Labor arbitrage benefits of global outsourcing are often offset by the costs of co-ordinating and managing far-flung operations. The downside can be mitigated by aggregating data on operations and real-time decision.

1. INTRODUCTION
International Procurement Operations (IPOs) are the nerve centers of decision-making for efficient global
procurement operations. Expansion into low-cost countries brings within the fold of an extended enterprise a
coalition of suppliers, buyers and logistics companies who can be more productive when they work in
concert. IPOs forge a network, whose members are initially tenuously tied to each other by their
transactions, into an interconnected global procurement network joined together by long-term relationships.
The several poles of decision-making local to a department, business unit or geography are merged into a
synchronized management process that spans the global procurement network.
The whole of a global procurement network is more valuable than the sum of its individual constituents.
Global procurement networks are more valuable when multiple redundancies are eliminated, real time
decisions become possible with greater visibility and communication between partners is bridged to ensure
that unanticipated costs are not incurred. IPOs reap these latent efficiencies in a global supply chain. The
business gains increase progressively as IPOs extend their initiatives from specific departments to
businesses across borders and finally to the whole of the supply chain. IPOs steer partners to integrate
technology, processes and communication systems so that the constituent enterprises, groups and
departments work as an intertwined extended enterprise. Their expertise in change management,
performance management and compliance enables seamless integration of the supply chain network.
Recent research by Accenture confirms a high rate of success achieved by IPOs; 70% of the companies
who have set them up report that they have met or exceeded their expectations1.
The difference that IPOs make is illustrated by the example of management of risks in an integrated
procurement network. When partners exist as silos, McKinsey found in a survey of a sample of enterprises
that two-thirds of them reported increased risks to their supply chains over the last five years. More than
eighty-percent of them are barely prepared to mitigate supply chain risks2. Experts agree that no individual
enterprise has the incentive to mitigate supply chain risks and they all have a tendency to “pass the buck” 3.
This is despite the fact that many of them have installed enabling technologies to gain visibility into global
supply chain networks. IPOs step in such a situation and make it clear that the “buck stops with them” and
ensure that action is taken to contain the damage from adverse events.
EVOLUTION OF IPOS
Enterprises, looking to benefit from international procurement, initially test the waters by outsourcing
commodity components that are not a part of their core business. The primary motivation for outsourcing, at
this stage, is labor arbitrage. Gains from lower labor costs are partially offset by higher transaction costs of
procurement from more distant sources and more so when several departments deal directly with suppliers.
IPOs become the single conduit for all transactions, consolidate information and processes internally and
negotiate with suppliers to keep procurement costs under control. These objectives can be achieved with a
virtual office with low overheads. Arm’s length transactional relationships with suppliers are adequate for
commodity procurement.
As they interact with suppliers overseas, IPOs learn more about their competencies. In time, they realize
that larger gains are possible from strategic sourcing including the core business of their clients. Entire
assemblies and products are outsourced. As business flows between partners, spread across the globe,
1
“Global Sourcing and Logistics: A roadmap for high performance”, Accenture.
2
“Disaster-proofing the supply chain” by Andrew K Reese, Supply and Demand Chain, August 6, 2007
3
As above in footnote no 2.

2. increase in volume so does the need for them to work in tandem. IPOs see a role in providing an array of
services to improve communication and collaboration among the members of the international procurement
network. Processes and technologies linking partners are streamlined for greater efficiencies. This is best
accomplished by a separate office with a charter and a steward to manage the international procurement
operations and a local office. The goal of IPOs is to reduce costs of all kinds---response time, cost of risk
and inventory costs.
Eventually, enterprises see an advantage in locating overseas closer to their suppliers as the locus of
manufacturing activity is centered overseas. Proximity brings with it informational gains such as a better
understanding of suppliers’ capabilities, risks and opportunities in the local business environment as well as
knowledge of local business practices. IPOs are incorporated as domestic companies to take advantage of
tax benefits, subsidies and other promotional programs available to local companies. Buying companies
have greater confidence in the ability of their suppliers and they decide to outsource entire product life
cycles. The local arm of the IPO becomes a recognized member of the local business community through
sustained networking in the community.
Emerging IPO Strategic Service Center Local control center
Strategy Global Purchasing Strategic Sourcing
Operational Excellence
Goals Reduce spend Reduce Total Costs Leverage local presence
1. Physical location in
supplying countries.
Incorporated as a domestic
1.Virtual Office 1.An independent office company.
Structure
2. Centralized decisions. 2.Decisions coordinated with 2. Recognized in local
3.Rudimentary knowledge of local control offices. business community.
trade 3.In-depth knowledge of trade 3. Relationships leverage
4.Arm's length relationships 4. Strategic partnerships local competencies.
Expected
Benefit Lower Spend Lower opportunity costs Domicile gains.
1. Internal communication
across locations.
Control over global supply
Challenges Limited visibility internally. 2. Control of local
chain
subsidiary and
business climate.
1. Automation of processes Product life cycle
and information across management systems and
Change 1. Visibility into spend data. the supply chain. processes
Management 2. Aggregating internal data. 2. Close-looped processes
3.Single interface with suppliers 3. Vendor Managed
Inventory
Price and cost based metrics Service Level Agreements: Financial performance of
Performance
for assessing performance of quantitative and qualitative the local subsidiary.
Management
suppliers. metrics.
Compliance to corporate
Compliance to global
Compliance Use catalogue for buying policy and product life cycle
processes.
guidelines.
Realized Price paid for procurement and 1.Demand and supply 1. Fiscal and other benefits
Benefits overhead costs incurred on matches for local companies.
procurement are reduced. 2.Resilient supply chain 2. Management of local
3.Lower response time risks.

3. 3. Leverage local skills
EMERGING IPO
Strategy
An emerging IPO seeks to lower the expenditure incurred, as operating costs or purchase price, on
procurement.
Challenges
In the absence of a single international procurement operations office, individual departments procure
directly from suppliers overseas. When a company has several departments, each of them separately
procures goods from their preferred suppliers. The following are the consequences of this method of
procurement
• The aggregate amount spent on international procurement is hard to estimate because
information is scattered in individual departments.
• Multiple redundancies exist as the processes in individual departments, regions, IT systems,
types of products, etc are implemented without a common design and contribute to the
complexity of managing the supply chain4.
• Individual departments place smaller size orders instead of bulk orders.
• The negotiating power of buyers is weakened when they act independently.
• It is not possible to compare the performance of suppliers when they place orders individually.
Altogether, the buyers don’t receive the most competitive prices and the operating costs of procurement are
high.
Solutions
Internal issues of managing information and processes take priority when buyers are purchasing
commodities from overseas suppliers. The following initiatives are representative of the solutions to expect.
• Change Management:
Information: A single catalogue5, with an approved list of suppliers and verified prices, is
made available to buyers. IPOs consolidate spend data available with all departments. They
use spend data to negotiate deals with their suppliers.
Processes: are automated and a single platform is used for managing them internally; a
common B-to-B interface is created for interaction with suppliers.
• Performance Management: cost and price based metrics are used to measure performance.
The availability of consolidated data as well as the catalogue helps to prepare benchmarks for
assessing performance.
• Compliance: IPOs ensure that each department chooses suppliers from the recommended
list in the catalogue and pays prices suggested there.
Benefits
4
http://www.scmr.com/article/CA6406208.html
5
http://www.scmr.com/article/CA6406208.html

4. The level of spend is reduced as lower prices are negotiated with the suppliers, savings in operating costs
are realized as a single procurement office does all the buying and bulk orders are placed.
Productivity gains and cost reduction is possible when processes linking partners are streamlined and
automated. Use of common processes and standardization can lower costs considerably. Air Products, for
example, realized 20% cost reduction in this way6.
SERVICE CENTER
Strategy
IPOs shift their focus from cost reduction to superior service across the global procurement network at this
stage. The services of IPOs are meant to ensure that all partners act in concert. A single global platform is
implemented for linking all partners. IPOs build bridges between partners to ensure communication and
collaboration between them. Long-term relationships of trust with suppliers underpin collaboration with the
buyers. The expected benefit at this stage is reduction of total costs including inventory costs, delivery time
delays and costs of disruptions in the global procurement network.
Challenges
The sprawling global supply chain needs to work harmoniously to maximize the benefit from its extension
into low-cost counties. As supply chains lengthen, the risk of a mismatch between demand and supply, time
delays and slippages in execution increase. IPOs have to drive suppliers to implement processes and
technologies that integrate the global supply chain. They have to reign in total costs by coordinating the
activities of partners across all businesses. The specific challenges of total cost reduction are
• Matching demand and supply:
 The risk of excess inventory in the supply chain are high as each partner in the
supply chain exaggerates demand to ensure adequate inventory for their
individual needs.
• As the number of tiers in the supply chain increase, so does the number of
partners who exaggerate their demand. The mismatch between demand and
supply grows and the cost of holding unwanted inventory increases7.
• When companies lower their inventories, they often find their costs from stock-
outs are higher.
• Rapid change in the levels and patterns in demand on the one hand and
pervasive congestion in the ports and roads of emerging economies on the other
aggravate the problem of matching demand and supply. Recent research
confirms that the unanticipated costs incurred by non-integrated and semi-
integrated supply chains offset any gains from labor cost savings and only
integrated supply chains are able to benefit from globalization8. This is because
integrated supply chains are better able to respond to contingencies.
6
“Effective Global Sourcing and Supply for Superior Results” by Robert M Monczka, Robert J Trent and
Kenneth J Petersen, CAPS Research, 2006.
7
http://www.beergame.lim.ethz.ch/Bullwhip_Effect_Article.pdf
8
“The China Rip Tide: Threat or Opportunity? Profiting from the Growing Supply-Chain Bottleneck”, by
George Stalk Jr. and Kevin Waddell, June 2006.

5. • Reducing response time: Lags in responses to market signals and events increase total
costs. Enterprises need data in real time to respond to market changes and events. At a time
when as many as 89% of companies9 see new product and services launches as the most
important factor for increasing revenues, higher lead times can be expensive. When manual
processes pervade an enterprise, the responses are slow.
• Risk management: A holistic view of the status of execution is required to spot any deviations
from expected performance. This is contingent on close-loop processes. For example,
suppliers have to send back confirmations, within an agreed period of time, when an order is
placed and make specific commitments for delivery. The information needs to be visible to all
partners such as by posting it on a dashboard.
Solutions
The internal consolidation of information and processes is extended externally to all the partners in the
supply chain. IPOs provide a range of services that transform the global procurement network from a
labyrinth of discrete business units into a continuous supply chain. A common global platform for all partners
in the supply chain is the bedrock of an integrated supply chain network. Growing costs of unanticipated
delays, higher inventories or stock-outs and disruptions10 can be lowered with synchronization of activity
across the global supply chain network.
• Change Management:
IPOs provide the leadership to shepherd partners into working within a common framework to
achieve the goals of the global procurement network. The role and status of the IPOs is
transformed by
 Vesting greater authority to IPOs who become part of the senior management
team.
 Assigning a mandate to IPOs to manage global processes.
 Delegating stewardship of the supply chain to the Chief Procurement Officer with
a charter to control global processes. A survey of Deloitte Research found that
the masters of the management of complex supply chains are 50% more likely to
have one person oversee a supply chain network than their peers11.
 Building a local presence for IPOs. They improve their understanding of local
business laws and taxes, trade rules and business practices. They also join local
business associations to blend in with the local community.
IPOs elicit co-operation from suppliers by
• Building long-term relationships with partners
• Defining common goals for constituent partners
Information: All partners in the network share information which is aggregated. The
processes of gathering and centralizing information are automated to make it available in real
time. Data on demand and supply and status of execution is made visible by displaying it on
9
“The challenge of complexity”, Deloitte,
10
“Effective Global Sourcing and Supply for Superior Results”, by Robert M Monczka and Robert J Trent
and Kenneth J Peterson, CAPS Research, 2006.
11
“Unlocking the Value of Globalization”, Deloitte.

6. a dashboard. A holistic view of the status of activity in the network provides actionable
intelligence which partners in the network can use to match demand and supply, respond
rapidly to mitigate risks and complete tasks concurrently to lower response times.
Processes: the processes linking partners are rationalized and automated to reduce cycle
time and productivity. All partners operate on a single platform.
• Performance Management: service level management with quantitative and non-quantitative
measures of performance. This ensures that cost reduction, for example, does not lower
customer satisfaction as stock-outs increase.
• Compliance: suppliers adhere to the processes governing the global supply chain network.
Benefits: The implementation of global processes helps to reduce cycle time as information flows rapidly
between partners. According to a study conducted by A T Kearney, the processing of purchase orders and
requisitions, before they are sent to suppliers, alone account for 50% of the cycle time12. The processing
time can be reduced from as much as 30 days to less than a day 13 with streamlining and automation of
processes.
The aggregation of information across the supply chain and its display electronically helps to respond rapidly
to adverse events. An example of how visibility enables companies to respond in real time to changes in
their business environment and gain long-term competitive advantage is the case of Nokia on the occasion
of the launch of a new generation of cell phones in March of 200014. The source of its chips was a plant of
Phillips NV located in Albuquerque, New Mexico which caught fire a few days before the delivery of the
order. Nokia’s managers sensed a delay when they looked at their computer screens. It was only after the
executives scrutinized the problem that they realized that the damage to the plant would delay shipments far
longer than anticipated. Other suppliers were not in a position to supply some of the critical components.
Nokia’s executives scoured over data on other Phillips’ factories and found other plants where the critical
components could be manufactured. They conferred with Phillip’s executives to press them to produce the
components in their other factories and were able to launch the new model of their cell phone in time. On the
other hand, Ericsson, who also procured its chips from the burned down plant, did not recognize the
magnitude of the problem; it lost market share for an extended period of time while Nokia gained.
LOCAL CONTROL CENTERS
Strategy
A local presence of IPOs in close proximity of sourcing countries becomes a compelling need at this stage.
The needs of a large number of suppliers clustered in sourcing countries are then better served. Their
numbers increase as entire product life cycles are outsourced. Depending on the size of the operations, the
local IPO could manage suppliers in a country or in an entire region such as South Asia.
Synergy in the workflows of partners, who constitute a supply chain network, sets the stage for effective
management of the supply chain from one end to another internally and externally. IPOs use their
knowledge of the region to increase efficiencies.
Opportunities in one country can be leveraged not only by the local unit but also globally. When threats
arise, they are managed not only locally but all along the supply chain.
12
http://www.scmr.com/article/CA6406208.html
13
http://www.scmr.com/article/CA6406208.html
14
The description of the event was extracted from http://scm.ncsu.edu/public/risk/risk3.html

7. As the business landscape of emerging countries is transformed by deregulation, IPOs have to find
opportunities for business growth locally and to keep track of risks inherent in the dynamic environment of
emerging economies.
THE CHALLENGES
Balancing the need for centralized strategic management and local autonomy becomes a major challenge.
Internal communications gets harder as the local subsidiary acquires a distinct character with its own
language and culture, business practices and time zone15. The constituent partners have to find a common
language for communications.
Optimization of supply chain from one end to another requires standardization of processes that are
dissimilar across countries. Sourcing countries have their own process management traditions, IT systems,
etc. Seamless integration of these systems involves substantial investment of effort. Nestle, for example
had to reduce the number of its data centers around the world from 100 to 416.
Global processes are required so that local opportunities and competencies can be leveraged for all units
within the company. One example of this is the case of Adidas which responded to the excitement over
Greece’s victory in a European championship by rapidly supplying its blue-and-white jersey to fans all over
Europe17. It was able to do so because it had the ability to synchronize production from its many contract
manufacturers.
When product life cycles are managed across borders, change happens at several levels and the chances
of clients and their suppliers adapting to change at a disparate pace are higher. This could mean, for
example, that client companies and their suppliers are using different versions of software and work at
cross-purposes. Recently, Airbus had to delay the launch of its state-of-art plane, the A380 super jumbo, by
two years and incurred losses in billions of dollars after errors occurred as a result of the use of different
versions of the CAD software in Germany and France.18
SOLUTIONS
Local considerations19 are of paramount importance in supply chain management at this stage. For example,
the IPO would have to find a way to adapt to the telecommunication infrastructure that may not be
sophisticated enough to build a network for real time communications.
IPOs provide more services to manage the gamut of product life cycle activities outsourced overseas; they
invest greater effort in selecting and developing more competent suppliers capable of offering higher value
services, ensure that global standards of quality are achieved and adapt to unique aspects of local
production methods. More knowledge of local business environment helps in due diligence of suppliers, risk
assessment and anticipating opportunities and threats.
The presence of IPOs locally helps to communicate the goals that the global strategy of the buying company
seeks to achieve. IPOs learn about the issues that would have to be addressed in order to implement global
processes. The local presence of an IPO and their networking within the community helps to gain knowledge
of reliable sources of supply, the pitfalls of the choices they make and the support they can find to solve
problems.
15
http://www.logisticsmgmt.com/article/CA6416244.html
16
http://www.scmr.com/article/CA6444369.html
17
http://www.scmr.com/article/CA6444369.html
18
“PLM: Boeing’s Dream, Airbus’ Nightmare”, by Mel Duvall and Doug Bartholomew, Baseline, Feb 5th 2007.
19
http://www.oliverwyman.com/ow/pdf_files/MOTL-DifferencesGlobalSourcing.pdf

8. • Change Management:
Information: data on the status of progress at each stage of the product life cycle is aggregated at
one point.
Processes: for ensuring that the activity at each stage of the product life cycle is synchronized.
When improvements are made in the processes, IPOs ensure that they are consistent across all
partners. IPOs help to ensure that processes across the extended enterprise change consistently.
Boeing, for example, updates software concurrently for all its suppliers four times a year. Suppliers
are offered incentives to make the changes in conjunction with the others 20. Consequently, the
Dreamliner, Boeing’s answer to the Airbus’ A380, has gained an edge in the airline market.
• Performance Management: the performance of the local IPO assessed by ROI metrics.
• Compliance: adherence to guidelines for product life cycle management.
BENEFITS
IPOs located in the sourcing countries take advantage of tax benefits, government incentives and lower
pricing available to domestic companies. Closer relationships with suppliers help to evaluate their
competencies accurately and to take advantage of their unique skills. As emerging markets grow, it is also
possible to leverage the global supply chain to meet local needs.
An example of the impact a local organization can have in managing the risks of outsourcing is illustrated by
the experience of The Limited and Warner Bros after a currency crisis struck Asia in 1997 and disrupted
supplies. Exporters were unable to pay for imported materials when their currencies were unexpectedly
devalued. However, the supplies to The Limited and Warner Bros were not interrupted because they had
contracted with Li and Fung, a company that specializes in the management of supply chains in the East
Asian region. Li and Fung, with a supplier base of 4,000, have an agile enough supply chain to find
alternative sources of supply21 within the region when the need arises.
When entire product life cycles are managed offshore, the gains are higher not only in terms of lower costs
but also lower risk. Typically, each supplier absorbs the operating risk by incurring the non-recurring costs
associated with the assemblies they design and manufacture. Client companies can then afford to launch
more products.
Enabling Technology
The technology that underpins the solutions is a multi-enterprise platform for integrating the information
flows and processes across departments and enterprises. Business processes and information
management are automated from one end of supply chain to another.
20
See footnote 8.
21
“Robust Strategies for mitigating supply chain disruptions” by Christopher S Tang in International Journal
of Logistics Research and Applications, 6th August 6, 2007, Taylor and Francis.