Global Sourcing Exam 1

Industry Life Cycle Theory

*cycle of an entire industry* International trade occurs because an industry in different countries are at different stages of its life. Four evolutionary stages for an industry: 1. The embryonic stage • Market environment in uncertain • Research and development phase. Product design is primal. - mock ups, sketches. • Products are produced using unspecialized equipment. • A lot of trial and error. 2.The growth stage • Rate of product innovation declines and remains stable. • Products are manufactured with more specialized machinery. • Results in more refined products. 3.The mature stage • Business functions like marketing and management advance. • Mature market with stable market shares. • Seeking of external markets to develop new sales = International Trade • Stage 3 ends with decline = stage 4 4.The declined stage- doesn't mean death There are different views on why firms are engaged in global sourcing. *Not one theory explains it all.* Different companies may use different theories at any point of time.

b corps

-B Corp is a for "benefit" corporation. -Each B Corp goes through a certification process to ensure their business is following the triple bottom line criteria. -B Corp's are certified by the nonprofit B Lab to meet rigorous standards of social and environmental performance, accountability, and transparency.

*Social and Environmental Compliance Issues:

-Child labor has been an ongoing topic in the global apparel-manufacturing industry. -Other labor issues include: prison labor, forced labor, and late or no compensation. -Must find suppliers that comply with fair labor practices. -Being sustainable in both social and environmental arenas is important for today's consumers.

Comparative vs. Competitive:

-Comparative advantage = relative. -Competitive advantage = absolute.

Risk Reduction Criterion:

-Evaluates the degree of potential risks (recalls, safety, etc.) in manufacturing on your own. -Businesses also face risk related to social and/or environmental responsibilities.

current status of global sourcing

-Global sourcing is common across many industries. -Labor-oriented businesses have been moved from high-wage economies (or developed countries), to low-wage economies (or developing countries), since World War II. -The U.S. is one of the largest apparel importing countries in the world—up to US $120 billion (22.3% of the world apparel's import).

cons of GS

-If done irresponsibly, global sourcing could create: • Increasing rates of unemployment. • Unfair labor practices in developing countries. • Child labor exploitation. • Negative Environmental Impact.

pros of GS

-If done right, global sourcing helps businesses to: • Reduce material/operating costs. • Improve quality (specialization- we are able to seek out countries that specialize in a certain part of the process). • Increase product availability. • Respond quickly to changing market.

examples

2-digit = manufacturing sector (31) 3-digit= subsectors like a textile mill or apparel manufacturing (313 or 315) 4 digit= industry groups such as fabric mills, knitting mills, cut and sew manufacturing (3132 or 3135) 5 digit= industry, curtain and linen mills, hosiery and sock mills (31521) 6 digit= nation specific information, USA (315291)

There are ? major economic sectors with NAICS

20

Textile and apparel manufacturing subsector:

313: textile mills 314: textile product mills 315: apparel manufacturing 316: leather and allied product manufacturing

Cost Minimization Criterion:

Both production cost and service cost must be included to assess the overall cost. • Cost of service links. -Internal and external costs.

Retailers (NAICS 44 and 45

Businesses "engaged in retailing merchandise, generally without transformation, and rendering services identical to the sale of merchandise. The retailing process is the final step in the distribution of merchandise; therefore, organized to sell merchandise in small quantities to the general public"

Manufacture (NAICS 31, 32, 33):

Businesses "engaged in the mechanical, physical, or chemical transformation of materials, substances, or components into new products. The assembling of component parts of manufactured products is considered manufacturing"

Wholesalers (NAICS 42)

Businesses "engaged in wholesaling merchandise, generally without transformation, and rendering services incidental to the sale of merchandise. It is an intermediate step. They sell goods for resale, sale of capital/durable non-consumer goods, and raw materials used in production."

REMEMBER about retail industry

Creating "BUYER DRIVEN" supply chains rather than product-driven.

Comparative Advantage Theory (relative advantage theory)

David Ricardo International trade occurs when two countries can gain from trade due to their different relative costs for producing the same goods. -You have to have things that compare. -Will occur between two different countries. Example: • If country A is relatively more efficient in producing product X rather than country B is • And country B is relatively more efficient in producing product Y • Then each country should focus on manufacturing X or Y and then trade them. -Creates a division of labor and specialization. Example: • Country A would have more labor involved in product X and country B in product Y. • Thus, the labor is divided between the two countries Comparative advantage is the ability of an individual, company or country to produce a good or service at a lower opportunity cost than its competitor. Having a comparative advantage doesn't mean that one entity is better than another at producing a good or service. It means that it sacrifices less to do so.

Law of Supply and Demand:

Demand and supply interact to determine the equilibrium price and the quantity that will be traded in the market. not an actual law a) If there is a high demand yet supply remains unchanged, the equilibrium price of the good and the quantity of the traded goods will increase. Ex. High-end bag (Birkin). b) If there is a low demand yet the supply remains unchanged, the equilibrium price of the good and the quantity of the traded goods will decrease. Ex. Popcorn shirt. c) If there is a high supply yet demand remains unchanged, the equilibrium price of the good and the quantity of the traded goods will decrease. Ex. Basic white tees, socks, underwear. d) If there is a low supply yet demand remains unchanged, the equilibrium price of the good and the quantity of the traded goods will increase. Ex. Commodities- there is only so much bottled water or gas available. When low supply happens, price will go up.

Direct sourcing

Doing it all yourself" by acquiring and owning manufacturing facilities overseas. -Advantages: • Overall Cost reduction in the long-run. • Less expensive. • Direct control. • Core competency preservation. -Disadvantages: • High fixed cost and knowledge. • High risks in both quality and delivery for the sourcer if both fail. • Limitation for the sourcer to explore new techniques or technologies. -When is direct sourcing preferred? • For a large retailer selling basic products repeatedly. • For a company that owns unique manufacturing technologies or processes.

-Full-package sourcing

Full package suppliers are responsible for the entire sourcing process, from designing concepts to shipping documents. -Depending on specific terms, this might be included: • Shipping and transportation. • Marketing and merchandising. • Technology services. -Advantages: • Focus on other core business activities. • Little or no up-front investment. • Higher degree of flexibility than CMT. -Disadvantages: • Sourcer relies heavily on the supplier. • The supplier's cost to the sourcer is higher than with any other sourcing option. • High risks of suppliers.

Cost:

Labor cost used to be the main factor in sourcing decisions. This is no longer true. -Critical to evaluate production cost beyond labor cost (duties, transportation costs, etc.).

Profit Maximization Criterion:

Opportunity cost (the value of something that must be given up to acquire something else). -The opportunity cost impact the company's overall profits.

Quality

Quality of fabrics, trim, and workmanship is point of difference. -Sourcers must consider different levels of quality. -RIGHT quality, not the highest. (Will be on exam)!

strategic choice theory

Strategic choice can be defined as understanding the underlying pillars guiding future strategy, and generating strategic options for evaluation and selecting from among them suggests that top managers make their business decisions and choices to align their firms with the market environment. 3 problems managers face: entrepreneurial problems, engineering problems, and administrative problems (human resources)

Capabilities Criterion

The capabilities approach considers the amount of time and effort necessary for any company to learn new knowledge or skills

CMT contracting

The sourcer provides its own design, fabrics, and other raw materials. -Suppliers are solely responsible for cutting and trimming. -CMT suppliers tend to be located in DEVELOPING countries. -Advantages: • Does not require significant fixed cost from the sourcer. • More flexibility in product acquisition. • Useful for sourcers in developed economies, with limited experience in capital. -Disadvantages: • Losing some or all control over design ideas. • Changing factories and going to other countries comes with significant learning costs. • Profit Share.

Joint venture sourcing:

Two or more companies establish a new business entity. -Share profits as well as loss. -Aids small businesses and companies who lack expertise. -Advantages: • Low investment cost and fast start-up. • Excellent access to businesses and markets through the foreign partner's expertise. -Disadvantages: • Does not bring the most profits to the sourcer. • Division of control.

supply chain management (SCM)

a business function that strategically and systematically coordinates the traditional business functions within a particular company as well as across businesses within the supply chain includes coordination and collaboration with channel partners, logistics management, supply and demand management, integration of all business functions, and coordination with inter-functional activities. -Global sourcing is one of the activities under the SCM framework.

Sourcing

a set of business processes and activities by which businesses acquire and deliver components or fully finished products or services from outside of the organization.... ...With the objectives of finding, evaluating, and engaging suppliers of goods and services to achieve long-term competitive advantages. Sourcing in the textile and apparel industry involves: • Making decisions regarding the amount of product needed. • Identifying production sites capable of producing goods for retail. • Negotiating prices and discounts. • Maintaining relationships with the manufacturers during thr production process, scheduling deliveries, following to ensure on-time delivery, and maintaining quality.

trade agents/brokers

act on hqebalf of buyers/sellers in the wholesale transaction

Textiles

all of the products that the FTA complex produces- fibers, yarns, fabrics, apparel, and so on.

import intermediaries

are defined as "domestic service firms linking domestic and foreign businesses to facilitate import transactions in the global supply chain." • One of the main drivers of global sourcing in the new market environment. main point is they don't sell to the ultimate consumer.

tariffs

are taxes that are imposed on imported goods.

business to business

arrange for the purchase of sale or goods owned by others.

Historical Background

before industrial revolution, Women were in charge of spinning fiber, weaving fabrics, and sewing cloth at home. -Women started sourcing yarns and fabrics from markets as economy becomes more sophisticated. -Business clusters were formed for efficient buyer-supplier relationships. -Business clusters are going to be centralized based on what region they are in. Sourcing operations have expanded beyond clusters, states and even across national borders.

industrial revolution

began in the United kingdom and spread throughout western spread to the rest of the world fueled by advances in technology earliest invention was a mechanism to spin cotton fibers

resource dependence theory

certain decisions related to sourcing are made for firms to minimize their dependence on other firms. resources may not be helpful for a firms competitive advantage

Old market:

domestic manufacturing, light competition, consolidated process, weak consumerism

critical theory

focuses on active improvements of society as a whole, as opposed to simple understanding go a phenomenon. sourcing decisions are made to improve society, not firms. maximize social improvement toms shoes

moral responsibility theory of corporate sustainability/moral responsibility theory of sustainable supply chain

for corporations to be truly sustainable, they must first regard sustainability as a perfect duty and have clear goals and well defined structures to fulfill the duty. moral responsibility

business clusters

geographic concentrations of interconnected businesses, suppliers, and associated institutions

New market:

global manufacturing, intense competition, fragmented process, strong consumerism

supply chain

group of suppliers, suppliers' suppliers, buyers, and buyers of buyers of materials, information, and service providers organized to supply raw materials, transform products, and satisfy the demand of ultimate consumers all work together to meet the end goal of meeting demand by supplying and transporting the goods or services required by such demand

Consistency

is the most important factor. -Supplier's optimal cost, quality, lead-time, compliances, and infrastructure. -Checking the supplier's past records and reputation is vital.

lead time

is the total amount of time required to receive goods from the suppliers from the moment when contracts are issued. -Think about fast fashion.

International trade occurs because?

it gives consumers access to products at the world price (lower than the domestic price). Yet, domestic producers will lose market shares to foreign goods. Retailers and consumers prefer international trade while domestic producers do not. Due to this, the government has put up trade barriers such as tariffs and quotas.- both of these decrease consumer welfare while protecting domestic producers' welfare.

fragmentation theory

kiezerkowski why countries trade parts and components Fragmentation occurs due to: • advances in transportation and communication technologies • reductions in trade and regulatory barriers It has become easier for companies to divide production functions and share them with companies in foreign countries= International Trade. Three processes of the evolution of the fragmentation theory: 1. Traditional Production Process • the production block in this model shows the production system in which inputs are organized and combined. • All production activities are performed in one or a close location. • Input (money, labor, parts & components) → Production Block (where everything is being put together) → Markets (buyer- retailer, consumer, etc.) • Traditional: think everything in one location. (women doing everything in the house to create clothing) 2. Simple Fragmentation • inputs are transported into two separate production blocks and processed into the final products. • Introduction to Service Links: includes transportation, communication, and quality control. (checkpoints, stops that production makes along the way) • Input → Production block 1 → Service Link → Production block 2 → Markets • Two production blocks occur when there are 2 separate processes occurring. 3. Complex Fragmentation • multiple production blocks coordinated by multiple service links before final products are available in markets. • This is where we currently are today. • (insert visual) Fragmentation theory allows for the division of labor and specialization. Developed countries perform the value added activities, like design and marketing. Developing countries perform the manufacturing activities. **DevelopED (US, Canada, France, Germany, England) versus DevelopING. (India, Bangladesh, Cambodia, China)**

sourcing

long term includes both buyer and supplier

if a firm outsources difficult tasks and sources easy ones, it will?

lose it's competitive advantage core competencies should be kept WITHIN COMPANIES

Countries that are bigger leaders in the exporting are?

making most money from textiles.

outsourcing

negative signifies loss within cluster

is sourcing a new phenomenon?

no

Most businesses in the textile and apparel industry belong to one of three economic sectors******

o Manufacturing (31-33) o Wholesale trade (42) o Retail trade (44-45)

resource based view of the firm (RBV)

proposes that the firm is a collection of productive resources. these resources must be valuable, rare, and costly to copy so competitors are not likely to easily acquire them human capital and knowledge/skills are key skills to competitive advantage. Not easily imitated The supporters of this view argue that organizations should look inside the company to find the sources of competitive advantage instead of looking at competitive environment for it. HETEROGENOUS-RBV assumes that companies achieve competitive advantage by using their different bundles of resources.

quotas

refer to the quantity limitations on imported goods to ensure there will not be too many imports in the market place.

softgoods

refers to nondurable goods that are usually made with textiles.

merchant wholesaler

sells good on own account.

procurement

short term

sustainable development

the development that meets the needs of the present without compromising the ability of future generations to meet their own needs must consider lack of resources

*Place:

the place factor includes not only physical infrastructure of the supplier's facilities, but also the overall climate. -Lack of government support could be a problem. -Both bureaucratic procedures and lack of government infrastrture would delay exporting, transportation modes, and payment.

dickerson's definition of sourcing

the process of determining where and how manufactured goods will be procured (obtained).

demand

the quantity desired by the buyer

supply

the quantity in which the market can offer

softgoods chain

the total textile and apparel production -distribution chain including " manufacturing products through retailing, and other distribution phases associated what making products available to consumers.

Textile complex

the traditional view of the textile and apparel industry focused on manufacturing activities within the industry.

true or false? Retailers are now directly or indirectly affecting global sourcing.

true

fiber-textile-apparel (FTA) complex

was used to describe the overall picture of the textile and apparel manufacturing industry. • FTA complex has been associated with phrases such as "dying industry," "plant closing" and "domestic job loss." ("out" sourcing). • Retailers are now directly involved in manufacturing through global sourcing • Manufacturers are now retailing their own products.

Porter's competitive Advantage of Nations:

why a certain place is good at things for a number of reasons (factors) -Firms' competitive advantages are built from either low costs or differentiated products that command premium prices. -To sustain the advantage, firms must constantly innovate themselves to a higher level of competitive advantage than before. -To explain why certain nations achieve success in international trade, Porter introduced 4 attributes of a nation that can shape their competitive advantage. 1) Factor Conditions: -Factors of production refer to inputs necessary to complete in nay industry, such as labor, land, natural resources, capital, and infrastructure. What raw materials are present? 2) Demand conditions: -Demand conditions of the domestic (or home) marketplace influence how domestic firms improve and innovate their products or services. -High and sophistocted demand leads to sophisticated innovation. 3) Related and supporting industries: -Having a competitive domestic supplier industry is much preferable to replying on foreign suppliers, even if they are well-qualified. -Having resources that help be competitive. 4) Firm strategy, structure, and rivalry: If the goal of the firms, individuals (or employees), and a nation are all aligned, the industry in which these firms operate will be more likely to be competitive than that same industry in other nations without such a cohesive industry structure. -Enrouraged competition creates rivalry and drives innovation and quality. -Protectionism can weaken a market.

*Quick response and flexible product supply by:

• Analyzing market demands. • Identifying new trends.

The goal of social responsibility:

• Consumers' satisfaction in addition to businesses' goals. • Low cost vs. poor labor practices?

Triple bottom lines of sustainability

• Environmental improvement. • Social improvement. • Economic improvement.

Sourcing Job Requirements and Responsibilities:

• Fabric or trim sourcing manager, assistant, coordinator, or merchandiser. • Sourcing specialist, coordinator, manager, or director. • Production/sourcing or sourcing/production. • Merchandise sourcing/creative designer. Common responsibilities: • Vendor management: identify, negotiate with, and select the vendors. • Product development - must understand the process ad acquire new materials for PD's. • Production- cost, delivery, quality, and legal compliance. • Internal collaboration. Required skills: • Organizational skills. • Multi-tasking skills. • Communication skills. • On the job experiences. • Willingness to travel. • Relationship skills. • Language skills.

Productivity growth by:

• Focusing on its core competencies while sourcing special products from others.

The goal of environmental responsibility:

• Long-term impact on the environments in addition to businesses' financial goals. • Toxic chemical without proper water treatment vs. low cost?

Supply assurance by:

• Maintaining both flexibility and supply flow to maximize business performance.

Efficient capacity management by:

• Managing optional capital and labor. • Keeping critical resources and skills to keep competitive advantages.

Quality assurance by:

• Minimizing defects and late delivery.

Value acquisition such as:

• Personnel, skills, knowledge, or know-hows; and/or • Social or environmental issues. • New, novel, one-of-a-kind products.

Cost in reduction by:

• Saving in labor costs. • Avoiding paying taxes or duties imposed by one country or another. • Reduction in production and transportation cost by finding a country nearby the courser; and/or • Reducing or removing risks.

North American Industry Classification System (NAICS)

• Since NAFTA, three North American countries classify business activities following the NAICS. • Purpose of the NAICS is to collect, analyze, and publish statistical data related to nation's business economy. • NAICS uses a 2-6 digit hierarchical classification system. o First 2 digits= the economic sector o Third digit= the subsector o Fourth digit= the industry group o Fifth digit= the NAICS industry o Sixth digit= the national industry

Wholesalers and Global Sourcing:

• Wholesalers engage in all aspects of businesses, including global sourcing, but without "product transformation." • Many companies in the "new" market environment may be wholesalers, offering value added services. • The term wholesaling "underestimates the importance of design, branding, marketing and logistics."

Global sourcing and the changed market environment

• global sourcing fundamentally changed the nature of the global textile and apparel industry. • In 2012, the entire world exported over U.S $709 billion worth of textiles and apparel. • In 2016, the entire world exported over $766 billion worth of textiles and apparel.