Managing Global Sourcing: Inventory Performance

39 Pages Posted: 5 Oct 2011 Last revised: 3 Jul 2013

See all articles by Nitish Jain

Nitish Jain

London Business School

Karan Girotra

Cornell Tech; Cornell SC Johnson College of Business

Serguei Netessine

The Wharton School, University of Pennsylvania

Date Written: July 03, 2013

Abstract

The use of global suppliers has increased considerably over the last three decades. Operations management theory establishes that global sourcing requires more units of inventory, but since these units are often procured at a lower cost from global suppliers the capital invested in inventory and the consequent financial burden may increase or decrease with global sourcing. This study provides the first rigorous firm-level empirical evidence that links the global sourcing practices of public U.S. firms and their inventory investments. 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 and link this information with quarterly financial data from the Compustat database. We provide stylized facts on the participation of dfferent firms and sectors in global trade. Using a simultaneous equation model, we find that an increase in global sourcing results in an increase in inventory investment. A 10% shift in sourcing from domestic to global suppliers increases the inventory investment by 8.8% for an average firm 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%. We illustrate the use of our estimates to identify the impact of changing global sourcing strategy on inventory investment and operational performance metrics.

Suggested Citation

Jain, Nitish and Girotra, Karan and Netessine, Serguei, Managing Global Sourcing: Inventory Performance (July 03, 2013). INSEAD Working Paper No. 2013/65/TOM. Available at SSRN: https://ssrn.com/abstract=1939029 or http://dx.doi.org/10.2139/ssrn.1939029

Nitish Jain (Contact Author)

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Karan Girotra

Cornell Tech ( email )

111 8th Avenue #302
New York, NY 10011
United States

HOME PAGE: http://www.girotra.com

Cornell SC Johnson College of Business ( email )

Ithaca, NY 14850
United States

HOME PAGE: http://www.girotra.com

Serguei Netessine

The Wharton School, University of Pennsylvania ( email )

3730 Walnut Street
Philadelphia, PA 19104-6367
United States
(215) 573 3571 (Phone)

HOME PAGE: http://www.netessine.com

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