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Barriers to International Outsourcing in Sysco

The research paper relates to Sysco Corporation. The firm’s background information has been given with reference to the products that the firm deals in. A set of objectives for research paper are outlined. The core objective of the research paper was to conduct an analysis of the barriers that Sysco faces in its international outsourcing process. In conducting the research, descriptive design method was used. Interview method is used in the process of collecting data from the field. The respondents that were considered for the interview were specifically 12 Sysco Corporation employees. The interviews were conducted through face to face and telephone. The literature review section entailed an evaluation of barriers to international outsourcing. The major barriers identified included political, legal, cultural, economic and technological barriers. The political factors considered include political instability and changes in international regulations. An analysis of the economic barriers facing the firm was conducted with consideration on the rate of inflation and exchange rate fluctuation. The cultural barriers identified relate to differences in corporate culture and communication differences. In relation to the legal environment, barriers identified include increased protectionism and trade restrictions. The paper also analyzes the technological barriers and changes in behavior of the business partner in relation to supply chain management. Discriminant Function Analysis method is used in the process of analyzing the data collected. Finally, summary result of the research and a conclusion are given.

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Introduction

Background

Sysco Corporation deals in a wide variety of food products and services within the foodservice industry in the United States. The firm operates on an international scale with its headquarters located at Houston, Texas. Some of the products that the firm deals with include frozen meat, fruits, desserts, vegetables, fully prepared entrees, dry and canned foods, dairy products, imported specialties, fresh produce and beverage products. In addition to food products, Sysco Corporation also deals with a variety of non food items. These include disposable napkins, paper products, plates, cups and a variety of silverware and china tableware. The firm markets its products to both individual and institutional customers. The main institutional customers for Sysco Corporation include restaurants, nursing homes, educational institutions such as colleges and universities, industrial caterers, hotels, motels, hospitals and lodging establishments. The firm’s management team has formulated a very effective distributional strategy for its domestic and foreign marketing process. By June 2009, Sysco Corporation operated 186 distribution outlets with a total customer base of 400,000. As a result of its superior management, the firm has managed to become a global leader in selling, marketing and distributing food and non food products to different businesses and industries.

Currently, firms in different industries are integrating the concept of international outsourcing in their operation. Increment in competitive environment has been the major stimulus for organizations to outsource. Jacques (2006, p.19) defines outsourcing as a decision by firm to either make or buy the products it deals with. In relation to supply chain management Jacques (2006, p. 19) defines outsourcing as the process through which an outside company supplies products and services which were previously sourced internally. Outsourcing can either be onshore or offshore. Onshore outsourcing refers to sourcing for products and services from within the domestic market. On the other hand, offshore outsourcing or international outsourcing refers to hiring an external party to conduct part or the entire business functions in a country different from where its products or services will be consumed. In its operation, Sysco Corporation outsources the products it deals with from suppliers around the world. Most of Sysco Corporation suppliers are from its domestic market and from North America. The paper entails an analysis of the barriers to international outsourcing process faced by Sysco Corporation.

Specific objectives

The research paper is aimed at achieving a number of objectives which include the following:

  • To identify the major external barriers to international outsourcing in Sysco Corporation
  • To evaluate the impact of barriers to international outsourcing process to Sysco’s supply chain management.
  • To evaluate the various alternatives available to the management team of Sysco Corporation through which it can mitigate or eliminate international outsourcing barriers facing the firm.

Scope and assumptions

The research paper gives background information relating to Sysco Corporation by considering the products that the firm deals with. Descriptive design method was used in collecting data from Sysco’s employees. The methods used in collecting data through interview included use of telephone and face to face interview. Face to face interview was mainly used in collecting data from the firm’s executive management. The literature review section entails an evaluation of barriers to international outsourcing. The major barriers identified include political, legal, cultural, economic and technological barriers. The political factors considered include political instability and changes in international regulations. An analysis of economic barriers facing the firm is conducted with consideration of the rate of inflation and exchange rate fluctuation. The cultural barriers identified relate to differences in corporate culture and communication differences. In relation to legal environment, the barriers identified include increased protectionism and trade restrictions. The paper also analyzes the technological barriers in relation to supply chain management.

The research paper assumes that the respondents selected for interview are conversant with international outsourcing dynamics. In addition, the research also assumes that there is a high degree of reliability in the information given.

Method of the study

In conducting the research, descriptive research design was considered. This has been attained by conducting surveys on the various barriers to international outsourcing. Through descriptive research design, the various barriers to international outsourcing were identified and analyzed. Interview method was used in collecting data from the field. The interview was specifically conducted on Sysco Corporation’s employees as the main respondents. A total of 12 respondents were interviewed. A total of 6 questions key questions were used during the interview. The objective of selecting the firm’s employees as the sample from whom the interview was conducted was necessitated by the need to obtain specific information of Sysco Corporation. The following are the interview questions which were used in collecting the data.

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  • What external factors impair Sysco Corporation’s efficiency in its supply chain management?
  • Which are the political difficulties that Sysco face in executing international outsourcing?
  • How does the existence of differences in the legal environment between United States and North America limit Sysco in conducting its international outsourcing?
  • How has the changes in the technological environment affected Sysco’s international outsourcing process?
  • Which are the major cultural differences that limit the effectiveness of conducting international outsourcing?
  • Has Sysco Corporation successfully integrated supply chain management in its strategic management process?

Literature review

Supply Chain Management (SCM) is an important element that management of firms in different economic sector should consider integrating in their strategic management processes. Polychronakis and Li (2001, p, 2) defines supply chain as alignment between organizations to make products and services accessible in the market. In the 21st century, the business environment is characterized by being highly competitive due to increased rate of globalization. Globalization has culminated into an increment in the degree of competition faced by firms due to elimination of national borders through formation of trading blocs. In addition, the competitive environment has been worsened by increased growth in Information Communication Technology (Jacques, 2006, p. 47). To improve their competitiveness, firms in various industries are considering incorporating the concept of international outsourcing. However, there are various barriers that limit firms to conduct international outsourcing more effectively. These barriers are illustrated below.

Economic barriers

According to Jacques (2006, p. 6), firm’s conducting international outsourcing are faced with numerous economic barriers compared to firms conducting outsourcing in the domestic market. Some of the economic barriers that Sysco Corporation is faced in its international outsourcing process relate to potential turbulence of exchange rate and inflation rates, changes in taxation policies and restriction to profit repatriation.

By involving itself in international outsourcing from suppliers in North America and other countries, Sysco Corporation will be faced by a challenge of changes in inflation rate. According to Nowacki (2008, par, 1), North America is currently experiencing a high rate of inflation. This represents a major challenge to the firm in dealing with suppliers from North America. Increase in the rate of inflation has culminated into an increment in consumer prices. Nowacki (2008, par. 1) asserts that the shift in the rate of inflation has a negative impact on international outsourcing. This is due to the fact that the existing outsourcing contracts which the firm entered into with its North American suppliers during periods of low rate of inflation may not take into account the current rate of inflation. As a result, high rate of fluctuation in the rate of inflation in North America will hinder Sysco Corporation in conducting international outsourcing. According to Norwacki (2008, par. 4), inflation affects both the supplier and the buyer. Upward shift in the rate of inflation has a negative impact on the outsourcer. This is due to the fact that the buyer will be obligated to make payments to the supplying firm in relation to the cost incurred in the process of delivering the services. This will culminate into increased financial constraints for the firm through a budget overrun.

International outsourcing is also affected by fluctuations in exchange rates. There is a high probability of Sysco Corporation’s international outsourcing process being affected by fluctuations in currency. The volatile and fluctuating nature of currencies may result into a decline in the firm’s retained earnings. This is due to the fact that fluctuations in the rate of exchange between the domestic and foreign county may culminate into the firm incurring a high outsourcing cost. According to Zinnov Off-shoring Research (2010, Par. 1), companies conducting international outsourcing do not consider currency trends of their destination country. Zinnov Off-shoring Research (2009, par. 8) asserts that it is paramount for firms conducting international outsourcing to conduct an analysis of currency trend in selecting their destination country.

Political and legal barriers

Effective international outsourcing process is affected by various political barriers. According to Alexandrova (2006, p.14), some of political barriers that the firms conducting international outsourcing face include political instability, changes in international labor market regulations, international and regional conflicts, environmental laws, and regulations related to international business and trade. For instance, during the 2004 national elections in United States, the government introduced some legislatives which had a negative impact on international outsourcing. The Congress introduced a number of non-tariff barriers in relation to offshore outsourcing. Some of these barriers related to restriction on visas to some countries and information privacy laws. For example, the government may formulate legislation requiring the establishment of call center agents whose role will be to identify the particular country from where the suppliers are calling from. Such legislations may make it difficult for firms to conduct some offshore outsourcing activities. In addition, the foreign government of the firm’s business partner may introduce a taxation policy on off-shoring related dollars flowing into or out of the country.

The political environment also bars effective international outsourcing through various international labor market adjustments. According to Kaushik (2009, par. 1), Obama’s economic policies in relation to US industrial transformation will impact on international outsourcing.

Political instability resulting from existence of regional or international conflicts may have adverse effects on Sysco Corporation’s operation. This is due to the fact that the firm’s supply chain is disrupted. This may culminate into reduction in the firm’s performance since the firm’s products are not able to be accessed efficiently from the market. Alexandrova (2006, p. 16) asserts that most companies freeze their offshore outsourcing relationship with their foreign partners during periods of political instability.

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The legal environment also poses a barrier to Sysco Corporation in its international outsourcing process. This results from existence of legal differences between countries. In conducting international outsourcing, firms do not conduct a critical evaluation of the country’s legal environment (Alexandrova, 2001, p.14). This poses a potential threat to the firm in the event of selecting suppliers from where to outsource their suppliers from. Alexandrova (2001, p. 16) asserts that assuming the existence of differences in the legal environment between the domestic and the foreign country poses a barrier in conducting international outsourcing process efficiently. This is due to the fact that there is a potential liability that exists in the process of crafting the contract. For instance, the firm may lose its intellectual property rights or other critical interests. To address these barriers, Sysco Corporation should enter into a contract with business firms which conduct expert analysis on potential legal barriers to international outsourcing.

In addition, political environment create a barrier to international outsourcing due to implementation of various protectionism laws. For example, some countries have placed a quota on the volume of imports to enter the country. In addition, some countries have instituted restrictions in relation to food imports entering the country. This means that Sysco Corporation will experience a limit in obtaining supplies from its business partners in those countries.

Cultural and ethical barriers

In conducting international outsourcing, Sysco Corporation will be faced by intense cultural barriers. This will result in a complication of business processes for the firm. Kaushik (2009, par. 1) asserts that culture has been one of the major barriers in the process of conducting successful offshore outsourcing. Kaushik cites the existence of cultural differences across different countries as the major of cultural barrier in international outsourcing. Some of the cultural differences relate to communication challenges. Kaushik (2009, par. 6) argues that communication is paramount in international outsourcing processes. A clear understanding of business objectives between parties in the supply chain should be ensured. To ensure effective communication between parties, the management of Sysco Corporation should ensure that there is a clear understanding of the type of communication to be used in the contract with its suppliers.

To cope with cross-cultural communication challenges, management team of firms are increasingly formulating training programs aimed at bridging the existing cross-cultural communication gap. It is estimated that these training programs can result into an increment of the firm’s productivity with a margin of 26%.According to a research conducted by ACCENTURE, approximately two thirds of business executives interviewed from firms which have already integrated these training program revealed that they experienced communication difficulties in the process of conducting international outsourcing. On the other hand, three quarters of executives from firms which have not incorporated the training programs experienced miscommunication issues in their international outsourcing (Kaushik , 2009, par.4).

Sysco will also face a challenge in its international outsourcing process due to the existence of corporate culture differences between the firm and its foreign suppliers. For instance, different firms have adopted different management hierarchies which affect their supply chain. Kaushik (2009, par. 7) asserts that it is important for the management of a firm to have a clear understanding of its business partner’s working methods. According to Polychronakis and Li (2001, p.3) international outsourcing demands a collaborative supply chain management. This has a significant contribution towards ensuring that all the parties involved in the supply chain work together harmoniously. For a firm to attain this, it must incorporate a global perspective in its operation which is often challenging task. This is due to the fact that the firm’s employees have been trained to operate within the local context. Considering international outsourcing means that the management team of the firm will be forced to retrain its staff so as to incorporate a global perspective culture in the operation of the firm. According Schomer (2010, Para. 3) the American business culture does not place more emphasis on title and rank compared to Indian business culture. In addition, the decision making process in American firms does not take the top-down structure. This means that dealing with Indian suppliers will be more challenging for Sysco Corporation.

Efficiency of conducting international outsourcing with Indian firm’s will also be challenged by Indian firms’ cultural attitude towards deadlines and appointments. Schomer (2010, Para. 2) asserts that management personnel of American firms consider strict adherence to deadlines as a key element of business professionalism. On the other Indian business culture is more flexible in relation to time. The difference in attitude towards time between Americans and Indians may strain Sysco’s relationship with its suppliers. This may negatively affect the firm’s supply chain.

Technological barriers

Lieberman (2004, p. 2) asserts that the technological environment is affecting offshore outsourcing in the services sector. Due to technological advancement, data entry facilities are being relocated to countries with lower wage levels. For a firm to be successful in its international outsourcing, it is paramount for it to have the current technology in relation to supply chain management. In addition, the technology integrated in the organization must be compatible with that of its suppliers. This will ensure effective transfer of data between the firm and its suppliers. Considering the fact that technological environment is characterized by a high level of volatility, firms conducting international outsourcing have to update their supply chain management technologies from time to time. This results into an increment in the cost of international outsourcing hence straining the firm financially.

Change in behavior of the business partners

International outsourcing is characterized by a high degree of uncertainty. For instance, the international business partner may change their needs thus negatively impacting the contract. Alexandrova (2006, p.14) asserts that there might be limited chances of flexibility within the contract making it difficult to change the contract of the outsourced processes. In addition, the contracted vendor may become a potential competitor to the firm. According to Alexandrova (2006, p. 14), this mainly occurs in the event of the vendor becoming acquainted with technological and managerial skills necessary to venture his or her clients market.

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Data collection method and procedures

In collecting the data, primary method of data collection was used. This involved conducting interview on Sysco Corporation employees. The interview took into account a total of 12 employees. To ensure that the information collected from the respondents was comprehensive, 7 of the respondents considered for the in the interview were those who were directly involved with the firm’s international outsourcing process. To minimize the cost of the research in data collection, interviews on the lower level employees will be conducted through use of telephone interviews. The interview questions were well structured and edited for ease of understanding by the respondents. Face to face interviews was conducted on the firm’s executive management team. The decision to use employees as the major source of information was arrived so as to attain legitimacy of information in relation to Sysco’s international outsourcing process.

Data analysis plan

The information obtained from the research was analyzed to ensure that all the critical variables in relation to international outsourcing were incorporated in the research. Considering the fact that the information obtained from data collection was descriptive in nature, Discriminant Function Analysis (DFA) method was used in analyzing the data collected. This involved comparing the identified barriers to international outsourcing to determine which of the barriers identified discriminate most against the other (StatSoft Incorporation, 2006, par. 4). Through DFA method, it was possible to identify the barriers which have greatly hinder Sysco Corporation’s international outsourcing process. For instance, the firm’s management team was able understand financial implications of exchange rate fluctuations on the firm’s profit. The feedback from the interview questions was coded by assigning the same number to similar responses. This aided through simplification of the data interpretation.

Summary of the results

Findings of the research revealed that Sysco Corporation is faced with numerous barriers in its international outsourcing process. 10 of the respondents interviewed identified the external environment as the major source of barriers to international outsourcing. The barriers to Sysco’s Corporation international outsourcing process identified relate to the political, economic, social, technological and cultural environments. In relation to political and legal barriers, 7 of the respondents cited political instability, changes in the legal environment and international business and trade regulations as the major barriers. According to these respondents, political and legal barriers results into adverse effects in the firm’s supply chain. This is due to the fact that firms do not involve themselves in international outsourcing with business partners in countries characterized by legal and political instability. On the other hand, 7 of the respondents identified increased government protectionism through trade restrictions as a key hindrance to international outsourcing.

Of the 12 respondents, 9 of them cited inflation as the major economic hindrance to Sysco’s Corporation international outsourcing process. These respondents asserted that, Sysco Corporation is faced with a challenge of fluctuation in the rate of inflation especially in relation to the cost of contracting. For instance, over the past few years, North America has had a relatively moderate rate of inflation. However, this trend has been reversed due to the current global economic recession. As a result, the rate of inflation has been on an upward trend. This has culminated into an overall increment the cost of international outsourcing.

In addition to economic barriers, 6 six of the respondents identified fluctuation in the rate of exchange between the domestic and foreign country as a hindrance. Their response was that the exchange rate has the effect of increasing the cost involved international outsourcing. All the respondents unanimously identified corporate, cross-cultural differences and communication difficulties as major barriers to Sysco’s Corporation international outsourcing process.

Conclusion and recommendation

Over the past few years, firms in different economic sectors have been integrating international outsourcing in their operation. International outsourcing has been cited as an opportunity through which firm’s can increase their competitive advantage. This results from the fact that the business environment has witnessed a rampant increase. Through international outsourcing, firms are able to boost their supply chain. This is due to the fact that the firm increases the scope from where it obtains its supplies.

For Sysco Corporation to conduct its international outsourcing process more effectively, the firm’s management team should conduct analysis of the external environment. The analysis should be aimed at understanding the barriers that hinder international outsourcing. More consideration should be given to gaining understanding on the dynamics in the foreign country which will have a negative effect on the firm’s outsourcing process. The analysis of the foreign country dynamics should be done prior to the selection of the foreign business partner. To minimize the effects of these barriers, the management of the firm should formulate strategies aimed at eliminating some of the barriers. Some of these barriers which the firm’s management has the capacity to minimize relate to cultural barriers. To attain this, Sysco Corporation should formulate a cultural training program to cope with international cultural differences.

References

Alexandrova, M. (2001). International outsourcing: incentives, benefits and risks for the companies in SEE countries. Sofia: University of National and World Economy. Jacques, V. (2006). International outsourcing strategy and competiveness: study on current outsourcing trends; IT, business processes. New York: Editions Publibook. Web.

Kaushik, A. (2009).Cultural barriers to offshore outsourcing. Web.

Lieberman, J. (2004). Offshore outsourcing and America’s completive edge: losing out in the high technology research and development and services sector. Washington, D.C: United States Senate. Web.

Norwacki, P. (2010). Is inflation rate putting your economics at risk? Outsourcing Center. Web.

Polychronakis Y. & Li, X. (2001). Barriers to international supply chain collaboration for small Chinese costume jewelry suppliers. Salford: University of Salford. Web.

Schomer, K. (2010). Culture matters: 5 challenges India offshore team face in working with Americans. Sourcingmage.com. Web.

StatSoft Incorporation. (2006). Discriminant Function Analysis. Web.

Zinnov Off-shoring Research. (2010). How exchange rates affect outsourcing. SourcingMag.com. Web.

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