Case study Global sourcing: process and design for efficient management

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1 Case study Global sourcing: process and design for efficient management The author is Assistant Professor of Operations Management in the Department of Management, Worcester Polytechnic Institute, Worcester, Massachusetts, USA. Keywords Globalization, Logistics management, Process management, Case studies, Supply chain management, Aircraft industry Abstract Although the literature on the strategic aspect of global sourcing is large, detailed studies on this procurement strategy from a process perspective are limited. This paper adopts the process viewpoint and examines the design and management issues associated with the global sourcing process based on a case study at a leading firm in the US aviation industry. The effectiveness of the company s global sourcing process is evaluated, the design alternatives of the supply chain structure are compared, and the critical issues of efficient management of the process are summarized. Specifically, three logistics-based criteria are developed to indicate the effectiveness of the transportation and distribution network. The paper also demonstrates that the process design can be assessed based on the dimensions of supply chain integration. Finally, a flow-level matrix is developed to identify the critical issues of managing the global sourcing process. Electronic access The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at Volume 8. Number pp # MCB UP Limited. ISSN DOI / Introduction Improved technologies have enabled companies to expand their markets worldwide and intensified competition has compelled organizations to outsource some of their non-core activities to other firms possessing the expertise. Under the waves of globalization and outsourcing, it is evidenced that large manufacturing companies often develop their products in Europe and the USA, manufacture in Asia and Latin America, and sell worldwide. This strategy, in its more advanced form, is known as global sourcing and is defined by Monczka and Trent (1991) as the integration and coordination of procurement requirements across worldwide business units, looking at common items, processes, technologies, and suppliers. Discussions on questions such as why to source globally, which items are to be globally sourced, and what challenges are faced by global sourcing managers can be found in articles by Stevens (1995) and Zeng (2000). The successful companies, whose supply chains currently span the globe, have spurned their remaining competitors to consider global sourcing as an important procurement strategy (Fagan, 1991). According to a recent poll administered by Purchasing (2001), 80 per cent of the respondents said that they have increased foreign purchases over the past five years and 64 per cent expect to see a corresponding increase in the next five years. The evidence indicates that the manufacturing industry will continue its efforts to expand the use of global sourcing. A significant amount of research effort has been devoted to studying the strategic perspective of global sourcing, for example its patterns of development (Handfield, 1994), its success factors (Alguire et al., 1994), and the interrelationships between sourcing decisions, strategies, and supplier The author would like to thank APICS - the E&R Foundation and Supply Chain Council for their financial support for this project (Grant No ) and Mr Christian Rossetti and Mr Ken Mair for their assistance in collecting the data and information of the two companies. The author would also like to extend her gratitude to Professor Paul Zipkin, the Editor, and reviewers for their thoughtful and constructive comments, which have helped improve the quality of this paper. 367

2 performance (Bozarth et al., 1998). A report by Samli et al. (1998) provides an overview of the global sourcing research topics, which center on the following five areas: evolution of the purchasing function; strategic versus reactive sourcing; from purchasing to global sourcing; global sourcing strategy; and global sourcing as a strategic tool. Other aspects of strategic global sourcing can be found in recent studies. For example, Peterson et al. (2000) identify a set of factors that drives the effectiveness of global sourcing strategies and examine the significance of each factor based on a structural equation modeling methodology. The other attempt, by Sislian and Satir (2000), develops a strategic sourcing framework that can help companies make sourcing decisions as well as implement the strategy. One of the findings provided by Peterson et al. (2000) indicates that the global sourcing structures and processes, including logistics processes, supply chain processes, and inter-organizational information systems, are important to the effectiveness of global sourcing. However, until recently, business process modeling and engineering has not been a common approach to studying an organization s effectiveness (Anupindi et al., 1999). Keeping this in mind and with the awareness that few previous research efforts have focused on the processes of global sourcing, we have conducted a detailed study of the necessary procedures needed in the global sourcing process and identified the associated challenges. This effort is accomplished by a comprehensive case study at a leading firm in the US aviation industry and its manufacturer in China. As requested by the companies, we will use Company P to refer to the US-based parent company and JV for the Chinese manufacturing joint venture throughout this paper. The information and data for this case study were collected during an extensive field research at both companies during the summer of The remainder of the paper is organized as follows. Section 2 summarizes the stages and issues associated with evolution of the global sourcing process reported from the literature. Section 3 reports the case study in detail and is divided into three parts. The first part provides background information about the two companies and the important characteristics of the global sourcing process. The second part explains the materials flow 368 process based on the collected information and data. And the last part analyzes the process performance. Section 4 contains the insights gained and lessons learned from the case study, in which the designing issues of supply chain structures are discussed and a two-dimensional operations matrix that helps manage the global sourcing process is proposed. Finally, the concluding remarks and future research directions are summarized in Section Global sourcing process: literature review Global sourcing falls into the arena of outsourcing and can be considered a special case of outsourcing. Although there is a large body of literature on the strategic side of outsourcing, studies on sourcing process design and management are very limited. We have surveyed practitioner-oriented as well as academic journals and noticed that the consensus among the processes proposed in the literature does exist (e.g. Liu and McGoldrick, 1996; McGowan, 1997; Maltz and Ellram, 1997; Fera, 1998; McIvor, 2000; Patterson and Amann, 2000). The general process can be broken down into five stages, which are illustrated in Figure 1 and explained as follows: (1) Stage 1 - investigation and tendering. Before global sourcing strategy is adopted, an organization should identify the core and non-core activities and analyze market/customer requirements and competitors so that the firm s objectives, target markets and positioning can be determined. The scope of the strategic sourcing project is outlined in a business plan with upper management, and the initial work plan and baseline criteria for measuring improvements are established and documented in a process plan. Data collection is performed in order to refine and update stakeholder requirements as well as confirm the baseline case. (2) Stage 2 - evaluation. Specific supplier selection criteria are developed that are used to identify a short list of appropriate suppliers. The sourcing strategy is refined as needed and cost models are finalized. The economic and

3 Figure 1 A generalized five-stage outsourcing process operating benefits of completing the project are then estimated. (3) Stage 3 - supplier selection and development. Final suppliers are selected and the negotiation of an agreement with the selected suppliers is conducted. A technical assessment of the selected suppliers that leads to savings identification needs to be conducted. The implementation schedule and timelines for the selected suppliers are then developed. (4) Stage 4 - implementation. A performance analysis program should be put in place. This may include the following series of activities. The implementation team is placed and the implementation strategy and schedule are published. Agreements on shared resources and supply and logistic terms are developed. Expected results are documented, both internally and with the selected suppliers. Finally, measurement of actual performance results is conducted and progress is reported periodically. (5) Stage 5 - performance measurement and continuous improvement. The suppliers performance is monitored both independently and in conjunction with the processes and resources used by the partners on a routine basis. An in-depth 369 assessment of the effectiveness of the collaborative working relationship with the suppliers is obtained, from which the involved partners can identify problems and seek out continuous improvement opportunities. The goal of this stage is to maintain a best-in-class procurement process that is dynamic and flexible enough to meet changing market conditions. Among the five stages of the outsourcing process, the last two stages, namely implementation and performance measurement, represent big challenges and, thus, the focus of this paper. We provide a case study in commercial aircraft industry to explore how a global sourcing process can be designed and managed efficiently. 3. A case study 3.1 The two companies involved in the study Company P is a leader in the design, manufacture and support of engines for commercial, military and general aviation aircraft, and space propulsion systems as well as a pioneer in flight and technology. Since the competition in today s aviation industry emphasizes cost and reliability, the company

4 strives to provide its customers with the services they need to concentrate on flying people and cargo safely around the world. In a business that shrinks the globe, Company P is truly worldwide, having representatives in 76 cities in 47 nations. Its partnerships and joint ventures have reached to Asia and Europe and have kept the company at the forefront of flight. In order to penetrate China, which was forecasted in the late 1980s to have the greatest increase in demand for jet engines over the next decade, Company P was asked to provide China with certain benefits as part of the overall purchase of Company P s jet engines. China s requests focused on hard currency infusion and technology transfer. In order to comply with this agreement, Company P established a joint venture in Chengdu, Sichuan Province, China in The joint venture (JV) in China is a greenfield operation as a means to provide low cost machining and manufacturing to Company P and help meet the obligations to its purchase agreements with the Chinese government. It is also the first joint venture established in the aviation industry of China. The partners are Company P, a local aircraft engine company, and the Aviation Authority of China (AVAC). Company P is a 50.5 per cent owner and has supplied the capital and machinery for the project while the local company provided the land and many of the first employees. In addition to the initial investment, Company P continues to provide technical assistance, capital and tooling for the JV. The second partner, which is a state-owned local company, owns 39.5 per cent of the JV and possesses abundant land and a large number of skilled workers. The last partner, AVAC, is a state agency controlling the aviation industry in China and its participation ensures that the Chinese government has influence over a foreign controlled company operating in China. Management of the JV is very similar to that of the US corporations and possesses three tiers: a board of directors; a general manager; and the managers of the four main operating groups (human resources, finance, operations, and quality). Since Company P provided the majority of the capital, it controls the day-to-day operation of the JV through placing its own employees in the positions of general manager, finance manager and operations manager. These 370 ex-patriates are contracted to two-year assignment at the JV with the option to renew. Local employees manage the remaining functional departments: quality control; logistics; and human resources. Manufacturing at the JV is divided into four major centers. These centers manufacture three types of parts: burner cans; pin disks; and shroud assemblies. The JV is considered a world-class manufacturer of sheet metal fabrication and its general machining quality competes with other experienced US manufacturers. 3.2 The characteristics of this global sourcing process In order to fully appreciate the complexity of implementing a global sourcing strategy, three characteristics that distinguish the aviation industry s supply chain from other industries need to be completely understood. First, a regulated and specific procurement process for raw materials is required for the aircraft manufacturers, which adds one more layer to the entire supply chain. Given the nature of aircraft engines, the quality of raw materials must meet the requirements of the Federal Aviation Association (FAA). As a result, there are a limited number of raw material suppliers in the world that satisfy the FAA standards and these suppliers are mainly located in Europe and North America. To overcome these difficulties, Company P has established two methods to acquire raw materials, subassemblies and consumable raw materials - materials that are destroyed in the manufacturing process. Detailed discussions of the pros and cons of the two raw material procurement alternatives will be given in Section 4. The second challenge of the global sourcing process lies in the nature of the materials and products. In the aviation industry, the goods are classified into the spares group and the assembly group. The former group has an intermittent consumption rate due to the erratic nature of the overhaul and repair business. This unpredictability stems from an increased reliance on just-in-time procurement processes by aircraft owners and the fact that required repairs are not fully realized until the engine has been removed from the aircraft and partially disassembled. Pressures on Company P are further increased due to the high cost of having aircraft out of service. Repair shops hedge

5 their bets by ordering parts and then canceling the order once the engine problem has been properly diagnosed. The assembly group has a well-planned part consumption rate but places incredible demands on the procurement specialists. If a part is missing or late, the assembly group will charge the procurement specialist responsible for this part at an hourly rate equivalent to the cost of shutting down production. Company P further complicates its supply chain by differentiating external customer spare parts and parts needed for internal engine assembly. The two groups, assembly and spares, manage separate physical locations and part inventory data. The third characteristic is revealed by the high standard of quality and the high value of the finished engine parts. Unlike those low valued consumer goods and commercial merchandise that are commonly sourced in China, the engine parts are normally of high value and require complicated manufacturing facilities and techniques. The pin disks and burner cans are important parts used on Company P s two popular commercial engine models. Table I provides a snapshot of the products manufactured at the JV. 3.3 Analysis of the effectiveness of the global sourcing process The materials flow comprises the visible and physical artery of any supply chain. The materials we consider in this project take on the following forms: raw materials (such as metal sheets); and finished engine components and subassemblies. The emphasis of the project is placed on designing and managing the sourcing process that links Company P and the JV Chain partners In addition to the US-based Company P and the JV in China, there are other key trading partners in this global sourcing chain:. Raw material supplier and sub-tier supplier. As described before, raw materials are supplied through long-term agreements with suppliers that have passed a series of quality assurance tests set forth by the FAA. The raw material suppliers are primarily located in the USA and Europe. China presently does not have the acceptable mining and metallurgical resources to provide the raw materials, nor does the JV have the financial ability to purchase the raw materials directly from the suppliers.. The international product center at Company P. This is comprised of a number of people involved in technical assistance, quality management, and materials management. This center represents the central point of the supply chain, starting, monitoring, and controlling various chain activities.. Freight forwarders/international expeditors. Their typical services include air and ocean freight forwarding, brokering, vendor consolidation, customs clearance, marine insurance, distribution and other value added global logistics services.. Export management agency. A firm that helps a domestic company becomes involved in foreign sales. It often locates foreign firms that can be licensed to manufacture the product in the foreign country and takes care of the details involved in exporting.. Customs. Customs procedure is a typical and important requirement when goods need to go across borders. In this case, since the JV does not import anything for sale within China and Company P is a protected industry, there are no duties that need to be paid at both frontiers. However, the container materials must pass the bug law set forth by the USA Evaluation criteria and procedures A set of attributes that can be used to measure the ability of processes to produce and deliver products and services is given in Anupindi et al. (1999, p. 10). Based on the availability of the information and data at the two companies and the possibility to derive the needed parameters, we have adopted three measures to evaluate the effectiveness of the Table I Key characteristics of the products manufactured at the JV Weight (kg) Value ($/unit) Volume (CBM) Yearly demand Pin disk 35 5, ,000 Burner cans 24 1, ,500 Shroud assembly 33 15, Average/total 29 7, ,

6 transportation and distribution network. The three measures are explained as follows. Process cycle time. This parameter consists of two portions. The first is the manufacturing time at the JV, which is, on average, three weeks for each order batch. The other is the total transportation lead-time, which is spent on a series of events that take place when moving materials between the two companies. The transportation lead-time is most difficult for accurate estimation, and yet an important indicator of the operational effectiveness of the global sourcing strategy. For this study, we have learned that the delivery process typically begins with consolidation, involves the transfer of the consolidated goods to the airport/sea port by rail or truck, storage in warehouses, loading, actual transit, unloading, customs clearance, transfer to the destination, and ends with receiving. Based on the locations of the two companies, five transportation modes are considered possible: all air, water-rail full container load (W-R FCL), water-rail less than container load (W-R LCL), water-truck full container load (W-K FCL), and water-truck less than container load (W-K LCL). Due to the number of stopping points and trading partners involved, a high degree of uncertainty and a high possibility of delay and damage may occur. In Table II, we have compiled two time figures for each activity: an absolute time value under a normal condition under which every step is completed correctly and a delay caused by reasonable and yet unexpected events (such as a storm). Using total transportation lead-time can quickly identify the preference of transportation mode. Table II clearly shows that air shipment involves lowest uncertainty and requires the shortest amount of delivery time. However, at least two constraints may limit the use of air: the shipping quantity of each delivery and the freight cost. In what follows, we will discuss how to take logistics cost into Table II The delivery lead-time (in days) for the five shipping alternatives USA to China China to USA Alternatives Time Delay Time Delay Air W-R FCL W-R LCL W-K FCL W-K LCL consideration when evaluating the delivery alternatives. Logistics cost. The second useful measure of the global sourcing process is cost. As pointed out by Murphy and Daley (1994), logistics problems have posed the biggest challenge to US-based firms in global sourcing, hence logistics cost is frequently used when making outsourcing decisions (Maltz and Ellram, 1997). The first step in dealing with logistics cost is to identify the cost items. To accommodate the two companies concerns and situations, we have classified the cost elements into a six-category system: transportation; inventory holding; administration; customs charges; risk; and material handling and packaging, with each category consisting of a number of cost items. The cost elements and a brief description of each are provided in Table III. Note that the dimension of each element given in Table III is derived based on the data we have collected from the two companies. The second step in dealing with the cost is to calculate the total for each transportation mode. In our case, all cost elements can be converted to a per-shipment basis for a given annual shipping frequency and an annual demand, and hence the total cost per shipment can be obtained, and then an annual cost figure can be derived. We have used the slightly modified data to complete the calculations for various scenarios. For each scenario determined by the annual shipping frequency and demand, the results are organized into a cost matrix. An example with the annual shipping frequency being 150 and the annual demand being 2,900 units is shown in Table IV. Note that the average unit value or unit weight of the two major outsourced parts, namely pin disks and burner cans, and their aggregate demand are used in calculations. Table IV shows the cost of delivering the raw materials from Company P to the JV and the cost of shipping the finished parts in the other direction. The matrix format is a convenient way to display the total logistics costs based on export and import activities and further to compare the economic performance of various transportation modes. We see that the quickest service with the lowest variability provided by air is compensated by a higher cost. Therefore, seeking a balance among reliability, speed and cost is essential and inevitable. 372

7 Table III Classification of logistics costs in the global sourcing process Logistics cost category Brief definition Dimension 1 Transportation Freight charge Cost incurred during delivery using various transportation modes $/kg Consolidation The fee for combining small shipments to form larger shipments $/kg Transfer fee Pickup and delivery Cost incurred during the transfer of goods between different modes of transportation Transportation charges incurred between shipper s warehouse and air, rail consolidator s terminal 2 Inventory holding Pipeline inventory Holding cost during the transfer $/$/year Safety stock Holding cost of safety stock $/$/year 3 Administration Order processing Salaries of employees responsible for purchasing and order Communication management Telephone, fax and information transfer related costs associated with international logistics Overhead Rent paid by the international logistics group 4 Customs Customs clearance Fee imposed by local customs to clear goods Brokerage fee Charge levied by an agent acting on behalf of the shipper or the receiver depending on the delivery terms Allocation fee Per house-bill 5 Risk and damage Damage/loss/delay Percentage of the value of each unit shipped that will be lost, damaged or delayed % of value shipped Insurance Min $25 or $0.50 per $ insured value % of value shipped 6 Handling and packaging Terminal handling Material handling fee charged by the transportation company Material handling In/out handling Disposal charge Cost of labor and equipment used to move goods within the shipper s or receiver s warehouse Material handling charge levied by the freight forwarder for use of its facilities Fee for taking away an empty container from the receiver s warehouse % of value shipped Packaging/supplies materials Cost of preparing goods for shipment % of value shipped Storage Rental fee of the warehouse space $/kg Table IV A sample cost matrix for all available transportation alternatives (annual shipment frequency = 150; annual demand = 2,900 units) To China From China Air W-R FCL W-R LCL W-K FCL W-K LCL Annual cost $717,479 $1,350,363 $676,922 $1,097,349 $613,873 Air $457,209 $1,174,687 $1,807,572 $1,134,130 $1,554,558 $1,071,082 WRF $1,177,046 $1,894,524 $2,527,409 $1,853,967 $2,274,394 $1,790,919 WRL $384,740 $1,102,219 $1,735,104 $1,061,662 $1,482,089 $998,613 WKF $1,062,104 $1,779,583 $2,412,467 $1,739,026 $2,159,453 $1,675,977 WKL $362,052 $1,079,531 $1,712,416 $1,038,974 $1,459,401 $975,925 Cost-to-value ratio. Frequently transportation/ logistics managers are concerned with the percentage of the value of the outsourced parts that is spent on the logistical activities. The cost figures in the cost matrix can help obtain a series of percentages of the logistics cost relative to the values of raw materials, valueadded services, or the finished parts, respectively. These percentages are extremely useful in evaluating the effectiveness of strategic sourcing alternatives as well as providing increased awareness of total logistics costs. These percentages can be calculated in the following way:! r ˆ ALC US!CN $ =AD units ; 1 OVORM $=unit! VA ˆ ALC CN!US $ =AD units ; 2 AV by the JV $=unit 373

8 ! f ˆ ATLC $ =AD units ; 3 VOFP $=unit where ALC = annual logistics cost; AD = annual demand; OVORM = original value of raw material; AV = added value; ATLC = annual total logistics cost; and VOFP = value of finished part. A numerical example of these measures is given in Table V. As indicated in Table V, the raw material logistics cost percentages range from 12 per cent to 41 per cent, the highest value corresponding to full container shipments via inland transport by rail due to low shipment weight and the high per shipment cost of the full container. The logistics cost of the value added portion of the finished part range from 11 per cent to 23 per cent. The finished part percentage is calculated by totaling the inbound and outbound logistics cost per part and dividing this sum by the final part value - raw material plus value added. The resulting total logistics cost can comprise as much as 29 per cent of the value of the final part. All these percentage values imply that logistics costs comprise a significant portion of the total global sourcing cost. 4. Lessons and insights 4.1 Issues in designing the global sourcing process As discussed in Section 3, procurement of the raw materials from FAA certified suppliers is an important feature of the global sourcing process under study. Since China does not have qualified sources of raw materials, the JV has been operating on a vendor-required-material (VRM) structure with Company P since its first day of operation. In this structure, Company P purchases the raw materials from the certified suppliers and then ships the raw materials to the JV. The material flow involved in this structure design is depicted in Figure 2. An alternative structure of the global sourcing process is called a vendor-supplied-material (VSM), in which the JV will have direct contact with the raw material suppliers and have full responsibility for decisions on procurement, materials management, production planning, and delivery. Note that the VSM approach is similar to vendor-managed inventory in the retail sector. This method will reduce Company P s involvement in forecasting demand and developing internal schedule requirements. The material and information flows of a VSM global sourcing process are illustrated in Figure 3, which shows that this process is significantly streamlined and simplified. The effects of the two global sourcing process designs can be assessed in two ways. The first is to look at the advantages and challenges faced by the two companies in the two scenarios. A quick assessment is shown in Table VI. In a VRM structure, Company P retains the central control over the supply chain, especially the information and cash flows. Additionally, Company P makes all critical decisions with minimal input from the JV on the amount of raw materials to be procured and shipped, delivery schedules, and production quantities. The disadvantage is quickly revealed by the substantial financial burden posed on Company P, since most of the major expenses, except the labor cost, are all paid by Company P. On the other hand, JV has far fewer decisions to make and financial payment responsibilities, more positive cash flow and a higher return on assets. The JV follows a make-to-order system and does not hold safety stock of finished parts. However, the JV has virtually no flexibility and control over its materials, production schedules and other key resources. As a Table V The ratios of logistics costs to various materials values Raw Logistics Value Logistics Finished material cost added cost part Total Mode ($/unit) (to China)! r (%) ($/unit) (from China)! VA (%) ($/unit) logistics! f (%) Air $1,000 $ $2,000 $ $3,000 $ WRF $1,000 $ $2,000 $ $3,000 $ WRL $1,000 $ $2,000 $ $3,000 $ WKF $1,000 $ $2,000 $ $3,000 $ WKL $1,000 $ $2,000 $ $3,000 $

9 Figure 2 The materials flow in Company P s VRM global sourcing process result, if there is a discrepancy between the amount of raw materials needed to complete the orders and the amount available, which frequently happens, the entire production schedule must be shifted, often resulting in delivery delays. The VSM structure overcomes most of the problems associated with its counterpart but requires more coordination, cooperation and communication. Especially, channels of communication are not only vital to the effectiveness of this chain structure, but also represent the biggest challenges. We have found that information technology, especially the Internet, is still playing a minor role in inter-organizational communication and information sharing, due in part to China s insufficient infrastructure of information systems. This is one of the major reasons that the VRM chain structure has been adopted since the establishment of the JV. Company P has indicated to us that as the information 375 infrastructure improves and the partnership matures, it will gradually move to the VSM structure. The other way to identify the differences between the two design alternatives is to examine their impact on supply chain integration. Dimensions of supply chain integration fall into three categories (Lee, 2000): information integration, coordination and organizational linkage, which can be further decomposed into ten elements. A rough-cut comparison based on the advantages and the challenges of the two design alternatives previously discussed leads to the results presented in Table VII. It is seen from Table VII that the VSM structure outperforms VRM structure on most elements. 4.2 Issues in managing the global sourcing process: a flow-level matrix The preceding sections provide a detailed description of the key processes, procedures

10 Figure 3 The material and information flows in a VSM global sourcing process and steps involved in Company P s global sourcing strategy. It is not difficult to see that, in a global environment, both the parent company and the joint venture are facing numerous challenges and problems, which come from a great number of sources, such as economic, political and legal, social and cultural, geographical, and technological. In addition to these uncontrollable factors, some commonly seen problems also exist, for 376 example the lack of local process equipment and technologies, inadequate transportation and telecommunication infrastructure, and complicated customs procedure and rules. To make global sourcing work, a set of key issues needs to be carefully addressed and considered. Based on the lessons we learned from this case study, we have expanded those questions in McGowan s study (1997) and derived a two-dimensional matrix of essential

11 Table VI The advantages and challenges presented to the chain partners in the two structure design alternatives Advantage Challenge Company P JV Company P JV VRM structure Has full control Less financial responsibility Responsible for all critical Slow response from Company P Easy to make changes Focus on production planning decisions due to no communication with Highest degree of independence and scheduling Substantial financial burden suppliers Difficult production planning and scheduling VSM structure Focus on coordination Smoother production and Increased responsibility for IT technology must catch up to Focus on strategic planning resource planning coordinating the entire improve the speed of Less involvement in production More flexibility and supply chain communication and distribution communication with suppliers More investment in Cooperate with both the parent administrative functions company and suppliers More currency risk questions to be answered periodically in order to ensure the smooth operation of the global sourcing strategy. The two dimensions are determined by the supply chain flows and the levels of decisions, where the former refers to material, information and cash, and the latter refers to strategic, tactical and operational decisions. Table VIII shows the detailed questions in a two-dimensional, flow-level matrix. The literature review section has revealed that an outsourcing process can be generalized into a five-stage procedure, out of which the last two steps are examined in great detail in this paper by using a case study at a leading firm in aviation industry and its global manufacturer in China. Based on the analyses conducted and lessons learned, we can summarize a guideline for implementing and measuring the effectiveness of global sourcing strategy in Figure 4. Specifically, the chain structure design and measuring the manufacturing and logistics costs are vital in the implementation stage. The last stage in the outsourcing process, namely performance measurement and continuous improvement, can be achieved through using the three dimensions of supply chain integration and facilitated by the flow-level matrix developed in this paper. 5. Concluding remarks and future research In order to gain insights into the complex processes that develop within the context of global sourcing strategies, we conducted a detailed field research at a leading firm in the US commercial aviation industry and its joint venture in China in the summer of We studied this global sourcing approach from a process perspective with particular interests being focused on the procedures and issues associated with the design and management. The effectiveness of the material flow is examined by cycle time, logistics cost, and cost-to-value ratio. The logistics cost and cost-to-value ratio are additional indicators of the performance of the transportation and distribution network. We found that information technology, especially the Table VII Assessment of the effects of the two design alternatives on supply chain integration Dimensions of supply chain integration VRM structure VSM structure Information integration 1 Information sharing Poor Good 2 Collaborative planning Poor Good 3 Forecasting Good Fair 4 Replenishment Poor Good Coordination 5 Decision delegation Poor Good 6 Work alignment Poor Good 7 Resource allocation Fair Good Organizational linkage 8 Channels of communication Poor Good 9 Distribution of accountability Poor Fair 10 Monitor of performance Good Fair 377

12 Table VIII Managing global sourcing process: a flow/level matrix Process flow Management level Material Information Cash Strategic 1 Who controls the movement of the 1 Is the information technology (IT) 1 Who is responsible for paying the raw goods? department at the global supplier materials and transportation? sufficiently staffed? Tactical 1 What are the MRP schedules 2 What are the procedures at the 1 How is information transferred between the trading partners? 1 What is the payment cycle? Should it be the same as the delivery cycle? customs? 2 What is the IT infrastructure at the 3 What is the best transportation mode? global supplier? 4 Who should be responsible for transportation? Operational 1 What are the packaging and material 1 Are the IT components adequate to 1 How to analyze the impact of handling procedures and policies? ensure timely information transfer? exchange rate? 2 How are inventories controlled? 2 Are the IT personnel sufficiently 2 What is the form of fund transfer? 3 How to determine the purchasing trained? cycle? Figure 4 A guideline for implementing and measuring the global sourcing strategy Internet, still plays a minor role in the inter-organizational information system and that both internal and external network environments in the joint venture lag the advances made by the parent company. The chain structure design is critical as it affects significantly how information can be integrated, how the trading partners deploy their decision rights, divide their accountabilities and coordinate their decisions, and how the performance of the global sourcing process can be evaluated and improved. Finally, we developed a two-dimensional matrix that contains critical questions regarding the successful operation of a global sourcing strategy. Although most of the results are obtained through a case study, the format of analyses presents an excellent example for studying other global sourcing processes. There are a number of other issues that call for in-depth studies and further investigations. For example, in the general outsourcing process, how to estimate the economic and operating benefits (in the second stage), how to assess the technical capability of suppliers and to identify potential savings (in the third stage), and how 378

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