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?
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