Senft2014 Book InternationalSourcing

International Sourcing
Daniel Senft
International Sourcing
A Method to Create Corporate
Success
Daniel Senft
Geiselwind, Germany
ISBN 978-3-658-02779-7 ISBN 978-3-658-02780-3 (eBook)

DOI 10.1007/978-3-658-02780-3
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Preface
„Der Mensch kann nichts Gutes hervorbringen, wenn ihm nicht zuvor die
Erkenntnisse eingesät sind, aus denen er wissen kann, was er glauben und
tun soll.“ 1
Emanuel Swedenborg
In accordance with the quotation above, I would like to thank here the companies and
institutes and, most of all, all of its employees who contributed to the elaboration of the
methodology of this scientific paper by providing the needed material and giving me the
necessary insights in numerous important documents. I would notably like to thank my
colleagues of the purchase department, who always offered to help me with their
expertise and advice, for their tireless efforts. What is more, I would like to show gratitude
to the superiors of the related departments. Thanks to their commitment, I was able to
provide a more practical point of view, since they created the necessary context to test the
theory in practice.
With the help of all people mentioned in the previous acknowledgment, it was possible to
develop a method, which has gained recognition in scientific theory and practice. This
method was honored with the „BME-Hochschulpreis 2013” by the Bundesverband
Materialwirtschaft, Einkauf und Logistik e.V. (BME e.V.) for its convincing scientific
research on material economy, purchase and logistics on the topic of „How to manage
international sourcing in order to achieve competitive advantages“. 2 Moreover, the Hans-
Wilhelm Renkhoff foundation has awarded this academic paper as a notably outstanding
achievement and it has received numerous positive appreciations from renowned experts,
institutes, associations and enterprises. 3
“The elaboration is especially characterized by the actuality, the high quality

and the well-structured, basic research approach.”
Prof. Dr. Christian Kille
1
The English version based on own translation: ”Human cannot do good if he has not gained the insight to
know what to believe and what to do”
2
The English version of the awards name is ”BME University Award 2013”. Compare BME (1), 2012; BME (2),
2013; BME (3), 2013; BME (4), 2013; Newscomm, 2013; Grimm, C., 2013; Technik + Einkauf, 2013; The
Bundesverband Materialwirtschaft, Einkauf und Logistik e.V. (BME e.V.) represents 8,500 members, amongst
them the 200 most important businesses in Germany as well as many medium-sized businesses.
3
Compare FHIW-S (1), 2013; FHIW-S (2), 2012; Mainpost, 2013; Mystipendium, 2013; The Hans-Wilhelm
Renkhoff foundation aims at supporting science, research and development. The foundation awards every
year notably outstanding papers of technics and economy.
VI Preface
“This sourcing methodology has been reviewed and highly recommended, in

particular for its comprehensiveness and clarity, by the Förderverein der
Logistiker. It covers all the essential elements to consider for international
sourcing in a detailed and thorough manner.”
Balthas Klein, Chairman of the Executive Board, Förderverein der Logistiker
However, not only the numerous awards and recognitions have shown that strategical
successful international sourcing is today extremely real and current in all business
divisions, independent from the kind of enterprise, but it is most of all evident due to the
fact that several specialist journals, executives and other interested experts contacted me
to get more information and a deeper insight in the scientific paper. On the one hand,
those newly built up contacts helped the enterprises to sharpen their awareness for
chances and challenges of globalization. Different renowned international businesses
already put this method into practice and have ever since achieved lasting success. On
the other hand, the feedbacks, critical remarks and suggestions have helped to
continuously improve the method. This win-win situation has induced me to publish this
method, which was first developed in a scientific paper, in a book. Interested people can
so hopefully find solutions to their problems. If you have any suggestions with regard to
the method, or if there are questions, problems or if you need help, please do not hesitate
to contact me via the following e-mail address:
[email protected]
Daniel Senft
Table of Contents
Index of Figures ............................................................................................................. IX
Index of Tables ............................................................................................................. XIII
List of Abbreviations ................................................................................................... XIII
1 Globalization ............................................................................................................ 1
1.1 Globalization forces companies to source internationally ........................................ 1
1.2 Driving factors of globalization ................................................................................ 3
2 Differences and impacts of global sourcing .......................................................... 7
3 Research question and targets ............................................................................. 11
4 Managing global sourcing economically ............................................................. 13

4.1 Ten steps to evaluate global sourcing successfully............................................... 13
4.2 Visualization of the ten steps in a cause-effect-diagram ....................................... 19
4.3 Step one: Market analysis .................................................................................... 22
4.3.1 Define the market correctly .......................................................................... 22
4.3.2 Market segmentation ................................................................................... 24
4.3.3 Relation between the strategy of entering a market, the product life
cycle, and the attractiveness of international sourcing ................................. 29
4.3.4 Portfolio of market growth and market share ................................................ 33
4.3.5 Customer analysis and determination of key success factors ...................... 39
4.3.6 Location of customers and local content regulations .................................... 48
4.3.7 Summary market analysis ............................................................................ 50
4.4 Step two: Competition analysis ............................................................................. 51
4.4.1 Porter’s five forces of competition ................................................................ 52
4.4.2 Analysis of the most important forces of competition.................................... 59
4.5 Step three: Company analysis .............................................................................. 63
4.6 Step four: Product analysis ................................................................................... 66
4.6.1 Product cost formation analysis ................................................................... 67
4.6.2 Product value analysis (ABC-analysis)......................................................... 72
4.7 Step five: Strategic determination ......................................................................... 74
4.7.1 Potential strategic options ............................................................................ 75
4.7.2 Impacts of sourcing strategies ..................................................................... 76
4.7.3 Determination of a sourcing strategy............................................................ 85
4.8 Step six: Country analysis .................................................................................. 100
VIII Table of Contents
4.8.1 Important criteria for the country evaluation ............................................... 100

4.8.2 Important indexes and agencies in a country selection .............................. 118
4.8.3 The current major procurement markets ................................................... 122
4.9 SWOT analysis ................................................................................................... 125
4.10 Step seven: Supplier analysis ............................................................................. 128
4.10.1 Supplier selection process ......................................................................... 128
4.10.2 Supplier pyramid ........................................................................................ 134
4.11 Step eight: Logistics management ...................................................................... 137
4.11.1 Logistics importance and costs .................................................................. 137
4.11.2 Distinction of kinds of transportations ......................................................... 140
4.11.3 Supply chain risks ...................................................................................... 142
4.11.4 Most important logistics service providers .................................................. 144
4.11.5 INCO-terms ............................................................................................... 146
4.12 Step nine: Total cost of ownership ...................................................................... 147
4.13 Step ten: Profitability of international sourcing .................................................... 152
5 Open points, outlook on further research approaches and learned topics ..... 155
6 Appendix .............................................................................................................. 159
Table of Appendices ................................................................................................... 159
7 Bibliography ......................................................................................................... 219

Index of Figures
Figure 1: Managing international sourcing .................................................................... 2

Figure 2: Drivers of globalization ................................................................................... 5
Figure 3: Differences of doing business abroad in comparison to a mere
business at home........................................................................................... 7
Figure 4: Impact of low cost country sourcing on a company’s business ...................... 8
Figure 5: Problems and goals on emerging markets ..................................................... 9
Figure 6: Ten steps to evaluate global sourcing .......................................................... 14
Figure 7: Cause-effect-diagram to evaluate the economic of international sourcing .... 20
Figure 8: Definition of markets .................................................................................... 23
Figure 9: Criteria for market segmentation .................................................................. 25
Figure 10: Relation between customer orientation and product type market
segmentation ............................................................................................ 27
Figure 11: Advantages of market segmentation ........................................................ 28
Figure 12: Connection between entry strategy, product life cycle and
attractiveness of international sourcing ..................................................... 30
Figure 13: Market growth – market share portfolio (Boston Consulting Group) and
attractiveness of international sourcing in a water fall entry strategy......... 34
Figure 14: Market growth – market share portfolio (Boston Consulting Group) and
attractiveness of international sourcing in a sprinkler entry strategy ......... 36
Figure 15: Key Success Factors for international sourcing (part 1) ........................... 40
Figure 18: International sourcing function and Taguchi’s loss function ...................... 47
Figure 19: Summary market analysis ........................................................................ 50
Figure 20: Two different situations of competition ..................................................... 51
Figure 21: Porters five forces of competition ............................................................. 52
Figure 22: Driving forces of rivalry among existing firms ........................................... 53
Figure 23: Entry barriers for new competitors............................................................ 54
Figure 24: Connection between entry and exit barriers and returns .......................... 56
Figure 25: Essential driving forces for substitute products......................................... 57
Figure 26: Criteria influencing the bargaining power of buyers .................................. 58
Figure 27: Criteria influencing the bargaining power of suppliers .............................. 59
Figure 28: Elements of a strategic competition analysis ............................................ 62
X Index of Figures
Figure 29: Critical factors in case of a breakdown of international sourcing

activities ................................................................................................... 63
Figure 30: Questionnaire: Company check for global sourcing readiness and
orientation ................................................................................................ 65
Figure 31: Cost components for calculating the manufacturing costs of a product .... 67
Figure 32: Graphic evaluation of the product costs ................................................... 69
Figure 33: Relation between high cost components, sourcing behavior and
internal effects .......................................................................................... 71
Figure 34: Morphological box for the purpose of defining a sourcing strategy ........... 75
Figure 35: Impact of the sourcing strategy on the target factors ................................ 78
Figure 36: Portfolio for determination of a sourcing strategy ..................................... 91
Figure 37: Sourcing strategies of the four portfolio fields ........................................... 95
Figure 38: Typical strategies and proceedings in the sourcing portfolio and
relations to the BCG-matrix ...................................................................... 98
Figure 39: Criteria for the country evaluation based on a PESTE analysis ............ 102
Figure 40: GDP (nominal) in millions of USD in 2009 .............................................. 104
Figure 41: Brazil’s, China’s, India’s and Russia’s shares of world economy
capacities in percent (in current prices, US-dollar).................................. 105
Figure 42: Countries with the largest GDP in 2007 and 2050 .................................. 106
Figure 43: Public debts in percent of the countries’ GDP ........................................ 107
Figure 44: Comparison of industrial labor costs per hour including social charges .. 108
Figure 45: GES-values for different economies ....................................................... 110
Figure 46: Visible and invisible cultural values ........................................................ 112
Figure 47: Cultural dimensions ............................................................................... 113
Figure 48: Labor force of the fifteen biggest employable economies and
Germanys labor force per occupation in 2009 ........................................ 116
Figure 49: GES-values for education ...................................................................... 117
Figure 50: Index of Economic Freedom (world view) .............................................. 119
Figure 51: Corruption Perceptions Index 2011 ........................................................ 120
Figure 52: Comparison of the most important current procurement markets ........... 122
Figure 53: Which country is most suitable for which product ................................... 123
Figure 54: SWOT-analysis ...................................................................................... 126
Figure 55: Flowchart of supplier selection ............................................................... 129
Figure 56: Tools and organizations involved in the determination of supplier
position ................................................................................................... 130
Figure 57: Criteria for evaluating suppliers .............................................................. 132
Figure 58: Number of suppliers vs. amount of information per supplier ................... 133
Index of Figures XI
Figure 59: Supplier pyramid .................................................................................... 134

Figure 60: Distribution of logistics costs in Europe 2008 ......................................... 139
Figure 61: Characteristics of different kinds of transportations ................................ 140
Figure 62: Transportation costs per kg freight and transportation times from
Asia to Germany .................................................................................... 141
Figure 63: Supply chain risks .................................................................................. 142
Figure 64: Supply chain risk map – Maritime sea routes and crucial chokepoints ... 143
Figure 65: The top players by logistic market segments (2008) .............................. 145
Figure 66: INCO-terms 2010 ................................................................................... 146
Figure 67: TCO Composition .................................................................................. 148
Figure 68: Detailed information on the TCO components ........................................ 151
Figure 69: Managing international sourcing successfully ........................................ 153
Figure 70: Porter’s three types of positioning strategy............................................. 164
Figure 71: Relationship between market share, positioning, international
sourcing and return on investments ....................................................... 166
Figure 72: Factors influencing the make or buy decision ......................................... 170
Figure 73: Part vs. modular sourcing ...................................................................... 171
Figure 74: Change of the supplier structure due to modular sourcing ..................... 173
Figure 75: Overview of the BRIC-states in comparison to Germany 2009 / 2010 .... 205
Figure 76: The worldwide top 10 business risk in 2012 ......................................... 209
Figure 77: The top five business risks by region and country for 2012 .................... 210
Figure 78: Export and imports in goods and services in Germany between
1999 and 2008 in billion dollars .............................................................. 212
Figure 79: Exports and imports of the five biggest OECD-countries in 2007 ........... 213
Figure 80: International trade in goods and services as a percentage of GDP
in 2008 .................................................................................................. 213
Figure 81: Top 7 countries for German exports and imports in 2009 ....................... 214
Figure 82: German shares of world exports 2004 (in %) ......................................... 216
Figure 83: Germany’s production and imports of energy resources 1997
and 2007 ................................................................................................ 217
Figure 84: The world economies in 2007 and 2025 with values of the wealth
level........................................................................................................ 218
Index of Tables
Table 1: Questions which arise with regard to international sourcing ......................... 11

Table 2: Evaluation of product complexity.................................................................. 89
Table 3: Country specific cultural distances in relation to Germany ......................... 114
Table 4: Example of an ABC-analysis ...................................................................... 162
List of Abbreviations
GDP Gross Domestic Product

GES Growth Environment Score
IPO International Purchasing Office
PESTE Political, Economical, Social, Technological, Environmental
ROI Return on Investments
SQMP Supplier Quality Management Process
TCO Total Costs of Ownership
TCQ Time, Cost and Quality
WTO World Trade Organization
1 Globalization
Due to many years of booming international trade, innovative technologies, specialization,
and the desire for a growing productivity, as well as for new kinds of added value, division
of labor and multinational companies, long distances between countries and continents
seem shorter, and the world seems smaller and smaller. This phenomenon is called
globalization, which describes the process of strengthened, closer, and stronger
worldwide connections in domains such as politics, economy, communication, culture, and
environment. The worldwide financial market crisis in 2009 is striking evidence that, seen
from the economical aspect, most countries are not confined to their geographical borders
and – considered from the point of view of globalization - are involved in international
relations.
1.1 Globalization forces companies to source internationally

As far as globalization is concerned, one thing can be said for sure: there is no way back.
Undoubtedly, winners of globalization are worldwide operating companies, which create
new markets and optimize their price structure. Still, despite the big phenomenon of
globalization, even some successful companies which do not consider outsourcing can be
found, such as the sport clothing manufacturer Trigema, whose production is still in
Germany. However, many companies are only able to keep their competitive position in
Germany, which is a country of high incomes, by outsourcing some production processes
and services to low income countries, such as China or Eastern Europe. Experts agree
that globalization will lead to increased fierce competition and companies which do not
pursue successful global sourcing within the next five years, are probably not able to
survive. 4 Hence the saying:
„Do what you can, do it best and outsource the rest“ 5
According to Krokowski and Sander, it is due to powerful logistic partners, lower

transportation costs, and global information and communication systems that today all
regions of the world are accessible with local cost advantages. 6 And yet, global sourcing
involves more than just a reduction of costs. In the sense of “Managing international
sourcing to achieve competitive advantage” the three key factors, namely price, quality
4
Krokowski, W. & Sander, E., 2009, p.11, p.155; Kille, C., 2011, Modul 7, pp.33f.
5
Nicklisch, G., 2006, back cover of the book; compare also Lockström, M., 2007, p.14; Koppelmann, U., 1997,
p.63
6
Krokowski, W. & Sander, E., 2009, p.41
D. Senft, International Sourcing, DOI 10.1007/978-3-658-02780-3_1,

2 Globalization
and time (= magic triangle 7 ), have to be controlled under careful consideration of the
company’s and the product’s positioning and image on the market, as well as with regard
to the company’s organization and processes (see figure 1).
Price
Problems
Problems
Quality Time
Organisation
8
Figure 1: Managing international sourcing
Lockström came to the same conclusion and defined the aim of international sourcing as
follows:
„The aim of the sourcing initiatives is to identify suppliers that can deliver
maximum amount of value at the lowest possible total cost, at adequate
quality levels“ 9
From the aspect of high competition and the attractiveness of potentials, however,
companies relocate services and manufacturing often without enough preceding
consideration, they take the decision too fast and, hence, oversee the risks that might
come up at their outsourced subsidiaries abroad. So it might be the case that orders have
been placed simply based on the offer of one or two possible suppliers abroad and after
the first successful delivery, companies are satisfied and enjoy their fast achievements.
Very often they are convinced that the international cooperation will continue in the same
way during the coming month and years. However, against all expectations, problems
may soon arise. Poor quality, wrong quantities, inflexibility, strikes, natural causes, war,
loss of know-how, bad exchange rates, scarcity of raw material, wrong capacity, not
enough or too much on stock, and law differences are only some examples of possible
problems. 10 Hence, it is not unusual that after some disappointments companies would
like to in-source again, however, since assets or products might now already be used for
other projects or might not exist anymore, this is no longer possible. All this, of course,
involves high costs, which, in the worst case, even could lead to the company’s insolvency.
7
Compare Weis, H.-C., 1999, p.82
8
Self-established figure based on the theory of the magic triangle
9
Lockström, M., 2007, p. 3
10
Sunil, C. & ManMohan, S., S., 2004, pp.53ff and Kille, C., 2011, Modul 9, p. 19
Driving factors of globalization 3
1.2 Driving factors of globalization

A precondition for the development of globalization is the increasing decline of political
and economical barriers. 11 Those barriers formerly meant isolation of national markets as
an effect of the Cold War and high tariffs. Two important steps towards the liberalization of
world trade were made, when in 1994 the GATT (General Agreement on Tariffs and Trade)
was signed in its completeness and the WTO (World Trade Organization) was founded
afterwards. Tariffs were lowered in almost all market segments and importation conditions
for businesses of member states were made easier within the WTO-space. A milestone
was the increasing openness of China as part of the WTO accession in 2001. 12 13
Taking
WTO as an example, several international organizations are supporting globalization by
fighting against protectionism. In addition, the stronger establishment of trading blocs has
made it easier to cross frontiers and has partly supported the reaching of common political
goals. Examples are most of all the dominant trading blocs ASEAN (Association of
Southeast Asian Nations), EU (European Union) and NAFTA (North American Free Trade
14
Agreement). The EU for instance, made it possible for the members with the
development of a single market to agree upon the free circulation of goods, capital, people
and services (the four freedoms).
Moreover, technological innovations in the domains of information and communication
have increased the spread and accessibility of information all over the world within no time.
The internet is now one of the most important media of communication and with its help
international business relationships can be established without high costs but with low
time requirements. 15 As a consequence, first market research can be done directly from
the workplace, contacts can be initiated, and meetings can even be held via video, which
renders business travels and the physical presence of the conference members in some
cases unnecessary. What is more, one has to mention the possibly of a direct distribution
of products abroad, as well as the placement of orders and the distribution of information
11
Hen and egg principle Æ The decline of political and economic barriers is caused, among others, by further
drivers of globalization.
12
As soon as in 2004, as much as 95% of the world trade was made on the basis of the WTO conditions.
Today there are 153 member states. Compare Scholtissek, S., 2008, pp.16ff.; World Trade Organization,
2013
13
Compare Arnolds, H. et al., 2010, p.208; Arndt, H., 2008, pp.8f.; Scholtissek, S., 2008, pp.16ff.; Kummer, S.
et al., 2009, p.24; Kutschker, M. & Schmid, S., 2011, p.182; Kraus, R., 2005, p.19
14
Compare Scholtissek, S., 2008, pp.17ff., Krüger, M., 2010, Part 1, pp.20ff.; Kummer, S. et al., 2009, p.24;
Kraus, R., 2005, p.19
15
Compare Arnolds, H. et al., 2010, p.208; Arndt, H., 2008, pp.8f., p.24; Scholtissek, S., 2008, pp.23f.; Gitman,
L., J. & McDaniel, C., 2009, p.73; Kummer, S. et al., 2009, p.24; Kutschker, M. & Schmid, S., 2011, pp.193f.;
Kraus, R., 2005, p.19; Walgenbach, G., 2007, p.53
4 Globalization
to the customers. All that can be made with a simple click and physical transport might
even be completely unnecessary. 16 This consequently gives the opportunity to companies
to complete a number of new sales and to enter into purchasing markets, but it equally
increased competition from abroad. Particularly the latter one forces companies to expand
and improve their worldwide activities. 17
Similarly, innovations in international logistics and improvements of means of
transportation make an increasing reduction of transport costs and times possible, which
consequently causes that the different parts of the world converge. 18
Besides, standardization and scaling of technologies becomes a driver of globalization.
The standardization of specific products leads to a production of this product in greater
lots, and creates possibilities or even necessities of globalization for pre-and post—stored
goods. 19 However, this makes it easier for a customer to change a competing supplier,
which means that he will search regularly the international market for products of a better
cost effectiveness. What is more, technologically and qualitatively well-developed
products, which are often the characteristics of standardized products, have a longer
working life, which results in longer periods of replacements and forces the producers to
extend the geographical market. 20
Another trend is the increasing market saturation, which can especially be recognized in
industrialized countries. Due to a constant under-supply, it was possible in the past, to
serve the market with the above mentioned standardized mass products. Today, however,
companies generate revenues most of the time only then, when they are able to satisfy
the increasing number of different customer needs. 21 This can only be achieved by
broadening the range of products and variants, which then causes an increase in the
company’s complexity. 22 Therefore, it is obvious that less developed countries are
economically more attractive for companies, since there are lower requirements and often
unsaturated markets.
However, globalization and, hence, greater competition, increasing individualization, and
quickly changing customer requirements, as well as, technical progresses, cause a
16
Compare Kutschker, M. & Schmid, S., 2011, p.194
17
Compare Arndt, H., 2008, pp.10f., p.18; Scholtissek, S., 2008, pp.23ff.; Kraus, R., 2005, p.19; Walgenbach,
G., 2007, p.53; Weber, J., 2011, p.1 / Business domains for that kind of situation are internet-banking
services and online-shopping businesses. Compare Kutschker, M. & Schmid, S., 2011, p.194
18
Compare Arnolds, H. et al., 2010, p.209; Arndt, H., 2008, p.9; Kummer, S. et al., 2009, p.24; Kraus, R.,
2005, p.19; Weber, J., 2011, p.3
19
Kutschker, M. & Schmid, S., 2011, pp.195f.; Compare Walgenbach, G., 2007, p.53; Weber, J., 2011, p.4
20
Kutschker, M. & Schmid, S., 2011, p.195
21
Compare Arndt, H., 2008, p.18; Corsten, D. & Gabriel, C., 2002, pp.24ff
22
Compare Arnolds, H. et al., 2010, p.203; Pfohl, H.-C., 2010, p.46; Schönsleben, P., 1998, p.6
Driving factors of globalization 5
shortening of product life cycles. Therefore, companies are forced to launch new products
or variants within even shorter intervals. This goal can only be achieved if they cooperate
with the most effective worldwide suppliers. 23
Besides, further decisive driving forces for globalization are economic conditions, and the
customer’s behavior. The customer’s ambition to buy the products as low-priced as
possible leads to the necessity of cheap production, which can be achieved by making
use of worldwide location advantages.
In addition to the points mentioned above, there are further crucial factors of globalization.
The main drivers behind globalization are outlined in the following figure.
Economic factors Market factors
Reduction of trading barriers Increased competition in home markets
(tariffs and quotas) due to additional competitors from abroad
International organisations Increased number of saturated markets
Increasing number of trading blocs Increased number of unsaturated markets
Liberalization of financial transactions in less developed countries
High foreign direct investment Multinational companies
Imbalance of economic growth between
developed industrial countries and less
developed countries
Decreasing transportation costs
Decreasing communication costs
Large wage differentials
Low tax and interest rates
Globalization
Technological factors Social factors

Rapid developments in wireless technologies Fast and unbalanced global population growth
and internet Increased wealth leads to search for novelty
IT technology enables global storage, transfer Liberalization of migration
and access of data in real time “Aging” population in developed countries
E-commerce simplifies international trade Differences in know-how and specialization
Global market transparency Cultural openness
Improved transportation in terms of Improved English proficiency
infrastructure, logistical systems and vehicles
Standardization
Technological and qualitative maturity
Technical progress shortens product life cycle
Increased productivity
24
Figure 2: Drivers of globalization
23
Compare Arndt, H., 2008, p.8, p.22; Kutschker, M. & Schmid, S., 2011, pp.194f.; Weber, J., 2011, p.4
24
Self-established figure based on the most important points from Lockström, M., 2007, pp.101f.; Krüger, M.,
2010, Part 1, pp.18ff.; Arnolds, H. et al., 2010, pp.208f.; Arndt, H., 2008, pp.8ff., p.18, p.22, p.24; Weber, J.,
2011, pp.1ff.
2 Differences and impacts of global sourcing
Doing business abroad is totally different from doing business merely in one’s own country.
Figure 3 gives an overview of things that can be influenced and affected when a company
decides to go international. Culture, infrastructure, education, trade barriers, law, wages,
and transportation are only some examples.
population
corruption unions
birth rate social trade law trade barriers
social group
language tax labor law
health care system
law and regulation
leadership attitudes copyright
history contracts
symbols doing business
philosophies people expropriation risk
believes
behaviour cleanness
religion hobbies
masculinity vs. diligence
feminity preferences values entry barriers
culture
rules democratic freedom
hierarchy authority long vs short term
form of government
orientation
uncertainty avoidance policy
negotiations economical freedom
political stability
time orientation
member of trade
local content regulations
organisations
trade alliances
competition embargos
market size
strategies disposal
market growth supplier (raw) materials
customer / time zone
needs and market consumer geography
requirements
communication system climate
market environment
saturation bargaining infrastructure location
power transportation power supply
distribution
know-how
advertisement technologies natural disasters
quality topography
productivity
performance
imports / exports
interest rates
economic power wealth
… economic
subsidies
quotas costs
inflation
currency public debts
economic growth rate wages
industries
25
Figure 3: Differences of doing business abroad in comparison to a mere business at home
25
Self-established figure, based on Krüger, M., 2010, Part 1, p.11; Krokowski, W. & Sander, E., 2009, pp.41ff.;
Kerkhoff, G., 2005, pp.68ff.; Arnolds, H. et al., 2010, pp.211ff.; Koppelmann, U., 1997, p.118

Judging from the information one can gather from figure 3, it is obvious that companies
are forced to face new challenges while doing business abroad, which then might
influence their performance. In short, when doing business abroad, companies might have
to change completely their way of working. The most crucial impacts of sourcing in low
cost countries on a company’s performance are outlined in more detail in figure 4, based
on Lockström’s research.
Total costs 10% 70%
Material costs 16% 60%
Labor costs 15% 51%
Material / component / service quality 21% 34%
Capital investment costs 20% 35%
Delivery reliability 28% 32%
Order lead time 39% 31%
Inventory costs 35% 24%
Transportation costs 50% 23%
80% 60% 40% 20% 0% 20% 40% 60% 80%

Positive impact Share of respondents in percent, neutral not shown
Negative impact
26
Figure 4: Impact of low cost country sourcing on a company’s business
According to Lockström, 70% of the interviewed companies get a positive impact on total
costs, compared to 10% of companies which name negative results. 27 Lower material and
labor costs are the major values which influence the amount of total costs in a positive
way. However, an important finding is that also 15 to 16% name negative impacts with
regard to these two factors. Labor costs should be kept especially in mind, since these are
most often the main drivers for a company to go international. Positive impacts on quality,
on capital investment costs, as well as on delivery reliability are pointed out by more than
30% of the surveyed companies. Only about 10% fewer respondents have a negative
experience as far as the first two mentioned factors are concerned and only 4% less on
delivery reliability. As expected, more companies have bad results with regard to order
lead time, inventory costs, and transportation costs than companies with positive results.
26
Lockström, M., 2007, p. 143
27
Lockström, M., 2007, pp. 142ff.
Differences and impacts of global sourcing 9
This is mostly due to larger transportation distances and supply chains with higher
complexity.
The upper part of the chart indicates clearly that the main positive impacts, namely
material and labor costs can be theoretically achieved by every company, simply because
of its presence in a low cost country. In contrary to that, the more negative impacts on
factors such as delivery reliability, order lead time, inventory costs, and transportation
costs at the bottom of the chart depend on the capabilities of the respective company
which opted for sourcing. That is one reason why a good supply chain management has
to be established when sourcing internationally.
In a study independent from that of Lockström, the logistics department at the Technical
University Berlin in collaboration with the National University of Singapore did some
research for the Federal Association Logistics (Bundesvereinigung Logistik BVL) on
emerging markets (see figure below).
Top problems Top goals
Quality 82% Cost savings 85%
Establishment of
Cultural difficulties 81% 55%
local supply chain
Local content
Logistics 77% 39%
regulations
Further problems Further goals
Supplier develop-
Supplier qualification 70% 26%
ment partnership
Technical
Negotiation mentality 73% 19%
know-how
Production know- Benefit from

68% 17%
how of supplier market growth
Communication 64% Currency reasons 15%
Loss of own
52%
know-how
0% 20% 40% 60% 80% 0% 20% 40% 60% 80%
Percentage of all responses rating the Percentage of EU based companies rating

respective challenges from medium to high the respective motivation as important
28
Figure 5: Problems and goals on emerging markets
28
Krokowski, W. & Sander, E., 2009, pp.13ff.
It is obvious that top problems in sourcing globally are quality, cultural difficulties, as well
as logistics. In comparison to Lockström’s findings, quality and culture are here
considered to be much more crucial. Both surveys, however, consider successful
managing logistic to be the key issue. Furthermore, the statistics indicate that 85% of the
sourcing companies are seeing cost savings as the most important motivation for going
international, followed by establishing local supply chains, and the fulfillment of local
content regulations.
Despite all possible benefits, one always has to keep in mind that global sourcing projects
are highly complex. According to Gartner, two-thirds of all sourcing projects in Europe are
considered to have failed. 29 One ought not to judge rashly, since successful companies
have made the experience that it needs at least one to two years to successfully finish the
qualification of a supplier. 30 Trying to reduce this time, however, increases the likeability of
possible risks. Therefore, global sourcing has to be well prepared and hence should be
part of a long term strategic decision of a company in order to achieve the wanted benefits.
Lockström describes the problems of international sourcing as follows:
„When investigating problems, many difficulties may arise. Firstly, many

factors involved are not quantitative (i.e. cannot be represented by numbers).
Secondly, many uncertainties make the problem impossible to reduce. Thus,
traditional means such as statistical research is usually not feasible.” 31
This statement brings us to the question of how to find “the right” strategy, which can be
seen as the best and most effective approach to, on the one hand, avoid problems as
much as possible and, on the other hand, achieve as many benefits as possible. This
issue is the fundamental question of this scientific paper and it will hence be discussed in
a more detailed way in the next chapter.
29
Nicklisch, G., 2006, p.16
30
Krokowski, W. & Sander, E., 2009, p. 156
31
Lockström, M., 2007, p.55
3 Research question and targets
Companies which are forced or want to source internationally see themselves confronted
with the following questions (see table 1):
What is dif f erent between national and international sourcing?

Differences
What are the business impacts of global sourcing?
What are the chances of international sourcing?
Chances &
risks What are the risks of international sourcing? How can these
risks be evaluated? How can risks be minimized?
What are the customer requirements?
What specif ications must be met in order to enter the market?
Market
Does the market potential and situation justif y the sourcing ef f orts?
Does global sourcing inf luence marketing positively?
What is the global competitive situation like?

Competition
How does competition inf luence the sourcing behavior?
Is the company well prepared f or international sourcing?
Company
Which processes have to be changed ?
Product What kind of products have the possibility for international sourcing?
How to f ind the right strategy?
How do positioning and image of the company , as well as the
Strategies
product inf luence the sourcing behavior?
Which strategy builds up saf ely and ef f iciently supply chains?
Which is the "best" country f or sourcing?
Country
How does one manage dif f erent cultures?
Supplier Who is the "right" supplier?
How to f ind the best transportation method?
How to handle long distances and delivery times?
Logistics
When do risks and costs f or transportation change between
customer and supplier?
What are the total costs of ownership?
TCO
How can total costs of ownership change over the years?
How can international sourcing be evaluated holistically regarding
Economic
costs and risks?
32
Table 1: Questions which arise with regard to international sourcing
32
Self-established figure, based on the content of the books Krokowski, W. & Sander, E., 2009 and Kerkhoff,
G., 2005

12 Research question and targets
The underlying academic research sets itself the target to give answers to the above
named topics and deals with the following general question:
“How do you manage international sourcing, in order to achieve competitive
advantages?”
The goal of this research is to generate a method of how to evaluate the economic
success of sourcing under consideration of the potentials and risks in an international
context. This method will be outlined in the following chapter.
4 Managing global sourcing economically
4.1 Ten steps to evaluate global sourcing successfully

„Outsourcing – alle tun es, aber wie erfolgreich?“ 33
Considering Nicklisch’s quotation, the question of what makes up a company’s success

and which goal factors are set by the enterprises when they consider outsourcing arise.
Generally, one distinguishes between primary and secondary goals. The latter comprise,
amongst others, the goal to achieve better qualities, to strengthen supply chains, to build
a better image, or to benefit from subsidies. 34 Although those might be only secondary,
they are a necessary basis to meet the primary goals, which is, firstly, to be economic and,
secondly, to derive as many benefits as possible from one’s efforts. The reason for that is
that the enterprises are not judged according to the quality of their products, but according
to the return on investments. Consequently, prices of on the stock exchange listed
enterprises are rising and falling according to their economic efficiency and thus financers
invest in those companies where they can achieve the biggest profits in relation to the
existing risks.
Successful managing of international sourcing, however, does not only imply the goal to
acquire parts cheaply abroad, but it can be considered to be a kind of strategic weapon to
achieve the set goals and keep the company successful on the long term, which is very
much dependent on the secondary goals. 35 A tool of ten steps is elaborated in the
underlying scientific paper, in order to value a company’s economic success in relation to
international sourcing. The following chart shows those ten steps, which have to be put
into practice in order to achieve a well considered and, most of all, in the long run,
economic project of sourcing of a company.
33
Nicklisch, G., 2006, p.15
34
Compare figure 4 and 5
35
Compare chapter 2 “Differences and impacts of global sourcing”. The time horizon has to be considered for
a longer period of time, because it needs at least one to two years to successfully finish the qualification of a
supplier.

S
t
a
r Market
t
Economic of
international
sourcing
Competition
S
TCO
W
Company
O
Logistics
Product
T
Supplier
Strategies
Country
PESTE
36
Figure 6: Ten steps to evaluate global sourcing
According to figure 6, all undertaking should start with a market and competition analysis.
Experience shows that invested resources remain without the wanted effects if they are
not used in a respective market which supports the sourcing activities, or if the enterprise
and its products are not competitive enough. To be more precise, misinterpretations or
mere ignorance of the market size, the market’s life cycle and most of all the own
competitiveness are not seldom the reason for a considerable loss of market shares. Its
consequences, such as under-utilization and the disappearance of economies of scales,
may then lead to operating loss results. This can be illustrated by the example of a means
of transport which does not make use of its full cargo capacity due to a low number of
36
Specially established figure, based on the secondary research (see bibliography) and discussions with
experts from the purchase department. For more detailed information on the basis of this figure please
compare to the description of the proceeding of the establishment of the ten-step-plan at the end of chapter
4.1.
Ten steps to evaluate global sourcing successfully 15
items, which thus raises the price for the single item. This might result in the company’s
loss of whole market segments and the destruction of the offered products. Resources
which had been invested in souring, as well as development, distribution, marketing, and
production are thus not managed well and no profit is generated.
And, even if this might at first sight seem very time-consuming and lengthy, it is so
important to do firstly a market and competition analysis in order to be able, on the basis
of prognosis, to invest in the right objects and to gain as much profit as possible from the
used resources. Most of the time, the necessary information on the market as well as the
competitive situation are already implied in the marketing department and hence they can
be relatively quickly be dealt with. How carefully and detailed a company conducts its
market and competitive analysis, as well as the following-up steps, is of course very much
dependent on the product which is to be sourced. The more important and essential the
product is for the company’s success, the more resources can and have to be invested
along the different steps.
What is more, the company analysis is meant to test if the own enterprise is prepared
enough for international sourcing, or if internal structures and processes, as well as
different interests and goals, or simply missing resources and capability might shank the
project of international sourcing.
The next step analyses the product or the object respectively with regard to its cost
components and related to this it equally examines the factor that drives cost upwards. In
relation to the cost analysis, it becomes apparent if the company finally achieves a cost
benefit by outsourcing or if internal costs, with fixed costs which might not be reduced by
outsourcing, arise. What is more, during the product analysis, the sourcing volume per
object is established.
Depending on the results of the first four steps, different goals are determined, which have
to be achieved by an effective sourcing strategy. The choice of the respective sourcing
strategy then influences the further actions to find the most convenient country and the
suppliers located there. However, one has to add here that the steps of country and
supplier-analysis can overlap or even be exchanged. Due to a monopoly position, for
example, only a restricted number of suppliers might be worthy of consideration and in
that case, the country analysis would be secondary and only necessary for getting an
impression of possible risks specific to the respective country. Generally, however, if there
are a high number of suppliers available worldwide, which is for example the case for
simple turned and milled parts, it is more logical to choose several potential countries first
and then to start doing some research for suitable suppliers.
After having made a first selection of all possible suppliers in the respective country, one
has to look more closely at the logistics, as well as the total cost of ownership TCO.
If the company, at this point of the ten steps, has not yet found a supplier, it still has the
possibility to draw up a chart with the complete analysis and its results. By establishing
this kind of chart, potentials and risks are taken into consideration and thus the project of
international sourcing might lead to economic results and hence contributes to a
company’s long-term success.
At this part of the book, the critical reader might wonder why this established method is
set up of ten steps and not nine or eleven ones. What is more, he or she might ask
himself or herself, why one chooses exactly those steps and on what definitions and order
the list of steps is based. In order to find an answer to all those questions, the proceeding
of the establishment of the ten-step-plan should be outline hereafter.
The basis of the development of the ten-step-plan was established by some intensive
secondary research, which initially aimed at determining an overview of the topic and
creating a better understanding of the potentials and problematic that occur during
international sourcing. 37
Based on the findings of the secondary research, along with the purchase department of a
large enterprise, a brainstorming on possible steps and important points of international
sourcing was made. The high amount of steps found during that first brainstorming was
then more clearly defined by establishing a priority matrix. Based on this first selection of
points, a draft of the method was set up, where the exact order of the different steps
initially remained insecure and rather “secondary”. This draft served as the basis for
several intensive talks with experts of the purchase department, who have had many
years of experience of international sourcing and whose experience has contributed
significantly to a further verification of the method. During these talks, it turned out that
international sourcing activities are highly complex and risky. 38 That is why the mere
comparison of offers would be only little promising. Contrary to that, the purchase
departments do not have the necessary capacities to carry out a comprehensive and
intensive sourcing analysis, which is due to the high amount of items and the fast-moving
markets. Hence, due to both the complexity of sourcing processes and the limited
capacity, one has, on the one hand to put available resources into the most promising
objects 39, and on the other hand to create the right proportion of expenditure and benefit
37
The most important sources were the books of Krokowski, W. & Sander, E., 2009; Kerkhoff, G., 2005;
Lockström, M., 2007; Porter, M., E., 2008; Koppelmann, U., 1997 und Large, R., 2006. All other sources can
be found in chapter 7 „Bibliography“.
38
The complexity of international sourcing is confirmed in literature. Compare e.g. Lockström, M., 2007, p.55,
pp.142ff.; Krokowski, W. & Sander, E., 2009, pp.13ff. and Nicklisch, G., 2006, p.16.
39
The features of a promising economic object are described in the steps „Market analysis“, „Competition
analysis”, and most of all, in the „Product analysis“.
Ten steps to evaluate global sourcing successfully 17
of the sourcing activities. Based on these fundamental conditions, the draft was then
gradually worked on, optimized and improved, which finally resulted in the establishment
of those ten steps.
After the single steps had been determined, they were put in order by making
comparisons in pairs. 40 Contrary to this theory, the single criteria (here the single steps)
were, during the comparison in pairs, not valued according to their importance, but rather
with regard to their chronological order. In that sense, it would be illogical to conduct a
country or supplier analysis if the corresponding market for the respective objects does
not exist. And that is why the market analysis has to be carried out before the country and
supplier analysis. What is more, the supplier and its respective location has to be known
before establishing the logistical structures, which is why the country and supplier analysis
has to be carried out before the logistics analysis. Finally, logical relations and
connections were thought through for all steps and were worked through in a structural
way during the comparison in pairs. 41 Hence, after the determination of the chronological
order, the single steps were elaborated in more detail with the aid of relevant literature
and were constantly critically checked and examined, on careful consideration of practical
experience and expert opinions. 42
For the practical examination, the method was applied to a product of a large enterprise. 43
40
The approach of the application of a comparison in pairs is described in Götz, K., 2007, pp.46f. Seeing that
this method is seen as basic, a detailed description is not given in this scientific paper.
41
The decision that some considerations were left out was taken deliberately, in order not to influence
negatively the clarity and comprehension.
42
The sources of the elaboration can be found in chapter 7 “Bibliography”. / Later findings during the detailed
elaboration of each step only changed slightly the previously determined steps and their order.
43
The sustainable success remains to be seen. The successful practical consideration of the method amounts
currently to 1.5 years.
.
Visualization of the ten steps in a cause-effect-diagram 19
4.2 Visualization of the ten steps in a cause-effect-diagram

The cause-effect-diagram is an efficient tool to identify causes of an effect logically and in
an arranged way. Due to its design, it is often called a fishbone-diagram. Sometimes one
finds also the designation Ishikawa diagram, which is the name of its inventor Kaoru
Ishikawa, who, in the 1940s, developed the diagram in the context of a quality program at
Kawasaki Steel Works in Japan. 44
While working on optimizing processes, the first available conclusion is often taken as the
working basis, at a moment where the causes have not yet really been analyzed. Hence,
real causes are not yet figured out at that stage and secondary causes are often
overlooked. 45 The Ishikawa-diagram tries to avoid these errors by
providing a structure in order to understand the relationships between many
possible causes of a problem
providing a framework for a data collection plan
illustrating already investigated causes
helping the team members to communicate with each other on the project, as well
as with other employees of a company.
When drawing an Ishikawa-diagram the analyzing effect “economic of global sourcing”

has to be put at the end of a horizontal line. The main causes then branch off like fish
bones, at their respective ends then, one finds the individual cause factors, indicated by
arrows. 46 Such a cause-effect-diagram, in that case for the profitability of global sourcing,
can be found on the following page (see figure 7).47
Moreover, figure 7 illustrates the connections between the individual causes. Thus, the
1
symbol for example represents the output of the individual cause with the number one.
1
This output is then exemplary represented by the symbol as an input for other causes.
The underlying cause-effect-diagram makes the reader aware of the high amount of
complexity of the international sourcing process. The following chapters are now meant to
demonstrate the effects of each cause on its cost-effectiveness.
44
Compare Magnusson, K. & Kroslid, D. & Bergmann, B., 2001
45
Rath and Strong’s, 2003
46
Verband der Automobilindustrie E. V. (VDA), 2003
47
Figure 7 is self-established, based on the secondary research (see bibliography) and discussions with
experts from the purchase department.
cost leadership / differentiation / niche

4 5
operative vs. strategic sourcing
Company Product Strategies standard-, key-,
make or buy core- capabilities
part vs. modular sourcing
material costs
material overheads Sourcing local vs. global sourcing
material costs of risk strategies low-cost-country vs. developed
manufacturing costs country sourcing
production cost of risk single vs. dual vs. multiple-sourcing
other production costs
short-term vs. mid-term vs. long-term
whole company
6 cost
Internal analysis
responsibilities alone vs. alliance vs. joint venture

components vs. service provider
purchasing
Product cost costs
research & 4 6 quality
development formation analysis Impact of the time
(Pareto-analysis) sourcing strategy
sales & marketing risk
costs of on the target factors performance
product
each part flexibility
logistic Evaluation of product
Company check for complexity 1 2 4 5
global sourcing readiness 7 Product value
and orientation own line of action
analysis
sourcing strategies of
(ABC-analysis)
Critical factors in case of the four portfolio fields
breakdown Portfolio for determination
employees of a sourcing strategy
supplier and logistic service provider 1 2 3 5 7
customer Opportunities & Strength &
Further on
Start 1 2 3 4 5 6
next page
fulfilment of local Threats Weaknesses
content regulations
Location of *The most feared
produce near customers corporate risks
consumers future strategies and targets
India
arguments
China Current major
4 Customer analysis and strength & weaknesses procurement
key success factors positioning and fulfilment of KSF Eastern Europe
markets
What is the customers available means incl. Turkey
principle problem? 5 Strategic competition Global
What are the analysis Competitiveness Index Important
customers needs? determination of unique selling Index of Economic indexes and
3 points and core competences Freedom agencies in
External analysis
Market growth – market comparison of the own Country credit ranking a country
share portfolio company to the competition Corruption Perceptions selection
Index
2 Porters five forces
entry-/exit- Federal Foreign Office
Product life cycle existing firms
barriers Political
new competitors
Second
1 Market entry substitutes Economical
decision
strategy bargaining buyer
Social criteria
power supplier
Size of market Technological
38
Market Market growth Market 2 Environmental
segmen- rate growth vs.

Market
tation stagnation First
Correct market
/decline Company decision
definition
criteria
Product
Market Competition Country
Strategy
Figure 7: Cause-effect-diagram to evaluate the economic of international sourcing

Visualization of the ten steps in a cause-effect-diagram 21
TCO market / country research

supplier research Nr. Number of the individual
Selection supplier audit cause (output)
signature of agreement
supplier qualification & development
ordering process Nr.
Input of the individual
purchasing price cause into other causes
Ordering tooling costs
payment terms
currency costs
freight costs
customs duties
Delivery costs for late delivery
fixed capital during delivery
supply chain risk
incoming inspection
Quality test / sample costs
quality costs
handling costs
cleaning costs
Storage packaging costs
inventory costs
fixed capital during storage
supplier improvement
supplier maintenance
Others
recycling / disposal
warranty costs
Economic of
… Further on
previous page
7 8 9 End international
Satisfaction of requirements sourcing 10
fulfilment of customer requirements
fulfilment of product specifications
bargaining power of fulfilment of the sourcing strategy
suppliers capacity INCO-terms
supplier related TCO
strategic competition delay
country related
analysis risks and potentials disruption logistic service
forecast
supplier indicators and ratings provider
system
company internal requirements and objectives inventory
specialized purchasing intellectual property Supply chain
price procurement risks
quality Position of receivables
technological performance IPO’s possible Kinds of
development suppliers transportation
indicators
production air freight
logistics SQMP
sea freight
flexibility
service combination of air
general management and sea freight
restriction
Preferred suppliers (P) rail freight
…
Technology specialist (T)
speed (delivery time) most
Essential suppliers (E) costs
supplier important
New (N) reliability
Actively eliminated (X) pyramid distinctions
delivery accuracy
Determinated (D) vibrations
Without new business (W) packaging Distribution of
capital commitment logistic costs
Are existing suppliers able to insurance costs
produce the respective features of transported
components? Supplier Logistic * in appendix
objects
S
4.3 Step one: Market analysis t
a
r Market
t
The market can be defined as the place Economic of
international
sourcing
where interactions between suppliers and S
Competition
buyers take place and where offer and

TCO
demand influence each other. 48 W
Company
With regard to international sourcing it is

O
important to know about the market Logistics
Product
behavior and, along with this, equally T
about the customer’s requirements. If Supplier

Strategies
these requirements are not met, or a Country
PESTE
company faces the situation of a
decreasing or not profitable market, international sourcing can become very inefficient and
can lead to the loss of the company’s image, particularly if customers consider sourcing
abroad as negative. 49 Therefore, every sourcing project has to start with a market analysis,
with the key factor of a correct first market definition.
4.3.1 Define the market correctly

Theodore Levitt, in his essay “Marketing Myopia”, describes very accurately the problem
50
of wrong market definitions. Levitt differentiates between the railroad and the
transportation market definition. The railroad market definition says that companies are
product-orientated. In contrast to that, transportation orientated markets are customer-
oriented. If a company faces a railroad market, it only concentrates on its own specific
product and does not see the whole process. Product orientated management aims at
promoting and selling the product, which is the center of every action. The management
does not pay attention to the customer’s wishes and does not consider what happens in
the market generally (compare figure 8, indicated by the area limited by the light gray
dashed line “- - - - - -“).
The railroad business, for example, is product orientated. They misdiagnose the market
because they believe they are in the railroad business, while actually, they are in the
transportation business. As a result, customer’s needs cannot be completely and
adequately fulfilled. Thus, the railroad business is in trouble and the customer needs are
fulfilled by other means of transport such as cars, trucks, and airplanes. It is important to
48
Weis, H.-C., 1999, p.18
49
Compare chapter 4.1 “Ten steps to evaluate global sourcing successfully”
50
Levitt, T., 1975
Step one: Market analysis 23
know, however, that the railroad still has a potential for growth if they change to the
transportation market.
product-oriented management has to find markets

product-oriented
market definition
1
customer substitutes & (railroad market)
competition
have
2 satisfy needs 6
needs product
create create
4
3 market 5
market company
analysis knowledge
of the
market
customer-oriented market definition (transportation market)
customer-oriented management generates a holistic view and has to fill markets
51
Figure 8: Definition of markets
A further example can be an oil selling company. The product orientated market definition
corresponds to the oil business, and as a result, the company aims at reducing production
costs, producing a better oil quality, creating new types of oil, as well as looking for new
customers to which they can sell oil. All this is done with the target to sell the product (oil)
more effectively.
However, markets are always subject to change, and consequently a specific product is
always threatened to be replaced by new inventions and discoveries. For instance, oil is
needed for kerosene lamps. However, Edison’s invention of a lighting independent of oil
(=substitute) closed this market for oil. Nevertheless, the sales of oil climb because of the
innovation of engines, heaters, and the need for oil in the process of plastic production.
However, this is not due to the oil company’s hard work, but they rather had a lot of luck,
since there is no guarantee for a product’s constant good position on a market. In the
case of a transport oriented market, a company can, by knowing the market and its
customers, make sure that it is successful.
The market oriented management gives the customer the priority and therefore grants the
market an essential position, too. It takes well into consideration of how to satisfy the
needs, which create the market (see figure 8; Point 1 to 6, marked by the dark gray
dashed line “- - - - - -“). The product, a patent, a raw material, or a selling skill is hence
subordinate and market oriented management, in that case, does not define the market as
51
Self-established representation following the content of Levitt’s essay
oil business but rather as mobility business (or energy business). The company does not
sell the oil, but it sells the right and the possibility to drive cars continually. According to
this market definition, the company searches for solutions in order to improve
transportation, with the target to make transportation more efficient, more comfortable, or
more flexible. As a result the company also considers different technologies and
possibilities, such as e-cars. This kind of management satisfies the customer needs
directly, whereas the loss of total branches due to new technologies is less dangerous.
To be more precise, different market definitions result in different kinds of competitors,
which means that, in the case of a product orientated management, the competitors are
“only” the oil companies. On the contrary, a market oriented management considers all
companies which provide energy or technologies for the use of a car or other means of
transportation to be competitors. Hence, if the market is defined correctly, the competitors
are equally defined appropriately, which then improves the competitive situation, because,
according to Kay, the company can research the specific aspects for the right strategy. A
unique strategy is a great advantage for a company, and moreover, it is hard to be copied
by other competitors. 52
In summary, the management has to fill markets rather than find them. The latter is
guaranteed by a product orientated management, whereas a market orientated
management fills markets. 53
For continued growth, the companies have to explore the needs and desires of their
customer’s continuously, while being aware of the fact that products do not enjoy an
indeterminate longevity. In short, companies have to “buy customers” rather than “sell
products”.
4.3.2 Market segmentation

After a correct definition of the market, it has then to be segmented into different market
groups. Market segmentation is the systematic division into homogeneous sub-markets in
order to deal with them separately. 54 The goal is to find markets where the greatest
leverage is suspected and to omit to offer efforts in markets with low potentials. 55
Possibilities of market segmentation

There are different possibilities to segment the market. A list of potential criteria for market
segmentation is illustrated in figure 9.
52
Kay, J., 1993
53
Compare Kuß, A., 2001, pp.132ff.
54
Weis, H.-C., 1999, p.37
55
Pepels, W., 2009, p.53
Behavioral media usage
product type selection
product volumes
product loyalty
shopping time
category of usage
price behavior
store choice behavior
Psychographic attitude
life style
interests
social orientation
activities
Geographical international economic area
states / countries
province
cities
Socio-demographic age
gender
family’s / family status
size of household / number of children's
Criteria importance to evaluate size of community

international sourcing:
income
very important
status of ownership
medium
profession
less important
education
56
Figure 9: Criteria for market segmentation
56
Self-established representation following the information from Weis, H.C., 1999, p.37; Pepels, W., 2009,
p.56; Kuß, A., 2001, pp.132ff.; Herrmann, A. & Homburg, C. & Klarmann, M., 2008, p.771-789; Boersch, C. &
Elschen, R., 2007, p.260 / The evaluation was established by carrying out a comparison in pairs.
In the above figure, criteria for segmentation which are most of the time irrelevant for the
economic evaluation of international sourcing, or only influence slightly the behavior of
sourcing are marked in light gray. In contrary to that, criteria that could be important for
international sourcing are highlighted in medium gray, very important ones in dark gray.
Both kinds of criteria, the dark gray and medium gray ones, should be explained in more
detail in the following: 57
The product type selection refers to the purchase or nonfeasance of a purchase of
certain product groups. For example, convertible cars are bought by a different
customer group than jeeps. Similarly, light and full flavor cigarettes target different
types of customers. These examples illustrate how important it is to fulfill the different
customer requirement, and why then different products are necessary.
Seeing that international sourcing involves a strategic and economic decision on a
product, it is essential to segment the market according to the respective product, in
order to recognize its potential future development on the market and, hence, to be
able to evaluate the economic profitability of the sourcing activities of this product.
The price behavior refers to the customer’s preference to certain price categories
while purchasing a product. The international sourcing behavior is influenced, by the
price behavior segmentation, due to the different customer requirements with regard to
the product specific price-performance ratio and the company’s positioning towards
these requirements. 58 One possible target group can be customers who are only
interested in special offers, which then leads to a search for suppliers who can
guarantee low prices. The focus of sourcing is, therefore, on low-cost countries or on
suppliers who are able to provide a high productivity because of specialization. In this
case, other factors, such as service, image, quality, or technical performance, are
secondary. In comparison to that, other customer groups are interested in exactly
those factors and are at the same time willing to pay a higher price. The satisfaction of
this demand often cannot be obtained by low-cost-suppliers.
In contrast to that, automobile manufacturers segment the market according to
international economic areas. Hence, the sales price varies in different countries
according to its respective purchasing power and its competitive situation.
With regard to international sourcing, it is exactly the specific competitive strength of a
specific area which delivers the necessary information on the profitability of
expenditures in the respective country. Furthermore, the fulfillment of local content
57
Pepels, W., 2009, pp.55ff.
58
Compare strategic positioning in step five “Strategic determination” and figure 15 + 16 “Key Success
Factors for international sourcing”
regulations and area specific requirements, such as short delivery times, and thus the
necessity of close suppliers, rather influence the sourcing behavior. 59
Just as international economic areas, markets can also be segmented by states.
At this point, a warning has to be issued to the reader and applier of this method, since
the kind of product-type market segmentation easily induces oneself to concentrate purely
on the product and hence lose the focus on the customer. The product-type market
segmentation thus is contradictory to Levitt’s theory, which was outlined in the precedent
chapter. With regard to international sourcing, the applier has to check at first if the
sourced product meets the customer’s needs (see figure 10, point 7). If that is the case,
the focus can be given to the product (see figure 10, point 8 and 9) and the advantages of
segmentation, which shall now be described in more detail, can then be applied on the
product. However, substitutes have, at all events, to be taken into account. That is why
the point on substitutes is again a central point in the competition analysis (step two).
8
9 product type
international
market
sourcing
segmentation
satisfy yes
needs
7
Does
1 product satisfy
no needs?
customer
have
2 Which product will 6
needs satisfy needs? product
create create
4
3
market market 5
company
analysis knowledge
of the
substitutes & market
competition
60
Figure 10: Relation between customer orientation and product type market segmentation
59
Local content regulations and area specific requirements have also to be considered at other segment types.
In case of segmentation according to international economic areas, these factors, however, stand out more
easily and quickly.
60
Self-established figure. It is a further elaboration of figure 8 “Definition of markets”.
Advantages of segmentation of markets

By doing a market segmentation, different advantages are gained (see figure 11). As a
result that target groups can be specified more precisely, firstly, the customer’s real needs
can be analyzed and satisfied in a much better way. This again brings companies greater
benefits in comparison to unaware competitors, most of all because of a better brand
awareness.
Secondly, prices of each product can hence be individually customized according to each
target group. A relatively low price increases the number of customers, whereas higher
prices will provide higher profits. In conclusion, finding the right price corridor for each
target group increases the profits.
Thirdly, companies which provide several products, which represents the economic
majority, can avoid mutual negative overlapping of their products. This is the case when
they differentiate those emotionally by segmentation.
Specification of
target groups
Better
Ideal pricing
satisfaction of
and profits
needs
Optimization Advantages of Avoidance of

of the market overlapping
marketing-mix products
segmentation
Optimal use Better forecasts

of marketing of market trends
budget and potentials
Necessary to evaluate
economic of sourcing
61
Figure 11: Advantages of market segmentation
Considering all the previous points, segmentation finally leads to the optimization of the
marketing-mix. The marketing-mix is the goal oriented strategic combination of marketing
tools. This can be illustrated by the example of baking, where it is important to mix the
right ingredients, in the right quantitative proportion, at the right time, with products of the
right quality, and all this in the correct chronological order. Similarly, it is important in
marketing to combine the right ingredients (= marketing tools) with the appropriate
intensity and timing in a professional way. McCarthy describes the marketing tools as the
4 P’s (Product, Price, Place, and Promotion). 62 In relation to market segmentation, the
61
Own established figure, based on the information from Pepels, W., 2009, pp.363f.
62
Pepels, W., 2009, pp.363f.
more a complete market can be finely divided into homogeneous segments, the better the
marketing tools can be adjusted to the needs of the individual customers.
Furthermore, the available marketing budgets can be used most effectively. Usually it is
impossible for companies to provide equal marketing activities to the entire market.
Therefore, it is logical to focus the limited financial resources on the segments with the
best prospects. 63
Finally, better forecasts of market trends and potentials equally result from market
segmentation. The market segmentation makes it possible to have a closer look at the
different target groups and hence to have a better knowledge of future customer needs.
This makes it easier for a company to know about the future market potential and finally to
come to a very precise conclusion on reactions on the market. That, at the same time,
renders the own actions more comprehensible. Most of all with regard to international
sourcing, this step is the most important advantage of market segmentation, since the
knowledge of the market size, the market growth, and future market demands are good
indications for the companies with respect to their decision if international sourcing is
worthwhile, and if the expenditures can then be turned into profits.
To be more precise, the knowledge of the future development of the market gives the
companies an idea of the longevity of the market. Due to the market segmentation
according to the different product types, the longevity of products is directly linked to the
longevity of the market, which influences decisively the sourcing behavior. Thus
international sourcing is, as far as the cost effectiveness and possible benefits are
concerned, very often more interesting at the beginning of a product life cycle than at a
product’s end. The connection between the market development, the product life cycle,
and the international sourcing behavior will be outlined in the following two chapters.
4.3.3 Relation between the strategy of entering a market, the product

life cycle, and the attractiveness of international sourcing
Just as it is the case for all living creatures, one assumes that products also follow
different periods or stages during their cycle of life, beginning with their launch until their
withdrawal from the market. Dependent on each phase of a product’s life, different market
activities and measures have to be done and applied with respect to international
sourcing. 64 The strategy of how a market is entered influences decisively the cycle of a
product’s life as well as the sourcing behavior. The connection between the strategy of
entering a market, the product life cycle, and international sourcing behavior is outlined in
the figure below:
63
Pepels, W., 2009, pp.53f.
64
Weis, H.-C., 1999, pp.73ff.
Figure 12: Connection between entry strategy, product life cycle and attractiveness of international
65
sourcing
65
Own interpretation, establishment and illustration based on preliminary collected information. Compare Weis,
H.-C., 1999, pp.73ff.; Krüger, M., 2010, Part 3, pp.57ff.; Sponholz, U., Lecture 3, pp.177ff.; Luger, A. E. &
Pflaum, D., 1996, pp.146ff.; Kuß, A., 2001, pp.111ff.
Generally, one distinguishes between the three time-dependent entry strategies, water fall,
toe head and sprinkler. 66 The so-called water fall-strategy involves that a product is
launched in one country (= market) after the other, which entrains a long process of
entrance to all markets. The advantage of this strategy is that relatively low financial
resources are needed, the complexity rises gradually, and thus the risk is kept relatively
low. Furthermore, a differentiated pricing policy is hence possible in the different countries.
Regarding profitability of international sourcing, both phases of “growth” and “maturity” are
the most attractive ones. Most of the time, at the initial stage of market entrance, the
company has not yet established a close customer relation, which means that market
demands and hence customer needs might still be vague, which represents a optimization
potential of the product. What is more important, however, is that at the initial phase of the
market entrance, the number of units and hence the volume of purchase is still very small.
Due to that, international sourcing, which is linked to higher costs of finding a supplier,
supplier maintenance, freight costs, and risks, may render the whole process
uneconomical. In this case, enterprises often draw on suppliers in domestic countries or
neighboring states. Global sourcing hence is only worthwhile during that phase, if the
company already works with global suppliers over there, and hence if they do not have to
start with a search for a supplier.
In contrast, the economy of scales, as well as a higher know-how on manufacturing and
the market situation, along with international sourcing not seldom cause an enormous
reduction in costs during the phases of “growth” and “maturity”. Regarding the two last
phases, one has to consider that, in addition to the decreasing amount of number of units,
companies only have a limited amount of time to make profits in order to render
expenditures and expenses for sourcing profitable. What is more, the question arises if
resources and capacities which are needed for sourcing might not be better invested for
other undertakings.
In comparison to the water fall strategy, the sprinkler strategy distinguishes itself by a fast
market entrance. 67 That is why the sprinkler strategy is often applied in fast-moving
markets (= short product cycles), as it is for example the case in the chip and computer
industry. In order to correspond to these market conditions, the company has to find
suppliers, with their respective advantages (costs, accessibility, know-how,…), worldwide
even before entering the market. Due to the short product cycle, international sourcing is
often only profitable at exactly this point of the process.
The toe head entry strategy, with regard to its product cycle and sourcing behavior, is to
be classified in between the other two strategies. An example for the toe head strategy is
66
Compare Krüger, M., 2010, Part 3, pp.57ff.
67
Compare Krüger, M., 2010, Part 3, pp.57ff.
the Indian electric vehicle manufacturer Reva, who started to sell its electric cars initially in
Denmark and only afterwards launched his products in other European countries.
The following points criticize the product life cycle:

- Focus on the product and not the market.
- The product life cycle is a theoretical idea, hence the length of the different phases
as well as of the complete cycle is not known.
- The shape of the curve illustrating the product life cycle is not known (steep, low,
short, long).
- Substitutions, competitors, technological progress, marketing measures, or
environmental conditions can influence or even change the product life cycle
drastically. This, however, is not taken into account.
- The product life cycle consideration is independent from the state of the economy
and economic fluctuations.
- Often conclusions are made on the basis of a snapshot.
- Product life cycle consideration focuses on already existing products. 68
Very often available resources are limited and the markets are complex. Managers
therefore are, despite their know-how about product life cycles, confronted with the
strategic decision which of the possible segments they would like to pay their attention to
and to make their investments to, and which segments they see as rather secondary.
The mere comparison of several product life cycles leads to wrong decisions, in most
cases, due to missing information, for example on competition and the importance for the
own enterprise. So expenses and expenditures for international sourcing would remain
with less or even without profitable effects and at the same time, they could be used better
elsewhere and thus improve the market position. The following growth-market share
portfolio can be used in order to find a convenient decision. 69
68
Compare Weis, H.-C., 1999, p.75
69
Due to the relative simplicity and rapidity of the market growth – market share portfolio, not all strategically
“important” points are considered. A further development of this portfolio is the market attractiveness –
competitive advantage portfolio, established by Mc Kinsey (compare Sponholz, U., Lecture 3, pp.206ff.). This
can be applied after the competitive analysis (Step 2), which is not a topic of further discussion of this scientific
paper.
4.3.4 Portfolio of market growth and market share

The market growth-market share-portfolio-analysis of the Boston Consulting Group is an
important tool in order to determine the actual state relatively quickly and hence take
strategically important decisions on international sourcing. In doing so, market segments 70
are evaluated according to the average percentage of market growth and the relative
market share of the enterprise, which is then noted down in a matrix (see figure 13). 71 The
expected percentage of market growth illustrates the market chances, which is noted
down on the ordinates, whereas the abscissa indicates the percentage of the relative
market share in comparison to the greatest competitor and thus the own capability of
estimating one’s chances and opportunities. 72 The area size of the circle in the matrix is
directly proportional to the share of turnover of the respective segment within the own
enterprise. 73
Based on the life-cycle theory 74, market segments in the matrix go through the five phases
in a chronological order: adoption, growth, maturity, saturation, and decline. These phases
are directly linked to the four strategy cases in the portfolio matrix. Depending on in which
of the four cases and hence at which point of the life cycle the segment currently is to be
found, one has to find the respective strategic decisions on management, which then
influences the company’s sourcing behavior. Those should for the moment be explained
on the basis of the water fall entry strategy: 75
70
Compare chapter 4.3.2 „Market segmentation“
71
Compare Weis, H.-C., 1999, pp.31ff.
72
Kuß, A., 2001, pp.138ff.
73
Pepels, W., 2009, p.1416
74
Compare for more information on the life-cycle theory chapter 4.3.3.
75
Compare Weis, H.-C., 1999, pp.31ff.; Kuß, A., 2001, pp.138ff.; Pepels, W., 2009, p.1416; Sponholz, U.,
2010, Lecture 3, pp.199ff.
high Attractiveness of
very attractive
Question marks Stars
attractive
mostly not attractive
adoption phase i f growth phase

L e
market growth
e
saturation and C y c l maturity phase
decline phase
Dogs Cash cows
low high
relative market share
Figure 13: Market growth – market share portfolio (Boston Consulting Group) and attractiveness of
76
international sourcing in a water fall entry strategy
Question marks:
Segments which distinguish themselves by a great market growth and small market
shares of the enterprise in comparison to competitors are called question marks. The
segment stands at the beginning of the life cycle and its further development is still not
clear. What is more, this phase is marked by a significant negative cash flow. Massive
investments have to be made in order to be successful on the market, to improve the
market situation, and to seize potential opportunities. At this point, the decision has to be
taken if needed financial means are provided by the company, or if it better leaves the
market. If the enterprise opts for this segment, international sourcing activities are valued
as positive.
76
Own interpretation and illustration in connection to international sourcing, on the basis of the Boston
Consulting Group portfolio. Compare also Weis, H.-C., 1999, pp.31ff.; Kuß, A., 2001, pp.138ff.; Pepels, W.,
2009, p.1416; Sponholz, U., 2010, Lecture 3, pp.199ff.
Stars:
So-called stars are notably successful segments. The market grows rapidly and the own
enterprise owns big market shares in comparison to the competitors. Gained means are
reinvested in order to improve its market position and to boost the turnover. This strategy
is called a growth strategy. In order to implement it, it is in many cases necessary to find
new output markets on the international level. Furthermore, in that context, the fulfillment
of required local content regulations, necessary increases in capacity due to a greater
turnover, as well as possible required delivery times and proximity to the customer, lead to
a network of worldwide suppliers. This is the reason why international sourcing is most
interesting during that phase.
Cash cows:
Cash cows are market segments in which the own enterprise has reached a relatively
great relative market share. The market, however, does not grow further. In this phase,
considerable profits are earned, which can then be invested in selected question mark
segments. The strategy is designed to hold market shares as long as business is
profitable. However, the gradual stagnation of the market results in a heightened
competition. This is often linked to an increased pricing pressure. That is why
manufacturing processes and international suppliers, which are willing to fulfill the
necessary services as low-priced as possible, have to be found and established. That is
why international sourcing is still very interesting during that phase of the process.
Poor dogs:
Segments with low market prospects and an inferior position of the own enterprise in the
market are called poor dogs. Usually they have cash-flows in balance or even negative
cash flows. The strategy is often to sell the segment or leave it respectively. In adopting
this strategy, resources (capacities and financial means) which can be better used in other
more promising segments become available. An exception to this might be a niche-
strategy, which, however, is only practical in case of a positive cash flow. Furthermore, it
might be strategically appropriate to keep a poor dog segment, since it might possibly
have positive results on other segments. This might for example be the case if a potential
customer only buys products of the own enterprise of a “more interesting” segment, when,
at the same time, he gets the opportunity to buy the products of a poor dog segment. Still,
the poor dog segment as such is still uneconomical, due to the pick-up business in other
segments, however, in total, a much greater profit is generated. However, most of the time,
the latter case remains the exception. Due to the mostly predominant unprofitability, the
bad prospects for the future and the possible more effectively usable resources in more
interesting segments, experts advise against international sourcing.
high Attractiveness of
very attractive
Question marks Stars
attractive
adoption phase i f growth phase

L e
market growth
e
saturation and C y c l maturity phase
decline phase
Dogs Cash cows
low high
relative market share
Figure 14: Market growth – market share portfolio (Boston Consulting Group) and attractiveness of
77
international sourcing in a sprinkler entry strategy
In principle, the four strategic cases in the portfolio-matrix are independent from the entry
strategy. However, in comparison to the waterfall entry strategy, the sourcing behavior
changes in every case (see figure 14) with respect to the sprinkler entry strategy, as it was
already explained in the chapter 4.3.3. Additionally, this portfolio illustrates better why the
sprinkler entry strategy is more critical and entails greater risks. In the first case of
question marks, the management has to take a decision for or against an investment in
the respective market segment, based on the underlying market data. The further
development of the market, however, is still unclear. At the same time, the investment in
the case of the sprinkler entry strategy is by far the greatest. In contrast, the advantage is
that, due to the shorter life cycle, it is relatively improbable that new competitors enter the
market at a later point in time. For the sake of completeness, figure 14 also illustrates the
portfolio matrix along with the attractiveness of international sourcing in a sprinkler
77
Own interpretation and illustration in connection with international sourcing, on the basis of the Boston
Consulting Group portfolio. Compare also Weis, H.-C., 1999, pp.31ff.; Kuß, A., 2001, pp.138ff.; Pepels, W.,
2009, p.1416; Sponholz, U., 2010, Lecture 3, pp.199ff.
strategy. The toe head entry strategy, again, is to be classified in between the other two
entry strategies.
Criticism towards the market growth – market share portfolio analysis:

- The competitive situation is only partly considered. Positioning and assumed
competitors’ strategies, as well as their strengths and weaknesses, and future
developments of the competitive situation are missing in the portfolio analysis. 78
- Possible substitutions are not taken into consideration.
- The portfolio does not help to increase relative market shares.
- The focus is very much on existing products.
- Constant market and technology trends are assumed to be provided.
- The future development of the important factor market growth is uncertain and is
only based on estimations. Furthermore, the market share of competitors and thus
the own relative market share remains vague, even after intense research.
- Key success factors of the customer, which are often decisive for purchase
decisions, and in comparison to that, the own positioning is not taken into
consideration.
With regard to the latter criticism, the following paragraph concentrates on the topic of key
success factors. In step 2 “Competition analysis”, the matter of competition and
substitution will be discussed. The two remaining criticized points, own positioning and
strategies in connection with international sourcing with the aim to increase market shares,
are approached in step 5 “Strategic determination”.
78
This, however, is examined in Step 2 “Competition analysis”.
.
4.3.5 Customer analysis and determination of key success factors

After the market segments have been defined and a preliminary selection of the most
interesting segments was done with the aid of the portfolio analysis, explained in the
precedent chapters, this section tries to work out the preferred market segments and the
key success factors, with the main emphasis on international sourcing. The term key
success factor describes the most important customer needs and demands. The
fulfillment of those key success factors influences essentially a customer’s purchase
decision and, consequently, they are decisive for the success or failure in a certain
segment. Most of the time, there are only some single key success factors in one industry.
The acquired know-how about these key success factors shows what actions are to be
taken for international outsourcing and mark the sourcing behavior decisively. In
conclusion, the key success factors help to find out to what elements the customer
attaches great importance and what amount of money he is willing to pay, which, in turn,
makes it possible to deduce a lot about which kind of supplier one’s own enterprise should
lay the focus on. This focus may vary according to quality, price, technology, and know-
how, as well as, according to the location in case of a need for short delivery times and
quick service. International sourcing, hence, does not only refer back to the reduction of
manufacturing costs, but rather to the best possible satisfaction of the customer needs
with the worldwide resources. An analysis of the competition, as well as of the own
enterprise, with regard to these key success factors hence provides further findings on
one’s own strengths and weaknesses. It hence allows to draw a conclusion on at what
point exactly the company has to improve its efforts for international sourcing.
The key success factors can, according to the respective branch and product, differ
considerably from one another and hence have to be established independently from one
another. Consequently, the key success factors of a luxury automobile manufacturer may
be glamour and individuality, and so the sourcing behavior concentrates on the supplier,
which provides unusual, high-grade material and new designs. The factor price is
secondary in that case. The motto is “the more unusual and exclusive, the better!”. In
contrast to that, the manufacturer of usual breakfast cereals attaches great importance to
source cheaply worldwide with at the same time, providing a stable quality.
A matrix of evaluation in order to determine the key success factors of products in the
industry sector and their consequences for international sourcing is illustrated in the
following figure. 79
79
The determined key success factors are then used as input for step 5 “Strategic determination”. Compare
also figure 7 “Cause-effect-diagram to evaluate the economic of international sourcing”
Attractiveness of international sourcing:

very attractive
attractive
Key success factors for sourcing no clear influence on sourcing
estimation variance of
criteria 1 2 3 4 5 6 7 8 9 10 estimation [%]
low price 1
very unimportant very important
costs
quality and reliability

accuracy
2
speed
life time
noice
product quality and technological performance
stiffness
robustness
(product and application related)
flexibility
controllability
f urther on next page

weight
size
temperature
protection class
environmental awareness (energy effiency, pollution,…)
recycleability
start-up efforts
user-friendliness
product safety
maintain standards
product innovation
sustainability
compatibility
delivery time 3
1 day 6 month 1 year
short delivery time long delivery time
short distances long distances
(terms of delivery / customer proximity)

processing time
necessity of JIT / JIS 3

required not required
strong customer weak customer
integration integration
80
Figure 15: Key Success Factors for international sourcing (part 1)
80
Self-established figure, based on the content of the books Krokowski, W. & Sander, E., 2009; Kerkhoff, G.,
2005; Göttgens, O., 1996; Hahn, D. & Kaufmann, L., 2002; Koppelmann, U., 1997; Large, R., 2006; Lockström,
M., 2007; Nicklisch, G., 2006 and Porter, M., E., 2008
effects on international sourcing

1 The demand for low prices makes companies search mainly for suppliers with high productivity or with low wages and low
tax payments, as well as for suppliers with access to cheap raw materials. Furthermore, transportation costs and assets
should be as low as possible. Finally, if low prices are most relevant, the focus on international sourcing depends strongly
on the total cost of ownership (TCO) consideration, which will be explained in step 9.
2 Product and application related criteria, which are considerd to be very important effect the international sourcing
behavior. Companies hence search worldwide for regions and suppliers which specialized in this specific problem and can
hence best fulfil the particular needs. This means that the supplier provides special knowledge, technology or material,
which all generate an added value for the final customers or which can put applications into practice which before had been
impossible. Hence, for example a material which can be used in very hot temperatures might generate new possibilities in
sintering processesses. Furthermore, a very light material, for instance, could innovate the automobile branch. This is due
to the need of less petrol, especially in times where scarcity of resources and increasing demands push prices up. If it is
important that there are no failures at all, as it is the case in the space flight, where defects could kill people and an crash of
an space shuttle would result in enormouss costs, as well as to a loss of time and image, it is recommended to search for
best class suppliers with a deep knowledge on quality methods. Therefore, if a company attaches great importance to these
criteria, factors such as low manufacturing costs, tarriffs, and transportation costs are mostly subordinated. Typically
suppliers, who can fulfill this kind of needs, have their location in developed countries.
In contrast, if the customer's specifications on this criteria are very unimportant, companies, with the aim to achieve the
highest possible profits, can easily search for the worldwide cheapest suppliers in low cost countries or alternatively in
developed countries with a high productivity degree. Concerns about different understandings of quality and other product
related criteria are here not justified. At the same time, expenses for regular controls to achieve sustainable success are
low.
The worst case scenario regarding international sourcing of this criteria is the average value between very important and very
unimportant. This field is neither black nor white and a clear sourcing strategy cannot be defined. Specifications and
therefore required regular controls, combinded with higher transportation costs and increased risks, can make the global
sourcing strategy uneconomic.
3 Neccessary fast delivery times make it impossible that large distances lie between the supplier and its customer. An
example could be a customer in Europe whose supplier is in China. The transportation per ship (including loading and
unloading) would take about 40 days from China to Europe. Even the fastest transportation method, namely by airplane,
would need about 3 daysfor delivery from dock to dock. If even shorter delivery times are demanded, sourcing can be done
only in regions or countries which are close to each other. Alternatively, it could be an option to store parts near the
customer's location. This requires certain planned procedures which are, however, not individual to all customer needs and
can therefore be fullfilled with regard to the same standard components. In addition, purchasers however have to consider
that transportation per airplane is the most expensive method and that storing products is also linked to considerable costs.
Both could make global sourcing inefficient. Furthermore, stored goods make companies unflexible to react on fast changes
of demands, which could for instance be a result of a unexpected recession. Consequently, the company's risks are
increased.
Besides, short delivery times require also fast internal operations and processes. Especially in large companies, which are
mostly characterized through long lasting proccesses, concentration on an internal analyses, and an improvement of its
weaknesses can so provide larger benefits than when they are just focusing on international sourcing.
The same is true for JIT/JIS requirments. A scale of estimation from 1 to 10 would here not be feasible, due to the fact that
the customer either needs JIT/JIS deliveries or not.
In summary, the combination of required short delivery times and JIT/JIS deliveries together with fluctuating individual
demands complicates international sourcing activities and processes enourmously, which are mostly unefficient and hence
not feasible.
product variants (number of different options) 4

many less
product individuality 4
very individual standard
generel market
customer specific

solution
special solutions
bulk goods
product range
for single application
component provider vs. system provider 5

system provider component provider
brand
image 6
prestige
design
recognition value

abnormality
emotional
historc background
effects of gobal sourcing on image 7
negative neutral positive
product know-how 8
application know-how
expertise
very important very unimportant

service place on site

9
service
consulting service 9
(e.g. support of the bringing into service, very important very unimportant
product selection)
81
4 Many different product vaiants as well as a high degree of product individuality leads to low quantities per option model.
Therefore, suppliers whose production is flexible enough to handle these different needs have to be found, with the target to
hold the number of suppliers as low as possible. Besides, a high number of varieties require a close relationship because of
regularly discussions. Thus, the search for a supplier in domestic regions or in countries next to it is often a better solution
than it would be to build up a supplier on the other side of the globe, especially if there are furhter requirements on short
delivery times. An exception to local sourcing, however, can be taken into consideration if high volumes can be purchased
by one single supplier, when orders can be grouped, despite the product variety. This results in fewer deliveries and hence
reduces tranportation costs and efforts. This is a possible option if delivery times are less important.
Furthermore, if one has a standard solution for multiple customers, quantities (=economy of scale) can be incerased, and
therefore transportation costs and aquiring suppliers would less influence the costs of each component. At the same time,
components can be stored and required delivery times fullfilled. The search for worldwide suppliers, in this case, has the
possibility to provide cost and quality advantages.
5 Both maintaining suppliers and the handling of complaints in the case of defects, would be easier for customers if there is
a system provider. This is due to the fact that they have only one supplier who is responsible for the whole system, instead
of one or more suppliers who are responsible for each respective part. As a result, a time- and cost-consuming inspection of
each single component in the case of a failure, for the suppliers which have caused the failure, would not be necessary. In
addition to that, time and money can be saved, since customers do not have to develop the system by themselves, and a
standard solution which has been tested before several times in other applications can be used . Lower costs can also be
achieved, because system providers, who find several customers for their solution, can generate a scale effect and therefore
purchase components cheaper in comparison to customers, who generate a solution only for their own needs. Beside all
the cost effects, it is often more important for customers to have a system provider who is reliable and provides a good
service. This influences the sourcing behavior of the own company as a system provider, because the focus depends on
other factors than on reducing only costs, which in general puts less pressure on cheap international sourcing. In
comparison, a component provider's sourcing behavior would typically concentrate more on how to find the cheapest
supplier worldwide, because of his exchangeability.
6 The sourcing behavior of emotional key success factors are similar to product and application related criteria. If
customers have a strong tendency to products with a powerful brand, a good image, or a high factor on prestige,
purchasers will search for worldwide suppliers who can notably fulfil these demands. Costs are subordinate. Therefore, a
high class brand automobile manufacturer (like Porsche) would prefer brakes from Brembo and sport seats from Recaro
than from no name manufacturers. Similar, if customers attach great importance to things with historic background and
prestige, they would prefer a Rolls Royce compared to an Audi, VW, Daimler, or BMW, even if these cars would be of
higher quality and cost less.
7
Purchasers have to know how international sourcing can influence the image of their company. The label of origin "Made
in Germany", for example, has been developed as a seal of quality especially in engeneering, but also in other branches,
such as for sport clothes. While Adidas, Puma, and Nike source internationally in countries such as India and China, in
order to achieve the most cost effective production for their sport articles, Trigema successfully manufactures in the high
income country Germany. The reason for that behavior is that sourcing in low cost countries would lower Trigema's high
quality image and therefore its profits.
8 If expertise of the own company is very important, the focus should not rely on international sourcing. Rather than that,
companies should invest in own research and development to get a deep understanding of the topic and to create a core
competence with the target to achieve this expertise. The sourcing of products relying on expertise can force a company
into a dependence on the supplier, which then increases their bargaining power and thus decreases the own economy.
However, if expertise is not necessary, processes should definitely be sourced internationally from suppliers, which can do
things cheaper or provide an additional value.
9 If service is very important, resources should be invested in this criterion, instead of putting it in international sourcing. An
exception would be if these services can be sourced internationally. Some companies offer a hotline for their customers in
case they have a problem or any questions. It is evident that for the customer it is not important where the employee in the
service department has his location, as far as the connection and understanding is good and costs are still low. Hence, a
company can save a lot of money by outsourcing this service to countries of low wages, for instance to India, where Indian
service employees answer the service calls from international customers. However, international sourcing cannot be done, if
customers need services which require a location next to them. An example for that can be the urgent need of fast
exchange of defect products.
81
personal sales semi-personal sales non-personal sales

10
sales on site personal sales not on sales via

visiting sales site technologies and
sales types stationary sales media
e.g. outlet sale, sales by e.g. sales via video e.g. e-commerce,

commercial travelers, conf erence, telephone sales via mail or
sales within a f air, key sales mms or sms, sales
account management, by catalog
sales
retail, wholesale
quickness of interaction process
(time between inquiry and offer) very important very unimportant 11
very fast very slow
within one day within one month
customer location (local vs. global)
local global 12
domestic customers int. customers
domestic orders international orders
domestic delivery international delivery
quickness
13
(e.g. overnight delivery, 96h delivery,…) very important very unimportant
warranty
function
(reliability, life time,…) very unimportant very important 14
Customer- / Market- Analysis

number of customers 15
less many
single customer multiple customers
sales volume per year

16
(=equivalent to possible sourcing volumes) <1.000€ 10.000 € >100.000€
very low very high
market-/ customer- characteristic
variability of demand 17
very fluctuading continious demands
demands
customer loyality 18
weak strong
82
10
Gernerally, international sourcing can be done by all three sales types. However, non-personal sales are characterized by
standard products, which need less consulting efforts or special options. Therefore the own company could pass their
customers' worldwide orders automatically on to their international suppliers. Close relationships for frequent discussions
are not necessary, and therefore this sales type would simplify the international sourcing process and make it more
efficient. In comparison to that, if personal sales are be required, employees would be close to the customers and they
would already have the necessary knowledge about the country, culture, and the companies in this region. Building up a
supplier there can be done easily and would result in different advantages (no exchange rates, no tarriffs, low transportation
costs and delivery times, low forcast necessity, flexibility,...).
11
If customers would like to get an offer as fast as possible after first inquiries, resources should best be invested in sales
and order fulfillment, rather than put in resources into the purchase department for international sourcing.
12
Generally, the location of customers does not influence international sourcing and can therefore be done with both local
and global customers. However, the location relates to the criteria of product range and terms of delivery and increases their
influence. Therefore, if customers are spread all over the globe and need short delivery times, it would be necessary to find a
supplier or a place for storage close to each of them.
13 See processing time.
14 See product and application related key success factors.
15
With regard to customer numbers, one can conclude how critical it is to lose one customer and how important it is to
meet customers needs completely. If there are only some customers, the company has two strategic options. Firstly,
companies have to leave this markt segment, or secondly, they decide to fulfill all customer needs as well as possible and
create therefore a strong competitive position. If there are less customers, each of them should be analyzed according to
his or her business, size, number of customers, sales, equity and debts, as well as on return on investments. Through this
analysis the own company can assess how risky it is of losing own customers due to insolvency.
16 Sales volumes and sourcing volumes respectively are some of the most important indicators to show if international
sourcing is economic or not. The reason for that is that larger sales volumes lead to lower sourcing cost shares per part.
Additional costs due to international sourcing can include the analysis of suppliers and countries, additional quality controls,
supplier certifications, additional efforts in research and development, travel expenses, interpreter fees, logistic costs, and
increased inventory costs. Sourcing of products with low purchasing volumes (approximately less than 50.000€) is only
economically interesting if the total international purchase volume can be increased by the bundling of sourcing volumes of
several products, or if necessary suppliers are already known and a costly research and certification process are therefore
not required.
17
A high fluctuation in demands complicates prediction and storage. This often results in the complete loss of a deal in the
case of international sourcing. In times, where less demand is needed, additional costs for storaging have to be payed or
alternatively already stored parts have to be scrapped to reduce storaging costs. This situation becomes even more critical,
the more complex and expensive storage is and the higher the value of the stored products are. According to this, some
products could require a maintenance, like the exchange of lubrication in case of extended storage. Even more critical is it
in case of products, such as foodstuffs, which have an expiry date.
In contrast to this, in times of high demands there might be not enough parts in stock, which entrains the risk of losing
suppliers.
Therefore, a high variability of demands goes along with suppliers which are located near the customers, in order to be
flexible for different demands and to manufacture products order related. However, if the demands are placed regularly and a
good prediction and planning is possible, then international sourcing of the parts can be taken into consideration.
18 Customer loyality shows how risky the market is. Strong customer loyality indicates a less risky market, whereas a
weak customer loyality is connected to a highly risky market. The lower the level of risk is, the higher is the probability that
international efforts are economic. Weak customer loyality, together with a lower number of customers could make risks too
high for sourcing.
82
Potential criteria of customer needs are listed on the left side of the evaluation matrix.
Criteria which have similar features are united in different groups. The estimation of
potential customer needs is illustrated in the middle of the matrix. The estimation is carried
out with the help of a scale of graduation ranging from 1 to 10. Criteria labeled as 10
generally show the highest attractiveness with regard to profitability of international
sourcing, whereas criteria with 0 points are mostly considered as unattractive. An
exception to this are the criteria “product quality and technological performance” and
“emotional”, which are very interesting even at a small amount of points. The worst case
of these two criteria with regard to international sourcing would hence be a medium
amount of points.
The area in which certain customer needs speak for or against international sourcing of a
product is labeled in medium gray (=very attractive), light gray (= attractive), and dark gray
(=mostly not attractive). However, the boundaries between the different areas are not to
be seen as absolutely fixed, but rather as guidelines 83, which are sufficient at this point,
seeing that one looks at some kind of a preliminary selection, which is then considered in
more detail in step 5 “strategic determination”. Furthermore, in practice, the key success
factors are always marked with a certain insecurity and variance between the single
customers and their exact applications, so diverse criteria cannot be exactly evaluated. In
addition to the differences due to different customers, as well as the high number of
clients, evaluations are always slightly subjective. So, fixed limits cannot be given, they
would create a “pseudo-accuracy”, and data are hence only to be seen as approximate.
Due to these inaccuracies, the variance of estimation was integrated into the evaluation
matrix, where the user indicates the inaccuracy of his estimation on a scale of 0 to 100%.
That means that with 0% inaccuracy, the respective criterion would be exactly estimated.
The higher the inaccuracy, the more cases are filled in the area between 1 and 10, with
the point of estimation being the average value. 84 By depicting it like that, the user can
conclude both the best and the worst case scenario.
If the majority of criteria is in the dark gray area, resources might, with high probability, be
better allocated elsewhere and should therefore not be devoted to the international
sourcing strategy for the product. In contrast to that, international sourcing is highly
recommended if the majority of cases lies in the medium gray area. A suggestion which
kind of sourcing behavior, dependent on the estimation, should best be followed for the
respective criterion can be seen on the right side of the evaluation matrix.
83
The determination of the boundaries was made based on some theoretical considerations, which were not
put into question or empirically proven in practice.
84
In case of 100%, all cases from 1 to 10 would be filled out.
Suppliers fulfill the customer’s needs best and they manage at the same time international
sourcing in order to achieve the greatest possible success for the enterprise most
successfully, which can track the course of estimations for each criterion in the
international environment most skillfully. Customer needs which are not satisfied might, as
already mentioned before, lead customers to prefer other competitors. If, however, a
criterion is fulfilled in a better way than it is necessary, the own enterprise mobilizes
unnecessary resources, which reduce the profitability of sourcing and thus also the profit
earned from this product (see following figure, left representation). Only rarely is the
customer willing to pay more for services which exceed his or her needs. The criterion
“quality” should here serve as an example (see following figure). The loss function by
Taguchi shows that the optimum of quality and the minimum of costs are identical. Quality
defects and quality reserves, along with an increasing difference/variance to the optimum,
result in an increased number of losses.
International sourcing function Taguchi‘s loss function
Maximum of profits and optimum of fulfillment Minimum of costs and quality optimum are
needs are identical identical
profits
loss
reduced profits € invested €

due to loss resources
of customers too high additional additional
costs after costs for
delivery production
invest resources
into international reduce resources quality as an point of no
sourcing, to fulfil and invest into example for an additional cost
needs and other projects influencing factor
maximize profits
- + - +
Needs are 0 needs met quality defects 0 quality reserves
not enough better than it
satisfied was required
ideal fulfillment ideal condition
of needs regarding quality
85
Figure 18: International sourcing function and Taguchi’s loss function
Remark:
The evaluation matrix of customer requirements has been developed specially for the
project of international sourcing. That is why only relevant market sizes which are
85
The left part is a specially established representation. The right part has been established on the basis of
Hessenberger, M. & Krcal, H.-C., 1997, p.84; Töpfer, A. & Günther, S., 2007, p.109; Brüggemann, H. & Peik,
B., 2012, p.213; Bergbauer, A. K., 2004, p.120; Linß, G., 2005, p.324; Spur, G., 1994, p.280
significant for sourcing were taken into consideration. The evaluation matrix is hence no
substitution for a complete market analysis in the sense of strategic marketing, even if
essential points for a detailed market analysis are included.
For a market strategy important points, amongst others promotion and publicity, discounts
(for paying cash, for bulk, for loyalty, for prototypes, for early orders,..), financing
(advantages by paying in advance, installments, preliminary financing, leasing,…), and
delivery conditions do not exist.
Criticism of the evaluation matrix:

- Within the evaluation matrix, only the complete product segment is evaluated on
the basis of the market analysis. As a consequence, a complete product can be
assessed as unattractive for international sourcing. An assessment of the single
units does not take place. Single units can, however, all the same be considered
as attractive with regard to international sourcing. This is, on the one hand, the
case if they show a sufficient purchase volume, for example when they are used in
a high number of products. One the other hand, if the single units show features,
such as a low amount of transportation and storage costs, or not existent
expiration days. The evaluation of single units according to their purchase volume
is carried out in step 4 “product analysis” and equally in step 5 “strategic
determination” according to the features of the different units.
In the following, the points “location of customers” and along with that possible “local
content regulations” are looked at separately.
4.3.6 Location of customers and local content regulations

Within the market analysis, the determination of the location of the customers plays an
essential part. Besides a required proximity to the customers and short delivery times,
most of all local content regulations can considerably influence the sourcing behavior and
its profitability. Local content regulations describe the legal rules of a country which say
that a defined added value of products in the own country has to be established. Even in
areas of free trade, the member countries only allow exemption from custom duty on intra-
commerce if the value of the merchandise was fixed at a preliminary determined minimum
percentage in a member country. If these local content regulations are not followed,
considerable tariffs might have to be paid. 86 According to the Beijing local content
regulations, for instance, domestically produced cars have to contain more than 60% of
Chinese parts. If cars exceed this percentage, custom duties of 25% of the imported
86
Weinberger, P. & Witherton, P., G.
invoiced value of goods, which corresponds to the rate of customs duty of imported cars,
have to be paid. 87
In practice, however, this results in a gray area, because the exact determination of the
single partial performances and product components delivered from abroad are difficult to
be made due to international cost and price differences. International companies therefore
strive to profit from this situation by keeping the value of the imported goods with respect
to transfer prices between the intercompany branches at the lowest level possible, in
order to conform to the local content regulations. With the aim to work against that, there
are two methods which proved themselves as efficient in practice. Those methods test the
value percentage of a merchandise with a satisfactory exactness. 88
Arm’s length principle
Three methods exist to calculate at arm’s length:
Cost plus method
An appropriate cost and profit mark-up is added on the basis of the real
costs of goods and services
Resale minus method
Appropriate cost and profit mark-ups are deducted on the basis of the final
selling price.
Uncontrolled comparable market price
The added value has been calculated on basis of the market price.
However, market prices are often not available or adjustments are
necessary, which makes this method difficult.
Unitary business rule

This method does not differentiate between domestic and external shares of added
value, because transfer pricing can distort the amounts, which have been caused
locally. Rather than that, property, savings and payrolls are used to determine the
local earned added value share.
Due to the local content regulations, along with the custom duty which has to be paid if
one does not meet the regulations, it can hence be economically logical to source
products, components, or services in those regions where the target market is located. A
general representation of the local content regulations is here not possible, since those
differ strongly from country to country and product to product, depending on the country’s
specific political aims, which might vary considerably. Research has shown, however, that
87
Shu-Ching, J., C.
88
Stahl, A., 2011, pp.92ff.
local content regulations are predominantly imposed in developing countries in order to

spur the economy.
4.3.7 Summary market analysis

The following paragraph summarizes once again the single steps of the market analyses
in a clearly structured and compact way (see following figure).
Step one: Market analysis

Correct market definition
doing a
Market segmentation
determination of
Market size / market growth /
future market requirements
cancel inefficient segments
choose
Market entry strategy
determine
Product life cycle
cancel segments at the end of the life cycle
establish a
Market growth – market share portfolio
cancel strategically unimportant segments
Market analysis and Key success factors

cancel satisfied segments
choose segments with potential to improve

satisfaction of needs and profits. determine
Location of customers
determine
Local content regulations
go to
Step two: Competition analysis
89
Figure 19: Summary market analysis
89
Specially established figure, on the basis of step 1 „Market analysis“ and the references used in this step.
Step two: Competition analysis 51
S
4.4 Step two: Competition t
a
r Market
analysis Economic of
international
t
sourcing
Competition
The competition analysis is to describe S
the competitive landscape, inclusive its

TCO
W
strengths and weaknesses within the Company
market segments, which were explained

O
in the precedent chapter. The results of Logistics
Product
T
the competition analysis then make it
Supplier
possible to conclude how well the market Strategies
Country
chances of the own company can be put
PESTE
into practice and to show how profitable
the single market segments are. In general there are two different competitive situations
(see figure 20). If the market grows, which represents situation one, companies naturally
see an increase in their turnover and the competitive situation is more or less peaceful
(right part of figure 20). An exception to this can be found if there are notably superior
competitors who, despite the market growth, drive weaker competitors from the market.
Companies mostly try to increase their profit and hence their market shares also in a
stagnating or shrinking market (left part of figure 20). Due to the underlying second market
situation, the competitors are competing for customers even more intensely.
90
Figure 20: Two different situations of competition
The preceding chapter chose most of the time growing markets for international sourcing,
since, as a rule, resources there can be allocated most profitably. To source in situations
of stagnation or decline is only then logical if the market segments are strategically
important and hence the competitiveness shall be kept up.
90
Sponnholz, U., 2010, Lecture 1, p.30
4.4.1 Porter’s five forces of competition

According to Porter, the competition is rooted in the economic structure which underlies
the market and exceeds considerably the behavior of the direct competitors. The intensity
of the competition is dependent on the five basic competitive forces, rivalry among
existing firms, potential of new competitors and substitutes, as well as the bargaining
power of suppliers and customers (see figure 21). These competitive forces strongly
influence the profit potential, as well as the strategies, which potentially are at a
company’s disposition. Correspondingly, an enterprise with a strong position on the
market which only faces a small risk of potential new competitors, will nevertheless only
achieve low earnings if it is confronted with a substitute product of higher quality and lower
price. 91
Potential new
competitors
Threat due to
new entrants
Industry
Bargaining power Bargaining power
of suppliers Competitors of buyers
Suppliers Buyers
Rivalry among
existing firms
Threat due to substitute

products and services
Substitutes
92
Figure 21: Porters five forces of competition
Those five competitive forces will be described in the following paragraph.
Rivalry among existing firms

The rivalry among established enterprises is often the most distinctive competitive force
and companies, hence, analyze this one at first. Companies therefore make use of means
such as price reductions, advertising campaigns, launching of new products, or a better
customer service, in order to win additional customers in the performance and price
91
Porter, M., E., 2008, pp.35ff.
92
Porter, M., E., 2008, p.36; Boersch, C. & Elschen, R., 2007, p.254; Freibichler, W., 2006, p.60; Arnolds, H.
et al., 2010, pp.30ff.
competition. The stronger the competition, the bigger is the pressure on the single
companies to act economical. The origin of a stronger competition is often due to the fact
that one or more competitors want to improve their market situation, which then results in
countermeasures of the remaining competitors. This kind of rivalry is, amongst others,
marked decisively by the number and size of the competing enterprises, the growth of a
market (see figure 20), the amount of fixed and storage costs, the capacities of the
respective branch, as well as the possibility to distinguish between the different
products. 93 Those driving forces are illustrated in the following figure.
Numerous competitors Equivalent competitors

A high number of competitors leads The combat readiness and
to the belief that their own action is willingness to permanent retaliation
not recognized by other is especially distinctive among
competitors and therefore equivalent competitors.
countermeasures do not occur.
High exit barriers Slow market growth rates

Economic, strategic or emotional A too slow desired growth of
factors may encourage firms to earnings makes companies try to
remain in a market despite negative grow disproportionately to the
earnings. Companies can seek market by increasing market
refuge to extreme tactics and shares.
therefore keep the profitability
permanently low.
High strategic stakes High fixed or storage costs

The success in individual markets The intensity of the High overcapacities or products
may receive high importance to rivalry declines the with high storage costs lead to
meet the overall corporate strategy. quickly escalating price
profitability of the reductions, in order to use full
market capacities and to ensure sales.
High numbers of listed Lack of differentiation

companies The purchasing decision is made
Privately owned companies are for the same products on the basis
often satisfied with lower profit of price and service. In contrast, a
margins and growth rates than high degree of differentiation leads
listed companies. to customer loyalty and renders the
price war less intense.
Heterogeneous competitors Low switching costs Large capacity expansion

Different strategies and goals can High switching cost oblige Economies of scale can lead to
lead to ongoing conflicts. Strategic customers. Price cuts or capacity expansions. This will
market decisions, which are good promotions of competitors are increase the offer on the market
for one competitor can be fatal for therefore less critical. and lower the prices.
others.
94
Figure 22: Driving forces of rivalry among existing firms
93
Porter, M., E., 2008, pp.51ff.; Hahn, D. & Taylor, B., 2006, pp.200ff.
94
Own representation on the basis of the information from Porter, M., 2008, p.51-56
Threat by potential new competitors

New competitors might set a company under pressure and lead to its decline, since there
is the danger that the profitability of this enterprise of a certain branch is put at risk at the
time of the market entry due to the acquisition of new means and capacities. The extent of
the threat is dependent on the expected reactions of established enterprises on the entry
of new competitors on the market and, most of all, on the underlying entry barriers. 95 The
bigger those barriers are, the lower is the danger of an entry. 96 The most important entry
barriers are shown and explained in the figure below.
Product differentiation Capital requirements

Established companies have a high High investments e.g. in
customer loyalty and famous brands. development or advertisement
To overcome this barriers, newcomer are necessary to be competitive
have to invest significant resources.
Economies of scale Access to sales channels

An increasing number of units Obvious sales channels are
leads to reduced costs per unit. already served by established
New entrants have to start with companies. These customers
high volumes or have to accept must be convinced with a surplus
cost disadvantages. Economies of to change the supplier, or new,
scale exist in all business areas more complicated sales channels
like production, development, have to be created.
purchasing and sales.
Economies of scope Costs for adjustments

Established companies have Entry barriers forcing new Switching costs incurred by
gathered experience in order to customers who change their
entrants to lower prices,
improve methods and processes supplier. Costs for tests or
that reduce costs in production, to provide additional redesign can be seen as
sales, marketing, etc. efforts, or to accept an examples.
increased level of risk
State policies Product technology

Political decisions can complicate Know-how or design features are
or prevent the entry into markets. already protected by patents.
Examples are compulsory
licenses, duties, regulations,
standards, quotas, or restrictions.
Governmental subsidies Favourable locations Cheap procurement of

Established companies which Established companies have raw materials
obtain governmental subsidies received favourable locations Existing companies have
gain a market advantage at lower prices than currently established cheap sources of raw
towards new comers without possible. material from early on , or they
such subsidies. have met their needs at lower
prices than currently possible.
97
Figure 23: Entry barriers for new competitors
95
Porter, M., E., 2008, p.47
96
Porter, M., E., 2008, pp.39ff.; Hahn, D. & Taylor, B., 2006, pp.200ff.
97
To overcome strong entry barriers, new competitors are forced to lower prices or to
provide additional efforts. Both of them lead to reduced profits of the entry. Alternatively,
some entry barriers can be overcome if entrants accept a higher level of risk.
Correspondingly, if entrants accept the risks not to find enough customers and to have
high failure costs at the beginning, as well as the risk to provide the wrong product for the
market, they can start with high volumes in order to profit from scale effects and therefore
equally from cost advantages, which can then be passed on to the customer. This,
however, is only recommended to companies who have a high equity ratio, because a
higher risk always goes along with higher amounts of debt financing charges. Those costs
would eliminate the advantages of the economies of scale and so newcomers would
suffer again from disadvantages in comparison with established companies.
Remark: The entry barriers, however, do have to follow certain restrictions, because
diverse points, such as mass production, and along with that the lower costs are
contradictory to the strategic positioning of the product differentiation. 98 Mass producers,
in comparison to newcomers, face a further restriction. They are less flexible due to their
specialized production facilities and machines. Moreover, because of the necessary
investments, they are more reserved towards a technological change. An advantage for
newcomers is therefore that they can make use of the latest machines and equipment,
which can generate an added value with regard to productivity, flexibility and quality. 99
At this point one should mention that enterprises do not only make the best profits if the
entry barriers for newcomers are high, but also if the exit barriers for established
enterprises are low. The following figure shows the connection between entry and exit
barriers and returns.
98
See conceptual explanations in appendix 4 “Product positioning towards the customers key success
factors”.
99
Porter, M., E., 2008, p.50
100
Figure 24: Connection between entry and exit barriers and returns
As illustrated in the figure, companies who invest in markets with high, stable returns can
profit the most from the sourcing activities. This is due to the own good competitiveness
which results from high entry barriers and low exit barriers and thus the costs which have
been economized by international sourcing can be kept by the company and do not have
to be passed on to the customer.
Threat by substitute products and services

Enterprises of one branch are indirectly competing with enterprises of other fields which
provide substitute products. Substitute products describe in that case products which fulfill
the same function as the product of the market and thus satisfy the customer needs in the
same or a similar way. Substitute products might not only reduce the sales volume of a
branch, but, most of all, the sales prices. Consequently it might limit the maximum of a
market’s profit potential. Accordingly, the more attractive the price-performance ratio of a
substitute product, the higher is the pressure on the profitability of the respective
branch. 101 Further decisive criteria which increase the pressure by substitutes are
illustrated in the figure below.
100
Own sourcing interpretation on the basis of the figure from Porter, M., E., 2008, p.57; compare also
Sponnholz, U., 2010, Lecture 2, p.104
101
Porter, M., E., 2008, pp.58f.; Hahn, D. & Taylor, B., 2006, pp.200ff.; Boersch, C. & Elschen, R., 2007,
p.260ff.
Price-performance ratio Economy of scale

The more attractive the price-performance Substitute products with strong effects
ratio of substitutes is, the lower the market on economy of scale have a potential to
gains are. price reduction. If this is used, the
pressure within one’s own market
increases.
High profits in the own Low collective action

market and increased within the market
competition in markets of
Essential criteria, Extensive and permanent actions
substitutes of competitors, such as
which increase the
Substitute products rapidly become advertisements, can improve the
more important, if competition in the pressure due to the position of products within their
market becomes more intense, substitution of market compared to substitutes.
which leads to lower profits and the products
search for new markets.
Scarcity of raw materials State policies and subsidies

The scarcity of raw materials may Political decisions and subsidies can
increase the price and worsen the supply improve the position of substitute
security of products within the market. products. According to this, for example ,
the position of renewable energies have
increased quickly over the last years.
102
Figure 25: Essential driving forces for substitute products
Remark: Of course, factors such as switching costs, access to sales channels or favorable
locations, as described in the previous two forces of competition, play an equally
important role. However, those kinds of factors are only important when the substitute’s
features, which mostly concentrate on the price-performance-ratio, can live up to the
existing products on the market. Therefore, in order to keep the time for the analysis as
low as possible, the research here concentrates only on the essential parts.
Bargaining power of buyers

The customers of a branch influence the profitability by demanding price reductions,
quality improvements, and better performances. They play the different competitors off
against each other to realize their demands. The negotiation power of a customer group
depends decisively on the features of the market situation. Especially important for the
negotiation power is the number of customers in relation to the providers, the size of their
purchases in relation to the overall sales in the respective field, the percentage of
102
standardization of the products, as well as the percentage of market transparence. Figure

26 illustrates the criteria of a strong negotiation position of customers. 103
Buyers influences a large Product significantly

proportion of total sales of the influences the overall costs of
seller the buyer
The buyer is particularly important for the In this case, the buyer invests
seller. To lose this buyer leads especially in significant resources in search for the
markets with high fixed costs to capacity cheapest provider. If the product is
under-utilization and thus to a overall loos of less important for the overall costs of
the seller in this market. the buyer, it is less price sensitive.
Possibility of influencing Standardized products

the purchasing decision A low degree of differentiation
of the end-consumer encourages buyers to find
If the buyer can easily convince alternative suppliers. Suppliers can
end-consumers, which product he then be pitted against each other.
or she should buy, his bargaining
position towards suppliers is
stronger.
High numbers of providers Low switching costs

Buyers are free to select out of a The bargaining power of High switching costs of customers
multitude of suppliers and pit buyers decisively make them dependent on
them against each other. influences the suppliers. However, the bargaining
power of buyers increases, if
profitability in a market suppliers are forced to high
switching costs.
Good knowledge of the Low profits of buyers

buyer Low profits of buyers lead to the
The deeper the knowledge of the reduction of their purchasing costs.
customer is to market demand,
market price and profits, the more
distinctive is their bargaining power.
Low quality and service Possibility of insourcing

requirements If buyers can manufacture parts by
If product failures or bad services cause themselves, they are able to threaten
low consequential costs and low negative suppliers with insourcing. In addition, in this
reactions, the buyer puts greater case buyers have a good knowledge about
emphasis on cheap purchasing prices. cost components of manufacturing, which
also increases the bargaining power.
104
Figure 26: Criteria influencing the bargaining power of buyers
Bargaining power of suppliers

Similarly, it is possible that a high negotiation power of suppliers lowers the profitability of
a market. This becomes apparent when suppliers manage to demand higher prices,
103
Porter, M., E., 2008, pp.59ff.; Hahn, D. & Taylor, B., 2006, pp.200ff.; compare Arnolds, H. et al., 2010,
pp.30ff.
104
Own representation on the basis of the information from Porter, M., 2008, p.59-62; Arnolds, H. et al., 2010,
pp.30ff.
poorer qualities, or less performance. However, the established enterprises do not

manage to pass these changes fully on to the customers. The factors of determination of
the supplier’s negotiation power are often a reflection of the customers, which are
illustrated for the sake of completeness in the figure below. 105
Low number of suppliers and Market is unimportant for the

high number of customers supplier
Suppliers who sell to relatively If a supplier sells in different markets,
fragmented consumers, can influence none of which has a significant proportion
price, quality, and delivery condition of the total turnover of the supplier, then
considerably to their advantage. these suppliers are disposed to play off
their negotiating position against each
other.
Scarcity of qualified Differentiated products

employees A large degree of differentiation
In the broadest sense, employees makes buyers dependent from
are also suppliers, whose bargaining suppliers, because alternatives
power can also lower profits. are hard to find.
Employees’ bargaining power is
mostly characterized by scarcity of
qualified employees. The bargaining power of
suppliers decisively
influences the
No threat of substitute High switching costs
profitability in a market
products High switching costs make
If substitute products are in customers dependent from
competition, then price reductions suppliers.
can be enforced by customers,
and even by powerful suppliers.
Supplier’s product is strategic Possibilities of forward

important for the customer integration
If the supplier is strategically important for If a supplier can threaten with a forward
the customer, then the supplier integration, his selling position can be
implement own interests better by improved. Forward integration can occur to
negotiating. Examples for strategic the extent that he acts as a system
importance could be a special production provider or provider of the whole final
processes, a very good quality or a product.
beneficial location.
106
Figure 27: Criteria influencing the bargaining power of suppliers
4.4.2 Analysis of the most important forces of competition

For a competition analysis to be convincing, more than simply the amount of rivalry has to
be taken into consideration. Most of all it is important to draw a conclusion from the
knowledge about strengths and weaknesses of the competing forces, in order to make
appropriate predictions of one’s own growth strategies, targets, and market chances
105
Porter, M., E., 2008, pp.62ff.; Hahn, D. & Taylor, B., 2006, pp.200ff.; compare Arnolds, H. et al., 2010,
pp.30ff.
106
Own representation on the basis of the information from Porter, M., 2008, p.62-64; Arnolds, H. et al., 2010,
pp.30ff.
(see figure 28). Therefore, it is important for the companies to make also assumptions on
future aims and strategies of their competitors, as well as on the amount of the means,
which they have at their disposal to reach their aims. 107 Moreover, the positioning of
each competitor and their respective products, as well as their behavior with regard to the
key success factors of the market, are decisive factors for the own success. 108 How
well a competitor can respond to each key success factors is particular evident through
the company-specific core competences. 109 The stronger the competition with respect to
the key success factors is, and the bigger the available means for a better positioning on
the market are, the lower are the own chances. Besides the determination of the own
market chances and the own positioning, it is necessary to have a detailed knowledge on
the competitors, in order to have arguments at hand to present the added value of a
product to the customer. The more convincing these arguments are, the more customers
can be motivated to buy the product. It is essential to know that, as practical experience
shows, that the customer very often does not opt for the best product but for the best
arguments, which is due to the customer’s ignorance. And with regard to this, of course, a
higher amount of customers who are willing to buy the product increases the enterprise’s
turnover within a market, but also the profit, which is due to economies of scales and a
stronger negotiation position. Consequently, a sustainable growth can be generated and
the life cycle can thus be extended, which then renders the investment of resources in
international sourcing more attractive.
The most important elements of a strategic competition analysis are illustrated with
reference to the mentioned points in figure 28. The comparison of single points between
the enterprises can be drawn with the help of an evaluation matrix.
The competition analysis of figure 28 can be carried out in more detail and one can add
different elements, such as discounts and warranty. Those kinds of expansions, however,
are rather senseless against the background of international sourcing and the aim to
economize on capacities. Expansions, such as business analysis tools, like value chain
and value net, might be used. These, however, will not be explained in more detail here.
In general, one can start out from two assumptions in order to carry out branch and
competition analyses. On the one hand, there are no two enterprises in a branch which
show completely the same features, on the other hand, there are no two enterprises in a
branch, which are completely different from one another. 110
107
Compare Porter, M., E., 2008, p.26; Freibichler, W., 2006, p.61ff.
108
Compare chapter 4.3.5 “Customer analysis and determination of key success factors”
109
Are the core competences an impossible act to follow, they can be seen as unique selling points.
110
Hahn, D. & Taylor, B., 2006, p.201
Vision / Mission Financial situation Key success factors

Provides information about The amount of available The competitors must be
the future direction and financial resources represents examined in order to see how
goals of competitors. how good a company can react they are positioned according
and use market opportunities, to the key success factors of
and how well it is prepared the market and how well they
against risks, such as recession. meet the individual factors.
The financial situation can be (see chapter “customer
described with the help of the analysis and determination of
essential elements sales, key success factors”)
balance sheet, cash flow, owner,
debt, and equity.
Branches, market Operation and Marketing, sales and

shares and rank in the business areas distribution
market The knowledge about the - Compared can be:
To be able to detect synergy business units of competitors fairs, internet, advertising,
effects, it is important to know may lead to future strategies brochures, catalogues,
the markets and related market and give information on multimedia, public relations
shares in which competitors whether different business such as trainings at
supply. The rank of competitors units influence each other universities,…
in the market is related to how positively or negatively. - kind of distribution (sales
critical reactions of competitors representative, e-commerce,…)
can be seen. - Distribution processes
Customer Production
- number of customers - production processes
- key customers - core competences
- target group - flexibility
- strategic relationships - mass production vs.
(incl. status and trends) individual manufacturing
Elements of a
strategic competition
Supplier analysis Purchasing
- number of suppliers - international experience
- key suppliers - bargaining power
- strategic relationships - separation between strategic
and operational purchasing
News Legal and related Research and

News often illustrate up to matters development
date information of the - pending lawsuits against the - description of the R&D
competitors. News are a competitor organisation
especially good way to - pending lawsuits initiated by - strategies and major activities
analyze competitors if they competitor - new product pipeline (status
are listed companies. - description of environmental and timing)
and employee safety issues
and liabilities
- list of material patents,
copyrights, licenses and
trademarks
Further elements of a strategic competition analysis on the next page

Further elements of a strategic competition analysis on the previous page
Time-orientation Stakeholders Service

Distinctions can be made by Stakeholders are in the - product training
- long term vs. short term broadest sense all interest - start-up support
orientation groups of a company. Typical - emergency service
- and future, present or past stakeholders are employees, - technical service
orientation. managers, owners, suppliers, - financial service
The kind of orientation infers society, government, creditors, - over-night delivery
to sustainability, the way of and customers. The analysis of - assembly and installation of
arguments and the public individual interests shows how the product directly by the
appearance of the company. stable the company is set up. customer
Products Geographical analysis Management & (Key-)

- product portfolio The location of competitors, Personnel
- purchased or self-made customers and suppliers must - number of employees
(product and components) be identified in order to detect - know-how
- cost structure and profitability strategically important - are there any personnel
of each size, sector and country locations. Strategically members who are crucial to
- product strategy: important locations can result the success of the company
differentiation / cost leadership from the following points: - organisation chart
/ niche / technology leadership - proximity to customers - summary biographies of
- major customers and - proximity to suppliers and senior management
applications resources - significant employee
- growth rates of sale - concentration of know-how relationship problems
- market shares - cost aspects (cheap (past or present)
- speed and nature of production, low duties, low - personnel turnover
technology changes transportation costs, high
- customer related construction subsidies,…)
- special options and special - good trade routes and
products distribution networks
Determination of unique
Base of Available
selling points and core Positioning
competition means
competences
Strength and weaknesses
Future strategies and targets

111
Figure 28: Elements of a strategic competition analysis
111
Specially established figure, however, compare Porter, M., E., 2008, p.27, 105-107 and due diligence
company analysis.
Step three: Company analysis 63
S
4.5 Step three: Company analysis t
a
r Market
t
In the company analysis, one analyses Economic of
international
sourcing
one’s own enterprise in order to find out if it S
Competition
is suitable and ready for the global market.

TCO
Processes within an internationally W
Company
oriented enterprise differ considerably from

O
those in a pure domestic market operating Logistics
company. 112 The questionnaire on the next T

Product
page might help to take this decision. All Supplier

Strategies
those questions which are answered with Country
PESTE
no should be considered critically with
regard to international sourcing. These could ruin the sourcing strategy, seeing that not
enough resources and strategies are available, or simply because decisive processes are
missing and future aims of the company do not include global sourcing.
The project of sourcing might be stopped while it is implemented if resistance within the
company is not considered early enough, and thus efforts and investments which have
been done until then, would be pointless. Furthermore, this could discourage the team
which is in charge of the sourcing project, seeing that all their energy and enthusiasm for
their work remained without effects and they might lose their sense for commitment for the
company’s aims. Very often, potential suppliers are annoyed, since they already made
available their products and offers, which necessitated the supplier’s capacities and might
already have led to considerable costs. The same is true for forwarding agents and
logistics service providers. Even if the enterprise might show interest for cooperation at a
later point in time, suppliers and providers might then be reluctant to work with them or
impose higher charges. Finally, the breakdown of a sourcing project might also leave a
negative impression at the customers, for example if these have already been informed
about a new sub-supplier or
Supplier and
logistics service if a potential supplier has
provider
been extolled for its superior
quality or better customer
Critical factors
in case of services. Figure 29 illustrates
breakdown the critical triangle of a
Employees Customer breakdown of international
Resources
sourcing activities.
Figure 29: Critical factors in case of a breakdown of international sourcing activities
112
Compare Kerkhoff, G., 2005, p.10, pp.65f., pp.101f.; Krokowski, W. & Sander, E., 2009, pp.26ff.
good f or international sourcing

bad f or international sourcing
Questionnaire: Company analysis (critical consideration necessary)
Answers
Questions
Yes No
Is the vision or mission focused on international business activities and targets?
Does the corporate philosophy allow international sourcing?
Are future goals of the entire company (purchasing, production, sales,…) aligned
internationally?
Are departments in harmony with each other and jointly represent international
sourcing activities?
whole company
Could be excluded, that specific goals of individual departments handicap

international sourcing?
Could be excluded, that strategic groups (employees, management, share-
holders, society, government, customers,…) are against international sourcing?
Is the organisation internationally present?
Are internal processes (inspection of incoming goods, cash flows, logistics,
delivery times,…) checked and ajusted to worldwide purchasing and obtaining of
materials?
Provides the company enough capacities for international sourcing?
Has the company enough financial resources for international sourcing available?
responsibilities
Are responsibles for international sourcing defined?

Sourcing goals have been defined correctly and in detail.*
Sorcing goals have been communicated understandable to sourcing executives.*
Sourcing executives are free of other goals and projects and can concentrate
fully on the sourcing project.
Is the purchasing department positioned internationally?
Could International Purchasing Offices IPO's of the company be used for the
project?
Are good English language skills available?
Are country specific knowledge and international expertise (contracts, rights,
purchasing
culture,…) available?
Is there a distinction between strategic and operational purchasing?
Is global sourcing daily and actively practiced? Products, components, parts or
raw materials are already sourced internationally?
Is it planned to increase the share of global suppliers in the future?
A global supplier strategy will be pursued.
Are necessary tools available (TCO=Total Cost of Ownership, SQMP=Supplier
Quality Management Process, supplier approval,…)
development
Are drawings, specifications and requirements available in English version?

research &
Is simultaneous engineering practiced?
Potential errors are avoided constructive (Poka-Yoke).
further on next page...

Step three: Company analysis 65
marketing
...further on previous page
sales &
Does the company supplies international customers?

product
Are product liabilities aligned internationally?

Is done an international marketing, sales or production of the product? (already or
in the future)
logistic
Are external international service provider involved?
Could be excluded, that employees are not demotivated in the case of a failure
during the sourcing project?
Could be excluded, that suppliers and logistic service provider are not annoyed
others
through potential international sourcing breakdowns?

Could be excluded, that the potential breakdown of the sourcing project does not
leave a negative impression by the customers?
Could international sourcing adversely affect the business (image, brand, …)?
*Mostly the sourcing goals are not fixed before Step 5 "Strategies".
113
Figure 30: Questionnaire: Company check for global sourcing readiness and orientation
113
Specially established questionnaire, compare Kerkhoff, G., 2005, pp.108ff.; Krokowski, W. & Sander, E.,
2009, pp.26ff., p.35, pp.161ff.
S
4.6 Step four: Product analysis t
a
r Market
t
Seeing that the 3 preceding steps Economic of
international
sourcing
examined if the market conditions, the Competition
S
competition situation, and the company’s
TCO
orientation might lead to profitable results W
Company
of global sourcing investments, the step

O
“product analysis” now lays the focus on Logistics
Product
the analysis of origin of costs and T
composition of costs of the sourced Supplier

Strategies
product and the corresponding single Country
PESTE
units and parts. This chapter gives
answers to the following three questions:
1) What are the costs and cost shares of each part compared to the
assembled product?
2) Which cost components make up the total costs?
3) Which parts have the greatest purchasing value?
The aim during international sourcing is to keep the main focus on the essential things.
Very often, sourcing activities are started without knowing the sources that drive costs
upwards. This ignorance can then lead to the fact that resources are misplaced and hence
do not result in the indented success. To be more precise, the purchasing of parts might
be optimized, even if they might in reality only have a low share of the costs of the final
product or only have a low purchase value. Even a cost reduction of 60% of such parts
would only be minimally noticeable with respect to the overall performance. In order to
avoid that a cost structure analysis has to be carried out carefully. 114 By looking at the
results of this analysis, a first rough estimation of the cost saving potentials by sourcing
should be made in order to get an overview, to verify the targets more precisely, and to
know if the efforts of sourcing globally are worthwhile.
During the cost structure analysis, it is not important if the product is already established
on the market or if it is a new development. The only difference lies in the fact that the
data basis of new developments is vaguer and is mostly based on estimations or rough
calculations. Two methods are logical for the cost structure analysis: 115
Product cost formation analysis
Product value analysis
Both methods are explained in the following.
114
Compare Hartmann, H., 2002, pp.170f.; Kluck, D., 2008, p.37
115
Compare Kerkhoff, G., 2005, pp.114ff.
Step four: Product analysis 67
4.6.1 Product cost formation analysis

The production cost formation analysis illustrates the cost structure of a product and its
single parts. The aim is to know the exact costs of a finished product and to advance the
product strategically by reducing the costs of the single factors that drive a product’s total
costs upwards. For that purpose, the Pareto-analysis suggests itself in order to list the
total costs of the single modules and parts. Pareto assumes that 20% of the parts make
up for 80% of the costs. With regard to international sourcing, the resources have to be
invested in those parts. In contrast to that, 80% of the parts cause only 20% of the total
costs. Costly international sourcing of these components is most of the time uninteresting
and even uneconomical. Exceptions to this might be, however, on the one hand, the
grouping of similar components in order to benefit from the economy of scales, on the
other hand, the purchase from already existing suppliers, which implies only a low effort of
sourcing.
However, the information about the total costs of a single part is not sufficient to know
where the costs arise exactly. One can distinguish at this point between costs that come
up internal or external to the enterprise. Therefore, the total costs per part have to be
divided up on to the single cost components. The total costs of each part can so be
divided up into the different cost components material costs, material overheads, material
cost of risk, manufacturing costs, production cost of risk, and administrative costs. The
further subdivision of these cost components is shown in figure 31.
cost whole
compact component name of cost components product part A part B part C part ...
10 raw materials
20 trading goods
material costs*
30 semi-finished goods
40 finished goods
material overheads 50 material overheads
material cost of risk 60 material cost of risk
development and
70
process engineering costs
80 set up costs * including the whole TCO consideration
90 production costs** ** some companies place the cost
100 assembly costs component 100 to production costs
110 delivery costs *** can be placed as allocation to the
manufacturing costs
120 test & quality costs machine hour rate
130 storage costs
140 operating materials
150 maintenance costs***
160 improvments productivity
170 external services costs*
production cost of risk 180 production cost of risk
other production costs 190 administrative costs
sum [EUR] 0,00 0,00 0,00 0,00 0,00
116
Figure 31: Cost components for calculating the manufacturing costs of a product
116
Own representation on the basis of the information from Teufel, T. et al., 2000, pp.302ff.; Liening, F. &
Scherleithner, S., 2001, p.121; Scheer, A.-W., 1997, p.660; Türk, P. et al., 2003, pp.387ff.; Giessmann, A.,
In addition to that, it is recommended to list machine costs and wages as separate cost
elements. Theoretically, these are already included in the set up costs and production
costs, but the separate consideration provides further information about the cost sources
which might influence the sourcing behavior. The following figure exemplary shows a
graphic analysis of the described cost elements.
2010, pp.239ff.; Horngren, C. T. et al., 2001, pp.478ff.; SAP (1), 2013; SAP (2), 2013; SAP (3), 2013, Quizlet,
2013; ControllingWiki, 2011; Compare also Figure 67 „TCO Composition” and the references listed there.
117
Figure 32: Graphic evaluation of the product costs
117
Self-established figure. For reasons of clarity, the example only shows the most important cost elements.
The data base for this evaluation can be found in appendix 1 „Example of cost components for a calculation of
the manufacturing costs of a product“.
The first two pie charts illustrate the cost shares of each product and the share of each
cost component of the whole product. The combination of these two pie charts results in
the diagrams 3 and 4, whereas diagram 3 shows the already mentioned Pareto-analysis,
as well as the composition of the cost components of each part. In contrast to that, the
total cost components are indicated on the x-axis of diagram 4. The total costs of each
cost component are then subdivided into the different shares of each component. Hence,
all these diagrams show the same information in different ways, which is, however,
necessary for a detailed and careful analysis. While the diagrams 1 and 2 provide a quick
and rough overview of the most important factors which drive up costs, diagrams 3 and 4
show those cost drivers in more detailed and independently from one another.
The respective share of cost components decisively influences the sourcing behavior. The
relation between the cost components and the sourcing behavior is explained in figure 33.
However, one has to keep in mind that the consequence of each cost component on
internal actions and the sourcing behavior is company- as well as product-specific and
hence it varies from case to case.
For instance, according to this figure, a product with high material costs results in a
collaboration with a supplier in a country with high natural resources, whereas a product
with a high share of labor costs, as a part of manufacturing costs, leads to the work with a
supplier in a region where wages are low and where the necessary know-how is available
to fulfill specifications.
influence
high value of place

each cost of cost sourcing behaviour internal effects
component origin
find suppliers with good access to redesign (using less cost
raw materials and cheap supply of intensive materials)
them proving alternatives (materials,
sourcing in countries with high production processes,…)
values of natural resources using standard materials and
searching for more efficient material components (no special
alternatives materials)
searching for suppliers with better check if one large order with
material costs external production processes which are storage of parts would be
more efficient and need less mat- cheaper than several small
erial (e.g. because of less waste) orders without storage
searching for cheaper suppliers prove if insourcing and own
(low cost country sourcing or production is cheaper
sourcing in developed countries
with high productivity)
reduction of material costs due to
economy of scales

outsourcing of operative purchasing optimize purchasing processes
activities to cheaper service optimize maintenance of
provider suppliers (for instance, using
reduction of the number of one flight to China to visit
suppliers (less maintenance of several suppliers)
suppliers, less business trips,…) build up material field specialists
purchase of the complete modules (not every purchaser is respon-
material instead of each single part sible for every part; create
internal
overheads specialists for similar parts; less
time for searching suppliers is
than needed)
integration of subsidiaries (IPO’s,
sales offices,…), which are
located in potential sourcing
countries, during the searching
process of suppliers
increase of quality specifications prove if less quality values are
implementation of quality tools at permitted
the supplier redesign parts which can be
force existing suppliers to change produced easier and are less
material cost to more reliable and consistent complicated
external
of risk production processes
force supplier to find and eliminate
the cause of failures
search for suppliers which can
provide higher quality
outsourcing to cheaper suppliers optimization of internal
and service providers processes
low-cost country sourcing or finding bundle similar production orders
suppliers with high productivity (reduce set up costs)
standardization
selection and reduction of cost
drivers
manufacturing prove alternative production
internal
costs processes
mass production instead of
individual production
use economy of scales effects
reduction of specifications and
requirements
reduction of cost intensive
packaging
outsourcing to companies with high determination of failure causes
quality standards and which are and eliminatation of those
production
internal specialized in the individual implementation of quality tools
cost of risk
problem Poka Yoke
(compare material cost of risk) (compare material cost of risk)
other reduce and optimize
production internal administrative costs
costs find cost driver
118
Figure 33: Relation between high cost components, sourcing behavior and internal effects
118
Own established figure, based on a preliminary secondary research (sources see chapter 7 “Bibliography”)
4.6.2 Product value analysis (ABC-analysis)

The aim of companies is to be able to use the same parts in several products at the same
time, which reduces the range of different parts and consequently simplifies the logistics
processes and leads to the economy of scales. Due to the usage of the same parts in
different products, single units, which have a low per-unit value, might have an enormous
purchase volume, if they are implemented in sufficient numbers. Consequently, besides
the determination of the percentage of costs of a single unit with regard to the finished
product via a product cost formation analysis, 119 also the purchase value with the help of
an ABC-analysis is necessary. The determination of the purchase value is especially
practical if the focus lies not only on a certain product, but if the purchase costs in a
company in general is to be reduced.
Similar to the Pareto-analysis, the ABC-analysis assumes that approximately 5-10% of the
items of an enterprise make up for 70-80% of the purchase volume (A-items). Further 15-
20% of the items are responsible for approximately 15-20% of the purchase value. The
remaining 70-80% only make up for 5-10% of the purchase value. 120 It is evident that
mostly A-items, but also B-items, are notably interesting for international sourcing. A
noticeable cost reduction for C-items, however, is, in comparison to A- and B-items, very
costly and consequently uneconomical. 121
Besides the purchase value, an ABC-analysis examines further criteria which influence
sourcing, such as stock turnover, storage costs, admissible storage times, fluctuation in
demand, volume, weight, necessary quality numbers (for example expressed in parts per
million, PPM), import duty, or transportation costs. 122 123
The single criteria can simply be
represented by a two- or three-dimensional representation, such as pivot-diagrams in
Excel, and hence be evaluated for the purpose of international sourcing. 124 In case of an
analysis of more than one criterion, further letters are used in literature in order to classify
119
Compare preceding chapter
120
Holger, A., 2010, p.85; Koppelmann, U., 1997, pp.48ff.; Arnolds, H. et al., 2010, pp.20f.; Hartmann, H.,
2002, pp.172.ff; Kluck, D., 2008, p.38; Oeldorf, G. & Olfert, K., 2004, p.92
121
The procedure for preparing an ABC-analysis is described in appendix 2.
122
Compare Holger, A., 2010, p.92; Koppelmann, U., 1997, p.49; Hartmann, H., 2002, p.171
123
Step 5 „Strategic determination“ explains how the single criteria influence the sourcing behavior (e.g. local
vs. global sourcing).
124
See appendix 3 „Exemplary evaluation of two criteria (ABC-XYZ analysis) in an Excel spreadsheet“
the parts in more detail, to simplify the evaluation, and to depict connections in a simple
way. That is why, one often finds the term ABC-XYZ-analysis. 125
At this point, it should also be pointed out to the reader that some of the points mentioned
above, are similar to each other. Consequently, the transportation and storage costs are
the higher, the greater the volume and the weight of the item is. 126
Some criteria might be difficult to evaluate with the help of an ABC-analysis. 127 In that
case, a criterion can simply be evaluated with the aid of an evaluation scale of 1 to 10,
based on experience. 128 An example for that is the “strategic importance for the
enterprise” or the “complexity of products”.
In the following step 5 “Strategies”, the reader of this scientific research has to formulate
and define his sourcing strategy on the basis of the previous analyses step 1 to 4.
125
Compare Holger, A., 2010, p.92; Koppelmann, U., 1997, p.49; Arnolds, H. et al., 2010, p.25; Hartmann, H.,
2002, pp.181.ff; Kluck, D., 2008, pp.43f.; Oeldorf, G. & Olfert, K., 2004, p.93
126
The procedure of the establishment of an ABC-Analysis for the respective criteria is identical to the
„Procedure of preparing an ABC-analysis“, as it can be found in appendix 2.
127
Arnolds, H. et al., 2010, pp.25f.
128
Compare „Key Success Factors“ (Chapter 4.3.5) in the market analysis for an explanation of the evaluation
matrix.
S
4.7 Step five: Strategic t
a
r Market
determination Economic of
international
t
sourcing
Competition
Managing international sourcing success- S
fully implies more than just purchasing
TCO
W
parts cheaply and sustainably from Company
abroad, but it is merely a strategic

O
weapon of an enterprise in order to Logistics
Product
achieve a competitive advantage. T
Kay, in his role of a strategic guru, Supplier

Strategies
identifies a company’s strategy as a Country
match between its external opportunities PESTE
and relationships and its internal

capabilities and targets (=vision). External opportunities and relationships describe how a
company responds to its suppliers, its customers (=market), its competitors, and the social
and economic environment in which it operates. Moreover, the strategy is based on an
understanding, definition, and identification of distinctive capabilities, derived from a
company’s experience or location. Providing that a company knows about its distinctive
capabilities, it can maximize its strength. A capability can only be distinctive if it is
sustainable, appropriate, and different from other firms. Distinctive capabilities can be:
1. Innovation
2. Architecture (is a system of relationships within the firm, or between the firm and
its suppliers and customers.)
3. Reputation 129
The following enumeration illustrates the factors for success of a strategy: 130
- The key factor for the “right” strategic decisions is a previously carried out analysis,
on the basis of the steps 1 to 4 described in this scientific paper.
- The evaluation of a possible successful strategy can be based on past experience.
- In most cases it is better to improve existing capabilities than to create new ones.
- Desire-driven strategies are to be avoided.
- Kay found out that the right strategy includes the match between the capabilities of
the organization and the challenges in understanding corporate targets (vision).
- Strategies have to be clear and understandable.
- A good strategy has to be flexible with regard to different options.
- A good strategy involves an element of surprise.
129
Summary of Kay, J., 1993 / „Mintzberg’s 5 Ps of Strategy“ is a further good source for more detailed
information on strategy determination.
130
Compare Kay, J., 1993; Sponholz, U., Lecture 1, pp.18ff.
Step five: Strategic determination 75
- A successful strategy is rarely a copycat strategy. Instead, it is based on improving

what competitors do badly and not on copying what they are doing well.
4.7.1 Potential strategic options

According to Kay, there is no general recipe or advice for a strategy which can be applied
in every company. 131 Therefore, companies have to take a decision for the right
combination out of a huge range of possible strategies, in order to create a company-
specific, distinctive success strategy with regard to international sourcing, and in order to
benefit best from the external opportunities, as well as to establish relationships with their
customers. The above mentioned points for a success strategy should be taken into
consideration when making that decision. The possible sourcing strategies are illustrated
in the morphological box below.
Sequence for defining a sourcing strategy
Categories Options
Strategic positioning cost leadership differentiation niche
Process scope operative (administrative) strategic (advanced)
Capability scope make buy
Unit scope part modular / system
local global
Geographical scope
low-cost country developed country
Supplier scope single dual multiple
short-term long-term
Time horizon mid-term
(changing supplier) (regular supplier)
Implementation alone alliance joint venture service provider
132
Figure 34: Morphological box for the purpose of defining a sourcing strategy
The left part of the diagram lists the strategy categories, to the right one finds the
corresponding options according to the respective category. The arrow to the left of the
diagram is a possible suggestion for the chronological order of the single sourcing
categories. However, depending on the company structure and the product, another order
might be more advantageous.
131
Compare Kay, J., 1993
132
Compare Lockström, M., 2007, pp.62ff.; Krokowski, W. & Sander, E., 2009, pp.21f.; Kerkhoff, G., 2005,
pp.48ff.; Arnolds, H. et al., 2010, p.202; Koppelmann, U., 1997, pp.40f.
Besides the listed categories in the morphological box, further sourcing strategies can be
distinguished: 133
Way of supplying a company Æ JIT vs. JIS vs. storage
Means of procurement Æ producer vs. merchant
Size of the supplier Æ big supplier vs. small supplier
Counter-business potential Æ counter-business partner vs. provider without
counter-business potential
Group affiliation Æ company-internal supplier vs. company-external
supplier
Decision-making level Æ middle management vs. department management
vs. senior management
organization type Æ centralized vs. decentralized vs. matrix
as well as in a wider sense: standardization and Kanban 134
These categories, however, will not be described in further detail in the context of this
research. The references listed in the footnote „ 135 “ are possible sources for further
information on these categories.
4.7.2 Impacts of sourcing strategies

In order to understand the relations between and consequences of the different sourcing
strategies in the morphological box (figure 34), every strategy option was evaluated on the
basis of the magic triangle (see figure 1) with regard to its influence on the target factors
costs, quality, and time, as well as on the further factors risk, performance and flexibility in
figure 35. 136
By looking at the different target factors in more detail, beginning with the factor costs,
one can see that this one is, in agreement with the usual business system, further
subdivided into the sub-areas development, purchase, storage, production, and
transportation. Although the sub-area transportation is placed at the end of the business
system, it is to represent all transportation processes within the supply chain.
133
Compare Arnolds, H. et al., 2010, p.202; Lockström, M., 2007, p.62
134
Standardization and Kanban represent rather a method or a principle than a sourcing strategy. They are
listed here for the sake of completeness, seeing that both methods are often found in literature in the context
of procurement of material.
135
Compare Arnolds, H. et al., 2010, p.202; Lockström, M., 2007, p.62
136
The target factors were independently chosen from a range of possible criteria. The importance for the
company’s success regarding international sourcing as well as figure 15 to 17 „Key Success Factors for
international sourcing“ were taken as selection criteria.
In comparison to the factor costs, the second factor quality indicates how the error and
failure rate of an object changes in accordance with the choice of a sourcing strategy. 137
Just as the factor costs, the factor time was equally subdivided into different areas. The
figure therefore distinguishes between the developing time and the processing time. The
processing time describes the time that is needed from receipt of the order until its
dispatch, and it is consequently decisive for the delivery time.
The fourth factor, the factor risk, indicates the probability of possible problems that may
arise. The higher the risks of problems, the more critically the other factors costs, quality,
time, performance, and flexibility have to be taken into consideration.
As far as the two latter factors are concerned, the factor performance shows how the
respective sourcing strategy influences the technical values of an object, such as
accuracy, noise or controllability. In comparison to that, the factor flexibility in connection
with the choice of a sourcing strategy is to indicate how flexible an enterprise remains
towards the product range and how dependent of its supplier it would become.
The arrows used in the figure, were chosen with the aim to represent graphically the
effects of the respective strategy option on the described target factors. An arrow pointing
upwards (×) shows an increase of costs, quality, time, risks, performance, and flexibility.
In contrast to that stands the arrow pointing downwards (Ø). However, such a simple
representation would only give an inappropriate overview of an enterprise’s success.
While an arrow pointing upwards indicates a positive quality, technical performance, and
flexibility, since it might stand in that case, for example, for an increase of the expected
product quality, the same arrow pointing upwards is indicating a negative development of
the remaining three factors (cots, time, risk), since these would equally increase or extend.
In order to avoid this discrepancy, the colors light gray and dark gray were used for further
distinction. A light gray arrow illustrates a positive development, whereas a dark gray
arrow stands for a negative influence on the target factor. A factor, which might develop
positively as well as negatively following the choice of a specific strategy, is represented
by a double white arrow (Ú). In that case, the effects of a factor are dependent on further
conditions and factors which, however, are not represented individually in the figure.
These are, though, described further in the respective chapters of each sourcing option
and can be read up on there (see appendix 4 until 11). What is more, the target factors,
whose change due to a strategy choice is not described in literature, were not evaluated
here either. The respective cases in the figure are hence left unfilled (white) and leave
their evaluation to one’s own interpretation.
137
Error and failure rate can be represented by indexes. Known indexes are the 0-km failure deficits, the field
deficits, and the QZ-examination and the 8D-reports.
Definition of the arrows:

impact of the sourcing strategy on target f actors cannot be
clearly def ined, as it depends on parameters
positive impact of the sourcing strategy on the target f actors
negative impact of the sourcing strategy on the target f actors
Target factors
Perfor-
Costs Quality Time Risk Flexibility
mance
1
independency
transportation
technological
development
development
purchasing
processing
production
conditions
problems
supplier
storage
product
product
arising
range
Sourcing strategy
cost leadership 2 2 2 2 2 2
Strategic
differentiation 3;4 3 3 3 3 3
positioning
niche 5 5 5 5 5 5
Process operative 6
scope strategic 6
Capability make (core-capabilities)7
scope buy (standard-capabilities)8
part 9 10 11
Unit scope
modular 12 13 14 15 16 12 17 18 19 20
local 21 22 23 24 21 21 24 25 21 26 27
Geographical global 21 22 24 21 21 24 25 21
scope low-cost country 28 29 30 28 31 30
developed country 28 29 32 30 28 31 30
single 33 34 35 36 37 36 38
Supplier
dual
scope
multiple 33 34 35 36 37 36 38
short-term (changing supplier) 39 40 39 41 39 42
Time horizon mid-term
long-term (regular supplier) 39 40 39 41 39 42
alone 43 43 44 43 46 45 43 46
Implemen- alliance 43 43 44 43 46 45 43 46
tation joint venture 43 43 44 43 46 45 43 46
service provider 47 48 49 50
138
Figure 35: Impact of the sourcing strategy on the target factors
138
Self-established representation. The information for this figure is based on the references which are given
in the respective chapters of the more detailed description of the single sourcing strategies (see appendix 4
until 11). For the sake of clarity, not all references were listed here. / A similar, but much simpler approach can
be found in Koppelmann, U., 1997, p.41.
In the following, the impacts of the single sourcing strategies on the target factors, as well
as possible uncertainties and connections are described, which are represented in figure
35: 139
1. Supplier dependency is similar to supplier integration.
2. The aim of the strategy is to lower the overall costs. However, some cost factors,
for example transportation and storage, can increase due to international sourcing,
mostly because of longer distances and transportation times. Since the company
is striving for lower costs, all the other target factors, without development time, will
get worse.
3. The single effects of this strategy are very much dependent on the way one
differentiates oneself. According to this, the target factors which are chosen for
differentiation would be emphasized as particularly positive.
4. On the whole, in comparison to cost-leadership, a higher cost factor arises due to
the differentiation. This is due to the fact that the customer is offered an added
value which necessitates investments which then influence the total costs in a
negative way. (Added value costs added money.)
5. The effects depend on the company’s positioning within the niche. Differentiation
and cost-leadership-strategies are still pursued, despite the niche. (Compare
effects of differentiation and cost-leadership on the target factors, as well as the
respective explanation in point 2 and 3.)
6. The effects of these sourcing strategies on the single factors are not clearly
definable. The separation according to the processes, rather sets the necessary
context within the own enterprise, so as to reach the best possible total result.
Primarily, an operative sourcing strategy is chosen if one wants to handle simple
uncritical objects in an effective way.
7. The effects of a make-strategy regarding the target factors are only right if it
concerns core-capabilities. If one was to produce products with standard
capabilities, the effect on the target factors would be in most cases an opposing
effect.
139
The effects of the single sourcing strategies on the target factors are given at this point as a summarized
representation. Clear and unambiguous effects, which were rated as such, were not listed here. A detailed
description of the single sourcing strategies and its effects can be found in appendix 4 until 11.
The represented information is based on detailed enquiries in literature whose references can be found
equally in appendix 4 to 11. For the sake of a better clarity and comprehension, the references were not listed
here.
The numbering of the listed points refers to the footnotes in figure 35 „Impact of the sourcing strategy on the
target factors“.
8. The effect of a buy-strategy with regard to the target factors is only right if it
concerns standard-capabilities. If one obtained the core-capabilities from external
sources, the effect on the target factors would be, in most cases, an opposing one.
9. Granted the higher amount of potential suppliers in case of part sourcing, those
can be used against each other so as to lower the purchase costs.
10. Only single units are sourced, so that the know-how for the production of the
modules stays in the own enterprise. The risk that knowledge or aims are known
by competitors is hence only small. What is more, the risk of forward integration of
suppliers is low.
11. Part-sourcing is characterized by a great amount of possible suppliers, which
makes it easy to exchange them.
12. The company saves time and development costs due to economies of the supplier,
as well as due to the fact that the participants assume the obligations and tasks
which are part of their core competences.
13. The modules which have to be obtained have a high proportion of added value by
the supplier. Even economies of scales and decreasing numbers of order
processing cannot amortize this investment.
14. Modules are presumably less expensive to store than the finished product;
however, they are more expensive than their single units.
15. Reduced production costs are caused by the concentration of the company on the
final assembly, due to which core capabilities arise, as well as through the
outsourcing of those manufacturing processes, which can be completed more
cheaply by a supplier.
16. The lower amount of suppliers in the context of modular sourcing, results in fewer
transports. However, modules might cause, due to their higher complexity and
sensitivity, along with their heavier weight and bulky volume, higher transportation
costs than their respective single components.
17. The same modules are used for multiple finished products. Those can be
assembled even before the placing of the order by the customer.
18. Owing to the fact that one does not do the production oneself, fix costs and capital
link are reduced in the context of modular sourcing. Furthermore, lower scrapping
costs have to be paid in case of a bad planning, seeing that the invoiced value of
goods of a module is lower than the value of the finished product. However,
modular sourcing involves a higher dependence on the supplier.
19. The producer is able, due to the use of a modular product assembly, to
manufacture a high amount of products in comparison to a relatively small number
of modules.
20. Modular sourcing renders the own enterprise inflexible, seeing that suppliers can
only be exchanged at high costs and in a time-consuming procedure, due to the
close relations.
21. A close relation with the business partners in the context of local sourcing is to be
seen in opposition to the access to the worldwide “best“ suppliers in the context of
global sourcing.
22. Regarding the purchasing costs, global sourcing - in comparison to local sourcing -
entrains more expenditure with respect to the country and supplier analyses,
business trips, and communication. Due to the access to worldwide suppliers,
those cost factors are very often topped by a better negotiation position, location
advantages, and by a benefit from currency differences.
23. Storage costs go down with local sourcing owing to the opportunity of smaller
order-related amounts according to the respective order, which can be supplied
more quickly due to a smaller distance. Very often local sourcing is a condition for
JIT/JIS-supplies.
24. Local sourcing involves lower transportation costs and allows shorter processing
times due to short transportation distances and less complex logistical processes.
25. Local sourcing can avoid those risks which arise due to the fact that goods have to
be obtained abroad and have to be transported over large distances. Moreover,
the planning becomes easier, planning lead time becomes shorter, bad planning
has less noticeable effects, and corrections can be done with shorter delays. In
contrast to that, global sourcing lowers dependences, supply risks, and risks due
to fluctuation in foreign currency. What is more, this sourcing strategy allows to
profit from capacities which are used differently all over the world, and sales risks
which can be reduced due to a simpler development of new markets. One
condition for the risk reduction with global sourcing is, however, a multi-sourcing
from different countries.
26. Very often, local sourcing is the basis of the guarantee of many product variants
and customer specific options, seeing that it can be manufactured by order and at
the same time delivery times can be kept short.
27. Local sourcing increases the supplier dependency due to close collaboration and
the low amount of possible suppliers.
28. The effects of the choice of the country on development costs and development
times are dependent on the productivity, the know-how, and the salaries in the
respective country, as well as the complexity of the sourced components and the
invested supplier’s capacities for a solution to the problem.
29. Regarding the purchasing costs, low-cost countries appeal to companies due to
low salaries, low material costs, partly good subsidies, low regulations, as well as
modest investments and consequently a small capital commitment in expensive
plants and machines. In contrast to that stands the productivity which is often
better in developed countries.
30. In most cases, one can find a better know-how in developed countries, which
leads to a better quality and better technical performances. Exceptions might be
those regions of low-cost countries which are specialized in particular problems.
31. Sourcing in developed countries is often linked to a smaller amount of risks, owing
to a smaller danger of losing one’s know-how, fewer problems due to cultural
differences, lower crime figures, and a better performance continuity, a higher
political stability, as well as better communication possibilities and a better
infrastructure.
32. Supplies in developed countries are often more certain and can be better planned,
which results in lower storage costs.
33. One opts mainly for single sourcing if the obtained objects are complex
components or modules, which are to be developed client-specifically and on a
long-term basis. In contrast to that, one could opt for multiple sourcing if
standardized goods with low complexity are concerned. However, multiple
sourcing involves the risk that the expenditure for the initiation of orders and order
processing, as well as the expenditure to acquire providers become too high.
34. Procurement costs can be reduced with single-sourcing, due to lower costs for
order processing, the profit from economies of scales, and a good negotiation
force owing to high order quantities. In comparison to that, similar cost results can
be achieved by multi-sourcing, due to the higher competitive pressure owing to
subsidy opportunities.
35. Single sourcing involves low transportation cost due to a lower number of
transportation journeys and owing to the fact that one makes use of the transport
goods’ capacities.
36. Single sourcing involves increases in quality and performance, due to long-term
and intensive collaboration between the business partners. In contrast to that,
multiple sourcing and the higher competition pressure forces suppliers to
permanently improve their quality and performance.
37. Multiple sourcing reduces the risk of supply, seeing that the loss of a supplier or
missing capacities are less critical.
38. Single sourcing with its intensive collaboration and the development of specific
products results in a dependence which cannot be easily reversed.
39. Advantages of short-term sourcing are that the liberty of choice concerning the
placing of an order results in a higher competition pressure between the suppliers
and the own enterprise keeps the overview of the current market conditions. In
contrast to that, long-term sourcing often means that a supplier gives his or her
regular customers preferential treatment in comparison to other customers, which
results in better conditions. Moreover, long-term sourcing involves a better
continuity in quality.
40. The close collaboration with regular suppliers results in smoother and simpler
processing of orders. This normally influences the effects on the amount of safety
stocks.
41. Long-term sourcing usually involves lower supply insecurity, seeing that a supplier
normally gives his or her regular customers preferential treatment and, moreover,
because a better continuity of performances and quality numbers exist.
42. Long-term sourcing is often characterized by a close cooperation and a tight
connection.
43. Better conditions can be negotiated when working in cooperation than it would be
the case if one acts individually. Reasons for that are economies of scales and the
better negotiation position. The exact outcome of costs, quality, and time, however,
is dependent on the positioning and the respective targeted focus.
44. Rather than acting individually one can, in cooperation, economize on
transportation costs if the means of transport are running on full capacity and the
number of journeys is hence reduced.
45. In a cooperation supply chain risks can be reduced if the purchase volume is
spread out on several worldwide suppliers. What is more, the own sales risk goes
down, as well as the risk which is linked to the purchase of machines, equipment,
and facilities if purchase costs can be shared. In contrast to that, the risk that,
when cooperating, one’s own interests are not fully fulfilled and one has to reach
compromises is relatively high.
46. In cooperation the processing time increases and the flexibility decreases, seeing
that changes and wishes demand frequent and intensive discussions, which can
considerably slow down the decision making.
47. If one leaves the purchasing of objects to a service provider, the own added value
decreases. Along with that earnings have to be taken into consideration which the
service provider pockets himself. However, costs can be reduced with the aid of
economies of scales, a possible better know-how, and a simple use of already
existing suppliers of the service provider.
48. Costs can be reduced if transportation means are utilized to their full capacities by
the service provider. In comparison to that, a single company is often not able to
make use of the full capacities.
49. On the one hand, the service provider is often responsible for the object purchase
(if it is laid down in a contract). On the other hand, the service provider can, in
many cases - most of all if the own company is a small one - fall back upon several
suppliers. Both would reduce the own supply risk. However, the object purchase is
not in one’s own hands and hence, one is dependent on the proceeding, the
current performance, as well as from the focus of the service providers. 140
50. The complete process of object procurement is done with the service provider,
which always entrains dependences.
On the basis of this representation (figure 35), the user finds clear advantages. The user
can make out easily and clearly how the sum of the chosen sourcing options influences
the single target factors. On the one hand, one can see those factors which are influenced
particularly well by the choice of a strategy. Those factors are predestined to do marketing
on one’s own behalf and to win over customers. On the other hand, those factors which
might finally lead to negative impacts become evident at an early stage, due to the
addition of the negative consequences of the chosen sourcing strategies. 141 At this point,
it would still be possible to intervene - if one chooses to do so - and to change the
sourcing strategy easily, quickly, and economically, so as to avoid those negative impacts.
If one is, however, still satisfied with the sourcing strategy, the representation at least
warns of critical and possible negative factors so as to one can be appropriately prepared.
Besides, there are more advantages for the users. Step 1 “market analysis” established
the key success factors of the customer. 142 After the own company made a decision for a
strategic positioning with regard to those market requirements 143, the representation helps
to chose a strategy, which follows the positioning and which might finally help put into
practice one’s pursued aims.
Finally, there is another advantage which has to be mentioned here. Step 4 “product
analysis” established the different cost components of a product. 144 On the basis of the
figure, one can specifically react to the factors which drive costs upwards by choosing a
strategy which reduces those factors and, consequently, positively influences the overall
140
Compare in literature „principal – agent theory“
141
The most critical impacts caused by global-sourcing were already described in chapter 2 „Differences and
impacts of global sourcing“ (see figure 4 and 5).
142
See chapter 4.3.5 „Customer analysis and determination of key success factors“
143
See appendix 4 „Product positioning towards the customers key success factors“
144
See chapter 4.6.1 „Product cost formation analysis“
result of the enterprise. However, correlations have to be taken into consideration. This
means, for example, that it would not be worthwhile for an enterprise to lower the
purchase costs by opting for a certain strategy, which would then increase the costs of the
own production on a larger scale.
Remark: The effect of the respective sourcing strategy on the different target factors was
evaluated in a way that it is true for most cases. In individual cases, this evaluation might
differ, however. For example, a buy strategy was evaluated with regard to decreasing
production costs. Reasons for that are lower assets, low fixed costs, reduction of capital
costs, utilization of scale effects, and usage of location advantages. If, however, one
cannot benefit from all these factors, the make-strategy might probably be more logical,
seeing that one could go without the profits of the suppliers and any customs duty. All this
shows that the representation, due to the high amount of influences, remains merely a
“rough” overview. In individual cases, a more detailed consideration might be logical which
might lead to a better decision regarding a chosen sourcing strategy. For that reason, the
single strategies were looked at separately, in order to assure a better and more detailed
comprehension, as well as to keep a central theme to the scientific paper. Those are to be
found in appendix 4 to 11. If, nevertheless, more information is needed, more references
can be found there.
4.7.3 Determination of a sourcing strategy

After the effect of the single sourcing strategies on the target factors had been explained,
one is wondering which sourcing strategy is suitable for a respective product. In order to
find an answer to this question, a tool has been developed in accordance with figure 35
which helps to categorize the different objects. In doing that, this research attaches a lot of
attention to the fact that the object categorization is simple, quick, and reproducible, as
well as to the fact that subjective opinions can be eliminated as far as possible. In order to
be able to put this into practice, one laid the focus on two characteristic features which
influence the sourcing behavior the most. These two are the purchasing value and the
complexity of the objects. On the basis of the categorization according to these features
typical characteristic procedures can then be established.
All in all, the tool is based on the analyses of the first four steps (market analysis,
competition analysis, company analysis, and product analysis) and it helps to make a
decision regarding the sourcing strategy. The following steps are to explain how the tool is
made up and how it is used:
Step 1: Determination of an object’s purchasing value. In doing so, the purchasing

value is the product of the costs of the respective object and its corresponding
number of units. 145
Step 2: Determination of the complexity of objects on the basis of the evaluation
matrix of table 2 “Evaluation of product complexity”. For this determination, the
following three sub-steps have to be pursued. Firstly, an evaluation of the product
complexity in dependence of the respective criteria on the basis of a scale of
estimation ranging from 1 to 10 is conducted. In doing that it is not necessary to
evaluate all criteria, but it is sufficient to take only the most important ones into
consideration. After that, the criteria are compared to each other, by splitting up
the 100% among all of them. The more important a criterion is, the higher the
percentage which it is attributed. Finally, the evaluation and the weight according
to each criterion have to be multiplied (total score) and in the end one adds up the
total score of all criteria to the total sum.
Step 3: At this point, one tries to group different components, seeing that they
might be similar with regard to handling, their assembly, and their complexity. The
aim is to increase the purchase volume of a single product by grouping it, in order
to take - on condition of economies of scales - other strategy options into
consideration and to make better conditions in the supply chain possible.
Step 4: Plot the object with regard to the established purchasing value (= ordinate)
and the evaluated complexity of objects (= abscissa) into the figure 36 “Portfolio for
determination of a sourcing strategy”. The portfolio is characterized by the four
fields “strategic”, “spot market”, “bottlenecks”, and „standard“. Dependent of the
field in which the object can be found, particular actions of sourcing are to be
carried out. Hence, the respective actions for each field are explained in the
portfolio. That is why the single actions are not explained in the running text. In
addition to this, in appendix 12 „Characterization of strategic sourcing items“, one
can find a more detailed representation which also lays out which typical features
are used to describe the objects in the different four cases.
Step 5: In step 5, the time factor for each object has to be taken into consideration,
seeing that the sourcing strategy is highly dependent on how the own number of
units and consequently the purchasing value of the object will develop in the future.
This statement regarding the development of the own purchasing value is made,
on the one hand, on the basis of the recent status in the product life cycle and in
relation to the kind of the market entry strategy, which both represent in a way the
expected market development. On the other hand, it is made on the basis of the
145
The determination of the purchasing value was already made in step 4 „Product analysis“.
own strength in the competition process, which reflect the probability of seizing
market opportunities. 146 In doing that, one must not only take into consideration
those products for which the objects have been used until now, but they also have
to consider the products for which the respective objects might be used in the
future. Those prognoses of possible chances should be included in the choice of
the sourcing strategy as early as possible. For example, standard components
which are at present only used in a low number of units might be used in higher
numbers at another point in time, and consequently, they would be handled as
spot-market-components. With this in mind, it would be imaginable to consider
international suppliers for the selection process as soon as one only deals with low
numbers of units, which usually corresponds to the sourcing strategy of local
sourcing. As a result, the company would, at a later point in time, save time and
resources for new supplier search.
Step 6: Dependent on the current and the future demand, as well as the object
complexity, the sourcing strategy has to be defined with regard to the explanations
in figure 35. Figure 37, in accordance with figure 35, shows typical strategies for
each case and their respective effect on the target factors. For the establishment
of an added up effect on the target factors, only white cases are counted in figure
37. Light gray cases show rather rough indications in what direction one has to go,
rather than that they influence the sourcing behavior, and hence they were not
taken into consideration when adding all elements up. Dark gray cases represent
possible alternative strategies to the ones explained in the white cases, which are
however subordinate. Completely untypical strategy options for a certain case
were not included in the figure. The explanations to the resulting effects are
equally to be found in figure 37.
Step 7: Reconsider the sourcing strategy and counter-proof the alternatives.
Step 8: Go Life! Application with regard to the actions in the tool (see figure 36 &
37).
146
Future developments were already taken into consideration in step 1 „Market analysis“. See step 2
„Competition analysis“ for the competition comparison.
Evaluation of the object complexity - high complexity parts are characterized by:
high requirements, high costs, high risks, critical
The "Evaluation of the object complexity" is an specif ications, complexe change possibilities,...
enlargement of the KSF to the object specif ic criteria. - low complexity parts are characterized by: low
The estimation of the f ollowing points is already available: requirements, low costs, low problems, no critical
specif ications, easy change possibilities,...
f rom Key Succes Factors KSF
f rom Market analysis
rts ity
rts ity
(compare entry strategy and product lif e cycle)
pa lex
pa lex
of mp
of mp
co
co
w
gh
lo
hi
=
=
10
1
Estimation of object complexity Weight* Total
Target factors Criteria 1 2 3 4 5 6 7 8 9 10 [%] score**
general importance of low costs/prices very unimportant very important
high requirements, low requirements,
elaboration of English version
very complex, high not complex, low
development drawings, specifications and costs, good know - costs, low know -
requirements how necessity how necessity
impact of currency changes negative postive
purchasing duties high low
price stability unstable stable
storage costs high costs low costs
storage
maintenance costs high costs low costs
difficult, complex, easy,
handling of objects costly, time not complex,
consuming fast
core-capabilities, standard-capabilities,
production complexity of manufacturing difficult, complex, easy, not complex,
high know -how less know -how
Cost need for special equipment
very special standard
and machines
transportation costs high costs low costs
utilization of means of
bad utilization good utilization
transportation
transportation
complexity of logistic
very complex easy, not complex
processes
costs for late delivery high costs low costs
storage and transport
less capable, good capable,
capability
very sensitive not sensitive
(sensitivity of objects)
storage + short, long,
allowable storage times expiration date promptly late expiration date
transportation
packaging costs high costs low costs
size of objects large small
weight of objects heavy light
Quality product product quality high requirements low requirements
length of product life cycle very short very long
requirements for fast
development
technological changes high requirements low requirements
(technological overhaul)
1 day, 1 year,
delivery time short delivery time, 6 month long delivery time,
short distances long distances
Time necessity of JIT / JIS required not required
quickness / urgent needs
very slow very fast,
processing (like services, repairs, overnight
delivery, 96h delivery…)
made to order
(e.g. length-depending parts)
application-related frequency
changes

supply insecurity
very high risk low risks
(scarcity of raw material,…)
arising
Risk monopoly or oligopoly condition very high risk low risks
problems
variability of demand very fluctuading continous
(forecasting possibilities) demands demands
Perfor- technological technological requirements high requirements low requirements
mance conditions complexity of materials very complex not complex
product variants
many less
(number of different options)
very individual, standard,
product customer specific, general market
product individuality
range special solutions for solution,
single application bulk goods
necessity of modular-/system-
system provider component provider
provider
necessity of close co-operation
(coordination between supplier
and buyer, simultaneous
engineering,...)
specificity / complexity of the

very specific, not specific,
Flexi- information between supplier
very complex not complex
bility and buyer
exchangeability of suppliers
complex and easy change of
(degree of integration,
cost intensive suppliers
supplier qualification,…)
indepen- number of possible suppliers low high
dency easy,
object substitutability no substitutes many
substitutes
availability of free capacities no free a lot of free
(capacity utilization of suppliers) capacities capacities
expertise requirements
(product know-how, application very important very unimportant
know-how)
could not be possibility of
opportunities of in-house
produced in the doing
production
own company it self
big competitive no competitive
competitive advantage
advantage advantage
Others others
emotional requirements
(brand, image, prestige,…)
sum: 100%
* The weight shows the relative importance between the criteria. The sum of weights has to be 100%.
** The total score is the product of the estimation and the weight. The sum of total scores could be in the range
between 0 and 10. Thereby the total score sum 0 represents a high complexity of objects and the score sum
10 shows a low object complexity.
147
Table 2: Evaluation of product complexity
147
Own representation, compare Hartmann, H., 2002, p.186; Koppelmann, U., 1997, pp.24ff.; Krokowski, W.
& Sander, E., 2009, pp.24ff.; Arnolds, H. et al., 2010, pp.33ff., p.208; Kerkhoff, G., 2005, p.51, pp.97ff.; Kille,
C., 2011, Modul 7, pp.30ff.; Mind Tools (1+2), 2011; Kraljic, P., 1983
Own line of action with strategic parts: Own line of action with spot market parts:
main targets: technological work together main targets: exhaust market potentials and
and supply security gain profits
long-term demand trend information / short- to medium-term demand planning
accurate demand forecasting good market data
intensive research of procurement markets intensive verification of objects price components
intensive make or buy consideration (value analysis)
establishment of long-term procurement plans intensive search for international suppliers
risk analysis, scenarios material flows management
establishment of early warning systems in the price/transport rate forecasts
field of material management detailed TCO / target pricing strategies
creation of an emergency plan intensive improving of price-performance ratio
use stocks as “buffer” (play off suppliers / exploitation of full
searching for substitutes or alternatives purchasing- and bargaining-power)
promotion of standardization efforts avoid costs from stocks / try to minimize transport
ensure security of supply and minimize risk, costs
without very negative effects on costs warehouse design and quality assurance at the
development of long-term close relationship supplier
and build up mutual trust stay in touch with substitutes
keep maximum control try to use proven objects also in new products,
purchasing department has to devote which already have been purchased for a long
especially strategic interests on this parts time
illustration of purchasing value Attractiveness of

today and in the future international sourcing: very attractive
purchasing values depend on
could be attractive
market prices and demands
high
strategic spot market
A-parts
(=company strength / own bargaining power /

importance for the company / importance of
purchasing / impacts of supply disruption)
purchasing value
B-parts
C-parts
bottleneck standard
low
0 1 2 3 4 5 6 7 8 9 10
high low
The closer an object
complexity of objects See “Evaluation of
gets to this point, the (=complexity of supply markets / product complexity”
higher supply risks are. supply risks / strategic importance for (table 2)
the business / competitive advantage)
core-capabilities key-capabilities standard-capabilities

further on next page (own line of action with bottleneck items and standard parts)...
...further on previous page (portfolio)

Own line of action with bottleneck items: Own line of action with standard parts:
main targets: ensure supply and availability main targets: handle efficiently
medium-term supply and demand forecasts short-term demand forecast
very good market data good market overview
managing product range and variants efficient processing / functional efficiency
volume insurance through contracts (at cost (e.g. reduce order processing costs)
premium if necessary) inventory optimization
backup plans increased use of IT
regular controls and maintenance of suppliers increased use of central purchasing
secure sufficient stocks agreements
cost management (optimization of storage costs application of new logistics concepts
and price policy Æ higher stocks and a generous e.g. ship to stock, line to line, etc.
price policy is necessary to prevent bottlenecks) try to bundle similar standard parts to increase
maintain long-term supply relationships purchasing value
intensive check if bottleneck items are urgently if possible try to eliminate standard parts
needed
try to eliminate (try to change bottleneck items
through standard or substitutes items)
148
Figure 36: Portfolio for determination of a sourcing strategy
148
Own representation, compare Koppelmann, U., 1997, pp.24ff.; Krokowski, W. & Sander, E., 2009, pp.24ff.;
Hartmann, H., 2002, p.186; Arnolds, H. et al., 2010, pp.33ff., p.208; Kerkhoff, G., 2005, p.51, pp.97ff.; Kille, C.,
2011, Modul 7, pp.30ff.; Mind Tools (1+2), 2011; Kraljic, P., 1983; Janker, C., 2008, pp.133ff.
Definition of the elements:

impact of the sourcing strategy on target factors cannot be clearly defined,
as it depends on parameters
positive impact of the sourcing strategy on the target factors
negative impact of the sourcing strategy on the target factors
strategies might be possible, but rather subordinated
Target factors
Perfor-
mance
1
Sourcing strategy
independency
transportation
technological
for
development
development
purchasing
processing
production
conditions
strategic parts
problems
supplier
storage
product
product
arising
range
differentiation 3 ;4 3 3 3 3 3
strategic 6
make* (core-capabilities) 7
buy* (standard-capabilities) 8
part 9 10 11
modular 12 13 14 15 16 12 17 18 19 20
local** 21 22 23 24 21 21 24 25 21 26 27
global** 21 22 24 21 21 24 25 21
low-cost country** 28 29 30 28 31 30
developed country** 28 29 32 30 28 31 30
single*** 33 34 35 36 37 36 38
dual***
long-term**** (regular supplier) 39 40 39 41 39 42
alone 43 43 44 43 46 45 43 46
sum by buying 1x 1x 3x 1x 1x 1x 2x 3x 1x 1x 2x 3x
(Only white squares have been counted. Buy choosing the preferred strategy "making", there are no effects
on the target factors from all other strategies.)
Solution: In the case of a prefereance for the purchase of the objects, this strategy enables short distances
and hence a short processing time. Finally the sensitive parts do not have to be stored and do not need
complex and expensive transport. Furthermore, due to short development times the company might be able
to withstand the technological pressure. In addition, the customer profits from a large product range and
can get an individual adjustment of the parts. However, due to the high performance requirements the costs
for purchasing increase and there is a critical dependence due to the close cooperation.
Annotations
*mostly make, sometime buy (carefully checking for efficiency, performance and supply security)
**International sourcing is only a good solution if international suppliers which meet the requirements very
well are available.
***attempts should be made to aquire a second or third source --> shift carefully
****up to 10 years
f urther on next page...
...f urther on previous page

Target factors
Perfor-
mance
Sourcing strategy 1
for
independency
transportation
technological
development
development
bottleneck
purchasing
processing
production
conditions
problems
items
supplier
storage
product
product
arising
range
differentiation 3 ;4 3 3 3 3 3
niche 5 5 5 5 5 5
strategic 6
make*(core-capabilities) 7
buy*(standard-capabilities) 8
part 9 10 11
modular 12 13 14 15 16 12 17 18 19 20
local 21 22 23 24 21 21 24 25 21 26 27
global 21 22 24 21 21 24 25 21
single** 33 34 35 36 37 36 38
short-term*** (changing supplier) 39 40 39 41 39 42
mid-term***
long-term*** (regular supplier) 39 40 39 41 39 42
alliance 43 43 44 43 46 45 43 46
joint venture 43 43 44 43 46 45 43 46
sum 3x 1x 3x 1x 3x 3x 2x 1x 1x 3x 2x 6x
(Only white squares have been counted.)
Solution: The aim of this strategy is to guarantee supplies, while costs for purchase, as well as excessive
storage and transportation costs should stay in an accessible range. Moreover, the quality and technical
performance should meet requirements over time. In order to achieve these targets, it is practical to
increase purchasing volumes by working in an alliance in order to attain a higher status for the supplier.
However, due to this alliance and by working closely with a supplier, the company is very unflexible when it
comes to changing its supplier.
Annotations
*Make or buy, depending on the market availability and the own capability to produce the product
economically. To guarantee supply, a make-strategy would be less risky.
**search for alternative suppliers
***variable, mostly long-term, but if possible reliable short-term sourcing

Target factors
Perfor-
mance
Sourcing strategy 1
for
independency
transportation
technological
development
development
spot market
purchasing
processing
production
conditions
problems
items
supplier
storage
product
product
arising
range
strategic 6
buy*(standard-capabilities) 8
part 9 10 11
modular 12 13 14 15 16 12 17 18 19 20
global 21 22 24 21 21 24 25 21
low-cost country 28 29 30 28 31 30
multiple**33 34 35 36 37 36 38
mid-term***
long-term*** (regular supplier) 39 40 39 41 39 42
alone 43 43 44 43 46 45 43 46
sum 1x 3x 3x 1x 2x 3x
Solution: As required by spot market items, this strategy has a particularly positive impact on purchasing
costs, risk level and the flexibility, with regard to the choice of suppliers. However, the development costs
increase, because construction (Poka-Yoke) and drawings (English version) have to be established for
international purchase. Especially the transportation costs increase, due to the the large distances and
the impossibilty to utilize the transportation means effectively.
Annotations
*keep low inventories / reduce or don't enter own production
**stay in touch with new suppliers
***varied; typically 12 to 24 months

Target factors
Perfor-
mance
Sourcing strategy 1
independency
transportation
technological
for
development
development
purchasing
processing
production
conditions
standard items
problems
supplier
storage
product
product
arising
range
operative 6
buy (standard-capabilities)
8
part 9 10 11
local* 21 22 23 24 21 21 24 25 21 26 27
global* 21 22 24 21 21 24 25 21
low-cost country* 28 29 30 28 31 30
developed country* 28 29 32 30 28 31 30
single 33 34 35 36 37 36 38
short-term** (changing supplier) 39 40 39 41 39 42
mid-term**
alone 43 43 44 43 46 45 43 46
alliance 43 43 44 43 46 45 43 46
joint venture 43 43 44 43 46 45 43 46
sum 2x 2x 1x 1x 1x 2x 2x 1x 1x 1x
Solution: The aim of this strategy is to handle parts most efficiently. Therefore, one found out that costs
for purchasing and transportation decrease. Furthermore, one should aim at fast processing times, which is
the basis to keep storage costs at a minimum level. Seeing that standard items are established simple
parts, the negative impact of this strategy on development costs and time, as well as on quality and
performance can be seen uncritically. The potential risks should not be overestimated either, since
suppliers can be substituded easily and quickly, despite single- and short-term-sourcing.
Annotations
*Searching for low costs suppliers in the closer environment
**limited; normally 12 months or less
149
Figure 37: Sourcing strategies of the four portfolio fields
149
Self-established figure, compare Koppelmann, U., 1997, pp.24ff.; Krokowski, W. & Sander, E., 2009,
pp.24ff.; Hartmann, H., 2002, p.186; Arnolds, H. et al., 2010, pp.33ff., p.208; Kerkhoff, G., 2005, p.51, pp.97ff.;
Kille, C., 2011, Modul 7, pp.30ff.; Mind Tools (1+2), 2011; Kraljic, P., 1983
Advantages of the tools:

- A subdivision according to the ABC parts is established in order to find out in a
simple and effective way where the capacities for international sourcing have to go.
- Clear representation of where the products of a company are and how the product
spectrum is composed (e.g. many components with a low purchase volume or
many bottleneck items).
- Determination of the really critical, procurement objects which threaten a
company’s existence out of a multitude of different purchase objects. 150
- Clear representation of the necessary capabilities for a product manufacturing.
(This step helps to find a suitable supplier.)
- The representation gives information in a clear and illustrative way about the
strategic position of the customer on the supply market and thus implies their
bargaining power. 151
- Object-specific test, not supplier-specific.
- Company- and product-specific factors do not get lost in the evaluation matrix.
- Higher level of objectivity during the sourcing decision.
- Quick and simple decision making, even for inexperienced purchasers.
- Application of scenario techniques is possible.
- Reasons for specific decisions can be easily given. (Tool guarantees a good
comprehensibility and possibilities of justification of one’s own actions.)
- Establishment of an overview of the possible sourcing strategies.
Disadvantages of the tools:

- While the purchasing value is easy to determine, getting information for a
convincing assessment of the complexity of the parts might be difficult and
arduous. 152
- Although the proposed strategies give one a rough opinion on what direction to go
for the buying behavior, this proposition might be wrecked by company- and
product-specific features, by historical developments, by certain situations, by
already existing relations, or given aims of the management. 153
- The diagram does not propose a clear sourcing behavior for objects which lie in
between two fields, or even in the middle of the four fields.
150
Arnolds, H. et al., 2010, p.35
151
152
Compare Arnolds, H. et al., 2010, p.35; Hartmann, H., 2002, p.187
153
Compare Arnolds, H. et al., 2010, p.35
- In many companies, the choice of the sourcing strategy is based on experience

and intuition. With respect to that, the diagram is an additional expenditure, since
this doing-barrier has first to be overcome. Old-established employees might
hence be of the opinion that they have always proceeded in that way and they do
not comprehend why this should be changed. They might also be complaining that
everything is left to the work of the purchase department which, at a certain point,
has the responsibility for too many tasks. Æ Under those circumstances it is true
that if nothing changes nothing will improve either.
- What is missing are considerations on local content regulations and the
representation of the level of difficulty for the establishment of new supply markets.
Hence, an already existing market- and country-specific know-how might be used
by IPOs and subsidiaries, in order to source components with less expenditure
and risk than elsewhere. Moreover, customer location is equally only partly taken
into consideration. 154
Remark: During the establishment of the tools, it became apparent that the consulted
literature does not provide uniform information on the choice of a sourcing strategy in
dependence of the object specification. Krokowski and Sander, for example, recommend
the global sourcing of spot-market parts, while Kraljic would obtain them locally from
multiple suppliers. The same is true for bottleneck items. However, in that case,
Krokowski and Sander would opt for the local, Kraljic for the global obtainment of the
objects. 155 During the establishment of the diagram, one tried to analyze and eliminate
those discrepancies as far as possible. Partly, the own research has contributed to the
decision making for each sourcing strategy. Altogether the differences between the
experts’ opinions show us again how complex this subject is and that, although there are
tools at hand, one should always consider again and test the different strategies with
regard to both plausibility, and effect on the target factors (see figure 35 & 37).
In principle, one finds in literature similar representations to the figure 36. However, these
are very often superficial and they do not show the consequences of the target factors
(see figure 37). An essentially important point of figure 36 is to be mentioned here, seeing
that - in contrary to the consulted literature - the abscissa was exchanged. Consequently,
a point near the zero-point of the coordinate axis indicate a very complex object, while in
154
Most of the listed points were, however, already examined in step 1 „Market analysis“.
155
Compare Krokowski, W. & Sander, E., 2009, p. 26; Kraljic, P., 1983
literature, such a point is used to represent simple objects. 156 Certainly, the level of
change seems at first very simple. The reason for that is, however, sobering, seeing that
the relation to the BCG-matrix becomes evident (see figure 13 and 14 “market growth –
market share portfolio”), which makes the use of the tool much more understandable.
These relations, as well as typical strategies are explained briefly in the following (see
figure 38).
illustration of purchasing value Attractiveness of

Purchasing value
today and in the future vs. complexity
international sourcing: very attractive
purchasing values depend on
market prices and demands could be attractive
high
strategic spot market
A-parts
(=company strength / own bargaining power /

importance for the company / importance of
purchasing / impacts of supply disruption)
2 1 2 2
purchasing value
B-parts
4’’
C-parts
1 2’ 3
1
bottleneck standard
low
4’
0 1 2 3 4 5 6 7 8 9 10
high low
The closer an object
complexity of objects See “Evaluation of
gets to this point, the (=complexity of supply markets / product complexity”
higher supply risks are. supply risks / strategic importance for (table 2)
the business / competitive advantage)
core-capabilities key-capabilities standard-capabilities
Figure 38: Typical strategies and proceedings in the sourcing portfolio and relations to the BCG-
157
matrix
156
The contrary is true for an object whose point is far away from the zero-point of the coordinate system. /
Compare Koppelmann, U., 1997, pp.24ff.; Krokowski, W. & Sander, E., 2009, pp.24ff.; Hartmann, H., 2002,
p.186; Arnolds, H. et al., 2010, pp.33ff., p.208; Kerkhoff, G., 2005, p.51, pp.97ff.; Kille, C., 2011, Modul 7,
pp.30ff.; Mind Tools (1+2), 2011; Kraljic, P., 1983
157
See Boston Consulting Group Matrix of figure 13 and 14
If one considers firstly the light gray line (“––––“), strategic objects can be seen as
question marks, seeing that higher financial means are necessary to be successful on the
market. These financial means are on the one hand used to do some research in
technologies which reduce their difficulty and complexity, and on the other hand, they are
used to find less complex alternatives to the current objects. Both strategies aim at
transforming the current strategic parts (point 1) in future spot-market items (point 2). The
field of the spot-market items is characterized by a high profitability and consequently by
particularly attractive objects. Gained financial means are partly taken to use these
objects in further products, so as to establish them in new markets and finally to increase
further the company’s turnover. Spot market items come close to the so-called stars.
During the following course of the product life cycle, there will be a market saturation and
the market will eventually decline. When numbers of units decline, spot-market items
(point 2) become standard items (point 3). If objects are not to be pushed strategically,
profits have to be made, and products have to be discontinued until point 4’. Sometimes
objects are still needed in single products (e.g. as replacement part of already sold
products) and consequently, they cannot be fully withdrawn from the market. However,
the number of possible suppliers could decline, e.g. due to outdated technologies. Owing
to the worse supply, standard items then become bottleneck items (point 4’’). As a
consequence, those items then have a subordinate market position and higher prices to
guarantee the supply and thus they resemble a poor dog market segment. The light gray
line, which has just been described, only represents a possible strategic order, as it would
be typical of the life cycle of a product.
In comparison to that, the dark gray line (“––––“) represents a further strategy, as it is
very often aimed at by companies. They try to increase the number of bottleneck items
and standard items (point 1), in order to profit from a better bargaining power (point 2).
The number of items can be increased by grouping of similar components, as well as by
using the objects in further products. If in the case of bottleneck items both solutions are
not possible, one should try to replace those by standard items (point 2’).
In general, one should always try to push as many objects as possible to the spot market
during the sourcing process, in order to have as few objects as possible in the other fields,
because the latter ones are more risky and less profitable.
S
4.8 Step six: Country analysis t
a
r Market
t
In this step, it has to be examined which Economic of
international
sourcing
supply country is most suitable for the S
Competition
respective object. During the elaboration,

TCO
however, it became quickly apparent that a W
Company
general statement with regard to the ideal

O
supply country is not possible, because this Logistics
Product
is, on the one hand, very much dependent T
on the customer demands and the product Supplier

Strategies
features (complexity and purchasing value), Country
PESTE
as well as the company’s situation and the
chosen strategy. On the other hand, it has to be taken into consideration that the situation
of the supply country, as well as their specialization might change within several years. 158
For that reason, this chapter firstly concentrates on the most important criteria for a
decision for a country (PESTE-analysis), while some points should be looked at in more
detail. Looking at it from the aspect of a quick obtainment of information, then some
important indexes and sources of information are shown as a result, which can help in the
search for the evaluation of the previously named decision criteria. After that step, the
currently most important and most interesting supply markets are described.
4.8.1 Important criteria for the country evaluation

The selection of the supply country was already limited in step 1 „market analysis“. In
accordance with that, the decision was made if the key success factors and along with
that the market requirements permit an international sourcing or if one rather should fall
back upon local purchase sources and countries (see first decision criteria in figure 39).
Furthermore, the sales market was determined within the market analysis. In that context,
the country decision is very much influenced not only by the completion of possible local
content regulations, but also by the location of the market and sourcing conditions. 159
In a similar way, the choice of a country can be also simplified by experience in the
potential supply countries by local suppliers, foreign company subsidiaries (IPOs,
production sites, etc.), or other local business relationships. 160
158
Compare step 1 to 5 / The most suitable example for the quick change of the supply situation in a country
is the nuclear catastrophe which took place in Japan in 2011.
159
See chapter 4.3.5 “Customer analysis and determination of key success factors” and chapter 4.3.6
„Location of customers and local content regulations“
160
See step 3 “Company analysis”
Step six: Country analysis 101
First decision criteria

Market Product
- market requirements - cost components

(key success factors) - product value
- location of customers
See Step 4 “Product analysis”
- local content regulations
See Step 1 “Market analysis”
Company Strategy
Still available connections? - sourcing strategy

- own subsidiaries (production plant, - target factors (costs, quality, time,
development centre, IPO’s, sales risk, performance, flexibility)
office…) - product complexity
- suppliers
See Step 5 “Strategic determination”
- customers
See Step 3 “Company analysis”
Second decision criteria

PESTE
Political & Legal Economical
Political Economic factors

- form of government - GDP / GDP per person
- political stability, political problems - economic development
- degree of democratic freedom - public debt
- degree of economical freedom - inflation
- embargos - import-/export rates
-trade alliances / - quotas
member of trade organisations - foreign investments
- entry barriers - degree of market saturation
Legal - economic cycle
- intellectual property / copy-right - industries
- expropriation risk Cost factors
- legal system - distance to market
- trade law / labour law / contract law - raw material costs
- rules for competition - energy costs
- wages
- productivity
- capital costs
- interest rates
- exchange rates
- hedging costs
- subsidies
- tax
further on next page... - customs
Social Technological
Social risks - know-how / expertise / education

- strike - quality and performance level
- war - access to R&D
- social unrest - communication systems
- discrimination - infrastructure
- corruption
Culture
Environmental
- religion
- communication - raw material
- operation method (sources, scarcity, access)
- attitudes, values, rituals - natural disasters
and believes - climate
Health care system - time zone
Language - location
Social groups - topography
Labour unions
Population-specific factors
- population
- population growth rate
- labour force
- age structure
161 162 163

Figure 39: Criteria for the country evaluation based on a PESTE analysis
Moreover, the choice of a country is very much dependent on the product value and the
cost components, as well as on the product features and the strategic demands for costs,
161
Own representation. Compare Krokowski, W. & Sander, E., 2009, pp.41ff.; Kerkhoff, G., 2005, pp.68ff.;
Arnolds, H. et al., 2010, pp.211ff.; Koppelmann, U., 1997, p.118
162
An evaluation and comparison of the supply countries can be made with the help of an evaluation matrix as
it is represented in table 2 „Evaluation of product complexity“ (Regarding the evaluation matrix, compare also
Krokowski, W. & Sander, E., 2009, p.44). In literature, one finds also several portfolios. See for example the
portfolio of country evaluation in Kerkhoff, G., 2005, p.68
163
In addition to the PESTE-analysis, appendix 16 „The BRIC-states“ represents in detail the nations Brazil,
Russia, India, and China, in order to obtain some information regarding the country choice. Against the same
background appendix 17 represents „The most feared corporate risks by region“, the biggest country-specific
dangers. In order to complete the investigation of the country choice, appendix 18 shows „Germany’s position
in international trade“, an overview of the international trade from the German perspective, in order to
minimize entrepreneurial supply risks, which are for example due to embargos or protectionism.
164
quality, time, risk, performance, and flexibility. The enumerated points influence
considerably the distance between customer and supplier (local vs. global), as well as the
country’s features (low-cost country vs. developed country). With this in mind, a purchase
from China would only be imaginable with regard to costs and logistics expenditure, if,
amongst others, volumes are sufficiently large and processing times are acceptable.
If only costs are to be reduced, the representation of the cost components of step 4
„Product analysis“ would give an important rough indication in accordance to which
category of supply country one should look for. 165 In this context, 80% of companies justify
their decision for global sourcing by the sustainable reduction of their labor costs and
incidental labor costs. However, it has to be noted here that it would be wrong just to look
for a country with a low wage level. Instead, the combination of the wage level, and the
necessary expenditures to use this level, possible risks, as well as possible additional
performances should be taken into consideration. 166
Besides the „first decision criteria“, which have been established in step 1 to 5, a PESTE-
analysis (= second decision criteria) should be carried out, for the simple reason to weigh
potentials up against the risks. 167 The most important criteria for the establishment of a
PESTE-analysis are equally to be found in figure 39. In order to give a first overview or to
avoid comprehension problems, some of these second decision criteria are to be
explained in the following. A complete drawing up of all criteria is, however, not possible in
this piece of work. During the elaboration of the single second decision criteria, Germany
was often set as a reference, or facts were described from the German perspective. The
respective supply country can then easily be set into relation with Germany. If the
headquarters are not in Germany, the specific information has still to be found out with
regard to the example of Germany and is then to be compared to the supply country, and
finally they should influence the decision on a country.
164
Compare step 4 “Product analysis”, step 5 “Strategic determination” (especially figure 35 “Impact of the
sourcing strategy on the target factors”) and Koppelmann, U.,1997, pp.119f.; compare also Krokowski, W. &
Sander, E., 2009, p.40
165
Compare figure 33 “Relation between high cost components, sourcing behaviour and internal effects”.
Compare also figure 32 “Graphic evaluation of the product costs”
166
Kerkhoff, G., 2005, p.67; One has to look at more than just the wage level, when one wants to pursue the
aim to reduce costs by international sourcing. A total cost of ownership consideration is hence necessary (see
Step 9).
167
PESTE is short for political, economical, social, technological and environmental
Degree of democratic freedom (Political analysis)

Essential for the decision of a supply country is the degree of democratic freedom. It
provides the information if unlimited civil rights in the specific country, as well as a social
security system for employees exist or not. If both elements cannot be found, supply risks
might arise due to imminent conflicts. 168
Overview of the world economy with focus on Germany (Economical

analysis)
A statement on the economic situation of a country is important, amongst others in order
to know what the population’s purchase power is like and how interesting the market is
with regard to one’s own turnover. Regarding international sourcing, the economical
analysis shows, on the one hand, how stable the economy and thus also the supply is (e.g.
owing to a low inflation risk of the suppliers), and on the other hand, to some extent, which
interest a specific country represents for foreign investments and supplies (e.g. partly
expressed by the GDP growth). Moreover, one finds out, which financial means are
gained due to which performances and, thus, also roughly which know-how is available in
the respective country. Due to the economic comparison, it becomes furthermore
apparent which position and power the country has in the world. 169
Regarding most of all the latter point, Germany is the fourth biggest economy, following
the USA, Japan and China (see chart below).
16.000.000
14.119.000 GDP World =
14.000.000
GDP [millions of USD]
12.455.979 58.141.500 millions of USD

12.000.000
10.000.000
8.000.000
5.069.000
6.000.000 4.985.460
3.330.030
0
4.000.000 2.649.390
0
2.174.530 2.112.780
2.000.000 1.687.540 1.573.410 1.460.250
170
Figure 40: GDP (nominal) in millions of USD in 2009
168
Compare Kerkhoff, G., 2005, p.70 / Information can be obtained for example from the federal foreign office.
169
Compare also Lam, Thuy Vo, 2012
170
Own representation based on the information from The World Bank
The agricultural sector makes up 0.8% of Germany’s Gross Domestic Product (GDP),
industry 26.6% and the service sector 72.6%. Their GDP increased by 2.7% in 2007 as
compared to only 1% in 2008. However, one year later, the GDP decreased by -5%. 171
Changes of the world economies

In the 1980s and 1990s, the driving forces of globalization were still the three biggest
economies USA, Japan and Western Europe. However, new markets for goods and
services have opened up and shares of production have been outsourced to low-income
countries because of their sourcing attractiveness. Consequently, over the last years,
several of the newly industrialized countries, such as China, India, Russia, and Brazil
have become economic giants themselves. 172 Chart 41 represents the share of the new
economy powers to the world’s economy capacity in percent, measured in current prices.
1990 1995 2000 2001 2002 2003 2004 2005 2006

Brasil 2,23 2,61 2,03 1,76 1,54 1,5 1,6 1,97 2,22
China 1,7 2,47 3,77 4,2 4,43 4,45 4,66 5,02 5,46
India 1,38 1,21 1,45 1,5 1,51 1,56 1,61 1,75 1,84
Russia n.a. 1,06 0,82 0,97 1,05 1,17 1,43 1,71 2,03
BRCIs 5,31 7,34 8,07 8,43 8,53 8,69 9,3 10,45 11,56
OECD 78,22 82,04 81,07 80,8 81,37 81,28 80,36 78,4 76,51
Figure 41: Brazil’s, China’s, India’s and Russia’s shares of world economy capacities in percent (in
173
current prices, US-dollar)
Referring to this chart, one can see that since 1990, particularly China’s economy has
grown by 350 percent. In comparison to that, the share of the OECD has nearly stagnated
over the last years. For more information, chart 42 also represents the countries with the
largest GDP in the world in 2007 and the respective prognostics for 2050.
According to this figure, Germany competes with several big politically and economically
powerful countries. A country’s economic size is the product of the working people in its
population and its productivity. Normally, countries with a big population therefore benefit
from a strong economy. China has 1.3 billion inhabitants, which corresponds to 16-times
Germany’s number of inhabitants. Moreover, outsourcing makes China’s productivity
increase very quickly. Due to both reasons explained above, Germany has already lost its
position of being the world’s third biggest economy to China. Probably in 2050, as
prognostics show, Germany will only be the ninth biggest economy in the world.
171
Data from the Central Intelligence Agency
172
Compare Scholtissek, S., 2008, pp.9ff.
173
Source: Dieter, H., 2008, p.10
174
Figure 42: Countries with the largest GDP in 2007 and 2050
174
English version of Staffelt, D. & Struck, P., 2008, p.112
Beside the GDP, the public debts essentially determine the economic health and with it
the attractiveness of international sourcing. The German public debt amounts to 73.2% of
the GDP (= 2,437,582 million USD) (see figure 43). Head of public debts are Zimbabwe,
Japan, Saint Kits and Nevis. 175
300
282,6
public debts [percentage % of countries GDP]
250
192,9
200
185
=2.437.582 million USD
154,8
150 (rank 20)
124,4 113,9
110
115,8 113,4
105,1
101
100 85,8 85
82,5
78 77,6
80,9 73,2
77,7 76,8 68,2 66,4
69 66,5 64,8
50
0
Jamaica
Dominica
France
Zimbabwe
Malta
Egypt
Japan
Germany
Greece
Sudan
Portugal
Ireland
Singapore
Saint Kitts and Nevis
Lebanon
Hungary
Iceland
Canada
Austria
Cote d'Ivoire
Israel
Sri Lanka
Italy
Belgium
United Kingdom
176
Figure 43: Public debts in percent of the countries’ GDP
Often, the inflation rate is directly linked to the public debts, as governments try to reduce
their debts in this way. The inflation rate shows how quickly prices fall in a country and
hence how stable and precious the currency is in the respective country, which, in turn, is
also interesting for international sourcing with regard to the exchange rates. According to
this, in November 2010, the German’s inflation rate was 1.5%, and hence relatively low. 177
However, one has to keep in mind that in this case the rate was achieved most of all due
to the recent economical recession in the wake of the worldwide financial crisis.
175
Data from the Central Intelligence Agency
176
Self-established representation based on the information from Central Intelligence Agency
177
Source: Destatis Statistisches Bundesamt
Wages (Economical analysis)

One of the most important points which decisively influence the decision for a supply
country is the country-specific wage level. 178 A comparison of industrial labor costs in
twelve countries is to be found in the following figure. The German labor costs were taken
as reference (100%) for the countries of comparison. According to this representation,
wage costs in Germany of 30€/hour (=100%), compared to about 1€/hour in newly
industrialized countries such as China (=2,6%), make companies consider outsourcing of
their production and services, seeing that a more effective production in foreign countries
is possible.
Germany 100%
Czech Republic 11,9%
Hungary 11,5%
Brazil 9,0%
Poland 8,8%
Mexico 8,0%
Malaysia 6,8%
Thailand 6,4%
Rusia 4,9%
India 3,7%
China 2,6%
Indonesia 1,3% percentage
0% 20% 40% 60% 80% 100%

179
Figure 44: Comparison of industrial labor costs per hour including social charges
However, the purchaser has to be aware of the fact that the expenditure and the risk
during the establishment of new supply structures is the biggest, when labor costs are
low. 180
178
Compare Kerkhoff, G., 2005, p.67
179
English version of Kerkhoff, G., 2005, p.72; Compare Scholtissek, S., 2008, pp.174ff.
Productivity (Economical analysis)

Besides the wage level, the productivity is essentially important for the evaluation of the
attractiveness and hence the profitability of international sourcing in a country. A country’s
productivity can be estimated with the Growth Environment Score (GES). 181 The scale of
the GES is divided into a scale ranging from zero to ten, with high scores showing high
productivity. The GES depends on 13 variables. Some of them are macroeconomic, such
as inflation, amount of foreign indebtedness, and national debts. Others are for example
corruption, rule of law, stability of the government, use of cell-phones, internet and
computers, life expectancy, and education, which can be covered by the term
microeconomic factors. 182 The following charts show the GES of different countries.
GES-values for Top 10
Change 1997-2007
GES 1997
Top 10 average 2007
Top 10 average 1997
180
Compare Krokowski, W. & Sander, E., 2009, p.40
181
The productivity is essential to become wealthy; Staffelt, D. & Struck, P., 2008, p.115
182
Staffelt, D. & Struck, P., 2008, p.115
GES-values BRIC-States and Next Eleven (N11)
Change 1997-2007
GES 1997
Average developing countries 2007
Average developing countries 1997
GES-values for Germany, USA and BRIC-States
GES 1997 Change GES 1997-2007
Germany USA Russia Brazil China India
183
Figure 45: GES-values for different economies
183
English version of Staffelt, D. & Struck, P., 2008, pp.116f.
As expected, the most developed countries such as Norway and Sweden achieve the
highest GES-values. All BRIC-states obtain lower GES than the G8 184 . The GES of
Germany and USA are almost equal. Consequently, the productivity of both states grows
similarly on condition of the respective demographic differences. In comparison to the
BRIC-states and the so-called Next Eleven, only South Korea achieves the same scores
as Germany. The other 14 nations are at least two scores behind Germany. 185
Hence, Germany in its role as an important export nation, benefits considerably from the
growth of the BRIC nations. With regard to sourcing, Germany could be notably
interesting after productivity has also been taken into consideration. 186 187
Exchange Rates (Economical analysis)

The increasing turbulences on the financial markets essentially influence the exchange
rate and consequently the success or failure of the own company. When one chooses a
supply country, one should therefore consider the minimization of currency risks, as well
as the seizing of opportunities. The currency risks can nowadays be reduced by exchange
hedging systems, which, however, entrains hedging costs. In that context, it is interesting
to know that the supply markets America and Asia are mostly USD-oriented, while the
supply market Europe, works with the Euro (€) as its currency. 188 189
184
without Russia
185
Compare Staffelt, D. & Struck, P., 2008, p.115
186
Compare Staffelt, D. & Struck, P., 2008, pp.118f.
187
Compare in appendix 8 „Local vs. global-sourcing” the subitem “Identification of key technologies and
know-how”.
188
Compare Krokowski, W. & Sander, E., 2009, p.40; Kerkhoff, G., 2005, p.70
189
See in appendix 8, the advantageous usage of fluctuating exchange rates by global sourcing.
Culture (Social analysis) 190 191
All people in the world show some similarities in their basic behaviors and interests, which
are determined by the human nature (e.g. sleeping). However, they have very different
personalities. The link between both phenomena is culture, which can be defined as a
system of values. Values are present in factors like family, peer group, associations,
religion, economy, education, or politics. Finally, the set of values are influenced by the
values around us, and as a result, individuals can have different beliefs, norms, status,
philosophies, ethic values, backgrounds, taboos, or strategies and structures. The danger
is, however, that only 10% of these values are visible, and about 90% of them are not,
seeing that they are below the “ocean surface” (see picture below).
Figure 46: Visible and invisible cultural values 192
Values show us what is good or what is bad, and they help us how to do things right.
Attitudes, verbalism, gestures, and contact, phenomena which are all positive and normal
in one culture, might, however, be a taboo in another culture. As a result, culture can
change the message. Consequently, a specific situation can be evaluated differently by
different people, because of their particular and personal values. All these cultural
differences can lead to problems or handicaps in an international cooperation and can so
wreck the common undertaking. Therefore, purchasers who want to source internationally
have to know how to handle the different values and how to make business correctly with
different cultures.
190
Independent elaboration based on the sources Dumetz, J., 2010; Krüger, M., 2010, part 1+2
191
For further information on cultural differences, see Hofstede, Trompenaars und Hall. Other experts are
D’Iribane, Schein, Samovar, Mead, Levis Strauss, Lewis, and Mole.
192
Krüger, M., 2010, part 1, p.61
According to Hofstede, Hall and Trompenaars, cultures can be described on the basis of
the criteria listed in figure 47.
Hofstede Hall Trompenaars
Individualism / collectivism Monochromic / polychromic Individualism / collectivism
High context / low context

Masculinity / femininity Universalism / particularism
communication
Uncertainty avoidance High contact / low contact Diffuse / specific
Power distance index Achievement / ascription
Long term orientation Neutral / emotional
193
Figure 47: Cultural dimensions
The evaluation of the most important cultural dimensions for different countries according
to Hofstede can be found in table 3. The respective cultural dimension is the more
distinctive, the higher the evaluation. The last column in this table shows the cultural
distance in relation to Germany, which was calculated on the basis of the following
formula: 194
¦ ^I `
I ip / Vi / 4
4
2
CD j ij
i 1
Iij represents the index for the cultural dimension i in the country j
Vi represents the variance of the index of the dimension i
p labels the purchaser’s home country (here Germany)
CDj is the cultural distance of the country j to the purchaser’s home
193
Krüger, M., 2010, part 1, p.72 / The signification of the single cultural dimensions are assumed to be known.
194
Kaufmann, L., 2001, p.293
Attractiveness of very attractive

international sourcing: attractive
risky, because of culture differences
Country Individualism Masculinity Uncertainty Power Culture
avoidance distance Distance
Germany 67 66 65 35 0.00
Switzerland 68 70 58 34 0.03
Italy 76 70 75 50 0.22
South Africa 65 63 49 49 0.22
Australia 90 61 51 36 0.30
New Zealand 79 58 49 22 0.30
Canada 80 52 48 39 0.31
Ireland 70 68 35 28 0.37
USA 91 62 46 40 0.39
Argentina 46 56 86 49 0.53
Great Britain 89 66 35 35 0.53
Austria 82 79 70 11 0.53
Malaysia 91 69 81 13 0.63
Israel 54 47 81 13 0.70
Spain 51 42 86 57 0.95
Iran 41 43 59 58 0.96
Belgium 75 54 94 65 0.99
Finland 63 26 59 33 1.08
France 71 43 86 68 1.20
Japan 46 95 92 54 1.23
Brazil 38 49 76 69 1.28
Turkey 37 45 85 66 1.39
Bulgaria 54 47 86 74 1.41
India 48 56 40 77 1.53
Pakistan 14 50 70 55 1.54
Poland 38 34 92 58 1.61
Taiwan 17 45 69 58 1.61
Greece 35 57 112 60 1.67
Colombia 13 64 80 67 1.87
Hong Kong 25 57 29 68 1.91
Netherlands 80 14 53 38 1.92
Mexico 30 69 82 81 1.96
Slovenia 27 61 112 66 2.07
Thailand 20 34 64 64 2.07
Czech Republic 27 61 112 66 2.07
Peru 16 42 87 64 2.11
Baltic states 35 26 82 66 2.17
Norway 69 8 50 31 2.33
Chile 23 28 86 63 2.37
Portugal 27 31 104 63 2.50
Denmark 74 16 23 18 2.52
Venezuela 12 73 76 81 2.58
Hungary 91 16 58 69 2.62
Philippines 32 64 44 94 2.80
China 20 57 8 69 2.85
Sweden 71 5 29 31 2.97
Singapore 20 48 8 74 3.24
Variance 633.27 376.71 669.16 404.28
195
Table 3: Country specific cultural distances in relation to Germany
195
English version by Kaufmann, L., 2001, p.293, with some independent modifications. Own estimation of
cultural attractiveness (medium gray 1; 1 < light gray < 2; dark gray 2)
196
Low cultural distance values indicate a similar culture. In the case of Germany, one
remarks the lowest cultural distance of 0.03 towards Switzerland. In contrast to that, the
highest cultural differences can be found in comparison to Singapore, with a value of 3.24.
At this point, one has to take into consideration figure 5 “Problems and goals on emerging
markets”, which lists cultural difficulties as one of the top problems. Therefore,
international companies may find it less risky and more profitable to source products from
similar cultures, rather than from those which are completely different. If one wants to
source successfully in China, for example, one would have to spend some time on the
cultural differences to this country. However, failures can arise instead of similar cultures.
Therefore, general differences should be well found out and defined in each single case
by getting in touch with the other culture well before doing business with them. One
should get a deep and solid knowledge of the other culture and learn as much as possible
about it. Although stereotypes are bad in a certain way, they might be useful to get in
touch with a culture in the first place. First contacts can be established by reading books
and newspapers, talking to friends and colleagues about a specific culture, participate in
seminars, or traveling. After that it is important to learn from each other.
Regarding the risks of cultural differences, one has to be sure that both cultures share the
same understanding of their future cooperation. Moreover, it is necessary to know about
the other’s attitude of quality (high/low), time (long term or short term thinking) and so on.
One should not be afraid to ask in case of doubt. It should always be absolutely clear what
the other person really wants and what his motivation is. Finally, one should not forget all
good purposes when under pressure. A good job can be done even between different
cultures, but none of the parties should leave a negative impression on the other. So
make sure that you create a good impression on your business partner, which is
necessary for further cooperation.
Further advice for doing business between different cultures:
- Do never do business based on assumptions, seeing that wrong assumptions are
always possible.
- If a person feels uncomfortable, find a place which is comfortable.
- Be open minded.
- Be aware and respect the difference in lifestyle. Cultural ignorance is not
acceptable.
- Culture shock is normal.
- Don’t think in a linear way, but be creative and create a new way to satisfy both
parties. Today’s managers are not afraid to seize opportunities.
196
In literature, similar cultures are grouped to so-called cultural clusters.
Be aware:
“We don’t see things as they are; we see them as we are.” (ANAIS NIN)
Everything is a matter of perception!
Population and labor force (Social analysis)

Although population and labor force are certainly secondary in comparison to other factors,
they should be included in the analysis, seeing that they are indicators for, amongst others,
the economical power, the size and the potential of a country. Furthermore, they show, in
some way, the capability and willingness to work, as well as the availability of workers. 197
Today, the population of Germany amounts to nearly 82 million 198, with an employment
rate of 70.9% (including all inhabitants between the ages of 15 to 64) in 2009. That leads
to a total labor force of 43.5 million people (see figure below), of which 2.4% work in
agriculture, 29.7% in the industry and 67.8% in the service sector.
900
813,5 Germanys labour force per occupation
800
labour force [million people]
700
67.8% service
600
500 467,0
400
29.7% industry
300
225,5
2.4% agriculture
200 154,2
113,7 101,7
100 75,7 72,4 66,2 53,8 47,3 46,5 46,2 43,5 38,4 37,9
Figure 48: Labor force of the fifteen biggest employable economies and Germanys labor force per
199
occupation in 2009
In comparison to Germany, China and India have a much bigger labor force and, with
regard to this factor, are the world leaders.
197
Compare „Overview of the world economy with focus on Germany (Economical analysis)”
198
Eurostat, 2012
199
Self-established representation based on the information from the Central Intelligence Agency
Education (Technological analysis)

The level of education indicates amongst other which performances one can expect from
a country with regard to e.g. quality or technology.
The following chart illustrates the GES-values for education of Germany compared to the
BRIC-states and the USA. 200
201
Figure 49: GES-values for education
Among all BRIC-states Russia achieves considerably high education scores. The deficit of
India’s education however is obvious. If India cannot improve the education level of its big
population, it will be impossible to reach its maximum economic growing potential.
Although Germany is among the leaders as far as education is concerned, it must
nevertheless improve its education level continuously, in order not to lose its “only” and
most important resource. 202
200
The GES-value has already been explained in the context of the criteria „productivity“ (Economical
analysis).
201
English version of Staffelt, D. & Struck, P., 2008, p.118
202
Compare Staffelt, D. & Struck, P., 2008, p.117
4.8.2 Important indexes and agencies in a country selection 203

With the aim of an effective information obtainment and evaluation of the above
mentioned decision criteria, some important indexes and contacts are shown.
Global Competitiveness Index (World Economic Forum)

The World Economic Forum publishes every year its Global Competitiveness Report. The
aim of this report is to show the business operating environment and competitiveness of
over 140 economies worldwide, represented in the Global Competitiveness Index GCI.
The competitiveness, which stands for the productivity, is determined on the basis of
twelve factors, namely institutions, infrastructure, macroeconomic environment, health and
primary education, higher education and training, goods market efficiency, labor market
efficiency, financial market development, technological readiness, market size, business
sophistication, and innovations. The productivity of a country is seen as a fundamental
driving factor of the economical growth, since it mirrors the level of return on investments.
Gained financial means can then be invested into new projects.
Besides the Global Competitive Index, the report also names the most problematic factors
for doing business in the respective country. 204 205
Index of Economic Freedom (The Heritage Foundation) 206

The level of economic freedom represents the fact that individuals or companies can
independently follow their business, without being influenced by the government. The
index shows what level of influence the respective government exercises. The less strong
a government’s influence is, the higher are the scores of economic freedom and the better
is the development of the national economy in the respective country. The index of
economic freedom is evaluated on the basis of ten separate factors. Each of these factors
plays an important role in the development and the preservation of the prosperity, as well
as the competitiveness of a country. These ten factors can be classified into four groups,
which are enumerated in the following:
Rule of law (property rights, freedom from corruption)
Limited government (fiscal freedom, government spending)
Regulatory efficiency (business freedom, labor freedom, monetary freedom)
Open markets (trade freedom, investment freedom, financial freedom)
203
The indexes are also represented in Kerkhoff, G., 2005, pp.70ff.. Compare also Global Player, 2012;
Global Sourcing Portal, 2006.
204
Compare Schwab, K., 2011, pp.4ff.; World Economic Forum, 2012
205
The ranking of the Global Competitiveness Index 2011-2012 can be found in appendix 13.
206
The Heritage Foundation, 2012
The map below represents the worldwide comparison of the Index of Economic Freedom
2012.
The World
Greenland Finland
(Denmark)
Sweden
Russia
Norway
Canada
Germany Kazakhstan Mongolia
United
Turkey
States China Japan
Algeria Libya
Taiwan
Mexico
Iraq Pacific
Ocean
Nigeria Sudan
Peru Brazil
Pacific Australia
Ocean Indian
Chile Uruguay
Ocean
Argentina
New
Zealand
207 208
Figure 50: Index of Economic Freedom (world view)
Country credit rankings (Standard & Poor’s / Moody’s / Fitch)

What is more, rating agencies, such as Standard & Poors’s, Moody’s, or Fitch calculate
the finance risks in a country with regard to its financial politics and the trends of the
national economy with the help of the so-called „Sovereign Risks“. Those make a
statement on a country’s solvency and they are calculated on the basis of the factors
political stability, changes on the labor market, economic growth rate, national debt, and
the interest rate level.
207
The Heritage Foundation, 2012; The figure was modified to simplify the understanding.
208
The Index of Economic Freedom (Europe view) is shown in appendix 14.
Corruption Perceptions Index (Transparency International) 209

The Corruption Perceptions Index 2011 measures the accepted levels of public sector
corruption in 183 countries and regions around the world. The index is composed out of
different surveys and studies which were carried out by nine different institutions. During
the elaboration, business people and country analysts, as well as citizens at home and
abroad have been interrogated. The Corruption Perceptions Index of 2011 is to be found
in the following figure.
210
Figure 51: Corruption Perceptions Index 2011
The representation illustrates that this tedious topic still plays an important role in both
economically highly developed countries, as well as in newly industrialized and developing
countries. 211
209
Transparency International, 2011
210
Transparency International, 2011; A complete representation inclusive the country ranking can be found in
appendix 15. The figure was modified to simplify the understanding.
211
Federal Foreign Office

The federal foreign office is an important contact for the choice of a country and the
evaluation, as well as for the process of finding of a supplier. The task of the German
foreign policy is both the further development of a subsidiary and just global economic
cooperation, as well as the support of the German economic interests in the world. The
foreign trade support helps the companies to enter foreign markets and improves then the
context for their entrepreneurial business. Necessary information and consultation can be
acquired both in state facilities (such as embassies, general consulates, the state
department of foreign trade and location marketing, GTal – Germany Trade and Invest
mbH), as well as by facilities of the economy (such as the chamber of foreign trade –
AHKs). In addition to that the state supports in a particular way entrepreneurial activities in
foreign countries with, amongst others, trade fair programs, the conclusion of contracts of
investment protection, and the guarantee of insurance of export credits. 212
Besides the facilities and indexes mentioned above, some other important, reputable, and
good contacts are the „World Trade Organization“, „The World Bank“ and the „Central
Intelligence Agency“. 213
212
Text content taken from Auswärtiges Amt (1+2), 2011
213
See links: http://www.wto.org/, http://www.worldbank.org/ and https://www.cia.gov/library/publications/the-
world-factbook/geos/gm.html
4.8.3 The current major procurement markets 214 215
With regard to the earnings potential India and China, as well as Eastern European states
inclusively Turkey are predestined for global sourcing. 216 A comparison of these trend
markets is established in the chart below.
Criteria India China Eastern

Europe
Level of education + to +/- - +
Availability of qualified personnel + to +/- - + to +/-
Number of qualified suppliers - + to +/- - to +/-
Level of suppliers - to +/- + to +/- +/-
Cost structure of suppliers + +/- - to +/-
Logistic / transport connection of suppliers - - to +/- + to +/-

mechanics
Preferred industries / software
comprehensive mechanics
Raw material production +/- + to +/- -
Euro / Dollar region USD USD Euro
Short- and medium-term prospects - + to +/- +/-
Long-term prospects +/- +/- +/- to -

Estimation: - negative; +/- middle; + positive
217
Figure 52: Comparison of the most important current procurement markets
The represented countries are characterized by their different core competences which
makes it possible to purchase the respective country-specific products cheaply and at a
reasonable quality. The following diagram shows which country is most suitable for which
product.
214
Further and very recommended more detailed information on the supply markets can be found in Kerkhoff,
G., 2005, p.73-94.
215
In addition to this chapter appendix 16 shows the „The BRIC-states“, the most interesting sourcing nations
Brazil, Russia, India, and China in more detail, in order to obtain more detailed information with regard to the
choice of country and most of all in order to understand better the reason why these countries are considered
to be part of the current major procurement markets.
216
217
English version of the figure from Krokowski, W. & Sander, E., 2009, pp.39f. / The statement on the level of
education in this diagram is contradictory to the statements in figure 49 “GES-values for education”.
High product competence Good potential for complex mass products

Eastern Europe Turkey
raw materials (oil, gas, metals, etc.) textile industry
foodstuff foodstuff
packaging automotive parts
wood items paper industry
mechanical engineering electronic products
steal packaging
metal parts
Country-specific
core competencies
India China
Business Process Outsourcing (BPO) textile industry
pharmaceutical products (generic) shoes
biotechnology automotive parts
information technology / software electronic products
electronic products toys
chemistry tools
cotton iron and steel
leather goods mechanical engineering
silk articles mineral fuels
carpets ball bearings
refined metals simple metal parts
fittings
High-tech products and high quality services Ideal for simple mass products
218
Figure 53: Which country is most suitable for which product
Besides the countries represented in detail above, one has to mention equally the Asian
states Singapore, Taiwan, Korea, Vietnam, Thailand, Malaysia with regard to the major
procurement markets, which are only secondary in the ranking of global sourcing, which
are, however, in the individual case of interest. Furthermore, Japan is notably important
218
English version of the figure from Kerkhoff, G., 2005, p.125 / At this point one has to remark that it is
doubtful if for example ball bearings can be called simple products (see China). In this context, recent own
practical experience with Chinese ball bearings showed that these still have considerable deficits with regard
to quality.
regarding the high-tech and car industry. 219 In addition to that, North America is an
interesting buying market. In that context, one has to mention Mexico as the door to North
America. 220 What is more, Brazil might become an interesting supply market in the near
future, seeing that the economy and the political situation are about to become more
stable. 221
In comparison to that, regions such as Africa (missing infrastructure, corruption, political
insecurity), Arabian countries (missing infrastructure, political insecurity, religious conflicts),
and South America (bureaucratic obstacles, corruption, crime) are currently rather
uninteresting for global sourcing. Furthermore, Australia is merely interesting in its role as
a supplier of raw material. 222
The current trend markets are subject to change and can alter in the course of the coming
years. For that reason, it is recommended to carry out regular analyses and examinations
of the different economic areas. 223
Remark: In this step “Country analysis” one has to mention finally that the choice of a
supply country is very difficult. “The supply country” as such does not exist, seeing that all
criteria can never be completely fulfilled. That is why China for example, as Germany’s
main trade partner, as well as due to its fast economic growth and the low wages, along
with a relatively good competitive index, would be a perfect supply country with regard to
these criteria. 224 In contrast to that, it is characterized by a high geographical distance,
considerable cultural differences, as well as relatively bad values of economic freedom
and corruption perception. 225 A careful and intensive decision in accordance with the own
importance has hence to be taken into consideration, in order to use potentials to full
advantage and to minimize risks.
219
Compare Krokowski, W. & Sander, E., 2009, pp.39f.
220
221
222
223
Compare Kerkhoff, G., 2005, pp.67f.
224
Compare figure 81 (Top 7 Countries for German exports and imports in 2009); figure 42 (Countries with the
largest GDP in 2007 and 2050); figure 44 (Comparison of industrial labor costs per hour including social
charges); appendix 13 (Global Competitiveness Index 2011-2012)
225
Compare figure 50 (Index of Economic Freedom (world view)); figure 51 (Corruption Perceptions Index
2011)
SWOT analysis 125
S
4.9 SWOT analysis226 t
a
r Market
t
The SWOT-Analysis (S-Strengths, W- Economic of
international
sourcing
Weaknesses, O-Opportunities, T-Threats) S
Competition
is in general a tool of strategic

TCO
management. It serves to derive suitable W
Company
strategic solution alternatives from the

O
strengths and weaknesses, as well as Logistics
Product
from the chances and risks, in order to T
achieve the goals of one’s own Supplier

Strategies
organization (see figure 54). 227 Strengths Country
PESTE
and weaknesses become apparent by
comparing the own enterprise and the own products to the competitors 228, while chances
and risks are marked by the market situation and the environment. Steps 1 to 6 analyzed
just these points with regard to the elaborated method for successful strategic
international sourcing. During this analysis, a respective sourcing strategy, which
influences mostly the environmental situation with regard to the SWOT-analysis, was
already chosen in step 5 “Strategies”, based on the market demands and the product’s
features. 229 At this point of the method, the SWOT-analysis is to serve to carry out a
complete examination and determination of the position of the sourcing strategy. At the
same time it is to uncover the effects on the organization. Based on the result, the
possible solution alternatives, which were mentioned above, are to be examined, in order
to be strategically best prepared with regard to one’s competitors.
In accordance with figure 54, when establishing a SWOT-analysis, strengths and
weaknesses are listed left to the diagram, opportunities and threats above the diagram.
After that, the respective two bordering factors were put into relation to one another in
accordance with the questions in the respective cases. 230 In doing so, it is important to
226
The application of a SWOT-analysis is assumed to be known, which is why the tool is only explained
roughly in this paragraph. Compare Sponholz, U., 2010, Lecture 2, p.99, p.146; Wiener, K., 2011, Lecture 1,
pp.37ff.; Bundesministerium des Innern, 2010
227
Compare Bundesministerium des Innern, 2010
228
Compare figure 28 „Elements of a strategic competition analysis”
229
During the application of the method of this research the choice of the strategy (step 5) essentially
influences the selected sourcing country and is hence responsible for the environmental conditions. In the
basic idea of the SWOT-analysis, the choice of the strategy, however, is not included as an input. Basically
the analysis serves more to find the right strategy (output). For this reason the SWOT-analysis is in the inner
circle colored more brightly at the points strategy and country analysis (see figure above to the right), in order
to emphasize them, than in steps 1 to 4.
230
Strengths, weaknesses, opportunities, and threads are here seen as the bordering factors.
focus on those combinations which can possibly have a strong impact on a company’s
future.
Strength and weaknesses of Step 1: Step 5: Step 6:

Input
the own company compared
to the competition which Market Strategies Country
results from each company’s -analysis -analysis -analysis
reaction to the market
requirements.
(compare also key success
factors in figures 15, 16 and 17) Opportunities Threats
Input Do we have the strengths to Do we have the strength to

use our opportunities? handle our risks?
Step 2: Do the opportunities which Can measures to safeguard
result from the chosen strategy threats be taken based on our
Competition
and the sourcing country expand strength?
-analysis our strengths? Do new strengths Can our strengths be reduced
Strength arise because of the chosen as a result from the threats of
strategy and sourcing country? the chosen strategy and
sourcing country?
Step 3:
Company
What opportunities might the What risks are we exposed to
-analysis
company miss because of our because of our weaknesses?
weaknesses? Can threats be reinforced
Will our weaknesses be because of our weaknesses?
reduced because of the Can our weaknesses be further
opportunities of the chosen negatively influenced, as a result
Weak- strategy and sourcing country? from the threats of our chosen
nesses strategy and sourcing country?
Step 4: Do new weaknesses arise
189 because of the chosen strategy
Product and sourcing country?
-analysis Which possibilities exist to
reduce our weaknesses together
with the threats?
231
Figure 54: SWOT-analysis
Remark: The SWOT-analysis was not listed as a separate step, since on the one hand, it
can be seen as a summary and illustration of the results of the first 6 steps, on the other
hand, purchase experts say that the SWOT-analysis is theoretically an important and
useful tool, the amount of time and expenditure, however, mostly exceeds the benefit, at
231
Own established figure, based on the information by Sponholz, U., 2010, Lecture 2, p.99, p.146; Wiener, K.,
2011, Lecture 1, pp.37ff.; Bundesministerium des Innern, 2010
SWOT analysis 127
least with regard to international sourcing. 232 If the SWOT-analysis is finally carried out, it
is hence dependent on the respective situation of the sourcing project, on its importance,
as well as on the available time and capacities.
At this point, one might wonder why the SWOT-analysis was not carried out earlier, for
example before the choice of the strategy, or later, for example by including the supplier
and logistics analysis. Frankly speaking, this is possible and sometimes it can even be
more practical. If one however examines this question in further detail, one might come to
the conclusion that, at an earlier stage, there might not yet be enough input in order to be
able to take a well founded decision on issues and mutual relations. In contrast to that, it
would be too late to apply the SWOT-analysis after further steps. In that sense, too much
time and capacity would have already been invested in the respective sourcing process,
and hence, the results of the SWOT analysis might only lead in some rare cases to a
fundamental change with regard to the sourcing decision.
232
Compare „Ten steps to evaluate global sourcing successfully“ in chapter 4.1 for a more detailed approach
to the elaboration of this scientific research.
S
4.10 Step seven: Supplier t
a
r Market
analysis Economic of
international
t
sourcing
Competition
This step mostly deals with the search S
and the preliminary selection of the right

TCO
W
supplier so as to satisfy the customer Company
needs and related to this the product

O
demands, as well as to fulfill the sourcing Logistics
Product
T
strategy. An integral consideration and a
Supplier
final decision are then made in step 10. Strategies
Although this step is one of the most Country

PESTE
important ones in the process of
international sourcing, only some essential points are to be explained here. The reason for
that decision is that a very detailed description of the process of the choice of the supplier
can be found in literature. Additionally, in practice, the procedure is most of the time
already known and can be applied directly. 233 A careful and complete elaboration of this
topic, however, would go beyond the scope of the context of this scientific paper.
4.10.1 Supplier selection process

The process of selecting a supplier and its release is very often carried out in a company-
specific organization. It describes the uniform internal procedure and the responsibilities in
the context of the selection and release of the suppliers. The process of the supplier
selection is exemplarily described in the following diagram.
233
A good and detailed method of supplier selection can be found in Janker, C., 2008, p.32-309.
Step seven: Supplier analysis 129
1
Definition of customer requirements
(Compare figure 15, 16 and 17
“Key Success Factors for
international sourcing”)
Are existing 2 4
suppliers able to produce No
Search for new supplier
the respective
components?
Yes 5 9
Obtain and analyze
3 Supplier not applicable
supplier self-disclosure
Position of Bad
possible suppliers?
6
Good
Undertake supplier audit
No
7 8
Are requirements No Qualification of
satisfied? supplier?
Yes Yes
11 10
Signature of
Qualify supplier
corporate agreement
12
Including new
supplier in pyramid
13
End
14
Step 10 “Profitability of
international sourcing”
234
Figure 55: Flowchart of supplier selection
234
Self-established representation. The source of information relies on experts’ opinions which were uttered
during conversations with purchasers. A more detailed explanation of every single point is deliberately not
done here. For further information compare Janker, C., 2008, p.32-309; Müssigmann, N., 2007, p.45-155;
The figure shows that the process of supplier selection is mainly dependent on three
criteria, which are described in the following:
Are already existing suppliers able to produce the respective components (Nr.2)?
Before starting an absolutely work intensive and long lasting research of new
suppliers it should be proved if the suppliers with which the company has already
been working are able to produce the respective components.
Do possible suppliers have a good position in the company (Nr.3)?
If this is the case, the next step is to find out which position the possible existing
suppliers have in the own enterprise and which experience has been made in the
past. One then has to ask oneself if one can continue working with these suppliers
or if new ones should be selected. This would depend on five criteria (see figure
below).
IPO’s
International Purchasing
Offices
Input Specialized Restriction

price
purchasing
quality Determination of
technological performance
suppliers position
development
production
logistics
Supplier ratings Supplier
flexibility
service and indicators pyramid
general management
235
Figure 56: Tools and organizations involved in the determination of supplier position
In accordance with the figure, specialized purchasers as well as IPOs were asked
for advice, experience and recommendations. 236 These experts often have recent
Bösch, M., 2007, pp.64ff., pp.237ff.; Sieber, M., 2007, pp.19ff.; Hofmann, E. et al., 2011, p.56; Akamp, M.,
2012, pp.63ff.; Navigatorconsulting, 2013; Rexar Technologies Sdn. Bhd., 2013
235
Self-established representation. The source of information relies on experts’ opinions which were uttered
during conversations with purchasers. The logical input of supplier ratings and indicators was derived from the
customer analysis and determination of key success factors (chapter 4.3.5), as well as from the consideration
of sourcing strategy impacts (chapter 4.7.2). For further information also compare Rennemann, T., 2007,
pp.125ff.; Müssigmann, N, 2007, p.45-155; Bösch, M., 2007, pp.64ff., pp.237ff.; Large, R., 2009, pp.47ff., p.73,
pp.119ff.
236
IPO’s und specialized purchaser are, if available, also the first contact for selection and acquisition of new
suppliers.
detailed knowledge on the available suppliers and their country-specific situation.

What is more, ratings and indicators of suppliers are also suitable information on
past performances, which can be used as a reference for future cooperation. The
main factors influencing the supplier ratings and indicators are price, quality,
technological performance, development, production, logistics, flexibility, service
and general management. Besides these indicators, internal restrictions can
equally influence the selection of already available suppliers. In that sense, a
corporation does not want the location to be responsible for more than 30% of the
turnover of a supplier. Moreover, the complete corporation may not exceed a
turnover of 50% of the supplier. The aim of these rules and regulations are to
reduce mutual dependencies and hence also risks. 237 More detailed explanations
will not be given here, since the following chapter will explain in more detail the
signification of the supplier pyramid.
Does the supplier satisfy the requirements (Nr. 7)?
The range of criteria of supplier requirements which have to be fulfilled is
represented in the following diagram.
237
Source based on experts’ statements during conversations with purchasers.
Criteria for evaluating suppliers further below
Fulfilment of Fulfilment of Fulfilment of TCO

customer product the sourcing Total Cost of
requirements specifications strategy Ownership
Criteria
Chapter 4.3.5 Table 2: Step five: Step four:

Customer Evaluation of Strategic Product
Input
analysis and product determination analysis

determination complexity
of key success
factors
First estimation.
Comment
Accurate
assessment will be
done in step nine.
Criteria for evaluating suppliers further above
Risks and potentials Supplier Company

indicators and internal
Supplier related Country related ratings requirements
Criteria
and
Bargaining Strategic objectives
power of competition
supplier analysis
Figure 27: Figure 28: Figure 39: Figure 56:

Criteria Elements of a Criteria for the Tools and
Input
influencing the strategic country organizations

bargaining competition evaluation based involved in the
power of analysis on a PESTE supplier
suppliers analysis selection
For new suppliers, (e.g. quality

Comment
indicators are not available figures)

until now. In this case, an
first estimation based on
existing similar suppliers
can be made.
238
Figure 57: Criteria for evaluating suppliers
238
Own establishment. For further information compare Pfohl, H.-C., 2010, p.54; Rennemann, T., 2007,
pp.125ff.; Müssigmann, N, 2007, p.45-155; Bösch, M., 2007, pp.64ff., pp.237ff.; Large, R., 2009, pp.47ff., p.73,
pp.119ff. / The fulfillment of local content regulations was deliberately not taken into consideration because
this fact is already decisive in step 6 „Country analysis“.
During the selection of suppliers one aims at reducing the number of suppliers to a limited
amount which then undergo the detailed process of supplier analysis and evaluation.
Therefore, at the beginning of the supplier selection, many potential suppliers are
available. With rising information content, the number gradually goes down (see next
figure).
Number of suppliers
Searching for Supplier identification

Supplier selection process
new suppliers
Checking of Supplier limitation

certificates (pre-selection)
Supplier evaluation
and analysis
TCO
Step 10 “Economic of
international sourcing”
Supplier determination
Amount of information per supplier
239
Figure 58: Number of suppliers vs. amount of information per supplier
In parallel to the process described in figure 55, buying samples of suppliers can already
be demanded. Release specimen and initial samples should, however, only be ordered
during the point “requirements satisfied”.
After suppliers signs the corporate agreement and have been included in supplier pyramid,
the preliminary selection is finished. 240
As soon as during the selection process of suppliers, one should take into consideration
the further proceedings of quality development and policy development, as well as
measures in case of deviation from demands of the supplier. After the selection of the
supplier, which is definitely taken in step 10, follows the start of series production and the
discussion of how to put into practice a continuing process of improvement. 241
239
Following Janker, C., 2008, p.36
240
Compare Janker, C., 2008, p.34
241
For more information on the following procedure after the supplier selection, see step 10 „Economic of
international sourcing“.
4.10.2 Supplier pyramid

The suppliers are grouped into different categories according to their performances. This
is done in a so-called supplier pyramid, in order to optimize the ability to successfully and
more easily manage the available suppliers for different objects. The establishment of
such a supplier pyramid aims at keeping the number of different suppliers relatively low,
with special regards to the guarantee of the supply chain, in order to reduce the efforts for
supplier care, agreements, price negotiations, as well as contracts, and finally also its
complexity. The building and the categories of a supplier pyramid is represented in figure
59.
Attractiveness of
(P) international sourcing:
Preferred very attractive
suppliers attractive
(T) (E) (N)

Technology Essential New
specialist suppliers suppliers
(X) (D) (W)

Suppliers Suppliers Suppliers
to be actively determined without new
eliminated by the customer business
242
Figure 59: Supplier pyramid
242
The structure and the design of the supplier pyramid was taken from Bosch, 2013; Reed, M., 2010; Scholer,
D., 2009, p.9.; GVS Group, 2012; compare also TROX Technik, 2013; Heidelberg Druckmaschinen AG, 2013.
The evaluation of attractiveness of international sourcing was established independently along with
purchasers on the basis of previous experience.
The features of the single cases within the supplier pyramid are explained skeletally in the
following: 243
Preferred suppliers (P)
Performance distinctively above branch average
Technology specialist (T)
Produce/Provide special technologies (products, processes)
Essential suppliers (E)
Potential for P
Particularly in focus
Supplies significant volume
New suppliers (N)
Development of new suppliers
High potential
High competitiveness
Actively eliminated suppliers (X)
Insufficient results and potentials
No visible signs of improvement
Determined suppliers (D)
Specified by the customer
Without new business (W)
Similar to X
Actively elimination (suppliers are not longer needed)
P, T and E suppliers are particularly interesting for international sourcing. Good
experience was made in the past during the cooperation with these suppliers.
Expenditures for qualification and standardization, as well as for acquisition of further
products are low. Companies plan to collaborate with them for a longer period in the future.
Very often those suppliers provide a high purchase volume. The economy of scale effect
which results from this, favors the cost structure (TCO) and hence the amortization of
expenditures. A particularly good know-how is available at T suppliers, which results in an
advantage on the market and hence also over the competitors.
In comparison to that, N suppliers can be interesting for international sourcing. This is,
however, dependent on several factors and has to be examined individually. Such factors
are for example expenditures (TCO) and risks, as well as the planned period of
collaboration.
243
Taken from Reed, M., 2010; Bosch, 2013; compare also Scholer, D., 2009, p.9.; GVS Group, 2012; TROX
Technik, 2013; Heidelberg Druckmaschinen AG, 2013
X and W suppliers are mostly uninteresting for international sourcing. Their features are to
be seen in contrast to the P, T and E suppliers. Investments in tools and machines which
are made during a short-term cooperation are uneconomical when these cannot be used
in other projects after the termination of the contract. Moreover, the own dislike of these
suppliers to source internationally is often influenced by the bad reputation, due to bad
supply performances with regard to technological performance, quality, and time.
Finally, one has to mention the determined suppliers. These are chosen by the customers
and are hence compellingly necessary. The profitability and their performance, and along
with that also the attractiveness with regard to sourcing is, however, uncertain. Due to the
customer demand it is only “secondary”.
Step eight: Logistics management 137
S
4.11 Step eight: Logistics t
a
r Market
management Economic of
international
t
sourcing
Competition
International logistics represents the S
economic and process-oriented supply of

TCO
W
the enterprise with the supply objects in Company
244
the international context. The task of
O
logistics in that context is to guarantee Logistics
Product
T
the availability of the right product, at the
Supplier
right quantity, in the right conditions, at Strategies
Country
the right place, at the right time, at the
PESTE
right costs, targeted on the right
customer. 245 The introduction to this publication has already shown that the logistical
indexes delivery reliability, order lead time, inventory costs, and transportation costs are
often influenced negatively by missing capabilities for international sourcing. 246 Due to the
complexity of international logistic management this step only concentrates on the most
important points. A detailed and complete examination would provide enough material to
write a further scientific paper especially on this topic. In many cases, anyway, it is
recommended to concentrate on primary sourcing activities (focus on core competences)
and to leave the logistical planning and carrying out to specialized service logistics
providers. Due to their volume and experience, as well as due to their technological
means, they can guarantee an often more flexible, cheaper, and more certain supply of
merchandise. 247 Furthermore, they partly have well conceived emergency plans at hand if
the supply chain is disturbed or interrupted and if delivery times cannot be kept.
4.11.1 Logistics importance and costs

Globalizations of markets and competition have especially contributed to a growing
importance of logistics. The reason for that is, on the one hand, longer distances between
the supplier and the customer, combined with longer delivery times, higher supply chain
risks, as well as higher volumes, which the companies aim at, but which they also
consider necessary, and which are due to the consideration of economies of scales. With
regard to global competition, on the other hand, enterprises often can no more
244
245
Klaus, P., 2002, p.11; Martin, H., 1998, p.2; Kille, C., 2011, Module 2, p.15
246
Compare figure 4 “Impact of low cost country sourcing on a company’s business” and figure 5 “Problems
and goals on emerging markets”
247
Compare Pfohl, H.-C., 2010, pp.53ff.
differentiate themselves by their products. They do that rather by their logistics and their
services which go with the product, that means delivery service, delivery time and delivery
reliability. 248
Besides the possibility of differentiation, logistics is also responsible for the
competitiveness of a business, since it has to create the necessary framework in order for
the production department to be capable of producing order-relatedly. This hence avoids
unnecessary storage costs and, most of all, a drop in value due to obsolescence of the
products. The necessity for this framework is mostly due to a shortening of product life
cycles and a larger product array. Reasons for that are the fast-paced change and
difference in the customer requests. 249 When it comes to shortened life cycles, only
logistics which is adjusted to the product innovations can guarantee a time-effective
commercial launch and market penetration, which is essential to the amortization of
research- and development expenses. 250
Finally, the area of logistics gets more and more important and along with it expenses
increase due to the capability considerably support a company in its adaption to a new
situation. 251 A business is called adaptable if it is able to profit from market opportunities
by promptly adapting its products and services to customer needs and by reacting rapidly
to market development and emerging problems. 252
With regard to what has been said about the importance of logistics, an opinion poll
conducted in Germany in 1999 has shown that logistics has an effect on the value of a
business. In accordance with that, enterprises which are called logistics leaders owe, due
to the performance of their logistics department, 40% of their market success (growth in
sales), 27% of economic success (ratio of profits to sales) and 27% of the adaptability of
an enterprise to new market developments (adaptability). Logistics is hence an essential
factor for an increased shareholder value. 253
As far as the commercial relevance is concerned, as soon as in the 1990s up to 10% of
the total costs of a company came to the logistics costs. If one specifies according to
countries and branches, this percentage may even be higher. 254 Some surveys even
calculated that the logistics costs on average come to slightly more than 10% of the total
248
Compare Pfohl, H.-C., 1997, p.181; Mathar, H.-J. & Scheuring, J., 2009, pp.25f.; Pepels, W., 2001,
pp.245f.; Wannenwetsch, H., 2010, p.1; Coyle, J., J. et al., 2009, p.53; appendix 4 ”Product positioning
towards the customers key success factors”
249
Compare Pepels, W., 2001, p.245; Coyle, J., J. et al., 2009, p.53
250
Compare Pfohl, H.-C., 2004, p.8
251
Krokowski, W. & Sander, E., 2009, p.46; Compare Pfohl, H.-C., 2000, p.65
252
Compare Pfohl, H.-C., 2000, p.65
253
Pfohl, H.-C., 2004, pp.8f.; Pfohl, H.-C., 2000, p.65
254
Compare Rommel, G. & Brück, F. et al., 1993, p.113; Pfohl, H.-C., 2010, pp.49ff.
costs. 255 To this day, this value has become firmly established and raised, most of all due
to the above mentioned topics. 256 However, this value should only be seen as reference,
since it can vary according to the company, the branch, and the country. Moreover, the
definition of the logistics costs and their calculation scheme is decisive for the exact
amount. 257
The signification of logistics becomes notably apparent when one looks at the logistics
market in numbers. Since 2006, the German logistics market has been growing
considerably stronger than the GDP and amounts to a total of 205 billion Euros in 2007. In
comparison to that the logistics market in 2008 amounts to 930 billion Euros in Europe. 258
The distribution of logistics expenses in Europe in 2008 is represented in the following
figure. According to this pie chart, the transportation costs make up by far the biggest part
of the logistics expenses. A similar distribution can be observed for Germany.
259
Figure 60: Distribution of logistics costs in Europe 2008
With the help of this distribution of logistics costs, the user gets a first guideline for the
TCO-consideration in step 9, which is useful for a first rough calculation. This distribution
can, however, just as the logistics costs, vary according to country, branch, company, and
necessary services and hence it should be clearly determined for each specific individual
case.
255
Compare Schulte, C., 1999, pp.8f.
256
Compare Pfohl, H.-C., 1997, pp.180f.
257
Compare Pfohl, H.-C., 2010, p.49; Kille, C., 2010, p.94
258
Klaus, P. & Kille, C., 2008, p.2; Compare Wannenwetsch, H., 2010, pp.1f.
259
Kille, C., 2011, Module 3, p.28; Compare Klaus, P. & Kille, C., 2008, p.3
4.11.2 Distinction of kinds of transportations

In general, there are four alternatives for international transportation, namely air freight,
sea freight, combination of sea and air freight, as well as the rail freight. 260 The specific
features of the different kinds of transportations are outlined in the following diagram.
Air freight Sea freight

quickest, but expensive
sive option the slowest, but low priced
i d option
tii
most reliable less reliable
high delivery accuracy means of transportation which is used
most often in the today's world trade
high frequency of flights (high flexibility)
low-vibration transport allows simplified
packaging (lower packaging costs)
low capital commitment costs
lower insurance costs
for relative slight and small cargo for large and highest weight cargo
for highest value and quality cargo for lowest value cargo
for time sensitive cargo for low time-sensitive cargo
Characteristics of different
kinds of transportations
Combination of sea
and air freight Rail freight
chose characteristic from sea and air relatively fast and low priced option
freight (“Twice as fast as the sea freight
and half the price of air freight.”) reliable
large range of weight and value
with regard to its characteristics
roughly between sea and air freight
261
Figure 61: Characteristics of different kinds of transportations
This representation shows that although air freight is the most expensive kind of
transportation, it is also the quickest and most reliable one. It is particularly suitable for
transportation objects which are small and light, which have a high invoiced value of
goods, a high precision, and a time-critical delivery, as well as objects which should only
be exposed to light shaking. Possible air freight might be expensive designer clothing, as
well as electronic components, like printed circuit boards. The transportation time of air
freight is normally 3 to 7 days. 262
260
261
Own representation on the basis of information by Krokowski, W. & Sander, E., 2009, pp.46ff.; DHL, 2008;
Kille, C., 2011, Module 4, p.73
262
Compare Krokowski, W. & Sander, E., 2009, p.48; DHL, 2008
Features and transportation objects of sea freight is to be seen in contrast to air freight.
Mass-produced articles, such as a standard t-shirts or simple steel components, are
examples of sea freight. Common transportation times for sea freight are the following: 263
Asia - Europe 49 days
Asia - North America (west coast) 39 days
Europe - North America (east coast) 27 days
The combination of both kinds of freights, sea and air freight, as well as more or less also
rail freight, is to be seen as an average value in comparison to the advantages and
disadvantages of the first two means of transport.
Costs and delivery times are strongly dependent on the point in time, the quantity, the
goods that have to be transported, the location from where goods are sent out, and the
geographical position of the addressee. In that context, seasonal particularities, such as
Chinese New Year or Christmas can lead to shortness of supplies and increased prices,
seeing that cargo holds and cargo compartments are highly demanded. 264
In order to get an idea of freight costs, some are represented per kg freight from Asia
(Shanghai or Singapore) to Germany (Hamburg or Frankfort) in the following figure.
Air freight:
2.50 – 4.50 USD/kg
1 week
Rail freight: §NJ
No data available
Hamburg 3 weeks
Frankfurt
Combination of sea
and air freight:
2.50 USD/kg
3 weeks Shanghai
Sea until Dubai, then
air freight
Dubai
Sea freight:
0.13 – 0.18 USD/kg
6 weeks Singapore
20’-container
265
Figure 62: Transportation costs per kg freight and transportation times from Asia to Germany
263
Kille, C., 2011, Module 4, p.75; shorter transportation times are given in Krokowski, W. & Sander, E., 2009,
p.47; compare also DHL, 2008
264
Krokowski, W. & Sander, E., 2009, pp.49f.
265
Own representation on the basis of the information by Krokowski, W. & Sander, E., 2009, p.50; DHL, 2008;
compare also Kille, C., 2011, Module 4, p.73
4.11.3 Supply chain risks

When it comes to selecting the kind of transport, the factors costs, delivery time, and the
features of the object that needs to be transported are, in general, notably taken into
consideration. The purchaser should, however, also consider the reliability of each
medium of transportation and along with that the possible risks. The figure below lists the
most important risks which could ruin a successful and reliable supply chain management.
The inner circle represents the different risk categories, whereas the outer light gray circle
shows possible drivers and examples.
Drivers and examples
costs of capacity
lack of flexibility
poor quality
technical problems poor payments
too less quantities
insolvency
border crossing
Capacity
wrong delivery
bottlenecks Delay Receivables scarcity of raw material
inflexibility exchange rates
Procurement capacity
strikes Supply
natural causes Disruption Chain Intellectual integration deepness
war / terrorism Risks property global outsourcing
global markets
Forecast Inventory
inaccurate forecasts
long delivery times
System too less/much on stock
228
bullwhip effect demand uncertainty
fluctuating demand supply uncertainty
break down of IT system
266
Figure 63: Supply chain risks
With regard to the listed risks above, the following figure gives an overview of the
terrorism threat conditions in different countries. Furthermore, the 39 major gateway
regions are illustrated. This gateways account for 90 percent of all world trade. 267
266
Own representation on the basis of the information by Sunil, C. & ManMohan, S., S., 2004; Kille, C., 2011,
Module 9, p.19
267
PwC, 2011, p.16 / Included are airports, ports and train stations.
268
Figure 64: Supply chain risk map – Maritime sea routes and crucial chokepoints
In addition, the diagram represents the bottlenecks of maritime sea routes. One can
gather from that diagram that at least three bottlenecks have to be traversed by ship for
the primary transport routes from China to Germany through the Strait of Bab al-Mandeb
and the Suez Canal. Moreover, there are many areas with a high risk of piracy and
terrorist dangers on this route. If the transport is interrupted at only one point by a hold-up,
bottlenecks, or other risks, the supply chain might collapse. Hence, it is obvious why the
listing and comparison of possible risks during the selection of the means of transportation
is so important.
268
PwC, 2011, p.17; AON, 2012; Kille, C., 2011, Module 9, p.17
4.11.4 Most important logistics service providers

The following figure shows the most important logistics service provider per logistics
market segment. 269 This representation helps to find a provider for the respective object
as fast as possible and very effectively. As already mentioned above, it is often
appropriate to leave the responsibility for the complete planning of the logistics to a
service provider.
Logistic market segments
and terminal operations

General ocean freight
General warehousing
and Parcel Services
Contract logistics
Courier, Express
General cargo
than truckload
transportation
Bulk logistics
Generel less
Specialized
Air freight
Company
Deutsche Bahn Group AG x x x x x x
DB Schenker Rail x x
DB Schenker Logistics x x x x x
Maersk x x x x
Dampskibsselskabet Norden x
SNCF x x x x
PKP SA x
Rhenus AG x x x
Odfjell Group x
Trenitalia x
Top players in the market
Ceske Drahy Cargo x

Trenitalia x
Ceske Drahy Cargo x
VR Cargo x
Gefco x x
DSV x x x
LKW --> Walter x
Norbert Dentressangle x x x
Deutsche Post DHL x x x x x x x
SBB Cargo x
Rail Cargo Austria x
Dachser x
Geodis x x
Kühne + Nagel x x x x
Hellmann Worldwide x
Mory Group SA x
IDS Logistik GmbH x
System Alliance x
269
A detailed description of each logistics market segment does not take place in this scientific research, since
it is assumed that the reader is already familiar with them.

CargoLine GmbH x
24plus Systemverkehre x
Heppner SA x
Ziegler Group x
Stef-TFE x
Kraftverkehr --> Nagel x
G4S Plc x
CAT Group x
Volkswagen Logitics x x
Hoyer GmbH x
Wallenius Wilhelmsen x
TNT N.V. x
La Poste x
GeoPost SA x
UPS Europe x
Royal Mail x
General Logistics Systems x
DPD Dynamic Parcel Distribution x
Psten AB x
Top players in the market
Hermes Logistik x
Austrian Post x
Swiss Post x
Gruppo Poste Italiane x
CEVA Group x
Wincanton x
Arvato Services x
Fiege Stiftung x
DP World Europe x
Chep Europe x
Koninklijke --> Vodak x
HHLA x
Eurogate x
Hutchison Whampoa Europe x
PSA Europe x
Associated British Ports x
CMA-CGM x
Mediterranean Shipping (-->MSC) x
Hamburg Süd x
Hapag-Lioyd x
Grimaldi Compagnia die Navigazione x
Panalpina Welttransport x x
Deutsche Lufthansa x
Lufthansa Cargo AG x
Air France-KLM Group x
Bollore x
Cargolux Airlines International x
270
Figure 65: The top players by logistic market segments (2008)
270
Modified form of the representation by Kille, C., 2011, Module 4, pp.39ff.; Compare Klaus, P. & Kille, C.,
2008, pp.8f.; Wannenwetsch, H., 2010, p.2
4.11.5 INCO-terms
In order to round off the topic of logistics management, this paragraph will explain the so-
called INCO-terms. INCO-terms are uniform contract and delivery conditions which are
accepted worldwide. Those make it possible for the two parties of a sale contract to follow
a standardized procedure in international and national trade business. They handle the
transfer of risk and the payment of transaction costs between seller and buyer. 271 INCO-
terms have to be mentioned explicitly in the contract in order to be valid.
The following figure gives a first overview of the INCO-terms 2010. The buyer’s duties are
listed in bright gray. Changes which have been made in comparison to the INCO-terms
2000 are signed with “New”.
New
EXW FCA FAS FOB CFR CIF CPT CIP DAT DAP DDP
Mode: Mode: Mode: Mode: Mode: Mode: Mode: Mode: Mode: Mode: Mode:
New
Services All All Water Water Water Water All All All All All
Packing Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Loading
Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Charges
Inland
Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller Seller
Freight
Terminal
Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller Seller
Charges
Insurance Buyer Buyer Buyer Buyer Buyer Seller Buyer Seller Seller Seller Seller
Loading
Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller Seller
on Vessel
Freight Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller Seller Seller
Arrival
Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller Seller Seller Seller
Charges
Duty &
Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller
Taxes
Delivery to
Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Buyer Seller Seller
Destination
EXW Ex Works CPT Carriage Paid To
FCA Free Carrier CIP Carriage Insurance Paid To
FAS Free Alongside Ship DAT Delivered At Terminal
FOB Free Onboard DAP Delivered At Place
CFR Cost & Freight DDP Delivered Duty Paid
CIF Cost Insurance & Freight
272
Figure 66: INCO-terms 2010
271
ICC Deutschland e.V., 2012; IHK Region Stuttgart, 2012 / One can easily find a lot of information on INCO-
terms on the internet. For this reason this research does not explain INCO-terms in more detail.
272
Commercial and Logistics, 2011; Compare IHK Nord Westfalen; ICC Deutschland e.V., 2012; IHK Region
Stuttgart, 2012
Step nine: Total cost of ownership 147
S
4.12 Step nine: Total cost of t
a
r Market
ownership Economic of
international
t
sourcing
Competition
During the previous steps the market, the S
reference object, the purchase strategies,

TCO
W
as well as the supply countries and the Company
suppliers were “pre”-selected or defined

O
respectively with the aim to achieve the Logistics
Product
T
most promising yield potential at the
Supplier
lowest possible risk. In this step the Strategies
Country
commercial yield per supplier has to be
PESTE
examined thoroughly by adding up all
cost elements to the “total cost of ownership” (TCO), starting from the surveys over the
production at the supplier to the delivery to the final customer. In doing so, one considers
elements such as purchasing price, tooling costs, payment terms, currency costs, freight
costs, customs duties, costs for late delivery and fixed capital, but also costs which arise
during the storage and the selection process, as well as qualitative cost elements and
post-transaction cost elements (see figure 67). The simple comparison of price offers
would, most of all in international trade, lead to wrong decisions.
The „total cost of ownership“ therefore has to be compared foresightedly for many years.
In practice, one most of the time compares three different years to each other. 273 As a
result, predicted changes of the exchange rates or the development of wages, for instance,
can considerably influence the commercial yield and hence also the complete decision.
Consequently, it is recommended to go through different scenarios in order to minimize
the risk of misinterpretations.
TCO considerations can be very complex and laborious. Hence, not every product is
worth doing a TCO analysis, seeing that possible savings have to exceed the expenses
for the carrying out of such a procedure. 274
The following figure lists the most important elements of a TCO-analysis.
273
The source of information relies on experts’ statements, which were uttered during conversations with
international purchasers.
274
Compare Hahn, D. & Kaufmann, L., 2002, p.663, p.665 / In Hahn, D. & Kaufmann, L., 2002, p.664
additional information regarding the „characteristics of items for pilot TCO projects“ can be found.
sum of Warranty Costs

costs Recycling / Disposal Post-
[€] Others transaction
Supplier maintenance
components
Supplier improvement
Fixed capital (S)6)
Inventory costs
Storage Packaging costs
Cleaning costs
Handling costs5)
Quality costs4)
Quality Test / Sample costs
Incoming inspection
Supply chain risk

Overview
Fixed capital (D)3)
Delivery Costs for late delivery

Transaction
components
Customs duties
Freight costs
Currency costs
6) fixed capital during storage
Payment Terms
5) during the complete in-house operations
Order Tooling costs
4) incl. also post-transaction components
Purchasing price
Ordering process2) 3) fixed capital during delivery
2) incl. other necessary documentations

Supplier qualification
(e.g. English drawings) besides the
& development
primary order transaction
Signature of agreement Pre- 1) with regard to customer requirements
Selection transaction (costs, quality,… / see figure 15, 16
Supplier audit1)
components and 17)
Supplier research
Market / Country research time

275
Figure 67: TCO Composition
Some important and possible ambiguous elements will be explained in more detail on the
following three pages (see figure 68). 276
275
Own representation on the basis of Krokowski, W. & Sander, E., 2009, pp.46ff., pp.59ff.; Krokowski, W.,
1998, pp.62ff.; Hartmann, H., 2002, p.472, p.475; Large, R., 2006, pp.50f.; Arnold, H. et al., 2010, p.213,
pp.398ff.; Oeldorf, G. & Olfert, K., 2004, pp.241f., pp.278f.; Hahn, D. & Kaufmann, L., 2002, p.663, p.666;
TCW Transfer-Centrum GmbH & Co. KG, 2013; Tangram Technology Ltd. 2000, 2010; ISM institute for supply
management, 2013; U.S. General Service Administration; Engel, B., 2009
Market / Country research
Supplier research
Supplier audit
Signature of agreement
This point mostly covers the costs which arise during Step 6 “Country analysis” and in Step 7 “Supplier
analysis”.
Supplier qualification
& development
Before taking advantage of sourcing, especially in low-cost countries, suppliers must be highly trained
with regard to the quality standards (e.g. ISO-certification) and the technical know-how. In addition,
special series start-up costs could arise, which also fall under the costs of supplier development. The
supplier development costs have to be divided by the projected quantities.
For negotiations it is Purchasing price

useful, to know
about the suppliers material costs
cost structure. + material overheads
+ material costs of risk
+ manufacturing costs (see in detail energy costs and wages and their prospective change)
+ production costs of risk
+ other production costs (plant administrative costs)
= production costs
Detailed Information
+ sales, development & administration overheads

= prime costs
+ profit mark-up
= offer price (= purchasing price)
Tooling costs Include also devices
planned quantities
required number of tools =
possible quantities per tool
Æ round up result
costs per tool * rounded up required number of tools

tooling costs per part =
planned quantities
Payment Terms
Payment terms include mainly the following points:
Payment place:
The payment place is the contractual place of fulfilment of the payment. If this is not covered by a
contract, the residence or place of business of the debtor shall be deemed for payment. (This point is less
important for TCO)
Time of payment:
In general one distinguishes between the payments before, while or after the delivery.
Discounts / default interests / collection expenses
If the customer pays within a specified period of time, discounts can be guaranteed. Otherwise, the
buyer must pay the full amount without deductions (net) or has to expect default interests or collection
expenses even by late payments. In addition, volume discounts, cash discounts, special discounts, or
functional rebates can be given.
The payment terms can also include costs which arise from the use of payment securities, such as the
“Letter of Credit”.
276
A detailed explanation of the „storage“-costs was deliberately left out here.

Currency costs
In general, a time difference exists between contracting and payment. During this time difference,
exchange rates from the domestic to the foreign currency can change negatively, which leads to
currency costs. This effect of negative exchange rates can develop more drastically over the years.
Therefore, exchange rates have to be considered over several years in advance. Currency costs can
be limited by forward exchange operations or currency options.
including insurance
Freight costs
and planning (Compare chapter 4.11.2
Freight costs essentially depend on the following points: “Distinction of kinds of
object size / object weight / packaging unit transportation”)
Today the transportation via container is established. One distinguishes between the
standardized 20‘ and 40‘ containers. The freight costs per container are defined with fixed
rates. Hence, the loading capacity of a container depends on the maximum permissible
container volume and weight. The steps to evaluate costs are the following:
1) Is the transportability of the object warranted by the packaging unit?
2) How many quantities fit in one packaging unit?
3) How much weighs one packaging unit inclusive its quantities?
4) How big is the size of one packaging unit?
5) How many packaging units fit into one transport container?
Æ limits are weight and volumes
6) How much are the shipment cost of one transport container?
7) Is it necessary to send packaging units back?
8) Backward calculation of costs to the individual object
distance
utilization of means of transportation

kind of transportation (land freight / air freight / sea freight)
allowable storage times (influence the kind of transportation)
costs for planning of logistic processes
insurance costs
INCO-terms
Cost calculation:
freight costs per container
freight costs per part =
number of packaging units per container * quantities per packaging unit
costs for sending packaging units back costs for one packaging unit
+ +
quantities per packaging unit quantities per packaging unit
+ insurance costs + planning costs
Providing that there are “normal” weight-volume ratios, a rough calculation of the freight costs can be
made by taking 3-4% of the purchasing price for a transportation from Asia (Singapore or Shanghai) to
Germany. (The costs based on an average container rate of approximately 1.600$ per 20’ container FCL and
additional 50% up-front and follow-up costs.) [for more details see Krokowski, W. & Sander, E., 2009, p.50]
Customs duties
Import and export duties must be taken into account in a TCO analysis. The following kinds of customs
duties can be distinguished: Valorem duties fix the tariff bill as percentage of value of goods.
Furthermore, there are specific duties which define the respective duties, for example based on the
weight of the goods. In addition, third country duty rates are possible. These are preferential tariffs due
to associations, preferential, or free trade agreements. With respect to the latter point, one has to
mention that there is an exemption from customs duties within the EU.
Besides, the amount of payable duties is also influenced by supply conditions, transport insurance,
license fees, or discounts and rebates.
For a first rough calculation, 2-10% of the purchasing price can be scheduled as customs duties for the
import of goods into the EU.

Costs for late delivery
Due to late delivery, further liabilities might arise in addition to the normal capital commitment costs,
because the principal can not be repaid on time. Furthermore, dunning costs and regress costs,
claimed by the customers, might be faced. Any costs of late delivery should be taken into consideration
from early on. The risk of late delivery increases with growing distance.
Fixed capital (D)

The fixed capital during transportation depends, besides the amount of capital (=principal) and the rate
of return, on the capital commitment time and therefore on the delivery time. This, in turn, often
depends on the means of transportation and the distance. The cost of capital are calculated as follows:
term
Capital costs = interests = principal * rate of return *
360
If the necessary capital has to be financed, with regard to the pure transport time, mostly a short-
term financing is preferable. However, in this case, it is important to know, that the capital costs are
calculated as soon as at the time of the financing. The so-called proceeds received are then
calculated as follows:
Proceeds received = principal – capital costs
At the maturity date the principal has to be paid back. The capital costs have then already been taken
into account.
Quality costs
This category includes the costs which arise due to poor quality, missing quantities, returns, rework,
service operations, field defects, or due to customer complaints and express deliveries for
troubleshooting. In practice, such deviations to the target are expressed in so-called problem supplier
indicators (in German: PLKZ = Problem Lieferanten Kennzahl), which are based on past experience.
Since these indicators are not available for new suppliers already existing indicators from similar
suppliers or the average of country specific suppliers should be used. In addition to the costs
mentioned above, this category equally includes measures for error prevention and quality assurance
measures.
Supplier maintenance
Supplier maintenance costs particularly arise due to regular inspections at the customer’s site. During
these inspections one discusses failures and delayed deliveries, as well as the current situation of
machines, equipment, facilities, and the personnel's know-how regarding quality standards. Hence, an
analysis of the future risk potential is made. Supplier maintenance is also used to refresh the
relationship and to discuss future collaborations. The costs of supplier maintenance is calculated as
follows:
supplier maintenance costs = number of supplier inspections per year * number of persons *
incurred costs per person * percentage of efforts for the supplier
incurred costs per person = flight costs + accommodation cost + subsistence costs + travelling costs
+ wages incl. surcharge + others
In many cases, several suppliers are inspected during one visit trip. Therefore, the percentage of
efforts for each supplier has to be included in the calculation.
277
Figure 68: Detailed information on the TCO components
277
Self-established representation on the basis of Krokowski, W. & Sander, E., 2009, pp.46ff., pp.59ff.;
Krokowski, W., 1998, pp.62ff.; Hartmann, H., 2002, p.472, p.475; Large, R., 2006, pp.50f.; Arnold, H. et al.,
2010, p.213, pp.398ff.; Oeldorf, G. & Olfert, K., 2004, pp.241f., pp.278f.; Hahn, D. & Kaufmann, L., 2002,
p.663, p.666
S
4.13 Step ten: Profitability of t
a
r Market
international sourcing Economic of

international
t
sourcing
Competition
Based on the analyses and results of the S
steps 1 to 9, one has to take a definite

TCO
W
decision for a supplier with which one Company
wishes to maintain a lasting and

O
succesful business connection. In order Logistics
Product
T
to be able to take the “right” decision as
Supplier
simply, objectively, clearly, and Strategies
Country
successfully as possible, all previous
PESTE
results have been summarized and are
represented in figure 69. The abcissa shows the country- and logistics-related criteria,
whereas the ordinate represents the supplier-related criteria and along with that the
fulfillment of market- and product-specific requirements at the best turnover (TCO)
possible. 278
The graph hence implies that a point which is as far away as possible from the center
point, which means it is to be found in the upper right part of the graph, represents a
supplier within a supply country whose combination promises that the objects of purchase
are delivered according to the respective market conditions with the lowest possible risk
and the best economic conditions. In contrast to that, a supplier which is represented by a
point in the graph which is close to the center point implies high risks along with poor
conditions and finally also leads to a low customer satisfaction, which renders the supplier
unsuitable for sourcing.
278
For a better understanding, one has to mention here that decisive points, such as the fulfillment of key
success factors, product specifications, and the sourcing strategy, have already been included in step 7
„Supplier analysis“ (see Figure 57 “Criteria for evaluating suppliers”). Hence, suppliers who do not fulfill these
demands in a minimum way, will – at that point – already have been dismissed. In the same way, the
fulfillment of possible local content regulations in the context of the country selection has already been
included in step 6 „Country analysis“ (See Figure 39 “Criteria’s for the country evaluation based on a PESTE
analysis” (especially the first decision criteria)).
Step ten: Profitability of international sourcing 153
Attractiveness
Purchasing of international sourcing:
value vs. complexity Low risks
mostly not attractive can be attractive very attractive and high cost
(high risks and low efficiency) efficiency
very
good
Supplier-related criteria
Step 7:
Supplier
-analysis
Step 9:
TCO
-analysis
very
bad
0 1 2 3 4 5 6 7 8 9 10
very very
High risks
bad Country- and logistic-related criteria good
and low cost
efficiency
243 Step 6: Step 8:
Input Country
-analysis
Logistic
-analysis
279
Figure 69: Managing international sourcing successfully
Remark: The chosen separation in the figure is useful since it reminds the user of the
handling of the SWOT analysis. 280 In that sense, the ordinate represents the strengths
and weaknesses of the supplier including the complete economical consideration. In
contrast to that, the abcissa, shows the relation between opportunities and threats which
result from the respective country-specific conditions of the environment and the
geographical postion.
279
Self-established figure / The evaluation of the criteria has already been carried out in the previous steps.
The steps here have simply to be combined according to their importance. The procedure of grading the steps
according to their importance has already been explained in the previous steps (e.g. in table 2 „Evaluation of
product complexity“ along with the previous explanation). It is absolutely necessary that the country analysis
does not influence the supplier analysis with regard to the elaboration of this diagram, since it would then be
evaluated in a double sense. For this diagram, the country analysis of figure 57 „Criteria for evaluating
suppliers“ has hence to be deleted.
280
Compare chapter 4.9 “SWOT analysis”
An alternative representation could be to use the mere TCO-consideration as the ordinate

of the diagram and to include the supplier analysis in the abscissa. In that case one would
separate clearly according to, on the one hand, economical aspects, and on the other
hand, according to performance-, chance- and risk-specific aspects.
After the primary sourcing process has been finished, a regular controlling system is to be
established. Such a controlling-system is meant to include the examination of country-
and most of all supplier-specific criteria with regard to the required product features over
regular time intervals. Product features can notably change quickly in international
environments due to, amongst others, cultural differences, as well as due to shifting
interests and priorities of the supplier. In practice, exemplary product features such as
quality and adherence to delivery dates can be evaluated and controlled with the help of
established methods like the PLKZ (Problem Lieferanten Kennzahl = problem supplier
index) and the ppm (parts per million). 281 The examination of such supplier performances
can be seen as an early warning system seeing that it shows gradual deteriorations. In
relation to that it is useful to establish emergency plans for possible error scenarios well in
advance, too.
What is more, in addition to the controlling of current performances, it is recommended to
strive for a continuing process of improvement. In some way, this implies also to establish
a respective complaint management. The 8D-report could be taken as example for such a
method which analyses problems in detail, in order to be able to find suitable solutions
which are to avoid that the same problem comes up again.
Besides the current suppliers, the company should equally regularly analyze new
suppliers within the controlling-system. The reason for that is the worldwide growing
competition as a result of globalization and hence the fast-paced development of markets,
which results in ever new chances. In doing so, one gets a good overview of the market
and hence one can profit from the worldwide best suppliers. Moreover, the knowledge on
the market situation is also useful for negotiations with existing suppliers. Both elements
render a future success more secure and thus, this is the reason why the process of
„Managing international sourcing to achieve competitive advantages“ is represented
as a circle and not a straight line. In general, however, benefits and expenditures of the
controlling, as it also has to be done in the primary sourcing process, have to be well
examined, in order to achieve a good ratio.
281
A more detailed explanation of these methods will not be given in this scientific paper.
5 Open points, outlook on further research approaches
and learned topics
This scientific paper has so far given a very detailed overview of the process of
international sourcing. However, there are still many points which have not yet been
explained. The most important points which have still to be explained are listed in the
following: 282 283
Law of trade and contract 284

Type of payment
- Bill of lading
- Letter of credit
Furthermore, during the elaboration it became clear that the literature is rather incomplete,
which results in further research approaches:
Research approach 1: Verification of the product complexity
Table 2 „Evaluation of product complexity“ evaluates the object with regard to
diverse criteria. However, it is not clear what low/high costs, high/low duties,
stable/unstable price stability, easy/difficult handling, small/large size,
light/heavy weight, etc exactly means. Therefore, many laborious evaluations
and weights are carried out which are based more or less on a subjective
opinion and which hence result in an insecure result, most of all due to the
open interpretation. Although scenarios can help partly, they entrain higher
expenditures and finally a considerable risk remains all the same. 285 Therefore,
the single points which explain the product complexity are to be verified and
are to be defined clearly for a comparable representation.
Research approach 2: Product specification vs. sourcing country
Furthermore, the most suitable sourcing country can be represented with
regard to table 2 “Evaluation of product complexity” in dependence of product
specification and requirements. Although a first overview can be gathered from
282
See also chapter 4.7.1 “Potential strategic options”, which lists the sourcing strategies which are not
explained in further detail in this elaboration.
283
In order to be able to exercise successfully international sourcing, the enterprises first have to convince
and motivate their employees for this step. This scientific paper, however, has not yet further explained how
companies ought to proceed, which is why appendix 19 deals briefly with „International sourcing vs. local jobs“.
284
A good overview and general information on that point can be gathered from the CISG (= short for „United
Nations Convention on Contracts for the International Sale of Goods“).
285
The same is true for the key success factors (see figure 15 until 17).

156 Open points, outlook on further research approaches and learned topics
figure 53 „Which country is most suitable for which product“, one still has to
concretize it in dependence of the product features in order to link them
afterwards.
Research approach 3: Selection of a strategy
The selection of a strategy (Step 5) implies several points which cannot be
found clearly with the help of this method. In that sense, costs, quality, and
time factors can be improved by local sourcing due to the good and close
cooperation of the different parties. This, however, is also given by the access
to the worldwide best suppliers. 286 Although a specification of the degree of the
effects per sourcing strategy would be useful, however, it is difficult to be
carried out.
Research approach 4: Calculation of international manufacturing costs
A considerable part of the costs in international business is caused by the
purchase price, which can be derived from the offer of the potential supplier.
However, very often it is not clear on which cost factor the production as such
is based and hence which profits the supplier finally earns. If a calculation of
the production costs was possible, offers could be better negotiated on the
basis of the detailed know-how, and hence better purchase prices could be
made. In order to do that, one would have to represent not only the area
specific wage and energy level, which can be done easily, but also the more
difficult and different international production processes and machine costs
together with the depreciation possibilities. 287
Many topics have been learned in this scientific paper. It is not productive to repeat all
the topics from chapter 1 to the end of step 10. In the following, some important main
topics should, however, be mentioned:
Resources have to be invested in the most profitable and strategically
important objects. The most decisive criteria for this decision are mainly the
market- and competition situation, the further longevity, the product complexity,
and the purchase volume.
Cost reduction is not the only driver of outsourcing. Elements such as quality,
performance, delivery performance, risks, and flexibility also play a decisive
role.
286
For more information, please see appendix 8 „Local vs. global-sourcing”, especially the point “Identification
of key technologies”, as well as at the end of appendix 9 the topic “Integration of suppliers”.
287
This approach is already known. Please see the tool „Spectra perfect procalc“ for more information
(exemplary link on the internet: http://www.tsetinis-partner.com/?gclid=CJqenvDr7a4CFUld3wod1DROKg).
Open points, outlook on further research approaches and learned topics 157
The sourcing strategy is dependent on the company and the product. There is
no universal method.
Companies should concentrate only on their core competences and outsource
the rest.
Outsourcing projects are complex and they contain some risks and dangers. It
is often the case that companies source to quickly and without the necessary
planning, which results at best in an only moderate success, which then again
causes in-sourcing. It is hence necessary to carry out a careful examination of
sourcing in accordance with this method.
Constant performances of suppliers are not self-evident.
Very often a high productivity, a good know-how, and low risks during the
country selection face a low wage level, high subsidies, and attractive markets.
6 Appendix
Table of Appendices
Appendix 1: Example of cost components for a calculation of the manufacturing

costs of a product .............................................................................. 160
Appendix 2: Procedure of preparing an ABC-analysis ........................................... 162
Appendix 3: Exemplary evaluation of two criteria (ABC-XYZ analysis) in an
Excel spreadsheet ............................................................................. 163
Appendix 4: Product positioning towards the customers key success factors ........ 164
Appendix 5: Operative vs. strategic sourcing ......................................................... 167
Appendix 6: Make or buy ....................................................................................... 168
Appendix 7: Part vs. modular sourcing ................................................................... 171
Appendix 8: Local vs. global sourcing .................................................................... 176
Appendix 9: Single vs. multiple sourcing ................................................................ 184
Appendix 10: Time horizon (changing supplier vs. regular supplier)......................... 192
Appendix 11: Sourcing implementation (alone vs. joint venture vs. alliance vs.
service provider) ................................................................................ 194
Appendix 12: Characterization of strategic sourcing items ...................................... 196
Appendix 13: Global Competitiveness Index 2011-2012 ......................................... 197
Appendix 14: Index of Economic Freedom (Europe view) ....................................... 201
Appendix 15: Corruption Perceptions Index (CPI) 2011 from Transparency
International ...................................................................................... 202
Appendix 16: The BRIC-states................................................................................. 204
Appendix 17: The most feared corporate risks by region ........................................ 209
Appendix 18: Germany’s position in international trade ........................................... 212
Appendix 19: International sourcing vs. local jobs .................................................... 218
D. Senft, International Sourcing, DOI 10.1007/978-3-658-02780-3,

160 Appendix
Appendix 1: Example of cost components for a calculation of the

manufacturing costs of a product
cost
com- name of cost whole
compact ponent components product part A part B part C part D part E part F
material costs 10 raw materials 138,15 € 23,94 € 27,10 € 43,95 € 21,56 € 5,35 €
material overheads 50 material overheads 20,72 € 3,60 € 4,06 € 2,27 € 6,59 € 3,23 € 0,81 €
material cost of risk 60 material cost of risk 1,37 € 0,23 € 0,27 € 0,16 € 0,44 € 0,22 € 0,05 €
80 set up costs 120,35 € 69,93 € 28,27 € 12,07 € 0,32 € 0,16 € 9,30 €
manufacturing costs
90 production costs 136,03 € 66,13 € 15,15 € 43,00 € 1,33 € 1,28 € 8,48 €

production cost of risk 180 production cost of risk 25,68 € 20,38 € 0,43 € 4,07 € 0,25 € 0,22 € 0,18 €
other production costs 190 administrative costs 11,85 € 4,80 € 2,12 € 2,14 € 1,37 € 0,69 € 0,69 €
sum [EUR] 454,15 € 189,01 € 77,40 € 63,71 € 54,25 € 27,36 € 24,86 €
cumulative percentage of
41,6% 58,7% 72,7% 84,6% 90,7% 96,1%
product value
cumulative percentage of parts 5% 10% 15% 20% 25% 30%
20% of the parts are responsible
20/80-Regel
for 80% of the product costs
finer analysis
set up costs
wages (var) 63,04 32,31 13,64 8,91 0,18 0,09 7,73
machine costs per
57,31 37,62 14,63 3,16 0,14 0,07 1,57
hour (fix)
sum [EUR] 120,35
production costs
wages 69,96 27,66 6,72 27,63 0,63 0,6 6,6
machine costs per
66,07 38,46 8,43 15,37 0,7 0,67 1,88
hour
sum [EUR] 136,03
Example of cost components for a calculation of the manufacturing costs of a product 161
others
(everything
part G part H part I part J part K part L part M part N part O part P part Q part R part S part T <5€)
4,90 € 4,39 € 1,97 € 1,37 € 1,21 € 1,07 € 0,02 € 0,03 € 0,38 € 0,28 € 0,27 € 0,24 € 0,22 € 0,04 € 16,39 €
0,00 €
0,00 €
0,15 € 0,15 € 0,30 €
0,35 € 0,33 € 0,68 €

0,08 € 0,07 € 0,15 €
0,02 € 0,02 € 0,04 €
4,90 € 4,39 € 1,97 € 1,37 € 1,21 € 1,07 € 0,62 € 0,60 € 0,38 € 0,28 € 0,27 € 0,24 € 0,22 € 0,04 € 17,56 €
97,2% 98,2% 98,6% 98,9% 99,2% 99,4% 99,6% 99,7% 99,8% 99,8% 99,9% 99,9% 100,0% 100,0%
35% 40% 45% 50% 55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
80% of the parts are responsible for 20% of the whole product costs
0,09 0,09
0,06 0,06
0,06 0,06
0,29 0,27
162 Appendix
Appendix 2: Procedure of preparing an ABC-analysis

An ABC-analysis is carried out in the following way (see table below). 288
Attractiveness of very attractive

attractive
purchasing percentage
cumulative purchasing price per of total cumulative
percentage quantities piece purchasing purchasing percentage of
parts of parts [pieces] [€/piece] value [€] value [%] purchasing value ABC
part O 5% 250.000 1,00 250.000 50,3% 50,3% A
part A 10% 90.000 1,45 130.500 26,2% 76,5% A
10% of the parts are resonsible for 76% of the purchasing value
part G 15% 15.000 2,00 30.000 6,0% 82,5% B

part D 20% 50.000 0,40 20.000 4,0% 86,6% B
part M 25% 180.000 0,10 18.000 3,6% 90,2% B
part T 30% 6.000 3,00 18.000 3,6% 93,8% B
further 20% of the parts are resonsible for 17,3% (93,8%-76,5%) of the purchasing value
part N 35% 16.000 0,63 10.080 2,0% 95,8% C

part P 40% 200 40,00 8.000 1,6% 97,4% C
part C 45% 10.000 0,50 5.000 1,0% 98,5% C
part R 50% 2.000 1,50 3.000 0,6% 99,1% C
part S 55% 8.000 0,25 2.000 0,4% 99,5% C
part H 60% 100 9,00 900 0,2% 99,6% C
part B 65% 50 12,00 600 0,1% 99,8% C
part E 70% 40 10,00 400 0,1% 99,8% C
part Q 75% 3 100,00 300 0,1% 99,9% C
part K 80% 200 1,00 200 0,0% 99,9% C
part I 85% 10 15,00 150 0,0% 100,0% C
part J 90% 300 0,30 90 0,0% 100,0% C
part F 95% 20 2,25 45 0,0% 100,0% C
part L 100% 10 1,10 11 0,0% 100,0% C
further 70% of the parts are resonsible for 6,2% (=100%-93,8%) of the purchasing value
sum 497.276 100,0%
289
Table 4: Example of an ABC-analysis
Firstly, the purchasing value of each component is calculated, which is made by

multiplying the quantities and the price per piece. Then, the products are arranged
according to their purchasing value, starting with the highest value to the lowest. After that
step one calculates the cumulative percentage of parts (see second column), as well as
288
Compare Holger, A., 2010, pp.86ff.; Arnolds, H. et al., 2010, p.21; Kluck, D., 2008, p.38; Oeldorf, G. &
Olfert, K., 2004, pp.94ff.
289
Own representation, compare Holger, A., 2010, pp.86ff.; Arnolds, H. et al., 2010, pp.22f.; Hartmann, H.,
2002, pp.172.ff; Kluck, D., 2008, pp.41ff.; Oeldorf, G. & Olfert, K., 2004, pp.94ff.
Exemplary evaluation of two criteria (ABC-XYZ analysis) in an Excel spreadsheet 163
the cumulative percentage of the purchasing value (see seventh column). Hence, the
percentage of each part is calculated by dividing 100% by the number of parts. The 20
parts from the example result in a percentage of 5% for each part. In contrast to that the
percentage of the purchasing value is calculated by dividing the purchasing value of each
item by the sum of the whole purchase volume (see example 497.276€). The term
“cumulative” means that the percentages of all preceding parts are then added to the
latest item.
In the last step, with the help of these cumulative values, every item is sorted in the
respective ABC-category. 290 In accordance with the example of table 4, the parts O and A
have a percentage of parts of 10% (5% for item O and 5% for the item A) and hence they
make up 76,5% of the purchase value.
Appendix 3: Exemplary evaluation of two criteria (ABC-XYZ

analysis) in an Excel spreadsheet
evaluation criteria 2
X Y Z sum
A 1.700.000 850.000 10.000 2.560.000
evaluation
B 680.000 420.000 50.000 1.150.000
criteria 1
C 200.000 90.000 38.000 328.000
sum 2.580.000 1.360.000 98.000 8.076.000
If one supposes that the evaluation criterion 1 represents the purchase volume and the
evaluation criterion 2 represents how accurate the prediction of the consumption value of
the parts are, the evaluation would show that the AX-parts are responsible for the
purchase volume of 1 700 000 € and that they have a high accuracy of predication. 291
290
The ABC-categorization is described in chapter 4.6.2 „Product value analysis (ABC-analysis)“.
291
Compare Holger, A., 2010, p.94; Kluck, D., 2008, p.43; Oeldorf, G. & Olfert, K., 2004, p.93
164 Appendix
Appendix 4: Product positioning towards the customers key

success factors
Step 1 „market analysis“ 292 has shown the market requirements (=key success factors),
later one looked at the positioning of the competition 293, which were weighed against each
other. Now, one has to compare the actual situation of the own product with the required
market conditions and then a strategic intended situation has to be fixed. This intended
situation influences considerably the sourcing behavior. 294
In most cases it is not possible to completely meet all customer requirements, such as low
price at a high quality and short delivery times. The desired situation hence has to show a
clear strategically advantageous positioning towards the competition and have a
recognition factor for customers and hence establish a strong brand. Porter here
distinguishes between three different strategy types: „cost leadership“, „differentiation“,
and „niche strategy“ (see figure below). 295
Strategic competitive advantage

Perceived Cost Attractiveness of
uniqueness advantage international sourcing:
very attractive
Strategic target market
(international sourcing for

Whole suppliers with the lowest TCO)
industry Differentiation Cost leadership
attractive
(local sourcing or sourcing
internationally in regions which
Focus specialized in the problem)
on a Niche strategy
not attractive / attractive
segment (depends on the market
attractiveness)
296
Figure 70: Porter’s three types of positioning strategy
International sourcing is notably interesting along with the pursuit of a cost leadership
strategy. In order to be able to meet the requirements for this strategy, one has to – on the
one hand –select international producers with the lowest total cost of ownership, on the
other hand, one should aim at a high number of items in order to be able to profit from the
292
See figure 15, 16 and 17 ”Key success factors for international sourcing”
293
See step 2 ”Competition analysis”
294
The sourcing behavior in dependence of the targeted aims has already been explained in the figures 15, 16,
17, 33, 35, 36 und 37.
295
Porter, M., E., 2008, pp.71ff.
296
Modification and extension of the figures by Porter, M., E., 2008, p.77; Sponholz, U., Lecture 4, p.274 / The
evaluation of the attractiveness was carried out on the basis of certain considerations together with the
purchase department of a concern.
Product positioning towards the customers key success factors 165
economy of scales. Due to the latter element, the respective purchase volumes, which are
a condition for international sourcing, are available. This high purchase volume again
results in low expenditures per part for international sourcing, which consequently renders
international sourcing economic. What is more, the negotiation position of the own
company towards the suppliers improves.
Differentiation means that the customer is offered an added value in some way. This can
be put into practice by providing a better service, shorter delivery times, or better product
models, e.g. with regard to quality. Although low prices are equally taken into
consideration, they are not central to this strategy. Depending on what the customer’s
requirements look like, international sourcing can be attractive or not (compare figure 15,
16, and 17). In most cases one sources with this strategy in regions (local or global) which
are specialized in the respective requirements and hence which can notably well fulfill
these requirements. Such kinds of regions are often to be found in developing countries.
A niche-strategy is generally characterized by a focus on a limited part of the market and
hence a lower number of competitors. This strategy is based on the premise that a
company can reach its limited strategic goal more effectively and efficiently than
competitors which are to be found in the larger competition. 297 All the same, one aims at a
differentiation or cost leadership strategy with the respective consequences on
international sourcing. The difference is, however, that due to the focus on a niche a low
amount of customers and hence a lower sourcing volume is underlying to the whole
procedure. The attractiveness of international sourcing is here very much dependent on
the market attractiveness (market size, market growth, life time,…) as well as the exact
customer requirements. The combination of a differentiation strategy in a niche segment is
often unattractive for international sourcing.
With regard to the profitability of invested resources, the worst case would be if neither a
cost leadership nor a distinctive differentiation is reached during the strategic positioning
(see figure below).
297
Porter, M., E., 2008, p.76
166 Appendix
Attractiveness of international sourcing:

mostly not
attractive very attractive
attractive
Return on
investments
Differentiation Cost leadership
Stuck in the
middle
Market share
Figure 71: Relationship between market share, positioning, international sourcing and return on
298
investments
298
Figure taken from Porter, M., E., 2008, p.81 / The evaluation of the attractiveness with regard to
international sourcing is based on personal considerations and discussions with experts of the purchase
department of a concern.
Operative vs. strategic sourcing 167
Appendix 5: Operative vs. strategic sourcing

Operative activities, such as the placing of orders, the elaboration of single contracts or
framework agreements, the administration of data, and the processing of single
commands, describe the routine work of the purchaser. Furthermore, the care for existing
suppliers, negotiations with them, as well as quality control is part of their field of
responsibilities. Thus, the primary goals are the minimization of purchase costs and the
guarantee of willingness to supply.
In comparison to that, the field of duty of the strategic purchase implies more than
“merely” covering the daily need. The strategic purchase serves a company to gain
international transparence, which is why it has to be familiar with the international supply
markets. Further duties are the permanent comparison of prices and conditions of
international suppliers and an elaboration of the “best” purchase strategy. Hence, the
strategic purchase aims at generating a long-lasting success of the company by applying
the best mix of the target factors costs, quality, time, risk of supply, technical performance,
and flexibility. The strategic purchase sets the scope of action for the operative purchase
in advance in accordance with the purchase strategy. 299
The choice of the process scope is necessary in order to clearly define the responsibilities
and the structures in the own purchase departments, and hence in order to create a
suitable context for the necessary activities. Due to their operative activities, the purchase
department often lacks the time to carry out the necessary strategic analyses and to make
crucial considerations. For that reason, a separation between the operative and the
strategic purchase for the guarantee of the best purchase sources is absolutely necessary.
The activities to manage international sourcing economically, as well as the necessary
sourcing strategies 300 explained in that scientific research are mostly to be put into the
context of the strategic purchase.
299
Compare Kerkkhoff, G., 2005, pp.102ff.; Hartmann, H., 2002, pp.58ff.
300
See appendix 6 until 11
168 Appendix
Appendix 6: Make or buy

In that step the company has to make the decision between an in-house production (make)
or an external production (buy) of the object, in order to determine the course for the
following procedure. An in-house production aims at optimizing internal processes,
whereas an external production puts the accent on the search for the worldwide best
supplier. The make or buy decision is very much influenced by the capabilities which are
needed for the production of the product. One distinguishes between standard-, key- or
core-capabilities, which are explained individually with regard to the make and buy
decision.
It is recommended to leave components with core-capabilities internal to the own
company. These capabilities are of a high strategic importance seeing that if a supplier is
lost, it is difficult to find another one. The reason for that is that only few suppliers feature
the necessary core-capabilities which are needed for the respective production. 301 As a
result of this supply shortage the risk of not being able to deliver would rise drastically and
the supplier’s negotiation force would be stronger, which would lower the own benefits.
Constellations of such a kind, however, can be seen as an entry barrier for potential new
competitors and they hence procure a market advantage for the company if one features
these core-capabilities oneself but not the competitors. Due to the predominant
disadvantages, the core-capabilities should hence be kept in the own company and be
kept secret from competitors.
Components which are produced with the help of standard-capabilities, on the contrary,
are to be handled in the opposite way. These capabilities can be fulfilled by a high number
of suppliers. Shortness of supplies is rather improbable due to the fact that suppliers can
be replaced easily and quickly. Due to this situation, there is the possibility to use the
different suppliers against each other, which renders the individual supplier’s negotiation
force very weak and hence a good price per item can be achieved. In the context of cheap
prices, many suppliers specialized in the production of standard items and they can hence,
due to economies of scales, get lower prices than the own company would be able to.
Consequently, it is recommended to purchase these components from an external source.
Components which necessitate key-capabilities are to be categorized in between these
two situations. One would opt for the make-strategy in case of a slack of one’s own
production and the guarantee of an economic internal production. If this is not the case,
one has to fall back upon the so-called key suppliers. Such key-suppliers feature a very
high quality, a good know-how, and a high in-house production depth. A close contact and
regular agreements are necessary, due to relatively high component requirements.
301
Compare Koppelmann, U., 1997, p.63
Make or buy 169
In conclusion, the best way to take a make or buy decision is to keep those things which
one can do better on one’s own (core competences) and to outsource the rest. 302
Consequently, the production of the respective product is always made by the company
which can offer this service at the lowest price, the best performance (quality, delivery
time,…), along with the lowest risks (sustainability and guarantee of delivery). 303
At this point one has to mention the advantage of low fixed costs and investments in case
of an external production. 304 In contrast to that, one has to consider the possible loss of
know-how to competitors and a possible dependence on suppliers, which generally
speaks in favor of in-house production. 305 Further criteria which influence the make or buy
decision are listed in the figure below. In contrast to the sourcing strategies in other
chapters, these points here have been noted in tabular form and have not been
elaborated in detail (see figure below). The reason for that is that the accent was to be put
on the capabilities. Further consequences are interesting to know, however they do not
really influence the make or buy decision, since they are subordinate to the capability
focus.
Sourcing
Make Buy
strategy
Capabilities Core Key Standard
saving the suppliers profits no capital commitment through
Most important for the make or buy decision
reduction of transportation investments in machineries and

and packaging costs buildings (low assets)
reduction of storage costs low fixed costs
which result from order- reduction of capital costs
related production own resources/funds can be
reduction of maintenance of invested in strategic parts
suppliers utilization of economies of scales
good planning of future costs utilization of economy of scope
and reduced price volatility (specialization and related know-
Investments
(no sudden price increases how lead to higher productivity;
and costs from suppliers) lower research & development
better overview over cost costs; lower rejection costs;…)
components lower costs due to location
advantages (low wages,
subsidies, no requirements for
environmental projection, tariffs,
good access to raw material,…)
advantageous usage of
302
Compare Nicklisch, G., 2006, back cover (book); Lockström, M., 2007, p.14; Koppelmann, U., 1997, p.63;
Hartmann, H., 2002, pp.207f., Arndt, Holger, 2010, pp.153ff.
303
Compare Oeldorf, G. & Olfert, K., 2004, p.334; Hartmann, H., 2002, p.211
304
Compare Hartmann, H., 2002, p.42, p.212; Arndt, H., 2010, pp.154f.
305
Hartmann, H., 2002, p.208; Arndt, H., 2010, pp.155f.
170 Appendix
M
environmental projection, tariffs,
good access to raw material,…)
advantageous usage of
supplier's good relations with
subcontractors
close cooperation and short utilization of foreign know-how
distances between and expertise
production and development utilization of others property
acquisition of own production rights
Quality know-how focused problem solving due to
responsibility in one hand specialization
reduces the search for working with the latest
culprits of errors technologies
faster response to errors
elimination of transportation elimination of deadline
times bottlenecks in one’s own
more accurate monitoring of production
Time
deadlines shorter development times and
processing times due to
specialization of suppliers
prevent supply bottlenecks lower risks at low incoming
by loss of suppliers (remedy orders (lower fixed costs)
by multi-sourcing) diversification of risk by
avoidance of monopolies and distribution to several suppliers
dependencies (e.g. natural disasters, strikes,…)
confidential treatment of the lower risks through inefficient
existing know-how ahead of product developments and bad
Risks the competition demand forecasts
confidentiality of new no risk of erroneous or improper
developments means of production
prevention of forward
integration of suppliers
no risks with exchange rates
no transportation problems
e.g. through bottlenecks
own capacity utilization access to foreign capacities and
(machines and personnel) professionals
Capacities avoidance of capacity
bottlenecks through multi-
sourcing
306
Figure 72: Factors influencing the make or buy decision
306
Own representation on the basis of the information by Koppelmann, U., 1997, p.62; Hartmann, H., 2002,
pp.206ff.; Arndt, H., 2010, pp.153ff.
Part vs. modular sourcing 171
Appendix 7: Part vs. modular sourcing
Conceptual definition
Modular sourcing, in contrast to part sourcing, is characterized by the fact that complex,
prefabricated modules or systems, and not individual parts and components are bought
from suppliers. 307 The distinction between part and modular sourcing is visualized in the
following representation.
assembled
parts components modules product
308
Figure 73: Part vs. modular sourcing
Modules are delimitable units as far as construction, manufacturing and logistics are
concerned. They are also replaceable unities, whose components are joined physically
and which are characterized by a high frequency of interaction between these
components. 309 Some examples of modules are dashboards, seat and chassis-systems,
which the car manufacturer then only has to integrate into his products. 310
Effects of part sourcing

Costs and flexibility: An advantage of part sourcing is that suppliers can be played off
against each other in order to cut purchase prices. This can be explained by a weaker
supplier dependence, seeing that the number of alternatives is high, due to the low
307
Compare Arnolds, H. et al., 2010, p.202; Kluck Dieter, 2008, p.25; Wolters, H., 1995, p.72; Wannenwetsch,
H., 2010, p.172; Schulte, G., 2001, p.435; Bichler, K. et al., 2010, p.38; Janker, C., G., 2008, p.27;
Schönsleben, P., 2011, p.86; von Eicke, H. & Femerling, C., 1991, p.31
308
Own representation following Wolters, H., 1995, p.77; von Eicke, H. & Femerling, C., 1991, pp.33f.;
Ruppert, T., 2007, p.23, p.151; Ebel, B. et al., 2004, p.73; Schönsleben, P., 2011, pp.84f.; Schulte, C., 1999,
p.236
309
Klug, F., 2010, p.119; Ruppert, T., 2007, p.25; Hünerberg, R. et al., 2009, p.107
310
Compare Werner, H., 2010, p.150; Voigt, K.-I., 2008, p.192; Bichler, K. et al., 2010, p.38; Schönsleben, P.,
2011, p.84
172 Appendix
specificity of the objects and hence a smaller necessity of a good know-how. 311 In contrast
to that, a change of the supplier during the process of modular sourcing would cause high
costs due to the strong cooperation and mutual commitments between the partners. This
is why a change of supplier is normally to be avoided. 312 Moreover, purchase costs are
lower, due to the outsourcing of individual parts, since the goods which have to be
acquired from the supplier have a lower value added share. Even possible scale effects of
the module-supplier and decreasing order processing cannot amortize them. 313
Risk: Besides the purchase costs, one would also have to mention the know-how for the
production of the modules, since this remains in the own enterprise. Consequently, the
risk that know-how and targets are known by competitors is low, since the disclosure of
the product structure and the production methods, as it has often to be done in case of
modular sourcing, is not necessary in case of part sourcing. Hence, there is also a lower
danger of forward integration of the suppliers. 314 Due to the fact that the main part of the
value creation chain and the know-how stays with the product manufacturer also the risk
that one overestimates the capabilities of the supplier and hence the risk of performance
weaknesses in development, manufacturing and logistics is low. 315
Effects of modular sourcing

Costs and time: Modular development is often done by both partners within the context
of Simultaneous Engineering. Development costs and times can be reduced because of
close co-operation and the fact that client-specific demands can be integrated into the
module as soon as possible. 316 Hence, they are not only reduced by the part which is
taken over by the supplier, but also due to the fact that unnecessary waiting loops caused
by changes can be avoided as best as possible due to a unique level of knowledge and
most of all by the value, which is economized due to the fact that the parties take over
duties which are part of their core competences. 317 Due to the shorter development times,
an earlier market entry is possible which results in a higher generation of turnover. 318
Furthermore, a higher number of innovations results from modular sourcing with regard to
311
Compare Arnolds, H. et al., 2010, p.205; Arnolds, H. et al., 2013, p.207; Bichler, K. et al., 2010, p.39
312
Compare Werner, H., 2010, p.152; Arnolds, H. et al., 2013, p.207; Bichler, K. et al., 2010, p.39
313
Compare Wolters, H., 1995, pp.95ff.
314
Compare Bichler, K. et al., 2010, p.39; Janker, C., G., 2008, p.27; Meierbeck, R., 2010, p.364
315
Compare Meierbeck, R., 2010, p.364
316
Compare Arnolds, H. et al., 2010, p.205; Schulte, G., 2001, p.435; Klug, F., 2010, p.120; Arnolds, H. et al.,
2013, p.207; Bichler, K. et al., 2010, p.38; Janker, C., G., 2008, p.28; Werner, H., 2010, p.150
317
Compare Arnolds, H. et al., 2010, p.205; Klug, F., 2010, p.120; Wannenwetsch, H., 2010, p.173; Bichler, K.
et al., 2010, p.38; von Eicke, H. & Femerling, C., 1991, p.73
318
Compare Arnolds, H. et al., 2013, p.207; Müller, M., 2000, p.13
the development activities, seeing that the single companies can, on the one hand,
specialize in their competences and, on the other hand, can now further develop their
modules as early and as independently as possible from one another. 319
Modular sourcing strategically resembles single sourcing, due to the low number of direct
suppliers and the necessary close cooperation with them (see figure below). 320
Part-sourcing (traditional purchasing)

1.
2.
nine suppliers
3. own company
4.
supplier
5.
6.
7.
8.
9.
Modular-sourcing
1.
2.
second-tier supplier
module-
3. supplier own company
4.
5.
6.
one
7. supplier
8.
9.
321
Figure 74: Change of the supplier structure due to modular sourcing
Therefore, modular sourcing also reduces the company’s complexity. This can be
explained by the lower number of objects which have to be purchased, as well as by
319
Compare Arnolds, H. et al., 2010, p.205; Klug, F., 2010, p.120; Meierbeck, R., 2010, p.364; Müller, M.,
2000, pp.51f.
320
Compare Arnolds, H. et al., 2010, p.203; Wannenwetsch, H., 2010, p.165, pp.172f.; Klug, F., 2010, p.119;
Schulte, G., 2001, p.435; Voigt, K.-I., 2008, p.192; Arnolds, H. et al., 2013, p.205; Bichler, K. et al., 2010, p.38
321
Self-established representation; compare Wannenwetsch, H., 2010, p.174; von Eicke, H. & Femerling, C.,
1991, p.34; Schulte, G., 2001, p.434; Werner, H., 2010, p.151; Arnolds, H. et al., 2013, p.206; The figure
shows that each module supplier has several suppliers of second degree behind him (=second-tier supplier).
These suppliers can again integrate other suppliers, which results in a pyramid-shaped structure of the
supply chain, which comprises first-, second-, and third-tier-suppliers. Compare Schulte, G., 2001, p.435;
Arnolds, H. et al., 2013, pp.205f.; Bichler, K. et al., 2010, p.38; Werner, H., 2010, p.151; Ebel, B. et al., 2004,
p.74
174 Appendix
simple logistics processes in the own enterprise. In addition, the supplier has the sole
responsibility for the production of the modules, as well as often the quality control. Hence,
production costs go down, most of all assembly costs 322 and, if necessary, the control of
the goods received might be omitted. 323 The own depth of performance is reduced and in
case of problems there is only one single contact person in charge. 324 Consequently, due
to modular sourcing, the own enterprise can put its focus on its real core activities, and the
manufacturing of image-products, as well as the final assembly, and the marketing. 325
The higher complexity of the modules, along with the sourced chain of added value,
influences the purchase volume and has then consequences for the ABC-analysis. 326 327
Hence, the purchaser’s position improves internal and external to the company due to the
higher purchase volume and the necessary better technical and economic know-how. 328
All the same, costs within the purchase department (e.g. personnel costs) often go down,
owing to the lower number of variants and the lower number of direct suppliers, as well as
connected to this the reduced supplier acquisition and supplier care. 329
What is more, the modular product structure reduces the processing time seeing that, due
to the use of the single modules in different finished products, one can produce the
modules before the placing of an order by the customer. So, when an order is finally made,
the modules on stock have only to be assembled. 330 Besides the reduced processing time,
modular product arrangement has the positive effect that defective components can be
replaced more easily, faster and more cost-effectively. 331
Risks: A further advantage of the modular sourcing strategy is that fixed costs and capital
commitment are reduced, e.g. by lowering the number of personal and machines, due to
the renunciation of one’s own production, which results in lower risks for the own
enterprise. Risks are lowered even more, owing to the fact that the invoiced value of
322
Compare Schulte, G., 2001, p.435; Voigt, K.-I., 2008, p.192; Arnolds, H. et al., 2013, p.205, p.207; Bichler,
K. et al., 2010, p.38; Janker, C., G., 2008, p.27; Werner, H., 2010, p.150; Ebel, B. et al., 2004, p.73;
Meierbeck, R., 2010, p.364; Hünerberg, R. et al., 2009, p.107
323
Compare Werner, H., 2010, p.152; Hünerberg, R. et al., 2009, p.107
324
Compare Wannenwetsch, H., 2010, p.165, p.172; Arnolds, H. et al., 2013, p.205, p.207; Wolters, H., 1995,
p.71, pp.92f., pp.95ff.; Klug, F., 2010, p.117, p.120; Meierbeck, R., 2010, p.364
325
Compare Arnolds, H. et al., 2010, p.203; Arnolds, H. et al., 2013, p.205; Werner, H., 2010, p.152;
Meierbeck, R., 2010, p.364
326
Compare Arnolds, H. et al., 2010, p.203; Arnolds, H. et al., 2013, p.205; Ebel, B. et al., 2004, p.72
327
See Step 4 „Product analysis“ and Step 5 “Strategic determination”
328
Compare Arnolds, H. et al., 2010, p.203; Arnolds, H. et al., 2013, p.205
329
Compare Wannenwetsch, H., 2010, p.173; Arnolds, H. et al., 2013, p.205
330
Compare Meierbeck, R., 2010, p.364; Mayer, R., 1993, pp.156ff.; Hünerberg, R. et al., 2009, p.107
331
Compare Hünerberg, R. et al., 2009, p.107
modules is lower than the invoiced value of a finished product. Scrapping costs due to bad
planning lead therefore to lower losses.
Flexibility: Since one is able to assemble cheaply a relatively high number of different
finished products from a comparatively low number of modules, due to the use of the
same interfaces, the producer has a higher flexibility. 332
Others: Modular sourcing often pursues logistical goals, such as just-in-time or just-in-
sequence supplies. The supplier has therefore to be at a low distance of the client. 333
One condition for modular sourcing is a close relation between the involved enterprises. 334
Due to the mutual dependence of both partners in the case of modular sourcing, it is
obligatory that the legal, informational and organizational framework is regulated. 335
Transportation and storage costs: It cannot be clearly said if transportation and storage
costs are advantageous or disadvantageous. On the one hand, a reduced number of
suppliers should result in lower transportation costs, on the other hand, modules can
cause higher transportation costs, due to a higher fragility, more required space, and
lavish fixing in comparison to single items. With regard to storage costs, modules are
presumably cheaper to store than the finished products, however they are more
expensive than single items. 336
The future trend is more and more to opt for the modular sourcing strategy. 337
332
Compare Meierbeck, R., 2010, p.364; Hünerberg, R. et al., 2009, p.107
333
Compare Wannenwetsch, H., 2010, p.173; Schulte, G., 2001, p.435; Werner, H., 2010, p.151; Meierbeck,
R., 2010, p.364
334
Compare Werner, H., 2010, p.152; Arnolds, H. et al., 2013, p.207; Bichler, K. et al., 2010, p.39
335
Compare Schulte, G., 2001, p.435
336
Werner H. assumes that freight charges will be reduced due to a low distance between the module supplier
and the client. Compare Werner, H., 2010, p.152
337
176 Appendix
Appendix 8: Local vs. global sourcing
Local sourcing means that one purchases from suppliers which are located in short
distance from the purchaser’s site. In that case there is no cross-border trade. 338
In contrast to that, global sourcing implies that trade between the supplier and the
customer is done on international level. 339 That means that source and addressee of the
flow of goods are located in different countries and the product has to cross borders on its
way from the supplier to the customer. 340 341
Effects of local sourcing

Costs: A considerable advantage of local sourcing is the possibility of ordering smaller
quantities from the supplier. 342 Moreover, this sourcing strategy guarantees a prompt
handling of express orders and a better reaction to fluctuating numbers of incoming
orders. 343 As a result of both the order-related production and delivery, not only the risk of
bad predictions is reduced by a higher flexibility, but also the storage costs or possible
scrapping costs. What is more, the short distance between provider and purchaser in case
of local sourcing leads to logistical advantages. Complex logistics processes, long
transportation distances, along with long processing times and high costs for freight and
assurances are avoided. 344 The amount of money which can be saved is influenced
considerably by the complexity and fragility of the components. Hence, in comparison to
standard components, components which necessitate a lavish storage and transport will
increase costs in a larger proportion to a growing transportation distance. In the same way,
transport costs might increase due to permissible storage periods, seeing that the
338
Compare Hartmann, H., 2002, p.188; Arnolds, H. et al., 2010, p.206; Krokowski, W. & Sander, E., 2009,
p.22; Wannenwetsch, H., 2010, p.167; Werner, H., 2010, p.152; Pepels, W., 2004, p.1050
339
Compare Arnolds, H. et al., 2010, p.206; Krokowski, W. & Sander, E., 2009, p.22; Wannenwetsch, H.,
2010, p.169; Werner, H., 2010, p.152; Pepels, W., 2004, p.1050
340
Compare Arnolds, H. et al., 2010, p.206; Pepels, W., 2004, p.1050
341
In literature one might also find the terms national or domestic sourcing respectively. This is the case if the
site of the company and the supply sources are in the same country, however not in the immediate vicinity.
Hence, there is no border-crossing trade in this case. However, this distinction is not taken into consideration
in this academic research. Compare Arnolds, H. et al., 2010, p.206; Krokowski, W. & Sander, E., 2009, p.22;
Wannenwetsch, H., 2010, p.169; Werner, H., 2010, p.152
342
Compare Arnolds, H. et al., 2010, p.207; Hartmann, H., 2002, p.188
343
344
Compare Arnolds, H. et al., 2010, p.207; Hartmann, H., 2002, p.188; Arndt, H., 2004, p.153;
Wannenwetsch, H., 2010, p.168; Werner, H., 2010, p.153; Pepels, W., 2004, p.1050; Schulte, C., 1999, p.230
Local vs. global sourcing 177
company might be forced to fall back upon cost-intensive means of transportation via air
freight.
Risk: What is more, local sourcing avoids risks which arise during a cross-border
purchase. Especially the following risks might come up during international purchase: 345
Higher supply risk due to logistic problems (the risk that delivery dates are not
respected due to delivery to a false address or due to force majeure, is in general
the higher the longer the distance from the supplier to the customer. Force
majeure implies here most of all growing climatic risks).
Cost risks of the respective country (What will be the future development of wages,
energy prices, rates, etc?).
Higher risk of bad quantities and quality costs (in case of global sourcing, mistakes
can only be rectified with a certain loss of time).
A higher control risk results from greater distances (necessity of formalized
processes, which are subject to considerable disruptive factors, e.g. language
barriers).
Risks of constant performance criteria (level and reliability are often less constant).
Risks due to different cultures (different values and behavior, higher risk of the loss
of know-how,…).
Negative effects of currency fluctuations.
Political risks.
Low legal security and higher rate of criminality.
As a consequence, the risk potential decreases along with shorter distances, seeing that
planning is easier, the time preceding the planning is also reduced, bad planning has less
consequences, and corrections can be made with lesser delay. 346 The basis of local
sourcing is therefore the highest possible supply security at the time when a certain
product is needed. 347
Besides the risks mentioned above, one should equally consider the mental barrier which
might cause a failure of business. Barriers due to missing knowledge of the respective
culture and language can be avoided by offering special training to the employees.
However barriers due to negative experience and prejudices, or simply due to patriotic
attitudes are only hard to avoid. 348 Not only can local sourcing avoid that risk, but it can
even cause a better image and position of the purchaser in its municipality or region,
345
Compare Koppelmann, U., 1997, p.68; Hartmann, H., 2002, p.189; Arnolds, H. et al., 2010, p.207;
Wannenwetsch, H., 2010, p.168
346
Koppelmann, U., 1997, p.68
347
Compare Hartmann, H., 2002, p.188; Arnold, U., 1996, pp.1866f.
348
178 Appendix
seeing that local sourcing always implies the creation of workplaces. If a company takes
global sourcing into consideration and hence might evoke job cuts, the municipality might
approve tacitly of own wishes and requirements in order to convince the company to stay
in the home country. 349
Product range (flexibility): Besides the already named more flexible quantities and the
possibility to order and make changes at short notice, local sourcing often serves as a
basis for the guarantee of many product variants and customer-specific options. 350 Owing
to the fact that companies aim at fulfilling the points mentioned above in the best possible
way, they not rarely establish just-in-time or just-in-sequence supplies. A condition for this
method is however that local suppliers are available or that a potential provider is willing to
create a site at a small distance from the customer’s location. 351
Supplier integration: Moreover, local sourcing provides good conditions for intensive
cooperation on different areas of the value analysis, Kaizen, simultaneous engineering,
quality control, and allows to profit from cost reducing potentials in the added-value chain
by target costing. Furthermore, meetings which are called at short notice for the
discussion of unexpected problems do not present difficulties to both partners of local
sourcing. 352
Effects of global sourcing

Costs: It is obvious that costs in the purchase department will go up due to bigger
expenditures on country- and supplier-related analyses, as well as international business
trips, which are needed for supplier acquisition and care of the supplier-purchaser-
relation. 353 Furthermore, there are higher expenses on communication costs, such as
higher fees for international phone calls. 354 In the information age, this point, however, is
only considered to be secondary. But also despite the other two cost-driving points
mentioned above, a more laborious research, along with higher costs for business trips,
one can in many cases achieve better purchase conditions than it would be possible with
local sourcing. The reason for that is the greater selection of possible suppliers and along
with that the company’s better negotiation position. Moreover, location advantages, for
instance lower wage costs, higher productivity, subsidies, good access to raw materials
349
350
Compare Kluck Dieter, 2008, p.29
351
Compare Arnolds, H. et al., 2010, p.207; Hartmann, H., 2002, p.188; Wannenwetsch, H., 2010, p.168;
Werner, H., 2010, p.153
352
Compare Hartmann, H., 2002, p.188; Arnolds, H. et al., 2010, pp.207f.
353
Compare Kluck Dieter, 2008, pp.28f.
354
and low energy costs lead to cost savings. 355 The above mentioned location advantages
are thereby mostly to be found in low-wage countries. 356
Regarding the cost comparison between local and international purchase, one still has to
take into account the time factor, since one has to make sure that the sum of the purchase
cost of the respective sourcing strategy will also be kept low in future years. 357 In that
context, exchange rates might mostly be subject to considerable fluctuations which could
have negative effects on the cost calculation. By dividing up the purchase volume
between several countries with different currencies, these fluctuations can be better
regulated; most of all when taking advantage of current exchange rates. 358
Risk: Besides the cost criteria, one also has to consider the risk factor. Global sourcing
can reduce entrepreneurial risks due to the fact that the companies can choose different
suppliers in a multitude of countries with different access to raw materials, which
minimizes dependencies and guarantees the supply of materials and goods. The
international mix of the supplier spectrum furthermore increases in some way the
enterprise’s flexibility, seeing that fluctuating unforeseeable market requirements can be
met by accessing capacities which are used differently worldwide. Moreover, sales risks
can be reduced due to the easier entry of new markets. Useful for that step might be
already carried out country analyses and current relations to local suppliers. Vice versa,
when a company is entering into new markets, outsourcing of value-added shares in this
country is even absolutely necessary if there are local content regulations which have to
be fulfilled. 359
According to Kopplemann, global sourcing more and more tends towards single
sourcing 360, which is mostly the case when the purchase volume is too small to be split up
on different suppliers. In that case, some of the above mentioned points for the reduction
of the risk by sourcing globally can be lifted and a local sourcing would then be the less
risky solution. This means that the advantages of global sourcing have to be compared to
355
Compare Arnolds, H. et al., 2010, p.209; Hartmann, H., 2002, pp.188f.; Wannenwetsch, H., 2010, pp.167ff.;
Werner, H., 2010, p.152; Pepels, W., 2004, p.1050; Schulte, G., 1996, pp.418f.; Schulte, C., 1999, pp.229f.;
Knolmayer, G. et al., 2000, p.52 / See also low-cost country sourcing vs. developed country sourcing
356
Compare Hartmann, H., 2002, p.189
357
358
Compare Arnolds, H. et al., 2010, p.209; Hartmann, H., 2002, p.189; Wannenwetsch, H., 2010, p.169;
Werner, H., 2010, p.153
359
See chapter 4.3.6 „Location of customers and local content regulations“
360
180 Appendix
the increasing purchase risks, with growing geographical, legal-political, and cultural
distance. 361
Others: A further positive effect of a targeted international purchase is that companies
might express their pleasure that their corporate philosophy and their culture are marked
by globalization and cosmopolitanism. Global sourcing can, however, equally influence
the image in some other ways. 362 In that sense, a foreign enterprise which sources in
Germany might benefit from the seal of quality “Made in Germany”.
Global sources of supply are sometimes used simply strategically, in order to stimulate the
competition on the domestic oligopoly or monopoly markets. In this way, local suppliers
can generate better results regarding quality, delivery time, price, performance, or
innovation. 363 The aim of this procedure is to work with local suppliers in order to profit
from all the advantages that go along with them, such as a faster processing time and
lower transportation risks, but at the same time to get all that at the costs of global
conditions.
In general one has to mention that just because of global competition global sourcing is
essential for the business venture, seeing that it is a necessary procedure when the
company wants to reach and secure its entrepreneurial success potentials. 364
Development costs, time, quality and technological performance: Elements such as

development costs, development times, as well as quality and technological performance
cannot be fully classified as positive or negative for the two geographical sourcing
strategies. On the one hand, the close contact and intensive cooperation of local sourcing
can improve those factors; on the other hand, however, global sourcing allows finding the
“worldwide best supplier” in order to reach one’s goals better, faster and easier. 365 In
addition to the latter one, a “technological listening post” abroad can help to get to know
new trends and technological innovations relatively early in order to benefit from them. 366
Technological aspects have become more and more important just because of the fast-
paced changes today. Technologies become obsolete very quickly and have therefore to
be replaced by new innovations. The best example for that phenomenon would be the
computer industry. Hence, it is all the more important to benefit from the know-how of
361
Compare Arnolds, H. et al., 2010, pp.209f.; Koppelmann, U., 1997, p.68; Hartmann, H., 2002, p.189;
Schulte, G., 1996, pp.418ff.; Wannenwetsch, H., 2010, p.170; Schulte, C., 1999, pp.230ff.; Werner, H., 2002,
p.98
362
363
Compare Arnolds, H. et al., 2010, p.209; Werner, H., 2010, p.153
364
365
Compare Hartmann, H., 2002, p.189
366
Compare Arnolds, H. et al., 2010, pp.208f.; Arnold, U., 1996, p.1867
worldwide experts in order to reach one’s targets in the most productive and cost-effective
way. In addition to that remark, one should also consider Koppelmann’s point of view:
„Leistungschancen resultieren aus dem Innovationsverhalten und dem daraus

resultierenden Leistungsvorsprung im Ausland tätiger Unternehmen.“ 367
Hence one could deem global sourcing as more advantageous than local sourcing, under
the pretext of having access to worldwide technology professionals and despite the loss of
possibility of a closer cooperation. However, it became apparent how difficult the
technological aspect during the selection of the geographical scope is. This is the reason
why the end of this chapter dedicates a separate sub-chapter to the topic of „Identification
of key technologies and know-how“.
Low-cost country vs. developed country

The geographical scope can be further divided up with regard to country specific features.
One then distinguishes between low-cost-country-sourcing and developed-country-
sourcing. The supply of objects from developed countries often benefits from a higher
productivity, a better quality, and a superior technical performance, which is most of the
time due to a better know-how. Furthermore, certain risks are reduced owing to a smaller
danger of know-how loss, fewer problems caused by cultural differences, lower rates of
criminality, better performance continuity, stronger political stability, as well as better
communication opportunities, and a better built infrastructure.
In contrast to that do low-cost countries appeal companies with lower wages, low costs for
material, partly good subsidies, fewer regulations, as well as a smaller amount of
necessary investments and hence a low capital commitment in expensive equipments and
machines. Moreover, low-cost countries are often marked by unsaturated markets. If a
company decides to source there, the market entry and the distribution are made
easier. 368
One has to add here that even low-cost countries might feature regions where there can
be found an excellent know-how as a result of the growing specialization and globalization.
Due to that fact, one can create a middle way between the above mentioned country-
specific features, which, of course, has many advantages. 369
Finally, the selection of the geographical scope of a sourcing strategy is also influenced by
the fact that the use of worldwide available supply sources and resources is easier for big
367
368
Compare chapter 2 „Differences and impacts of global sourcing”
369
Compare also „Identification of key technologies and know-how“ at the end of appendix 8.
182 Appendix
multinationals than it is for smaller and average corporations. 370 The reason for that is that
the corporations can, amongst others, fall back upon experience from local international
purchase offices (IPOs) or local subsidiaries. Moreover, a large company can more easily
afford the expenses for international sourcing due to the larger purchase volume.
Identification of key technologies and know-how (related to global

sourcing) 371
According to Ferdows, companies mostly opt for foreign plants because of cheap labor,
capital subsidies, taxes, reduced logistics costs, spreading foreign exchange rates, trade
concessions, and tariffs. 372 However, companies which only rely on these factors could
have a difficult life. The reduced importance to overcome trade barriers results from
worldwide tariffs, which decreased from 40% in 1940 to 7% in 1990. Procter & Gamble
can serve as an example of a corporation which had to close many of its 30 plants in 1993
as a result of the changes mentioned above. In comparison to that, Ferdows is of the
opinion that companies should take more advantages from foreign plants. According to
this, companies could learn from foreign suppliers, customers, competitors and research
centers and they could also attract skilled and talented employees from all over the world,
which helps them to provide more effectively and to create a strong weapon. Alcatel Bell
puts this method into practice and hence two of its most innovative manufacturing plants
can now be found in Shanghai. The reason for this is that worldwide professional regions
have been created due to specialization on one product or technology. Consequently
companies which have settled in this region are able to learn more about the latest
technological progress than it is possible for a producer who operates elsewhere. A
further successful example is 3M, who decided to manufacture in Bangalore, because of
its skilled workers and advanced infrastructure, although it is a relatively expensive
country with fairly high wages in comparison to other places in India. Similarly, a
manufacturer of medical instruments could benefit from a plant in Minnesota’s “Medical
Lane” near the Mayo Clinic. Finally, as a last example one could look at several ceramic
producers which are operating a factory in New York’s “Ceramic Valley”.
In addition to the specialization aspect many companies have realized that low wages
become unattractive after they were adjusted to productivity. Hence, wages in India and
the Philippines are low in comparison to the USA. However, the average manufacturing
labor cost is often considerably higher after adjustments to the productivity have been
made.
370
371
Compare for an opposite view „Integration of suppliers“ at the end of appendix 9.
372
This section is a summary of Ferdows, K., 1997
Owing to the fact that companies can provide from specialized areas, ten industrialized
countries have received half of the foreign direct investments in 1994 and hold two-thirds
of the worldwide accumulated stock of foreign direct investments.
Finally, companies which do not practice global sourcing, either through their own or
external production, would miss opportunities to collect and adopt the expertise that other
regions have to offer.
“Be there where knowledge is available!”

184 Appendix
Appendix 9: Single vs. multiple sourcing
Single sourcing deliberately aims at reducing the supply sources for an object to a single
one. 373 In comparison to that, multiple sourcing implies the supply of an object from
several suppliers. 374 Dual sourcing can be classified in between these two strategies,
since, in contrast to single sourcing, one can find two supply sources. 375 The aim of this
strategy is to profit from the advantages of both single and multi sourcing while, at the
same time, risks should be kept low.
Effects of single sourcing

Costs, quality and technological performance: The primary goal of this sourcing
strategy is to lower the costs and, at the same time, to improve the object quality or rather
the technological performance. The former can be put into practice by a larger volume,
which results in an increase of the company’s negotiation power and which allows the
supplier to grant discounts to its customer due to the economies of scales. One example
regarding the economies of scales is the expensive setup costs, which are lower, since
these can be allocated to a larger number of parts. 376 Similarly, concentrating on one
single supplier makes it possible to reduce the costs for order processing and
transportation. 377 Furthermore, due to the usage of the same technologies and processes
to produce the parts, a more constant quality of one single supplier compared to several
suppliers could be expected. This reduces the effort for incoming goods inspection. 378
Speaking of product quality, this can be adapted individually to the customer requirements
owing to a long-term and intensive strategic cooperation between the business
373
Compare Krokowski, W. & Sander, E., 2009, p.22; Knolmayer, G. et al., 2000, pp.52f.; Wannenwetsch, H.,
2010, pp.164f.; Voigt, K.-I., 2008, p.190; Östring, P., 2004, p.26; Klaus, P. & Krieger, W., 2008, p.513
374
Compare Krokowski, W. & Sander, E., 2009, p.22; Voigt, K.-I., 2008, p.189; Östring, P., 2004, p.26; Klaus,
P. & Krieger, W., 2008, p.513
375
The dual-sourcing was not further examined here, compare Krokowski, W. & Sander, E., 2009, p.22; Voigt,
K.-I., 2008, pp.191f.; Klaus, P. & Krieger, W., 2008, p.513
376
Compare Wisner, J., D. et al., 2012, p.61; Voigt, K.-I., 2008, pp.190f.; Wannenwetsch, H., 2010, pp.164f.;
Krampf, P., 2012, p.33; Compare for further information regarding the negotiation power figure 23 „Entry
barriers of new competitors“ and figure 26 „Criteria influencing the bargaining power of buyers”
377
Compare Wisner, J., D. et al., 2012, p.61; Voigt, K.-I., 2008, pp.190f.; Wannenwetsch, H., 2010, p.165 /
Also the capital commitment can be reduced, especially, if just in time (JIT) or just in sequence (JIS)
concepts could be established. Central to these concepts is to eliminate waste, which save costs too.
Referring to this, compare Ungson, G., R. & Wong, Y.-Y., 2008, p.231
378
Compare Wisner, J., D. et al., 2012, p.60; Voigt, K.-I., 2008, pp.190f.
Single vs. multiple sourcing 185
partners. 379 What is more, objects, as a rule, are permanently improved by this sourcing
strategy. 380
Supplier integration: A disadvantage of this intensive, long lasting cooperation is,
however, that the partners become very dependent from one another. This kind of
dependence is difficult to reduce and connected to high efforts, due to the specifically
developed products and the relations and cooperation between the different businesses.
To be more precise, joint investments and the exchange of staff are often made during the
cooperation. 381 A resolution of the common business activity is hence linked to large risks,
because the supplier has customer-specific know-how. 382
Others: Finally, one would rather opt for single sourcing if the objects are less
standardized and complex, which needs the specific know-how and innovations of the
best supplier, as well as close relationship with them. 383 Companies, which opt for single
sourcing, tend to the differentiation strategy. 384
The conditions for a successful single sourcing include a thorough pre-analysis of the
supplier, intense negotiations, a contractual obligation of the supplier for the complete
product life cycle, an early implication of the supplier in the development of the product
and a coherent encouragement of the supplier. 385
Typical examples of single sourcing are the aviation and automobile industry, where,
amongst others, jet engines, engines, gearing mechanisms, seats and cockpits are
delivered by the same supplier. 386
Effects of multiple sourcing

Costs, quality and technological performance: The possibility to substitute suppliers
and the general existing high market transparency, which is closely related to this
sourcing strategy, leads to a stronger competition between the suppliers and a better
negotiation power. Based on that, the aim of multiple sourcing is to lower the purchase
379
Compare figure 18 “International sourcing function and Taguchi’s loss function”
380
Compare Voigt, K.-I., 2008, pp.190f.; Wannenwetsch, H., 2010, pp.164f.; Krampf, P., 2012, p.33
381
For further information regarding the exchange of stuff compare at the end of appendix 9 the point
„Integration of suppliers”
382
Compare Voigt, K.-I., 2008, pp.190f.; Wannenwetsch, H., 2010, pp.164f.
383
Compare Wisner, J., D. et al., 2012, p.60; Wannenwetsch, H., 2010, p.165.; figure 36 „Portfolio for
determination of a sourcing strategy”
384
Compare Voigt, K.-I., 2008, pp.190f.; Wisner, J., D. et al., 2012, p.60; See also appendix 4 „Product
positioning towards the customers key success factors”
385
Wannenwetsch, H., 2010, p.164; Compare also Ungson, G., R. & Wong, Y.-Y., 2008, p.231
386
Wannenwetsch, H., 2010, p.165; Compare also Ungson, G., R. & Wong, Y.-Y., 2008, p.231
186 Appendix
prices. 387 However, transfer costs go up due to the higher amount of suppliers. In that way,
transportation costs increase if an object is provided by several suppliers and at the same
time if the amount of products is not large enough to fully make use of the means of
388
transportation. This phenomenon, however, does not completely contradict the
reduction of supply costs, but it is strongly dependent from the distance between the
customer and the suppliers, as well as from the complexity of the object. 389 Besides the
steady reduction of production costs, the increasing competition forces the suppliers to
permanently improve their product quality and technological performance. As far as the
quality of suppliers is concerned, one has to make sure that the respective objects
provided by the different suppliers are of identical quality. 390
Risk: Multiple sourcing might avoid possible supply risks. The logic is to avoid
overdependence on one supplier by being able to fall back upon several suppliers at the
same time. 391 In addition, the strategy of multiple sourcing avoids an emergent market
power of individual suppliers through greater competition between suppliers. 392 Therefore
raising prices or lower quality is rather improbable. Furthermore the risk of missing
innovations is reduced, since multiple suppliers, compared to only one supplier, usually
have more information about market conditions, new product developments and new
product technologies. This is especially important if the product has a short product life
cycle. 393
Flexibility: Multiple sourcing with its independence and its short delivery relations results
in low exit barriers. 394 But also during daily business, the segmentation into different
suppliers permits a higher flexibility. This is due to the fact that fluctuations in demands
can be better balanced by a reasonable usage of supplier capacities. Besides the higher
387
Compare Voigt, K.-I., 2008, p.189; Wisner, J., D. et al., 2012, p.61; Wannenwetsch, H., 2010, pp.164f.;
Ungson, G., R. & Wong, Y.-Y., 2008, p.230; Krampf, P., 2012, p.32
388
Compare Wisner, J., D. et al., 2012, p.61; Voigt, K.-I., 2008, p.189; Klaus, P. & Krieger, W., 2008, p.513
389
Compare Ungson, G., R. & Wong, Y.-Y., 2008, p.230; Inderfurth, K., 1998, p.204; See local vs. global
sourcing
390
Compare Voigt, K.-I., 2008, p.189; Krampf, P., 2012, p.32
391
Compare Voigt, K.-I., 2008, pp.189f.; Wisner, J., D. et al., 2012, pp.60f.; Östring, P., 2004, p.26;
Wannenwetsch, H., 2010, pp.164f.; Ungson, G., R. & Wong, Y.-Y., 2008, p.229; Krampf, P., 2012, p.32;
appendix 9 “Distribution of risk” and “Scarcity of supply”
392
Compare Voigt, K.-I., 2008, pp.189f.
393
Compare Voigt, K.-I., 2008, p.190; Wisner, J., D. et al., 2012, p.61; Ungson, G., R. & Wong, Y.-Y., 2008,
p.229
394
Compare Voigt, K.-I., 2008, p.190; Ungson, G., R. & Wong, Y.-Y., 2008, p.230; Wannenwetsch, H., 2010,
pp.164f.; Krampf, P., 2012, p.32; See also figure 24 “Connection between entry and exit barriers and
returns”
flexibility, this also has positive effects on the storage at the buyer, as well as at the
supplier. This again leads to a lowering of costs. 395
Others: The reason for the usage of multiple suppliers stems from the inability of any one
supplier to provide the necessary volumes to buyers. 396 All in all, this sourcing strategy is
practical when one deals with standardized goods of low complexity. Otherwise the
danger of too high expenditures for order preparations and processing, as well as the
acquisition of suppliers becomes too high.
During the selection of the supplier related sourcing strategy, one observes that the effect
on the objects plays in both cases, single as well as multiple sourcing, a subordinate role.
The reason for that phenomenon is that both methods aim at an improvement of the
objects with regard to their price, their quality, and their technical performance, even
though both strategies do that in a different way. Single sourcing achieves these goals
due to the long-term and intensive cooperation, as well as the use of economies of scales,
while multiple sourcing does this by increasing the competition pressure between the
suppliers.
In the following, some points are explained in more detail. They deal with both the
geographical (local vs. global), as well as the supplier-related (single vs. multiple) sourcing
strategy. Hence a better comprehension and a higher sensitivity for important topics are
achieved, even if single subtopics might be repeated in a similar way.
Improvement of the bargaining position (related to global sourcing and

multiple sourcing)
Suppliers who feel save in a non-competitive position are less permissive in terms of cost
reduction, whereas a high competitive environment is often characterized by “kinky” prices
with less profit margins. Knowing about the suppliers’ international competition will lead
automatically to a better bargaining position of the purchaser. According to Kerkhoff, the
hint of the existence of another offer from abroad issued during negotiations, often results
in a high willingness of price adjustments to international markets. 397 However, statements
which are not definite enough, might affect the persuasiveness in a negative way, since
suppliers, too, are well informed about their international competitive position. In addition
to that, international sourcing is also used as a strategic method. So, current suppliers are
kept by reducing the prices through improvements of the bargaining position.
395
Compare Krampf, P., 2012, p.32
396
Ungson, G., R. & Wong, Y.-Y., 2008, p.230
397
Kerkhoff, G., 2005, p.39
188 Appendix
Distribution of risk (related to global sourcing and multiple sourcing)

Natural disasters, strikes, war, technical problems, political instability, scarcity of skilled
workers or raw materials, sales of subsidiaries, insolvency, change of ownership, and
lawsuits are only some reasons for a breakdown of supply chains. 398 Companies, for
instance, which only relied on one supplier from Japan, certainly faced supply problems
during the nuclear disaster in 2011. Production stops are a likely result of such a
catastrophe. Companies had to search for new suppliers as quick as possible so as to
overcome this situation. However, hasty supplier certification is also mostly connected
with quality risks and higher prices. In any case, the company certainly experienced profit
losses and a damage of its image, because of its instability. In contrast to that,
organizations which work with the right mix of suppliers from different countries can avoid
such hazardous supply chain breakdowns by temporal shifts of orders.
Scarcity of supply (related to global sourcing and multiple sourcing)

Ever declining raw material deposits and increasing demands, especially in fast economic
growing countries, such as India and China, as well as monopolies can lead to scarcity
and huge price increases. China, for instance, currently produces 97% of global output
(=monopole) with approximately 130,000 tones of rare-earth magnets. The increasing
trend of using electro-motors, for the production of which rare-earth magnets are essential
(=increasing demand), as well as scarcity theses, and China’s announcement of export
restriction lead to a multiplication of prices and interruption of supplies. 399 One can early
detect the changing supply situation by establishing a presence in important international
procurement markets. If one knows about the imminent problem, one can avoid
production stops and the fact to be forced to buy overpriced products by increasing the
stocks as soon as possible or partly as well by the early adherence of suppliers outside of
China to the own company. An early consideration of substitutions is equally
recommended. Finally, multiple and global sourcing can be, with respect to scarcity of
supply, considered as an early-warning tool, the maintenance of supply chains, and an
instrument to avoid enormous price increases.
398
Compare figure 63 “Supply chain risks”
399
Compare EMFIS.COM, 2011; Kautz, H., 2011; Lee, F., 2011; Röttger, M., 2011; Frankfurter Allgemeine
Zeitung, 2011; Rain, A., 2011
Quality (related to global sourcing and multiple sourcing)

Often the Supplier Quality Management Process (SQMP) has been successful and the
first delivered samples fulfill all necessary specifications. 400 However, in the day to day
business stress, changing environment conditions, or internal problems (e.g. loss of
skilled employees, defect machines…) can influence the quality in a negative way. In
addition to this, culture differences will multiply the risk of bad quality in an international
sourcing process.
Moreover, the quality is influenced by the importance of the degree of the principal’s
(=your company’s) projects/products to the agency (=supplier). If the principal is less
important for the agency, the cooperation can be seen as a pick-up business. In this case,
the agency tries to gain a maximum profit with as less effort as possible. Therefore, quality
control is subordinated, whereas the agent tries to do the best to fulfill the specifications
and therefore to control the quality if the principal (=your company) is strategically
essential for survival. 401
Finally, according to the visualized points, the access to an increased number of qualified
suppliers gives a company the opportunity to deal with different attitudes, targets and
current situations of suppliers and therefore to better meet its own quality requirements.
Integration of suppliers (related to local sourcing and single sourcing)402

Shortened product life cycle and global competition puts a certain pressure on companies
to quickly move from the development of an idea to the production of the object, and to do
it in an economical way, while at the same time they guarantee a good quality. 403 To
achieve these targets, suppliers have to be involved early and closely. Different
approaches for the establishment of a customer-supplier collaboration in order to improve
time, costs, and quality (following named TCQ) are possible. Some of them are explained
in the following.
To put the improvement of TCQ in practice, one should first start with employing resident
engineers. Resident engineers are paid by the supplier, however work at the customer’s
plant. The target is to provide an additional service to satisfy the customer. Today, this
way of cooperation is most common in the automotive industry, as it is the case for
Faurecia and Audi. 404 Resident engineers improve the quality, because they participate in
daily audits and help to solve problems. They are up to date and have a similar point of
400
SQMP is a method for establishing suppliers.
401
Compare principal – agency theory
402
Compare “Identification of key technologies and know-how” at the end of appendix 8.
403
See also figure 1 and 2
404
Compare Loch, C., H. et al., 2007, p.45-61
190 Appendix
view on failures. Furthermore, Faurecia’s resident engineers, for example, are responsible
for all kinds of problems which might come up with regard to their seat products.
Therefore, Audi does not lose time while searching for the problems and writing a long
report on it for the supplier. The resident engineers take immediately care of it. Such
resident engineers equally improve TCQ during the development of new problems. If Audi
for example wants to reduce the costs of the car’s seats, the resident engineer has a
better understanding of the supplier’s production processes and hence knows exactly
what can possibly be made, or rather which product design is necessary to achieve the
lowest price. Therefore, the simultaneous engineering team SET, which includes mostly
members of the customer then provides from the participation of the resident engineer.
Another advantage of resident engineers is that customer and supplier speak the same
language. Due to their daily cooperation the resident engineer knows much better what
the customer really wants to express by his or her often unclearly formulated requirements,
such as “more comfort”.
The second important point is dissemination of standards. The Audi-Faurecia cooperation
still serves as an example here. Faurecia in its role of the seat supplier for Audi has
established the same order system, the same racks, and the same quality system. This
makes the daily work for and with Audi more comfortable, while at the same time it
reduces TCQ. For example, the same order system makes it easy for Audi to order seats
and Faurecia gets this order in real time. Audi does not lose time because they do not
have to get in touch with them, start a communication and wait for a reply. Due to the
order system, furthermore, orders are already sequenced by Faurecia in accordance with
Audi’s wishes. Time consuming re-sorts are therefore not necessary. Owing to the same
racks, time and costs can be saved, since seats do not have to be loaded and unloaded
for several times. In accordance with the dissemination of standards, the most important
thing is, finally, that both partners have the same idea of quality. The fact that they both
have the same quality systems and guidelines, Audi can decrease the failure rate and
handle quality problems in an efficient way. 405
The third point to improve the customer-supplier relationship and along with that to reduce
TCQ is an open communication and trust. Generally, customers expect from their
suppliers that they are immediately informed in case of delivery problems. Audi, for
example, would have to stop its production line and finally would face a high revenue loss
if Faurecia is not able to deliver seats as a result of, for example, a natural disaster. It is
illogical for Faurecia to say cheekily “Hey you get the order in two days”. Therefore, an
open communication on the problem, which is based on a mutual confidence, works like
405
Compare Loch, C., H. et al., 2007, p.45-61
an early warning system, which is very important for the customer to be able to react
quickly and to save TCQ.
Of course, these are only some examples and there are further methods to improve TCQ,
such as monthly customer reports on failures, failure identification (e.g. through FMEA),
and the solving of problems well in advance. One thing is sure, however, a close
customer-supplier relationship can reduce time, cost and quality. But, creating such a
relationship needs a lot of time and enormous efforts, which is the reason why very often it
is not possible to have multiple suppliers.
192 Appendix
Appendix 10: Time horizon (changing supplier vs. regular supplier)
Changing suppliers are characterized by a relatively short cooperation (short-term). The
company prefers to change its supplier for the respective object and purchase it from
someone else after a certain time. One condition for the choice of a short-term
cooperation is that there are several acceptable suppliers on the market. In comparison to
that, if one opts for a regular supplier, one sources the object for a long period (long-term)
at the same supplier.
In contrast to the supplier-related sourcing strategy (single vs. multiple sourcing), this
chapter does not focus on the number of suppliers, but it concentrates rather on the
duration of the cooperation. Of course, the two sourcing strategies “changing supplier”
and “multiple sourcing”, as well as “regular supplier” and “single sourcing” do have some
points in common.
Effects of changing suppliers

Costs, quality and technological performance: If one opts for a regular change of
one’s supplier, the liberty of choice during the placement of the order might lead to a
stronger competition between the prospective suppliers. 406 Owing to this competition
pressure, better conditions can be guaranteed and own interests can be better achieved.
One consequence of the steady comparison of offers is that the company does not lose
the overview of the current market conditions. A regular supplier might just rest on his or
her laurels and count on the habitual demands of his regular purchasers. That, however,
would lead to a loss of the will to continually improve the products and make use of the
latest technologies, which then does not guarantee the best price for the demanded
quality. 407
Effects of regular suppliers

Costs and risks: An essential effect of a long-term relationship of two business partners
is in practice that a supplier gives preferential treatment to his regular customers. This
might affect the demanded costs and other conditions, but most of all the supply
guarantee. What is more, a close cooperation with a regular supplier results in general in
a smoother and easier proceeding of the orders. This also tends to influence the amount
of security stocks, which results in lower storage costs. 408
406
See also multiple sourcing in appendix 9
407
408
Time horizon (changing supplier vs. regular supplier) 193
Quality: A further advantage of a long-term cooperation with a supplier is the regularity of

quality of the purchased objects for several orders in a row. In contrast to that, a change
of suppliers is always connected to the danger of a change of quality. That is why
companies, which attach a great importance on the continuity of quality, might mostly opt
for long-term cooperation. 409
In conclusion, although this sourcing strategy implies a more or less strong dependence
on the supplier, one can however expect from one’s regular supplier that he or she is
more committed to guarantee an economic, qualitative, and technological performance of
the objects, than this would be done by a supplier with whom one only works occasionally.
In that sense, one would consider a regular supplier as very good if he or she supports the
customer in the value analysis and the product improvement. What is more, the supplier
should attach the greatest importance to the customer’s wishes and requirements and
take them into consideration for the production program. 410
The advantages mentioned above can only be guaranteed if the purchase department
regularly examines the market despite the cooperation with a regular supplier and then,
on the basis of this information, pushes the regular supplier to keep up to technological
progress and to guarantee a steady improvement. In some way, these proceedings also
wreck the advantages of ever changing suppliers. 411
The strategy of changing suppliers is only then practical if one deals with large supply
volumes and if one places orders only after long time intervals. The most fitting example
for this would be the supply of drive technology for the opening and closing of sluice gates
in shipping. The frequency of new orders per customer is very low. One reason for that is
that the customer, here the department for water management of the respective region,
only has a few sluice gates. On the other hand, the drive technologies in the sluice gates
only have to be changed after several decades. The order volumes, however, are very
large, due to the high requirements on corrosion, sealing, pollution, security, maintenance
possibility, and longevity. Hence, a new call for tenders would be logical, since the
department for water management would then be informed about current market
conditions and it could thus benefit from the currently most profitable suppliers. A further
example might be big machines and sites in industries.
One might have to criticize with regard to the time horizon that in literature one cannot find
clear indications what is meant by short-term, mid-term, and long-term time intervals.
409
410
411
194 Appendix
Appendix 11: Sourcing implementation (alone vs. joint venture vs.

alliance vs. service provider)
That step necessitates the decision if one wants to do the purchase alone or in
cooperation. The cooperation can start as an alliance or can come into existence due to
the founding of a joint venture. 412 The aim of cooperation is that partners cooperate in
order to find together solutions to problems. It is possible to start purchase cooperation
with one or more companies which have the same interests. Purchase cooperation in an
alliance leads to the phenomenon that one of the partners buys the object X for all
members, whereas another partner acquires the object Y for everyone. Hence, an alliance
is based on the fact that markets are divided up among the members which are then
responsible for their respective area. In contrast to that, a joint venture founds a new
independent unit, which is responsible for the supply of all objects. In general working in
cooperation is notably interesting for smaller companies. 413
With regard to the supply strategy, one can increase one’s market position towards a
supplier by being in supply cooperation by adding up the respective purchase volumes of
the different partners. The companies can so benefit from cost savings on development,
purchase, and transportation, since besides the better negotiation power, they also profit,
most of the time, from economies of scales. In the same way, dependent on the
cooperation’s focus, one can require a better quality or a better technological development
from the supplier. The larger supply volume also results in the possibility of different
strategy variants, such as global sourcing and multiple sourcing and at the same time it
reduces several risks for single companies. 414 Risks can also be reduced by purchasing
possibly necessary tools and equipment collectively from the supplier. Hence, one can
test the acceptance of one’s product on the market relatively cost-effectively and in case
of failures, one only loses the part which one had invested before.
Disadvantages would be most of all the longer process times and the inflexibility. Changes
and wishes necessitate frequent and intensive discussion and negotiations, which can
extremely slow down the decision-making. What is more, the own enterprise might agree
to compromises and it might then not achieve its interests in the best possible way.
Moreover, very often the founding of cooperation implies considerable expenditures and
efforts. It might not only be difficult to find possible partners, but one might also have
412
The distinction between joint venture and alliance, as well as their features, is considered to be basic,
which is why these topics are not further dealt with in this scientific research.
413
414
See global sourcing and multiple sourcing (appendix 8 and 9)
Sourcing implementation (alone vs. joint venture vs. alliance vs. service provider) 195
some difficulty in matching the individual interests, defining of processes, rights and
obligations, as well as in elaborating possible contracts and secrecy agreements.
As an alternative to cooperating on the basis of an alliance or a joint venture, one might
also ask a service provider to take care of the object purchases. Service providers are
here purchase offices, which are specialized in the purchase of objects and to whom one
might hand over the responsibility to purchase the respective objects. Although one
reduces one’s own added value, and the service provider makes earnings too, however,
this might often lead to cost savings. This is mostly due to economy of scale and economy
of scope effects. In that case, for instance, means of transport could be used to their full
capacity and hence the number of journeys can be reduced, which would then lead to cost
savings. What is more, costs can also be reduced due to the fact that not seldom the
service provider has a multitude of worldwide suppliers at hand which can supply
relatively easily and quickly at good conditions. Hence, great expenditures on country-
analyses and supplier acquisition do not exist. Supply risks can also be reduced since the
service provider very often can fall back upon several suppliers. However, the own
dependence on the service provider is increasing. 415
415
Compare also paragraph „Single vs. multiple sourcing“ (appendix 9). The points explained there are in
principle identical to those for the selection of a service provider. Compare also the paragraph „Make or
buy“ and „Part vs. modular sourcing“ (appendix 6 and 7).
196 Appendix
416
Appendix 12: Characterization of strategic sourcing items
The following figure shows how objects are characterized in the respective fields. The
representation is based on figure 36 “Portfolio for determination of a sourcing strategy“.
Strategic parts are characterized by: Spot market items are characterized by:
complex parts (most critical items) standard parts / established products
high-value materials and objects (low complexity, not critical items)
short allowed period of storage cheap materials and objects
high storage and transportation costs possible long periods of storage
high tool costs low or not available storage and
difficult manufacturing transportation costs
high logistical requirements tool costs per part mostly low or not
(JIT/JIS/needs-based planning) available
high technological and quality specifications manufacturing is mostly easy
necessity of high know-how low logistical requirements
high supply risks (natural scarcity,…) low technological and quality specifications
low number of suppliers low know-how necessity
(monopolistic structures) low supply risks
necessary good contact, close relationship high number of suppliers
and common arrangements close relations and arrangements are not
exchange of suppliers is only possible with required
significant efforts and costs simple and efficient exchange of suppliers
long replacement time short needed replacement time
high bargaining power of suppliers (parts are mostly on suppliers stock)
(dependent from suppliers) low bargaining power of suppliers
(suppliers can be played off against each
other for price reduction)
high service degree low service degree
purchasing value > 1 Mio.€ purchasing value > 1 Mio.€
high impact on business high impact on business
A-parts A-parts
Æ Accordingly, strategic parts are the top Æ Accordingly, spot market items are simple
innovative products, which are connected to products on the bottom performance level
a high degree of novelty and the required which makes low prices possible.
upper level of performance, but also to risks.
Strategic parts are also called key products Spot market items are also called leverage
items
Bottleneck items are characterized by: Standard items are characterized by:
similar characteristics as strategic parts, similar characteristics as spot market parts,
however lower purchasing volumes however lower purchasing volumes
low profit impacts low impact on business
C-parts with very high supply risks C-parts without supply risks
production-based scarcity high administrative efforts
very high bargaining power of suppliers standard parts are unified within or
(parts are unimportant for the supplier Æ between companies
very high purchasing costs)
416
Own representation, compare Koppelmann, U., 1997, pp.24ff.; Krokowski, W. & Sander, E., 2009, pp.24ff.;
Hartmann, H., 2002, p.186; Arnolds, H. et al., 2010, pp.33ff., p.208; Kerkhoff, G., 2005, p.51, pp.97ff.; Kille, C.,
2011, Modul 7, pp.30ff.; Mind Tools (1+2), 2011; Kraljic, P., 1983
Global Competitiveness Index 2011-2012 197
417
Appendix 13: Global Competitiveness Index 2011-2012
further on next page…
417
Schwab, K., 2011, p.15; The figure was slightly changed and enlarged for a better understanding
198 Appendix
…further on previous page

Global Competitiveness Index 2011-2012 199

200 Appendix

Index of Economic Freedom (Europe view) 201
418
Appendix 14: Index of Economic Freedom (Europe view)
Europe
418
The Heritage Foundation, 2012; The figure was slightly modified for a better understanding
202 Appendix
Appendix 15: Corruption Perceptions Index (CPI) 2011 from

Transparency International 419
419
Transparency International, 2011; The figure was slightly modified for a better understanding
Corruption Perceptions Index (CPI) 2011 from Transparency International 203
204 Appendix
Appendix 16: The BRIC-states

In addition to the PESTE-analysis of chapter 4.8.1 „Important criteria for the country
evaluation“ and the chapter 4.8.3 „The current major procurement markets”, this
paragraph is to give more and detailed information on the four nations Brazil, Russia,
India, and China (=BRIC-states), in order to find the most suitable sourcing country. The
reason for this specialization is, on the one hand, that these countries are very interesting
sourcing regions due to their know-how, raw materials, and economic performance. 420 421
The latter point, for example, implies that all four countries have wage costs which
correspond only to 2-9% of the wage costs of a German worker. 422 Therefore, the
outsourcing of “simple”, wage-intensive work steps from Germany to one of those
countries might be possible. 423
On the other hand, BRIC-states do have booming economies. 424 That is the reason why,
as a rule, the danger of a supplier’s insolvency, as well as mutual economic dependence
is lower, in comparison to a supplier from economic weak regions. 425 426
Moreover, the still
unsatisfied markets there can, along with the fast-paced growth and the potential market
volume, be interesting for the distribution of one’s own products. 427 What is more, the
influence of these countries in the world will increase, due to their economic power. 428
First class information of suppliers on country-specific strategies and procedures will
hence be useful for one’s future success, most of all under the aspect of the worldwide
economy by networking due to globalization. 429 In order to be more precise, one has to
mention that as a result of the constellation of the global networking, country-specific
420
Compare chapter 4.8.3 “The current major procurement markets”
421
Not all of the four countries have a good know-how, large resources, and a high economic potential yield.
For a more detailed representation, see the explanation for the respective country on the following pages.
422
Compare figure 44 “Comparison of industrial labour costs per hour including social charges”
423
This procedure has currently been put into practice. Hence, for example, many German companies leave
the IT-activities and services to subsidiaries in India.
424
Compare figure 42 „Countries with the largest GDP in 2007 and 2050“
425
Compare, chapter 4.8.1, especially the explanations in the sub-point “Overview of the world economy with
focus on Germany (Economical analysis)”
426
With regard to the economic dependence, for instance, the complete corporation may not exceed a
turnover of 50% according to internal rules and regulations (compare chapter 4.10.1. „Supplier selection
process“). It is less probable that the company reaches this percentage if the supplier – due to the economic
boom – finds further purchasers (customers) in the same country.
427
Compare chapter 1.2 “Driving factors behind globalization” / A further keyword would here also be the
fulfillment of the local content regulation which were explained in chapter 4.3.6 „Location of customers and
local content regulations“. In order not to be repetitive, they were not mentioned again in the elaboration.
428
Compare also Lam, Thuy Vo, 2012
429
Compare introduction of chapter 1 “Globalization”
The BRIC-states 205
crises, for example, might have consequences on the worldwide economic climate and
hence on the own turnover. Thanks to early predictions, one can better decide on certain
measures, such as the reduction of the production volume and the storage costs, and
one’s own company is hence better prepared for future challenges. 430
The following chart includes an overview of all the countries indicated above.
BRIC
Germany Brazil Russia India China
Space
0,36 8,5 17 3,29 9,6
[million km²]
Inhabitants
82 201 139 1.173 1.330
[million people]
average 44,3 28,9 38,5 25,9 35,2
0 - 14 [%] 13,7 26,7 14,8 30,5 19,8
Age
15 - 64 [%] 66,1 66,8 71,5 64,3 72,1
65 [%] 20,3 6,4 13,7 5,2 8,1
Unemployment rate of the
7,5 8,1 8,4 10,7 4,3
labour force [%]
GDP [billion USD] 3.339 1.574 1.232 1.237 4.985
GDP growth rate [%] -4,7 -0,2 -7,9 7,4 9,1
Public debts of GDP [%] 73,2 59,5 8,3 57,3 16,9
agriculture 0,8 6,1 4,7 17,1 10,3
GDP per
industry 26,6 25,4 32,9 28,2 46,3
sector [%]
services 72,6 68,5 62,4 54,6 46,4
Inflation rate [%] 1,5 4,9 11,7 10,9 -0,7
431
Figure 75: Overview of the BRIC-states in comparison to Germany 2009 / 2010
In the following, all BRIC-states are to be described in more detailed.
432
Brazil
From 1964 until 1985 Brazil was ruled by military dictators. After that, it suffered from the
biggest debts in the world and a high number of bankrupt state-owned companies. The
base for new economic increase was created in 1985 by implementing a democracy and
by fighting continuously against corruption and over-indebtedness. Since 2000, the
economy has increased sustainably and has even achieved a growth rate of 4.2% during
the financial crisis in 2007. The growth however is limited by the country’s inadequate
infrastructure. The connections between economically important geographical places via
430
The contrary is true for times of economic boom. According to this, for instance, storage and production
capacities can be build up in advance in order to satisfy the customer needs in the best possible way and
therewith to support the own success.
431
Personally established representation; data taken from Central Intelligence Agency
432
Summarized content taken from Scholtissek, S., 2008, pp.66ff.
206 Appendix
streets, railroads, or communication networks are at present still very bad. Only 12% of
Brazil’s streets are asphalted. In comparison to that, India has 48%, China 81%, and
Russia 84% of asphalted streets. Moreover, the electricity network is overloaded due to
the growing requirements in industry and private households. About 49.4 billion Euros
annually would be needed to improve the infrastructure over the next years. It is not sure,
however, if Brazil will be able to afford these investments. Resulting from the bad
infrastructure the country’s supply security is critical, e.g. because of electric power
outage, which must be considered in international sourcing processes.
However, in comparison to that, the country’s sourcing attractiveness increases due to the
available high values of natural resources, such as iron ore. Furthermore, high amounts of
water power can be used as an economic source, which can be one future solution for the
electric problem. Goods such as coffee, sugar, cacao, and tropical fruits, as well as
massive investments into agricultural development make Brazil the second biggest
exporter of agricultural products. In addition to that, Brazil has a high percentage of
presently unused acreage, double the size of Germany. Thus, over the next years, Brazil
could rise and become the biggest food exporter in the world. Moreover, some Brazilian
companies have already today upgraded their product range from acre fruits and
slaughter meal to pizza, salami or other nutritional products.
The population doubled between 1960 and 2006 and will expectedly grow by 30% until
2050. Although between 1998 and 2003 25 million inhabitants escaped from poverty,
Brazil still suffers from a high percentage of poor people and almost the biggest share of
social problems in the world, which also might critically influence supply chains.
433
Russia
Russia has the biggest gas resources in the world. The increasing demand on resources
and energy therefore ensures that it is part of the world’s most important economies and
sourcing regions. The government benefits from the country’s good status and threatens
other countries to impose a delivery stop. Furthermore, Russia profits considerably from
its direct contact to fast increasing economies, such as Poland, the Czech Republic, and
Rumania.
New fiscal reforms and reduction of government functions serve as an excellent economic
basis. Incomes gained through taxes are invested in future projects and are used to
promote high and advanced technologies. The nanotechnology and the improvement of
the value chain in converting resources are only some examples. Moreover, investments
in social systems, such as the pension and healthcare sector, are meant to increase the
433
Summary, data taken from Scholtissek, S., 2008, pp.72ff.
The BRIC-states 207
purchasing power of its inhabitants and with regard to sourcing it decrease risks through
social unrests.
Its population decreases by 0.4% per year. Similar to the USA, Western Europe, and
Japan the country is therefore afflicted with aging problems.
434
India
India has no oil resources at all. Expensive oil imports during the oil crisis at the beginning
of the 1970s and low exports have increased India’s share of debts. In the 1980s the
country reorganized its finances by falling back upon international currency funds, due to
total debts of 72 billion US-dollars. At the beginning of the 1990s the government allowed
foreign investors to establish offices in India or to lead Indian companies. Huge
investments from foreign companies, privatization of state-owned enterprises, lowering of
duties from 79% to 30% between 1991 and 2001, as well as promotion of education and
key industries have lead to a booming economy. Even today, some industries, such as the
steel industry, have achieved world market level. Furthermore with a 20% share of the
world’s software exports, India is well on its way to become the world leader in IT-
technologies. The world’s cheapest car, the Indian “Tata Nano” for € 1700, is only one
example for the country’s competitiveness.
However, India consists to one-third of illiterates and hundreds of millions of people still
live in conditions of extreme poverty. Additionally, lacking experts and high corruption
decelerate the growing potential and increases supply chain risks.
435
China
China’s population has grown tremendously over the last decades, however, the number
of inhabitants increased by only 0.7% per year recently because of the country’s one-
child-policy. As a result, the country is confronted with aging problems. Moreover, for
further economic growth, China’s value-added chain and productivity would have to be
improved. To satisfy the needs, the government invested 4% of its GDP in the educational
sector between 2007 and 2011 and has already established several high-tech R&D
programs and trainings. Chinese full-time R&D personnel reached 2 million in 2008,
nearly three times more as compared to 1991. Almost 1.6 million of those were scientists
and engineers. 436 Furthermore, China had 225.42 millions of rural migrant workers in 2008.
Millions of them wait to be trained for factory jobs and easy service activities. At present,
50% of all sold shoes in Europe and 80% of all sold toys in the USA are produced in
434
Summary, data taken from Scholtissek, S., 2008, pp.75ff.
435
Summary, data taken from Scholtissek, S., 2008, pp.79ff.; Compare Staffelt, D. & Struck, P., 2008, pp.407ff.
436
Guanqun, W., 2010
208 Appendix
China. Besides, the country is now the world biggest manufacturer of steel and iron
products. The production of Chinese cars grew by 900% from 1992 to 2007. Moreover, as
published in September 2010, the country decided to make explorations in outer space. In
2015 the country wishes to be a member of the most innovative countries of the world,
which includes reducing the dependence of Western technologies from 50 to 30%.
China is a single party-state, ruled by the Communist Party of China (CPC), which pursue
an increasing capitalistic economy policy. Several of China’s companies are ruled by the
government and also the labor unions work in accordance to the government’s interest.
CPC practices an aggressive Africa policy and made pacts with human rights violators.
Moreover, in 2006 China was evaluated as the second most corrupt country.
The most feared corporate risks by region 209
437
Appendix 17: The most feared corporate risks by region
With the aim to get a first impression of the different conditions of the single supply
markets, this paragraph will, in addition to chapter 4.8.1 „Important criteria for the country
evaluation“, focus on the most important country-specific risks. In order to get to know
more about that, the Allianz’s industrial insurer AGCS (Allianz Global Corporate &
Speciality) carried out a survey on the worldwide most feared corporate risks for 2012.
According to the consulted experts economic risks, business interruptions, and natural
catastrophes are considered to be most dangerous globally. These elements are followed
by legal and reputation risks. The ranking of further possible risks, as well as the exact
percentage distribution of each risk are, illustrated in the figure below.
AGCS Risk Barometer: The Top 10 Business Risks

21% All figures in %, 153 respondents, three risks mentioned per person.
Each risk category is defined in the Risk Legend on figure 77.
14%
9% 7%
6% 5% 4%
3% 3% 3%
catastrophes
risks
risks
Business
Legal / regulatory
Business-inherent
Natural
risks
Environmental
risks
risks
interruption
risks
risks
Political
Economic
Fire
Staff-related
Reputational
situation
438 439
Figure 76: The worldwide top 10 business risk in 2012
If one further subdivides these risks according to country and region, one gets the most
feared country-specific main risks, which are represented in figure 77. This figure also
includes a legend with the description of the single risk categories.
437
Summary, data taken from Piro, K. & Schünemann, A., 2011/12; Müller, R., 2012; Allianz News, 2012
438
Allianz News, 2012; compare also Müller, R., 2012; Piro, K. & Schünemann, A., 2011/12; Figure was
modified for a better understanding
439
153-risk management professionals of the AGCS were interrogated for the establishment of the distribution,
whose opinion is based on experience and conversations with customers. It is doubtful if the results are
representative and hence reproducible. At this point one assumes that this is the case.
210 Appendix
AGCS Risk Barometer: Top Five Business Risks by Region and Country
AMERICAS UNITED KINGDOM EUROPE
1 Economic risks 1 Economic risks 1 Economic risks
2 Business interruption 2 Business interruption 2 Business interruption
3 NatCat 3 Legal/regulatory risks 3 NatCat
4 Legal/regulatory risks 4 NatCat 4 Legal/regulatory risks
5 Fire risks 5 Reputational risks 5 Reputational risks
FRANCE GERMANY ASIA PACIFIC & MENA

1 Economic risks 1 Economic risks 1 Economic risks
2 NatCat 2 Business interruption 2 NatCat
3 Business interruption 3 Business-inherent risks 3 Business interruption
4 Reputational risks 4 Legal/regulatory risks 4 Political risks
5 Legal/regulatory risks 5 Reputational risks 5 Legal/regulatory risks
Risk legend
Economic risks: Business-inherent risks:
Economic recession, sovereign debts Defective design, the increasing
crisis and foreign exchange effects complexity of projects and organizations
Business interruption: Political risks:

Including contingent business interrup- Protectionism, social unrest, state
tion, disruptions to the global supply chain intervention in financial markets
Natural catastrophes (NatCat): Staff-related risks:

Floods, storms, earthquakes, tsunamis, Demography, loss of key employee
volcanic eruptions and heat waves
Legal/regulatory risks: Environmental risks:

Changes in regulation/overregulation, Climate change, increased costs of
loss of patent protection, compliance challenges resources
Reputational risks: Fire risks:

Negative publicity or other crises result- Fires/explosions at production sites
ing in damage to a company’s brand or
image and subsequent financial losses
440
Figure 77: The top five business risks by region and country for 2012
440
Piro, K. & Schünemann, A., 2011/12; compare also Müller, R., 2012; Allianz News, 2012; Figure was
modified for a better understanding
The most feared corporate risks by region 211
On closer examination one sees that the economic risks are unanimously considered to
be the top risks in the whole world. Business interruptions are seen to be equally highly
risky. In contrast to that, the further dangers differ from region to region. Natural
catastrophes, for example, can be found on the second place in Asia, while in Germany
these are practically not to be found at all. Political risks, too, are more frequent in the
Asian countries. 441 In comparison to that, business-inherent risks represent an above-
average danger potential in Germany, whereas the United Kingdom fears rather legal and
regulatory risks. All in all, the figure illustrates that an effective sourcing strategy, which
implies the selection of worldwide first class suppliers and the division of object amongst
suppliers in different countries, can help to reduce certain risk categories. In that way,
worldwide corporation can for example minimize the risk of natural catastrophes by
sourcing or producing respectively in Germany. What is more, such a sourcing strategy
would also lower the risk of business interruptions, if one could switch the supply volume
quickly and without problems to another supplier in a different country in case of a
disturbance of the supply chain. 442 Economic risks work in a similar way. Hence, dangers
due to currency fluctuations, as well as profit risks can be reduced due to the access to
different markets. Moreover, low prices of suppliers would be possible in countries which
are currently facing a recession.
With regard to the economic risks, one might have to add that not least the stronger
networking of the worldwide markets, as an effect of globalization, leads more and more
to uniform economic changes (boom or recession). These risks can hence be rather
reduced with the help of financial instruments (hedging) and “precise prognoses”.
In conclusion, one has to mention that some experts are of the opinion that current IT
risks are underestimated by the companies.
441
Compare „China“ in the preceding chapter
442
Compare global and multiple sourcing (appendix 8 and 9), and especially the part “Distribution of risk” at
the latter part of appendix 9.
212 Appendix
Appendix 18: Germany’s position in international trade

In addition to the PESTE-analysis from chapter 4.8.1 „Important criteria for the country
evaluation“ , the following chapter establishes an overview on international trade, as well
as trade relations and trade objects, seen from the German perspective. In that context, it
is important to know for the purchaser, which role plays his or her home country, as well
as the supply country in international trade. Trade alliances and networking have to be
well understood in order to minimize the supply risk. In that sense, countries which have a
trade relation to each other and which are hence dependent from one another would do
anything to keep the trade up. The risk of protectionism or of trade embargos is therefore
very small, seeing that the economy of both nations can come to a stop, or at least be
considerably damaged, in case of an interdiction of commerce. With the aim to minimize
supply risks, one recommends an international supply of objects from countries with which
the home country has strong mutual trade relations.
Germany’s imports and exports

Germany’s economy, just as that of many other countries, is strongly influenced by
globalization. Since the post-war period, foreign trade has been built up in Germany and
has ever since been the driving force of its economic development. 443 Exportations of
goods have grown from 510 to 992 billion dollars between 1999 and 2008. Similar
developments can be observed with importations of goods as well as with the exportations
and importations of services, as shown in chart 78.
goods [billion USD] services [billion USD]
exports imports balance exports imports balance
1999 510,0 444,7 64,2 80,8 126,8 -46,0
2000 597,4 538,3 59,1 92,7 141,7 -49,0
2001 638,2 542,7 95,4 101,4 151,3 -49,8
2002 651,3 518,5 132,7 110,7 146,4 -35,7
2003 664,4 534,5 129,9 111,2 145,7 -34,4
2004 731,5 575,4 156,0 119,6 149,0 -29,4
2005 786,2 628,0 158,1 129,0 158,1 -28,8
2006 893,0 733,9 159,0 141,4 164,3 -2,4
2007 965,2 769,9 195,3 161,3 177,7 -16,4
2008 992,7 814,5 178,2 166,1 180,7 -14,6
Figure 78: Export and imports in goods and services in Germany between 1999 and 2008 in billion
444
dollars
443
Compare chapter 1.2 “Driving factors behind globalization”
444
Dieter, H., 2008, p.54
Germany’s position in international trade 213
In 2007, Germany was able to export more than Japan and France together and thus
followed closely the world’s leading export power USA, as illustrated in the chart below.
2500
Exports
2000
Imports
billion $
1500
1000
500
0
Germany France Great Britain USA Japan
445
Figure 79: Exports and imports of the five biggest OECD-countries in 2007
In addition to that, the graph equally shows the relations of export and import values of the
five biggest OECD-countries in 2007. Those values are materialized by financial means
coming from exports, which are then used to buy things from other countries (imports)
again. Germany imports massively too, and as can be gathered from the following bar
chart, international trade in goods and services has a 44.1% share of Germanys GDP
(see chart 80). 446
100
90 85,3
percentage of GDP [%]
80
70
60
50 44,1
41,0
40
30
15,2 17,4
20
10
0
USA Japan EU Germany Belgium
447
Figure 80: International trade in goods and services as a percentage of GDP in 2008
In order to be able to achieve a high prosperity, as a rule, a small nation has to import
more, compared to bigger nations. A country such as Belgium, for example, whose
445
Own representation on the basis of the information by Dieter, H., 2008, p.28
446
Compare Dieter, H., 2008
447
De Meuter, J., 2010, Chapter 1, p.5 (original source: Organization for Economic Cooperation and
Development)
214 Appendix
international trade makes up 85.3% of the GDP, lies considerably higher than the
European average percentage. It can be compared to countries, such as Japan and the
USA, as examples for big nations, which trade much more within their own country than
with international nations. Although Germany is the largest economy in Europe 448 ,
German’s percentage nevertheless lies, according to figure 80 above the European
average.
Therefore, Germany’s central position in Europe and the good infrastructure provides an
excellent initial position for international sourcing.
Germany’s trading partners

The top trading partners of Germany are France, USA, Netherlands, Great Britain, Italy,
China, and Russia (see figure 81).
trading partners exports [billion $] trading partners imports [billion $]

France 82 Netherlands 58
USA 54 France 55
Netherlands 54 China 55
Great Britain 53 Italy 40
Italy 51 USA 40
China 37 Great Britain 33
Russia 21 Russia 25
Total 808 Total 674
449
Figure 81: Top 7 countries for German exports and imports in 2009
The value of trade with these countries can be explained by the “Gravity Model”, which is
calculated by the following general form: 450
a b
A * Yi * Y j
Tij c
Dij
Tij is the value of trade between country i and
country j
A is a constant
Yi is the GDP of country i
Yj is the GDP of country j
Dij is the distance between country i and country j
a, b, c are factors which are allowed to differ from 1
448
Compare figure 40 “GDP (nominal) in millions of USD in 2009”
449
Slightly modified representation of De Meuter, J., 2010, Chapter 2, pp.4f. (original source: Statistisches
Bundesamt)
450
De Meuter, J., 2010, Chapter 2, p.13
According to that model, European countries, such as the Netherlands and Belgium, have
high trade shares with Germany, seeing that they are geographically close to Germany. In
2006, 11.5% (= Euros 103.7 billion) of German exports were delivered to both countries,
whose populations altogether only count 26.8 million inhabitants. 451 Germany’s high
percentage of trade with countries which are geographically close to its frontiers, results
from low transportation costs, the lack of mountain barriers, available ocean harbors, and
open borders.
In comparison, there are “less” distinctive trade relations with bigger economies that lie
farther away, such as the USA and China. Generally, big economies manufacture high
amounts of goods and services which are then used for trade with other countries.
However, in comparison to Belgium and the Netherlands, Germany exported “merely”
Euros 75.3 billion (=8.3% of German exports) to the world biggest economy USA in 2006.
In accordance with the gravity model an increase of 1% in the distance between the
economies results in a decrease of 0.7% to 1% in the volume of trade. 452 Due to both the
small distance and the big economy, France is Germany’s top trading partner.
German exports are dominated by the economical interrelations within the European
Union. In 2006 the exports in the EU countries had a 63.5% share of Germany’s entire
percentage of exports. This percentage has increased to 74.0% with regard to all
European countries. Consequently, only about a quarter of Germany’s exportations result
in trades with economies outside the borders of Europe. Similarly, only 29,5% of German
imports came from non European countries in 2006. To illustrate some of the exact
numbers, the following percentages should be taken into consideration: 10% from
America and 16.7% from Asia. 453
In accordance with figure 81, Germany shows a deficit in trade with newly industrialized
countries such as China. Germany imported more from these countries than it exported to
them. Therefore, only through trading with industrialized economies and hence the
successful competition with their companies Germany makes considerable profit.
451
452
Compare De Meuter, J., 2010, Chapter 2, pp.7ff.
453
216 Appendix
Germany’s merchandise
Germany is a leading exporter of automotive products, chemicals, machinery and
transport equipments, manufactures, and also pharmaceuticals (see following chart;
status 2004). As a consequence of the country’s poor share of raw materials, most
exports are so-called finished products, which mainly come from engineering and high
skilled labor force.
454
Figure 82: German shares of world exports 2004 (in %)
The most significant German importations are vehicles, chemicals, machinery, food and
nutritional products, textiles, but also metals, oil, hard coal, and natural gas. Speaking of
coal and gas, Germany is the world’s fifth largest energy consumer. However, most part of
the needed energy, about 2/3, has to be imported (figure 83), since Germany cannot
454
German Business Portal, 2012
provide for it itself. It is most importantly oil, with 155.2 Mtce in 2007, followed by natural
gas and hard coal.
455
Figure 83: Germany’s production and imports of energy resources 1997 and 2007
455
Bundesanstalt für Geowissenschaften und Rohstoffe, 2012
218 Appendix
Appendix 19: International sourcing vs. local jobs

A big problem, which has to be considered in the context of international sourcing, is the
willingness of the employees, seeing that international sourcing is always related to the
shifting of workplaces to foreign countries and hence the loss of workplaces at home.
According to this, surely, some inhabitants will experience a loss in their wealth level due
to globalization because of missing jobs in the outsourced sectors and the nonexistent
ability to meet the new economic conditions. But generally, all states profit from
globalization and therefore from international sourcing. Although the economies of the
BRIC-states will overgrow Germany’s economy 456, the following calculation shows clearly
that Germany’s wealth value will nevertheless increase.
The world in 2025 (with values of the wealth level)
income per income per
GDP 2007 GDP 2025 GES
capita 2007 capita 2025
(billion US-dollar) rank (2007 billion US-dollar) rank (US-dollar) rank (US-dollar) rank value rank
USA 13.807 1 20.543 1 45.971 9 58.750 12 7,3 24
Japan 4.339 2 5.294 3 34.400 22 44.936 26 7,6 17
Germany 3.299 3 4.117 5 40.317 16 51.051 21 7,5 20
China 3.283 4 19.479 2 2.447 56 13.473 51 5,5 67
Great Britain 2.799 5 3.864 6 45.619 10 60.549 9 7,5 19
France 2.573 6 3.609 8 40.181 17 52.670 19 7,3 25
Italy 2.014 7 2.679 10 36.195 20 47.632 23 6,8 34
Spain 1.429 8 1.850 15 35.575 21 46.731 24 7,2 27
Canada 1.407 9 2.060 13 42.891 15 53.986 18 7,8 13
Brazil 1.314 10 3.476 9 6.849 47 15.199 47 5,3 76
Russia 1.296 11 3.719 7 9.050 40 29.008 35 5,5 66
India 1.174 12 4.704 4 941 64 3.250 63 4,6 110
Mexico 1.023 13 2.433 11 8.386 43 19.512 44 5,5 65
South Korea 969 14 2.191 12 19.846 29 44.699 27 7,6 18
457
Figure 84: The world economies in 2007 and 2025 with values of the wealth level
In order to be able to continue to benefit from globalization and hence to increase its
prosperity, it is important that Germany keeps its strong competition position on the
international level. In order to be able to do that, Germany has to further increase the
education level, in order to have access to the core competences in the own country. As a
result of this, wages will go up, which can then be compensated by international sourcing,
because of the mostly cheaper supply of simple components. Finally, German enterprises
have to find the right ratio between high-tech and costs, in order to be accepted worldwide.
Corporations should transmit that message to their employees in order to motivate them
for international sourcing.
456
Compare figure 42 „Countries with the largest GDP in 2007 and 2050“
457
English version by Staffelt, D. & Struck, P., 2008, p.120
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International Sourcing

ISBN 978-3-658-02779-7 ISBN 978-3-658-02780-3 (eBook)

The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie;

Library of Congress Control Number: 2013949179

Printed on acid-free paper

Springer Gabler is a brand of Springer DE.

“The elaboration is especially characterized by the actuality, the high quality

Prof. Dr. Christian Kille

“This sourcing methodology has been reviewed and highly recommended, in

Balthas Klein, Chairman of the Executive Board, Förderverein der Logistiker

Index of Figures ............................................................................................................. IX

Index of Tables ............................................................................................................. XIII

List of Abbreviations ................................................................................................... XIII

2 Differences and impacts of global sourcing .......................................................... 7

3 Research question and targets ............................................................................. 11

4 Managing global sourcing economically ............................................................. 13

4.8.1 Important criteria for the country evaluation ............................................... 100

6 Appendix .............................................................................................................. 159

Table of Appendices ................................................................................................... 159

7 Bibliography ......................................................................................................... 219

Figure 1: Managing international sourcing .................................................................... 2

Figure 29: Critical factors in case of a breakdown of international sourcing

Figure 59: Supplier pyramid .................................................................................... 134

Table 1: Questions which arise with regard to international sourcing ......................... 11

GDP Gross Domestic Product

1.1 Globalization forces companies to source internationally

„Do what you can, do it best and outsource the rest“ 5

According to Krokowski and Sander, it is due to powerful logistic partners, lower

D. Senft, International Sourcing, DOI 10.1007/978-3-658-02780-3_1,

1.2 Driving factors of globalization

Technological factors Social factors

D. Senft, International Sourcing, DOI 10.1007/978-3-658-02780-3_2,

Total costs 10% 70%

Material costs 16% 60%

Labor costs 15% 51%

Material / component / service quality 21% 34%

Capital investment costs 20% 35%

Delivery reliability 28% 32%

Order lead time 39% 31%

Inventory costs 35% 24%

Transportation costs 50% 23%

80% 60% 40% 20% 0% 20% 40% 60% 80%

Top problems Top goals

Quality 82% Cost savings 85%

Further problems Further goals

Production know- Benefit from

Communication 64% Currency reasons 15%

0% 20% 40% 60% 80% 0% 20% 40% 60% 80%

Percentage of all responses rating the Percentage of EU based companies rating

„When investigating problems, many difficulties may arise. Firstly, many

What is dif f erent between national and international sourcing?

What is the global competitive situation like?

D. Senft, International Sourcing, DOI 10.1007/978-3-658-02780-3_3,

4.1 Ten steps to evaluate global sourcing successfully

Considering Nicklisch’s quotation, the question of what makes up a company’s success

D. Senft, International Sourcing, DOI 10.1007/978-3-658-02780-3_4,

4.2 Visualization of the ten steps in a cause-effect-diagram

When drawing an Ishikawa-diagram the analyzing effect “economic of global sourcing”

cost leadership / differentiation / niche

responsibilities alone vs. alliance vs. joint venture

Unitary business rule