Seminar Report on Sourcing and supplier management

including global sourcing

Jose Xavier
MBA FT 2015-17
School of Management Studies
CUSAT, Kochi-2

Abstract:Strategic sourcing is an institutional procurement process that continuously improves

and re-evaluates the purchasing activities of a company. In the services industry, strategic
sourcing refers to a service solution, sometimes called a strategic partnership, which is
specifically customized to meet the client's individual needs. In a production environment, it is
often considered one component of supply chain management.

1.0 INTRODUCTION

1.1.

General Information

Sourcing strategies can make or break a business. Business winners use a broad range of
sophisticated tools and techniques to continuously wring value from their supply chains. They
view the aggregation of purchase volumes and effective negotiation with suppliers as just the
tip of the iceberg. A strategic partnership is a relationship between two commercial
enterprises, usually formalized by one or more business contracts. A strategic partnership will
usually fall short of a legal partnership entity, agency, or corporate affiliate relationship.
Typically, two companies form a strategic partnership when each possesses one or more
business assets or have expertise that will help the other by enhancing their businesses.

Strategic partnerships can develop in outsourcing relationships where the parties desire to
achieve long-term win-win benefits and innovation based on mutually desired outcomes.

2.0 SOURCING STRATEGY

Sourcing strategy involves the analysis of expenditures (in terms of purchasing volumes and
prices) and suppliers (level of dependence and supply), definition of which products to
purchase in a centralized manner, definition of the sourcing strategy per category, market
consultation and re-negotiation of contracts etc.

A successful sourcing strategy requires a thorough understanding of a companys business

strategy, the resources required to deliver that strategy, the market forces and the unique risks
within the company associated with implementing specific approaches. A periodic review of the
sourcing strategy ensures achievement of desired results and continued alignment with
business objectives. Some of the sourcing strategies that are used in supply chain
management today include:

2.1.

Single sourcing

A method whereby a purchased part is supplied by only one supplier. A manufacturer will
frequently have only one supplier for a purchased part so that close relationships can be
established with a smaller number of suppliers. These close relationships (and mutual
interdependence) foster high quality, reliability, short lead times, and cooperative action.
Acquiring goods, services and construction works from only one source is referred to as: solesource procurement, single-source procurement, sole-source selection, direct procurement,
among others. This is clearly a non-competitive procurement method, and it should be used
only under exceptional circumstances, namely:
for emergency situations;
when only one firm or individual is qualified to fulfill the requirement;
for the continuation of previous work, or additional work, that cannot be acquired from another
firm or individual due to patent, compatibility issues, or exclusive rights;
the use of this method represents a clear advantage over the use of a competitive method;
the total cost is within the threshold set for this method of procurement;
for the procurement of related items that are available only from one source;

 for other situations contemplated in the procurement legal and regulatory framework.
The use of this method should be preceded by a rigorous approval process.
A checklist should preferably be developed for requesting entities to complete in sufficient detail
to justify the need for fulfilling a procurement requirement from a single source. Such
justification should identify the requesting entity, describe the requirement, address why the
requirement can only be fulfilled from the identified source, including action taken to identify
additional sources, in addition to the total cost and planned future actions to preclude the need
forusing this method

2.2. Multisourcing
The purchase of individual items used to create a product from different,
multiple providers in order to keep production on track in the event of a failure to produce at
one particular source. This reduces production risk in the event that the supply chain has
a problem. Companies may use it sometimes to induce healthy competition between the
suppliers in order to achieve higher quality and lower price.

Promotes innovation: If you continually use the same suppliers without branching
out into new, diverse markets, you risk stymieing the creative benefits you should be
receiving. We should encourage new small and medium-sized businesses because
they bring along the added innovation advantages, differentiating themselves from
their competitors. Small businesses, unlike their larger counterparts, are more agile
and can create and innovate quickly. Buyers should capitalize on this opportunity,
because if they continue to use their larger, more traditional suppliers, they are not
going to experience the depth and breadth of innovation that naturally occurs when
you have a diverse supply base.

Provides multiple procurement channels for goods and services: Procuring a

large database of suppliers from which to source opens up the opportunity to create
scenarios that involve multiple suppliers for one sourcing event. This allows you (the
buyer) to promote and engage several suppliers while simultaneously reducing the
overall cost of the product/service. Additionally, multiple channels also allow you to
analyze the prices, location, and range of goods of several suppliers and choose the
one that works best for them. A final benefit to having multiple channels is the volume
of opportunities created by forging new relationships with suppliers alliances.

Drives up competition, driving down prices: When sourcing the products you need,
there are many factors you take into consideration when choosing a supplier.
Whatever factors they may be price, location, service levels, deliverable date, etc.
suppliers are looking to give you the best deal they can to win your business.
This drives competition between suppliers, which reduces your direct and indirect
spend.

2.3.

Displays your companys interest in and commitment to the economic growth of

your community:Contracting with local small-medium sized enterprises (SMEs) or
minority business enterprises (MBEs) has a profound effect on your surrounding
community. By contracting with these suppliers, youre helping increase spend and
consumption while promoting job creation on the local level. Engaging with local
suppliers enhances and bolsters the communities you live and work in, and in the end,
isnt that what matters most?

Allows access to a whole different network: Organizations implementing supplier

diversity programs are more likely to penetrate new markets and gain new
customers. As you reach out to more and more suppliers, you will become privy to
each of their business networks and certification networks.

Outsourcing

The process of having suppliers provides goods and services that were previously provided
internally. Outsourcing involves substitutionthe replacement of internal capacity and
production by that of the supplier.Overseeing supply chain management can be a demanding
task and a serious time drainer. That is why some companies choose to outsource their supply
chain management and leave it to a third party organization. While this is not for everyone it
can be suitable for many businesses. There are also some risks associated with outsourcing.
Unanticipated Costs : At first glance, the improved efficiency and financial savings may look
appealing. The problem is that there is always the potential for hidden fees along the way when
leaving this process in the hands of a third party. Issues like increased shipping costs for
hauling freight and associated taxes can put a damper on cost projections that initially
appeared promising.
Potential for Setbacks: Although outsourcing SCM will often look great on paper, it can be a
complex process with plenty of opportunities for complications. If the third party you choose
creates unrealistic timelines throughout distribution, it can lead to a host of problems. One
scenario could be inventory not being received on time, which means consumer demand
wouldnt be met. In turn, this could lead to revenue loss and further glitches within the supply
chain.
Quality Suffers: When the organization you hire for supply chain management lacks experience
in your industry, the quality of your products may diminish. If the organization cuts corners,
uses cheaper materials, and doesnt fully assess risks, it can be detrimental to your company.
Sales can decrease along with your brand equity, and competitors are more likely to get ahead.
Selection of partner, Shipping costs, Lead time, quality & reliability are other factors that should
be looked into

2.4.Insourcing
The goods or services are developed internally. The act of deciding whether to produce an item
internally or buy it from an outside supplier could be called insourcing. Factors to consider in

the decision include costs, capacity availability, proprietary and/or specialized knowledge,
quality considerations, skill requirements, volume, and timing.
Insourcing often involves bringing in specialists to fill temporary needs or training existing
personnel to perform tasks that would otherwise have been outsourced. An example is the use
of in-house engineers to write technical manuals for equipment they have designed, rather than
sending the work to an outside technical writing firm. In this example, the engineers might have
to take technical writing courses at a local college, university, or trade school before being able
to complete the task successfully. Other challenges of insourcing include the possible purchase
of additional hardware and/or software that is scalable and energy-efficient enough to deliver
an adequate return on investment.
Insourcing can be viewed as outsourcing as seen from the opposite side. For example, a
company based in Japan might open a plant in the United States for the purpose of employing
American workers to manufacture Japanese products. From the Japanese perspective this is
outsourcing, but from the American perspective it is insourcing. Nissan, a Japanese automobile
manufacturer, has in fact done this.

Whether insourcing or outsourcing, the decision is needed on where best to locate the work
(best shoring). The location criteria is usually based on three key dimensions:
a) Is there a premium or an advantage on proximity?
b) What are the relative cost differences?
c) Which locations provide the language and expertise required for the function?
Sourcing functionsupport organizations to improve their internal organization in the procurement
and logistics areas. This implies defining agile structures, with adequate employees for each
function, harmonized internal processes, focusing on cost reduction and according to legal
practices, with supporting documentation and procedural pieces in line with the best practices and
performance monitoring tools that expose sourcing functions true value.
The procurement outsourcing solutionenables organizations to benefit from the immediate
experience and external support in their sourcing function. These benefits derive from the support of
operational experts on the matter, that ensure value maximization in every purchase and the
reporting and validation of strategic decisions solely when essential, allowing managers greater
focus on their business core activities. An alternative approach could be the establishment of sourcing
centrals, a solution that allows for a greater centralized coordination of sourcing strategies, swifter
processes, broader use of the best suppliers, and, consequently, greater aggregate volumes to
negotiate.Technically, sourcing and procuring are different sides of the same coin. Sourcing refers
to the practice and skill of being able to track down sources of supply. Procurement refers to taking
those sources of supply that have been identified as being purposefully advantageous in theory,
and molding them into realizable sources of supply that are deliverable advantageous in real terms.
For example it may well be apparent that the cost of producing steel is lower in India than it is say in
the USA. But how viable financially is that source once transport costs have been taken into
consideration? It doesnt stop there either. Taking the same analogy into consideration, what are the

respective lead times, and are there any political or social ramifications to be considered? How
about green supply chain considerations? To be fully effective, sourcing and procurement must be
calculated as a whole, in order to maximize the benefits.

3.0 SUPPLIER MANAGEMENT

The term supply management describes the methods and processes of modern corporate or
institutional buying. This may be for the purchasing of supplies for internal use referred to as
indirect goods and services, purchasing raw materials for the consumption during
the manufacturing process, or for the purchasing of goods for inventory to be resold
as products in the distribution and retail process.
In many organizations, acquisition or buying of services is called contracting, while that of
goods is called purchasing or procurement. The supply management function of an
organization is responsible for various aspects of these acquisitions:

Working with business leaders who have identified a business need or requirement to
identify, source, contract, and procure the needed good or service from qualified suppliers
Managing supplier performance

Implementing technologies, processes, policies, and procedures to support the

purchasing process (Supplier Relationship Management).

The supplier relationship management process: a process for providing the structure
for how relationships with suppliers will be developed and maintained.

Economic theories of supply and demand

Supply management is generally regarded as a systematic business process that includes

more functions than traditional buying, such as coordinating inbound and internal preproduction logistics and managing inventory.
Supply management deals primarily with the oversight and management of materials and
services inputs, management of the suppliers who provide those inputs, and support of the
process of acquiring those inputs. The performance of supply management departments and
supply management professionals is commonly measured in terms of amount of money saved
for the organization. However, managing risk is one of the other critical aspects of supply
management; especially the risk of non-availability at the required time of quality goods and
services critical for an organization's survival and growth.

3.1.

Five facts about SRM you need to know now to start meaningful supplier

relationships:

The focus is on the relationship. In todays world, managing the supply base is about
strengthening relationships that can make or break your business. Earning your
suppliers trust with honest communication, listening to their concerns and involving
them in your processes ultimately makes them a vested partner in your business.
Expectations are changing. Procurement is expected to know where they are
vulnerable and bolster their teams for success. Teams that put a greater emphasis on
qualitative and quantitative supplier data analysis will be able to quickly and succinctly
identify weak spots, risks and opportunities in the global supply chain - improving the
strategies and plans needed to manage the suppliers, and ultimately both businesses,
for continued success.
Its mutually beneficial. If you are aligned with your suppliers and treat them as
partners, both businesses will experience higher success rates, decreased risks and
enhanced collaboration and innovation. Studies have found the top procurement
teams that have successfully aligned with their key suppliers have improved supplier
capabilities of innovation, quality, reliability and costs/price reductions and agility to
reduce risk factors. Greater value can be achieved for both businesses, something
that would be difficult to achieve if operating independently.
It delivers big opportunities. Successful SRM yields a faster time to market,
transactional efficiency, competitiveness, risk management, and large financial gains all of which not only contribute to your bottom line, but also allow you to deliver a
quality and cutting edge product, putting you ahead of the market.
Technology can simplify the process. The key to effective SRM is having a system in
place that makes it easy to view your suppliers and analyze all of the risk factors.
Using SRM technology provides you with full and unparalleled visibility into your
supplier base, giving you a detailed picture of what is impacting your supply chain and
making it easy to mitigate the risk.

3.2.Listed below are 10 strategic points used in strategic supplier management

Understand the cost and value of the entire supply chain. Without a thorough
understanding of all costs, from raw materials through the end product or service, and the
value provided by each supplier in the process, a supplier cannot be evaluated.

Realize that supplier strategies go two ways. Most companies focus on what suppliers can
do for them rather than on what they can do with the supplier to lower costs. A true
partnership leverages the total production cost to both parties' advantage.

Accept accountability. Companies should plan sufficiently in order to request orders from
suppliers with acceptable lead time and without multiple changes. If every order requires
emergency handling, the relationship will never work.

Incorporate appropriate service levels and metrics into agreements. A relationship based
on a handshake is far more likely to encounter problems than one in which expectations
are clearly established and agreed upon.

Spend equal time aligning incentives and penalties. It is natural to worry about the worst
case, such as if a shipment is not received and a plant grinds to a halt. Conversely, the
extra value created when production and asset utilization is optimized should be the basis
of improving the value proposition for both parties.

Share critical information as early as possible. Information is the grease that makes an
integrated supply chain work. Waiting to share critical volume and timing information with
suppliers can create lost business for the company or excess inventory and added costs
for suppliers. Sharing information constantly, with appropriate security and confidentiality,
is critical for successfully managing a supplier relationship.

Plan for everyday exceptions. Sometimes emergencies will occur, especially in complex,
multiparty supply chains. Agree ahead of time how emergencies will be handled and
analyze why they occur so that the number of emergencies is minimized.

Plan for major contingencies. Unavoidable events that stress the supply chain should be
planned and practiced. Some industries, such as utilities, implement plans for natural
disasters. Every supply chain strategy requires similar foresight and joint planning so that
disruptive events can be managed smoothly.

Expect and reward honesty. As in personal relationships, the best supplier relationships
require honesty when exceptions to normal operations occur. Companies should require
immediate notification without penalty when critical supplier situations occur.

Make relationship meetings meaningful. Companies often hold formal quarterly meetings
without appropriate representation in which the vast majority of time is spent on
information best provided through other communication forums. Instead, relationship
meetings should focus on critical issues, areas for supplier improvement and discussions
on how the buying organization can improve the relationship.

4.0 GLOBAL SOURCING

Global Sourcing is the practice of sourcing from the global market for goods and services
across geopolitical boundaries. Global sourcing often aims to exploit global efficiencies in the
delivery of a product or service. These efficiencies include low cost skilled labor, low cost raw
material and other economic factors like tax breaks and low trade tariffs. A large number of
Information Technology projects and Services, including IS Applications and Mobile Apps and
database services are outsourced globally to countries like Pakistan and India for more
economical pricing.

4.1.Stages of Global Sourcing

Stage (i): Preliminary Research Investigation and Tendering

At this stage, the enterprise identifies the core and non-core operational activities, analyzes
customer and market requirements and identifies competitors. The idea is to develop the firms
business objectives, prospective markets and brand positioning.
The strategic sourcing scope is also outlined through a business plan developed by the
executive and the sourcing specialist, and the preliminary work strategy and baseline for
measuring performance is established and documented as a procurement process plan.
Stage (ii): Market and Supplier Evaluation
At this stage, the enterprise develops a detailed list of supplier selection benchmarks, which is
used to select the most appropriate suppliers that fit the requirements. Based on the findings of
the process, the sourcing strategy may be tweaked further and a final costing model is
released. The operational and economic benefits of the project will then be estimated. RFIs will
then be sent out to the shortlisted suppliers.
Stage (iii): Selection of the Supplier (Sourcing Event)
Based on the results of the RFI dispatch, a final list of suppliers is selected and negotiation for
products is carried out, culminating in a supply agreement. Technical assessment of final
supply candidates is conducted to come up with the savings estimates for each. Finally, an
implementation schedule outlining timelines for various suppliers is developed.
Stage (iv): Implementation
A performance analysis schedule should be developed, outlining all activities in the
implementation process. The implementation team should be constituted by the procurement
agent and the schedule and strategy should be published. Agreements related to shared
supply, resources and logistical arrangements are developed.
At this stage, expected internal and external results from the suppliers should be documented.
Periodic measurement and reporting of actual performance should be carried out.
Stage (v): Performance Monitoring
Performance of suppliers is measured, both independently and in relation to the resources and
processes applied by supply partners. This should be carried out routinely and reported
accordingly. In-depth evaluation of the efficacy of collaborative efforts with each supplier is
obtained, and the partners involved continuously isolate problems and find out ways these can
be solved for improved performance.

The objective of performance monitoring is to maintain the most efficient procurement process,
one that is flexible and dynamic, easily adapting to a changing market environment.

4.2.

A Good Global Sourcing Strategy Addresses

Cost the main purpose of product sourcing strategy is to take advantage of lower
labor costs in foreign countries. However, the procuring organization will face additional costs
that dont factor into domestic transactional costs. These include broker fees, freight charges,
taxes called, insurance, duties and bank fees.

Laws the sourcing specialist together with the supplier should consider what body of
law shall be applied to their contractual agreement, i.e., the buyers countrys law, the suppliers
countrys law or the law applicable through a signed treaty between the 2 countries.

Currency some buyers may insist on transactions in their own currency for the sake
of simplicity. However, a prudent buyer will consider the possibility of using the suppliers
currency where the buying countrys currency may become stronger in the period between
agreement and supply and eventual payment.

Lead time global purchases have a significantly longer lead time than domestic
sources. The reason is that overseas travel is slower, unless air travel is used. In addition,
there is time taken in the custom clearance process, which does not apply for domestic
sources.

Culture and language where the procurement agent is unfamiliar with the culture
and language of the supplier, the risks of misunderstanding, miscommunication and
offensive/awkward encounters significantly increases.

Transportation whereas domestic sourcing necessitates the use of a single mode

of transportation, global sourcing frequently includes multiple modes of transport, e.g.,
combining air or water transportation with road transport to bring goods from the supplier to the
suppliers port, to your own port and finally to your place of business.
Methods of payment in global sourcing, a letter of credit is used for payment, which
necessitates the cooperation of the banks of the supplier and buyer.

4.3.

Advantages of Global Sourcing

The global sourcing philosophy has following advantages:

(i) Low cost manufacturing

(ii) Tapping skills and resources that is not available in the home nation
(iii) Seeking the benefit of alternate suppliers
(iv) Utilizing an efficient supply chain management systems
(v) Learning global business skills
(vi) Meeting competition prudently and efficiently

4.4.

Disadvantages of Global Sourcing

Disadvantages of global sourcing philosophy are as follows:

(i) No exposure of international culture, traditions and beliefs
(ii) Hidden costs related to different time zones and languages
(iii) Financial and political risks associated with emerging economies
(iv) Risk of losing intellectual properties, patents and copyrights
(v) Long lead times
(vi) Labor problems and labor related issues
(vii) Unnecessary shutdowns and supply interruptions
(viii) Difficulty in supervision
(ix) Difficulty of monitoring goods and services quality

4.5.Costs Associated with Global Sourcing

(i). Countrys Origin:

The countrys origin has a lot of impact on the sourcing decisions. Buying a handicam from
Japan (a developed nation) and from China, India, Korea (developing nations) makes a
difference in cost. Japan, USA are famous for producing latest and high quality goods resulting

in high cost, while developing nations due to cheap manpower and other benefits of economies
of scale produce the same thing relatively in cost effective manner. Further, some countries are
technologically advance and therefore, may provide high quality goods in relatively less cost.
Therefore, a retailer must consider following issues:
(i) Technological advancement
(ii) R&D difficulties
(iii) Distribution and logistics network
(iv) Countrys specific richness
(v) Saving associated with buying from a particular country.
(ii). Import Duty:
Import duty (commonly known as tariff) is a tax imposed by a government on imported goods.
Tariff raises the cost of imported goods. Government imposes such taxes to protect the interest
of domestic manufacturers and traders. In absence of import duty, India will be dumped with
cheap goods (low cost goods) demolishing the Indian business. Therefore, a retailer before
entering into international sourcing agreements must check the rate of import duty on particular
merchandise in question.
(iii). Foreign Currency Risk:
In recent days, currency fluctuations have become significant consideration while making
global sourcing decisions. Currency risk arises due to change in price of one country with
respect to another. For example, you are an Indian retailer and you buy merchandise from
USA, as usual there exist time gap between placing the order and paying for the supplies, and
now while making the payment in dollars, you have to pay more (because dollar is stronger
than rupee in international market) and also there is a possibility that you would realize that no
gain from merchandise buying.
(iv). Trade Blocks:
Trade blocks like FTZs (Free Trade Zones), SEZs (Special Economic Zones), EOUs (Export
Oriented Units) are some designated areas in a country that dont come under countrys
applicable tariffs. Like Free Trade Zone is an area within a country where no taxes are
applicable with regard to storage, inspection, packaging, assembly, fabrication or exhibition.

Therefore, a retailer while searching for foreign vendors should consider these trade blocks.
Also Indian retailers should develop relations with global vendors belonging to these
designated areas.
(v). Merchandise Carrying Cost:
The cost of maintaining inventory in a retailers warehouse like rent, electricity expense,
insurance and employees expenses is known as merchandise carrying cost. In another words,
this is basically the cost of holding merchandise in stock.
Carrying Cost = Average Inventory at Cost X Opportunity Cost of Capital
(vi). Opportunity Cost of Capital:
It is the rate of return that could be earned by investing in the next best possible option. It is the
expected return foregone by using capital for other purpose.
(vii). Logistics Expense:
It basically includes transportation cost occurred on merchandise travelling. Higher the distance
from vendor, higher will be the transportation expense. For example, buying merchandise from
China is significantly lower than the cost from New York to India.

4.6.

Managerial Issues Associated With Global Sourcing

Buying merchandise from overseas may be cheaper than from vendors located locally. Vendors
that are in foreign country is where majority of the retailers get their merchandise and make a
huge profit globally.
Following are the managerial issues associated with global sourcing:

Quality Control:

It will take long time for merchandise from outside the country to reach to your store, keep in
mind that shipping/air time while sourcing globally. These problems are more common in
countries that are under developed or have no bilateral trade with your nation. Therefore,
limited/no trade details regarding a countrys vendors are available.
It can have following consequences:

(i) What will happen if the merchandise delivery is delayed?

(ii) What will happen if the merchandise is of poor quality?
(iii) What will happen if the merchandise is of superior quality but packaging, transport
conditions are substandard?
Consequently, it becomes imperative on the part of retailers to assure the quality of imported
goods through insurance, agreement with vendor or otherwise.

Building relationships with vendors:

Building relationships with suppliers overseas is difficult but if made correctly, can do wonder
for both sides. Domestic retailers look global sourcing not only for lower costs, but also to
improve quality, prompt deliveries and develop innovations to keep them a step ahead of their
competitors.
Problems Related to Global Sourcing:
(i) Language barrier
(ii) Cultural difference
(iii) Climate/time difference
(iv) Distance issue
Therefore, considering the complexities of global sourcing, retailers should try to remove these
obstacles and work for building long-lasting relationships. The key to build solid relationships
with overseas suppliers is to maintain trust with suppliers.

5.0 REFERENCES

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https://en.wikipedia.org/wiki/Strategic_sourcing
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http://procurementclassroom.com/procuring-from-asingle-source/
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14.Five secrets of facts of supply chain management

http://www.cips.org/supplymanagement/opinion/2015/february/the-five-secretsof-supplier-relationship-management/
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suppliershttp://www.industryweek.com/companiesamp-executives/10-strategies-managing-suppliers
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https://en.wikipedia.org/wiki/Global_sourcing
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