A synthetic study of sourcing strategies
Amy Zhaohui Zeng
Keywords
Sourcing, Purchasing,
Globalization, Alliances
Abstract
As more evidence indicates that a
corporation is very much defined by
its purchases and benefited by its
close partnership with the suppliers,
the sourcing decision becomes
increasingly important in the firm's
growth and profit. This paper
synthesizes the available sourcing
alternatives into four categories,
namely multiple sourcing, single
sourcing, single/dual hybrid or
network sourcing, and global
sourcing, and provides a
comprehensive review of these
purchasing methods based on
extensive literature. Besides the
discussion of the pros and cons, the
paper focuses on the underlying
factors that determine the
preference and suitability of each
sourcing option. In addition, with the
note that numerous companies are
switching to do business on a global
basis, we attempt to use China as
an example to examine global
sourcing from the standpoints of
both buyer and supplier.
Industrial Management &
Data Systems
100/5 [2000] 219±226
# MCB University Press
[ISSN 0263-5577]
Worcester Polytechnic Institute, Worcester, Massachusetts, USA
1. Introduction
Of various activities occurring in a
corporation's daily operation, purchasing is
an inevitable task that is responsible for
materials moved from suppliers/vendors to
manufacturing facilities. By one estimate,
between 50 percent and 70 percent of a
manufacturing company's potential value is
in purchased items; even for service
industries, half of their services are in fact
purchased from other companies (Mihaly,
1999). Thus, an organization's profit is
determined and defined by its purchases to a
large extent, and purchasing has been
considered one of the key drivers for a
company's survival and growth.
One of the purchasing department's major
responsibilities is sourcing or selection of
suppliers. Zenz (1994, p. 120) defines sourcing
as the strategic philosophy of selecting
vendors in a manner that makes them an
integral part of the buying firm for a
particular component or part they are to
supply. This definition pinpoints the
profound meaning of sourcing that is beyond
the traditional view. In other words, sourcing
no longer simply refers to getting the
materials at desired prices, rather, the
decision should be incorporated into the
buying firms' operating strategies to support
or even to improve the firm's competitive
advantages. Numerous studies have reported
that a sound working partnership with a
firm's suppliers improves the firm's
performance in many areas, such as total cost
reduction, better product quality, and faster
delivery (e.g. Swift, 1995; Larson and
Kulchisky, 1998; Willis, 1998).
The underlying importance and utilization
of sourcing can be seen not only from the
above general economic point of view, but
also from its impacts on the buying firm's
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internal operation. First of all, sourcing may
dictate the beginning of actual production
runs, since the availability of raw materials
and other supplies purchased are essential
for the production facilities to operate. In
addition, the materials sourced have direct
impact on the final product's price and
quality in a manufacturing setting as well as
the service quality provided by non-
manufacturing companies. It is evidenced
that more buyers rely on their suppliers to
improve their products' quality and price
(Zeng, 1999) and that by understanding more
about the supplier's operation, the buyers
may see a way to help shave costs on the
purchasing side (Mihaly, 1999). Second,
sourcing may represent or incur a
considerable amount of capital expense, as
the selection process can be extremely
lengthy and require inputs of managers from
various departments. Third, the primary
advantage of sourcing is increased flexibility,
which is gained in the workforce, scheduling
process and product price and quality,
and hence, companies of every type are
virtually all sourcing their necessities from
outside.
Finally, sourcing is a strategic decision
when the buying firm attempts to establish a
long-term business relationship with its
suppliers. This supplier-buyer alliance has
received great attention because, as quoted
by Mihaly (1999), leading companies see their
success is increasingly defined by the
relationships and linkages forged with
organizations outside their immediate
sphere of influence.
As sourcing plays an important role in a
firm's competitiveness and growth, it is
necessary to study and understand different
sourcing alternatives. This paper synthesizes
the available choices into four categories:
multiple sourcing, single sourcing, single/
dual hybrid or network sourcing, and global
sourcing. The philosophy of each sourcing
approach will be examined by citing and
summarizing current literature. The
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A synthetic study of sourcing
strategies
Industrial Management &
Data Systems
100/5 [2000] 219±226
[ 220 ]
objectives of this research are threefold. First
of all, the nature, the advantages and
disadvantages of each sourcing option are
provided. Second, the underlying factors that
determine the suitability and preference of
each alternative are summarized. Finally,
two perspectives of global sourcing are
provided. Extensive previous research has
reported on the benefits of using global
sourcing from a buyer's perspective,
however, little has been focused on the
consequences from a supplier's perspective,
therefore, we attempt to bridge the gap by
using China as an example. The next four
sections are designated to these four
strategies in order and provide in-depth
discussions. Concluding remarks and future
research directions are given in Section 6.
2. Multiple sourcing
As indicated by the name, a company is
implementing a multi-sourcing strategy if it
has business relationships with a number of
suppliers. In this approach, each of the
suppliers respond to the demands and
specifications of a particular quotation from
the buying company. It is easy to see that this
purchasing method plays one supplier
against another and the competition between
the suppliers is intense. This may help the
buyer to bid lowest prices and shipping costs
and increase the buying company's leverage
over suppliers. Other resultant benefits
include a greater degree of flexibility in
technical areas and a better provision of
protection in times of shortages against
failure at a supplier's plant (Ansari and
Modarress, 1990, pp. 31).
The consequences of this strategy include a
large base of suppliers and very short
duration contracts. From the suppliers' point
of view, they have the burden of being
responsible for maintaining the necessary
technology, expertise, and forecasting
abilities plus cost, quality, and delivery
competencies (Render and Heizer, 1997,
pp. 401-402). For the buyer, dealing with
several suppliers may require a longer time
in negotiation and in return, may delay or
disturb the buyer's production schedules.
Many-supplier approach is a traditional
sourcing method and places the emphasis on
achieving the lowest possible price for a
particular product. A study by Swift (1995)
has found that if the long-term partnership is
not the goal of the buying firm and the initial
price is more important than the total price
of a product, then multiple sourcing is a
preferable and suitable purchasing
alternative.
3.Single sourcing
The debate on multiple and single sourcing
has attracted many researchers and
practitioners and resulted in numerous
publications. However, one weakness of the
existing literature is that the single-sourcing
approach is not addressed completely. This
paper will discuss this alternative from the
following four aspects.
3.1 The evolution of single sourcing
Single sourcing involves the idea of reducing
the number of suppliers a firm does business
with. In the past, industries, especially
western countries, have typically dealt with
multiple suppliers for each item. However,
the trend has now begun to move towards a
reduction of suppliers. This concept is
evolved with the growing popularity of
Japanese just-in-time (JIT) philosophy. To
support the central idea of JIT, which is to
eliminate waste and to emphasize value-
added activities, one of the purchasing
objectives is to ensure that the orders are
placed at the right amount, at the right
time, and at the right place with the right
quality.
To accomplish this task a manufacturing
facility must maintain an excellent working
relationship with its suppliers. Once the
supplier and manufacturer begin working
together and a long-term commitment is
established, there is no need for additional
suppliers. This has led to the idea of single
sourcing.
Ansari and Modarress (1990) provide a
detailed comparative analysis of single and
multiple sourcing practices, which has
revealed that the key distinction between
these two sourcing methods lies in the areas
of quality control, lot size, delivery
frequency, and the term of contract.
3.2 The pros and cons of single sourcing
With regard to the advantages and
disadvantages, a number of researchers have
reported their findings in the literature (e.g.
Treleven, 1987; Ansari and Modarress, 1990).
We summarize these results in Table I. It can
be noticed that the overlapped benefits for
both buyer and supplier are revealed in cost
reduction, improved communication,
flexibility, and stability. As single sourcing
outperforms multiple sourcing from a
number of aspects, the former is being
adopted by many organizations. What
process should a firm follow to qualify such a
superior supplier? We will discuss the
answers in the next section.
Amy Zhaohui Zeng
A synthetic study of sourcing
strategies
Industrial Management &
Data Systems
100/5 [2000] 219±226
Table I
Outcomes of single sourcing
Advantages
Buyers' perspective
1. Improved communication from the close 1. A strike or a production resulted
buyer-seller relationship
2. To cooperatively design quality system 2. The absence of bargaining control power
and to share quality output data
3. Lower price stemmed from reduction of 3. The relationship must be a genuine
costs in ordering, shipping, and material
handling
4. Improved stability for both parties
Vendor's perspective
1. Quality considerations
2. Cost considerations
3. Dependability
4. Flexibility of reacting to demand and
environmental changes
3.3 The attributes of single source
qualification
The question as to which one from the
supplier base should be selected as the most
qualified is not easy. The decision must be
based on an extremely careful and sometimes
painfully lengthy analysis of the total quality
of the potential suppliers. As pointed out by
Newman (1988), the decision-making process
involves an assessment of the risks of single
sourcing by not only the buyer, but by a team
of supplier qualifiers who individually and
collectively evaluate the potential supplier.
The team may include members coming from
quality assurance, design engineering,
manufacturing engineering, purchasing,
industrial engineering, and accounting.
Newman (1988) further suggests that the
following eight areas be reviewed and
evaluated to qualify a supplier:
1 Specification review ± is each element
included in material specification really
necessary?
2 Equipment capability ± is the supplier's
equipment capable of producing the
product?
3 Quality assurance ± is the supplier able to
ensure a good output?
4 Financial capability ± is it risky to do
business with the firm?
5 Cost structure ±what does the item cost?
6 Supplier value analysis effort ± is the
supplier capable of performing value
analysis with the buyer's technical
personnel?
7 Production scheduling ± what are the
supplier's production scheduling and
procedures? and
Disadvantages
disruption could cause major difficulties
a buyer has in dealing with a single
source
cooperation
1. Without competition the vendor may
attempt to cut costs
2. Vendor needs to exercise great care
when negotiating a contract
8 Contract performance ± how is
performance measured?
It is seen that the process of qualification
appears extensive and perhaps expensive.
But it is better to spend the time and money
to do the job right at the beginning than to
suffer the results of a poor qualification effort
later.
Another empirical study by Swift (1995)
explicitly points out the selection criteria
that distinguish the preference of single
sourcing to multiple sourcing. The study
reports that when the supplier's availability
of technical support, the reliability of the
product, and the total cost of the product are
emphasized, single sourcing is normally
chosen as the purchasing method. Ansari and
Heckel (1987), based on their empirical
investigations in a few leading companies,
suggest that usually A-products classified by
ABC-inventory analysis be purchased by
single source.
3.4 Is single sourcing realistic?
A number of reports in the existing literature
argue that the single sourcing strategy seems
too ideal to be feasible for pursuit (e.g. Hines,
1995). Are companies really utilizing this
purchasing method? Presutti (1992) surveyed
147 purchasing managers and buyers in the
US manufacturing companies and found that
nearly all the respondents (70 out of 74 useful
responses) had indicated that they had more
than one qualified source. Furthermore, of
the 70 firms with multiple sources, 51 (69
percent) indicated a supplier base of two to
three sources. Is there a convergence
between the US system and Japanese system?
The author further argued that:
1 similarities exist in the area of the so-
called ``minor'' suppliers, for under both
systems firms are totally dependent on the
major manufacturers; and
2 the US industry is actively pursuing the
partnership concept.
Therefore, managing smaller supplier bases,
which facilitates closer buyer-seller
relationships suggests that the US and
Japanese approaches are converging.
4. A single/dual hybrid-network
sourcing
Based on the above discussion, a hybrid
model that bypasses the debate on multiple
and single sourcing and overcomes the
drawbacks of the two methods seems
prevalent. Hines (1995) identified a single/
dual hybrid sourcing alternative termed
networking, which may suggest a possible
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strategies
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solution. According to Hines (1995), network
sourcing is a system in which companies
maximize the bought in content of their final
product, relying on the skills and specialized
knowledge of the subcontractors. The supply
network is constructed in a hierarchical
pyramid with the top tiered suppliers being
the most skilled and possessing the most
advanced technologies. Communication is
available not only between the buyer and
supplier but between the suppliers within the
network. Those suppliers at the first tier are
largely responsible for complete systems
rather than individual components, whereas
those at the lower tiers become
subcontractors to the upper level suppliers.
In this way the number of supply sources can
be reduced. The system typically, but not
exclusively, relies on multiple sources for
any one part or service purchased. The key
point is that the purchasing expenditure is
maximized within a pre-selected and
relatively long lasting array of sources, some
of which may be direct competitors.
Network sourcing is generally a purchasing
choice for an assembly-type of manufacturing
organization. Particularly, Hines (1995) points
out that this purchasing alternative is most
appropriate to the industries with a heavy
reliance on a high purchased content of parts
made uniquely for the particular assembler
under consideration, such as Mazda and other
auto producers. It has been also noticed that
network sourcing may have a profound
impact on the transfer of technology between
firms.
5. Global sourcing
Many companies now are seeking closer,
more cooperative trading partnerships with
sellers as opposed to the traditional
adversary relationship. Competitive
pressures from offshore producers, shortened
product life cycles, and rapid technological
change have contributed to the changing
nature of the buyer-seller relationship.
Another profound change in purchasing is
that with more and more companies
competing on a global market, global
sourcing has become an increasingly
important part of a firm's purchasing
strategy (Ohmae, 1989). Furthermore, as
developed countries are switching from
manufacturing-oriented to service-oriented,
sourcing finished goods from outside has
become inevitable. Industries such as
apparel, toys, and automobile manufacturers
are typical global sourcers. For example, Liz
Claiborne, Inc. sources broadly, using 240
factories in 31 different countries to meet its
needs (Mottley, 1996).
5.1 Why global sourcing: a buyer's
perspective
Definition of global sourcing
Interestingly enough, there are a number of
terms used to describe the purchasing process
from suppliers outside the buying firm's
country. Examples such as foreign sourcing,
international sourcing, worldwide sourcing,
and global sourcing have all appeared in the
literature to date. Dobler and Burt (1996) point
out that the term ``foreign sourcing'' has
largely been replaced with ``international
sourcing'' in recent years, and at a number of
leading firms, international sourcing is being
replaced with a broader international
approach called ``global sourcing''. Johnson
and Wood (1996) define international sourcing
as buying components and inputs anywhere in
the world in such a way that the manufacturer
casts out a much wider net in search of sources
rather than relying solely on its local Yellow
Pages. Spekman (1991) cites global sourcing as
the efficient use of worldwide human,
material, energy, and capital resources. The
definition of global sourcing given by Monczka
and Trent (1991) has been adopted widely.
They define global sourcing as ``the integration
and coordination of procurement
requirements across worldwide business
units, looking at common items, processes,
technologies, and suppliers.'' They also
distinguish international and global sourcing
by recognizing that international sourcing is
lack of coordination of requirements between
worldwide business units.
Issues in global sourcing
The importance of global sourcing has been
increasing dramatically. It is necessary to
understand this purchasing strategy from a
number of aspects, which may include:
1 types of companies that source globally;
2 types of items purchased from
international sources;
3 reasons for global sourcing; and
4 primary countries of overseas sources.
We summarize the findings reported in the
literature in Table II. In addition, several
major obstacles that influence the success of
international sourcing have also been
identified as transportation delays, foreign
exchange fluctuations, travel costs, quality
assurance, language, paper work, inspection
procedure, contract terms, culture/customs,
political stability, trade barriers, company
integrity, and nationalism. With the growing
interests in global operations, efficient
strategies and solutions for coping with the
Amy Zhaohui Zeng
A synthetic study of sourcing
strategies
Industrial Management &
Data Systems
100/5 [2000] 219±226
Table II
Issues in global sourcing
1. Types of companies that source internationally
Wholesale trade, durable goods
Fabricated metal products
Industrial machinery and equipment
Wholesale trade, non-durable goods
Electric and electronic equipment
Chemicals and allied products
Furniture and fixtures
Rubber and miscellaneous plastic products
Stone, clay and glass products
Instruments and related products
Business services
Engineering, accounting, research and management
Source: Frear et al. (1992)
3. Reasons for global sourcing
Improves competitive position
Global attitude
Lower prices
Enhanced company image
Countertrade obligations
Better availability
Better quality
Local content requirement
Higher level of technology
Better terms of delivery
Unavailability of items in the US
More advanced technology abroad
Negotiability
Association with foreign subsidiary
Geographical location
Government assistance
Source: Frear et al. (1992)
problems in global sourcing will become
available.
Implementation of global sourcing strategy
To be successful in implementing global
sourcing, it is important to understand the
stages in the development of this strategy and
the information sources about overseas
suppliers. Monczka and Trent (1991, 1992)
classify the international procurement into
four phases:
Phase 1: domestic purchasing only;
Phase 2: foreign buying based on need, where
companies use subsidiaries or other
corporate units for international
assistance and designate domestic
buyers for international purchasing;
Phase 3: foreign buying as part of
procurement strategy, where
companies start establishing
international purchasing offices;
and
Phase 4: integration of global procurement
strategy, where firms integrate and
coordinate worldwide sourcing
strategy and assign design, build,
2. Types of items purchased from international sources
Finished goods
Electrical components
Mechanical components
Capital equipment for in-house use
Subassemblies
Raw materials excluding fuel
Chemical components
Services
Textiles
Technology
Source: Min and Galle (1991)
4. Principle country of overseas sources
North America
Canada, Mexico
Europe
UK, France, Germany, Italy, Ireland, Poland,
Hungary, Romania, Turkey, Yugoslavia
South America
Brazil, Venezuela
Asia
Japan, Singapore, Taiwan, South Korea, Hong Kong,
China, India, Malaysia
Caribbean Basin
Puerto Rico
Source: Frear et al. (1992)
and sourcing to specific worldwide
business units.
It is seen that the level of worldwide sourcing
in these four phases span from none to low, to
medium, and finally, to high. When
companies intend to implement global
sourcing, the first task is to search for
overseas suppliers capable of satisfying these
companies' needs. Min and Galle (1991) have
conducted a survey and found that a variety
of sources of information about potential
overseas suppliers have been utilized, of
which the most popular ones are private
sources, such as professional contacts, trade
journals, directories, trading companies, and
import brokers.
5.2 Why global sourcing: a supplier's
perspective ± example of China
A brief review of US buyer's relationships
with Pacific Rim sellers
Since the 1980s, many buyers from developed
countries have sought closer, more
cooperative trading relationships with
sellers on a global scale. Frequently, the
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Amy Zhaohui Zeng trading partner has been an Asian supplier. every aspect, China possesses the capability
A synthetic study of sourcing Spekman (1991) has conducted a survey of 700 and competence to be a focal point in the
strategies American manufacturing companies and global business.
Industrial Management & found that slightly more than 85 percent of
Data Systems
the trading partnerships reported are focused
Why China is a great supplier
100/5 [2000] 219±226
The fact that it has taken China only 20 years
on suppliers from four Pacific Rim places:
Japan 48 percent, Taiwan 28 percent, South of development to become a great business
Korea 9 percent, and Hong Kong 7.9 percent. partner has fascinated the whole world and
It should be noted that Spekman's study was caught the attention of researchers in
completed nearly eight years ago. Over the various disciplines. From marketing and
past few years, the rapid economic growth of operational points of view, we summarize the
China in the Pacific Rim has enabled this key factors that have made the giant's
giant to gain a great deal of attention from all current status possible.
over the world. 1 China's huge market would attract every
It is believed that more and more businessman to explore the opportunities.
partnerships with China have been It is not only a market of consumer
established and the trend will continue. Why products, but also a supply of various raw
has China received so much attention? Why materials.
is it a great trading partner? We attempt to 2 China is a major producer of industrial
answer these questions through careful and agricultural products: Table V shows
examination of China's current and future why.
economic environment. 3 China has a strong ability to attract
China's current economic situation outside investment owing to the
Since its initial opening up in 1978, China's competitive prices of its labor and raw
economic system has evolved from a centrally- materials: China's foreign investment has
planned economy to a market-oriented one always been ranked top among the
with Chinese characteristics, and the greatest developing countries. In particular,
benefits that China has received from the China's use of foreign capitals has
influx of outside businessmen are the hard increased from $2.31 billion in 1987 to
currency, technical expertise, and increased $45.28 billion in 1997. Table VI supplies
job opportunities. Table III lists the top ten some examples of investment and
countries that possess the highest world trade sourcing activities of a few world-famous
as published by the World Trade Organization companies in China.
(WTO). It is seen that China is ranked number 4 The rhythmic government control of
ten in the world in terms of the total dollars of development has resulted in stable
its import and export. Before 1997, China had
economic environment. The recent Asian
been ranked number 11 for five consecutive
financial turmoil has virtually no
years. This ranking indicates that China's role
significant impact on China's economy
in the world economy is growing and that
because of China's excellent foreign trade
China is an inevitable and competitive trade
and adequate foreign exchange reserve.
partner for many countries. In addition to
world trade, China's seven other indexes are Specifically, the exchange rate of Chinese
top-ranked on a global scale, as reported in currency to US dollars has been very
Table IV. These figures demonstrate that from stable since the beginning of the crisis.
The past and present situations both
Table III indicate and support that opportunities in
Ranking of countries in 1997 world trade China will continue to grow and that
China's role in global business will
Import/export Export Import
continue to be strengthened.
Rank Country (region) (in $100 million) (in $100 million) (in $100 million)
5 Joint ventures and privately-owned
1 US 15,784 6,870 8,914 international enterprises are among
2 Germany 9,490 5,110 4,380 the most popular choices for college
3 Japan 7,612 4,211 3,401 graduates at all levels owing to higher
4 UK 5,906 2,830 3,076 salaries and better benefits. This certainly
5 France 5,520 2,900 2,620
strengthens the competitiveness and
6 Italy 4,452 2,382 2,070
position of these companies in China. On
7 Hong Kong 3,973 1,863 2,110
the other hand, the domestic companies
8 Canada 3,940 2,120 1,820
9 Netherlands 3,810 1,980 1,830 are facing great challenges from those
10 China 3,250 1,827 1,423 joint ventures and how to protect the
domestic industries has become a big and
Source: People's Daily: overseas edition, 22 January 1998 thorny issue.
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Amy Zhaohui Zeng
6. Discussion and future research Table VI
A synthetic study of sourcing Examples of international businessmen in China
strategies
Sourcing is one of the purchasing
Industrial Management & Company Investment and sourcing activities
Data Systems department's responsibilities and plays a
100/5 [2000] 219±226 critical role in an organization's survival and Motorola Has invested $1.2 billion so far and is
growth, since the materials sourced from planning to invest $25 billion by year
outside rather than produced by the in-house 2000
Has plants and factories in more than
facilities determine the service quality and
three cities
the profitability of the buyers. Recent
recognition of the impacts of a close buyer- GE Has 22 joint and private enterprises
Has employees in nearly 20 cities
seller alliance on both parties' benefits has
Primarily invests in aircraft, polymer
also given sourcing strategy a great deal of
products, banks
attention. This paper studies four sourcing
strategies and examines them in a synthetic Volkswagen Produced 46,000 cars in 1997 and
received $22.5 million as profit
manner. These four strategies are multiple
15,000 engine cylinders produced in the
sourcing, single sourcing, network sourcing,
China plants in 1997 were sourced by
and global sourcing. It is not the objective of
Germany
the paper to conclude that the four sourcing
approaches would converge, rather, there
In addition to the discussion and review of
exist important factors that determine the
the advantages and disadvantages of each
suitability of each method.
sourcing approach, the paper is focused on
global sourcing. In particular, we explore the
Table IV scope of global sourcing from two
China's top-ranked indexes
perspectives: the buyer's in general and the
Index Rank Figure Remarks supplier's using China as an example. We
1. Population and 1 1.22 billion (1996) 21% of the world population conclude that as the market is becoming
land area 3 9.6 million km2 7% of the world land area globalized, global sourcing would become an
2. GNP 7 $697.6 billion (1995) 1.8% of world GNP important purchasing strategy and deserves
3. Economic growth 1 8.8 % (1997) Average growth rate during further study.
rate 1993-1997 is 11% while world While a better understanding of the
average is 3.7% sourcing strategies is provided in the paper,
4. Major industrial and top 5 a number of issues need to be addressed for
agricultural future research. First, would the available
products sourcing approach converge to one method
5. Import/export 10 $325billion (1997) or should a company employ a combination
6. Foreign investment 2 $64billion (1997) Increased by 64% from 1993 of the current methodologies? Second, how to
7. Foreign capital 2 $139.9 billion (1997) cope with the problems occurring in global
reserve sourcing? Finally, what is the magnitude of
Source: People's Daily: overseas edition, 3 March 1998 social, economic and cultural impacts of
global sourcing on the supplying countries?
Table V The answers to these questions should be
China's major industrial and agricultural production volumes useful for any organization that seeks
efficient purchasing outcomes.
Production volume Rank in the world
Unit 1993 1996 1993 1996
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strategies
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