Introduction
One of the sectors that have not only had a much-needed shot in the arm thanks to the advent of technology and globalization but will continue to reap big from the opportunities that technology has to offer is the business sector. It is much easier and cost-effective to run and operate trans-continental businesses as the world has become a global village. Due to the possibilities that have been made available to the business sector through technology, a new era in supply chain management and procurement has emerged in which corporations can take advantage of low costs and outsource raw materials, human resources, and other factors of production from markets where they feel like such products are cheaper regardless of the geographical distance or geographical barriers between them. Dubbed global sourcing, distance and location are no longer hindrances to business as they used to be many years ago. The concept of global sourcing can be described as a procurement tactic in which organizations and businesses save on cost by buying cheap labor and raw materials on the global market, usually from low-cost countries located across diverse geographical boundaries. Also, it is pivotal to point out that it does not have to be raw materials alone; global sourcing can also involve leveraging cheap labor or tapping into low-cost, high-quality skills or human resources that are found across varied geographical boundaries. While the notion of outsourcing goods and services from low-cost countries is exciting and can potentially lower the operation costs of a business enterprise, there are a myriad of challenges and risks that come with global sourcing, and organizations have to be adroit in maneuvering such challenges and risks if they are to be successful in the global space. It implies that it is imperative for businesses to fashion their global sourcing endeavors in a way that aligns with their expectation while venturing into cross-geographical business. This research paper explores global sourcing as a procurement strategy in supply chain management. Specifically, it strives to provide comprehensive answers to the question of how firms balance the trade-offs between cost savings and innovation in their global sourcing strategy.
Executive Summary and Background
This research paper probes the concept of global sourcing; particularly, it seeks to shed more light on how firms, businesses, and corporations that heavily rely on global sourcing as a procurement strategy strike a balance between saving costs and ensuring innovation in their global sourcing strategy. Correspondingly, the overarching research question that is guiding this research paper is how do firms balance the trade-offs between cost savings and innovation in their global sourcing strategy. It is vital to point out that global sourcing has risen in popularity over the years, with the international business landscape experiencing cut-through competition, putting them in an incessant quest for ways to cut costs and enhance their efficiency.
The promises that the concept of global sourcing for businesses holds are grand and include saving on cost, especially when businesses can get cheap raw materials from other countries or tap into the cheap labor or human resources that an outside country provides and which could not have been possible in their home country. Moreover, global sourcing can also mean tapping into technological advancements and even resources that may not be available in the country where a business operates. Nonetheless, the concept of global sourcing as a business strategy also comes riddled with some extreme challenges, including hidden costs that may not be apparent, leakages of information/trading secrets ensuring quality, and efficiently and effectively coordinating and navigating foreign policies, regulations, and guidelines. The overarching implications of the challenges that come with the concept of global sourcing imply that businesses have to fashion their global sourcing strategies in ways that align with the expected benefits that global sourcing has to offer, such as cost savings and innovation. This paper thus seeks to understand how firms balance the tradeoff that comes with the concept of global sourcing in order to ensure innovation and profitability.
In order to offer cogent responses to the overarching research question, the research paper searched for existing literature on the concept of global sourcing as well as what studies are saying about the strategies that organizations that are involved in global sourcing as a procurement tactic are using to balance the trade-offs between cost-saving and innovation. The search for existing literary works on the subject involved searching for scholarly articles published in reputable journals between 2014 and 2024 (10 years) on the subject of global sourcing. The criteria that were used to appraise a study as critical to providing answers to the research question involved the publication year (2014-2024), if it was published in English, and if it was a longitudinal, phenomenological, meta-analysis, or systemic review of the subject. Exclusion criteria included articles that were opinion-based commentaries published more than 10 years ago and those that were published in languages other than English. Online Databases searched include EBSCOhost, ProQuest, JSTOR, and Scopus.
Literature Review
One of the themes that have emerged out of the literature review on how businesses balance the trade-offs between cost savings and innovation in their global sourcing strategy can be categorized into those that handle the cost perspective and those that handle the values perspective. Kotabe and Murray (20170 while performing an in-depth study of global sourcing and how organizations navigate the risks associated with global sourcing, especially cost and innovation, note that designing what Kotabe and Murray (20170 call a “configurational approach” in which three chief aspects of strategy: the extent of disaggregation, degree of dispersion and the governance structure constitute one of the main ways through which firms balance the trade-off between cost saving and innovation in global sourcing. Kotabe and Murray (20170 define the extent of disaggregation as the measure of how the overall business process is subdivided/broken down into minute tasks. Likewise, they define the degree of dispersion as implying the geographical distribution/spread of the tasks that are being carried out by a firm as part of their global sourcing process. Similarly, Kotabe and Murray (20170 define governance structure to imply the design of the overarching control and coordination that occurs between the different places where specific tasks that make up the entire firms’ activities abroad are controlled.
Similarly, Kotabe and Murray (20170, while also delving into the notion of global sourcing and how firms that have adopted it as a procurement strategy design their operations to ensure cost saving and innovation, noted that among the principal ways in which the latter is achieved is the evolution of the supply network. Kotabe and Murray (20170 note that the evolution of the supply chain entails diversification of bases of supply or even the development of alternative sources such that risks associated are spread as opposed to being concentrated on one supply network/route or country. More importantly, Kotabe and Murray (20170 note that the evolution of the supply chain gives firms a bargaining power that makes them able to keep their costs in check and exploit the potential of different suppliers while also avoiding some risks like supply disruptions.
According to Trautmann et al. (2009) and their analysis of firms that have not only embraced global sourcing but are actually doing well at it, real-time data transparency is another key way through which firms balance the trade-offs between cost saving and innovation when navigating the global sourcing landscape. Trautmann et al. (2009) note that real-time data transparency entails real-time management and monitoring of global sourcing data that offer an actual image of what is happening with regard to a firm’s activities in the real world. According to Trautmann et al. (2009), the role that real-time data transparency plays when it comes to making a firm become not only visible but also agile and responsive in the global sourcing landscape makes risk aversion and decision-making easier and simpler.
The sentiments by Trautmann et al. (2009) on real-time data transparency also reinforce and corroborate a research study by Vos et al. (2016) in which the latter endeavored to study how aligning global sourcing strategies with the overall business strategy works to guarantee cost savings for firms that have adopted global sourcing as a procurement strategy. Based on Vos et al. (2016) study, the innate connection between global sourcing and technology implies that firms whose strategic planning leans more towards technology significantly exploit the latter to ensure cost-saving and innovation while navigating global sourcing processes and activities.
Discussion
The final/overarching outcomes/findings from reviewing studies show that firms that are involved in the global sourcing process design a configurational approach to their processes, evolve their supply networks, create real-time data transparency, and align their global sourcing goals with the overall global business strategic goals all as an effort to try and balance the trade-offs between cost-saving and innovation. Based on Kotabe and Murray (20170, the benefit of a higher degree of disaggregation means that firms have the ability to outsource/offshore tasks that they consider low value to places that they consider to be low-cost while also retaining the tasks that they deem to be high value to in-house locations. The overall net effect of this is that such firms can easily save on cost since low-valued tasks that would otherwise be expensive to operate in-house are taken to places where the same output can be achieved but at a considerably lower cost. However, Kotabe and Murray (20170 also note that even though a high degree of disaggregation has the potential to lead to low costs when tasks are extremely standardized and modularized, there is a certain extent of standardization and modularization that can be a hindrance to innovation. As a consequence, firms tend to allow for higher levels of disaggregation while also being wary of or keeping standardization and modularization in check to ensure that innovation does not suffer.
On the other hand, the degree of dispersion is all about the extent of the geographical distribution of the tasks, and according to Kotabe and Murray (20170, dispersions save costs by allowing for access to diversified pools of resources. This diversification is important for innovation as it brings different people with unique perspectives and experiences, and thus, they often come up with unique solutions to problems. At the same time, diversity can be a source of challenges as the differences can work against people instead of being an added advantage. As such, in order to balance the trade-off between cost saving and innovation in their global sourcing process, firms tend to allow for a higher degree of dispersion while also creating an environment that harnesses differences for the better. Governance structure is all about coordination and control of the dispersed and disaggregation aspects of global sourcing. In order to balance the trade-offs between cost savings that come with global sourcing and innovation, firms that practice global sources often infuse hierarchical and market-based coordination and control structures. According to Kotabe and Murray (20170, this offers a combination of flexibility and visibility that aid in enhancing innovation and driving costs lower.
According to Vos et al. (2016), evolving markets, when it comes to balancing the trade-offs between cost-saving and innovation, work in three fundamental ways. This includes aspects to do with enhancing bargaining power, aspects to do with supply stability, as well as aspects to do with best practices. Firms save costs in the global sourcing landscape by leveraging their bargaining power when it comes to pricing and even terms and conditions of operations when they have disaggregated and dispersed operations. Leverage comes through aspects like competitive bidding and even, in some cases, reverse auction, which has a lot of potential to drive costs down. When it comes to supply chain stability, cost savings come through aversion of unforeseen occurrences in one place that may disrupt supply by ensuring that through diversified sourcing, when one aspect of the sourcing process is disrupted, other aspects can come in and fill the void left (Vos et al., 2016). At the same time, innovation comes in through the capacity to try out what works best in one place or somewhere else through the diversity of experience associated with sourcing from different regions. Closely related to this is the concept of best practices in which global sourcing allows for diverse sources of knowledge and even technology that allows for differentiation and application of the best-fitting strategy based on the region that is involved.
According to Trautmann et al. (2009), other avenues, like alignment of the procurement goals with the overall business strategic goals as well as leveraging on real-time data transparency, all exploit the diversity that global sourcing brings in their attempt to lower cost while also being mindful of innovation. Specifically, they work to ensure visibility, agility, and responsiveness while also enhancing collaboration in a way that feeds on differentiation to drive innovation. This often happens by not only ensuring that procurement data is part of the firm’s global strategic plan but also heavily employing procurement data in the everyday decision-making process (Trautmann et al., 2009).
Conclusion
The popularity and traction that global sourcing has seen over the years, thanks to technological advancement and the excited curiosity of many on the subject. Studies on global sourcing show that firms strive to balance the trade-offs between cost savings that come with global sourcing and innovation through varied means. Some of those means involve designing a configurable approach to global sourcing, evolving their sourcing networks, creating real-time data transparency, and making use of procurement data in the global strategic plan of the business in question.
References
Kotabe, M., & Murray, J. Y. (2017). Global sourcing strategy: An evolution in global production and sourcing rationalization. Advances in Global Marketing, 365-384. https://doi.org/10.1007/978-3-319-61385-7_15
Trautmann, G., Bals, L., & Hartmann, E. (2009). Global sourcing in integrated network structures: The case of hybrid purchasing organizations. Journal of International Management, 15(2), 194-208. https://doi.org/10.1016/j.intman.2008.09.001
Vos, F. G., Scheffler, P., Schiele, H., & Horn, P. (2016). “Does global sourcing pay-off? A competitive dynamics perspective”. Journal of Purchasing and Supply Management, 22(4), 338-350. https://doi.org/10.1016/j.pursup.2016.07.002
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