The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010
A Framework to Improve Sourcing Strategy Implementation Mohamad, M.N. † 1 University Science Malaysia School of Management, University Science Malaysia, 11800 Pulau Pinang, Malaysia Email:
[email protected] Julien, D.J.2 and Kay, J.M Cranfield University School of Applied Sciences, Building 50, Cranfield University, Cranfield, MK43 0AL Bedfordshire, United Kingdom Email:
[email protected] Email:
[email protected]
Abstract - The research on which this paper is based seeks to understand how companies based in the UK have approached the implementation of their sourcing strategy. This paper describes the development of a framework using critical success factors of implementing the global sourcing strategy that were identified in past studies and findings from the survey and case studies. Numerous past studies have suggested critical success factors to the implementation of the global sourcing strategy. However, none of these studies have proposed a framework that specifies practices that should be undertaken to facilitate the progression to a higher sourcing level. Following this, a development of a framework is deemed important to help businesses understand what is needed in order to be an effective global organization in terms of implementing a global sourcing strategy. Keywords: global sourcing, framework, critical success factors.
1. INTRODUCTION
2. LITERATURE REVIEW
There is an abundance of literature covering the subject area of international purchasing and global sourcing, mainly focusing on the benefits, challenges, critical success factors, strategy development and the issues associated with progression towards higher levels of global sourcing. However, there is only a limited amount of literature that addresses the global sourcing practices of firms in the UK. There is also little emphasis placed on the development of frameworks of best practice that can provide companies with the guidance to achieve global sourcing excellence. The research on which this paper is based seeks to understand how companies based in the UK have approached the implementation of their global sourcing strategies. The focus on this paper is to propose a framework to improve a company’s sourcing strategy implementation.
Hong and Holweg (2005) explained that the most commonly quoted definition of the term global sourcing is by studies conducted Monczka and Trent. The terms foreign sourcing, global sourcing, international sourcing and multinational sourcing have been used interchangeably and there is a distinction between these concepts (Monczka and Trent, 1991; Birou and Fawcett, 1993 and Trent and Monczka, 2005).
________________________________________ † : Corresponding Author
2.1 International Purchasing and Global Sourcing According to Birou and Fawcett (1993), international sourcing, multinational sourcing and foreign sourcing are defined as “buying outside the firm’s country of manufacture in a way that does not coordinate requirements among worldwide business units of a single firm”. Global sourcing, however, refers to “the integration and coordination of procurement requirements across
The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010 worldwide business units, looking at common items, processes, technologies and suppliers” (Monczka and Trent, 1991). Global sourcing “includes the sourcing requirements combined from two or more of your business unit’s location/sites outside the country borders where purchased goods or services are used” (Monczka et al, 2006). According to Trent and Monczka (2002), global sourcing, “which differs from international purchasing in scope and complexity, involves proactively aggregating volumes and coordinating common items, practices, processes, designs, technologies, and suppliers across worldwide procurement, design, and operating locations”.
Engage in Domestic
Int. Purchasing
Level I
Level II
Purchasing Only
Engage in Worldwide Buying As-Needed
Worldwide Buying as Level III
Part of Purchasing
Global sourcing
Strategy
Level IV
Regional and Global Coordination of Worldwide Purchasing Strategies
Level V
Integration and Coordination of Global Purchasing Strategies with Other Functional Groups and Processes
Figure 1: International Purchasing & Global Sourcing Levels (Trent and Monczka, 2002) A company “evolves or progress from domestic purchasing only to the global coordination and integration of common items, processes, designs, technologies, and suppliers across worldwide locations” (Monczka and Trent, 1991). This progression is parallel to Rajagopal and Bernard (1993) article, where they stated that “firms evolve along a continuum as they pursue and mature within their sourcing efforts”. Figure 1, a multi-level framework that is supported by previous research, presents international purchasing and global sourcing as a series of evolving levels along a continuum (Trent and Monczka, 2002).
2.2 Critical success factors of implementing the global sourcing strategy Trent and Monczka (2005) have documented seven key characteristics that firms should have in order to achieve global sourcing excellence. Trent and Monczka (2005) explained that the characteristics of global sourcing excellence can be grouped in seven broad characteristics, namely executive commitment to global sourcing, rigorous and well-defined process, availability of needed resources, integration through information technology, supportive organizational design, structured approaches to communication and methodologies for measuring savings. These seven factors were used as the main input for the factors that is used in the proposed framework. The author believes that qualified personnel as a factor, should have the same importance as the other factors that were identified in past research and has promoted this factor to be one of the main factors along with the seven characteristics identified in the Trent and Monczka (2005) paper. The eight key factors that have been identified as critical to the successful implementation of global sourcing for the use in the proposed framework are: 1. Executive commitment to global sourcing - covers the role of the executive leadership in the development and implementation of the global sourcing strategy. 2. Rigorous and well-defined processes - explains the global sourcing process in place. 3. Availability of needed resources - describes how critical resources are made available to support the global sourcing process. 4. Integration through information technology emphasizes the importance of having compatible information systems with suppliers. 5. Supportive organizational design - describes the internal groups that are responsible to oversee the global sourcing process, from the sourcing strategy development, identification of global opportunities, to development of sourcing agreements. 6. Structured approaches to communication and relationship building with suppliers – explains communication and coordination across different departments in the company and with business partners worldwide. 7. Methodologies for measuring performance - covers the measures used to evaluate performance improvements or benefits from global sourcing initiatives. 8. Qualified personnel - explains the knowledge and skills that purchasing personnel need to possess that were regarded as important to perform global sourcing successfully.
The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010
2.3 The identification of the need to develop a global sourcing framework As more and more studies create awareness of the critical success factors that are important in implementing a global sourcing strategy, there is a need to develop a global sourcing framework to help companies identify areas they can improve in terms of implementation of the sourcing strategy. The identification of existing frameworks throughout the literature revealed that there is little emphasis placed on the development of a framework to improve the implementation of global sourcing. The proposed framework was developed following the identification of the worldwide sourcing assessment process suggested by Monczka and Trent (1992) to improve the execution of worldwide sourcing. The worldwide sourcing assessment process that was suggested by Monczka and Trent (1992) did not suggest details about how companies can evaluate their global sourcing implementation. None of the frameworks or models in literature has detailed methods to identify gaps between a company’s requirements and their actual capabilities. The framework that is proposed in this research is positioned under the “gap definition” step of the Monczka and Trent (1992) study. This framework will suggest a detailed process on how companies can identify the gaps and devise an action plan to reduce the gaps.
3. METHODOLOGY The initial ideas on the development of the framework were devised based on a brainstorming process with academics. Following the initial development of the framework, the author obtained feedback from participants in the industry and academics. The objectives of obtaining feedback on the framework include: (1) To determine the applicability and reliability of the framework to work in real life situations. (2) To obtain response on the strengths, weaknesses and limitations of the framework. (3) To confirm that the framework meets the purpose of its development. (4) To determine improvements and changes which could be made on the framework.
The interviews were recorded and the duration of the interviews usually lasted between 40 minutes to one hour. The participants were given an explanation regarding the purpose of the feedback, purpose of the framework, some background of the research that lead to the development of the framework, key concepts from the literature, the framework development process, and the proposed framework. For the proposed framework, the participants were given an explanation about the steps in the framework, the process under each step and the tools used in the framework. The framework was not tested in any of the companies that were involved in the feedback process because of time constraints. In the feedback process, the author obtained the opinions of the industrialists and academics based on their personal knowledge and experience. The framework that is presented in this paper is the refined version of the framework after the feedback process has been conducted.
4. THE PROPOSED FRAMEWORK The proposed framework has three steps. Step 1 (Needs identification) requires companies to assess their current sourcing level to determine whether they need to improve their sourcing strategy implementation. In Step 2 (Assessment tool application), companies carry out a gap analysis of the leading practices against their current practices to assess the company’s status. This step includes the validation of the data to decide on the overall score for the company and identify any outliers. In Step 3 (Areas for improvement), companies focus their efforts on identifying the areas that need improvement and the sequence of implementation. This framework can be executed repeatedly for companies to continually assess their sourcing strategy. Figure 2 illustrates the proposed framework. Step 1 – Needs identification
Feedback
Top management (Precursors check)
The feedback process was conducted through one-toone semi-structured interviews with seven participants. From the seven participants, five of them were from industry and hold a position as a manager or director. They all have knowledge and experience on the sourcing activities and processes in their respective company. The other two participants were academics specializing in supply chain and manufacturing operations.
Feedback
Feedback
Step 3 – Areas for
Step 2 – Assessment
improvement
tool application
Figure 2: The proposed framework.
The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010
4.1 Top management is the centre of the initiative The top management needs to be in the centre of the sourcing initiative. The main concern from the implementation aspect of the framework is whether the action plan will be executed after the team has gone through the framework. Hence, what is important is including people that can have an impact on the sourcing strategy development and execution. The team would consist of personnel that deal with the actual sourcing implementation. It terms of strategic strategy development and approval for execution of sourcing strategies, the support and involvement from top level management is crucial in the implementation of the framework. Top level management would receive input from the team that implements the framework, therefore making the process of using the framework more effective and relevant.
According to Monczka et al. (2008), a process owner is a person that assumes ownership for conducting lessons learned sessions at the end of each sourcing initiative, forwards the results to all global participants and works to secure the participation of different functional groups when crafting global sourcing agreements. The process owner is responsible for the performance of the sourcing strategy implementation and has the authority to revise the strategy. Trent and Monczka (2005) explained that part of a company’s strategic planning process should include determining an appropriate sourcing level. Hence, in this framework, before the process owner assesses the company’s sourcing strategy implementation, the process owner should first determine the appropriate sourcing level at which the company wants to operate.
4.3 Step 2 – Assessment tool application The team should provide feedback to top management within every step. This will help ensure the successful execution of the framework and also the strategies that were planned to improve the company’s implementation. The critical success factors that were used were not an exhaustive list. There are other factors that this framework does not cover. These factors include factors that are categorized as enablers, inhibitors and external factors that companies may not have control over. These factors need to be defined before the company can execute the proposed framework. Examples of these factors include competitive forces, customer requirements and worldwide market opportunities, as suggested by Monczka and Trent (1992) in their worldwide sourcing assessment process. In addition, Quietens et al. (2006), suggested drivers, facilitators and barriers that may influence the decision for companies to source globally. The author has defined these factors as precursors that need to be outlined by those involved in sourcing before executing the framework. These precursors will help the decision makers prioritize the action plan. These precursors would also provide the company direction for their requirements to achieve their intended sourcing level.
4.2 Step 1 – Needs Identification In the first step, the company conducts an assessment on their current sourcing level to determine whether they need to improve their sourcing strategy implementation. The purpose of this step is to identify if the company needs to assess their strategy implementation in order to proceed to the next step. This step is carried out by the process owner of the global sourcing strategy.
In the second step, the company carries out a gap analysis of the leading practice against their current practice (refer Figure 3). The purpose of this step is to identify gaps in the sourcing strategy implementation. This step is carried out by the process owner of the global sourcing strategy and employees that have insight into company-wide sourcing strategies. Potential candidates for the team that will be involved include purchasing managers, supply chain management managers, sourcing team members/leaders, executive steering committee members and those who are closely involved with global sourcing such as logistics representatives. EXAMPLE OF A GAP ANALYSIS Practice 1 Level 5
Practice 8
Level 4
personnel
Level 3
Practice 2
Level 2 Level 1
Practice 7
Practice 3
0
Practice 4
Practice 6
GAP Practice 5 Company Current Practice
Leading Practice
Figure 3: Example of a gap analysis
The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010
4.3 Step 3 – Areas for improvement
REFERENCES
The team discusses the gaps and identifies specific areas for improvement. The team takes into account the sourcing level that the company wants to operate. The discussion will be focused on aligning the sourcing strategy with the corporate strategy. The sourcing strategy should fit the requirements of the company’s corporate strategy, as the higher the sourcing level, the more resources will be tied down to support the sourcing strategy.
Birou, L.M. and Fawcett, S.E. (1993), “International purchasing: benefits, requirements and challenges”, International Journal of Purchasing and Materials Management, Vol. 29, No. 2, pp. 27-37.
The team then prioritizes the list of areas that they need to improve. The last action at this stage is to recommend the action plan for top management approval. The company can then repeat the whole process to reassess their current position and further improve their implementation of the global sourcing strategy.
Hong, E. and Holweg, M. (2005), “Evaluating the effectiveness and efficiency of global sourcing strategies: a conceptual note”, University of Cambridge. Citing Internet resources (WWW document). http://wwwinnovation.jbs.cam.ac.uk/publications/hong_evaluating.pdf. (accessed 18th January 2007). Monczka, R.M. and Trent, R.J. (1991), “Global sourcing - a development approach”, International Journal of Purchasing and Materials Management, Vol. 27 No. 2, pp. 2–8.
6. CONCLUSIONS Earlier studies found that there is a distinction between international purchasing and global sourcing. Furthermore, past studies have also found that companies can achieve greater benefits through global sourcing. The benefits that could be attained from global sourcing have attracted companies to employ the global sourcing strategy. This paper looks at the development of a framework using critical success factors of implementing the global sourcing strategy that were identified in past studies and findings from a survey and case studies. As more and more studies create awareness of the critical success factors that are important in implementing the global sourcing strategy, there is a need for a framework to be developed to help a company identify areas where they can improve in terms of implementation of the strategy. The proposed framework helps businesses compare their progress and practices against leading practices and make modifications as they progress. Following this, businesses are able to improve their supply chain management by exploring practices that are required to implement global sourcing successfully and at the same time gain competitive advantage over their competitors.
Monczka, R.M. and Trent, R.J. (1992), “Worldwide sourcing: assessment and execution”, International Journal of Purchasing and Materials Management, Vol. 28, No. 4, pp. 9-19. Monczka, R.M., Trent, R.J and Petersen, K.J. (2006), “Effective global sourcing and supply for superior results”, Center of Advanced Purchasing Studies, Tempe, AZ. Citing Internet resources (WWW document). http://www.capsresearch.org/publications/pdfspublic/monczka2006es.pdf.(accessed 18th January 2007). Monczka, R. M., Trent, R. J. and Petersen, K. J. (2008), "Getting on track to better Global Sourcing", Supply Chain Management Review, Vol. 12, No. 2, pp. 4653. Quintens, L., Pauwels, P. and Matthyssens, P. (2006), "Global purchasing strategy: state of the art and research directions", Journal of Purchasing and Supply Management, Vol. 12, No. 4, pp. 170-181. Rajagopal, S. and Bernard, K.N. (1993), “Globalization of the procurement process”, Marketing Intelligence and Planning, Vol. 11, No. 7, pp.44-56. Trent, R.J. and Monczka, R.M. (2002), “Pursuing competitive advantage through integrated global sourcing”, Academy of Management Executive, Vol. 16, No. 2, pp. 6680. Trent, R.J. and Monczka, R.M. (2005), “Achieving excellence in global sourcing”, MIT Sloan Management Review, Vol. 47, No. 1, pp. 24-32.
The 11th Asia Pacific Industrial Engineering and Management Systems Conference The 14th Asia Pacific Regional Meeting of International Foundation for Production Research Melaka, 7 – 10 December 2010 AUTHOR BIOGRAPHIES Dr. Marini Nurbanum Mohamad is a Lecturer at the Department of Operations, School of Management, University Science Malaysia, Malaysia. Her teaching and research interests include supply chain management and applied operations research. She can be reached at Dr. Denyse Julien is a Lecturer at the Department of Manufacturing, School of Applied Sciences, Cranfield University, United Kingdom. Her teaching and research interests include supply chain management and applied operations research. She can be reached at Prof. John Kay was a Lecturer at the Department of Manufacturing, School of Applied Sciences, Cranfield University, United Kingdom. His teaching and research interests include supply chain management and applied operations research. He can be reached at
