Sourcing

 Sourcing is a set of business processes required to purchase goods and

services
 Sourcing is basically identifying and evaluating number of selected
suppliers, in the end when supplier is chosen it results in an
agreement or contract with each other, contract includes what is to
be procured and what are the terms agreed upon
 There are two types of sourcing strategies: - 1) Off-shoring
maintains ownership but moves the production facility off-shore ,
2) Out sourcing  hires an outside firm to perform operations
 Benefits of effective sourcing is that, if purchase orders are aggregated
then economies of scale can be achieved, lower cost, better design
collaboration, coordination, risk sharing, and lower price (scrutinizing
the market by increasing competition)
 Once intention has been made to outsource the process then starts
with firstly supplier assessment and scoring, supplier selection and
contract negotiation, design collaboration, procurement, sourcing
analysis
 Outsourcing is mostly achieved by competitive bidding processes
 Bidding is a form of auction in which bids are not revealed to other
bidders
 Two types of bidding: - 1) Open Competitive Bids  bids are opened
in full view to those who may want to view, 2) Closed Competitive
bids  bids are sealed and are only disclosed to authorized
personnel
 Auction is a system in which potential buyers place competitive bids,
there are some types of auctions: - 1) Sealed bid first price auction 
in this auction bidders place bid simultaneously and in a specified time
frame, bids are open one by one and contract given to the highest
bidder, 2) English auctions  product set at low price/base price and
then sold to the one having the highest bid, 3) Dutch auctions 
starts with a high price and then lowers down, 4) Second price
 auctions  in this all potential bidders submit a bid and bid is sold to
the highest bidder at a price of the second highest bid
 Contracts should be designed in a manner to avoid information
distortion
 Type of contracts: - 1) Contracts for product availability and supply
chain profits  a) Buy Back Contract, b) Revenue sharing contract, c)
Quantity flexibility contract  2) Contracts to Coordinate supply
chain costs, 3) Contract to increase agent effort, 4) Contracts to
induce performance improvements
 Contracts for product availability and supply chain profits aim is to
maximize profit by designing a contract that encourages the buyer to
buy more (supplier must keep in mind to share some of buyer’s
demand uncertainty)
 Double marginalization is for example if the retailer demand is
affected he has to adjust the price according to it, hence if it is not
selling this will lead the retailer to buy less from supplier and hence
supplier will be in loss, so he will sell it to retailer on a lower cost
 Buy back contract  is an agreement between supplier and retailer
that for a specific time frame he can return the unsold inventory at a
cost they both have mutually agreed upon, downside of it is increase
in supply chain costs and information distortion cause supply chain
reacts to retail orders rather than consumer demand
 Revenue sharing contracts  Retailer buys supplies from supplier at a
minimum price but in the condition that supplier will have his fair
share in the revenue, can lead to deduction in inventory holding cost
for retailer, information distortion can occur as same in buyback
contract
 Quantity Flexible Contracts allows buyer to vary order amount
within limits as demand visibility increases, lower level of information
distortion
 Contracts to Coordinate supply chain costs encourage buyer to buy
more quantity, taking into account supply chain cost of supplier’s end
(quantity discount contract)
 Contract to increase agent effort Contract include two part tariff
(manufacture extracts profit upfront as a franchise fee)and threshold
contracts (if sales exceed some percentage then an additional bonus
will be given if done, it increases information distortion)
 Contracts to induce performance improvements Performance
improvement from the supplier’s end.
 To outsource or not depends upon whether the third party provides
optimal amount of supply chain surplus with a small amount of risk,
can be done through capacity aggregation(aggregating demands
across multiple firms, economies of scale), inventory aggregation,
transportation aggregation etc
 Risks of third party are, process is broken (indicates that a firm does
not has control over its supply chain), reduced customer and supplier
contact, loss of internal capability and growth, leakage of sensitive
data, negative reputational impact
 Procurement process is when supplier sends product in response to
the order of buyer, Direct materials (PC for use) improve coordination
for direct materials, Indirect material (PC for automobile
manufacturing) lower transaction cost
 Direct materials can be classified into: - 1) Bulk Purchase items
focus should be on well-designed auctions, 2) Critical items  focus
should be on lead time as if they are available or not, 3) Strategic
items  look for suppliers who can assist in the design phase
 A firm should analyze its procurement spending and make a supplier
portfolio, assessment should be based on 1) aggregation of spending
and 2) supplier performance
 Cheaper but lower performance suppliers must be given the
responsibility to cater for steady demand, Expensive and high
 performing suppliers must be given the task to cater for the buffer
demand (in case of demand variability)
 Concept of E-Procurement is on the rise, limits the purchasing
experience etc
 Risks in Sourcing: - 1) Inability to meet the demand on time, 2)
Increase in procurement cost, 3) loss of intellectual properties
 Can be solved by using multiple sources (advised for products high in
demand as cost incurred for multiple sourcing is high), delays can be
dealt with carrying inventory (best for low value products) and
developing a backup source (advised for high value short time
products)