model provides guidelines to evaluate WHICH business processes are appropriate for various sourcing mechanisms, WHERE to source from, WHOM to select as vendor, and HOW to implement. In making sourcing decisions, the staged-model helps managers to consider process level decision criteria such as process maturity, asset specificity, and strategic criticality; firm level decision criteria such as strategic vulnerability, risk profile, firm’s experience with certain sourcing mechanism and offshore countries; and also country-level macroeconomic criteria such as risk profile, political stability, physical infrastructure, labor markets, and regulatory and cultural environments of offshore countries. Understanding the various variables has important implications in writing contracts and service level agreements.

Driven by global IT infrastructure and falling communication costs, an increasing number of firms are exploring various sourcing mechanisms for their business processes for cost and strategic advantage. Once tightly coupled business processes in the firm’s value chain are being unbundled to exploit global sourcing opportunities, particularly from low-wage counties like India, Philippines and China. However, each sourcing mechanism has different cost, benefit and risk characteristics, and may not be appropriate for all companies or suitable for all business processes. For instance, sourcing from another country may entail low cost or access to new markets, but creates risks due to lack of intellectual property protection or differences in legal and regulatory environments. Thus, managers need guidance to select the most appropriate sourcing mechanism given the benefit-risk tradeoffs, and to efficiently manage a portfolio of sourcing choices. The sourcing portfolio of a business process can become complex. A senior executive of a large Fortune 100 company revealed during our discussions a complex sourcing portfolio for their call center services. Some of the call center services are conducted by the firm’s own employees in the U.S. (i.e., domestic insourcing); some are sourced from a domestic vendor (i.e., domestic outsourcing); some are done at a subsidiary of the firm in India (i.e., offshore insourcing); and the remaining call center services are outsourced to a Philippines-based vendor (i.e., offshore outsourcing). The domestic outsourcing vendor allocates its responsibilities between its domestic sites and a subsidiary in India. In short, multiple sourcing mechanisms involving multiple firms and geographic sites are used simultaneously to govern call center services of the oil company. The proliferation and co-existence of such sourcing mechanisms increase complexity and present managerial challenges.

In the manufacturing environment, managers have long faced the question of which activities to execute in-house (i.e., insource), and which to buy from outside (i.e., outsource) or source from other countries (i.e., offshore). Manufacturing activities have been unbundled to support such decisions. For example, Li & Fung – producers and exporters of private label consumer goods – exemplifies unbundling as it orchestrates a global network of vendors from 40 countries to deliver high-quality products to its customers. A parka may have been assembled in China with fabric from Korea, label, elastic and studs from Hong Kong, and zipper from Japan2. By contrast, business process sourcing is a fairly recent phenomenon. A business process is often human-intensive. It involves primarily information access, processing, and communication tasks. It adds new levels of complexity as the delivery of services are often synchronous – real-time interaction with customers or entities within a firm – and specification and metrics are relatively difficult to assess. Language and cultural differences may become exacerbated in executing a business process outside the firm. Processes themselves may need deep knowledge of the company and its products and services that are often acquired over time. Furthermore, unlike physical products where product components can be easily partitioned, processes are often inter-dependent. Thus, unbundling business processes is difficult. It entails significant coordination costs. However, cost pressures are forcing firms to modularize their business processes and gain the flexibility to switch to alternative sourcing mechanisms when they become cheaper, less risky, and more beneficial to the firm.

Fortunately, there is a wealth of academic research to support a framework for analyses of sourcing choices. This article develops two conceptual frameworks to help managers meet the challenges of understanding and classifying the different sourcing mechanisms, and choosing the right sourcing mechanism for business processes. The variables identified will provide key input to writing contracts and service level agreements.