Wednesday, September 24, 2014
In today’s current market, the pace of innovation has quickened and technology has become more sophisticated,[i] which has left various businesses struggling to determine the right assets and capabilities to maintain in-house at the right time. To address the challenge businesses have relied on sourcing. Sourcing is not only a way to find low cost suppliers, it is a function that determines a business’s value chain, and the flow of productive activities involved in bringing a product or service to market (including both the supply of goods as well as complementary services like after sales support, maintenance, and repair). Sourcing is a strategic business approach that improves strategic positioning and company performance in the face of increased competition and cost pressures.
With this approach businesses can concentrate resources and activities where it can be supreme and contract out areas that are bleak. Businesses can leverage the substantial and specialized investments in capabilities suppliers possess that would be expensive or impossible to duplicate internally. [ii] Sourcing can help businesses avoid the costly and time-consuming process of switching out internal assets such as tooling and skilled labor, by pooling demand across multiple customers.[iii] Businesses are now more flexible having shed many external costs, determined no longer needed. Sourcing decisions are tough on issues that are fundamental to a firm’s identity; having dynamic effects on the business’s market—enabling competition, commoditizing components, and shifting control of resources and capabilities. [iv] Ultimately highlighting sourcing’s strategic nature of.
While souring is a valuable approach it is imperativebusinesses take stock of the demand landscape. The demand landscape is comprised of product structure and attributes, customer preferences, variability in demand, customer bargaining power, and market structure can strongly influence where an organization procures goods and components.[v] A key decision attribute is product structure—the way a good is subdivided and organized. It is often common to see modularity, “the degree to which a product can be divided into subsystems with well-defined boundaries, “[vi] in a product structure. Product modularity is often driven by the need to manage complexity by empowering parallel teams of specialists to work independently on subsystems, both in design and production. These parallel teams at times include sourcing partners that can develop specialized skills and assets well beyond what a business can do internally.
Another key product attribute is its tradability—if a good can be sold in a location that is different from where it is produced, it is said to be tradable.[vii] Examples of such products are electronic goods, shoes, and clothing, [viii] while services like a haircut are non-tradable. The tradable sector has experienced size increase, due largely to technologies that have increased the speed and lower the cost of transporting physical goods. Through tradability, businesses can choose geographically dispersed suppliers.[ix]
In conjunction with tradability, customer preferences are a highly important attribute of products and the demand landscape. A sourcing strategy’s flexibility is determined by the speed or frequency of which a customer’s preference changes and changes in technology. [x] Many businesses use sourcing in order to shift capacity risk away from the business. Through risk mitigation many manufacturers for example use sourcing to accommodate variable portions of demand. These manufacturers keep a baseload of production in-house and outsource the peaks to providers—often located in emerging markets—that can manage labor arrangements and capacity utilization more flexibly.[xi] This helps avoid in-house employment peaks and valleys.
As companies take advantage of sourcing strategies, mitigate its demand and customer preference risk, its leads to the question of what impacts does this have on the market? Is it safe to assume that there will soon be a more robust sourcing (suppliers) market as more companies participate in sourcing?
[i] Strategic Sourcing (Pierson and Shih, Dartmouth and HBS)
[ii] Strategic Sourcing (Pierson and Shih, Dartmouth and HBS)
[iii] Strategic Sourcing (Pierson and Shih, Dartmouth and HBS)
[iv] Strategic Sourcing (Pierson and Shih, Dartmouth and HBS)
[v] Strategic Sourcing (Pierson and Shih, Dartmouth and HBS)
[vi] Strategic Sourcing (Pierson and Shih, Dartmouth and HBS)
[vii] Strategic Sourcing (Pierson and Shih, Dartmouth and HBS)
[viii] Strategic Sourcing (Pierson and Shih, Dartmouth and HBS)
[ix] Strategic Sourcing (Pierson and Shih, Dartmouth and HBS)
[x] Strategic Sourcing (Pierson and Shih, Dartmouth and HBS)
[xi] Strategic Sourcing (Pierson and Shih, Dartmouth and HBS)