||Jai Sri Gurudev||

SJC Institute of Technology

Supply Chain Management
Module 2 Questions and answers

1 Explain the benefits and role of sourcing in supply chain.

2 Explain in detail Make verses Buy process in Supply chain

Make verses Buy issue is a strategic in nature. Decision based on supply chain surplus and reduced risk.
What activities should be carried out by the firm and what activities should be outsourced. How to select
the Partners to carry out activities and what should be the nature of the relationship with those partners?
Should the relationship transactional in nature or should be a long-term partnership?
Make verses Buy decisions we analyze from the point of view of the Focal firm or nodal firm
which is at a strategic center of the supply chain. We classify all the supply chain activities as primary
activities and support activities. Primary Activities: Inbound logistics, operations, outbound logistics,
sales and services. Support activities: Procurement, Technology development, human resource
management and firm infrastructure management.

3 Explain how to indentify core process in sourcing.

The identification of core process is a crucial decision. The first step for a firm is to develop the
capability to distinguish between core activities and commodity activities. It has to keep certain
activities in-house for all outsourced critical activities. If this decision is driven by short term benefits,
than the long term business sustainability is endanger.

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 The first step for a firm is to develop the capability to distinguish between core activities and
commodity activities. Even among core activities, it has to keep certain activates in-house for all
outsourced activities; it has to maintain some knowledge so that it can manage an effective relationship
with its outsourcing partner.

• Two ways of identifying a firm’s core process are

1. The business process route
2. The Product Architecture Route

The business process route

For any firm 3 core and high-level business process include
1. customer relationship
2. Product innovation
3. supply chain management
• It is possible to un-bundle the three business process and a firm can afford to outsource two of these
business process.

• within the indemnified core business process firms can examine each of the activity and probably out
source those activities that are of the commodity type.

• A firm has to ensure that it has a relatively higher bargaining power within the chain

• A firm has to make sure that in-house business process give it enough strategic power in the chain and
do not allow other chain partners to dictate the terms of value : exchange in the chain

The Product Architecture Route

• In the product architecture approach the focus is on sub-systems and components and the Make or Buy
decisions are made at that level
• A product like a car be divided into sub-systems such as engine, chassis and transmission.
• The engine sub-system can be divided in to components such as power cylinder, fuel system and engine
electronics.
• In a product first the sub-system are classified as strategic and non- strategic
• A sub-system is strategic if it involves technologies that change rapidly, if it requires specialized skills
and technologies and if it can significantly impact the performance of the product on attributes that are
considered important by the customer.

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 • By keeping these strategic sub-systems internal, a firm can ensure that it can offer differentiated
products and can avoid being commoditized.

4 Explain Market verses Hierarchy

• Make versus Buy decision is also known as the market verses Hierarchy decision in economic
literature.
• if the firm decides to make the relevant component in-house, it may not have the necessary economies
of scale and might have to use internal hierarchy for coordination.
• In the hierarchical form, a firm has a greeter control over coordination but there may not be enough
motivation for the internal supplier to work on innovations to reduce cost and improve service over a
period of time.
• The cost involved in control and coordination of internal supply is termed as “agency costs”
• When a firm uses market mechanisms to procure the necessary inputs, it may be able to take advantage
of “Economies of scale” and also choose the supplier that supplies goods and services at lower prices.
• In this case supplier has enough motivation to innovate and the firm, as a buyer, has the flexibility of
changing the supplier.
• The costs incurred in the control and coordination of the external supplier are termed as “transaction
costs”
Now we look at each of 3 issues
1. Economies of scale
2. Agency costs
3. Transaction costs

Economies of scale
A vertically integrated firm produces only for its internal needs, while an external supplier firm can
aggregate demands of many potential buyers and, thereby, enjoy huge economies of scale can be
achieved in manufacturing or logistics activities.
There are 4 major sources of economies of scale.
1. Higher volume allows a firm to spread its fixed cost over large volume.
2. Higher volume allows a firm to choose more efficient technology
3. Polling of buffer capacities and inventories
4. Learning curve effects

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 Agency costs
• How does ensure that the interest of the IT Department and that of the marketing departments are
aligned, and how does one make sure that the IT department is putting its best effort and is not
slackening? This issue is known as the agency problem in economics literature.
• IT department is known as agency
• Marketing Department is known as the Principal
• The cost involved in control and coordination of internal supply is termed agency cost in economics
• If one decides to manufactures the necessary input within the firm, then the firm has to worry about
agency costs.
• It is quite common that managers and workers of internal supply units sometimes knowingly do not act
in the best interests of the firms.
• In-house divisions within a firm are usually treated as cost centers and are usually insulated from
competitive pressures as they have captive internal markets.
• Large firms have common overheads and joint costs, which are allocated to different units, so it is
usually difficult to measure individual division’s contribution to overall profitability.
• The absence of market competition along with problems involved in measuring divisional performance
make it difficult for the top management to evaluate the current performance of input supply operations
with respect to its best achievable performance.

Transaction costs
• There are costs involved in using market mechanisms, which can be avoided if those relevant activities
are brought inside the firm. These costs are known as transaction costs.
• The transition costs comprises the fallowing
1. Search and information costs
2. Bargaining and contracting costs
3. Policing and enforcement costs
4. Cost incurred because of loss of control
If additional costs due to poor economies of scale plus agency costs of internal control and coordination are
less than transaction costs of market exchange, the firm should settle for Make option.

5 Explain sourcing strategy in supply chain.

Firms buy a large number of components and services not all of them should be handled in same way.
Portfolio approach classifies items based on the importance of the item in terms of value of purchase and

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 associated supply risk in the supply market. Supply risk captures two dimensions: number of suppliers in
the market and the demand-supply gap in the supply market. 80-20 rule, that 20 per cent of the items
about 80 per cent of the value of purchase.

Routine products: The focus is on reducing the number of parts and the number of suppliers. The aim
is to reduce administrative and logistics complexity. The time saved here is used to focus on strategic
suppliers and bottleneck suppliers. The focus is on moving to system buying rather than component
buying. A large number of items and suppliers come in this quarter, which represents a non-critical, low-
valued supply

Leverage products: This quadrant consists of high-value, standard products. These items provide an
opportunity for leveraging buying power in low-supply risk situations. In these supply chain markets,
there are a large number of suppliers and switching costs are low. So firms should be aggressive in their
attempts to encourage competitive bidding in order to leverage their position. A firm can reduce the
number of suppliers and focus on operational-level integration so that apart from purchasing costs
inventory and administrative efforts can also be reduced.

Strategic products: This quadrant represents high-value products with high supply risks. This
quadrant usually accounts for less than 5 per cent of the items and for almost 40 per cent of purchase

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 value. Items in this quadrant are treated as strategic items, and a firm must work with towards
establishing collaborative, long-term relationships with suppliers in this quadrant. Firms must create
opportunities for mutual cost reduction by working together on all aspects, including product design.
Because fewer parts and suppliers are involved, firms can invest in building collaborative relationships.
The top management of firms should get actively involved in devising a strategy for this category of
items.
• Bottleneck products: These items represent relatively low value, but a firm is vulnerable on this front
because of the supply risk inherent in this market. Since a firm is likely to be buying relatively smaller
value, it is also unlikely to have much clout with suppliers. Here the focus is on securing the supply, and
a firm should actively keep looking at alternative sources of supply. If possible, the firm should also
look at substitutes that are from low-risk supply markets.

6 Explain two important alternative ways in which the exchange can be organized in Make verses
Buy Sourcing.
or
Explain Make verses Buy Continuum.
There are several alternative ways in witch the exchange can be organized. We discuss 2 important alternatives
1. Tapered Integration, where a firm both makes and buys a given input.
2. Collaborative Relationship, which could be a formal contractual relation or a long-term informal
relationship.

Tapered Integration
• Tapered integration represents a mixture of market and
vertical integration
• A firm makes part of the requirement in-house and procures the rest from the market
• Keeping part of the manufacturing in-house allows the firm to have a better understanding of the
industry cost structures
• Helps them in negotiating better deals with suppliers
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 • Firms are able to keep up the pressure on their internal supply groups to innovate and work on cost
reductions by showing them benchmark numbers from markets.
Firms can also keep the pressure on suppliers by saying that if they Do not improve the complete
manufacturing will be shifted in-house.
• Through at first glance it looks like as if tapered integration allows a firm the best of both worlds.
• If not managed properly, the firm might end up getting the worst of both worlds
• By distributing production between internal and external supply groups, firm may not have the
economies of scale at both places.
• The coordination and monitoring activities might increase significantly.

Collaborative Relationship
• In collaborative relationship, the supplier is an extension of the firm
• The firm treats its supplier as strategic partner and usually a supplier is assured of business for a
reasonably long period of time.
• The firm does not indulge in competitive bidding every year and does not change its supplier to get the
small price reduction offered by a competing supplier.
• Information is shared freely across firms, And the supplier is willing to invest in relationship-specific
assets.
• The supplier gets involved early at the product design stage and the price paid to the supplier is based on
the actual cost incurred.
• Major concern in collaborative relationships is to ensuring that the supplier keeps working on
innovations.
• Just like the internal supplier, the partner in a collaborative relationship is assured of business, and this
may result in compliancy on the part of the supplier.
• Firm should periodically bench mark partners costs with the market so as to ensure that the supplier
remains competitive.
• American and European automakers have realized the importance of collaborative relationships and
have been progressing in that direction.

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 7 Explain supplier selection and contract negotiation.
Or
Identify and explain the assessment factors that are to be considered while sourcing and assessing
the supplier.

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 8 How to create a world class supply source.

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9 Explain supplier development in supply chin

10 Explain the role of supplier Development in supply chain success.

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11 Explain worldwide Sourcing in supply chin

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