Developing Sourcing Strategies Assignment
This report is aimed at developing a sourcing strategy in light of the information provided in the reference article ‘Back to Reality’ (Williams, 2012) and analysing the available information while considering the constraints of doing business in the modern world.
The report talks about why it is important and necessary to have a sourcing strategy due to various factors. The focus is then shifted to the possible challenges and things to watch out for while making decision to outsource a business process, activity or product.
The report also highlights some of the key steps while making a sourcing decision and the factors that need to be considered while zeroing in on a vendor and recommendations are provided for the way ahead for businesses and the mind-set change required for making the most out of a vendor relationship.
The guidelines and suggestions are substantiated with relevant recent examples wherever applicable to reinforce the concept.
The Need for a Sourcing Strategy
Though the article (Williams, 2012)primarily talks about the hazards of outsourcing and lays emphasis on back sourcing, it is clear that in the modern era businesses simply cannot survive without outsourcing some, or in some cases, most part of the business.
A business may source raw material (product vendors) or services (website development, IT system implementation, housekeeping) from another vendor or may outsource their processes (customer relationship management, accounts processing, recruitment) or even knowledge based activities (market research, pharmaceutical research and development) (Howells, et al., 2012)or any combination of these or several other types of outsourcing. The very existence of so many types of outsourcing businesses point out the futility of bashing outsourcing.
Several reasons why outsourcing is important are:
Core vs.Non-Core Activities
As per Pareto principle, 80% of the activities are non-value adding and the resources spent on 20% activities are what contribute to the business’ growth and sustenance. Thus it is prudent to concentrate on the value adding or core activities and outsource everything else. Another way to look at it is through the delegation principle which states that one should do what only he can do and delegate everything else. The same is true for businesses in the context of outsourcing(Ganhinhin, 2012).
If someone else can do a job better than you, at a lesser cost, outsourcing is the way to go since specialized vendors have the expertise and the economies of scale to bring down costs while not compromising on quality(Williams, 2012). Vendors can also be source of valuable insights when entering new, unexplored markets.
Certain business environments tend to lend themselves a natural fit for outsourcing. In highly capital intensive industries with quick obsolescence, leasing the equipment from a vendor instead of buying are preferred(Gordon, 2008).
Thus, there is no escaping vendor management and outsourcing. To better manage the interaction while mitigating the risks, it is important to have a sound sourcing strategy in place.
Problems and Issues When Developing Sourcing Strategies and Relationship with Key Suppliers
Highlighting the inevitability of outsourcing in no way implies that it is risk free. In fact, there are several risk factors that must be carefully thought through while making a decision. While the article mentioned in the assignment highlights several risk factors, some worth mentioning are:
One of the biggest risk factors while outsourcing important tasks is to consider the confidentiality aspects. Processes and activities dealing with sensitive customer information like credit card details, social security numbers etc. and critical business information like new product launches etc(Handley & Jr., 2012). should be carefully examined from a risks-return and trade-off point of view. ???? what you mean? Is the English correct? Yes this is correct English (refer a dictionary). These aspects become highly important in industries dealing with personal records like in the case of financial services and healthcare. Any leak or misuse of data can not only lead to loss of business but also in litigation and ruining of public image. Thus, not only is it important to choose the vendor carefully but also utmost care must be taken in identifying the activities to be outsourced.
Working in silos is outdated and vendors are perceived more and more as an extension of the clients’ business. Thus any misconduct on the vendor’s part will also reflect poorly on the public image of the customer. Apple is the example that immediately comes to mind when one thinks of this situation. The in human conditions in factories manufacturing for Apple in China have been highlighted several times in the recent past. One cannot help contrast it with the hefty profit margins Apple commands(Apple Inc., 2011). Similarity when one hears of Wal-Mart squeezing its suppliers to the limit, the company’s public image, and also the business, is bound to take a beating. Therefore, while it is important to keep in mind the cost savings brought by the vendor relationship, considering the terms of engagement to ensure fairness to the vendors is also important. The pesticide issue raised against Coke and Pepsi (Bouckley, 2012)in India is a great example of how companies need to spend a lot on damage control which could have been avoided had necessary precautions been taken. In general, higher the brand value, higher is the risk of the public image getting tarnished due to vendor’s mistakes reflecting on the company.
Should have more citation on this paragraph ?you said apple example, where is the source come from?
The threat of a major vendor turning into a competitor is very real, as also highlighted in the article. SAP (Saran, 2012)is among the biggest customers of Oracle’s database software. Now, Oracle is the biggest credible threat to SAP’s dominance in the ERP market. To counter this, SAP has started decoupling its offerings with Oracle. Similarly, after Samsung (Worstall, 2012)became Apple’s biggest competitor in the smartphone market while being the major supplier of chips to Apple for iPhones and iPads, a billion dollar lawsuit followed and now Apple is trying to reduce Samsung’s footprint in their products.
Requirements clarification is another major cause of concern (Ward, 2010)especially when the vendor and customer are not at the same location. If the requirements are not clarified upfront, communication gaps can set in and the entire vendor relationship can come crashing down. It is important to ensure that the requirements are clarified to the vendor and the terms of engagement are mutually understood and agreed upon.
Then there is always the principal-agent problem. Vendors will act in their best interests sometimes even at the cost of the customer if the customer isn’t careful(Handley & Jr., 2012). To eliminate this problem, again it is important to clarify the terms beforehand, set expectations and identify goals that are aligned with the objectives of vendor and customer, both.
Practices to Address Potential Problems
Although a supplier relationship is a strategic one and evolves over a long term, there are a few things that need that need to be considered before a vendor is taken aboard(Guth, 2007). Literature points out various vendor management best practices (Ganhinhin, 2012)and some of the basic things that need to be verified, in the same sequence, are:
It is important to verify the stability and soundness of the organisation one plans to do business with. Though this is a generic statement in sense of B2B relationships, it becomes even more critical in case of upstream relationships. The potential vendors’ business philosophy and culture should match that of the customer so that there is no cultural mismatch. Things that need evaluation here are the ownership structure, corporate policies, the financial condition of the vendor, relative position in their segment etc(Bose, 2012). Though these seem trivial, many times the importance of these factors may be overlooked in favour of plain cost analysis. However, it is important to note that a culture and philosophy mismatch makes seamless communication difficult resulting in a difficult relationship which can substantially increase costs in the long run.Order Now