Global sourcing and production sharing

The trend of global sourcing and production sharing has been growing. Encouraged by the success of the Japanese industry, out-sourcing became so prominent in the United States that an increasing dependence on outside suppliers during the decade of 1980s helped reverse a trend toward increased vertical integration that had been occurring for almost a century. In other words, the 1980s witnessed a trend toward de-integration or the emergence of hollow manufacturing companies.

Spreading Web of Global Production Network:

The compositional shifts in trade have created a new pattern in the international exchange of goods, services and ideas. Trade in components is one part of that new pattern. “Sourcing” such components from abroad is an increasingly common practice, and use of the internet is sure to expand the process, encouraging entry by new products throughout the developing world while precise numbers are difficult to come by, in the early 1990’s one third of all manufacturers trade involved parts and components. This type of trade has generated an ever spreading web of global production networks that connect subsidiaries within transitional firms to unrelated designers, producers, and distributors of components. These networks offer their constituent firms access to new markets and commercial relationships and facilitate technology transfer. Advances in information technology help firms from developing countries into global production networks. General Electric, for instance, posts information on its component requirements on the internet, and firms from all over the world bid to supply them.

Out sourcing has been much more conspicuous with the Japanese industries than others. For instance, typically figures of about 60 to 70% out-sourcing for Toyota versus 30 to 40% for General Motors were reported. The successful use of higher percentage of subcontracting by Toyota, Nissan and other Japanese automotive companies has cited increasingly in recent years as a model for US manager who have increased their own out-sourcing. As a result of the massive out souring program GM’s share of parts and components produced in-house was predicted to drop from 60% to 45% by the end of the 1980s.

Much of the increased sourcing over the past decade or so has been global in nature. Many companies have adopted global sourcing as major competitive strategy.

Some of the offshore sourcing was in fact accompanied by plant or product line closings in the United States as US manufacturers sought the advantage of cheaper labor abroad, either in their own plants or from others.

According to the Purchasing survey, the reasons for offshore purchases are the following, listed in the order of importance:

1. Lower price
2. Better quality
3. Only source available
4. More advanced technology
5. More consistent attitude
6. More co-operative delivery
7. Counter trade requirements.

It may be noted that, besides the above, outsourcing has certain other advantages. It reduces the capital and manpower requirements. It may also impart more flexibility to adjust to certain conditions like a recession.

International sourcing accounts for an estimated one-third of the world trade. Many developing countries have taken lot of the advantage of this trend. India, however, has not benefited to any significant extent. However, with the changes in the business environment there are positive signs of change. The Indian auto components industry has become, for instance, suppliers to foreign heavy weights like General Motors, Renault, Fiat etc. The export performance of the Indian auto components is expected to improve very significantly with the further improvement in quality and productivity which the industry is now striving to achieve.

Production sharing is a natural corollary of the growing international sourcing. Production sharing, a term introduced by Drucker, refers to the practice of carrying out different stages of manufacturing of a product in several countries.

Such production sharing has become quite common in many industries including high technology and sophisticated products. The technical development and designing may be done in one country, the various components may be manufactured in different countries, the assembling may be done in some other country/countries and the product may be marketed globally.