1) What is global sourcing?
Global sourcing is defined as the process of identifying, developing, and utilizing the source of supply for the enterprise through expanding purchasing activities internationally. It is a part of post reengineering activities which is an useful measure of cutting cost. Global sourcing is a typical example of foreign construction outsourcing firms which process construction by distributing each process of construction work to vendors instead of running on its own.
Such construction method not only does reduce costs in terms of managing construction sites such as labor cost and equipment cost including vehicles, but also is being adopted by various companies for value-adding construction management (CM) project. For instance, global sourcing was utilized when building Daewoo Business Center at Warszawa, Poland, on March, 1997. The process of erecting the center was alloted to vendors; construction was executed by VOICE(England), design through RTKL(U.S.), facility management was duty of Dongwoo which is a department of Daewoo Group, hotel management by Hilton hotel(U.S.).
2) Global sourcing factors
Global sourcing factors that must be understood and balanced can 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 inventory delivery cost can be dwindled through global sourcing. Moreover, significant amount of transportation expense can be reduced when marketing products at outsourcing regions. Cross-border taxes, tariffs, and duty costs are third factor which form global sourcing. Instead of relying on domestic production but rather outsource each process internationally, costs can be reduce by avoiding trade 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 enables global sourcing companies to manufacture high quality-low price merchandises. The last category of global sourcing is supply and operational risks. Cultural and geographical
disparities can yield additional costs such as labor cost and transportation cost. If not managed thoroughly, they can militate as huge risks in terms of conducting sourcing.
3) Advantages of global sourcing
There are three major merits of performing global sourcing; gumption 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 environmental alterations when confronting unexpected economic crisis. Secondly, average 20% of cost saving is possible. Components of products or raw materials procured from abroad is advantageous 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. Even in case of Korea, sourcing products from China are 30%~40% cheaper than Korean domestic goods. In particular, simple 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 acquire restricted raw materials and resource. Thus, unique and competitive products can be created.
2. Case-Study (Li&Fung)
Li&Fung is a professional trading 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, Li&Fung acts as a professional sourcing and distribution firm focusing on toys and textile. Becoming an intermediary, it reconstructed the
business by forming it as a connection and manager of diverse supply chains. Li&Fung is the representative of ‘smokeless factory’ without owning any equipment and factories regarding production process from raw material to final goods and distribution of final products.
2) Business area / Present condition
Li&Fung won the rewards in ‘Fabulous 50′ selectied by Forbes Asia, ’50 for 2012’ from Morgan Stanley, and ‘The most influential companies 25’ from Business week. The sales of Li&Fung in 2007 was 92.4 billion in Hong Kong dollars, approximately 36% increase in sales compared to that of 2006.
Net income reached 30 billion dollars(2007) and Li&Fung Co. Ltd. succeed in gaining 19.8% increase in sales (110.7 billion Hongkong dollars)than that of previous year. After 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 Li&Fung, and Royal Ahold, Guess Jeans, Bebe also joined as major customers of Li&Fung in 2000. As a result, Li&Fung currently 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 Li&Fung, especially 40,000 related businesses only in the United States. Thus, it can be said that Li&Fung has entered plateau stage as a company settling new form of SCM rather than just being a simple trading firm.
3) Platform / Operation System
Li&Fung is one of the enterprises which effectively employ platform strategy. In terms of strategy, Li&Fung adequately balances SRM and CRM strategy to manage producers and customers. Li&Fung 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, Li&Fung 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 dyed 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 Factors
Success factors of Li&Fung can be categorized into three elements. The first factor is IT evolution. Through IT development, product lead time dwindled through forming network among producers and customers, and even efficiently manage vendors. Another facet is SRM and CRM, especially have strength on SRM. Li&Fung analyze customer’s needs and scrutinize supply chain to meet the desires. Since firms tend to focus on maximizing their capability instead of in accordance with needs, Li&Fung can otherwise strive to fortify supply chain or value chain for customers.
In other words, the key role of Li&Fung is to direct manufacturers of supply chain to the intended 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, Li&Fung follows 30/70 rule, which is to set a standard(from 30% to 70% of total production) on production quota to Li&Fung.
This enables Li&Fung to have loose liaison among subcontractors. Minimum 30% of total production allows Li&Fung to possess minimum supply from each subcontractors and prevention vendors from being subordinates can be done by setting 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 room for growth. Other vendors also benefit from the principle by being expose to opportunities to work with others, which help them to learn and come up with innovative ideas. Such principle demonstrates value of Li&Fung on making supply chain more dynamic and lively. Thus, change in partners frequently happens in supply chain of Li&Fung. In conclusion, Li&Fung shows contradictory management of pursuing stable and long-term partnership whereas also demanding loose network instead to forming strict organization.
3. Problem & Solution
1) Wage stagnation / Pricing pressure
The first problem of Li&Fung is wage stagnation of China. China accounts for 60% of total global sourcing of Li&Fung, which means that shift in China impact Li&Fung heavily. After 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, China’s wage has been increasing 16% annually. As labor cost takes up the largest portion of garment industry’s costs, Li & Fung’s first half of 2011 net income dwindled 18%. Therefore, there is high necessity for finding a new production base(a new partners) and gain price competitiveness through such measure. Second problem is overseas buyers’ desire to lower supply pricing due to high uncertainty 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 Li&Fung.
2) China & U.S Trade conflict
Third adversity is potential trade disputes between the United States and China. This trade conflict, which is referred to as protectionism, is noteworthy of a notice as 69% of total production of Li&Fung is sold to the United States. The United States has criticized China on the currency 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 severe 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 Asia
In preparation for deterioration of China’s production environment and falling competitiveness of China as a sourcing region, Southern Asia is evaluated as the most practical alternative for strategic sourcing of Li&Fung. 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 significantly 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 Li&Fung.
4) Quality management system
Controlling over 15,000 vendors is demanding and the possible drawback is failure of consistency in quality. Since quality is prerequisite these days, stricter vendor’s quality management system should be made. One of the tools that Li&Fung can utilize and apply stricter is ‘Vendor compliance index’. There are six indexes Li&Fung 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, Li&Fung will be able to afford products to customer with coherent quality. 4. Conclusion
The concept having used by Li&Fung 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 relation 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 be followed when implementing global sourcing.