Strategic Sourcing: To Make Or Not to Make Intro: In todays manufacturing business, sourcing decisions are often made with

narrow-minded thinking that creates distortion within the company. Ravi Venkatesan designed a new thinking process for making sourcing decisions that could lead a company to discovering and building its competitive advantage. It is based on and follows three very important principles: 1) Determine parts that are critical to the product and that the company is distinctively good at making 2) Outsource the components where suppliers have an obvious comparative advantage 3) Utilize outsourcing decisions as a way to generate employee commitment to improve manufacturing performance Managers are not devoting attention to the right components of the product as they should be-- outsourcing difficult parts that the company should take on as an improvement project, and insourcing ones that practically add no value to customers. Conflicting reasons for sourcing decisions could lead to destructive results and over time, the survival of the company is threatened. Despite a large amount of competition from foreign investors, many companies have refused to utilize strategic sourcing. There are four main reasons for this occurrence. The first is that different functional groups have conflicting strategic sourcing goals. For example, manufacturing managers may want to maintain operations in-house in order to better utilize machines, while labor managers may want to preserve jobs. Additionally, insourcing production gives managers a greater sense of responsibility and power that they do not want to lose. The second reason why companies avoid outsourcing is pride and suspicion. Managers are wary of smaller suppliers and their ability to produce parts more efficiently and quickly than themselves, challenging managers to better their operations. However, managers are also concerned with opportunistic suppliers causing them to only create short-term agreements, despite the fact that these suppliers are dependent on larger corporations. The third reason companies avoid outsourcing is due to antiquated accounting systems. The opportunity cost of outsourcing is being vastly underestimated, forcing employees into monotonous and archaic positions. Accounting systems are failing to properly allocate overhead costs, so managers arent getting a proper view of their processes. The last reason companies avoid outsourcing is a fear of hollowing. To many managers, outsourcing means losing differentiation. However, this is a common misconception and shows why strategic sourcing is so vital to business practices. By outsourcing commodity-like products, companies can focus on those components that really differentiate their products. However, the problem remains of determining what the core of the company is. Thus, companies need to utilize strategic sourcing to determine what components to insource and what components to outsource. Strategic and nonstrategic subsystems make up the first task in strategic sourcing, which is to get to the correct level of abstraction, the appropriate unit of analysis. Getting to the correct level of abstraction is difficult because products are made up of individual components a number of systems and subsystems (which are assemblies and subassemblies of components).

The first decision a company must make when it comes to subsystems is what subsystems will be indispensable to the companys competitive position over subsequent product generations. Companies may differ in priorities and capabilities. Subsystems should be classified as strategic when the subsystems have a high impact on what customers perceive as the most important product attributes, the subsystems require highly specialized design and manufacturing skills and specialized physical assets and for which there are very few, if any, capable independent suppliers, and the subsystems involve technology that is relatively fluid and in which there is a significant likelihood of gaining a clear technological lead. After determining that subsystems are strategically important, companies must answer to questions to determine whether to design the product subsystems in-house or procure the subsystems from an outside source. What are the suppliers design and manufacturing capabilities relative to the companys? What would it cost to catch up with the best suppliers, and can the company afford it? If internal design and manufacturing capabilities lag behind those of the suppliers, companies must choose to try and close the gap or to pull the plug and outsource the subsystem. 1. Criticism against Outsourcing 1) Product commoditization : If the company just outsources the subsystem and the competitors do same for the cost efficiency, there would be no difference between the companys product and the competitors product. 2) Hollowing of the company : Replacing the in-house subsystem production to outsourcing from suppliers results in the loss of jobs. 2. Architectural Knowledge Architectural knowledge is the intimately detailed and specialized power of translation required to capture customer requirements and reproduce them in the language of subsystem performance specifications. It is unique to each company, intuitively developed in countless conversations by teams of strategists, designers, and marketing people. It can be utilized by controlling outsourced subsystem design and manufacture, remaining expert on architectural knowledge of it. The Fairfield which is a disguised name can give a good example of how to deal with the commodity component families. Fairfields actions have taken being divided into two steps. The first step is to classify the product into three categories and next step is to decide whether or not to out-source each line. As discussed before, the Fairfield plant also broke down their parts portfolio into families based on the characteristics of the processes. Then, they classified product families into three colors- red, yellow, and green in terms of their manufacturing capabilities. The green, red, and yellow are decided by the cost advantage of each line. If the parts have cost advantage over supplier more than 15%, it is red, and if it is under 15%, it will be red. And the yellow is at the border between red and green. According to the analysis of each part families process characteristics, 30% of the families of Fairfield plant are classified into red, 40% belongs to yellow and the rest parts are green. Company should decide whether or not to out-source about each production line, which the second step is dealing with the commodity-

like parts. Generally, the green parts are decided to in-source, and red parts are conceived to be out-sourced and yellow remains questions. Company should notice the actions the Fairfield co. has taken to each part. It did not just follow the general method, they approached the matters creatively. About the yellow parts, the management gave employees one year to meet external benchmarks for quality and cost, and it worked. Within 18 months, all but two of the families had moved from yellow to green. It is the key point of the Fairfields actions because it settled the problem of labor. Out-sourcing means loss of jobs to employees. The managers of the Fairfield used the out-sourcing issues to generate employees commitment. Regarding red ones, some of them were out-sourced to a sister plant nearby rather than to external suppliers. Because the sister plant is considerably competitive in the relevant field. Such actions resulted in consolidation which could make center of excellence. Also, purchasing managers introduced rigorous supplier grading system and started awarding contracts to more capable and cooperative suppliers, rather than to suppliers who submitted merely the lowest price. And the method rationalized the supply base to 50% of what it had been. Conclusion: These principles must be followed and as an ongoing process to ensure success. Companies must reexamine how sourcing decisions are made and how resources are allocated continuously and most importantly, determine components that are critical to the company.