Global sourcing Essay Example for Free

Global sourcing Essay1) What is international sourcing?Global sourcing is defined as the process of identifying, developing, and utilizing the source of fork out for the enterprise through expanding purchasing activities internationally. It is a part of post reengineering activities which is an effectual measure of cutting cost. Global sourcing is a typical example of foreign formula outsourcing firms which process grammatical locution by distributing from each one process of construction work to vendors instead of running on its own.Such construction method not only does reduce cost in terms of managing construction sites much(prenominal) as labor cost and equipment cost including vehicles, but also is macrocosm adopted by various companies for value-adding construction trouble (CM) project. For instance, international sourcing was utilized when building Daewoo Business Center at Warszawa, Poland, on March, 1997. The process of construct the center was alloted to vendors construction was executed by VOICE(England), design through RTKL(U.S.), facility management was calling of Dongwoo which is a department of Daewoo Group, hotel management by Hilton hotel(U.S.).2) Global sourcing work outsGlobal sourcing factors that must be understood and balanced stinkpot be segmented into 5 categories. First factor is material cost. The bottom line of execution of global sourcing is reduce cost by minimizing material cost. Another category is transportation cost. Various costs including size up delivery cost can be dwindled through global sourcing. More everywhere, significant amount of transportation depreciate can be reduced when marketing products at outsourcing regions. Cross-border taxes, tariffs, and duty costs be third factor which form global sourcing. Instead of relying on domestic doing but rather outsource each process internationally, costs can be reduce by avoiding make do barriers which include cross-border tax, tariff and duty cost. Next factor is supply and operational performance. With effective resource management and cheap labor cost, supply and operational performance can be efficiently managed which en qualifieds global sourcing companies to manufacture high quality-low price merchandises. The endure category of global sourcing is supply and operational risks. Cultural and geographicaldisparities can yield additional costs such as labor cost and transportation cost. If not managed thoroughly, they can militate as great risks in terms of conducting sourcing.3) Advantages of global sourcing there are leash major(ip) merits of performing global sourcing sentience to changes, reduction of cost, and trade barriers avoidance. To begin with, global sourcing allows a firm to develop capacity to cope with changes in market condition. Importing numerous raw materials and resources economically and steadily can be done through global sourcing. With such abundant resources, a firm can flexibly adopt to environme ntal alterations when confronting unanticipated economic crisis. Secondly, average 20% of cost saving is possible. Components of products or raw materials procured from abroad is availous in terms of price. Furthermore, many countries such as American and Europe are sourcing materials to cut cost in terms of distribution industries.As a result, China has become the hub of production base for global sourcing. thus far in case of Korea, sourcing products from China are 30%40% cheaper than Korean domestic steady-goings. In particular, elementary functional merchandizes whose design and quality are relatively less considered are largely influenced by global sourcing. Consequently, over 70% of commodities and clothes are imported from China. Last merit of global sourcing is evasion of trade barriers. In case of global sourced goods, the price is lower, leading to economical purchase, by avoiding trade barriers such tariffs and cross-border taxes. On top of that, firms are able to ac quire re rigided raw materials and resource. Thus, unique and competitive products can be created.2. Case-Study (LiFung)1) IntroductionLiFung is a professional traffic company which specializes in global sourcing and was founded in 1906. It functioned as a broker between Asian manufacturers and foreign traders and expanded as a trading company later on. Today, LiFung acts as a professional sourcing and distribution firm focusing on toys and textile. Becoming an intermediary, it reconstructed the occupation by forming it as a connection and manager of diverse supply fibrils. LiFung is the representative of smokeless mill without owning any equipment and factories regarding production process from raw material to final goods and distribution of final products.2) Business knowledge domain / Present conditionLiFung won the rewards in Fabulous 50 selectied by Forbes Asia, 50 for 2012 from Morgan Stanley, and The virtually important companies 25 from Business week. The sales of LiF ung in 2007 was 92.4 meg in Hong Kong dollars, approximately 36% increase in sales compared to that of 2006.Net income reached 30 billion dollars(2007) and LiFung Co. Ltd. succeed in gaining 19.8% increase in sales (110.7 billion Hongkong dollars)than that of previous year. later on 1998, foreign companies such as The Limited, Gymboree, American Eagle, Warner Brothers, Abercrombie Fitch, Bed, Bath Beyond, Tesco, Avon Products, Levi-Strauss, Reebok have become major customers of LiFung, and Royal Ahold, Guess Jeans, Bebe also joined as major customers of LiFung in 2000. As a result, LiFung shortly has 68 offices in the 38 countries, and shareholders numbers 17,900. In addition, it consists of 107,000 employees engaged in the business associated with LiFung, especially 40,000 link up businesses only in the United States. Thus, it can be said that LiFung has entered plateau stage as a company settling new form of SCM rather than just being a simple trading firm.3) Platform / Operat ion SystemLiFung is one of the enterprises which effectively employ platform strategy. In terms of strategy, LiFung adequately balances SRM and CRM strategy to manage producers and customers. LiFung distributes textile component orders to vendors as soon as receiving orders from textile industries. It makes most of 15,000 subcontractors which are located around the globe. When producing a jacket, for example, LiFung procures materials from diverse vendors outshell is from Korea, Zipper from Japan, lining is done from Thailand, and trademarks and thread from Hongkong. Fabric is colored in Southern Asia, China sews, and finally quality inspection and packaging are done in Hongkong. Then, headquarter in Hongkong generally manages cash flow and value-added process.4) Success FactorsSuccess factors of LiFung can be categorized into three elements. The first factor is IT evolution. Through IT development, product lead time dwindled through forming nedeucerk among producers and customers, and even efficiently manage vendors. Another facet is SRM and CRM, especially have strength on SRM. LiFung analyze customers needs and scrutinize supply chain to meet the desires. Since firms tend to focus on maximizing their potentiality instead of in accordance with needs, LiFung can otherwise strive to fortify supply chain or value chain for customers.In other words, the key role of LiFung is to direct manufacturers of supply chain to the mean direction. For that specific purpose, it establishes education to producers on scattered network management rather than having strict control system for managing vendors, and emphasizes on trust and active empowerment. Lastly, LiFung follows 30/70 rule, which is to set a standard(from 30% to 70% of marrow production) on production quota to LiFung.This enables LiFung to have loose liaison among subcontractors. Minimum 30% of total production allows LiFung to take in minimum supply from each subcontractors and prevention vendors from be ing subordinates can be done by fit maximum 70%. The core objective of this principle is to assure vendors of gaining huge profit from being a member of the network and on the other hand guaranteeing flexibility of business and availability of a means for growth. Other vendors also benefit from the principle by being expose to opportunities to work with others, which help them to describe and come up with innovative ideas. Such principle demonstrates value of LiFung on making supply chain more dynamic and lively. Thus, change in partners frequently happens in supply chain of LiFung. In conclusion, LiFung shows unconnected management of pursuing stable and long-term partnership whereas also demanding loose network instead to forming strict organization.3. Problem Solution1) Wage stagnancy / Pricing pressureThe first problem of LiFung is wage stagnation of China. China accounts for 60% of total global sourcing of LiFung, which means that shift in China impact LiFung heavily. Afte r the economic liberalization of China, China has been able to attract world companies as the most suitable production base due to cheap and abundant labor. As a consequence of substantial growth, Chinas wage has been increasing 16% annually. As labor cost takes up the largest portion of garment diligences costs, Li Fungs first half of 2011 net income dwindled 18%. Therefore, there is high indispensability for finding a new production base(a new partners) and gain price scrap through such measure. Second problem is overseas buyers desire to lower supply pricing due to high scruple from global recession. As shown in the average import price of textile in the U.S. graph on the right, the average import price has been continually decreasing, from $3.18 in 2006 to $3 in 2009. Heavy pressure on supply pricing is having negative impact on net income of LiFung.2) China U.S Trade conflict trey adversity is potential trade disputes between the United States and China. This trade confli ct, which is referred to as protectionism, is noteworthy of a scorecard as 69% of total production of LiFung is sold to the United States. The United States has criticized China on the bills exchange rate manipulation, along with accusation of exchange dumping. In addition, Section 421 is an article which can be executed in a situation where increased import of Chinese products acts as a dreaded damage to American domestic industries. Accordingly, it is inevitable to exclude potential trade conflict between two countries on account of high possibility of implementing additional countervailing duty by executing section 421.3) Expanding partners in Southern AsiaIn preparation for deterioration of Chinas production environment and falling competitiveness of China as a sourcing region, Southern Asia is evaluated as the most practical alternative for strategic sourcing of LiFung. In terms of percentage change in world textile industry sourcing, diminution of China is noticeable, as 7% , whereas Vietnam and Bangladesh show growth, respectively displaying 1% and 20% of sourcing uprising rate.To demonstrate suitability of sourcing to Banladesh, environment of Bangladesh such as social infrastructure and facilities, and educational level should be thoroughly examined. Nevertheless, wage of Bangladesh is much cheaper than that of China, Bangladesh being one third that of China, in terms of only considering unit labor cost. Furthermore, Bangladesh is likely to be importantly equipped with garment-industry infrastructure judging from the large number of textile industries sourcing to Bangladesh. Therefore, it is no hasty conclusion that Bangladesh is the most appropriate region for new production base of LiFung.4) Quality management systemControlling over 15,000 vendors is demanding and the possible drawback is failure of consistency in quality. Since quality is prerequisite these days, stricter vendors quality management system should be made. One of the tools that LiF ung can utilize and apply stricter is Vendor compliance index. There are six indexes LiFung should keep attention to efficient operation, productivity, process innovation, ensuring the quality, purchase the appropriate law material, and good working condition of labor. By balancing and fulfilling following vendor compliance indexes, LiFung will be able to afford products to customer with coherent quality. 4. ConclusionThe concept having used by LiFung is highly familiar to us as global sourcing is also deployed by domestic companies such as Samsung and LG. Global sourcing can be divided into two factors risk element and opportunity element. These two elements are in trade-off social intercourse which means that change in one element accompanies the other, while endeavoring to maximize opportunity element. Thus, taking advantage of opportunity and risk element in a timely manner is the premise for successful global sourcing and in-depth analysis on local region and strategy should b e followed when implementing global sourcing.