GLOBAL SOURCING STRATEGY: R%D, MANUFACTURING, AND MARKETING INTERFACES

1. GLOBAL SOURCING STRATEGY:R%D, MANUFACTURING, AND MARKETING INTERFACES

2. Global Sourcing Strategy: Logistical interfaces of R&D, manufacturing, and marketing activities on a global basis • Marketing managers should understand and appreciate the important roles that product designers, engineers, production managers, and purchasing managers play in marketing decision making. • This interaction will determine a company’s competitive strengths and consequently its market performance I - Introduction

3. Five Trends in global sourcing are identified: a) The decline of Exchange Rate Determinism of Sourcing Strictly based on the price factor. Foreign sourcing occurs for noncost reasons (long term relationships with suppliers, quality, See Figure 10-1. b) New Competitive Environment Caused by Excess Worldwide Capacity There has been a strategic shift form price and quantity to quality and reliability of products as a determinant of competitive strength II - Trends in Global Sourcing Strategy

4. c) Innovations in and Restructuring of International Trade Infrastructure Advances in structural elements of international trade have made it easier for companies to employ sourcing for strategic purposes. d) Enhanced Role of Purchasing Managers e) Trend Toward Global Manufacturing

5. III - Value Chain and Functional Interfaces The design of global sourcing strategy is based on the interplay between a company’s competitive advantage and the comparative advantage of various countries. Competitive Advantage influences the decision regarding what activities and technologies a company should concentrate its investment and managerial resources in, relative to its competitors Comparative Advantage affects the company’s decision on where to source and market, based on the lower cost of labor and other resources in one country relative to another.

6. The Value Chain concept offers a general framework for understanding what it takes to manage the interrelated value-adding activities of a company on a global basis. The value chain can be divided into two major activities performed by a company: a) Primary Activities: inbound logistics, manufacturing, outbound logistics, and after-sales service b) Support activities: human resource management, technology development, and other activites See Figure 10-4 Competing companies constantly strive to create value across various activities in the value chain

7. Global sourcing strategy encompasses management of: 1) the interfaces among R&D, manufacturing, and amrketing on a global basis, and 2) Logistics identifying which production units will serve which particular markets and how components will be supplied for production. - R&D/Manufacturing Interface - Manufacturing/Marketing Interface - Marketing/R&D Interface

8. IV - Logistics of Sourcing Strategy Sourcing strategy includes a number of basic choices companies make in deciding how to serve foreign markets A – Imports, assembly or production within the country to serve a foreign market B – Internal or external supplies of components or finished goods Sourcing Decisions: a) intra-firm sourcing and outsourcing Where to source major components seems much less important than how to source them

9. V - Costs and Consequences of Global Sourcing A - Need for Coordination B - Functional Mismatch C - Long-Term Consequences C.1. Development of Strategic Alliances C.2. Dependence on suppliers, leading to difficulty for the company to keep abreast of constantly evolving design and engineering technologies. C.3. Hollow corporations

10. VI - Transfer Pricing MNCs should consider the following criteria when making transfer pricing decisions: a) Tax regimes b) Local Market conditions c) Market Imperfections d) Joint-venture partner e) Morale of local country managers Key drivers behind transfer pricing: a) Market conditions in the foreign country b) Competition in the foreign country c) Reasonable profit for foreign affiliate d) U.S. federal income taxes

11. e) Economic conditions in the foreign country f) Import Restrictions g) Customs Duties h) Price Controls i) Taxation in the foreign country j) Exchange Controls Setting Transfer Prices a) Arm’s length prices: use of market mechanism as a cue for setting transfer prices. b) Cost-based pricing (adds a mark-up)

12. VII - Global Pricing and Antidumping Regulation Dumping: imports are being sold at an “unfair”price Protectionism - To minimize risk exposure to antidumping actions, exporters might pursue any of these strategies: - Trading-up (move away from low-value to high-value products) - Service Enhancement: differentiate your product by adding support services to the core product - Distribution and Communication: strategic alliances

13. VIII - Price Coordination When developing a global pricing strategy, one of the thorniest issues is how much coordination should exist between prices charged in different countries In deciding how much coordination, several considerations matter: a) Nature of customers b) Nature of channels c) Nature of competition d) Market integration e) Internal organization f) Government regulation

14. IX - Countertrade Countertrade is an umbrella term used to describe unconventional trade-financing transactions that involve some form of noncash compensation. A – Forms of Countertrade Barter Buy Back Offset B – Motives Behind Countertrade - Gain access to new or difficult markets - Overcome exchange rate controls or lack of hard currency - Overcome low country credit worthiness - Increase sales volume - Generate long-term customer goodwill

15. C – Shortcomings ofCountertrade - No in-house use for goods offered by customers - Timely and costly negotiations - Uncertainty and lack of information on future prices - Transaction costs