International Outsourcing: A current Analysis
Author(s):
Alex Sharland Ph.D.
Alex Sharland Ph.D., Barry University, Miami Shores, FL 33161, 305/899-3525.
Larry Giunipero CPM, Ph.D.
Larry Giunipero CPM, Ph.D., Florida State University, Tallahassee, FL 32306, 904/644-8224.
79th Annual International Conference Proceedings - 1994 - Atlanta, GA
The study investigates the influence of three competing influences in
international outsourcing; a) the characteristics of the sourced components,
b) the transactions costs associated with supply contracts, and c) the
competitive advantage of the product in the finished goods market. The data
is collected from purchasing agents and tested using regression analysis. The
findings indicate that a) the characteristics of the component have little
effect on contractual arrangements, b) asset specificity has a weak influence
on the negotiation process, c) uncertainty has a weak influence on the period
of the contract, d) the quality of the finished product has the strongest
effect (of all the variables included in the study) on the contractual
arrangements, and e) the outcome variables of Cooperation, Trust, and
Satisfaction are closely correlated. The implications of these findings are
two-fold. First, it seems that purchasing managers should be less concerned
with protecting transaction-specific assets than with protecting the firm's
output in the finished goods market. Second, in order to achieve the above
suggestion, purchasing agents should coordinate sourcing decisions with not
only the production/manufacturing departments, but with sales and marketing
too, in order to ensure that the final positioning strategy is supported by
components procured from external suppliers.
THE ISSUES
The role of procurement within firms has become substantially more
important in the last decade. The increasing importance is the result of
several forces at work both within the firm and in the marketplace. Managers
at all levels pay closer attention to the design process and to production
costs. The rising costs associated with the above two areas have forced many
firms to expand outsourcing as a means of increasing efficiency. Furthermore,
customers in both the consumer and industrial goods market are more aware of
the availability of alternative suppliers and demand higher levels of quality
at equivalent or lower prices. Consequently, in response to market forces
many companies have involved their suppliers to help achieve cost savings and
improvements in quality. Being competitive today requires finding low cost,
high quality suppliers, not only in one's own country, but also by pursuing a
low cost worldwide sourcing strategy. For instance, Heinz Corporation's 1993
Annual Report states one of two ways to meet cost goals is through worldwide
sourcing programs.
Even though international outsourcing can achieve significant gains in
purchase costs and component quality, it can also lead to substantial
management problems and expense in terms of scheduling, coordination, and
quality control. Therefore, many senior managers seek guidance about when to
use international or domestic suppliers and when to focus on internal
improvements.
This paper presents the results of a survey that attempts to address the
above issues. A questionnaire was sent to purchasing agents that source
internationally. The items on the survey focus on:
- internal costs
- management control
- organization costs
- finished product market issues
The following sections of this paper discuss the practical, conceptual,
and empirical issues that apply in the area. The results present an
interesting picture of the driving concerns in the area of international
outsourcing.
PREVIOUS RESEARCH
International outsourcing has been cited as a way to lower component
costs, operating costs, and organizational costs while achieving higher
quality. Previous studies have attempted to isolate important reasons to
engage in international outsourcing. One school of thought suggests that
international outsourcing is a means of achieving lower organizational costs
(Williamson 1975, 1985). That is, when component production is sourced
externally, the overall cost of being in business is lower than if production
were achieved in-house. This approach is often called "Transactions Costs
Analysis". As far as this group is concerned, the primary reason for external
(including international) sourcing is to achieve a more efficient
organizational structure.
A second perspective suggests that international outsourcing is really a
response to finished product market concerns (Day and Wensley 1983 & 1987;
Porter 1980 & 1985). This group claims that when a firm adopts or engages in
international outsourcing it is really trying to achieve or develop a
competitive advantage. Therefore, in this scenario, the firm is not driven by
efficiency concerns (as in the case of Transactions Cost Analysis) but by
competitive concerns, such as market share and competitive positioning.
Monczka and Giunipero (1990) cite multiple reasons/benefits from
offshore sourcing, including 1) cost/price benefits, 2) stimulating
competition, 3) assuring supply, 4) obtaining technology, 5) higher quality,
6) access to new markets, and 7) make or buy alternatives. These approaches
stand in marked contrast to the traditional approach that claims international
outsourcing is merely driven by a desire to achieve the lowest unit cost for
that particular component. This last approach is out-dated because the
procurement function now has a much more sophisticated relationship with the
design, manufacturing, and marketing functions of the firm. If outsourcing
was just a desire to achieve the lowest unit cost, then it would not be
necessary to include the procurement function in so many aspects of the firm's
operations.
MANAGERIAL ISSUES
The above discussion is an attempt to identify the primary variable in a
firm's decision to engage in international outsourcing. From a more practical
perspective, senior managers generally acknowledge the existence and influence
of a number of forces. Purchasing managers are more interested in determining
the most appropriate and strategically advantageous use of international or
domestic outsourcing. This has been complicated by a marked increase in the
number of long-term sourcing relationships. Long-term relationships provide a
measure of security against market uncertainty, but conversely reduce the
options of a firm in sourcing components. Managers seek a means of assessing
the best way to approach international outsourcing both in terms of whether to
use foreign suppliers and whether to use long-term or short-term contracts.
It appears that academics and practitioners have different perspectives
on the international outsourcing arena. Academics seek to explain the
influence of particular variables. Practitioners want to know how each
variable is likely to affect his/her business, and whether international
sourcing is a viable, secure, and practical solution to the existing business
problems. The current survey develops an information base that can help
answer both sets of questions. The results section presents statistics that
address each issue in turn.
THE RESEARCH STUDY
The results of this research are based on 193 usable responses from NAPM
members. When survey research is used in a particular area of business there
are always problems concerning validity and reliability. One specific concern
stems from the expertise of the respondent. If a respondent is not really
knowledgeable about the area under consideration then the data collected is
useless. This survey was sent to NAPM members working for firms in SIC codes
34, 35, 36, and 37, covering metal goods production, machinery production,
electrical and electronic machinery and transportation machinery. These are
areas of manufacturing that often utilize external suppliers and,
consequently, the purchasing managers from whom responses were received often
have to deal with international outsourcing problems.
A second concern revolves around the generalizability of the results.
In addition, if the respondents have different characteristics from the rest
of that business segment, conclusions may not be generally applicable. In
this study, 193 responses were obtained which is more than sufficient for
analysis concerns. Tests of the characteristics of respondents suggests that
any conclusions drawn can be applied across the whole business area.
RESEARCH ISSUES
Key variables were measured based on past studies to determine the
impact on international outsourcing. The four major groups were:
- Organizational Efficiency Variables:
- Asset Specificity (e.g. capital equipment versus component parts)
- Uncertainty:
- Volume Unpredictability
- Technological Unpredictability
- Performance Ambiguity
- Competitive Advantage Variables
- Price Advantage
- Quality Advantage
- Technology Advantage
- International Sourcing Contract Variables
- Contract Time Period
- Contract Payment Method
- Contract Negotiation Process
Regression analysis was used to examine the correlation between the
variables. The larger the correlation (in terms of strength of association)
the more likely it is that the variable has a strong effect on management
decisions regarding international outsourcing.
RESULTS
Effect of the characteristics of the component on the sourcing
arrangements: The variables included in the study were the price/cost of the
component, the extent to which the component could be easily substituted, and
the relative value of that component compared to all other components in the
finished product. None of these variables was a significant factor in the
sourcing arrangements.
Effect of the organization costs on the sourcing arrangements: The
variables in the analysis were asset specificity and the uncertainty as listed
above. Asset specificity was found to have a weak, positive correlation with
the negotiation process that is used to establish the sourcing arrangements.
Both Volume and Technological Unpredictability (dimensions of uncertainty)
were found to have weak correlations on the Contract Time Period. Performance
Ambiguity was found to have a weak correlation with the Payment Method used in
the contract arrangements.
Effect of the finished goods market variables on the sourcing
arrangements: The price competitiveness of the finished product was found to
have no significant correlations with the sourcing dimensions. The quality of
the finished product was found to have a mild correlation with the contract
period and the negotiation process. The technological competitiveness of the
finished product was found to have a weak correlation with the time period of
the sourcing contract.
Interaction of Satisfaction, Cooperation and Trust: In addition to the
above tests, measures of cooperation, satisfaction and trust were included in
the survey. The correlation among these outcome variables was very strong.
Cooperation and Trust are exceptionally highly correlated, and Satisfaction is
strongly correlated to the other two.
DISCUSSION
The above results have implications for the senior managers and the
purchasing managers within a firm. For the purchasing managers, it seems that
focussing on the characteristics of the product (that is, trying to find the
lowest cost supplier) is not really important. Furthermore, trying to protect
assets that are committed to one supply relationship is not as important as
some researchers have claimed. The most important relationship found in this
study was that between quality in the finished goods market and the sourcing
arrangements (time period and negotiation process). This relationship
suggests that purchasing managers should coordinate more closely with the
design, manufacturing, and marketing managers to make sure that all components
meet the actual requirements in the finished goods market.
For senior mangers the implications are equally simple. The costs
associated with organizing the firm are less of a problem than has been
claimed in some research (Williamson 1975 & 1985). Senior managers should
focus more on customer issues than on the problems associated with
organization costs.
REFERENCES
- Day, George, and Robin Wensley "Marketing Theory with a Strategic
Orientation" Journal of Marketing 47 (Fall 1983): 79-89.
- "Assessing Advantage: A Framework for Diagnosing Competitive Superiority"
Journal of Market n" 52 (April 1988) 1-20.
- Monczka, Robert and Larry Giunipero Purchasing Internationally Chelsea
MI: Bookcrafters, 1990.
- Williamson, Oliver Markets and Hierarchies Boston: Free Press, 1975
- The Economic Institutions of Capitalism Boston Free Press, 1985.
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