Global Sourcing Strategies Under Exchange Rate Uncertainty

Abstract

Firms competing in the “global” marketplace have to take into account the comparative advantages of various countries in forming their manufacturing and sourcing strategies. Developing countries, for instance, have advantages over the developed nations in terms of low labor and raw material costs. Such cost advantages provide strong motivation for multinational firms to seek offshore sourcing arrangements in developing countries. In other cases, critical technological components and/or process equipment are available only from few foreign sources, which are in many cases located in technologically advanced countries other than the firm’s home country. In such cases the firm has no choice but to look at these foreign suppliers for its sourcing needs. Because of these reasons, global sourcing is increasingly emerging as a key strategy for companies seeking competitive advantages, and it represents a sizable amount of the economic activities cf multinational firms. Nearly 10 percent of Chrysler’s $8.6 billion outsourcing budget is spent on global purchases. Westinghouse spent more than 7 percent of its total purchasing dollars on international procurement.