There are two most important decisions faced by firms in their drive to obtain superior performance which are which, if any, value-chain activities should be outsourced and where inthe world these activities should be performed.Firstly, the concern is the value-chain activities to be outsourced or not, which is eitherthe firms make the product and perform value-chain activities by themselves or they source itfrom an outside supplier. So, the firm must decide between internalization and externalization.Internalization is the value-chain activities are conducted in house and externalization is thevalue-chain activities are conducted by an external, independent supplier. The firms usuallyinternalize the value-chain activities that they believe a part of their core competencies.Secondly, the firm must decide whether to keep each value-adding activity in the homecountry or locate it in a foreign country. Configuration of value-adding activity is the pattern orgeographic arrangement of locations where the firm carries out value-chain activities. Manyfirms organize their value-adding activities to other countries because external suppliers indeveloping and emerging countries known for having low-cost labor, competent production processes and others.Moreover, there are some approaches that Wolverine follows to configure and coordinateits value-chain activities worldwide. The approaches are outsourcing, global sourcing and offshoring. Outsourcing is the procurement of selected value-adding activities, including productionof intermediate goods or finished products from independent suppliers. As stated in the case,Wolverine outsources production by make contracts with the manufacturers throughout Asia andLatin America, more than 90% of its footwear produced in China.Besides, global sourcing is the procurement of products or services from independentsuppliers or company-owned subsidiaries located abroad for consumption in the home country ora third country
A study conducted by PWC’s Advisory Services in December 2010 under the topic of“Creating Competitive advantage in today’s volatile marketplace” defined the term global
sourcing as a solutions designed to improve operating efficiencies and bottom-line results forglobal organizations with distributed operations across the organization, country and around theworld. It comprises both shared services and outsourcing solutions that can be implementeddomestically and offshore.
Global sourcing method in today’s business world is significant for the operation of
worldwide company to continually expend and maintain its current operation. There are a lot ofkey factors that drive to the growth of global sourcing method. The top four drivers of globalsourcing are cost savings, competitive pressures, enhancing efficiency through business processredesign and flexibility of technology. These three drivers have bring effects to Wolverine toshift its focus from manufacturing to designing, marketing and distributing its footwear brands by outsourcing its manufacturing activities to lower cost contract manufacturer like China.This company has well-recognized brand names and markets its footwear throughnumerous company owned subsidiaries in all over the world. Increased in operational cost ofcompany-wide caused the company to redesign its operational activities by outsourcing its
manufacturing to China. This may reduce the high cost of manufacturing since China’s
manufacturers are able to provide this service at a lower cost. Decreased in manufacturing cost
will put the company product’s price competitive with other market competitor.Changes in competitor’s operation strategies into outsourcing also may influence and
give pressure to the company to follow the new strategy. This is possible when the price set by
the competitors in the market is highly competitive and has power to influence buyer’s
preferences. Any unexpected drop in price of products offered will effects the sales performanceof other competitors. Therefore any attempts taken by competitors to cut the cost will befollowed closely by other competitors in order to maintain the customer preferences and salesunit per targeted market, most of the competitors will keep following each other closely in termof setting up the price of their products and cutting cost in any part of its value chain.Having wide-ranging value chains in many countries is challenging and costly forwolverine to supervise its operation and maintaining the quality of their product. In order tocompete globally and producing at the most efficient level, outsourcing through strict rulesimposed to foreign manufacturer is an alternative to reduce the cost of production
For the design, marketing and distribution, Wolverine’s approach to global sourcing is
internalized value adding activity. It is due to these activities are done in the company-owned factories in the United States. Unlike the design, marketing and distribution, Wolverine applies global sourcing to its manufacturing process. Today, Wolverine outsources production of more than 90 percent of its products to independent suppliers, with the remainder produced at company-operated facilities. Most of its footwear is produced in China.
Value-chain activities should Wolverine outsource and internalize:
Firstly, Wolverine should internalize its manufacturing process. It should apply captive sourcing which is a shift in intra-firm supplies to an affiliated firm. It can be either onshore (in the home company) or offshore (located abroad). In this case, Wolverine must internalize its production abroad. Before this, Wolverine deals its manufacturing process with independent suppliers. However, there are many problems appear in the surface while using this approach. Overreliance
on the suppliers that leads to inventory shortages and long transit time from China to wolverine’s
warehouses that affects production schedules, transportation cost, insurance and delivery timelines are the examples of those matters. If Wolverine keeps importing the products from China, there will be a risk regarding the currency exchange rate. WTO and Western countries have regularly pressured China to rescind the regime of depreciated Yuan. If the Yuan strengthened, the cost of products imported from China would increase significantly.
Some of the most important benefits that wolverine obtains from global sourcing are:
Cost reduction: The main objective of Wolverine having and international presence and outsourcing is to maximize company profit margins through the reduction of costs. Currently most of the
Wolverine’s footwear is produced in China. The reason why the company chose to outsource to
China and some other countries is because those countries are able to provide the labour and services at less cost.
Access to new markets: Another benefit that Wolverine obtains from outsourcing is gaining an access to new market areas by taking the point of production closer to their end users. China and India are the largest retail markets for Wolverine after US therefore it is more beneficial for Wolverine to
outsource to those countries rather than exporting their products. Global sourcing has allowed Wolverine to achieve economies of scale outside of the United States. Some of the risk and threats that Wolverine faces are shortage of qualified workers and production capacity. Since the demand for their product is increasing globally Wolverine will need to increase their work force and they might face difficulty in recruiting qualified employees. If the company faces that problem the management will have to recruit even none qualified workers and that will eventually create other unwanted issues in the company. The Company currently sources a substantial majority of its products from third-party manufacturers in foreign countries, predominantly China. As is common in the industry, the Company does not have long-term contracts with its third-party suppliers. There can be no assurance that the Company will not experience difficulties with such suppliers, including reductions in the availability of production capacity, failures to meet production deadlines or increases in manufacturing costs. Another risk that the company is currently facing is in terms of strengthening foreign currency value which affects the cost of imports. If the Chinese currency (yuan) strengthens that would increase the cost of products imported from China.
The firm has developed guiding principles, called “Engagement Criteria for Partners & Sources” in order to ensure Wolverine is socially responsible firm. More specifically, the
Engagement Criteria covers different aspects, such as:
The ethical business standards: This is to
ensure that Wolverine’s partners are conducting the business activities in
truthful manner, complying with the product and quality requirement, and conforming to the applicable national and local law and regulations.
Health and safety regulations: The company must provide a safe and healthy working environment that complies with the law, for instant, safety equipment, medical facilities, fire exits, and comfortable workplace.
Environmental safe practices: The Wolverine must ensure that its partners run business activities in a way that protect surrounding environment and atmosphere where it operates. Such as, waste material must be disposed of properly in an environmentally responsible manner according to local laws and regulations.
The company must ensure that its employees must be treated fairly regarding employees’
working hours, wages and benefits; no discrimination among employees, no use of child labor and forced labor. In addition, Wolverine can also try to re-engineering majority of its footwear packaging by abandoning traditional materials, in favor of post-consumer recycled cardboard for boxes for footwear packaging and recycled paper for packing tissue. As well, the company can reduce its ecological footprint by using biodegradable shoe forms and soy-based inks in footwear production.
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