International sourcing of products, services and components is a trend that has been picking up with more vigor in UK companies over the past decade. It is the main agenda of most companies. The purpose of this paper will be to analyze the main issues, benefits and drawbacks that UK companies come across when they decide to internationally source products, components or services by highlighting the issues behind why these companies source internationally, communication and cultural issues and legal systems in different parts of the world and giving a view of the possible issues UK companies will face, by China’s population having improved standards of living.
Purchasing has failed to be acknowledged and recognized as one of the fields in organizations that contribute majorly to the competitive advantage that is sustainable. The attitude that purchasing doesn’t need much expertise is a contributing factor to this failure of recognition. People often consider purchasing as less consequential compared to other business activities and functions. However, the last decade has witnessed a gradual change in this attitude with people acknowledging that there is a strategic point of view to purchasing and that the company that has the best prospers more than its competitors.
The major goal of companies is to make the most profit and provide their consumers with quality products and services. The more a company’s client base expands, the more likely it is that the company will make phenomenal gains. During the end of the 1980s and the beginning of the 1990s, international sourcing was considered a key procurement strategy by firms and companies around the world. This owed to the belief that most companies held at the time as to international sourcing reversing the decline of competitiveness with western firms.
As a result of the increasing interest that companies and firms have in international sourcing, significant research has followed that addresses the issues and benefits that they should expect by deciding to venture into sourcing internationally. This is because there was a thirst for this particular information so in order to enhance the competitive advantage of the newer companies against the older, more experienced ones. Despite more research being put in this area, there is little in-depth analysis of how the companies need to structure themselves for competitive advantage in international sourcing. To be more specific, there is little information that is available about what UK companies should do as pertains to the type of coordination that firms need to adopt in their supply and sourcing endeavors.
There have been recommendations that there needs to be the consistent and global rule that govern international sourcing so that the activity is viewed by companies as a strategic tool. The trend is shifting towards attaining information that is backed with evidence from research than anecdotes. Additional recommendations include the companies having a focused approach to their international sourcing where they would concentrate on a particular clientele country and product before venturing into the activity. This kind of focus will enable them to concentrate fully on a single project at a time and to minimize the chances of great loses and sabotage. Before an investment is made to international sourcing, the company should identify factors that they consider as being vital to the performance of the international sourcing venture. Some of these factors include information available, the knowledge and skills of personnel, time, personnel availability, logistics and skills of suppliers. A good and effective international sourcing endeavor would meet these needs effectively.
Research shows that the number of organizations opting for international sourcing in the UK is increasing. There are many reasons that companies have for sourcing internationally. The major ones involve money. Companies want to save on the cost of producing more goods while at the same time making more profits from the increased sales. Some of the challenges that are encountered by these companies include:
- A longer component lead period
- Cultural and communication issues that may arise from certain countries
- The issue of delivery and the quality of the goods
- Legal complications in the countries that have the suppliers
- Finding and assessing suppliers who are qualified
These issues are not so bad as to completely sabotage the process of international sourcing by the companies in the UK. Most of the large companies consider these problems moderate and can solve them with focus and other resources. When a company decides to invest internationally through sourcing, there are some benefits that are expected from the process. They are:
- Increased client base
- International recognition and appreciation
- Increased profits
- Deeper market penetration
The value of communication is not a new thing for accompanies as some of their vital strategies depend on communication like advertising. International sourcing may present a greater challenge since it involves communicating across cultures. International business functions of any kind involve communication. In the context of international sourcing, activities that companies may engage in like making decisions, negotiating, giving and receiving information and ideas, leading and motivating are all a part of communication whose success or failure is determined by a manager’s capability to communicate their needs to those they are dealing with who may be from a different culture. Getting this type of expertise is a challenge in itself but it becomes even greater when a company incorporates operations that will include various cultures and languages in its running. One such operation is international sourcing.
Purchasing Management Research
According to Oxfam international people, who are the consumers of company products and services, are gaining more knowledge about the products they are using and are getting more concerned about the ethics attached to where the products are manufactured. These concerns are mostly affecting the food and beverage companies in the UK. Customers are more demanding about information as to how the food they are burying is produced. There has been a trend by food and beverage companies to try and standardize their products as much as possible while maintaining considerable costs of production. However the need for a change is evident as globalization takes root and demands for products becomes customized .
One of the main reasons for food companies in the UK making a decision to source their services, components and products from the international market is to aid them in somehow reaching and retaining more and diverse customers while generating a positive outlook of their brand to their consumers while keeping their corporate value at high levels. In addition, they often hope to attain more commercial sustainability.
Oxfam states that companies venture into international sourcing as a strategy to manage risks to their reputation.UK is a developed country and in these countries, the value of a brand is responsible for half of the product’s market capitalization. In addition, consumers have begun holding companies responsible and accountable for their limitations of exports to certain farmers or areas. International sourcing results in smallholders being part of a company’s supply chain. By incorporating them, the company can communicate this action by acknowledging or including part of them in their brands for recognition. As a result of this, they will get new customers and gain more loyal one from the older customers.
These markets need to be treated with care as any publicity about exploitation of these markets may result in losing customers. In 2009, 64% of consumers in the UK said that they had avoided certain products because the company had a bad reputation. Poor relations with suppliers from international sourcing damage brand names and decrease the value of the brand in the eyes of the consumers.
Another issue that often accompanies international sourcing is social and environmental gains through agriculture at the location of the sourcing. This is one of the ways that an ethical market is determined. It comes at an appropriate time when there is growing demand for ethical markets to be developed. 51% of shoppers in UK said that they had made their purchases on ethical grounds in 2008 while in 2007; there were only 47% of them to this claim. For instance, companies that have sourced products from Fairtrade (with mostly smallholder suppliers) have seen a rise in their retail trading with about €2.9bn in sales. Another example is the Rainforest Alliance program for certification that has sourced from other tea companies like Lipton and Tetley and has consequently seen a raise in annual tea sales.
Companies that venture into international sourcing have to be prepared to deal with some drawbacks to their action. There are some disadvantages of global or international sourcing that have been documented, they include: fluctuations in the exchange rate between countries, political issues and risks, concerns about paperwork and the flow of cash and extra fees that may be incurred like when arranging for agents and brokers to travel. In addition, most of the companies in the UK tend to internationally source from countries that are geographically further from them subsequently increasing the costs of transportation. In addition, this augments the complications that the company will face as the lead-time will be increased at the supply chain level.
Communication is an important part of business and even the slightest misunderstanding can lead to loss of opportunity. In her research, Nancy Adler exemplifies a case where a British Boss asks an American employee to lunch later where he hopes to communicate his intentions to promote him. The employee replies “yeah” to the lunch but the boss perceives this reply as being an offensive remark and withdraws his offer. In this example, culture and communication come into play, in the American culture, the word “yeah” refers to “yes” but the same word is disrespectful in the British culture. All aspects of communication should be considered by companies if they are to source internationally. Symbols, actions, non verbal cues, words, culture and context should be taken into account.
When communicating with people from different cultures, the companies should assume that there are differences between the two cultures until a similarity is proven to exist between the two. Culture is an important consideration because it affects the purchasing behavior of consumers and will be majorly influential in the selection of international sources. Differences in culture and language sometimes also diminish business functions making them ineffective.
Hong and Holweg describe a shift in the strategy of manufacturing that has resulted in companies in the UK embracing globalization in the sourcing aspect. As industrialization continues to progress in countries like China, companies in the UK are under pressure to come up with strategies, like international sourcing, that will reduce the cost of manufacturing products. China has an abundance of labor at a lower cost and companies in the UK cannot afford to ignore the great economic potential that lies in China. Though international sourcing has major advantages for companies in the UK, it sometimes presents a disadvantage. In her working paper that she prepared for the Knowledge Economy Programme, Katerina Rudiger argues that international sourcing presents a threat to knowledge jobs in the UK. This especially happens in the IT sector where people with these skills are missing out on opportunities. In addition, it may result in unemployment.
Yet another issue that UK companies have to deal with when seeking international sources is that they may get into legal tussles with political systems that may govern the functioning of some of their suppliers.
Findings and Analysis of Purchasing Management
China has been the world’s global workshop for businesses. Events such as hosting the Olympics and becoming part of the World Trade Organization has made the country even more attractive to its investors now more than it was before (Morley fund management). As a result of this, more countries and companies are utilizing the products, manpower and services that can be provided by the 100 million working class individuals. As the investment opportunities increase, the trading profits also go up. It has become one of the top trading powers in the world. This is good for UK companies that have chosen to invest in the country since they assured of their product being sold to the targeted markets. In addition, since most of the products that are used around the world are made in China, it has become a trusted source of commodities therefore the companies investing in them have less concerns about the quality of their product that is manufactured in China.
Though China presents endless opportunities for investors from other countries, they should keep in mind that it is a complex country that has the world’s highest population. In addition to challenges that may arise because of the country’s population, communication and cultural differences present a major problem. The culture and language of the Chinese has been maintained for years even when they incorporate other cultures into their own. Understanding them is key to having a successful investment in the country. It is especially important to understand their cultures so that one can have an idea of the information to include in areas of manufacturing. For instance, if you want to include a symbol that will make one of the suppliers get more recognition and ownership of the product.
Oxfam found that firms and companies that incorporated smallholders into their supply chain as part of their international sourcing activities were gaining more profits than those that didn’t. In addition, their comparative image is improved adding value to their brand. When this happens and the value of a brand is high on everyone’s agenda, it will help the company in case they decide to go elsewhere and expand. The suppliers that they approach in other countries may be more receptive to their product because they will have heard about the brand’s value.
International sourcing is an inevitable step of action as there are no substitutes for marketing products to other countries in this era of globalization. It is the single strongest reason as to why companies in the UK are venturing into international sourcing. The other reasons for companies sourcing internationally stem from globalization. For instance, there is an increasing need for companies to maintain their image since more people are watching their behavior. This is because globalization has brought with it more customers and newer interests from company stakeholders.
International sourcing costs a lot of money but the benefits outweigh the drawbacks resulting in more companies thinking about venturing into the practice. The UK has seen a substantial increase in the number of companies going for international sourcing. Other contributing factors to the preference of international sourcing are the well developed logistics between the UK and its interests. Issues such as communication have not been addressed fully even though the problem is considered as being a minor one that can be dealt with. The other drawbacks that accompany international sourcing seem to have plausible solutions that lie in the management getting more skills. However, there are problems that cannot be solved by tactic alone but also by changing attitudes.
Globalization of the UK business markets has had significant impact on the strategic arrangement and design of international sourcing activities. For instance, companies in the UK chose their locations for the international sourcing of following globalization trends. China is an example of such a decision coming to play. The relocation of their manufacturing facilities to countries where they would get more production at lower costs is a well thought and undisputed rationale for increasing the competitive advantage of an organization. Thus, one of the reasons why companies decide to source internationally is to gain competitive advantage over others or to get on the same lane of competition as other larger scale companies.
In most of the literature available, the term international sourcing interchanges with outsourcing and global sourcing. In some of the literature, the terms are approached as different wordings to the same concept. On the other hand, there are disparities in the definitions when they are described by other researchers like Hong and Holweg (n.d., p.9). The definition that describes international sourcing as the activity of companies buying from foreign suppliers describes a common practice in UK companies (Monczka, Trent & Petersen 2006, p.1). However, the activities of international sourcing go beyond just purchasing from outside sources to include all the activities that companies engage in to come up with international suppliers who will serve their consumers. The buying that is involved in this case has greater dimensions in terms of buyer and supplier satisfaction, brand incorporation, more exposure to customers around the world and more production at lower costs.
The food and clothing industry in the UK has been going through changes owing to globalization for a long time. Consumers are often attracted by food and clothing that has some ties to them either directly or indirectly. International sourcing that takes these considerations into account has proven to have more profitable benefits to the companies.
Based on the research available about international sourcing in the UK, it is evident that more needs to be done to come up with ways of streamlining the process and combating the challenges that may be encountered. The issues that the companies face while employing international sourcing, have a root in issues that stem from costs, ethics and cultural differences. These issues put pressure on the companies to conform to appropriate ways of running businesses. Companies that do not plan their international sourcing well often end up with losses in their hands. In general, international sourcing is a beneficial venture for companies in the UK. However, the disadvantaged are those in the country whose work skills are more about knowledge do not benefit as much as the rest of the population. International sourcing for companies in the UK has presented them with a profitable and long-term venture that they can engage in and benefit tremendously. China is the main international market that these companies deal with and its advancement is a hopeful thing for them.