Internal integration as a pre-condition for external integration in global sourcing: A social capital perspective

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Abstract

The purpose of this study is to explore the link between integration and global sourcing success in international operations and by doing so, to clarify the ambiguous picture that prevails in the existing literature. Specifically, this quantitative study aims at identifying the role of the buying companies’ internal and external integration with suppliers using a social capital lens. Data were collected from the central purchasing department of a multinational automotive OEM located in Germany. A sample of 82 purchasers was surveyed about their assessment of global sourcing projects, focusing on internal cross-functional integration, external supplier integration and project success. The data were analyzed with structural equation modeling procedures, using SmartPLS. The findings indicate that internal integration is a precondition for external integration with suppliers, which accordingly has a strong positive influence on global sourcing success. Surprisingly, the direct relationship between internal and external integration was not significant, indicating a mediating role of social capital within this relationship. The theoretical originality lies in the use of the social capital theory and its three dimensions: cognitive, structural and relational capital for both internal and external integration, and in the connection between integration and global sourcing success. From a practical perspective, it can be recommended that managers distinguish between an internal and an external perspective. Internally, the focus should lie on the clear communication of common goals and norms, whereas externally, the definition of mutual contact points between organizations is of higher importance.

Introduction

Following the idea of lower factor costs in certain supply markets, there seems to be a strong consensus, in particular among practitioners, that international sourcing is either inevitable and/or beneficial for firms (Kotabe and Mudambi, 2009, Nassimbeni, 2006, Schiele et al., 2011a, Steinle and Schiele, 2008). Global sourcing has been called “an automatic expectation to respond to competition” (Carter et al., 2008, p. 225). However, previous findings concerning the results of global sourcing initiatives are somewhat contradictory; they show effects that range from negative to neutral (Kotabe and Omura, 1989, Murray et al., 1995, Schiele et al., 2011a) to 20% savings (Petersen et al., 2000, Trent and Monczka, 2003b, Weber et al., 2010). Some scholars argue that global sourcing is primarily a means of generating short-term cost advantages on a unit price level (Petersen et al., 2000, Schiele et al., 2011a), omitting a longer-term total cost perspective (Holweg et al., 2011, Murray, 2001, Trent and Monczka, 2003b).

It has been argued that the success of global sourcing is based on the “worldwide integration of engineering, operations, and procurement centers within the upstream portion of a firm׳s supply chain” (Trent and Monczka, 2003b, p. 608). Thus, organizations face the challenge of integrating their internal functions with the entire supply chain (Golini and Kalchschmidt, 2011, Pagell, 2004). Apart from internal integration, recent research has investigated the link between external supplier integration and performance; the results suggest a positive effect of supplier integration on the buying firm׳s performance (Golini and Kalchschmidt, 2011, Lawson et al., 2008, Leana and Pil, 2006, Villena et al., 2011, Zhao et al., 2011) as well as a positive effect in the global sourcing context (Zhao et al., 2011).

Dyadic success factors for global sourcing, such as external integration between companies, have been widely researched, e.g., under a transaction cost economics view (Kotabe, 1994, Murray, 2001, Murray et al., 1995, Schneider et al., 2013) or the resource-based view (Espino-Rodríguez and Padrón-Robaina, 2006). This research has employed case studies (Forza, 2009), surveys (Frohlich and Westbrook, 2001) and simulations. However, despite a call for research from various scholars (Petersen et al., 2000, Trent and Monczka, 2003b, Weber et al., 2010), the internal prerequisites for a firm׳s global sourcing success have been largely under-researched (Hartmann et al., 2008), although the importance of the integration of various functions within the firm for knowledge transfer and cooperation, e.g., for new product development (Kahn, 1996), make-or-buy decisions (Moses and Ahlstroem, 2009), and the general performance of the firm (Maltz and Kohli, 1996) has been shown.

Previous studies have also explored the interplay of internal and external integration in contexts such as product development (Koufteros et al., 2005) and general corporate performance outcomes (Droge et al., 2004). The results of these studies suggest that there may be a positive link between the two types of integration. However, it has not yet been shown how the joint effects of internal and external integration influence global sourcing success. Based on the prevailing literature, it cannot be stated a priori that internal and external integration also contribute to global sourcing success because global sourcing often incorporates special needs and particular firm characteristics (Trent and Monczka, 2003b, Trent and Monczka, 2005).

This research paper aims to demonstrate that global sourcing is more than simply a set of tools designed to provide short-term cost savings. Specifically, the influence of intensified integration efforts is of interest. At the core of this research is the question of whether a high level of internal cross-functional integration contributes to a higher level of external integration (Koufteros et al., 2005) in a global sourcing context. Consequently, this work explores whether internal and external integration can serve as antecedents for successful global sourcing.

Because integration usually involves various elements of social interaction (Rabbiosi and Santangelo, 2013) and in line with prior research on integration in supply chain management, social capital theory has been chosen as the theoretical framework of the present research (Krause et al., 2007, Villena et al., 2011, Zhang and Huo, 2013). This leads, finally, to the main research question: Are internal integration of the functions within the buying firm and the accumulation of social capital prerequisites for external supplier integration, ultimately leading to increased global sourcing success?

The paper is structured as follows. After a brief literature review, our hypotheses regarding the relationship between social capital and internal and external integration, as well as the role of integration in the success of global sourcing, are presented. The chosen method of empirical analysis, which involves a sample of 82 global sourcing purchasing projects, is explained, and the results of our survey are discussed. The paper concludes with a discussion of the limitations of the research setting and some suggestions for further research.

Section snippets

Global sourcing and the internal – external integration link

Since the 1990s, global business transactions have been growing considerably faster than domestic economies (Bowersox and Calantone, 1998), and multinational business has received increasing attention (Schiele et al., 2011a). The clear focus for firms on traditional western purchasing markets has been shown to lie in the cost-saving aspects of global sourcing (Alguire et al., 1994, Monczka and Giunipero, 1985, Spekman, 1991). While many terms, some of which have been precisely defined and some

Data collection

The aim of the paper is to investigate internal and external supply chain integration and its links to global sourcing performance. For the research at hand, a group of purchasers from the central purchasing department of a multinational automotive original equipment manufacturer (OEM) located in Germany were surveyed. By pursuing this research approach, we were able to benefit from the experience of purchasers who operate under comparable conditions in diverse industries.

A single-firm

Findings

Predictive validity within the model is medium to high. Approximately half of the variance in relational capital within the firm (45.6%) and in relational capital with the supplier (52.5%) can be explained by cognitive and structural capital. The existence of relational capital accounts for 38.9% of internal integration and for 59.4% of external integration, and 20% of global sourcing project success is explained by external integration with the supplier. All significant estimates have high

Discussion

The accumulation of cognitive and structural capital within an organization has been shown to facilitate the build-up of relational capital (Carey et al., 2011). Thus, the results of Tsai and Ghoshal (1998) as well as those of Carey et al. (2011) concerning the relationships between the social capital dimensions have been confirmed. Additionally, the study presents empirical evidence for the existence of a positive relationship between cross-functional integration and the build-up of social

Implications for managers

In the previous section, the theoretical implications of our findings were discussed. However, the results of the study also have implications for management practice. Because social capital accumulation and integration have been shown to be beneficial for global sourcing success, managers should facilitate integrative efforts (Pagell, 2004, Trent and Monczka, 2003b, Zhao et al., 2011). In contrast, when recommending procedures for increased global sourcing success, it is important to

Conclusion

Based on the results of our survey, we conclude that internal cross-functional integration can be seen as a precondition for external integration with suppliers and global sourcing success. Surprisingly, the direct relationship between internal and external integration was not significant, indicating a mediating role of the three dimensions of social capital within this relationship. This finding emphasizes the importance of social capital within the firm as a facilitator for the development of

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