Making Sourcing Decisions in a Supply Chain in Practice

1. Use multifunctional teams. Effective strategies for sourcing result from multifunc­tional collaboration within the firm. A sourcing strategy from the purchasing group is likely to be relatively narrow and focus on purchase price. A strategy developed with the collaboration of purchasing, manufacturing, engineering, and planning is much more likely to identify the correct drivers of total cost. The collaboration must be continued beyond strategy formulation to the procurement phase, because that is where manufacturing and engineering are most likely to real­ize the full benefits of good sourcing strategy.

2. Ensure appropriate coordination across regions and business units. Coordination of purchasing across all regions and business units allows a firm to maximize economies of scale in purchasing and also to reduce transaction costs. Other opportunities from improved sourcing, such as better supply chain coordination and design collaboration, however, may require strong involvement at the business-unit level to be effective. Mandating global coordination across all business units may complicate these efforts. Items such as MRO supplies, for which transaction costs and total purchase volume have a significant impact on total cost, benefit most from coor­dinated purchasing across geography and business units. On the other hand, items for which most of the value is extracted from better design collaboration and coordinated supply chain forecasting and fulfillment are better served with somewhat more decentralized sourcing.
3. Always evaluate the total cost of ownership. An effective sourcing strategy should not make price reduction its sole objective. All factors that influence the total cost of ownership should be identified and used in selecting suppliers. Supplier performance along all relevant dimensions should be measured, and its impact on total cost should be quantified. Focusing on the total cost of ownership also allows a buyer to better identify opportunities for better collabo­ration in design, planning, and fulfillment.
4. Build long-term relationships with key suppliers. A basic principle of good sourcing is that a buyer and supplier working together can generate more opportunities for savings than the two parties working independently. Solid cooperation is likely to result only when the two parties have a long-term relationship and a degree of trust. A long-term relationship encourages the supplier to expend greater effort on issues that are important to a particular buyer. This includes investment in buyer-specific technology and design collaboration. A long-term relation­ship also improves communication and coordination between the two parties. These capabilities are very important when sourcing direct materials. Thus, long-term relationships should be nur­tured with suppliers of critical and strategic direct materials.

Source: Chopra Sunil, Meindl Peter (2014), Supply Chain Management: Strategy, Planning, and Operation, Pearson; 6th edition.