Bozarth ch10

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.
 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.
© 2008 Pearson Prentice Hall --- Introduction to Operations and Supply Chapter 10, Slide 2
Chain Management, 2/e --- Bozarth and Handfield, ISBN: 0131791036
Introduction
• The sourcing decision
• Sourcing strategies
• Supplier evaluation
• Trends in supply management
Focus
Sourcing decisions and purchasing activities serve to
link a company with its supply chain partners
• 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 11
The activities associated with identifying needs, locating and
selecting suppliers, negotiating terms, and following up to ensure
supplier performance
The Sourcing Decision
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
• Insourcing –
The use of resources within the firm
to provide products or services Make-or-Buy
• Outsourcing – Decision
The use of supply chain partners
to provide products or services
Advantages and
Disadvantages of Insourcing
Advantages Disadvantages
• High degree of control • Required strategic
• Ability to oversee the flexibility
entire program • Required high
• Economies of scale investment
and/or scope • Loss of access to
superior products and
services offered by
potential suppliers
Advantages and
Disadvantages of Outsourcing
Advantages Disadvantages
• High strategic flexibility • Possibility of choosing a
• Low investment risk bad supplier
• Improved cash flow • Loss of control over the
• Access to state-of-the-art process and core
products and services technologies
• Communication and
coordination challenges
• “Hollowing out” of the
corporation
Factors Affecting the Decision to
Insource or Outsource
Favors Favors
Factor Insourcing Outsourcing
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
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 Outsourcing
•Direct material •Price (from invoice)
Direct •Direct labor •Freight costs
costs •Freight costs
•Variable overhead
•Supervision •Purchasing
•Administrative support •Receiving
•Supplies •Quality control
Indirect •Maintenance costs
costs •Equipment depreciation
•Utilities
•Building lease
•Fixed overhead
Portfolio Analysis
High
Bottleneck Critical
Complexity
or Risk
Impact
Routine Leverage
Low
Low High
Value Potential
Critical Quadrant
• Critical to profitability and • Strategy
operations – Form partnerships with
suppliers
• Few qualified sources of
supply • Tactics
– Increase role of selected
• Large expenditures suppliers
• Design and quality critical • Actions
• Complex and/or rigid – Heavy negotiation
specification – Supplier process
management
– Prepare contingency plans
– Analyze
market/competitions
– Use functional
specifications
Bottleneck Quadrant
• Complex specifications • Strategy
requiring complex – Ensure supply continuity
manufacturing or service • Tactics
process – Decrease uniqueness of
• Few alternate suppliers
productions/sources of – Manage supply
supply • Actions
• Big impact on – Widen specification
operations/maintenance – Increase competition
• New technology or – Develop new suppliers
untested processes – Medium-term contracts
– Attempt competitive
bidding
Leverage Quadrant
• High expenditures, • Strategy
commodity items – Maximize commercial
advantage
• Large marketplace
capacity, ample • Tactics
– Concentrate business
inventories
– Maintain competition
• Many alternate products
• Actions
and services
– Promote competitive
• Many qualified sources of bidding
supply – Exploit market cycles/trends
– Procurement coordination
• Market/price sensitive
– Use industry standards
– Active sourcing
Routine Quadrant
• Many alternative • Strategy
products and services – Simplify acquisition
process
• Many sources of
supply • Tactics
– Increase role of systems
• Low value, small – Reduce buying effort
individual transactions • Actions
• Everyday use, – Rationalize supplier base
unspecified items – Automate requisitioning,
e.g., EDI, credit cards
• Anyone could buy it – Stockless procurement
– Minimize administration
costs
– Little negotiating
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
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
Purpose:
• 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
System - II
Summary Data for Alternative Suppliers
Performance Aardvark Beverly Conan the

Dimension Electronics Hills Inc. Electrician
$4/unit $5/unit $2/unit
Price
Quality 5% defects 1% defects 10% defects
Delivery 95% on time 80% on time 60% on time

reliability
System - III
n
Score X   Performance XY  WY
Y 1
Criteria Weights Scoring Scheme
WPrice = 0.3 5 = excellent

4 = good
WQuality = 0.4 3 = average
2 = fair
WDelivery = 0.3 1 = poor
System - IV
Performance Values for Alternative Suppliers
Performance Aardvark Beverly Conan the

Dimension Electronics Hills Inc. Electrician
4 3 5
Price
Quality 3 5 1
Delivery 4 2 1
reliability
System - V
Total Scores for Alternative Suppliers

Score Aardvark = (4 x 0.3) + (3 x 0.4) + (4 x 0.3) = 3.6
Score Beverly = (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 quality

Beverly Hills should improve their delivery and price
Conan 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
Case Study in Sourcing
Decisions
Pagoda.Com

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Sourcing Decisions

Environmental uncertainty low high

A process by which a firm seeks to

How do we evaluate alternatives when criteria

Summary Data for Alternative Suppliers

Performance Aardvark Beverly Conan the

Delivery 95% on time 80% on time 60% on time

WPrice = 0.3 5 = excellent

Performance Values for Alternative Suppliers

Performance Aardvark Beverly Conan the

Total Scores for Alternative Suppliers

Score Beverly = (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 quality

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