10_Sourcing

2. To what extent do risks grow upon outsourcing? Basically, we outsource if it increases supply chain profits without significantly increasing risks
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How can Outsourcing Increase Supply Chain Profits?
5. Increased flexibility
• Ability to better react to changes in customer demand • Ability to use supplier’s technical knowledge to accelerate product development • Ability to gain access to new technologies and innovation • These are critical in high-tech (where changes are frequent) or fashion industries (where product life cycles are short)
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Some Related Terms
• A third-party logistics (3PL) provider
• Performs one or more activities relating to flow of product, information, and funds that could be performed by the firm itself • E.g. of activities: inbound/outbound transportation of materials, warehouse management, maintenance of information systems
• E.g., manufacturer and raw material supplier, retailer and distributor, manufacturer and transporter
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Sourcing Decisions
• We must first decide which supply chain activities will be
• A fourth-party logistics (4PL) provider
• Can manage all aspects of a supply chain • 4PLs usually manage various 3PLs performing individual activities
• How??
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How can Outsourcing Increase Supply Chain Profits?
2. Risk pooling
• Outsourcing transfers buyer’s demand uncertainty (to suppliers)
• Demand aggregation across multiple buyers may reduce suppliers’ demand uncertainty
• Acceptable to suppliers when demands are high
• High financial risk for buyer when economy is slow (low demand)
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Risks of Outsourcing
ii. Conflicting Objectives: Product design issues
3. Reduce capital investment
• Capital investment (such as production capacity, warehousing)
may be transferred to suppliers • Suppliers’ higher investment is shared between all its customers
• Buyers insist on flexibility
10_sourcing topic,you should sourcingdecisions? whatfactors effect sourcing decisions? sourcingprocess. riskmanagement sourcing.seem 3027 businessprocesses required purchasegoods sourcingrelates two supply chain stages onepays otherdelivers e.g.,manufacturer rawmaterial supplier, retailer distributor,manufacturer transporterseem 3027 sourcingdecisions wemust first decide which supply chain activities outsourcedecision otherdecisions? sourcingprocess, like supply contracts madetogether supplierseem 3027 somerelated terms third-partylogistics (3pl) provider performsone moreactivities relating product,information, firmitself activities:inbound/outbound transportation materials,warehouse management, maintenance informationsystems fourth-partylogistics (4pl) provider canmanage all aspects supplychain 4plsusually manage various 3pls performing individual activities seem 3027 outsource?two questions govern rdparty increase supplychain profits relative activityin-house? whatextent do risks grow upon outsourcing? basi
itself from competition
• E.g. Nike focuses on innovation, marketing, distribution and sales, NOT on manufacturing • Some facts about Nike:
• Vast majority of production comes from China, Indonesia, Vietnam, Taiwan, South Korea, etc. • Factories in these nations are owned by subcontractors, with the majority of their output consisting solely of Nike products
How can Outsourcing Increase Supply Chain Profits?
Supplier
Buyer
1. Economies of scale
• 3rd party manufacturers can aggregate demand across multiple
firms (↑ economies of scale) • Production costs in the SC could be reduced to levels not realizable by a single firm through in-house production
objectives • Examples…
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Risks of Outsourcing
i. Conflicting Objectives: Demand issues
• If a buyer outsources production, it is more able to change its production rates based on customer demand (↑ flexibility) • But supplier would like stable demand and long-term commitment from buyer (↑ cost reduction) • Buyer may commit to minimum order quantities for a long period of time
• E.g., IBM entered PC market in 1981 and outsourced almost all major components
• IBM was market leader in 1985 with over 40 % of market share
• Compaq entered the market using the same suppliers as IBM • By end of 1995, IBM (<8%) fell behind Compaq (10%) in the PC market
• Information aggregation
• Lower costs or higher quality
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Risks of Outsourcing
1. Loss of Competitive Knowledge
• Outsourcing critical components to suppliers may open up opportunities for competitors
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How can Outsourcing Increase Supply Chain Profits?
4. Focus on core competence
• Buyer can focus on building its core strength and differentiating
Sourcing
At end of the topic, you should be able to answer …
• What are sourcing decisions? • What factors effect sourcing decisions? • Describe the steps in the sourcing process. • Risk management in sourcing.
outsourced?
• in-house or outsource decision • Made by Buyer
• Other decisions?
• Decisions in sourcing process, like supply contracts
• Made together by Buyer and Supplier
• Outsourcing implies that companies lose their ability to introduce new designs based on their own agenda rather than supplier’s agenda
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Risks of Outsourcing
innovations, and solutions that typically require cross-functional teamwork
2. Conflicting Objectives
• Suppliers and buyers typically have different and conflicting
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How do Suppliers Increase Supply Chain Profits?
• Capacity aggregation
• Inventory aggregation • Transportation aggregation • Warehousing aggregation • Procurement aggregation
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In-house or Outsource?
Two questions govern the decision: 1. Will the 3rd party increase the supply chain profits relative
to performing the activity in-house?
1. Loss o百度文库 Competitive Knowledge (Cont’d.)
• Outsourcing the manufacturing of various components to different
suppliers may prevent the development of new insights,
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Sourcing
• Sourcing is the set of business processes required to purchase goods and services
• Sourcing relates two supply chain stages
• One pays for (buys) a product/service and the other delivers the product/service • Supplier ↔ Buyer