Sourcing strategy for a manufacturing company

Abstract

The decision confronting many business managers today “of determining the activities that ought to be performed internally and those that can be done outside the premises of the firm” has long been a conundrum. The economics of the decision, the strategic thrust, the environmental issues, competitor reactions and many more dimensions have to addressed before arriving at the actual Make or Buy decision. Subsequent to the decision, issues regarding nature of the relationship with the outsourced party, selection of outsourcing partner, drawing up contracts and SLAs, developing internal capabilities for the process are some of the additional concerns for the organization. An important understanding in the nature of the make or buy problem is the realization that make or buy alternatives exist on a continuum and are not disparate opposing alternatives. The make v/s buy decision typically includes activities performed in the supply chain of the firm and backward integration is one such decision alternative. The supply chain activities of a firm consists of a series of inter connected activities starting from raw material procurement, transformation of raw material to finished products and then final delivery of goods and services to the end customer. In order to analyze a supply chain the firm under study (for which the strategic decision is to be made) has to be considered the nodal firm (Janat Shah, 2006) in the supply chain. All activities of the chain have to be then classified into primary and secondary activities from the viewpoint of the nodal firm. Primary activities (Michael Porter, 2002) consist of inbound logistics, operations, outbound logistics, sales and service. All support activities form part of the secondary activities. Traditionally firms have always approached this problem by considering all activities to be internal unless, there is a compelling logic to outsource the activity. Maharashtra State Road Development Corporation, a State government organization set up for constructing the Mumbai-Pune expressway is an excellent example of the other extreme of this traditional approach. MSRDC decided to outsource all activities unless the activity can not be performed outside in a more efficient way at lower costs. Firms therefore need to build up a compelling logic to address this issue. This logic should further pave the way for further decision making and subsequent actions.