Unit Iii Introduction To Sourcing

UNIT III
INTRODUCTION TO
SOURCING
Procurement and outsourcing in the fashion industry -
benefits and risks of outsourcing - searching, evaluating,
and maintaining sources of supply - make-buy decisions
- single-multiple sourcing decisions -domestic-global
sourcing decisions
PROCUREMENT AND OUTSOURCING STRATEGIES
 Outsourcing components have increased progressively over the
years. Some industries have been outsourcing for an extended

time.
 Fashion Industry (Nike) (all manufacturing outsourced)
 Why do many technology companies outsource manufacturing,
and even innovation, to manufacturers?

 „What are the risks involved?
 „Should outsourcing strategies depend on product

characteristics?
BUY/MAKE DECISION PROCESS
 Advantages and the risks with outsourcing
 „Structure for optimizing buy/make decisions.
EFFECTIVE PROCUREMENT STRATEGIES

 „Framework for identifying the appropriate procurement strategy
 „Linkage of procurement strategy to outsourcing strategy.
THE PROCUREMENT PROCESS

 Independent (public), private, and consortium-based e-
marketplaces.
 „New developments mean higher opportunities and greater
challenges faced by many buyers
OUTSOURCING BENEFITS AND RISKS BENEFITS
ECONOMIES OF SCALE
 „ Aggregation of multiple orders reduces costs, both in
purchasing and in manufacturing
RISK POOLING
 „ Demand uncertainty transferred to the suppliers
 „ Suppliers reduce uncertainty through the risk-pooling effect
REDUCE CAPITAL INVESTMENT

 „ Capital investment transferred to suppliers.
 „ Suppliers higher investment shared between customers.

OUTSOURCING BENEFITS
FOCUS ON CORE COMPETENCY

 Buyer can focus on its core strength
 Allows buyer to differentiate from its competitors
INCREASED FLEXIBILITY
 The ability to better react to changes in customer demand
 The ability to use the supplier’s technical knowledge to
accelerate product development cycle time.

 The ability to gain access to new technologies and innovation.
 Critical in certain industries
 High tech where technologies change very frequently
 Fashion where products have a short life cycle

OUTSOURCING RISKS
LOSS OF COMPETITIVE KNOWLEDGE

 Outsourcing critical components to suppliers may open up
opportunities for competitors

 Outsourcing implies that companies lose their ability to
introduce new designs based on their own agenda rather than
the supplier’s agenda.
 Outsourcing the manufacturing of various components to
different suppliers may prevent the development of new
approach, innovations, and solutions that typically require
cross-functional teamwork.
OUTSOURCING RISKS
CONFLICTING OBJECTIVES
Demand Issues
 „In a good economy
 „Demand is high
 „Conflict can be addressed by buyers who are willing to make
long-term commitments to purchase minimum quantities
specified by a contract
 „In a slow economy

 „Significant decline in demand
 „Long-term commitments involve huge financial risks for the
Buyers
OUTSOURCING RISKS
PRODUCT DESIGN ISSUES

 „ Buyers insist on flexibility
 would like to solve design problems as fast as possible

 „ Suppliers focus on cost reduction
 implies slow responsiveness to design changes.
Two Main Reasons for Outsourcing
Dependency on capacity
 Firm has the knowledge and the skills required to produce the
component
 „For various reasons decides to outsource
Dependency on knowledge
 „Firm does not have the people, skills, and knowledge required
to produce the component

 „Outsources in order to have access to these capabilities.
Supplier performance evaluation is based on the
following criteria,
Manufacturer professional credibility: Here, the credibility of the
supplier, his History, Technical expertise, Reputation, Credit
rating, Previous customers, are all considered during the
selection process.
Production and delivery capability: Here, the supplier’s

Production capacity, Efficiency, Skill of operators, training
procedure, throughput and lead time, proximity, delivery are all
taken as deciding factors.
Quality: of Technical facility, Machinery maintenance, quality

control instruments have to be taken into consideration.
Continued….
Price of product: relative to quality, is also to be considered.

Delivery and Payment terms: Suppliers, who are flexible in
payment terms, and who are willing to supply goods on credit
will be much sought after. Also, the suppliers, who keep up
their promise of delivery schedules, are the ones who would be
preferred. Other factors like guarantee and warranty,
Compensation for defectives and late delivery are also to be
considered.
MAKE OR BUY DECISIONS
 A basic decision in sourcing either materials or production is
whether to “Make or “Buy” the desired product.
 Making involves producing the fabric, components, and / or

finished products in the firm’s own production facilities.
 Buying involves contracting with another firm to produce the

product.
 “Make-or-Buy” decisions arise as the result of the

development of new products, need for specialized
equipment, unsatisfactory supplier or contractor performance,
and increase or decrease in demand for established products.
Continued….
The conditions favourable for The conditions favouring “Buy”
“Make” decisions decisions
1. Less expensive to make 1. Less expensive to buy

2. Available excess plant 2. Small volume requirements
capacity 3. Short product life
3. Unreliable suppliers / service 4. No close supervision needed
4. Design secrecy 5. Deficient production system
5. Maintain stable work force in 6. Desire to have multiple
periods of decline sales sourcing
6. Integration of production 7. Open product specification
7. Limited lead time. (unbranded goods)
8. Closed product specification
(branded goods)
Domestic Sourcing - Global Sourcing Decisions
There are two methods of “Sourcing decisions” raw materials,

accessories and trims. They are:
 Domestic Sourcing
 Global Sourcing
Domestic Sourcing Decisions
Here, the products or accessories are sourced from own country.
The advantages are:
 Can manage with peak production requirements or increased
customer demand without investment
 Offers Product - line flexibility
 Has the ability for Quick response and short throughput cycles
 Can utilize special equipments and skills
 Has the advantage of Quick start up / turnoff ability
Continued….
Global Sourcing Decisions
Here, the products or accessories are sourced from other countries.
The greatest advantage is that, sourcing can be done in “bulk” from
“extremely low-cost labour countries”.

However, it has the following disadvantages

Higher inventory has to be maintained,
Inability to replenish styles that create reorders,
Higher costs (travel, communications, brokerage, insurance,
management etc),
Transport delays and Risks, and Lead time
Continued….
 Quota & Customs problems,
 Buying offices, agents / staff in sourcing countries are needed
 Legal consultants, Technical, Customs / Bank / Freight specialists
are needed
 Offshore sourcing payments to be made. (L.C, Documents against
payment / acceptance, Electronic fund transfer, Open account) –
 Risk of Currency Fluctuations
 Problems in Compensation for defectives, etc.

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UNIT III

 Outsourcing components have increased progressively over the

years. Some industries have been outsourcing for an extended

 Why do many technology companies outsource manufacturing,

and even innovation, to manufacturers?

 „Should outsourcing strategies depend on product

 „Structure for optimizing buy/make decisions.

EFFECTIVE PROCUREMENT STRATEGIES

 „Linkage of procurement strategy to outsourcing strategy.

THE PROCUREMENT PROCESS

 „ Suppliers reduce uncertainty through the risk-pooling effect

REDUCE CAPITAL INVESTMENT

 „ Suppliers higher investment shared between customers.

FOCUS ON CORE COMPETENCY

 Allows buyer to differentiate from its competitors

accelerate product development cycle time.

 Critical in certain industries

 High tech where technologies change very frequently

 Fashion where products have a short life cycle

LOSS OF COMPETITIVE KNOWLEDGE

opportunities for competitors

 „In a slow economy

PRODUCT DESIGN ISSUES

 would like to solve design problems as fast as possible

to produce the component

Production and delivery capability: Here, the supplier’s

Quality: of Technical facility, Machinery maintenance, quality

Price of product: relative to quality, is also to be considered.

 Making involves producing the fabric, components, and / or

 Buying involves contracting with another firm to produce the

 “Make-or-Buy” decisions arise as the result of the

1. Less expensive to make 1. Less expensive to buy

There are two methods of “Sourcing decisions” raw materials,

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 Allows buyer to differentiate from its competitors

 High tech where technologies change very frequently

 Fashion where products have a short life cycle