SOURCING

Key Consideration When Sourcing

Industry-Based Sourcing
Without the need for raw materials to feed production, the sourcing team of
company X is spending more time managing what would be traditionally considered
indirect sourcing aspects such as operating, maintenance, and support costs: ‘the
business of doing business as it were. 

Company X belongs to which of the below-mentioned industries? 

A dairy plant

An autombile manufacturer

A blogging website 

✓ Correct
Feedback:
With the rapid evolution of the global marketplace websites which are typically more
geared toward service based products would be spending more time on indirect
sourcing

A large format retail store

Direct vs Indirect Sourcing
Match the following - 
i. High processing cost relative to the value of the transaction
ii. Forms part of cost of goods sold
iii. Any delay in sourcing will lead to a delay in production 
iv. Relatively low number of transactions
1- Direct sourcing
2-Indirect sourcing
 

Direct Sourcing: i, iii

Indirect Sourcing: ii, iv

Direct Sourcing  ii, iii, iv

Indirect sourcing  i
 
✓ Correct
Feedback:
 The options  have been matched correctly. 

i) Processing cost & number of transactions - High processing cost (relative to price
of items sourced) for indirect materials due to higher number of transactions.
ii) Accounting: Direct sourcing forms the part of cost of goods sold while indirect
sourcing forms part of selling & general expenses 
iii) Impact on production: Any delay in arrival of direct material is going to affect
production adversely. On the other hand, for an indirect material, it has a lesser
impact. 

iv) Number of transactions is low for direct materials and high for indirect materials 

Direct sourcing i,ii, iv;

Indirect sourcing iii
 
Outsourcing
Soul Foods sells vegan cheese locally. The vegan cheese market is extremely niche
with a high demand, and hence, Soul Foods is growing rapidly. So far, the company
has been making 100 kgs of vegan cheese at their in-house facility. They are looking
to cater to a demand for an additional 20 kgs. According to you, should they
outsource the additional production or manage it in-house?

Consider the options below and select the most appropriate strategy.

Soul Foods continue making the vegan cheese in house by incentivising

labor to work overtime for 30 days

✓ Correct
Feedback:
It is best to manage additional 20% capacity using existing infrastructure as
compared to the alternative options 

Outsource it to Vendor A where the quality risk would increase by 15%

Outsource it to Vendor B where they take a hit of 18% on profits

✕ Incorrect
Feedback:
Taking a hit on profits may not be favourable

Outsource it to Vendor C where they are able to earn better profits (than
inhouse), however, C refuses to sign a NDA