sourcing module 5

Key Drivers for Decisions

Limited time, attention and resource as an organization grows

Decisions can be changed..

but it is not easy to implement

Making or Buying have similar considerations

Quality, Quantity, Delivery, Price/Cost, Service, Risk, Competitive Advantage, Customer Satisfaction

Economic: Making

Cheaper

Competitive: Making

Competitor acquires ownership of a key source of raw materials

Political: Making

Government requires a certain amount of processing be done within national boundaries

Social: Making

High unemployment area and economic development zone

Environmental: Making

Risks to organize reputation

Additional Reasons for Making

No supplier is interested, lower cost, reduce risk, control quality, forecasts shortage or rising prices

Buying: Economic

cheaper

Buying: Competitive

use a preferred strategic supplier

Buying: Political

Government contracts require a certain percentage of woman, veteran, minority owned spend

Buying: Social

Workforce willingness to do work

Buying: Environmental

Natural resources not available, disposal considerations

Additional Reasons for Buying

Lack of technical experience, insufficient production capacity, flexibility, may open markets, market faster, improve customer service

The Gray Zone in Make or Buy

There is a range of options between 100% Make or 100% Buy

• middle ground may be useful for testing and learning wihout making a full commitment

• Creative, win-win solutions

Automotive Example

Supplier takes on design responsibilities from the car manufacturer

Maintenance Example

Servicing done by the purchaser of the equipment

Subcontracting

Special class of the make/buy spectrum

• common in military and construction procurement

• prime/general contractors bid out part of the work to other contractors

Subtracting is used when work

Is difficult to define, takes a long period of time, is anticipated to be extremely costly

Aerospace subcontracting

Structural (wings and landing gear)

Avionics (radar systems)

Subcontracting is complex and requires a high degree of control

Cost, schedule, technical, configuration

Conceptual Framework Developed by Mishra & Sinha (insourcing, outsourcing, offshoring)

Focused on global technology projects. Classified by firm and country boundary

Domestic-Insourcing

Carried out internally, within country boundary, could be with a different part of the firmor in a different city

Domestic-Outsourcing

Carried out by a different firm, located in the same country, could be in the same or different city

Offshore-Insourcing

Carried out internally, by a division/unit located in a different country

Examples: Target India, Microsoft Shanghai

Offshore-Outsourcing

Carried out by a different firm and located in a different country

Ex: Foxconn for iPhones, other International vendors for manufacturing

Reversal of an original decision to make or buy

Why? Things change

Which products or services are we currently buying that we should be doing in-house?

Potential Reaction: Insourcing

Which products and services that we are currently doing in-house should we be buying from suppliers?

Potential Reaction: Outsourcing

The Outsourcing Matrix

• Current State

• Future State

• Q1 and Q4 are good

• Action needed in Q2 and Q3

Reasons to Insource: The necessity argument

We would prefer not to produce this product or service in-house, but we really do not have any other options

Reasons to Insource: The opportunity argument

We would prefer to do this in-house because it would give us a strategic competitive advantage

The Necessity Argument

Anything that threatens assurance of supply

Ex: A sudden massive increase in price. The purchase of a sole source by a competitor. Political events and regulatory changes

Transition from existing supplier is risky

Reasons to Outsource: The necessity argument

We would prefer not to outsource this product or service, but we really do not have any other options

Reasons to Outsource: The opportunity argument

We would prefer to outsource this product or service because it would give us a strategic competitive advantage

Deciding what might be outsourced

Determine strategic, critical and noncore activities

Confirm scope of outsourcing: an entire function or some elements of an activity

Process: Deciding what might be outsourced

1. Identify a function/activity as a potential outsourcing target

2. Break into its components

3. Determine which are strategic or critical and should remain in-house

4. Determine which can be outsourced

Domestic outsource=

Onshoring

International outsource =

Offshoring

Examples of deciding what might be outsourced

Transportation services from school districts, payroll and benefits administration, travel departments

Service Triads

An emerging area of outsourcing management

Features of service triads

Buyer contracts with a supplier. Supplier delivers services to the buyers customer

Examples of Service Triads

Outsourcing help desk services and repair or installation of customer equipment

Use of performance-based contracts in Service Triads

Focus on the outcome, flexibility on how the service is delivered, customer experience considerations

Risks of Outsourcing

LOSS OF CONTROL, exposure to supplier risks, costs, attention required by senior management, concerns with long-term flexibility

Implications of Outsourcing Supply

Direct or core spend more critical to the organizational mission (more likely to be retained)

Procurement of indirect or noncore spend (more likely to be outsourced)

Three types of procurement outsourcing contracts

• Procure to pay (P2P)

• Source to contract (S2C)

• Source to pay (S2P)

Procure-to-Pay (P2P)

Day to day purchasing, performance management, accounts payable

Source to contract (S2C)

Strategic activities and sourcing, spend analysis, demand and supplier management

Source-to-pay (S2P)

End-to-end service, includes all services in P2P and S2P

Outsourcing serve providers may have special capabilities

Market expertise, efficient and effective processes, state-of-the-art procurement technologies, cost advantages through scale and purchasing volumes.

Three reasons for outsourcing logistics activities

Improved Service

Reduced Costs

Increased ability to focus on core competencies

Organizations can either outsource

Entire logistics function and selected activities to a third-party logistics service (3PL) provider

The most frequently outsourced logistics activities are transactional, operational, and repetitive

Transportation, Warehousing, Freight forwarding

Supply’s role in insourcing and outsourcing

Provide a comprehensive competitive process, identify opportunities for in/outsourcing, aid in selection of sources, identify potential relationship issues, develop and negotiate contract, monitor and manage supplier relaitonship