1.0 Introduction
Since the early 1990s outsourcing has been a major industrial development, with all the forces in operation, many companies understandably find the pressure to outsource irresistible. The idea that it is not appropriate is fast becoming almost inconceivable (Van Weele 2014)). Several reasons for the popularity of outsourcing, which defined as an outside company’s provision of the products or services previously carried out within the company with aim to reduce cost (Wasner 2011).
On the other hand, effective management of the supply chain is a critical objective in manufacturing firms. For company to outsource vendor selection problem deals with issues related to the selection of right supplier. Subsequently, after selection, create a systematic approach of allocating orders among the identified suppliers (Baily et al 2008). In fact, the importance of both intra-firm relationships and governance through supplier’s management is well recognized in purchasing management. Suppliers play an important role in achieving the objectives of an organisation. Hence, identification and strategic partnership formulation with the most suitable supplier should be integrated within the supply chain for improving the performance. In many directions, including reducing costs by eliminating wastages, continuously improving quality to achieve zero defects, improving flexibility to meet the needs of the end-customers, reducing lead time at different stages of the supply chain. No wonder that purchasing or procurement management is such a high priority activity and there are so much critically important to the success of any organisation.
This paper aim to critically discuss the specific information required in outsourcing decision making, in order to select a supplier for the high level complex assembly in manufacturing company. The paper will also discuss the merits and issues associated with single and dual sourcing in the context of this case. To ascertain this, the paper is divided in to three sections. Introduction section one above, section two the company specific information required in order to make decision for the outsourcing. Section three discusses the merits and issues with single and dual sourcing. Finally, summary and conclusion.
2.0 Specific Information Required for Outsourcing Decision making.
Selecting appropriate suppliers is an important to the decision for any organisation in its outsourcing. Price is not the only criterion that purchasers consider when they choose a supplier. In contrast, the supplier selection process is a multiple criteria decision-making (William, Xiaowei and Prasanta 2010). To imitate real life behaviour, supplier’s performances are assumed stochastic. Intuitively speaking, it is almost impossible to expect the same quality or service levels by any of the suppliers. For example, delivery routes can encounter events that have different probabilities of taking place. In addition, different delaying effects might affect the delivery schedule between a supplier and a purchaser. However, stirring the importance of the component is key to the success and determination of either to single or dual source. Kraljic (1983) portfolio model is a good determiner in positioning the component to be outsourced. Since it has been identified, this is a key high level component to be outsourced, it is therefore considered to be strategic to the company. Single sourcing is the appropriate strategy that will fit in the decision making. As evidence from Cousins et al (2012) single supplier is analysed as form of strategy that will give the outsourced party a clear understanding of the cost structure in long term while the supplier has to his advantage a good relationship with the organisation. However, some of the limitation to single sourcing, company can be in position of weakness if it relationship with the supplier is not managed as appropriate. In other way if the supply source is ceased the purchaser will be exposed in the market. Stanley and Gregory (2001) came up with the supplier selection criteria and what you need to know about your supplier before making a decision to select the supplier, these are;
2.1 Suppliers Organisational profiles
This factor has been measured on the basis of the importance of the following organizational dimensions: achievement of sales and marketing goals, financial performance, achievement of current organizational goals and strategy for technology age. Good suppliers should have high organizational power and advanced coordination skills (Baily et al 2008).
2.1.1 Financial Statement
One of the critical source of information of supplier is his financial statement, it is important for the procurement manager to obtain the financial statement of the suppliers due to the fact that the statement speak the supplier’s success and competence. It will also give an account on the secrets of the supplier financial strength. The earnings and or loss of the supplier are determined in the financial statement as well as the comparative of the past performance and potential growth of the supplier (Baily et al 2008).
2.1.2 Service Level, Delivery and Lead time.
The performance of the supplier in providing service to the manufacturer is the prime criteria to decide its Suitability for a particular product or what is been outsourced. Beamon (1999) argues that the good service given by the supplier may help in increase the customer base and therefore, this criterion is important in supplier selection. It is analysed based on the following attributes:
Delivery, is the ability of the supplier to follow the predefined delivery schedule. It is always the prime criteria for selection in this fast moving world. This means that suppliers who keep their promises are easier and profitable to work with.
While as lead time is a great factor to be considered, it is the time between order and placement of material and the actual delivery. The shorter the lead time, the better the supplier. Every purchasing firm will be comfortable when the lead time is shortest possible. Long lead time has the impression that the specific supplier is less efficient or has more customers than he can serve thus may be delaying deliveries (Beamon 1999).
2.1.3 Ease of communication
The ease of communication and negotiability with the suppliers decide the long-term relation between the Supplier and manufacturer. Since languages, business customs, ethics and communication devices vary from Country to country, good suppliers should be best communicators; good message in good time.
2.2 Technical capabilities
Even do, as identified in the case as both the suppliers have the capabilities to do the work. However, technical capabilities is important before selecting a supplier, hence suppliers need competent technical ability to provide high quality product or service, ensure future improvements in performance and promote successful development efforts. Especially, this is very important when the firm’s strategy included development of a new product or technology and access to proprietary technology (Tang 2006). These technical criteria insist company to shift into achieving competency. These factor can be viewed from the basis of the importance of the following technical dimensions:
- Compliance with quantity standard in all business of the supplier.
- Compliance with due date efficiency.
- Production planning systems of suppliers, and
- Maintenance activities of suppliers, plant layout and material.
The production facilities and ability of the supplier to increase its capacity should also be taken into account to evaluate the best one among them. The potential production capability of each supplier should be analysed to meet a specified criterion in line with the purchasing company’s core competencies and develop a new product according to the market demand (Harps 2000).
2.3 Quality Assessment
Quality assessment information of the suppliers is key factor to be considered before selecting a supplier. It is very important for the procurement manager to obtain information on the supplier’s quality framework and assessment report as well as compliance. Quality and availability of product depends on this criterion, this specific information has been measured on the basis of the importance of the following quality dimensions (Beaman 2002) are:
- Management commitment, product development of suppliers.
- Process improvement of suppliers.
- Quality planning and quality assurance in supply chain,
- Quality assessment in production, inspection and experimentation.
- Quality staff of the suppliers.
2.4 Performance History
The performance history of the supplier should be analysed carefully keeping in mind the competitive nature of the supplier, its past production schedule, response to market, and ability to make supplier relations and business references and improvement. It is easy to get a profile of ageing supplier easier than new suppliers. Therefore, this information can be view from the supplier’s annual financial statement. Research shows that, old suppliers are more experienced and more stable in business than developing new supplier (Kibe 2000).
2.5 Risk factors
Owing to a number of exogenous factors influencing outsourcing, how the supplier perceive risk and the majors put in place in mitigating such risk is key to the success of outsourcing. However, outsourcing is considered to be a riskier decision especially in view to either single or dual source. Having the risk assessment report of suppliers is inevitable. The supplier selection decision is most strongly affected by perceived risks while the procurement manager should look further into categories judged to have a high risk, assess potential risk to be addressed proactively or for improvement to be made. There is frequently scope for improvement through better models, alternatives and innovation opportunities if the buyer and the supplier collaborate in mitigating risk. (Felix and Niraj 2007)
2.6 Sustainability and ethical compliance.
Procurement manager need to know about his supplier’s policies on ethical and sustainability standard. To achieve this, suppliers, especially in developing countries or countries with weak workplace regulatory environments, need knowledge, guidance and incentives to improve from the organisations they supply. Working with suppliers and focusing on economic, social and environmental performance is good for a buying organisation’s brand reputation as well as efficiency, quality and security of supply. Increasingly, buyers have legal obligations(even extraterritorially) to ensure that they take measures to prevent illegal conduct such as fraud, corruption, bribery and modern slavery, and other human rights abuses, from entering their outsources. Supplier countries and communities can reap economic and social benefits through ethical sourcing relationships. Buyers must be mindful of the impact of their decisions and ensure that they do not cause harm to their suppliers and workers (CIPS 2013).
2.7 Technology and Innovations.
According to (Van Weele 2014)) Technology has becoming an intrinsic component to organisations. Therefore, they are infiltrating every facet of our lives and adopting an increasingly organic quality as they become literarily part of us, rather than something out-there, as they have been throughout. It is important for the purchasing manager to have good information on the current state of technology and innovation of the suppliers. On the other hand, knowledge of how the suppliers improve on state of earth in current and new technology across the industry. Because technologies drive everything, certainly make it easier, quicker and less expensive of both the buyer and the supplier if modern technologies are applied.
2.8 Cost
The aim of procurement manager to have information about cost is to identify vital element of cost associated with the outsourcing from both suppliers. The most common cost related with a product is purchase price, logistics cost and taxes (Stanley and Gregory 2001). Operational costs are also being considered during the supplier selection. While operational cost includes transaction processing; cost of rejects etc. but it requires more effort to estimate. Thus, cost is very important criterion for selection of right suppliers. The cost factor has been measured based on the importance of the following cost/price dimensions in supplier selection especially with regard to this high level critical assembly. The Factors (attributes) affecting this criterion includes as identified by (Stanley and Gregory 2001) are;
2.8.1 Price
Companies always require the minimum price of the product to increase the profitability. The firm therefore must find a low-cost supply base where it can minimize manufacturing cost related to the production of the Product and assembly. Basically, price containment leads to supplier attractively.
2.8.2 Distribution cost
This contains the lengthy distribution channel cost, transport expenses, inventory cost, handling and packaging Cost, damages during transportation and insurance costs. Since every business enterprise is out to procure at least cost possible, cost management brings a lot of business to suppliers who offer least cost, holding other factors constant. Therefore, information about this is very important to relevant outsourcing decision.
2.9 Negotiation
After obtained all critical relevant information required to assess both the supplier internally, cost savings is one of the key important reason for outsourcing. Hence, negotiation is a central component of any organisation’s policy-making, which includes processes from setting agendas to determining what issues are to be addressed by policy makers, exploring options, finding solutions and securing needed support from relevant parties. In order to ensure that planned policies are sustainable. Negotiations are a vehicle of communication and stakeholder management. As such, negotiation play a vital role in assisting policy-makers to obtain a better grasp of the complex issues, factors and human dynamics behind important policy issues. According to Kenneth and Michael (2003) “the formal definition of negotiation is an occasion where one or more representatives of two or more parties interact in an explicit attempt to reach a jointly acceptable position on one or more divisive issues about which they would like to agree.” Since this is a process that bring about discussion, understanding based on a specific goal and objectives, it is important to identify the key important things to be considered by negotiators. However, it is also important to have a positive relationship between you and the suppliers. A positive relationship makes possible the development of common ground in principled negotiation the common ground can include similar goals and objectives. Instead of negotiating against each other, the negotiators form a team and negotiate “against” the problem while they now have shared interests. However, there can be no doubt that the process is a contest where each negotiator can take nothing for granted, and can never relax. Even if it is possible to establish mutual interests and move into the principled negotiation mode, prudence demands risk analysis and control. The more consequential the issue, the more important risk management is. The key to a successful negotiation process is preparation and experienced negotiators while having information and knowledge of the following;
2.9.1 Zone of Possible Agreement (ZOPA)
A Zone of Possible Agreement (ZOPA) must exist. As a negotiator, you must know what your zone is. This may appear to apply more to positional than to principled bargaining because a ZOPA is the least favourable agreement you would accept, and the most favourable one you believe the other negotiator (supplier) would accept. However, with a bigger pie, the ZOPA shifts for both in the positive direction (Baily et al 2008)).
2.9.2 Best Alternative to Negotiated agreement (BATNA).
According to Peter et al (2008) negotiator must also have a Best Alternative to a Negotiated Agreement (BATNA). As part of the preparations prior to beginning negotiations, each negotiator must decide at what point it is best to cease negotiating and to be satisfied. Although the BATNA may change slightly as negotiations proceed, a negotiator will use the BATNA agreed upon by his team as a touchstone throughout the negotiation process. Hence, with a BATNA a negotiator never feels cornered or under pressure to yield to pressure from the other side of the predetermined goal has defined the point at which negotiations are no longer profitable and may be ended.
Negotiators rarely have the authority to make final decisions. They are sent as representatives of those who do have that authority, who are the closers. As closers, they have a significant advantage. For example, protected from the possibility that in a weak moment they will accept an impossibly poor agreement. In addition, if principled negotiation has not been possible, there may be times when the negotiator has no easy reply to a hard bargaining opponent. It may be useful to end a session with the need to go back and discuss options with your management. By the same token, a negotiator would never want to enter negotiations without detailed instructions from the management as to what options are satisfactory and what options are not; i.e., the Zone of Possible Agreement and the Best Alternative to a Negotiated Agreement.
3.0 The Merits and Issues with single and or dual sourcing strategy
Single sourcing strategy strives for a strategic partnership between a buyer and a supplier to foster a close collaboration and to optimize shared benefits (Chopra and Mindle 2004). The tighter coordination between the buyer and supplier is a prerequisite for a successful execution of outsourcing initiative, which encourages the two partners to streamline the outsourcing process and encourage the buyer and seller relationship to move toward a single sourcing model. However, the general benefits of single sourcing include higher quality obtained at lower total cost to the buyer while the suppliers are linked to developed levels of buyer supplier relationship. However, the dependence on a single source also exposes the buying firms to a greater risk of supply chain interruption therefore as for strategic component not reliable important to adopt such strategy (Chopra and Mindle 2004).
In contrast, an increasing awareness of the high risks associated with single sourcing and companies expanded efforts to mitigate risks or to build in contingency, multiple or dual sourcing is gaining attention. Especially in how to determine the optimal supply size has resulted in a great deal.
On a nutshell, the selection decision between single and dual sourcing strategy, as Pochard (2011) examines how buying firms should prepare for disruptions in their supply chain by using real options theories to compare single sourcing with dual sourcing. Burke et al. (2010) indicate that single sourcing is a dominant strategy only when supplier capacities are large relative to the product demand and when the buying firm does not obtain diversification benefits, but in all other cases, dual sourcing is an optimal sourcing strategy. Wagner and Friedl (2007) argues that whether a firm chooses single sourcing to dual sourcing when there is either symmetric or asymmetric information about the alternative supplier’s cost structure. The sourcing strategies depend on the buying firm’s beliefs in the alternative supplier’s unit costs, switching costs, the price offered by the incumbent supplier, and refinements of the price offered by the incumbent supplier due to competitive reactions and economies of scale. However, assessing the both suppliers through the critical factors as discussed above.
In case of dual sourcing, Lau and Zhao (2009) identify the optimal proportion of split between two suppliers by minimizing the sum of annual holding and ordering costs subject to a maximum allowable stock out risk. Through, the optimal proportion of the difference varies with other factors, such as the difference in the suppliers mean lead times. The issue of order difference between two suppliers Kelle and Miller (2001) sees in the context that the objective of decision is to minimize risk and achieve the best out of decision to outsource. In a recent analysis, Tomlin and Wang (2005) observe the flexibility and reliability goes by dual sourcing using but applying the best and careful criteria. The factors affecting the use of the dual supplier, including the resource costs and reliabilities, the firm’s downside risk tolerance, the importance of the products. The product demand correlations and the spread in product contribution margins In terms of supply chain performance (Bichescu and Fry 2007).
Summary and Conclusion
Specifically outsourcing is increasing attention in the manufacturing industry; it benefits companies in financial, technical, operational and market expertise issues. In general outsourcing is used by companies also o accelerate the process of revitalising in applied to the substantially improving certain criteria of company performance such as cost, quality, service and speed. However, in decision on who to outsource to the procurement manager need accurate and relevant reliable information. On the other hand, negotiation is the best option for the procurement manager to have a necessary competency and skills to win the best deal for his company in getting the best price among the two identified suppliers.
In summary, in both the supplier’s and buyer’s points of view, single and dual sourcing strategies provide advantages as well as disadvantages. The choice between single sourcing and dual sourcing depends on the importance of the component been outsourced, of the two sourcing methods and other environmental factors accumulated comparison between these two sourcing models under various situations.
