Introduction to sourcing
Definition of sourcing
Sourcing is the process of identifying, selecting and developing suppliers.
The definition of sourcing can be simple or much more complex, the simple definition is “the process involved in identifying potential suppliers, conducting negotiations with them to and then signing purchasing agreements with them to provide goods/or services that meet your company’s needs”
Sourcing generally refers to those decisions determining how components will be supplied for
production and which production units will serve which particular markets. Multinational firms have been pursuing integrated sourcing to a greater extent than before because such an operation allows them to exploit their competitive advantages (Kotabe and Murray, 1990). Sourcing can, next to the above, be defined as ‘the reorganization of tasks, functions and services of an organization, whereby the more effective managing of organizational and operational processes is the main issue (Huibers and Schut, 2006).
Huibers and Schut (2006) also state that ‘with sourcing, organizations can manage their
operational and organizational processes more effectively’. This can be done internally,
externally, national or international. Sourcing can be done by concentration of activities, by transferring the execution of services or processes to an external party or by the transferring business activities abroad. In other words sourcing can have many forms depending on the organization it is applied to.
Types of suppliers
- Suppliers of manufacturer brand: These kinds of suppliers are responsible for developing the merchandise and establishing an image for the brand. In some cases, the manufacturer will use its name as part of the brand name for a specific product.
- Suppliers of private-label brands: In this case retailer buyers develop specifications for the merchandise and then contract with a supplier to manufacture it. The retailer is given the mandate to promote the brand but not the manufacturer.
- Supplier of licensed brands: This applies whereby the owner of a well-known brand name (the licensor) contracts with licensee to develop, produce and sell the branded merchandise.
- Suppliers of generic products: This involves suppliers of unbranded, unadvertised merchandise found mainly in grocery and discount stores.
Three of the main sourcing options that can be applicable for organizations to enhance their competitive advantage are:
- Internal sourcing (in sourcing).
- Local sourcing
- Global sourcing is a term used to describe practice of sourcing from the global market for goods and services a cross geographical, political boundaries. Global sourcing often aim to exploit global efficiencies in the delivery of a product poor service. Some of these efficiencies include:
low cost, skilled lab our, low cost of raw material and other economic factors like tax or low trade tariffs.
Global sourcing is sourcing products and some times services irrespective of national
boundaries, For example it is particularly popular in European Economic countries in Europe and Asia. The rise of Chinese and Indian manufacturing capabilities has meant that sourcing from these countries has greatly increased in the past few years. This is because purchasing companies are seeking lower labor and production cost.
Single sourcing:
Single sourcing of an item means that the company adopts the practise of purchasing all its
requirements for an item or service from one supplier although a number of suppliers may have
the capability to supply. In sole sourcing, only one supplier supplies all the goods.
Advantages of single sourcing:
- Improved communication and understanding between supplier and buyer
- Supplier is able to respond positively to the buyer’s feedback on quality issues, engineering changes, design changes and suggestions that can reduce cost
- Elimination of supplier ‘switching’ costs
- Reduction in total cost of product due to bulk purchases
- Reduction in supplier communication faxes, telephone calls and paperwork
- Enhanced ability to implement just-in-time (JIT) procurement, since scheduling
- communication and planning permits more effective and efficient handling of inventory and orders
- Personal relationship at various levels between buyer and supplier can be established easily,
- making communications more effective
Disadvantages of single sourcing:
If a defect in the supply is noticed after the product is produced and dispatched to the buyer’s plant the cost of quality would be very high
A fire, strike or breakdown in the single source supplier’s plant can stop production in the
buyer’s plant
Less market intelligence and reduced flexibility, being committed to lean, single/sole-source
Research and development, technological capability and creativity
If the supplier is unable to share competitive pressure and reduce costs of his products concurrently the buyer will be at a competitive disadvantage
Constant pressure to improve the quality, delivery and price of a product may frustrate the
supplier and make him break the relationship
Multiple sourcing:
Multiple sourcing of item(s) means that the company adopts the practise of purchasing all its
requirements from various suppliers in the market. The objective of multiple sourcing is to
maximize benefit on prices and services. In situations of multiple sourcing, both buyers and
suppliers feel a high level of uncertainty and therefore there are multiple controls to ensure
successful transaction.
Advantages of multiple sourcing:
- It allows using various supplier’s creativity, ideas, innovation and newer materials
- It gives flexibility to the buyer to meet large quantities orders or sudden changes in schedules
- It allows the buyer to share the risk in uncertainty or crisis
- The buyer has a stronger negotiation position
- Insurance against just-in-case situation like fire, strike, poor quality delivery, breakdown of machines
- No extra tooling cost if the items purchased are standard
- With many suppliers holding stock, the buyer can reduce inventory levels
Disadvantages of multiple sourcing:
- Small order quantities sometimes decrease the supplier’s morale
- In case of non-standard part the tooling cost is adjusted in the price of the product
- More communication and paper work cost
- Weak buyer-supplier partnership
- More waste, scrap levels, rework, maintenance, delays, down-time, warranty claims,
- resulting from frequent set-ups and variation in supply from multiple suppliers raise the cost of quality.
Considerations of source selection
- Flexibility of the Supplier:
- The degree of service provision
- Effectiveness/efficiency of the supplier
- Reliability of the supplier
- Delivery capability
- Technical support by the supplier
- Supplier’s capacity
- Financial clout
- Integrity of the supplier
- SOURCES OF INFORMATION RELATING TO POTENTIAL SUPPLIERS ENCOMPASS:
- Catalogue: This is a booklet containing details of items for sale by the supplier. They contain valuable technical information and format of presentation is simple.
- Trade directories: These contain new product requirements, special/occasional requirements and emergency items.
- Yellow pages: Entail a classified telephone directory, often printed on yellow paper that lists subscribers by the business or service provided.
- Sales persons: They can provide useful service information regarding suppliers
- Exhibition: This is a public display of products/services and it offers a great opportunity to talk with a number of potential suppliers in the same place at the same time.
- Trade Journals: This is a periodical containing new developments, discussions etc concerning a trade or profession.
- Business advisers: Local business-support organisations, such as chambers of commerce or Enterprise Agencies often point out prospective suppliers to deal with.
- Professional peers: This entail informal exchange of information between buyers
- Information provided by prospective suppliers
- Internet search engines
- Websites
- Local press both printed and electronic
- Mobile marketing platform
- SUPPLIER DEVELOPMENT