Explain sourcing (outsourcing, off shoring, insourcing) and procurement?

Supply chain involves all the organisations involved in making a product available to the customer. It includes raw material providers, transporters (logistics), manufacturers, and intermediaries. The functions that provide support services like consultants, lawyers, quality control also form part of the supply chain.

Sourcing and procurement are that functions of the supply chain management which are concerned with the supply of materials to the manufacturers. Under sourcing, an organisation evaluates and hires individual businesses for the meeting its supply needs. It is part of the supply chain management that deals with the selection of suppliers and management. The organisations do the necessary evaluation of the supplier basis requirements (quality, price, time of delivery, period of supply, etc.) and sign written contracts for the delivery of goods.

Procurement refers to the purchase of good and services from the suppliers. The deliveries are bought from the selected suppliers and payments are made.

Under Sourcing the contract is signed and under Procurement, the contract is executed and fulfilled. Sourcing includes activities like identifying suppliers, screening them basis their services, sharing requirements relevant to components, parts, material, etc., selecting the right supplier, negotiating deals, and signing of final contract. It is a one-time activity, but there are often changes made after the expiration of the contract if there have been change in prices of materials in the market, new supplier for a better material or new material. These depend on the buying situations – the new task, modified rebuy, or straight rebuy. (Kindly refer, “Explain Business/ Industrial Buying situations”, under the Topic- Business markets and buyer behaviour.”)

Organisations constantly look for ways of reducing costs and evaluate the functions up and down the supply chain. If it finds an organisations that can do any of the functions more efficiently and effectively it will outsource that function for adding more value to the supply chain. For example, most of the automobile manufacturers don’t manufacture the tyres themselves. They buy them from tyre manufacturers like Dunlop, MRF, Goodyear, Michelin, etc. This trend of outsourcing started in the 1990’s. This provided manufacturers with two advantages – reduction in costs and organisations get the opportunity of focusing on their core business. For example, most of the brands like Adidas focus on “Research and Development” for designing of their products. The manufacturing is outsourced to firms which can produce the required product at minimal cost (firms in countries with low labour costs line Bangladesh, China, India, etc.). Outsourcing refers to delegating a particular function to another organisation. Offshoring is outsourcing to a foreign country. The organisations can outsource different functions like manufacturing, procurement, product development, transportation, supply chain planning, customer service, warehousing and development, legal services, etc.

There are risks involved in outsourcing. Many times the services are not up to the standards. An organisation had to recall thousands of its products because of lead content in its goods which were manufactured abroad. Similarly a well-known brand was in news as its products were manufactured by an organisation which employed children as labours. An organisation always faces the risk of loss-of-control when an activity is outsourced. Outsourcing has another disadvantage of high wait-time for receiving the product from an offshore company.

Another challenge that an organisation faces is the leaking of its patented technology, product specifications, etc. These features can be imitated by competitors if the outsourced firm leaks the information.

To overcome these problems, organisations have started employing quality experts for checking product or service quality. Similarly many organisations have their representative stationed at the supplier firms to do various product or service checks to ensure they meet the acceptable standards.

As many of the organisations have reported quality problems from the outsourced organisations, they have started insourcing the activity. Insourcing refers to reassigning the activities within the organisation. The man disadvantage of insourcing is the increase in costs. But the organisation has the advantage of making a product as per its set standards.