Jenny explains the six different types of sourcing strategies and pros, cons which she experienced.
Global sourcing: sourcing process of finding products and services outside of your geographical borders. Pros : Cost-effective, Multiple supplier choices, Cons : long lead time, high logistic cost
Local sourcing: sourcing process of finding of products or services within your home country. Pros : Short lead time, Quick communications. Cons : not as cost-effective as global sourcing, less choices of supplier and products
Delegated sourcing: Delegated sourcing pioneered in aerospace and automotive industry. This structure applies when there is one supplier for an entire sub-assembly. The buying company delegates authority of this assembly to a key supplier known as a tier 1st supplier. Pros : Close collaboration. Cons : Same as a single sourcing
Single sourcing: One supplier per product. This type of sourcing is used when the supplier specially invested an equipment for the buyer, or volumes are too small, or there is a shortage of suppliers. Pros : partnership relationship, Cons : difficult to improve the sourcing process, difficult to negotiate the price.
Multiple sourcing: Two or more suppliers for each products. Dual or multiple sourcing is the traditional approach with several advantages, including supply security, price control, competition between the suppliers, and the ability to explore different solutions and ideas. Meanwhile, the only downside to dual or multiple sourcing is the additional time and effort required to manage multiple suppliers. Regardless, Jenny believes the advantages of dual or multiple sourcing outweigh the cons.
Parallel sourcing: Parallel sourcing was developed as a concept through game theory by Richardson (1993) to optimize supplies for the buyer. This structure is a combination of single and multiple sourcing that aims to have the advantages of both, whilst excluding the disadvantages. Parallel sourcing occurs when a buyer has a single sourcing relationship for the components within a product group whilst having a multiple sourcing relationship across product groups.
Bellow drawing of Parallel sourcing shows two circles that illustrate two building construction projects which have two types of subcontractors, A and B. Type A subcontractors, for instance electrical installations, are different companies in the two projects. Type B subcontractors, for instance mechanical installations, are similarly two different companies in the same two projects. In this way, the buyer has alternative sources of supply if necessary. The buyer can thereby maintain price competition and avoid capacity constraints while still working closely together within each product group.
This drawing also shows a grow model of your business and projects. You can start with local and single sourcing to reduce the risk. When the procurement becomes complicated with bigger volume, you can switch to global and multiple sourcing.
Be aware of the disadvantages of single sourcing, which include increased supply risk when something goes wrong, difficulty improving performance, and a risk of supplier monopoly on price.
How to proceed with your sourcing strategy?
Using a broker : which is a great way to access large amounts of data quickly. However, it can be expensive and you don't always get the most up-to-date information.
Using a direct sourcing approach : Which is great for finding specific types of data that may not be available through a broker but can be more time consuming.
Using a trading platform : Which is great for getting a wide range of data that is updated quickly and at a lower cost.
Using a marketplace : Which is great for getting data from a variety of sources at once. However, it can be difficult to find the data that you need.
Using an aggregator: Which is great for finding the most up-to-date data from a variety of sources. However, it can be difficult to filter the data to find what you need.
If your company is in a single-sourcing situation, Jenny recommends that you search for different ways to maximize your advantages, like long-term contracts with performance clauses, or joint ownership with your influence, profit-sharing, or open-book cost calculations.