The Role of Sourcing in Supply Chain

The role of sourcing in supply chain

Do you treat Purchasing term same as procurement?

Well, there are certain differences. But here we are not discussing it.

Our topic here is to find sourcing part of purchasing any item.

It is a process of acquiring raw materials and other components, products or services of a company from its suppliers to execute its operations.

Sourcing is the entire set of business processes required to purchase goods and services.

If you are in supply chain field, you should know that it’s a major decision whether you outsource your production/function or perform in-house. Outsourcing results in the supply chain functions being performed by a third party.

One of the most important issues a firm is facing is outsourcing and actions across industries tend to be varied.

For example, W.W. Grainger, an MRO distributor, has constantly owned and managed its distribution center. In contrast, outbound transportation of packages from distribution centers to customers has consistently been outsourced to a third party.

For less-than-truckload outbound transportation, Grainger is moving from a scenario under which it was all outsourced to a third party to a hybrid model under which Grainger owns some trucks. What factors can explain Grainger’s decisions?

Dell is credited with improving profits by keeping the retail function in-house and selling directly to customers. In contrast, Proctor & Gamble (P&G) has never attempted to sell detergent directly to its customers.

You may remember about supply chain surplus which is the difference between the total cost that occurs for all supply chain activities to bring a product to the customer and the value of a product for the customer.

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Once you make a decision that you will outsource, sourcing processed include the selection of suppliers, the contracts, designing a product, material or services procurement, and evaluation of supplier performance, as we discussed here.

You know that about 80% of the cost of a product is determined during design, it is crucial that suppliers be actively involved at this stage.

Design collaboration allows the supplier and the manufacturer to work together when designing components for the final product. Design collaboration also ensures that any design changes are communicated effectively to all parties involved with designing and manufacturing the product. Once a product design is finalized, procurement is the process whereby the supplier sends the product against the orders placed by the buyer.

Cost of goods sold (COGS) contributes over 50% of sales for most major manufacturers. In  COGS, purchased parts are a much higher fraction than they were several decades ago. This change has occurred because companies have reduced vertical integration and outsourced manufacture of many components.

Companies such as Cisco, have gone further and also outsourced a significant fraction of the assembly capacity. As there is greater pressure on firms to achieve lower costs and the suppliers’ share of the COGS grows, good sourcing decisions will have a greater impact on the cost leadership and competitive advantage enjoyed by a firm.

As we always emphasize on effective sourcing process. It reduces the supply chain surplus, reduces inventory costs, and bring many other benefits for the firm. It is important that the drivers of improved profits be clearly identified when making sourcing decisions. Some of the benefits from effective sourcing decisions are the following:

  • Better economies of scale can be achieved if orders within a firm are aggregated.
  • If you want to reduce the purchasing cost, your procurement transactions should be more efficient.
  • Design collaboration can result in products that are easier to manufacture and distribute, resulting in lower overall costs.
  • If you coordinate with suppliers, then your forecasting and planning efficiency will increase for goods.
  • While making contracts with suppliers, the result should be such a way of sharing the risk. The result is very excellent. It brings profits for both the supplier and the buyer.
  • If any Firm use auctions the can significantly reduce the purchase price due to competition between vendors.
Read also:  Supplier Capability Assessment

Reference book: “Supply Chain Management” by Sunil Chopra & Peter Meindl

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