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Sourcing Decisions. Chapter Objectives. Be able to: Discuss the various strategic issues surrounding sourcing decisions and identify some of the key factors favoring one approach over the other. Perform a simple total cost analysis.

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chapter objectives
Chapter Objectives

Be able to:

  • Discuss the various strategic issues surrounding sourcing decisions and identify some of the key factors favoring one approach over the other.
  • Perform a simple total cost analysis.
  • Explain what a sourcing strategy is, and show how portfolio analysis can be used to identify the appropriate sourcing strategy for a particular good or service.
  • Show how multicriteria decision models can be used to evaluate suppliers, and interpret the results.
  • Discuss some of the longer-term trends in supply management and why they are important.
  • The sourcing decision
  • Sourcing strategies
  • Supplier evaluation
  • Trends in supply management
  • Sourcing decisions –High level, often strategic decisions regarding which products or services will be provided internally and which will be provided by external supply-chain partners
  • Purchasing – discussed in Chapter 11The activities associated with identifying needs, locating and selecting suppliers, negotiating terms, and following up to ensure supplier performance

Sourcing decisions and purchasing activities serve to link a company with its supply chain partners

the sourcing decision
The Sourcing Decision
  • Insourcing –The use of resources within the firm to provide products or services
  • Outsourcing –The use of supply chain partners to provide products or services
  • Sourcing decisions are high-level, often strategic decisions that address:
  • What will use resources within the firm
  • What will be provided by supply chain partners

Make-or-Buy Decision

advantages and disadvantages of insourcing

High degree of control

Ability to oversee the entire program

Economies of scale and/or scope


Required strategic flexibility

Required high investment

Loss of access to superior products and services offered by potential suppliers

Advantages and Disadvantages of Insourcing
advantages and disadvantages of outsourcing

High strategic flexibility

Low investment risk

Improved cash flow

Access to state-of-the-art products and services


Possibility of choosing a bad supplier

Loss of control over the process and core technologies

Communication and coordination challenges

“Hollowing out” of the corporation

Advantages and Disadvantages of Outsourcing
factors affecting the decision to insource or outsource
Factors Affecting the Decision to Insource or Outsource




Environmental uncertainty low high

Competition in the supplier market low high

Ability to monitor supplier performance low high

Relationship of product/service to high low buying firm’s core competencies

total cost analysis
Total Cost Analysis

A process by which a firm seeks to identify and quantify all of the major costs associated with various sourcing options

  • Direct costs – Costs that are tied directly to the level of operations or supply chain activities
  • Indirect costs – Costs that are not tied directly to the level of operations or supply chain activity
insourcing and outsourcing costs
Insourcing and Outsourcing Costs

Insourcing Outsourcing



portfolio analysis
Portfolio Analysis


Complexity or Risk Impact




Value Potential

critical quadrant
Critical to profitability and operations

Few qualified sources of supply

Large expenditures

Design and quality critical

Complex and/or rigid specification


Form partnerships with suppliers


Increase role of selected suppliers


Heavy negotiation

Supplier process management

Prepare contingency plans

Analyze market/competitions

Use functional specifications

Critical Quadrant
bottleneck quadrant
Complex specifications requiring complex manufacturing or service process

Few alternate productions/sources of supply

Big impact on operations/maintenance

New technology or untested processes


Ensure supply continuity


Decrease uniqueness of suppliers

Manage supply


Widen specification

Increase competition

Develop new suppliers

Medium-term contracts

Attempt competitive bidding

Bottleneck Quadrant
leverage quadrant
High expenditures, commodity items

Large marketplace capacity, ample inventories

Many alternate products and services

Many qualified sources of supply

Market/price sensitive


Maximize commercial advantage


Concentrate business

Maintain competition


Promote competitive bidding

Exploit market cycles/trends

Procurement coordination

Use industry standards

Active sourcing

Leverage Quadrant
routine quadrant
Many alternative products and services

Many sources of supply

Low value, small individual transactions

Everyday use, unspecified items

Anyone could buy it


Simplify acquisition process


Increase role of systems

Reduce buying effort


Rationalize supplier base

Automate requisitioning, e.g., EDI, credit cards

Stockless procurement

Minimize administration costs

Little negotiating

Routine Quadrant

Sourcing Strategies

  • Single sourcing –The buying firm depends on a single company for all or nearly all of an item or service
  • Multiple sourcing –The buying firm shares its business across multiple suppliers
  • Cross sourcing –Using a single supplier for a certain part or service and another supplier with the same capabilities for a similar part
  • Dual sourcing –Using two suppliers for the same purchased product or service
multicriteria decision models in sourcing and purchasing

Multicriteria Decision Models in Sourcing and Purchasing

How do we evaluate alternatives when criteria include both quantitative measures (such as costs and on-time delivery performance) and qualitative factors (such as management stability and trustworthiness)?


Weighted-Point Evaluation System - I


  • Evaluating potential suppliers
  • Tracking suppliers’ performance over time
  • Ranking current suppliers

The Process:

  • Assign weights to performance dimensions
  • Rate the performance of each supplier with regard to each dimension
  • Calculate the total score

Weighted-Point Evaluation System - II

Summary Data for Alternative Suppliers

Aardvark Beverly Conan the Electronics Hills Inc. Electrician




Delivery reliability


Criteria Weights

Scoring Scheme

WPrice = 0.3

WQuality = 0.4

WDelivery = 0.3

5 = excellent

4 = good

3 = average

2 = fair

1 = poor

Weighted-Point Evaluation System - III


Weighted-Point Evaluation System - IV

Performance Values for Alternative Suppliers




Delivery reliability

Aardvark Beverly Conan the Electronics Hills Inc. Electrician


Weighted-Point Evaluation System - V

Total Scores for Alternative Suppliers

ScoreAardvark= (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6

ScoreBeverly= (3 x 0.3) + (5 x 0.4) + (2 x 0.3) = 3.5

Score Conan= (5 x 0.3) + (1 x 0.4) + (1 x 0.3) = 2.2

Aardvark should improve their qualityBeverly Hills should improve their delivery and priceConan is out of the running as a potential supplier


Trends in Supply Management

  • Sustainable Supply*
  • Supply Base Reduction
  • Global Sourcing
    • Supply Chain Disruptions
    • Supply Chain Capacity
    • Transportation Costs