Sourcing and Supplier Management Including Global

Sourcing

Abstract: The globalization phenomenon has induced a considerable shift in

manufacturing and supply chain strategies across many industry sectors. In
a quest for cost efficiency manufacturers and service operators alike are
considering the reallocation of their operations to, and sourcing of
components from, low cost countries. The concepts of sourcing, supplier
management and global sourcing were arisen in these circumstances and
the purpose of this paper is to explore how sourcing, supplier management
and global sourcing is carried out in modern business firm so as to deliver
value to its customers.

Key Words: sourcing, global sourcing and supplier management.

1.0 INTRODUCTION

The term sourcing refers to a number of procurement practices, aimed at finding, evaluating
and engaging suppliers of goods and services. Global sourcing is a term used to describe
practice of sourcing from the global market for goods and services across geopolitical
boundaries. Global sourcing often aims to exploit global efficiencies in the delivery of a product
or service. These efficiencies include low cost skilled labor, low cost raw material and other
economic factors like tax breaks and low trade tariffs. In recent developments of purchasing
tools supplier or vendor management has acquired importance. Suppliers are part of
companies supply chain and any weak link can effect the entire chain .Supplier management is
the process of defining the structure for how relationships with suppliers will be developed and
maintained. It involves defining certain standards and making sure these are consistently met.
Strategic sourcing and supplier management directly contributes to operating margins. A
proactive and effective organization should take necessary steps to manage sourcing and
supplier management not only to save on cost of production or make margins but also to
deliver better customer value.

2.0 SOURCING

Sourcing refers to a number of procurement practices, aimed at finding, evaluating and

engaging suppliers of goods and services. Sourcing is an institutional procurement process that
continuously improves and re-evaluates the purchasing activities of a company. In a production
environment, it is often considered one component of supply chain management. Strategic
sourcing techniques are also applied to non traditional area such as services or capital.
Sourcing is also a cornerstone of total cost management (TCM), a technological and process
framework for the optimal alignment, management and control of the total cost of ownership
(TCO) of supply relationships.

The steps in a strategic sourcing process are:

1. Assessment of a company's current spend (what is bought where?)

2. Assessment of the supply market (who offers what?)
3. Total cost analyses (how much does it cost to provide those goods or services?)
4. Identification of suitable suppliers
5. Development of a sourcing strategy (where to buy what considering demand and
supply situation, while minimizing risk and costs)
6. Negotiation with suppliers (products, service levels, prices, geographical coverage,
etc.)
7. Implementation of new supply structure
8. Track results and restart assessment (continuous cycle)

Every sourcing decision requires companies to balance the tradeoffs of cost, performance, and
risk. However, these factors are heightened when sourcing globally because of variability of
non price or “hidden” cost factors such as cross boarder freight and handling fees, complex
inventory stocking and handling requirements, and multitude of documentation and regulatory
compliance requirements.

2.1 FUNDAMENTALS OF STRATEGIC SOURCING PROCESS

The main objective of strategic sourcing is to save money but other reasons include improving
the acquisition process, supplier performance and minimizing risk. A formal strategic sourcing
process includes the following steps:

Step 1 Profile the category:

Understand everything about the spend category as the first step in the strategic sourcing
process. This means defining the category and commodities in it. What is the current quantity
used, types and sizes. Who are the users, where are they located, what are the processes
used and who else is involved in the supply chain. Data must be documented in as much detail
as possible as changes may be needed.

Step 2 Supply market analyses:

Identify potential new global and local suppliers. Study the cost components of the product or
service, and analyze the suppliers’ marketplace for risks and opportunities. Key raw material
prices and other variables such as labor and transportation must be priced and calculations
done of the suppliers’ cost elements.

Step 3 Develop the strategy:

Deciding where to buy while minimizing risk and costs is how you develop the strategic
sourcing strategy. Using a cross functional project team is a must. The strategy will depend on
what real alternatives there are to the current suppliers, how competitive the supplier
marketplace is and importantly, how open the users are to new suppliers.
Step 4 Select the sourcing process:
The most common method of sourcing is to use a Request for Proposal process for soliciting
bids. It includes product or service specifications, delivery and service requirements, pricing
breakdown and legal and financial terms and conditions. Often the evaluation criteria are also
stated.

Step 5 Negotiate and select suppliers:

The first round of the negotiation process, after reducing the bids to the valid ones, is
conducted with many suppliers asking for clarifications and more detail where needed. A good
strategic sourcing strategy is to conduct multiple rounds of negotiations to get to a short list.
The final selection is usually done by the team and signed off as per the approval process.

Step 6 Implement and integrate:

Notify the successful suppliers and ensure that they are involved in the implementation
process. Implementation plans vary depending on the degree of changes. The communication
plan in the strategic sourcing strategy will include any improvement to specifications or
process, changes in delivery or service requirements or pricing.

Step 7 Benchmarking and tracking results:

This is a key element of the sourcing management process. It is the start of a continuous cycle,
starting with benchmarking the current status of the commodity or category, monitoring the
results and ensuring that full value is being achieved. Back to Step 1 to review the supply
market again and restart the process in a constantly evolving marketplace.

3.4 How to Prioritize Suppliers

 Reach - Build a better business case for supply management

 Measurement - How well do you perform against your competitors?
 Innovation - Think outside the box
 Extracting Value - Make sure you’re getting the most out of suppliers while remaining
attuned to the market
 Global Business - Think worldwide to optimize sourcing practices
 Diversity - Expand the horizons of your supply base

3.0 GLOBAL SOURCING

Global sourcing is a strategic procurement concept with an international focus. A cross-boarder

search is conducted for suitable suppliers that meet specific quality, time and price
requirements. Global sourcing is defined as the process of identifying, developing, and utilizing
the best source of supply for the enterprise, regardless of location. Global sourcing entitles
identifying, evaluating, negotiating and configuring supply across multiple geographies to
reduce cost, maximize performance and mitigate risks.
Global sourcing often aims to exploit global efficiencies in the delivery of a product or service.
These efficiencies include low cost skilled labor, low cost raw material and other economic
factors like tax breaks and low trade tariffs. The whole point of global sourcing is to find better
sources of supply around the world, offering improved quality and lower prices. Global sourcing
factors that must be understood and balanced can be segmented into six categories as
following:
  Material costs
 Transportation cost
 Inventory carrying cost
 Cross border taxes, tariffs and duties
 Supply and operational performance
 Supply and operational risks

3.1 Global Sourcing Objectives

The objectives into one elegant package of global sourcing:

1. Efficiency with Innovation

Sourcing initiatives typically begin as a means to get the house in order, eliminate
inefficiencies, control and lower costs etc. However the benefits desired do not stop once those
are achieved and extend to creation of new value through innovation and transformation.
Innovation is expected to follow its humble cousin, Operational Efficiencies, as a natural
progression and that too in quick succession.

2. Quick Transitions with Minimum Disruptions

Companies want to complete transition quickly but do not want transition to impact business.
Quick transition helps in avoiding the dreaded ‘bubble’ and also reduces risks due to attrition
(quick transition = less time for people to react). But it could be potentially disruptive to
business if it requires more intense effort from key personnel. Traditional outsourcing used to
take care of this using a 100% people and asset transfer model. In case of Global Sourcing
(as opposed to just Outsourcing), more creative models are required to reconcile these two
disparate objectives.

3. Low Risk with Maximum Savings

Sourcing initiatives are not just driven by a need to save costs, but also by a desire to minimize
risks (the latter part is not usually verbalized, but is key in terms of decision criteria). So, while
the price point is being watched carefully, enough attention needs to be paid to the service
provider’s capabilities to deliver and for both parties to achieve their objectives, esp. in a global
sourcing scenario. This trade-off between price and risk is not captured in either a typical T&M
pricing or a regular Fixed-Price model. New pricing models and deal structures are being
discussed and talked about, but are yet to become the norm.

4. Accelerated Results without a Learning Curve

As the business needs become more critical and the urgency increases, there is intense
pressure to achieve accelerated results, while avoiding the pitfalls and mistakes made by past
adopters of different kinds of sourcing. Companies do not have the time to go through the
learning curve, and they pass this pressure through the sourcing eco-system. Additional
players, other than just the service provider(s), whether internal or external, are required to
take on pivotal roles.

5. Capability with Reassurance

Companies want world-class capabilities, and they want ownership and control to the extent
possible. Ideally they want both at the same time.

3.2 Global Sourcing Challenges

  Identifying and establishing new supplier relationships
 Less advanced IT systems and information sharing
 More research and due diligence must be done on overseas suppliers
 Incorporating local business culture into negotiation strategy

3.3 Approaches to Global Sourcing

 International Supply Management Office
 Local Joint Ventures
o Work with in-country enterprise to establish presence
 Trading Agent
o “sourcing brokers”
o Procurement Outsourcing

3.4 Advantages of Sourcing

 Source your non-core activities and spend more time concentrating on your core
business processes
 Off shoring gives you access to professional, expert and high-quality services
 Your organization can experience increased efficiency and productivity in non-core
business processes
 You can streamline your business operations
 Offshore outsourcing can help you save on time, effort, manpower, operating costs
and training costs, giving you overall cost advantage
 Outsourcing can make your organization more flexible to change
 Experience increased control of your business
 Save on investing in the latest technology, software and infrastructure and let your
outsourcing partner handle all the infrastructure
 Get the assurance that your business processes are being carried out efficiently,
proficiently and within a fast turnaround time
 Off shoring can help your organization save on capital expenditures
 By outsourcing, your company can save on team management problems as your
offshore partner will be managing the team who does your work
 Cater to the new and challenging demands of your customers
 Free up the cash flow of your company
 Share your business risks
 Improves service quality
 Give your business a competitive advantage - increase productivity in all the areas of
your business
 Sourcing can help your organization cut its operational costs by more than half
 Makes the business more flexible to change (i.e. demand)

If you want your organization to stay ahead of competition, concentrate on core competencies
and make use of the latest technologies, then outsourcing can help your organization achieve
all this and more. The advantages of outsourcing far outweigh the disadvantages. Many
organizations across the globe have made the choice to outsource and experience the benefits
that it has to offer.
3.4 Disadvantages of Sourcing
 The fear of the service provider ceasing to trade
 You may lose control of the process
 Creates potential redundancies
 Other companies may also be using the service provider. Therefore in some cases,
the best interests of the service provider may be diluted with other users
 You may lose focus of the customer and concentrate on the product (the outsourced
process)
 The loss of talent generated internally
 Employees may react badly to outsourcing and consequently their quality of work may
suffer
 While outsourcing services such as payroll processing services and tax preparation
services, your outsourcing provider will be able to see your company’s confidential
information and hence there is a threat to security and confidentiality in outsourcing
 Off shoring can create potential redundancies for your organization and your
employees might express lack of interest or lack of quality at work
 Your outsourcing provider might not be providing services only for your organization.
Since your provider might be catering to the needs of several companies, they will not
be able to give your company 100% attention
 Sourcing, though cost-effective, might have hidden costs, such as the legal costs
incurred while signing a contract between companies. You might also have to spend a
lot of time and effort in getting the contract signed
 With outsourcing, your organization might suffer from a lack of customer focus
 There can be several disadvantages, such as, renewing contracts, misunderstanding
of the contract, lack of communication, poor quality and delayed services amongst
others

In a nutshell, strategic sourcing refers to efforts on the part of organizations to carefully

evaluate and to form lasting relationships with suppliers. These relationships are generally
mutually beneficial and also can involve a dramatic change in attitude. With strategic sourcing,
businesses view their vendors as partners instead of simply commodity providers. While this
difference in attitude may not seem significant, it has a lasting and positive impact on the
success of both the supplier and the buyer.

Strategic sourcing has particular importance with manufacturing firms. First, these firms use a
greater portion of their revenue on purchasing than any others. Sometimes as much as 75% of
company budgets are devoted to purchasing raw materials and other goods/services required
to create their products. Another reason is that with most manufacturers there are some goods
that manufacturers cannot go without for any period of time. Otherwise, the production lines will
have to be shut down. These are called bottleneck items since if a company is unable to obtain
them, there will be a costly bottleneck in the manufacturing process. These are items that are
usually only provided by a relatively small number of suppliers, so the costs can be driven
higher by the laws of supply and demand. Plus, shortages of the product can cause delays and
problems with the company's production cycle.

Because of these two reasons, manufacturers can benefit from strategic sourcing. One benefit
is that by having a stable relationship with key suppliers, the business can ensure that they
have a steady supply of both bottleneck items and other necessary goods. Additionally, by
negotiating with the supplier and finalizing a purchasing arrangement, the company can secure
a lower price on those items because the vendor is assured of a buyer for their products.

The problem with most companies and their vendor relationships is that there are not
established to be lasting vendor relationships. Most businesses pick suppliers based almost
exclusively on price and only a few take the time to thoroughly go into the backgrounds of the
vendors that they do choose. In the long run, going through the RFP process for almost every
purchase is more time-consuming and expensive than it needs to be. Additionally, suppliers
have no real loyalty to their buyers because they realize that their buyers have no loyalty to
them nor are they willing to invest the time in understanding the details of the buyer's industry.

There are ways to repair and strengthen relationships even if these problems are present in the
company existing purchasing process. First, the organization needs to change its attitude
towards purchasing and its suppliers. No matter what other changes are made, these changes
simply won't have any impact if those attitudes are not in place because vendors will still be
treated as being “outside the loop”.

Once that adjustment is made, companies should begin creating a short list of suppliers to
work with on a regular basis. These suppliers should not be randomly selected but should be
chosen based on their experience, reputation, price, quality, and reliability. After the company
determines the suppliers, contracts need to be discussed and negotiated so that they are
mutually beneficial for both companies.
Another way to strengthen those relationships is by using application software. While this type
of software is just breaking into the market, these types of programs could result in cost
savings and improve communication and collaboration with suppliers. Ideally they extend the
buyer’s relational capabilities. Some companies have already reported significant ROI within
the first year of implementing these software.

The biggest benefit of the software is that it counteracts many problems that do arise during the
strategic sourcing process. These problems include trying to work with too few suppliers,
basing vendor decisions on incomplete information, and taking longer to finalize purchasing
choices. Essentially, if a company is truly interested in strategic sourcing, using software and
changing the way it does purchasing can be a great way to enhance the procurement process.

4.0 SUPPLIER MANAGEMENT

Organizations are under pressure to find the most profitable ways to bring products to market.
Increasingly, this means relying on third parties and outsourced relationships. It is imperative to
have a highly collaborative working relationship with suppliers. Visibility into your suppliers’
business processes that impact your customers is fundamental to your business’ success.

Purchasing or procurement plays a very pivotal role in manufacturing organisation,

providing seamless flow of quality raw material for the production. Big companies have
large supplier/vendor base and these vendors have to be regularly evaluated on their
performance. To succeed in this complex environment there needs a comprehensive view of
trading partners and associated business processes and the ability to perform an impact
analysis as those business processes are executed across supply chain.

In recent developments of purchasing tools supplier or vendor management has

acquired importance. Suppliers are supposed to be the part of companies supply chain
and any weak link can affect the entire chain. Supplier management is the process of
defining the structure for how relationships with suppliers will be developed and
maintained. It involves defining certain standards and making sure these are consistently met.

Suppliers are selected on the basis of the following aspects:

 Innovation and growth
 Value chain optimization
 Advanced cost management
 Risk management and
 supply continuity

Supplier Evaluation

All suppliers are subjected to quantitative ratings for different areas of competencies such as
delivery compliance, rejection or quality, price, responsiveness, facility, technical competency
etc. supplier could be the contract manufacturers or offshore suppliers. Nowadays we can find
Vendor evaluation software's which generates accurate reports on the vendor performance on
pre set parameters .Evaluation is normally done prior to registration of supplier/vendor into
company vendor data with vendor code.

Supplier Ratings

After initial registration and on site inspections of supplier facility and few deliveries, suppliers
are monitored for parameters and are ranked on the scale of 1 to 5 or any other scale. After
continuously ranking these vendors the best performers are awarded with more orders and the
worst performers are phased out with new vendors hence these ratings improves the plant or
production efficiency indirectly.

Supplier Rating is a system used by buying organizations or industry analysts to record,

analyze, rank and report the performance of a supplier in terms of a range of predefined
criteria, which may include such things as:

 Quality of the product or service

 Delivery performance and reliability
 Cost, price
 Capabilities
 Service
 Financial continuity of the firm

The method includes defining the criteria and the weight each criterion receives in the
overall result, development of the questions and questionnaires, actually carrying out
the measurements, and finally interpreting the results. If supplier ratings are carried out
periodically or even ongoing, the results (per vendor) can be analyzed and compared
over time.

Benefits of Supplier Rating

 Clear and objective overview of performance of suppliers
 Enables better vendor management
 Incidents and escalations can be monitored earlier
 Suppliers are stimulated to improve their performance
 In the case of periodical vendor rating: analyze trends in vendor performance

If vendor rating is carried out before the placement of an order, it is also known as Supplier
Evaluation. When undertaken after order fulfillment, it is also referred to as Supplier Rating

Supplier Relationships

Suppliers are awarded with more orders on annual contact based on their performance
Or else can be acknowledged with some for of certificate of appreciations in public. Further
buyer could send its technical team to assist vendors team in finding out innovative methods
which can result in savings .Relationships with vendors are based on trust, reciprocality,
transparency and mutual agreement on terms and conditions which is a win -win situation for
both.

Purchasing or procurement plays a very pivotal role in manufacturing organisation,

providing seamless flow of quality raw material for the production. Big companies have
large vendor base and these vendors have to regularly evaluated on their performance.

In recent developments of purchasing tools supplier or vendor management has

acquired importance .Vendors are supposed to be the part of companies supply chain
and any weak link can effect the entire chain .Vendor management is the process of
defining the structure for how relationships with suppliers will be developed and
maintained. It involves defining certain standards and making sure these are
consistently met.

Supplier performance is about more than just a low purchase price:

 The costs of transactions, communication, problem resolution and switching suppliers

all impact overall cost.
 The reliability of supplier delivery, as well as the supplier’s internal policies such as
inventory levels, all impact supply-chain performance.

It used to be common to line up multiple suppliers for the same raw material, over concern
about running out of stock or a desire to play suppliers against one another for price
reductions. But this has given way, in some industries, to working more closely with a smaller
number of suppliers in longer-term, partnership-oriented arrangements. Supplier involvement
and partnership is also important.

Benefits of supplier partnerships include:

 Partnership arrangements with fewer suppliers mean less variation in vital process
inputs.
  If your suppliers have proven to be effective at controlling their output, you don’t need
to monitor the supplier and their product as closely.

Figure 4.1: Key supplier involvement in the product and service development process

Establishing an effective supplier management process requires:

 Support from the top management of both companies involved.

 Mutual trust.
 Spending more money now to develop the relationship, in order to prevent problems
later.

Supplier performance management is a critical initiative in supply chain governance for

organizations dealing with multiple suppliers. The globalized manufacturing and sourcing
mantra has made companies focus on their core competencies and outsource the rest of the
non-core business to suppliers across the globe. Companies in service industry such as
banking, financial services and IT have also started realizing significant advantages in sourcing
good and services from multiple suppliers while benefiting through improved pricing and
enhanced services. Companies are becoming highly dependent on their suppliers and have to
assess and manage their supplier's performance to reduce business risks and revenue losses.

Supplier performance management can help companies have better visibility into supplier
deliverables and offer benefits to uncover and remove hidden cost drivers from poor quality,
increase competitive advantage by reducing order cycle times, chargebacks for non-conforming
material and supplies, gain insight on how to best leverage their supply base, and align
practices between themselves and their suppliers

An effective Supplier Management System addresses the following:

Supplier Management
  Define key suppliers in the supply base
 Define and create contracts for goods and services from suppliers
 Link suppliers with the contracts for performance management against contracts
 Define quality, financial and operational metrics in the contracts

Supplier Performance Measurement and Management

 Define Service Level Agreements for contracts

 Define metrics and key performance indicators (KPI) for contracts
 Manage the certification status and compliance requirements of their suppliers

Evaluating Supplier Performance through Scorecards and Supplier Rating

 Evaluate and measure supplier performance through supplier scorecards

 Generate executive dashboard reports for entire supplier base and supply chain
performance

In particular, Supplier scorecards are an integral part of the supplier performance management
process. It should define categories or groupings of metrics/KPIs by which suppliers will be
measured, such as, cost of poor quality, delivery cost, inventory cost, response index, order
fulfillment score, order visibility score, returns/charge-back score and can be extended to
custom categories such as vendor risk, innovation, customer complaints and corporate social
responsibility.

Internal collaboration was essential to solving manufacturer’s problem, and procurement

played a major role in spearheading the effort. Procurement alone could not mandate design
changes, but it could lead the way. In addition to this complexity reduction, other advanced
cost-management techniques include:

 Tiered sourcing: combining company and tier-one supplier volumes so that the
supplier negotiates more favorable contracts with its own suppliers
 Mega-supplier strategies: offsetting a supplier’s advantage in a non-negotiable
category by bundling other categories in the negotiation
 Supplier tiering: restructuring the value chain by bundling or unbundling activities at
various value-added stages (for example, transferring management responsibility for
second-and third-tier suppliers to the first-tier supplier)
 Value-based sourcing: using supplier capabilities to generate other kinds of value
such as shorter time to market or innovation
 Design to cost: revising specifications to avoid costs, for example, by eliminating
over-specifications or optimizing subsystem designs
 Collaborative cost reduction: generating and implementing cost-reduction ideas
(and sharing the risks and benefits) with suppliers
 Best shoring: finding competitive suppliers in cost-advantaged countries along each
step of the value chain
 Demand management: rationalizing requirements, controlling approvals and
reducing or eliminating non-essential purchases in certain (primarily indirect and
select direct) categories.

Thus there are various tools and techniques available for supplier evaluation, selection,
performance evaluation, and overall supplier management.

The following picture illustrates the components of total value added to the business such as
Strategic sourcing, demand management, processing efficiency and supplier relationship
management. Strategic sourcing added most value to the business which then declines over
the time. It is supplier relationship management that helps to keep the value of the business at
the maximum level and sustains it. The contribution of supplier relationship management to the
value of business increases over the time. Thus sourcing and supplier relationship
management are integral and complementing parts of total value of the business.
Figure 1.1: value added to business by strategic sourcing and supplier relationship
management over time

5.0 CONCLUSION

Increasing global competition, changing product customization, price and margin pressures
and increasing customer expectations are forcing companies to source process, raw materials,
skills etc including global sourcing so as to deliver better value to the customer and stay
competitive and continue in business. Supplier management is also another important aspect
of supply chain management as it is an integral part of the system. A proactive and effective
organization should take necessary steps to manage effective and efficient sourcing, supplier
management and thus performance.

6.0 REFERENCE

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