Supply Chain Management

Third Edition
Nada R. Sanders

Chapter #6

Sourcing
Learning Objectives
• Define sourcing, and explain the differences between purchasing, strategic
sourcing, and supply management.
• Explain the impact of the sourcing function on the organization and the
supply chain.
• Describe the sourcing process.
• Explain characteristics of different types of sourcing engagements.
• Explain how to measure sourcing performance.

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What Is Sourcing?
• Purchasing, Sourcing, and Supply Management
• Evolution of the Sourcing Function
• Commercial versus Consumer Sourcing
• Impact on the Organization and the Supply Chain

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Purchasing, Sourcing, and Supply Management
• Sourcing is the business function responsible for all activities and processes
required to purchase goods and services from suppliers
• Purchasing is a term that defines the process of buying goods and services
o It is a narrow functional activity with duties that include supplier identification and
selection, buying, negotiating contracts, and measuring supplier performance
• Strategic sourcing considers sourcing opportunities that will solve greater
problems for the buying firm and give it a competitive advantage

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Evolution of the Sourcing Function
• Historically purchasing was regarded primarily as a clerical activity
• During World War II, the ability to acquire raw materials when needed
became critical
o As a result, sourcing slowly moved from being a mere buying function to one
responsible for cultivating suppliers
• Technological developments in the early part of the 21st century created
high expectations for supply chain integration, lower transaction costs, and
faster response times
o Due in part to the Internet and B2B
• The role of the sourcing function within the organization had become
elevated, moving to the highest ranks of the organization

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Commercial versus Consumer Sourcing
• Commercial sourcing is very different from personal buying
• One difference relates to the number of buyers versus suppliers
• In commercial buying the volumes purchased are on a much larger scale,
and organizations typically have very specialized purchasing needs
• The primary function of commercial buying is acquiring the right materials
and services, and making sure they are available to all parts of the
organization in the right quantities, at the right price, at the right time

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Impact on the Organization and the Supply Chain
• Operational impact: The operational performance of an organization and its
supply chain is dependent on an efficient and effective sourcing function
• Financial impact: Companies spend large sums of money on sourcing goods from
their suppliers
o The savings that can result from proper management of this function can have a huge
impact on the organization
• Strategic impact: Sourcing must find suppliers that support the company’s
competitive priorities
• Risk mitigation: Must minimize risks of supply disruptions and erosion of image
that can result from improper sourcing selection
• Information impact: Sourcing is continually gathering information on availability
of suppliers and goods, and prices, as well as new products and technology
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The Sourcing Function
• The Sourcing Process
• Cost versus Price
• Bidding or Negotiation?

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The Sourcing Process
• The sourcing function is responsible for every aspect of acquiring goods and
services
• The purchasing process begins when a purchase need within the organization is
identified and clearly specified
• Supplier selection is an important part of the sourcing function
o Request for quotation (RFQ)
o Request for proposal (RFP)
o Request or invitation for bit (RFB)
• The sourcing function must act as the primary contact with suppliers
• Sourcing personnel are responsible for understanding a range of material
requirements and whether they can meet organizational needs

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Cost versus Price
•

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Bidding or Negotiation?
• Another important role of the sourcing function is determining how to
award buying contracts
• Competitive bidding has the objective of awarding the business to the
most qualified bidder
o Best for purchasing standard items that are a commodity and that have standard
specifications
• Negotiation is a communication process between two parties that
attempts to reach a mutual agreement
o Best when it is important to work with suppliers in product development

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Criteria for Using Competitive Bidding versus Negotiation
• Competitive bidding
o Performance criteria and specifications can be clearly defined
o Volume purchased is high
o Products being purchased are standardized
o Many qualified suppliers exist in the marketplace
o Time is available for bid evaluation
• Negotiation
o Performance criteria and specifications cannot be clearly defined
o Many criteria exist for supplier selection (e.g., cost, quality, delivery, and service)
o Product being purchased is new or technically complex
o Few qualified suppliers exist in the marketplace
o Suppliers customize the product to buyer

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Sourcing and SCM
• Functional versus Innovative Products
• Single versus Multiple Sourcing
• Domestic versus Global Sourcing
• Outsourcing
• Electronic Auctions (E-Auctions)

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Functional versus Innovative Products
• Supply chains have uncertainty on both the demand and supply side
• Demand uncertainty occurs when product demand is unstable and difficult
to predict
• Supply uncertainty occurs when there is uncertainty regarding sources of
supply and their capabilities
• Products can be classified as either primarily functional or primarily
innovative
o Functional products are those that satisfy basic functions or needs
o Innovative products are purchased for other reasons, such as innovation or status

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Functional versus Innovative Products Continued
• There are also uncertainties on the sourcing side
• The supply side of the supply chain can be classified as either a stable or an
evolving supply process
o A stable supply process is where sources of supply are well established,
manufacturing processes used are mature, and the underlying technology is stable
o An evolving supply process is where sources of supply are rapidly changing, the
manufacturing process is in an early stage, and the underlying technology is quickly
evolving

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Types of Supply Chains
• Efficiency-focused supply chains have both low demand and supply uncertainty
and are easiest to manage
o Highly predictable with low margins
• Responsive supply chains are used for innovative products that have a stable
supply base
o Mass-customization strategies such as postponement are effective here
• Risk-hedging supply chains are those with high uncertainty on the supply side
o These supply chains typically rely on higher inventory safety stocks
• Agile supply chains are used in cases of both high demand and supply uncertainty
o These are the most difficult to manage

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• Traditionally companies held the view that multiple sources of supply were
best to increase cost competition and ensure supply security
• However, the notion of single sourcing is becoming the acceptable norm
• Single sourcing has a number of benefits
o Consolidating purchasing power
o Less natural variation
o Lower freight costs
o Easier scheduling
• There are some risks
o May use all of their capacity
o Highly vulnerable if there are disruptions

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Domestic versus Global Sourcing
• Another challenge to consider is whether to use domestic or global
sourcing
o Sourcing from another country is called offshoring
• Global sourcing has been on the rise
o Mainly due to cheap labor
• Rising fuel prices may offset the labor savings
o Bringing production back is called re-shoring
• Global sourcing requires work groups of individuals from different
companies, and different cultures and languages to work together
o This is known as virtual teaming

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Outsourcing
• An important sourcing decision is whether to “outsource” certain aspects
of the sourcing function
• Outsourcing involves choosing a third party to perform a task, function, or
process to incur business benefits
o Not necessarily offshoring
• Outsourcing is big business
• Two key dimensions that help define outsourcing are the scope and
criticality of the outsourced task
o Scope is the degree of responsibility assigned to the supplier
o Criticality is the importance of the outsourced activities or tasks to the organization

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Electronic Auctions (E-Auctions)
• E-auctions are the use of Internet technology to conduct auctions as a means of
selecting suppliers and determining aspects of the purchase contract
• There are many benefits to using e-auctions
o Market transparency
o Decreased error rate
o Simplified comparison of sources of supply
o Increased market reach
• There are also potential problems
o Suppliers can bid unrealistically low prices during the e-auction process
o The inclusion of suppliers in the e-auction who do not actually plan on participating
o Interrupting a good supplier relationship

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Types of E-auctions
• In an open auction, suppliers can select the items they want to place offers
on, see the most competitive offers from other suppliers, and enter as
many offers as they want
• In a sealed bid auction, sellers have a certain amount of time to submit one
best and final bid
• In a reverse auction, sellers place decreasing bids on a set of goods or
services and follow a specified set of rules that governs the auction

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E-auction Criteria
1. The specification for goods or services needs to be well defined
2. There must be a competitive market in place and a sufficient number of
qualified suppliers
3. There must be a clear understanding of market standards to set
appropriate expectations
4. The buyer must believe the cost of the e-auction is justified by the savings
in price
5. Clear rules for running the e-auction are specified

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Measuring Sourcing Performance
•

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