of 3 - Center for Global Outsourcings

Introduction and Literature Review
When it comes to global sourcing, low-cost, especially low labor cost, is the ‘must-bementioned’
drive with which companies make their following decisions: Which products or
categories of products are best suited to global sourcing? And what approaches exist for
structuring global sourcing activities? (Byrne, 2005). Labor-intensive products-items geared to
leveraging a country's abundance of lower-cost labor-used to represent the bulk of products
sourced from lower-cost countries. In China, for example, consumer goods, clothing, and
textiles were long the largest export categories. However, Strategic sourcing demands that
companies align what the customer wants, what's best for the business, and what's needed to
get the supply (Mickey, 2007). Many companies have successful experience in global sourcing.
US technology giant Apple, for example, assembles its products in massive factory complexes
in China, run by Foxconn, which also handles the production of consumer electronics for many
other large players in the industry. While Apple's been phenomenally successful by making
products people love, Foxconn has also been criticized for poor working conditions and lack of
working relationships at the company, which climaxed with a series of suicides. The serial
accidents at Foxconn, its largest supplier, undermined Apple’s reputation. Even though we do
not have any evidence that Apple actually suffered financially from the negativities, Apple itself
has already realized the potential harm for the company and took remedial actions, for example,
releasing its annual Supplier Responsibility Progress Report, detailing its commitment to
improving working conditions in the international network of factories that produce its products.
In a mature consumer market, the price and quality of a certain product are not the only
considerations for a successful purchase. The social image of a company plays, as well, a more
and more important role in developing or maintaining the competitive edge. In response to this
call for social responsibility, companies should reconsider their global sourcing decisions.
Model Framework
Assume a company is making its global sourcing decision in face of many options (outsourcing
companies in different countries) with (different) multi-attribute. We formulate the outsourcing
options as a multi-attribute model, similar to economic theory of consumer discrete choice
advanced by (Lancaster, 1966). We represent the value of option i, , by
( ) ∑ ,
where is the amount of price advantage of option i, is the amount of corporate’s
social image, is the amount of the social image of the country in which the option i is located,
is the amount of all other attributes not known with certainty.
The exponential was selected to give the following form for how a decision company
allows for uncertainty in his preference function, ̃ :
( ̃ )
̃
where ( ̃ ) is the utility after allowing for the uncertainty of the value, ̃ . r represents
the consumer's risk aversion. r is assumed to be positive and constant. and are scaling
constants( > 0).
If we assume the consumer's uncertainty about the measurable value of option i,
Tenth Annual International Daejeon, South Korea P a g e | 19
Smart Sourcing Conference June 28-29, 2012
̃ may be
characterized by a normal distribution, mean and variance , then it is possible to calculate
the expected utility that a consumer will derive from i.
( ( ̃ )) (∑
)