Role of Outsourcing in the Global Economy What are the main triggers of globalization?

? o technical informational revolutions o The internet revolution (made the world connected) o liberalization of trades -Breaking down of geographic and intra-industry barriers What are the main impact of globalization o Convergence of tastes More demanding with increased knowledge Value seeking (high quality at low price) Increasingly specialized consumer preferences Increased private labels Increased global sourcing Retail concentration/consolidation Due to increased competition from globalization, only large, competitive players can survive

o Changing patterns of competition

Define retail concentration/consolidation. How does retailing affect the globalization? What is outsourcing? What roles does it play? o the contracting out of a business function (commonly one previously performed in-house) to an external provider

Outsourcing vs offshoring vs. insourcing vs. global sourcing o Global Sourcing The orientation of the procurement activities of companies to available sourcing markets worldwide Offshore outsourcing Occurs when a company moves or expands some of its operations and jobs to overseas locations Incorrectly used by media to describe foreign firms that set up or expand operations in the U.S. Correct usage: It occurs when a company brings work that was previously purchased from an external supplier in-house.

o Offshoring

o insourcing

What are the major drivers of outsourcing? (Figure 1.1)

o What are the benefits (competitive advantages) of outsourcing? o cost reduction o Improved focus on core competences o Increased flexibility Due to the internal focus shifts towards areas of unique competitive advantage Due to the reduced production cycle and the additional capacity brought by the external supplier

o Increased speed

o More adaptive in responding to changing market conditions o Access to better technology, better skills and expertise o Access to innovation and creativity Outsourcing Decision Factors What becomes most important in outsourcing decisions? o Determining the most cost efficient vendor of materials, production, and/or finished goods at the specified quality and service level with delivery within an identified time frame. o No longer is outsourcing just about doing things more cheaply. It is about doing them better and faster as well.

Make-buy decisions: how companies make decisions for core vs. non-core activities?

Outsourcing decision steps o Decision Stage 1 What to outsource (product selection) Where to outsource (country selection) To whom to outsource (vendor selection) o Decision Stage 2 o Decision Stage 3

Differences of basic vs. fashion products o

Basic Products o Product characteristics Standardization utilitarian/ functional infrequent changes in styling o Inventory control steady predictable demand automated replenishment o Selection process price is major factor comparative shopping o Firm characteristics large size automated process Fashion Products Product characteristics Individualized (differentiated) hedonic/symbolic frequent changes in styling Inventory control ever changing stock zero to zero inventory Selection process value, fashion image impulse buying Firm characteristics small size labor intensive work

Advantages and Potential Problem Areas of Global Sourcing (by Sanuwar) Drivers of global sourcing o Globalization Development of an increasingly integrated global economy marked especially by free trade, free flow of capital, and the tapping of cheaper foreign labor market. Foster interconnection through the world. o Textile Complex Interconnectedness of firms across the globe to accomplish fiber and textile production and manufacturing, apparel manufacturing, retailing and consumption. Developed, developing, and newly developing countries play a role within textile complex (consumption versus production) o Hyper competition The competitive pressure from markets and consumers forces firms to increase the value of products by reducing cost and/or improving quality. Companies go global to find the supplier who can produce the quality product in cheap price. o Cultural Diffusion_ Ways in which cultural traits-ideas, beliefs, material items- are spread from one society to another. o Rapid commoditization_: Almost total lack of meaningful differentiation in the manufactured goods. Commoditized products have thin margins and are sold on the basis of price, not brand. This situation is characterized by standardization, ever cheaper, and common technology that invites more suppliers who lower the prices even further. Definition of rapid commoditization

Advantages of global sourcing o Cost reduction In the apparel industry, wages constitute a large part of production costs. In developing countries, wages are significantly lower than in the USA. Therefore, exploiting cheap labor cost, apparel brands from USA go global. Better equipment and process Improves the factory, thus reducing the price. Exchange rate When dollar is strong, cheaper to buy foreign goods Low pricing for export goods Government subsidy for exports o Artificially lower price for export products o Quality Japan and Germany are considered as high quality sources in the area of consumer electronics and automobiles. Highly quality and brand conscious consumers in the US are satisfied with the products from England and Italy even at higher prices. The quality of service is no longer obstructed by global sourcing due to the advancement of information technology o Availability Global sourcing is compulsory sometimes simply because the desired products or raw materials are not available in the USA. To ensure wider availability of products, many retail firms chose global sourcing. Domestic buyers foreign sourcing may drive out domestic suppliers, which, in turn, may decrease the availability of the domestic products, resulting in further dependence on foreign sources. o Additional source of supply: Dont put all your eggs in one basket Broad supplier base ensures that supply chain disruption in one factory or region can be absorbed by suppliers in another region. H&M sources its products from 800 independent supplier all over the world and Nike contracts with more than 700 factories in 52 nations. Cost reduction: Ways or sources to achieve low prices (or cut costs) from global sourcing o See above

Potential problem areas of global sourcing o Logistics support: Controlling the timely flow of materials into, through and out of the international corporation is challenging while the basic goal is maximizing cost-effectiveness with minimum service requirements. longer distance covered by international logistics causes higher lead time. International logistics attribute may be different from those experienced at home. Many researchers have identified logistics problem as number-one challenge that domestic buyers face in global sourcing. o Cultural differences Differences in values, attitudes, manners, customs, religion and language can cause miscommunication and create further problems in supplier evaluation, contracting, product inspection and maintaining relationships in global sourcing. o language_ Language is the mirror of culture and it is very important in information gathering and evaluation. Assistance from language experts may not even convey the subtle aspect of meaning. National pride and negative stereotypes about foreign suppliers can be a problem for a buying firm in global sourcing. o regulations_ Several government regulations including tariffs and quotas from buyers country and suppliers country influence global sourcing and often make it complicated. Non-tariff restrictions, such as complicated documentation requirement for border crossing processes, and various kind of international trade bills are also challenges which buying firms face. o Source location and evaluation o Political and labor problems o Currency fluctuations o Difference in payment method o Quality control o Rejects/reorder o Paper work costs

Product types/characteristics that are more suitable for global sourcing o Labor intensive products o Standardized products Design, specifications and production technology is the same of its type. o Low complexity material o Clarity of drawing and technical specifications The simpler and clearer the drawings and technical specifications, the better the supplied quality. o Products with high shelf life o Product with a predictable sales pattern As opposed to products with abrupt shifts in demand o High purchase volume The benefit should be greater than necessary costs (travel cost, research cost, production costs, transportation costs, etc.) o Products that are easy to ship and face no/low import dues. o Consider multiple suppliers to reduce supply risk and to ensure supply in terms of strike, political unrest, and natural catastrophes. Factors to consider in new product development o Specification buying o Exclusivity o Pricing/mark-up opportunity o Merchandising mix (compatibility of product lines)

Theories of International Trade What is autarky? o An economy that limits trade with the outside world (= closed economy) - Not affected by influences from its outside - Relies on its own resources - Self- Sufficient What is protectionism? What is the purpose of it? o Practice of regulating imports and exports with the purpose of protecting domestic industries from foreign competitors o Protection from the cheaper labor and lower cost of production in many foreign countries. What are the three major tools of protectionism? o Tariff- tax on imported merchandise o Import Quotas- quantity control on imported merchandise o Export Subside

What is free trade? Which theory is it based on? o Trade carried on without such restrictions as import duties, import quotas, import licenses, export bounties or domestic production subsides. o Basic argument for free trade is based on the economic theory of comparative advantage

What does the roundabout way to wealth mean? o Making products that can be traded to a foreign country for a different product Ex) Making televisions by producing something else such as drug and trading the drugs for Tvs more cheaply. o A country does better by specializing in few things rather than trying to do everything.

Define economic efficiency. Explain production and consumption efficiencies. o Production Efficiency Countries can produce more goods and services with the same amount of resources Ex) In the last ten years, freer trade has helped raise US GDP (Gross Domestic Product) by nearly 40%. o Consumption Efficiency Consumers will have a more satisfying collection of goods and services from which to choose

Explain the theories of absolute advantage and comparative advantage. Who made which theory? o Theory of Absolute Advantage (Adam Smith, 1776) Different countries can produce some products more efficiently than other countries. Thus, global efficiency can be increased through free trade. Each country would specialize in those products that resulted in an absolute advantage for it. There may still be global efficiency gains from trade if a country specializes in those products that it can produce more efficiently than other products without regard to absolute advantage Although a country may be good at making a product, they may be better at making otherscreating a comparative advantage for that product. Therefore, a country gives up or reduces the production of the first product

o Theory of Comparative Advantage (David Ricardo, 1817)

Exercises related to these two theories (e.g., which country specializes what).

Is Trade Good for America What are the major factors influencing global/international trade? o General economic conditions growth rate o Stages of economic conditions Developed vs. Developing countries o o Types of economy market vs planned economy Shifts in exchange rate

Strong vs. Weak currency o Differences in natural resources o Differences in traditions of specialization o Differences in technology development o Political objectives What are the measures/indicators of the wealth? o per capita GDP o wages o product price o assortment o standard of living o leisure activity What are the expected consequences of restricted outsourcing for apparel items? o What if America has no imports? o Global Patterns of Textile and Apparel Activities What are the five levels of development? List them in order of the development. o 1.Least developed country (LDCs) o 2. Newly developing country o 3. Developing country o 4. Newly industrialized country o 5. Developed country

Measurement for the level of development: GNP, per capita GNP, GDP, and per capita GDP; GDP PPP o Gross National Product (GNP) The value of the output of products and service produced by domestic residents of a nation GNP divided by number of citizens in the population The value of the output of products and service produced within a country Includes the contribution of migrant workers and foreigners GDP divided by number of people in the population

o Gross National Product Per Capita (GNPPC) o Gross Domestic Product (GDP)

o Gross Domestic Product Per Capita (GDPPC)

Top 10 the largest economies in the world know the top four for 2014. o

The key characteristics of each level of development and country examples of each level. For the county examples for each level, refer to my lecture slides. o 1. Least Developed Country (LDCs) GDP per capita: The lowest in the world (<2,000) The lowest Human Development Index (life expectancy, literacy, education, income) Hardly involved in industrial development via apparel Ex) Mostly in Africa: Zambia (1800), Sierra Leone (1200), Madagascar (980), Malawi (900), Togo (960), Congo (380), etc. Central America: Haiti (1400) Asia: Nepal (1400)

o 2. Newly Developing Countries Poverty GDP per capita: Low income High levels of unemployment, illiteracy, and infant mortality

Comparatively low life expectancies

Increased participation in the production of textiles and apparel for industrial development Ex) Lesotho (2100), Mauritania (2300), Cambodia (2500), Pakistan (2900), Vietnam (3700), India (3800), Bangladesh (2100) etc. Lower level of well-being (GDP PC: 4K~10K) Fully embraced the production of textiles and apparel production as a means to compete in the global marketplace In a transition phase between focusing primarily on production for export and increasing focus on opportunities related to domestic consumption Ex) Philippines (4300), Indonesia (5200) Swaziland (5300) Jordan (6100), Sri Lanka (6600), Egypt (6700), etc. Rapid development and rising level of well being Have open trade policies Ex) In the 90s: Hong Kong, S. Korea, Taiwan, Singapore Used to be called Dragon, East Asian Tigers, or Big Four**** (know for test) Hong Kong (53000) and Singapore (63000) shifted to the developing country stage

o 3. Developing Countries

o 4. Newly Industrialized Countries (NICs)

Issues-increasing labor and production costs* New NICs- China (10,000), Thailand (10,000), Peru (11,200), South Africa (11,700), Chile (18800), Mexico (15800), Russia (18700), Turkey (15300) High level of well-being Progressed from full industrial production to other stages of product development or even other formsof less labor-intensive work (e.g.) Technology, communications, services Shifted their primary emphasis from producing consuming them. textiles and apparel to

o 5. Developed Countries

Ex) Western Europe, UK (37600), Netherlands (43000) The US (51000), Canada (42000), Hong Kong (53000), Singapore (63000), Japan (37000), Taiwan (41000), Australia (43000), etc

How do newly developing countries benefit from staring an apparel industry? o Production of textile and apparel products for export is a vehicle for industrial development and participation in the global marketplace. o The apparel industry requires: Comparatively low startup costs Labor-intensive production

o Short training time o These countries most available resource is: Human labor

What are the main characteristics of the apparel manufacturing industry? What are the major issues in trading with newly industrialized countries? Why are developed countries more likely to have trade deficits in apparel? o Consumers in developed countries have more money to spend o Seeking more variety o Production costs and labor costs are higher in developed countries o Stronger currency value in developed countries

Key characteristics of each stage of development in the textile complex and country examples for each stage o 1. The Embryonic Stage The poorest and least-developed countries Products are produced for domestic consumption Ex) Sub-Saharan areas in Africa Low wage labor is used for labor-intensive operations Products are exported for the low-end of the market in the developed nations Price is the primary appeal. Ex) Sub-Saharan areas in Africa, Bangladesh, several Latin American and Caribbean countries Improvement in volume, quality, and sophistication Fabrics may be exported to other countries Develop own fiber production

o 2. Early Export of Apparel Stage

o 3. More Advanced Production of Fabric and Apparel Stage

Large manufacturers and retailers in more developed countries provide assistance to foster advancement. Ex) India, Vietnam, Sri Lanka, Philippines, Indonesia Increasingly enlarged and sophisticated textile and apparel production Run large trade surpluses Depend less on the textile complex for industrial development Start to favor other industries Make investment in other countries Ex) Turkey, some of China Employment in the textile complex starts to decline Products and process: fairly advanced The industry becomes more concentrated Fairly capital intensive Ex) some of China, S. Korea The number of firms and employment in the textile complex decline significantly Trade deficit in many segments Significant increases in off-shore production Ex) US, UK, Germany, France, Belgium, Netherlands

o 4. The Golden Age Stage

o 5. Fully Maturity Stage

o 6. Significant Decline Stage

Explain how the stage of development for textile and apparel production is related to the developmental stages of a nation. o The stages of development for textile and apparel production generally parallel the developmental stages of a nation or region. Global patterns of textile and apparel activities in terms of production, employment, consumption and global trade. o Global shifts for the following activities: Production US Japan The Dragons China S.E AsiaS. Asia o Employment Decline for the more-developed countries Growth for the less-developed countries o Consumption Increased o Trade Increased

Does Trade Deficit Hurt America? What is the BOT? How is the BOT related with economic factors or exchange rates? o BOT = Exports- Imports o Positive (trade surplus) Export > Import Import > Export o Negative (trade deficit) o BOT is the result of economic factors, not the cause . o BOT is highly reflective of the value of the dollar against other currencies that is, exchange rate o A strong currency is usually a significant factor in producing a trade deficit. Do tariff deficits hurt the US economy? If not, what is the logic behind it? o One of the causes of Americans trade deficit is that foreigners want to hold American assets, not because foreign nations do not want American products. o When America is running a trade deficit, it is almost always running a capital account surplus**. o A trade deficit means: Import > Export USD is stronger in value than local currency o Cheaper for the US to import A strong dollar means: American assets are valuable for foreigners to hold . More capital flowing into the U.S.

What is current account? What is capital account? How is the US trade deficit related with the capital account balance? o A capital account surplus means that foreigners buy more American assets than Americans buy of foreign assets. o Therefore, when America is running a trade deficit, it means that the US runs a deficit in goods

What is balance of payment? o BOP= record of all monetary transactions between a country and the rest of the world

Is trade surplus always good? Why or why not? o Running a favorable balance of trade is not necessarily a beneficial situation o Nor it is necessarily disadvantageous to run a trade deficit o Trade surplus means your currency is low/weak

Tools of Protectionism: Tariff and Non-Tariff Barriers Two purposes of tariffs o 1) To protect the domestic industry by restricting trade o 2) to accumulate revenue for the government o The tariff revenue is captured by the American Government The effects of tariffs on the price of domestic and foreign products. Explain the logic behind it. o Drives up the prices for BOTH domestic and foreign products o The tariffs will raise the price of the foreign goods. Price of foreign goods > price of domestic goods Increased demand for domestic goods (b/c they are cheaper)

o The demand placed on the cheaper domestic goods will eventually drive those prices up. Supply-demand theory Demand(up) price goes up (up) Production capacity expansion due to growing demand Additional costs for production Price (up) The increased price for domestic products raises the manufacture's profits and the wages of their workers. However, they are paid for out of American consumers pockets Can be a form of extortion The harm to consumers is larger than the benefits to producers and their workers.

Examples of non-tariff barriers. Explain each barrier. o Import Quotas- Quantity control on imported merchandise for a certain period of time Often administered by a government that issues import licenses up to the quantity of imports that will be allowed. The import licenses may be given away or sold. When sold, it does generate governmental revenue. it limits what he can sell at the old price. How come? Dumping happens when a company uses a foreign market to sell off goods at prices lower than the fair market value. A form of price discrimination Foreign exporters can penetrate the US market American manufacturers can be injured Due to the lack of price competitiveness. Due to lower prices Beneficial for American consumers Unfair if selling below home market price (i.e., normal price charged in the exporters country) An antidumping fine is equal to the difference between the fair price and the price that was being charged in the US. Eventually, the anti-dumping order encourages foreign exporters to raise their prices their prices to avoid the anti-dumping duties Duties to counter the effects of subsidies provided by foreign governments on the price of products exported to the U.S. Importers are required to obtain a license for each shipment they bring into the country. When used in a discriminatory manner, these licenses can become a nontariff trade barrier. To protect health, safety, and product quality for domestic consumers Requires government or sometimes private companies to buy domestically produced products to restrict imports.

o Anti-dumping duties (ADD)

o Countervailing duties (CVD)

o Import license requirement

o Quality standards o Domestic Content Requirement

Typically specify the percentage of a products total value that must be produced in order for the product to be sold in the domestic market. Often used for developing countries to foster agricultural, automobile, and textile production Exchange rate: the ratio at which one currency trades for the other Currency devaluation Some countries manage the exchange rates to restrict imports and encourage exports. Ex) china japan

o Exchange Rate Management Policies

o Environmental standard o Working condition regulations o o Employment regulations Use of child labor Packaging/labeling requirements

What are the effects of quotas? Quotas reduce the number of foreign goods. This limited supply results in: The price will increase for the foreign goods The demand increase for the cheaper domestic products, in turn driving up the price of domestic products Increases in the price of both domestic and imported goods Quotas cause American customers to pay higher prices. Quotas are the most regressive among the various types of trade barriers.

What are the similarities and differences between quotas and tariffs? Who captures the revenue? o o Tariffs It forces the exporter to raise the price. The tariff revenue is captured by the American government o Quotas It does not force the exporter to raise the price. The quota revenue could be captured by the foreign government/ exporters or American importers

Difference

Similarity

o The end results of both are higher prices and fewer varieties for consumers. o National welfare falls

o Standard quota vs. voluntary quota: compare who determines the recipients of licenses and who captures the revenue? o Standard Quotas The US government gives licenses to American importers Import licenses: the right to import a particular amount of the good. Distribution of import licenses is not done randomly.

The quota revenue is captured by American government or American importers. They enjoy higher profits from the higher prices paid by by American consumers.

o Voluntary Quota = VER (Voluntary Export Restraints) A foreign country agrees Voluntarily to restrict its exports to the U.S. to a fixed number. The foreign government determines who gets to export the goods to the US. Common in the textiles, clothing, steel, agriculture, and automobile industry The quota revenue is captured by foreign governments or foreign exporters Quotas drive up the price

because American importers compete to buy the scarce supply of foreign goods. The foreign exporters enjoy the profits from the higher prices paid by American consumers.

Why would exporters agree to voluntary quotas? o If they dont, they will likely face more restrictive quotas. Voluntary quotas are more flexible. Bilateral trade agreement no need to go to Congress

o To avoid a trade war Consequences of tariffs and quotas o The end result of both is higher prices and fewer choices for consumers. o Encourage foreign manufacturers to set up plants here. Advantages: create jobs increases in GDP Increases in the capital account Increased threat for the domestic industry; market dominance Profits go to foreign companies Environmental damage Disadvantages:

o Because this decision is NOT based on true economic criteria they often FAIL. What is exchange rate? What are the effects of currency depreciation? o Exchange rate: the ratio at which one currency trades for the other o Currency devaluation Some countries manage the exchange rates to restrict imports and encourage exports.

When is protectionism justified? o It is considered as infant or crucial industry o There is a concern for national defense and national security o There is a potential for unemployment o There is a presence of foreign monopoly

Where does public stand on free trade? o US consumers In favor of free trade o US retailers In favor of free trade o US manufacturers Against free-trade o US labor unions Against free-trade

*Bring a blue scantron.