Sourcing Decisions in a Supply Chain

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Table of Contents

Introduction
Significance of Sourcing Decisions
Benefits and Challenges of Insourcing and Outsourcing
Recent Research Associated to the Topic
References

Introduction

The model of relationships between suppliers and consumers has evolved from diversified and fragmented systems of cooperation to a single, integrated network known today as a supply chain. It has become a source of numerous benefits for both manufacturers and producers. However, at the same time, it is a source of challenges and dilemma, which made doing business more sophisticated.

With the further development of supply chain networks, making productive sourcing decisions became significant. There are several sourcing methods. For example, there is a classification of strategies based on the number of suppliers involved in the supply chain. That said, there are single-, dual-, and multiple-sourcing strategies (Yu, Zeng & Zhao 2009). Among them, multiple-sourcing techniques are believed to be the most effective ones because they are beneficial for finding reliable suppliers and diminishing risks arising from supply breakdowns (Xanthopoulos, Vlachos & Iakovou 2011).

Moreover, there are two strategies centring on the location of production facilities and employing new people – insourcing and outsourcing. Insourcing implies involving external resources to reach a company’s strategic objectives. Outsourcing, on the other hand, implies scattering manufacture worldwide based on core competencies, increasing profitability and efficiency, and becoming more competitive (Kang, Wu & Hong 2009).

There is one general rule for choosing between these two strategies; in the case if an enterprise feels the deficit of employers (skills, knowledge or labour as such) and resources, it should select insourcing. Instead, if a firm experiences a capability surplus, it can share its resources with the world, i.e. the decision is to outsource (Chaudhury, Gerdemann & Kapoor 2015).

This paper will focus on such sourcing decisions as insourcing and outsourcing. It will provide a brief review of the significance of these strategies, mention their benefits and challenges for companies implementing them, and investigate the most recent research in this area. The primary objective of this paper is to present a background on these techniques and the ways to reach the balance between them.

Significance of Sourcing Decisions

It is significant to draw the line between insourcing and outsourcing because understanding the nature and peculiarities of both strategies together with the accurate estimation of a company’s resources determines the future of the business. This dilemma is a responsibility of managers, who have to juxtapose a firm’s resources and strategic objectives to select the correct direction for the further development (Won 2015).

These decisions determine whether an enterprise will continue to prosper or go bankrupt. However, it should be noted that there is no obligation to stick to only one strategy because they can be switched over time in response to the market developments, resources availability, and company’s goals.

Benefits and Challenges of Insourcing and Outsourcing

Choosing between sourcing and outsourcing is always a challenge because both of them promise various benefits. For example, insourcing is often preferred to outsourcing because it guarantees lower costs and more control over business operations and team activities, which inevitably leads to increasing productivity and improving performance (Singhania & Gupta 2014). Indeed, it is easier to monitor operational performance and control employees when business is located in one region than it is in the case if production facilities are scattered all over the globe.

Moreover, insourcing is one way to keep intellectual property and corporate information in safety because employed people are those, who proved that they could be trusted (Chaudhury, Gerdemann & Kapoor 2015). In addition to it, insourcing is seen as a tool for making a supply shorter, i.e. faster, because everything that is necessary for a company’s success is available internally and there is no need to involve external sources (Tieman 2015).

Outsourcing, on the other hand, is helpful for involving talented people, low-paid labour, and cheap resources (Cagliano et al. 2012). The justification for choosing this strategy is that it is always better to invest in developing business in places where people already have skills and knowledge needed for becoming a part of the team than in local population. The same is true about resources, especially in the case of raw materials, which are difficult to transport.

Outsourcing faces several challenges. First of all, it is expensive to move manufacture worldwide even if this decision promises cheap workforce and resources. Second, increasing production capacities inevitably leaves a footprint on the natural environment, which can become a source of additional expenses because many countries have strict regulations regarding the acceptable levels of greenhouse gas emissions into the atmosphere and pollution, and they should be followed (Christopher et al. 2011).

Finally, it is a threat of losing productivity because of losing skills, knowledge, and corporate memory as well as rebalancing power because it is complicated to control facilities scattered all over the globe (Cagliano et al. 2012). That said, outsourcing almost always becomes the cause of the local population deterioration because influential companies choose to invest into foreign people rather than in local workers and national economy.

There is one common limitation of both sourcing and outsourcing – they require the capacity of managers and all staff involved in business because it is the only way to guarantee that these strategies benefit a company and secure its activities (Warner & Hefetz 2013). Furthermore, it demands constant negotiations and cooperation to assure that managers, suppliers, and employees focus on achieving a shared objective – operational and financial success of their firm (Gumus & Love 2013). All in all, both outsourcing and insourcing are effective decision-making strategies, but they require knowledge of a company, its resources, and objectives as well as market developments to benefit one’s business.

Recent Research Associated to the Topic

There are some challenging ideas highlighted in recent research. For example, some researchers believe that insourcing and outsourcing cannot be seen as two separate strategies. Instead, they should be deployed as a single whole. It is especially acute in the case of processing industries, which are recommended to combine outsourcing of manufacturing with insourcing of the newest technologies to minimise their influence on the natural environment. Reaching this balance is referred to as rightsoursing (Mujumdar 2014).

Another noteworthy opinion is that it is recommended to outsource jobs and insource labour. The justification behind this statement is that sometimes it is impossible to outsource particular production capacities such as agriculture, forestry, construction, care giving, services, etc. That is why they require insourcing employees, who would be willing to fill vacant positions. However, it is always possible to outsource job, i.e. positions and requirements to occupy them, because numerous professions and industries are easy to move abroad such as production (Chamie 2016).

Finally, there is the concept of re-insourcing. It means bringing processes outsourced to suppliers back home. This strategy might be beneficial during or after economic crises when companies focus on keeping afloat and preserving their competitive positions. It is also advantageous when the sales rates are low. Primary reason for falling back on this strategy is to maintain or restore flexibility and efficiency together with cutting the costs per unit of production because all operations are performed internally. It should be noted that re-insourcing decisions are always made from a cost perspective keeping in mind sales, amortisation costs, expenses on human and physical capital, prices for raw materials, etc. (Drauz 2014).

References

Cagliano, A C, Marco, A, Rafele, C & Arese, M 2012, ‘A decision – making approach for investigating the potential effects of near sourcing on supply chain,’ Strategic Outsourcing: An International Journal, vol. 5, no. 2, pp.100-120.

Chamie, J 2016, ‘Outsourcing jobs, insourcing labour & increasing profits,’ Inter Press Service. Web.

Chaudhury, R, Gerdemann, D & Kapoor, B 2015, ‘Innovation advantage: insourcing engineering,’ Strategy & Leadership, vol. 43, no. 6, pp. 3-9.

Christopher, M, Mena, C, Khan, O & Yurt, O 2011, ‘Approaches to managing global sourcing risk,’ Supply Chain Management: An International Journal, vol. 16, no. 2, pp. 67-81.

Drauz, R 2014, ‘Re-insourcing as a manufacturing-strategic option during a crisis –cases from the automobile industry,’ Journal of Business Research, vol. 67, no. 3, pp. 346-353.

Gumus, M & Love, E C 2013, ‘Supply chain sourcing game: a negotiation exercise,’ Decision Sciences Journal of Innovative Education, vol. 11, no. 1, pp. 3-12.

Kang, M, Wu, X & Hong, P 2009, ‘Strategic outsourcing practices of multi-national corporations (MNCs) in China,’ Strategic Outsourcing: An International Journal, vol. 2, no. 3, pp. 240-256.

Mujumdar, A S 2014, ‘Editorial: outsourcing, insourcing & rightsourcing of R&D,’ Drying Technology, vol. 32, no. 14, p. 1641.

Singhania, M & Gupta, P 2014, ‘First telecom: insourcing vs. outsourcing,’ Emerald Emerging Markets Case Studies, vol. 4, no. 5, pp. 1-13.

Tieman, M 2015, ‘Finding a balance between outsourcing and insourcing,’ New Straits Times, 2 September, p. 4.

Warner, M E & Hefetz, A 2013, ‘Insourcing and outsourcing,’ Journal of the American Planning Association, vol. 78, no. 3, pp. 313-327.

Won, J C 2015, ‘Insourcing or outsourcing: the entrepreneurship approach,’ The Academy of Entrepreneurship Journal, vol. 21, no. 1, pp. 13-31.

Xanthopoulos, A, Vlachos, D & Iakovou, E 2011, ‘Optimal sourcing decisions for unreliable reverse supply chains,’ Asia-Pacific Journal of Operational Research, vol. 28, no. 1, pp. 125-146.

Yu, H, Zeng, A Z & Zhao, L 2009, ‘Single of dual sourcing: decision-making in the presence of supply chain disruption risks,’ Omega, vol. 37, no. 4, pp. 788-800.

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