Wednesday, October 5, 2011

Managing Global Sourcing: Inventory Performance
INSEAD Working Paper 2011/103/TOM

The shift towards sourcing products from global suppliers has been a key economic trend over the last three decades. A vast body of modeling literature has illustrated the trade-off between the cost advantage of global suppliers and the operational inefficiencies of global sourcing. However, there is a significant unresolved debate around the actual overall impact of global sourcing. Further, there are widely varying prescriptions and practices for diversifying global sourcing amongst suppliers. This study provides the first rigorous firm-level empirical evidence to help resolve these debates by linking the global sourcing practices of public U.S. firms and their inventory performance. We process bill of lading manifests (customs forms) to extract information on over half a million sea shipments from global suppliers to U.S. public firms. We link this information with quarterly financial data from the Compustat database. Using a simultaneous equation model, we find that, although global sourcing firms source inventory at a lower cost, this advantage is dominated by the much larger inventory amounts they must hold, so the overall inventory investment increases. A one-standard-deviation increase in the fraction sourced globally increases inventory investment by 23% in our sample. We also find that increasing the number of suppliers can mitigate this increase in inventory investment: for example, going from single to dual sourcing reduces inventory investment by about 11%. Our study provides rigorous empirical evidence on the operational impacts of global sourcing and provides actionable guidance for managing global sourcing.