1. The document discusses key concepts related to sourcing decisions in a supply chain, including the role of sourcing, factors that affect outsourcing decisions, and total cost of ownership. 2. It covers dimensions of supplier performance that impact costs, mechanisms for supplier selection like auctions and negotiations, and approaches for risk sharing between buyers and suppliers. 3. The document also discusses designing a tailored supplier portfolio and strategies for making effective sourcing decisions in practice through multifunctional teams, coordination across regions, evaluating total cost, and building long-term supplier relationships.

1. 1

2. SourcingDecisionsin
aSupplyChain
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Presented to:
Huma Jamshaid

3. 3
Meet Our Team
Group- 6
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4. LEARNING OBJECTIVES
1. Understand the role of sourcing in a supply chain.
2. Discuss factors that affect the decision to outsource a supply
chain function.
3. Identify dimensions of supplier performance that affect total
cost.
4. Structure successful auctions and negotiations.
5. Describe the impact of risk sharing on supplier performance
and information distortion.
6. Design a tailored supplier portfolio.
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5. The RoleofSourcingin
SupplyChain
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 Sourcing is a setof entire business processes
required to purchase goods and services
 Outsourcing functions in the supply chain being
performed by third party.

6.  Sourcing is the set of business processes
required to purchase goods and services
– Outsourcing
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The Role of Sourcing in
a Supply Chain

7. The Role of Sourcing in a
Supply Chain
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Outsourcing questions
1. Will the third party increase the supply chain surplus
relative to performing the activity in-house?
2. How much of the increase in surplus does the firm get
to keep?
3. To what extent do risks grow upon outsourcing?

8. 1. Better economies of scale through aggregated
2. More efficient procurement transactions
3. Design collaboration can result in products that are easier to
manufacture and distribute
4. Good procurement processes can facilitate coordination
with suppliers
5. Appropriate supplier contracts can allow for the sharing of
risk
6. Firms can achieve a lower purchase price by increasing
competition through the use of auctions
Benefits of Effective Sourcing
Decisions
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9. In-House
or
Outsource
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10. How Do Third PartiesIncrease the Supply
Chain Surplus?
Inventory aggregation
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Transportation aggregation by
transportation intermediaries
Transportation aggregation
by storage intermediaries
Warehousing aggregation
Capacity Aggregation Procurement aggregation
Receivables aggregation
Information aggregation
Relationship aggregation
Lower costs and higher quality

11. 11
ZubaiR
LatiF

12. Factors Influencing
Growth of Surplus
by aThirdParty
Scale
Uncertainty
The
specificity
of assets
Factors Influencing Growth of Surplus
by a Third Party
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13. Factors Influencing Growth of Surplus by a Third Party
Scale
Large scale it is unlikely that a third party can achieve further scale economies
and increase the surplus
If assets required are specific to a firm, a third party is unlikely to increase the
surplus because all it does is move the assets from one firm to another.
If requirements are highly variable over time, third party can increase the surplus
through aggregation with other customers
Uncertainty
Specificity of assets
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14. 14
Factors Influencing Growth of Surplus by a
Third Party
Specificity of Assets Involved in Function
Low High
Firm scale Low High growth in surplus Low to medium growth in
surplus
High Low growth in surplus No growth in surplus unless
cost of capital is lower for
third party
Demand
uncertainty
for firm
Low Low to medium growth in
surplus
Low growth in surplus
High High growth in surplus Low to medium growth in
surplus

15. 1. The process is broken
2. Underestimation of the cost of coordination
3. Reduced customer/supplier contact
4. Loss of internal capability and growth in third party power
5. Leakage of sensitive data and information
6. Ineffective contracts
7. Loss of supply chain visibility
8. Negative reputational impact
Risks of Using a Third Party
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16. Strategic Factors
in Sourcing
1. Support the business strategy.
2. Improve firm focus.
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17. What isTotal CostOf
Ownership-TCO?
Total cost of ownership (TCO) is the
purchase price of an asset plus the
costs of operation.
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18. Componentsof TCO:
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• • Item value
• Minimum order quantities
• Material content
• Physical characteristics
• Method of delivery/lead time
• Source of supply
• Volatility of demand
• Product life cycle/obsolescence

19. Another ComponentsAre:
• Order processing costs
• Application
• Program management costs
• Opportunity costs
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20. 20
Muhammad
Sajid

21. Supplier Selection
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22. SingleSourcingVs
Multiple Sourcing
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Single Sourcing
• Higher indirect cost
• Involvement with a single
supplier
• Risky
Multiple Sourcing
• Low indirect cost
• Competitive bidding
• Flexible

23. Mechanismof
SupplyChain
1. Auction in supply chain
2. Negotiation
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24. BasicPrinciple of Negotiation
• The first recommendation is to have a clear idea
of one's own value and as good an estimate of
the third party's value as possible.
• The second recommendation is to look for a fair
outcome based on equally dividing the
bargaining surplus or dividing it based on
needs.
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25. SharingRiskto Grow
SupplyChain Profits
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• Independent action provide lower profit
• Coordinate actions provide maximize profit
• Strong firm push more risk to the supply
chain partners
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26. Three Approaches to Risk Sharing
IncreaseOverall SupplyChain Profit
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1 2 3
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27. RiskSharingThrough Buyback
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• Return unsold inventory at an agreed upon
price
• Sharing risk with buyback unsold inventory
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28. RiskSharingThrough Revenue
Sharing
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1. Charge a low wholesale price
2. Retailer’s cost is low when demand is low
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29. RiskSharingThrough
Quantity Flexibility
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1. Change the quantity order
2. Order according to better
market information
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30. 30
NasiR
SattaR

31. A buyer may want performance improvement from a supplier who
otherwise would have little incentive to do so, A shared-savings
contract provides the supplier with a fraction of the savings that
result from performance improvement. Effective in aligning supplier
and buyer incentives when the supplier is required to improve
performance and most of the benefits of improvement accrue to the
buyer
Sharing Rewards to Improve
Performance
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32. The Impact ofIncentives
in Outsourcing
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Incentive in outsourcing is important
whenever the third parties action are not
fully observable
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33. • Encouraging greater effort
• Strong communicators of
performance
• Poor incentive with back fire
performance
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Impact of Incentives
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34. Exampleof Incentive
• Chrysler offered an incentive to dealers the rough
structure was as follow.
• Keep margin if sales less than 75%
• Additional margin if exceeded 75% or below 100%
• More additional margin if exceed 100%but less
110%
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35. DesigningA SourcingPortfolio:
Tailored Sourcing
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Firms have many options with regard to whom to source
from and where to source from .A company must decide on
whether to produce in house or outsource to a third party. A
company can choose among
1. On shoring
2. Near-shoring
3. Offshoring

36. On shoring
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OffshoringN earshoring

37. What istailored portfolio ?
 A tailored portfolio consists of a
combination of responsive and
low cost suppliers.
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38. FakhaR
AbbaS
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39. Categorizationof Purchased
Goods
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1. Based on materials
• Direct materials
• Indirect materials
2. Based on value or cost

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Making Sourcing Decision
in Practice
Purchasing
Planning
Engineering
Manufacturing

41. Use Multifunctional Teams
 They are relatively narrow and focused on
purchase price .
 A strategy developed with the
collaboration.
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42. Coordination of purchasing across all regions allows a
firm –
• To maximize economics of scale
• To reduce transaction cost .
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EnsureAppropriateCoordination
AcrossRegionsAnd BusinessUnits

43. 1. Should not make price reduction .
2. All factors that influence the total cost of
ownership should be identified and
measured .
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EvaluateThe Total Cost
of Ownership

44. It improves communication and coordination
between two parties .
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Build LongTerm Relationship
With KeySuppliers

45. Thank you
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