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Achieving Excellence In Global sourcing is an

increasingly popular

business strategy, but

it's not easy to execute.

There are seven typical

characteristics of

organizations with

outstanding global

sourcing.

Robert J. Trent and

Robert M. Monczka

As organizations search for new and better ways to compete, global businessstrategies will continue to receive increasing attention. One area in whichglobalization can move from concept to practice is global sourcing, anadvanced approach to sourcing and supply management that involves inte- grating and coordinating common materials, processes, designs, technologies and suppli-

ers across worldwide buying, design and operating locations. Since most organizations do

not have well-developed global sourcing strategies in place, improvement opportunities

in this area are attractive and as yet largely unrealized. Shifting from a narrow cost-reduc-

tion emphasis to an emphasis on globally integrated and coordinated sourcing strategies

should improve an organization's competitiveness.'

Our research suggests that many executive managers, particularly at large U.S.-based

manufacturing companies, clearly desire to obtain the benefits available from more

advanced sourcing approaches. The reality, however, is that most companies currently lack

the understanding, capability or willingness to operate at such demanding levels. This can

have serious consequences when companies have competitors that truly understand how to

integrate and coordinate their worldwide activities. Companies that produce and sell world-

wide should no longer view global sourcing as an emerging strategy.

From our research, we have identified key features that characterize leading global

sourcing organizations. These characteristics will help executives understand what an

effective global organization looks like and compare their progress and practices against

global sourcing best practices. The participants in our research were primarily large,

North American-based multinationals, involved largely in manufacturing rather than

services. (See "About the Research," p. 26.) Given the size and location of participating

companies, we make no claims about whether the results of the study can be generalized

to a broader population of companies, particularly to small and medium-sized compa-

nies, or to companies headquartered outside the United States.

Global Sourcing Defined "International purchasing" and "global sourcing" are terms that have very specific meanings

in our research. Although many researchers and practitioners interchange the terms, funda-

mental differences exist between them. International purchasing involves a commercial trans-

action between a buyer and a supplier located in different countries. Global sourcing, on the

other hand, involves integrating and coordinating common items, materials, processes, tech-

nologies, designs and suppliers across worldwide buying, design and operating locations.

The progression from domestic buying to international purchasing and then to global

sourcing can be visualized as movement along a continuum through five different levels.

Robert J. Trent is Supply Chain Management Program director and Eugene Mercy Associate Profes- sor of Management at Lehigh University. Robert M. Monczka is Distinguished Professor and ISM Pro- fessor of Supply Chain Management at W.P Carey School of Business, Arizona State University, and director of strategic sourcing and supply chain research at CAPS: Center for Strategic Supply Research. Contact them at rjt2@lehigh.edu and rmm@monczka.com.

24 MIT SLOAN MANAGEMENT REVIEW FALL 2005

Global Sourcing (See "Five Levels of Sourcing,' p. 28.2) In moving from domestic

purchasing to international purchasing, organizations must con-

tend with longer distances, increased rules and regulations, cur-

rency fluctuations, customs requirements, and language, cultural

and time differences. Companies that then go on to pursue global

sourcing must contend with the operational issues that affect

international purchasing while also managing a higher level of

cross-functional and cross-locational coordination.

The reasons behind the progression from domestic to inter-

national purchasing have been well studied, along with the issues

associated with the progression.3 Organizations that practice

strictly domestic purchasing (Level I) often progress toward

international purchasing (Level II) because they are con-

fronted with a requirement for which no suitable domestic

supplier exists or because competitors are gaining an

advantage due to their sourcing practices. Level I compa-

nies may also find themselves driven toward interna-

tional purchasing because of a supply disruption,

rapidly changing currency exchange rates, a declining

domestic supply base, inflation within the home mar-

ket or the emergence of new supply sources. Interna-

tional purchasing at Level II is usually limited or

performed on an ad hoc or reactive basis.

Companies often start making international

purchasing part of their sourcing strategy (Level 1i1) once they

recognize that purchasing internationally can lead to a range of

performance improvements. However, strategies at this stage are

not well coordinated across worldwide buying sites or locations

and usually focus on price improvements. More companies in

our sample currently operate at Level III than at any other level.

The fourth level, the first of two global sourcing levels in our model, features integrated and coordinated sourcing strategies

across worldwide buying or site locations. Operating at this

level requires worldwide information systems, personnel

with advanced knowledge and skill sets, extensive coordina-

tion and communication mechanisms, an organizational

structure that supports global integration and an executive

leadership that can clearly articulate a global vision. The

strategy integration that occurs at Level IV is primarily

among buying locations and mainly considers the develop-

ment of global sourcing agreements. (A global sourcing agree-

ment or contract is one that applies throughout an entire

company, usually with a supplier that has global capabilities.)

An organization at this level may have wide discrepancies in

FALL 2005 MIT SLOAN MANAGEMENT REVIEW 25Illust,At-o: 9o Qr,pbdl Laird/-mge--,o

terms of the extent of coordination in various major purchase categories. It may be progressive in coordinating its sourcing of capital equipment purchases across its locations but fail to coor- dinate raw material requirements. Or it may excel at coordinating the sourcing of facility support services but not pursue opportu- nities within other service areas. The challenge is to move from having pockets of excellence to addressing global opportunities wherever they exist.

Two primary distinctions separate companies operating at Level IV and Level V. In companies at Level V, the highest global

sourcing level, integration and coordination occur not only among worldwide buying locations but also across functional groups, including operations, marketing and engineering. This integration, which often involves the coordination of design and procurement activities, occurs during the development of new products and technology as well as during the sourcing of items or services to fulfill existing demand. In addition, Level V com- panies focus on more than simply developing global agreements or contracts; they also work to standardize their supply manage- ment processes and practices worldwide.

Most participants in our research, and probably most compa- nies in general, expect to progress toward a more advanced sourc- ing level. However, most lack the ability, the willingness or even the need to operate at Levels IV and V. For some, a progression

toward Level IV would be a major accomplishment. For others, particularly smaller and medium-sized companies with limited geographic reach and capabilities, Level III might be a more real- istic option. Part of a company's strategic planning process should include determining an appropriate sourcing level.

Despite the complexities associated with global sourcing, the

process offers advantages. 4 During the quantitative portion of our research, respondents evaluated the degree to which they have realized 16 separate benefits from their sourcing efforts. Companies that engage in global sourcing realize every benefit to a greater extent than companies that merely engage in interna- tional purchasing. In fact, the average rating for all benefit areas was 32% higher for companies that have achieved some level of global sourcing than for those companies that pursue interna- tional purchasing. Certain benefits, such as greater sourcing con- sistency among locations or better management of total supply chain inventory, are only available once an organization takes an integrated approach to its global strategies and practices.

Air Products and Chemicals, Inc., an Allentown, Pennsylvania,

company that designs and operates industrial gas and chemical facilities in dozens of countries, has experienced the benefits of advanced global sourcing. After three years of experience with the process, Air Products has more than 100 global sourcing agree- ments in place, which are yielding average unit cost savings of

The conclusions presented here are part of the Global Sourcing Research Project, an exploratory project that investigated

the development of global sourcing processes and strategies. This project

included an extensive review of previous research, information obtained through site visits to 15 leading companies and quantitative data collected from execu-

tives responsible for the international and global activities at 162 different companies.

The quantitative research relied on

survey data provided by respondents selected randomly from a database of

supply executives. Researchers intention- ally selected names from a database

consisting of larger rather than smaller companies because experience sug- gested that larger companies are more likely to pursue the kinds of activities

that were of interest. The average partic- ipating company had annual sales of

$1.5 billion. Thirty-eight percent of

respondents worked for companies with

annual sales of $500 million or less, 31%

worked for companies with sales of $500

million to $3 billion, 15% worked for

companies with sales of $3 billion to

$10 billion, and 16% worked for compa-

nies with sales over $10 billion.

Of 1,800 surveys forwarded world-

wide, 162 were returned, yielding a 9%

response rate. Some companies elected

not to participate due to their inexperi-

ence with worldwide sourcing activities.

Furthermore, the response rates for sur-

veys sent outside the United States

were low, resulting in a final sample

that contained a large percentage of

U.S. companies. The participants in this

study were primarily large, North Ameri-

can-based multinationals involved

largely in manufacturing. Most respon-

dents (91%) in the final sample were

vice presidents or managers working at

the corporate level rather than at the

division or site level. Represented indus-

tries included industrial products (39%),

consumer products (15%), high technol-

ogy (8%), services (9%), basic materials,

utilities and energy (each at 3%), retail-

ing (1%) and other diversified compa-

nies (19%).

Industry experts who are familiar

with leading-edge practices helped iden-

tify the 15 companies visited during the

field research. Visited companies com-

pete in the chemical, electronic, com-

puter, process control, consumer

products and transportation equipment

industries. Field visits featured face-to-

face interviews with sourcing team

members and leaders, executive steering

committee members, executives and

others closely involved with global sourc-

ing. Site visits provided a level of detail

that was not possible through the analy-

sis of quantitative data.

26 MIT SLOAN MANAGEMENT REVIEW FALL 2005

I About the Research I

One company, with operations in more than 100 countries, has demonstrated its commitment to global sourcing by creating a formal position best described as a sourcing "czar."

20%. Furthermore, the company's worldwide engineering and

procurement centers have better aligned their strategies with one

another and with the company's business strategy. An added

bonus is that sourcing managers now work with marketing staff

to include expected savings from global agreements when bid-

ding on new business opportunities. Integrated global sourcing is

helping a company that operates in a mature yet intensely com-

petitive industry gain new market share. 5

The Characteristics of Outstanding Global Sourcing On the basis of our research findings, we have identified a set of

features characterizing organizations that are especially effective at

global sourcing. (See "Characteristics of Global Sourcing Excel-

lence" p. 30.) The features cluster into seven broad characteristics:

i Executive commitment to global sourcing

"* Rigorous and well-defined processes

"* Availability of needed resources

"* Integration through information technology

"* Supportive organizational design

* Structured approaches to communication

* Methodologies for measuring savings

Few organizations, if any, demonstrate all the detailed features pre-

sented here. However, this profile can serve as a benchmark, allow-

ing executives to compare their company's current capabilities and

features with best practices in global sourcing.

#1: Executive Commitment to Global Sourcing It's hard to imagine a process as complex as global sourcing becoming a reality without

an executive champion who has the authority and ability to

translate a vision into practice; global sourcing does not migrate

up from the bottom of an organization. Best-practice companies

recognize the importance of a high-level individual who can

develop and communicate a global sourcing vision and is respon-

sible for its overall success. This individual should also be respon-

sible for making strategy presentations to the executive commit-

tee and to the board of directors. A leader who has access to the

highest executive levels will help differentiate successful global

efforts from less successful ones.

At companies that are proficient at global sourcing, an execu-

tive steering committee or council is often formed to oversee the

process. The steering committee at a leading electronics com-

pany, for example, includes the vice president of research, the vice

president of supply chain management, the corporate controller,

the vice president of marketing and sales and the vice president

of information technology. Each committee member is responsi-

ble for championing a global project that relates to a major pur-

chase category. The CEO, whom the steering committee reports

to regularly, stated that the development of a global sourcing

process was one of his primary initiatives during a recent plan-

ning period. This pronouncement quickly resulted in support for

global sourcing from functional managers and a willingness to

take on steering committee responsibilities.

Another company, which has operations in more than 100

countries, has demonstrated its commitment to global sourcing

by creating a formal position that is best described as a sourcing "czar." This manager, a well-respected engineer with more than 25 years of experience, works closely with an executive steering

committee to prioritize sourcing opportunities while overseeing

the process. He recruits team members, allocates budget to spe-

cific projects, helps teams establish improvement targets, meets

weekly with project teams and looks for ways to continuously

improve the global sourcing process. He is currently leading an

initiative to develop tools and databases to support better sourc-

ing decision making and consistency at every level and location.

Executive leaders can demonstrate commitment in many

other ways, through both speech and action. They can fund the

development of a well-defined global process; make staff and

budget available to support global sourcing project teams; pro-

mote site and plant-level buy-in for global activities and agree-

ments; and stress the importance of global sourcing to other

groups within the company.

#2: Rigorous and Well-Defined Processes Developing a well-

defined and adhered-to process is a global sourcing best prac-

tice.6 In our research, respondents were asked to compare their

most and least successful global sourcing experience by consider-

FALL 2005 MIT SLOAN MANAGEMENT REVIEW 27

ing 22 factors. The presence of a well-defined sourcing approach or process was found to be the strongest differentiator between successful and less successful global efforts.

Developing a systematic global sourcing process makes sense for a number of reasons. It accelerates learning as participants become familiar and experienced with a defined process. It "builds in" best practices and knowledge that enhance the likeli- hood of success. Perhaps most importantly, it allows organiza- tions to document, measure and continuously improve.

A defined global sourcing process also helps overcome many of the differences that exist among locations - such as social cul- ture and laws, personnel skills and business culture - thereby aligning participants and practices around the world with the broader corporate interests.

The global sourcing processes we studied share certain fea- tures: a widely communicated and understood process that becomes the foundation for pursuing integrated global sourcing; the designation of a process owner who has responsibility for reviewing and improving the process; and "lessons learned" ses- sions conducted at the end of each project, with results forwarded to global team members and leaders. In addition, contracts are continuously monitored, reviewed and reestablished as required. By requiring global teams to provide regular updates and to meet stringent milestones, the process allows executive leaders to prac- tice what Takeuchi and Nonaka term "subtle control."

#3: Availability of Needed Resources Various resources can pro- mote or interfere with the translation of a global vision into

effective practices.8 The availability of needed resources has the

potential to separate marginally performing from exceptionally performing global-sourcing organizations. The most critical resources usually are access to qualified participants, budgets,

information, time and help from others outside the sourcing

process. Leading companies recognize the importance of these

resources and make them available before global initiatives even

commence. The executive steering committee at one company,

for example, provides a travel and living budget at the time a

work team is formed. This alleviates the concerns of the com-

pany's functional managers, who had expressed strong reluctance

to use their budgets to cover global sourcing expenses.

Time is perhaps the most essential resource to commit to

global initiatives, but also the least available, as an earlier study

has concluded. 9 That study also found that the statistical corre-

lation between time availability and team effectiveness was

higher than for any other resource category. Since most organi-

zations rely on team members who have other responsibilities,

an important role for steering team members involves negotiat-

ing with functional managers to ensure that participants can

commit the necessary time.

One theme that consistently emerges when working with lead-

ing global sourcing companies is the importance of qualified per-

sonnel. In the quantitative portion of our research, the factor

identified as most important to global sourcing success was access

to personnel with the right knowledge, skills and abilities. Respon-

dents ranked a lack of qualified personnel as the most serious of a

dozen potential problems that could affect global sourcing success.

The knowledge and skills required for global sourcing differ

dramatically from those required for site-based sourcing, and

that represents a challenging barrier in the short term. Most

companies have created decentralized supply organizations that

are proficient at managing transactions and material flows and

tend to favor familiar supply sources. Global sourcing, however,

requires individuals who can view supply markets from a

worldwide perspective while collaborating across functional

Fiv Leel of Sorcn

The movement from domestic purchasing to integrated global sourcing can be viewed as a continuum with five stages. The majority of survey respondents now practice some form of international purchas- ing, but most anticipate moving to a global sourcing approach over the next five years.

Domestic Purchasing Only

International International Global Sourcing Global Sourcing Purchasing Only Purchasing as Strategies Strategies as Needed Part of Integrated Across Integrated Across

Sourcing Worldwide Worldwide Strategy Locations Locations and

Functional to on enrate at a arfticular level INI=1 691 Groupsnf rnmnininc• nn•r,tinn nr nynor-in

Y 13.4% 21.3% 31.0% Ilans 7.8% 7.8% 14.3% d Change -42.0% 63.0% -54.0%

18.1% 15.6%

-14.0%

16.1% 54.5%

'239.0%

boundaries, particu-

larly between engineer- ing and procurement.

As with any compa- nywide initiative that relies on teams, help

from outside the team

is often critical. This may include legal help when reviewing con- tracts, technical help when evaluating sup-

plier proposals or help

when evaluating supply

sources or collecting

data. A best practice is

to identify those indi-

viduals who must sup-

28 MIT SLOAN MANAGEMENT REVIEW FALL 2005

The use of teams to analyze and propose sourcing strategies remains a popular and growing organizational design option, but leaders should keep in mind the barriers to their use.

port a global initiative before forming a project team. When the

team is formed, people external to the team are identified as "as

needed" resources.

Global sourcing demands an unusual amount and variety of

information, often from diverse and dispersed operating loca-

tions. Needed data include information about existing contracts

and suppliers; incumbent supplier performance and capabilities;

projected demand by commodity and location; capabilities of

potential suppliers, including suppliers in emerging markets such

as China; and internal customer requirements. A lack of infor-

mation about potential suppliers often results in a reliance on

current suppliers, which may not be the best sourcing option.

#4: Integration Through Information Technology While it seems obvi-

ous that accessible data and information support analysis on a

global level, the reality is that companies often struggle in this

area. Many companies have grown through mergers and acquisi-

tions, and newly combined units rarely have compatible contracts,

systems or material-coding schemes. During our research, respon-

dents rated their ability to aggregate common requirements across

buying units as an important success factor for global sourcing.

Best-practice companies address these issues by creating global

data warehouses and contract repositories that use companywide

coding schemes for easier aggregation of requirements and by

assigning a commodity or category code to every major item and

service required in their businesses. This allows efficient access to

information when analyzing global sourcing opportunities.

Perhaps the most advanced information support system

observed during our research exists at a producer of automated

control systems. The company collects data on every supply chain

transaction at each operating location. Analysts across the com-

pany can quickly identify worldwide usage requirements by com-

modity, compare supplier performance across locations, review any

contracts currently in place and compare actual prices against con-

tracted prices. This system also validates the savings that are real-

ized from global sourcing agreements, and the savings are reported

regularly to the chief financial officer and executive committee.

In addition to data warehouses and repositories, leading com-

panies rely extensively on Web-based systems and intranets to

make global sourcing information widely available within the

company. One company that is noted for its creative use of infor-

mation technology has placed a wide range of support docu-

ments on its intranet, including an online manual that describes

the company's global sourcing process; a global strategy develop-

ment template; a contract terms and conditions checklist; a

report that identifies the status of completed, in-process, author-

ized and future global sourcing opportunities; a request for pro-

posal template; and currency risk-management guidelines. The

company has also created a system that allows users at any loca-

tion across the organization to search for approved suppliers. As

an added feature, this system provides advance notification of

any contracts that will expire during the next three to six months.

#5: Supportive Organizational Design "Organizational design" is a

broad term that refers to the process of assessing and selecting the

structure and formal system of communication, division of

labor, coordination, control, authority and responsibility

required to achieve an organization's goals." Executive leaders

should not overlook the important relationship between organi-

zational design and the success of major initiatives, including

global sourcing initiatives.

Businesses that excel at global sourcing often share three orga-

nizational design features. Two of those features - a formal exec-

utive steering committee to guide the global process and an

executive leader who has accountability for global results - have

been discussed above. A third is extensive reliance on teams to

analyze and propose sourcing strategies.

An earlier study involving 172 U.S. companies examined the

organizational design features that companies rely on when pur-

suing their supply chain objectives.' While only one-fifth of the

design features that respondents were asked to evaluate involved

teams, team-related features represented three of the seven fea-

tures ranked as the most widely used. The study concluded that

the use of teams remains a popular and growing organizational

design option.

Executive leaders should plan for and use teams selectively,

always keeping in mind the barriers to their use. One barrier

involves relying on part-time team members who have other job

responsibilities. Dual responsibilities often lead to conflict as

members manage time and reporting pressures. Another barrier

involves teams whose members rarely, if ever, meet in person.

Just as global sourcing makes communication among partici-

pants more complicated, it also makes supplier evaluation and

selection decisions more complex. Given the performance

FALL 2005 MIT SLOAN MANAGEMENT REVIEW 29

requirements demanded of global suppliers and the extremely high cost of switching suppliers after selection, it is not surpris- ing that survey respondents rated site visits to evaluate supplier capabilities as an important success factor. One approach is to use teams to conduct visits; another relies on international purchas-

Charcterstic of Glba SorigEclec

ing offices to conduct direct evaluations of supplier capabilities. These offices, usually staffed by people from the country or region where the office is located, help identify potential suppli- ers, solicit price quotations, conduct site visits, obtain product samples and support negotiations. International purchasing

While few, if any, companies possess every feature detailed on this list, these characteristics were identified through qualitative and quantitative research about global sourcing best practices.

1. Executive Commitment to Global Sourcing

"* Cross-functional leaders participate on a global sourcing steering committee or council.

"* A designated executive has the authority to translate a global vision into reality.

"* Executive leaders work to gain support for global agree- ments and processes from cross-functional groups and buy- ing locations.

"* Global sourcing leaders make strategy presentations to the executive committee and to the board of directors.

"* Executive leaders recruit qualified participants to join global sourcing project teams.

2. Rigorous and Well-Defined Processes

" A well-defined process is in place that requires participants to establish goals, meet milestones and report progress to executives.

"* An executive leader or steering committee, with input from participants, reviews and proposes process improvements.

"* "Lessons learned" sessions are conducted at the conclusion of each project, and findings are distributed to worldwide participants.

"* Global agreements are continuously monitored, reviewed and reestablished as required.

3. Availability of Needed Resources

"* Executives make critical resources, such as budgets and qual- ified participants, available to support global initiatives.

"* The process involves individuals who have the ability to take a global sourcing perspective rather than a local or regional perspective.

"* Relevant information is accessible to project teams and par- ticipants.

4. Integration Through Information Technology

"* Data warehouses provide access to required data and infor- mation on a real-time basis.

"* A companywide intranet provides access to global sourcing support documents, guidelines, templates and progress updates.

" Contract repositories store global agreements and provide warning of expiring agreements.

5. Supportive Organizational Design

"* A formal executive steering committee or council oversees the global sourcing process, including the identification of global sourcing opportunities.

"* Cross-functional project teams are responsible for the detailed analysis of global opportunities and the develop- ment of sourcing agreements.

"* Organizational design includes the separation of strategic activities, such as global sourcing, and operational activities, such as the routine reordering of material.

"* International purchasing offices support global sourcing requirements.

"* Sourcing support personnel are (1) located near technical and marketing personnel during new product development projects and (2) linked organizationally to the appropriate global sourcing team.

6. Structured Approaches to Communication

"* Project teams meet regularly, either face-to-face or electroni- cally, to coordinate efforts.

"* Strategy review and coordination sessions ensure under- standing of global initiatives and buy-in for them.

"* Project teams regularly report progress to executive leaders. "* Advanced communication and coordination tools are avail-

able, including videoconferencing and Web-based collabora- tion tools.

" Project information and updates are posted on a company intranet.

7. Methodologies for Measuring Savings

"* Finance representatives agree on methods of validating sav- ings from global initiatives.

"* Global sourcing participants meet regularly with executive leaders to review savings from existing agreements and expected savings from in-process activities.

" Measurement systems support the calculation of - Companywide savings realized and expected to be real-

ized from global agreements - The impact that sourcing initiatives have on corporate

financial measures (e.g., return on assets) - The return on investment for individual projects - The impact that global suppliers have on buying location

performance indicators

30 MIT SLOAN MANAGEMENT REVIEW FALL 2005

offices also help with the many operational issues that arise after

a supplier selection decision. Organizations that are committed

to global sourcing should seriously consider making interna-

tional purchasing offices part of their structure.

#6: Structured Approaches to Communication Participants in global sourcing initiatives are often located around the world, making

real-time and face-to-face interaction difficult. Furthermore,

participants may speak various languages and adhere to different

business practices, cultures and laws. When research participants

identified the factors most critical to worldwide sourcing success,

a well-established approach to communication and coordination

was highly rated.

Leading companies rely on various methods to manage their

communication requirements, such as regular strategy review

meetings, training sessions involving team members from each

site or region and regular project updates reported through an

intranet. A common approach for coordinating team efforts is to

rely on scheduled conference calls, usually on a weekly basis.

Other widely used options include videoconferencing and Web-

based meeting tools.

Leading companies also commit the time and budget to con-

duct strategy review and coordination sessions, another highly

rated success factor according to survey respondents. These meet-

ings, often featuring face-to-face interaction, provide an opportu-

nity for managers to better understand an organization's global

strategies. Review sessions also reduce redundancy and misunder-

standing among global participants and worldwide locations.

#7: Methodologies for Measuring Savings A frustration often voiced during field interviews was an inability to articulate or validate the

savings derived from global sourcing agreements. A vice president

at a top consumer products company said that one of his group's

greatest failures has been an inability to validate the savings from

global sourcing and confirm its value. This failure is in part due to

a lack of interest from the finance department in evaluating the

savings realized from global agreements. This company's inability

to document savings has resulted in some of its managers viewing

global sourcing as an expense rather than an investment.

Unfortunately, quantifying and validating the direct benefits

of globalization, particularly in areas such as better inventory

management or increased process consistency, is not an easy task.

Best-practice companies have the capability to validate unit cost

savings from global activities and report them, usually to execu-

tive and site-based managers. Validation usually involves a

finance group verifying that actual prices are lower than a prior

base price or comparing actual price changes to market price

changes. The producer of automated control systems mentioned

earlier had the most advanced validation system observed during

our research. To identify unit cost savings across the organiza-

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tion, the company's system compares current prices paid against the last price paid during the previous year, which is considered the base price for the current year. The finance department has agreed that the system is reporting actual savings that should be forwarded directly to executive management.

While the ability to measure unit cost savings from worldwide sourcing is certainly desirable, total cost savings from global sourcing are never equal to unit cost savings. In fact, respondents in our survey estimated that one-quarter of unit cost savings achieved through global sourcing are consumed by the added complexities and costs associated with international transactions. Unfortunately, few companies currently have systems that accu- rately capture the total costs associated with worldwide buying. We expect that organizations that are serious about global sourc- ing will develop measurement systems that look beyond unit cost.

Currently, more progressive companies calculate the impact that global sourcing savings have on measures that capture the attention of executive leaders, such as return on assets. These companies also show how savings from global sourcing agree- ments affect the financial performance indicators at individual sites. This helps create buy-in to the process from site locations, which is a critical success factor. Additionally, some companies incorporate current and expected global savings when calculat- ing their financial projections.

Best-practice companies use measurement to promote compa- nywide process consistency. Instead of reinventing a methodology for evaluating potential suppliers, buying locations can use assess- ment criteria and measures that are consistent across a company, with adaptation as required. The performance of incumbent sup- pliers also can be evaluated with a companywide scorecard that includes a defined measurement process and metrics.

Looking Ahead Executive leaders should view global sourcing as a continuously evolving strategy area and process that, if managed and sup- ported properly, should provide a steady stream of benefits. Interviews with sourcing executives reveal that they plan to enhance and expand their global sourcing practices across a number of important areas. In particular, many sourcing leaders recognize the need to accelerate the development of a global rather than local or regional view of the supply network. Other needed enhancements include developing a set of global per- formance measures, establishing compatible information systems across the value chain and pursuing worldwide consistency in different sourcing processes, such as supplier evaluation and development. Leading companies also expect their global efforts to promote even greater integration between marketing, engi- neering and sourcing groups.

Looking across many industries reveals something they each have in common: The pressure to improve is severe and relentless.

The companies that succeed will be the ones that have learned how to leverage and coordinate their activities on a worldwide basis. For many, integrated global sourcing may offer the best opportunity to achieve the kinds of performance breakthroughs required in highly competitive industries. Realizing these break- throughs, however, demands a thorough understanding of what an effective global organization looks like. And it requires execu- tive leaders who can define, support and put into place the prac- tices that translate a global vision into a global reality.

REFERENCES

1. A.C. Samli, J.M. Browning and C. Busbia, "The Status of Global Sourcing as a Critical Tool of Strategic Planning," Journal of Business Research 43, no. 3 (1998): 177-187.

2. The continuum presented in this diagram has its roots in research performed in the early 1990s. See R.M. Monczka and R.J. Trent, "Global Sourcing: A Development Approach," International Journal of Purchasing and Materials Management 27 (spring 1991): 2-8.

3. For a discussion of specific topics related to international purchas- ing, see M.S. Alguire, C.R. Frear and L.E. Metcalf, "An Examination of the Determinants of Global Sourcing Strategy," Journal of Business and Industrial Marketing 9, no. 2 (1994): 62-74; U. Arnold, "Global Sourcing: An Indispensable Element in Worldwide Competition," Man- agement International Review 29, no. 4 (1989): 14-28; L.M. Birou and S.E. Fawcett, "International Purchasing: Benefits, Requirements, and Challenges," International Journal of Purchasing and Materials Man- agement 29 (spring 1993): 27-38; P.R. Murphy and J.M. Daley, "Logis- tics Issues in International Sourcing: An Exploratory Study," International Journal of Purchasing and Materials Management 30 (summer 1994): 22-27.

4. For a detailed discussion of the differences between companies that pursue international purchasing and those that pursue global sourcing, see R.J. Trent and R.M. Monczka, "International Purchasing and Global Sourcing - What Are the Differences?" Journal of Supply Chain Management 39, no. 4 (2003): 26-38.

5. Authors' interviews with managers at the company.

6. For a more detailed description of a leading company's global sourcing process, see R.J. Trent and R.M. Monczka, "Pursuing Com- petitive Advantage Through Integrated Global Sourcing," Academy of Management Executive 16, no. 2 (2002): 66-80.

7. H. Takeuchi and I. Nonaka, "The New New Product Development Game," Harvard Business Review 64 (January-February 1986): 137-146.

8. L.H. Peters and E.J. O'Connor, "Situational Constraints and Work Outcomes: The Influences of a Frequently Overlooked Construct," Academy of Management Review 5 (1980): 391-397.

9. R.M. Monczka and R.J. Trent, "Cross-Functional Sourcing Team Effectiveness," (Tempe, Arizona: Center for Advanced Purchasing Studies, 1993).

10. D. Hellriegel, J.W. Slocum and R.W. Woodman, "Organizational Behavior" (Cincinnati, Ohio: South-Western College Publishing, 2001), 474.

11. R.J. Trent, "The Use of Organizational Design Features in Pur- chasing and Supply Management," Journal of Supply Chain Manage- ment 40, no. 3 (2004): 4-18.

32 MIT SLOAN MANAGEMENT REVIEW FALL 2005

TITLE: Achieving Excellence In Global Sourcing SOURCE: MIT Sloan Manage Rev 47 no1 Fall 2005

WN: 0528807228011

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