Sourcing involves identifying and evaluating suppliers and negotiating contracts to purchase goods and services. There are two main sourcing strategies: offshoring, which moves production overseas while maintaining ownership, and outsourcing, which hires an outside firm to perform operations. Effective sourcing can lower costs through economies of scale, risk sharing, and increased competition. Sourcing is often achieved through competitive bidding processes like open or closed bids, as well as different types of auctions. Contracts must be designed carefully to avoid issues like information distortion and ensure both parties' interests are addressed.
Sourcing involves identifying and evaluating suppliers and negotiating contracts to purchase goods and services. There are two main sourcing strategies: offshoring, which moves production overseas while maintaining ownership, and outsourcing, which hires an outside firm to perform operations. Effective sourcing can lower costs through economies of scale, risk sharing, and increased competition. Sourcing is often achieved through competitive bidding processes like open or closed bids, as well as different types of auctions. Contracts must be designed carefully to avoid issues like information distortion and ensure both parties' interests are addressed.
Sourcing involves identifying and evaluating suppliers and negotiating contracts to purchase goods and services. There are two main sourcing strategies: offshoring, which moves production overseas while maintaining ownership, and outsourcing, which hires an outside firm to perform operations. Effective sourcing can lower costs through economies of scale, risk sharing, and increased competition. Sourcing is often achieved through competitive bidding processes like open or closed bids, as well as different types of auctions. Contracts must be designed carefully to avoid issues like information distortion and ensure both parties' interests are addressed.
Sourcing involves identifying and evaluating suppliers and negotiating contracts to purchase goods and services. There are two main sourcing strategies: offshoring, which moves production overseas while maintaining ownership, and outsourcing, which hires an outside firm to perform operations. Effective sourcing can lower costs through economies of scale, risk sharing, and increased competition. Sourcing is often achieved through competitive bidding processes like open or closed bids, as well as different types of auctions. Contracts must be designed carefully to avoid issues like information distortion and ensure both parties' interests are addressed.
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Sourcing
Sourcing is a set of business processes required to purchase goods and
services Sourcing is basically identifying and evaluating number of selected suppliers, in the end when supplier is chosen it results in an agreement or contract with each other, contract includes what is to be procured and what are the terms agreed upon There are two types of sourcing strategies: - 1) Off-shoring maintains ownership but moves the production facility off-shore , 2) Out sourcing hires an outside firm to perform operations Benefits of effective sourcing is that, if purchase orders are aggregated then economies of scale can be achieved, lower cost, better design collaboration, coordination, risk sharing, and lower price (scrutinizing the market by increasing competition) Once intention has been made to outsource the process then starts with firstly supplier assessment and scoring, supplier selection and contract negotiation, design collaboration, procurement, sourcing analysis Outsourcing is mostly achieved by competitive bidding processes Bidding is a form of auction in which bids are not revealed to other bidders Two types of bidding: - 1) Open Competitive Bids bids are opened in full view to those who may want to view, 2) Closed Competitive bids bids are sealed and are only disclosed to authorized personnel Auction is a system in which potential buyers place competitive bids, there are some types of auctions: - 1) Sealed bid first price auction in this auction bidders place bid simultaneously and in a specified time frame, bids are open one by one and contract given to the highest bidder, 2) English auctions product set at low price/base price and then sold to the one having the highest bid, 3) Dutch auctions starts with a high price and then lowers down, 4) Second price auctions in this all potential bidders submit a bid and bid is sold to the highest bidder at a price of the second highest bid Contracts should be designed in a manner to avoid information distortion Type of contracts: - 1) Contracts for product availability and supply chain profits a) Buy Back Contract, b) Revenue sharing contract, c) Quantity flexibility contract 2) Contracts to Coordinate supply chain costs, 3) Contract to increase agent effort, 4) Contracts to induce performance improvements Contracts for product availability and supply chain profits aim is to maximize profit by designing a contract that encourages the buyer to buy more (supplier must keep in mind to share some of buyer’s demand uncertainty) Double marginalization is for example if the retailer demand is affected he has to adjust the price according to it, hence if it is not selling this will lead the retailer to buy less from supplier and hence supplier will be in loss, so he will sell it to retailer on a lower cost Buy back contract is an agreement between supplier and retailer that for a specific time frame he can return the unsold inventory at a cost they both have mutually agreed upon, downside of it is increase in supply chain costs and information distortion cause supply chain reacts to retail orders rather than consumer demand Revenue sharing contracts Retailer buys supplies from supplier at a minimum price but in the condition that supplier will have his fair share in the revenue, can lead to deduction in inventory holding cost for retailer, information distortion can occur as same in buyback contract Quantity Flexible Contracts allows buyer to vary order amount within limits as demand visibility increases, lower level of information distortion Contracts to Coordinate supply chain costs encourage buyer to buy more quantity, taking into account supply chain cost of supplier’s end (quantity discount contract) Contract to increase agent effort Contract include two part tariff (manufacture extracts profit upfront as a franchise fee)and threshold contracts (if sales exceed some percentage then an additional bonus will be given if done, it increases information distortion) Contracts to induce performance improvements Performance improvement from the supplier’s end. To outsource or not depends upon whether the third party provides optimal amount of supply chain surplus with a small amount of risk, can be done through capacity aggregation(aggregating demands across multiple firms, economies of scale), inventory aggregation, transportation aggregation etc Risks of third party are, process is broken (indicates that a firm does not has control over its supply chain), reduced customer and supplier contact, loss of internal capability and growth, leakage of sensitive data, negative reputational impact Procurement process is when supplier sends product in response to the order of buyer, Direct materials (PC for use) improve coordination for direct materials, Indirect material (PC for automobile manufacturing) lower transaction cost Direct materials can be classified into: - 1) Bulk Purchase items focus should be on well-designed auctions, 2) Critical items focus should be on lead time as if they are available or not, 3) Strategic items look for suppliers who can assist in the design phase A firm should analyze its procurement spending and make a supplier portfolio, assessment should be based on 1) aggregation of spending and 2) supplier performance Cheaper but lower performance suppliers must be given the responsibility to cater for steady demand, Expensive and high performing suppliers must be given the task to cater for the buffer demand (in case of demand variability) Concept of E-Procurement is on the rise, limits the purchasing experience etc Risks in Sourcing: - 1) Inability to meet the demand on time, 2) Increase in procurement cost, 3) loss of intellectual properties Can be solved by using multiple sources (advised for products high in demand as cost incurred for multiple sourcing is high), delays can be dealt with carrying inventory (best for low value products) and developing a backup source (advised for high value short time products)
