Global Sourcing, as summarized in Wikipedia, “is the practice of sourcing from the global market for goods and services across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product or service”.
Companies across the globe pursue strategic sourcing as part of their operations strategies aiming to drive down costs, achieve continuous improvements in processes and quality levels, and ensure the much-needed flexibility in rapidly changing complex and ambiguous world. Strategic sourcing can boost speed of innovation and new product development and can have a significant impact on financial leverage.
Sourcing strategy can take different forms and levels of engagement between the sourcing company and its suppliers, ranging from complete vertical integration to transactional market exchange.
We made a summary of a framework, designed by Jan van Mieghem and Gad Allon, which can be very instrumental in your decision-making process and more specifically when you considering an appropriate supply relationship for each activity in the value chain.
1. Identify the activity, its requirements and potential qualified suppliers
This step necessitates a clear specification of the scope of activities in the value chain, design, production, distribution, service, that is being considered. Clearly defining what we require from the activities is equally important. Requirements take various forms depending on activity under consideration.
2. Make-or-buy decision
Is outsourcing feasible?
Is outsourcing necessary?
Which activities are internal and which are not?
Will outsourcing be more desirable than insourcing?
Is outsourcing desirable given our value proposition?
Is outsourcing in line with strategic priorities and risks?
Are the internal financial and operational capabilities sufficient?
Is there a stable supply base providing availability of required resources?
Perform analysis from both qualitative and quantitative perspective.
A qualitative test of alignment with competitive priorities such as quality, time, variety
and a quantitative economic test that zooms in on capital expenditures and total cost of ownership.
political consequences, government regulations, potential non-market customer responses to outsourcing.
Start-up costs of the new location, training, quality control and other soft costs – traveling, working at odd hours.
Lead-time and service level.
3. Supply relationship management (SRM)
Can we contract and manage supplier and ongoing risks.
Defining, establishing and managing the bilateral relationship.
The final test is whether we can align incentives in the bilateral relationship.
Relationships with suppliers can take various forms, e.g. Arm’s Length, Cooperative, Integrated, etc.
At InfoSource we focus on establishing arm’s length relationship with our clients. We are pleased to serve companies looking for supply continuity and willing to engage in a long-term relationship based on openness and trust.
The benefit of outsourcing through arm’s length relationships or by using the market include:
- Operational and strategic focus on key competencies
Outsourcing some activities allows the firm to solely focus on those activities at which it excels.
- Cost and risk pooling efficiencies; sizing and location.
External specialists may have greater economies of scale and scope, they may also enjoy risk pooling by serving many other customers in market segments. When outsourcing is combined with off-shoring, additional cost efficiencies may accumulate.
- Operational and financial flexibility which relates to timing type and risk. Outsourcing reduces capital commitments, such as fixed assets, thereby liberating the balance sheets. If structured correctly, outsourcing allows capacity to scale up and down quickly and flexibly among products, thus mitigating demand risks.
- Access to the latest technologies and innovations.
Few companies have the scale and the resources to stay updated with all the latest technologies. Outsourcing can give access to proprietary technology or other intellectual property.
- Market competition enhances efficiency and incentives for improvement.
If there are several potential suppliers, the firm has choices and gains more insights into true costs. In contrast, insourcing creates an internal monopoly that may be reluctant to change. Thus, it may provide lower quality service and higher costs than those of external parties that must compete for business.
Please do not hesitate to share your comments and interest to contribute further to this topic. We would be happy to answer your specific questions and explore opportunities of working together.
Please give us a shout.