The Impact of Near Sourcing on Global Dynamic Supply Chains: A Case Study

Abstract

Although near sourcing is a valid alternative to global sourcing as a way to improve supply chain (SC) efficiency, there is a lack of studies aimed at understanding the reasons underlying the adoption of near sourcing strategies and at evaluating the related benefits. With the purpose of contributing to the discus-sion about the role of near sourcing in current dynamic SCs, the present work analyses the case of an Italian retailer that turned the global store furniture pro-curement process into near sourcing. Switching from Far East suppliers to a conti-nental one enables a SC reengineering that decreases transportation and inventory carrying costs and assures economic viability. The work provides a methodologi-cal reference to compare global and near sourcing policies and to calculate the as-sociated savings. The approach may be adapted to investigate different products, services, and business sectors

Full text

The Impact of Near Sourcing on Global
Dynamic Supply Chains. A Case Study
Anna Corinna Cagliano, Alberto De Marco, Carlo Rafele
Department of Management and Production Engineering
Politecnico di Torino, corso Duca degli Abruzzi 24, 10129 Torino, Italy
anna.cagliano@polito.it; alberto.demarco@polito.it; carlo.rafele@polito.it
Abstract Although near sourcing is a valid alternative to global sourcing as a
way to improve supply chain (SC) efficiency, there is a lack of studies aimed at
understanding the reasons underlying the adoption of near sourcing strategies and
at evaluating the related benefits. With the purpose of contributing to the discus-
sion about the role of near sourcing in current dynamic SCs, the present work
analyses the case of an Italian retailer that turned the global store furniture pro-
curement process into near sourcing. Switching from Far East suppliers to a conti-
nental one enables a SC reengineering that decreases transportation and inventory
carrying costs and assures economic viability. The work provides a methodologi-
cal reference to compare global and near sourcing policies and to calculate the as-
sociated savings. The approach may be adapted to investigate different products,
services, and business sectors.
Keywords supply chain management, purchasing, global networks, near sourc-
ing
1 Introduction
Global sourcing, meaning proactively integrating and coordinating materials,
processes, technologies, and suppliers across worldwide purchasing, engineering,
and operating locations (Trent and Monczka 2003), is an effective way to gain
competitive advantage in today’s dynamic supply chains (SCs). There are multiple
reasons for building an international supplier base: the lower operations costs in
low-wage countries, the availability of more advanced manufacturing technolo-
gies, the increased availability of potential vendors for selected items, and the pos-
sibility of entering new markets and seizing fiscal opportunities (Quintens et al.
2005). However, growing labour costs, the volatility of currency exchange rates,
and the awareness that global suppliers may cause inflexibility and non-
responsiveness are recently pushing firms to seek alternatives to global sourcing.

In such a context, near sourcing can be defined as manufacturing or procuring
products and services from foreign suppliers located in geographical areas close to
the buyers’ facilities and customers and able to offer low prices (Christopher and
Holweg 2011).
Due to a substantial lack of analysis about the advantages of near sourcing, this
policy is still little applied. The first examples of near sourcing strategies can be
found in industries where transportation costs have been largely affected by the
increased oil price, such as furniture, apparel, footwear, and steel (Lynch 2008;
Allon and Van Mieghem 2010). In addition, some multinational companies like
Caterpillar and Ford have recently moved back their production facilities to the
US and Mexico because of salary increase and currency strengthening in Far East
countries and encouraged by incentives from local governments to invest in manu-
facturing activities (Cappellini 2011).
In order to contribute to the debate on how near sourcing may increase SC effi-
ciency, this work discusses the case of an Italian retailer that changed a global
sourcing strategy into near sourcing of the furniture of flagship retail stores.
The paper is organised as follows. Significant literature about the topic is pre-
sented in Section 2, whereas Section 3 details the case study. Implications of the
work and conclusions are discussed in Section 4.
2 Literature Background
Although global sourcing allows to focus on core competencies and to improve
profitability, efficiency, and flexibility, it is also characterised by relevant draw-
backs.
The geographical distances increase transportation costs and long order cycle
times cause scarce supplier flexibility and responsiveness to demand changes. Due
to the lack of buyer-supplier proximity, global sourcing is incompatible with just
in time (JIT) philosophy as distances usually do not allow frequent deliveries of
small orders and rapid problem solving (Humphreys et al. 1998). Suppliers may
sometimes not meet the promised quality standards (Berman and Swani 2010).
Furthermore, different languages, currency, business practices, and heterogeneous
cultural and legal environments make buyer-supplier relationships risky (Rao
2004; Wilkinson et al. 2005). Finally, economic and financial events may put high
cost pressure on suppliers, which is in turn transferred to their customers.
Thus, considerable costs are incurred with global sourcing strategies and price
benefits may be offset. However, companies largely underestimate the hidden
costs of global sourcing (Lowson 2001; Weidenbaum 2005; Lampel and Bhalla
2008). A recent study reports that additional sourcing costs are on average 50%
out of the purchasing product price, while they are often perceived to be just 25%
(Platts and Song 2010).
Near sourcing strategies can be adopted to optimise labour, material, and fully
landed costs with risk, speed to market, and flexibility (Shister 2008). The reduced

lead times allow companies to implement fast inventory turns and JIT policies.
Also, the increased flexibility enables to better address last-minute changes in cus-
tomer demand. Canada and Mexico are the most popular near sourcing destina-
tions for US firms, while eastern European countries play the same role for com-
panies located in western Europe (Edgell et al. 2008; Lacity et al. 2008; Thelen et
al. 2010). Central and eastern Europe countries benefit from lower labour costs
than in western Europe, even if more expensive than in traditional far-east loca-
tions. However, geographical and cultural ties, partially common language skills,
and the availability of trained professionals make central and eastern Europe sup-
pliers very attractive to western companies (Meyer 2006).
Despite a very rich literature about benefits and limitations of different sourc-
ing locations, the reason why some companies review their global purchasing
strategies and move towards near sourcing is still a poorly researched topic.
To this end, the present work discusses a business case in order to better under-
stand the impacts of near sourcing on SC efficiency.
3 The Case Study
3.1 Company Presentation
The case company manages the product lifecycle from design to distribution.
Products are sold in company-owned or company-leased retail stores that are out-
fitted with finishes and furniture compliant to a suitable design to facilitate sales
and enhance the brand loyalty of the customers (Cagliano et al. 2011).
The SC of the retail store furniture aims to equip the brand stores with customized
pieces of furniture, such as counters, shelves, drawers, dummies, and signs that are
purchased from suppliers located in eastern China, then transported and stored at a
centralised warehouse in Italy, and finally shipped for installation at the various
European retail store locations.
Recently, several inefficiencies have arisen in the system of the European cor-
porate-owned retail stores with exponential growth of the furniture centralised in-
ventory and increasing transportation cost from the Chinese suppliers’ facilities.
Because of these factors, the case company asked the authors’ research group to
understand the root causes of the cost increase and to come up with new procure-
ment policies.

3.2 The Traditional Purchasing Process
The purchasing process traditionally applied by the case company may be de-
scribed as follows. First, based on basic design guidelines provided by the Image
Office, a store template layout is issued by the Engineering&Design Department
to allow the Procurement Department to release a standard order of furniture. Such
order, that will be named “buy-to-stock” (BTS) order, contains a preset amount of
pieces of furniture whatever the actual layout of a specific shop floor area will be:
in fact, the actual layout will be disclosed on a later time. The standard order
based on the template layout is necessary to face a three-month long lead time pe-
riod for the furniture to be manufactured and transported from eastern China to
Europe, which results to be a longer time than the two-month long period elapsing
from the point in time when the actual material take-off is available to the date of
store opening. Usually, detailed design drawings and material take-offs are 80%
compliant to the template layout quantities, so that the remaining 20% of the furni-
ture can be purchased at that time. Because only approximately two months are
left, the Procurement Department purchases the rest of the necessary equipment
from a vendor with manufacturing facilities located in eastern Europe, which as-
sures one-and-a-half month long delivery lead time from the date the order is re-
leased. This second kind of order will be named “buy-to-order” (BTO) order. It is
interesting to remark that in this specific furniture SC the decoupling point
(Hoekstra and Romme 1992) is set when the detailed store layout is issued. As a
matter of fact, before the release of final drawings and take-offs the material flow
is driven by forecasts, while it is driven by the actual quantity of furniture that is
needed after such a moment.
3.3 Case Study Methodology
The approach developed in collaboration with the case company’s management
can be summarised by the following four steps.
• SC organisation and purchasing process mapping. Data about orders placed
and deliveries completed were collected during a period of time of 21 months.
• Inventory management model. Based on the analysis of the criticalities of the
current process and the identification of all constraints and system variables, an
inventory management model was created to simulate the effects of different
purchasing and SC management strategies in order to optimise the operations
costs. One and a half year holding period is considered. The quantities of mate-
rial to be ordered from the Chinese suppliers are strictly related to the demand
forecast, which equals the projected store openings schedule multiplied by the
average unit quantity of furniture to be procured for the template store, which is
approximately 35 cubic meters. The material is assumed to be shipped via high-
cube forty-foot equivalent unit containers. Also, five cost components are con-

sidered, namely purchasing, order, transportation, inventory carrying, and addi-
tional orders and stock-out costs. (Silver et al. 1998). The purchasing costs rep-
resent the average prices for pieces of furniture charged by both the Chinese
and the eastern European suppliers. The order costs include the company’s ex-
penses for order issuing, insurance coverage, communication, and quality
check. The transportation costs are made up of both costs for shipping from the
suppliers to the centralised warehouse and expenses for moving the furniture
from the warehouse to retail store locations. Transportation costs include cus-
tom border expenses. Inventory carrying costs comprise human resource ex-
penses and overhead costs associated with occupancy, interest on working capi-
tal, and product obsolescence. Finally, additional orders and stock-out costs are
related to the expenditure for orders placed to the eastern European supplier,
that are required to fulfil the remainder material to integrate a store template
layout with detailed furniture, and to the costs for replacing, again from the
eastern European vendor, late Chinese deliveries. Detailed numerical values for
the different costs involved in the inventory management model are available
from the authors.
• Risk analysis. A risk analysis of the selected best SC arrangement was con-
ducted to assess the main factors impacting on the future viability of the strat-
egy to switch from global to near sourcing. A two-year time horizon, consistent
with the forward outlook time span of the company's business planning proc-
ess, is assumed. Moreover, the risk analysis is performed on a country level:
social, economic, and political determinants of uncertainty influencing sourcing
decisions (Zsidisin 2003) are considered and reflected by sources of economic,
inflation, monetary, and country risks. Such risks are investigated by compar-
ing the values of selected indicators of the sourcing countries.
• Result analysis. Results were analysed and interpreted.
3.4 As-is Scenario
The inventory management model was here used to simulate monthly orders is-
sued according to a lot-for-lot order policy (Boyer and Verma 2010) and a BTS
approach with 80% of a new store furniture sourced from China and the remaining
20% from eastern Europe.
The first column of Table 1 shows the total costs of the as-is scenario. The nu-
merical value is basically determined by two aspects. First, inaccurate orders,
based on the standard store template layout, lead to the procurement of pieces of
furniture that are then not used for equipping a store, thus increasing the inventory
level in the centralised warehouse. Also, the high store-specificity of the material
causing rapid obsolescence and the relevant quantity of safety stock necessary to
avoid potential stock-outs, due to the long Chinese shipping time, contribute to
raise the inventory holding costs.

Second, shipping costs from China have been growing during the last two years
due to increased fuel price (United Nations Conference on Trade and Develop-
ment 2010).
3.5 To-be Scenarios
Some alternative scenarios, respectively characterised by fixed period, economic
order quantity (EOQ), and Wagner-Within (W-W) inventory management policies
(Silver et al. 1998), were simulated and compared with the as-is scenario (Table
1).
Table 1 Total costs under different inventory policies
Inventory
management policy
Lot-for-
lot (as-is) Fixed period EOQ W-W
Average inventory
level [m3] 229 627 322 229
Max-min inventory
level [m3] 593 630 694 593
Total costs [€] 3,175,205 3,674,055 3,279,524 3,033,613
The fixed period policy reveals to be the most expensive one with the highest av-
erage level of inventory. The inventory level significantly decreases with an EOQ
policy, because of frequent orders, but this scenario brings an increase in total
costs compared to the as-is situation as well as the greatest difference between the
maximum and the minimum inventory level in the holding period. Out of the
simulations, the W-W approach results to be the most convenient. In fact, it pre-
sents both the lowest total cost and the lowest average inventory and max-min in-
ventory levels. However, the case company chose to keep the lot-for-lot policy be-
cause the W-W method is more time-consuming to apply and the current order
policy is just slightly more expensive than the W-W one while having the same
operational inventory performance.
Therefore, what significantly contributes to decrease costs is not the adopted
inventor management policy but more likely the way the SC is structured. In par-
ticular, it became interesting to study the case when furniture is completely or-
dered based on the detailed needs of a new planned store. This might happen only
if either the time required for the Engineering&Design Department to issue the de-
tailed material take-off is shortened or the supply lead time period is reduced to
meet the Engineering&Design Department timeline. However, it was impossible
for the case company to shorten the time required to issue the detailed layout, so
the first option was discarded.
A BTO-Eastern Europe scenario, implying sourcing from a continental nearer
supplier to reduce the lead time, was simulated. Table 2 compares the resulting SC

total costs versus the as-is situation showing that BTO is an appropriate strategy.
As a matter of fact, it allows total cost savings up to about 20%, with a relevant
contribution of the reduction in additional orders and stock-out expenses.
Table 2 Total costs by changing supply chain structure
As-is BTO-Eastern
Europe BTO-Eastern Europe
w/o Warehouse
Total costs [€] 3,175,205 2,549,848 2,287,627
Savings [€] - 625,357 887,578
The relatively short distance between the supplier’s manufacturing facilities and
the European retail stores allows to ship directly to the stores with no need for an
intermediate storage in the distribution warehouse. In addition, the E.U. location
allows to avoid customs duties and delays, and the high quality of the products by
the eastern European vendor requires little inspection. Therefore, the previous
BTO-Eastern Europe scenario was simulated with direct shipments. The associ-
ated results are presented in the last column of Table 2: the relevant cost savings
compared to the as-is scenario, due to decreased shipping costs and null inventory
carrying costs, make the BTO-Eastern Europe without Warehouse scenario the
most appropriate solution.
The case study highlights that near sourcing is attractive because it enables to
reduce transportation and inventory holding costs, which counterbalance the less
expensive price of goods charged by the global suppliers located in the Far East.
To be more precise, the actual advantage of near sourcing is given by its ability to
activate changes to the SC organisation, rather than by the lower cost per se. In
fact, no significant savings are estimated to be gained with near sourcing com-
pared to global sourcing in those scenarios that do not make structural changes to
the SC.
3.6 Risk Analysis
With the aim of understanding the robustness of the best solution against potential
future market changes and transitions, a two year risk analysis is performed. The
present work focuses on the indicators of economic, inflation, monetary, and
country risks reported in Table 3. Their numerical values were collected through
official sources, such as Eurostat and the Organisation for Economic Co-operation
and Development (OECD) (Eurostat 2010; OECD 2010), for both China and east-
ern Europe.

Table 3 Risk sources and indicators
Risk
source Indicator
Economy Gross domestic product growth rate
Labour cost index
Inflation Consumer price index
Production price index
Monetary Currency exchange rate
Country OECD Ranking
Based on the prospect indicators for the two geographical areas, the total yearly
sourcing costs under the as-is and the BTO-Eastern Europe without Warehouse
scenarios were quantitatively estimated (Table 4).
Table 4 Future yearly costs according to risk analysis
As-is BTO-Eastern Europe
w/o Warehouse
Year 1 Year 2 Year 1 Year 2
Total costs [€] 2,929,271 3,383,815 1,495,218 1,584,140
The total sourcing costs in the as-is scenario are increasing in the next two years
due to the growth of the purchasing and shipping expenses as a consequence of
rising Production price index (PPI) and Labour cost index (LCI). The total esti-
mated costs in the BTO-Eastern Europe without Warehouse scenario are still sig-
nificantly lower than in the as-is one and they are likely to remain steady because
of the moderate increase in PPI and LCI. Also, the currency risk in eastern Europe
is more moderate than the one induced by the forecasted re-appreciation of the
Chinese RMB against the euro in the near future. Thus, the strategy of switching
to the eastern European supplier and arranging direct delivery to stores seems to
be validated in the medium-term.
However, the assumptions and results of the risk analysis are strongly influ-
enced by the economic, financial, and social development in an extremely dy-
namic international context. Therefore, the viability of the suggested policy should
be periodically reviewed in order to check its consistency with the latest changes.
Also, sourcing areas that may emerge as possible alternatives to the current sup-
pliers should be taken into account.
The shorter SC lead time introduced by the near sourcing strategy provides the
case company with cost savings and enables it to make major changes to the pur-
chasing approach, so that a buy-to-stock SC can be transformed into a JIT system.
In other terms, the value of the near supplier is inherent with the fact that its
manufacturing facilities are located within regional boundaries, thus allowing for
short transportation delays and augmented flexibility. Such advantages offer

chances for SC reengineering which makes near suppliers be competitive against
low price global vendors.
4 Conclusion
The current dynamic SC environment characterised by continuously changing
economic, social, and political conditions has significantly reduced the potential of
global sourcing, especially when the lead time represents a crucial operational fac-
tor. In this context, near sourcing allows to implement SC strategies that are not
available with global sourcing, such as JIT and short time-to-market, thus contrib-
uting to optimise costs. These factors, together with lower transportation expenses,
greatly offset the more expensive product prices paid to near suppliers.
In this case study the near sourcing strategy triggered a SC reengineering effort
that proved to be effective. Therefore, the company’s management chose to im-
plement the BTO-Eastern Europe without Warehouse scenario for the purchasing
of store furniture.
The methodology proposed in the present work is intended to be a guideline for
SC professionals analysing alternatives to global sourcing. In particular, the dis-
cussed approach and case study may be interesting for those industries in search
for increased SC flexibility since the time variable is the most important competi-
tive factor. This is for example the case of electronic and high-tech sectors. Also,
industries that have recently approached near sourcing as a way to control the
costs associated with global strategies may find the proposed methodology benefi-
cial.
As a future research line, the conceived evaluation framework might be ex-
tended for application to different manufacturing and service sectors.
References
Allon G, Van Mieghem JA (2010) Global Dual Sourcing: Tailored Base-Surge Allocation to
Near- and Offshore Production. Manag Sci 56/1:110-124.
Berman B, Swani K (2010) Managing product safety of imported Chinese goods. Bus Horiz
53/1: 39-48.
Boyer K, Verma R (2010) Operations & Supply Chain Management for the 21st Century. Cen-
gage Learning, Mason, OH.
Cagliano AC, De Marco A, Rafele C, Volpe S (2011) Using system dynamics in warehouse
management: a fast-fashion case study. J of Manuf Technol Manag 22/2:171-188.
Cappellini M (2011) Incentivi e flessibilità, produrre in Occidente ritorna vantaggioso. Il Sole 24
Ore 6 June: 23.
Christopher M, Holweg M (2011) “Supply Chain 2.0”: managing supply chains in the era of tur-
bulence. Int J Phys Distrib & Logist Manag 41/1: 63-82.
Edgell J, Meister G E, Stamp N (2008) Global sourcing trends in 2008. Strateg Outsourcing: An
Int J 1/2:173-180.

Eurostat. http://epp.eurostat.ec.europa.eu/portal/page/portal/eurostat/home. Accessed 30 Novem-
ber 2010.
Hoekstra S, Romme J (1992) Integral Logistic Structures. Developing Customer-oriented Goods
Flow. Industrial Press, New York, NY.
Humphreys P, Mak KL, Yeung CM (1998) A just-in-time evaluation strategy for international
procurement. Supply Chain Manag: An Int J 3/4:175-186.
Lacity MC, Willcocks LP, Rottman JW (2008) Global outsourcing of back office services: les-
sons, trends, and enduring challenges. Strateg Outsourcing: An Int J 1/1:13-34.
Lampel J, Bhalla A (2008) Embracing realism and recognizing choice in IT offshoring initia-
tives. Bus Horiz 51/5:429-440.
Lowson RH (2001) Offshore Sourcing: An Optimal Operational Strategy. Bus Horiz 44/6:61-66.
Lynch DJ (2008) Transport costs could alter world trade. Usa Today 13 August.
http://www.usatoday.com/money/industries/manufacturing/2008-08-11-cargo-costs-
oil_N.htm. Accessed 21 September 2011.
Meyer T (2006) Nearshoring to Central and Eastern Europe. Dtsch Bank Res, E-conomics 58.
http://www.dbresearch.com/PROD/DBR_INTERNET_EN-
PROD//PROD0000000000201757.pdf. Accessed 21 September 2011.
OECD. http://www.oecd.org/. Accessed 30 November 2010.
Platts KW, Song N (2010) Overseas sourcing decisions-the total cost of sourcing from China.
Supply Chain Manag: An Int J 15/4:320-331.
Quintens L, Matthyssens P, Faes W (2005) Purchasing internationalisation on both sides of the
Atlantic. J Purch & Supply Manag 11/2-3: 57-71.
Rao MT (2004) Key issues for global IT sourcing: country and individual factors. Inf Syst
Manag 21/3: 16-21.
Shister N (2008) Executive Overview: Near-sourcing. World Trade Mag 3 January.
http://www.worldtrademag.com/Articles/Column/BNP_GUID_9-5-
2006_A_10000000000000226880. Accessed 5 July 2011.
Silver EA, Pyke DF, Peterson R (1998) Inventory Management and Production Planning and
Scheduling, 3rd ed. John Wiley & Sons.
Thelen ST, Honeycutt Jr ED, Murphy TP (2010) Service offshoring. Does perceived service
quality affect country-of-service origin preference? Manag Serv Qual 20/3:196-212.
Trent RJ, Monczka RM (2003) Understanding integrated global sourcing. Int J Phys Distrib &
Logist Manag 33/7: 607-629.
United Nations Conference on Trade and Development (2010) Review of Maritime Transport.
http://www.unctad.org/en/docs/rmt2010_en.pdf. Accessed 10 June 2011.
Weidenbaum M (2005) Outsourcing: Pros and cons. Bus Horiz 48/4:311-315.
Wilkinson B, Eberhardt M, McLaren J, Millington A (2005) Human resource barriers to partner-
ship sourcing in China. The Int J of Hum Resour Manag 16/10:1886-1900.
Zsidisin GA (2003) Managerial Perceptions of Supply Risk. J Supply Chain Manag 39/1:14-25.