see the word and PDF
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 2
1 Introduction ……………………………………………………………………………….. 3
2 Essential Reading ……………………………………………………………………… 6
2.1 An Overview of Strategic Sourcing Decisions ………………… 6
2.2 A Framework for Strategic Sourcing: Where to Produce
………………………………………………………………………………………………. 8
Demand Landscape …………………………………………………………… 8
Supply Landscape …………………………………………………………….. 12
Macro Environment …………………………………………………………… 14
2.3 Operational and Strategic Considerations ………………………. 15
Coordination Costs …………………………………………………………… 15
Risks …………………………………………………………………………………….. 16
Long-Term Impacts ………………………………………………………….. 18
Kraljic’s Matrix ………………………………………………………………….. 20
3 Supplemental Reading ………………………………………………………….. 23
3.1 A Primer on Make-or-Buy Research ………………………………… 23
4 Key Terms ………………………………………………………………………………… 28
5 Endnotes ………………………………………………………………………………….. 29
6 Index…………………………………………………………………………………………… 31
This reading contains links to online interactive exercises, denoted by a . In order
to access these exercises, you will need to have a broadband Internet connection.
Verify that your browser meets the minimum technical requirements by visiting
http://hbsp.harvard.edu/list/tech-specs.
Copyright © 2013 Harvard Business School Publishing Corporation. All rights reserved. To order copies or
request permission to reproduce materials (including posting on academic websites), call 1-800-545-7685
or go to http://www.hbsp.harvard.edu
Table of Contents
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 3
1 INTRODUCTION
f you configure and order a MacBook computer online, your
order is sent electronically to the Quanta Shanghai
Manufacturing City in China. This area around Shanghai is the
notebook computer manufacturing capital of the world, an
industrial cluster that is home not only to assemblers but also to an
army of companies that provide components such as flat panel
displays, circuit modules, and keyboards. Your MacBook—one of
the million computers the Quanta factory produces each week—
leaves the factory several days later and travels to Shanghai Pudong
Airport, where it is loaded onto a cargo flight to Anchorage,
Alaska. In Anchorage it passes through a third-party logistics (3PL)
import hub on its way to your home or business.a By the time it
reaches you, your MacBook has passed through the hands of many
organizations, but nowhere along the way did an Apple employee
touch it.
For most of the twentieth century, companies competed on the basis of resources
they owned. AT&T dominated the American telephone market through its ownership of
a vast electronic network as well as production facilities for telephones and network
switching equipment. ExxonMobil integrated upstream oil exploration and production
with downstream refineries and retail distribution. To reduce costs and improve
efficiency, these companies employed vertical integration, the ownership or control of
multiple points on the production path. When they needed to procure, or source, a
component or a capability from another company, they chose a supplier primarily on the
basis of cost.
For the past several decades, however, as the pace of innovation has quickened and
technology has become more sophisticated, companies have found it very challenging to
have the right assets and capabilities in-house at the right time. Many organizations have
gained strategic advantage by relinquishing previously integrated business functions to an
outside supplier—the source—a decision known as outsourcing. (See the following
sidebar “Outsourcing versus Offshoring” for an explanation of terminology.) Outsourcing
allows organizations to leverage the substantial and specialized investments in capabilities
suppliers possess that would be expensive or impossible for organizations to duplicate
internally. Suppliers are better able to make these investments because they can pool
demand across multiple customers, and the organizations are able to avoid the costly and
time-consuming process of switching out internal assets such as tooling and skilled labor.
a Rising fuel costs and air freight rates have driven more freight to oceanborne shipment, but time-
critical and configure-to-order goods still travel by air.
I
Outsourcing versus Offshoring
The terms “outsourcing” and “offshoring” are often used interchangeably.
Outsourcing is the subcontracting of a business function that was previously done
internally to an outside supplier. Offshoring is the subcontracting of a business
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 4
Figure 1 Sourcing Strategies
Work conducted in
foreign markets
Captive Offshoring Offshore Outsourcing
Work conducted in
domestic markets
Internal Sourcing Outsourcing
Work conducted
within company
Work conducted by
outside supplier
Source: Adapted from Oliver E. Williamson, “Comparative Economic Organization: The Analysis of Discrete Structural
Alternatives,” Administrative Science Quarterly, 36. No. 2 (June 1991): 284, Figure 1, by Cornell University, Johnson Graduate School
of Management. Copyright ©1991 by Cornell University. Reproduced with permission of Sage Publications Inc. Journals.
The shift away from vertical integration coincided with an increased focus on core
competencies, the collective learning within the organization, particularly relating to the
coordination and integration of resources.1 This increased focus was a way to improve
strategic positioning and company performance in the face of increased competition and
cost pressures. An organization concentrates its resources and activities where it can be
preeminent and contracts with others where it does not have distinctive capabilities or
critical strategic needs. This focus also makes organizations more flexible; external
resources are easier to shed when they are no longer needed.
As a result, sourcing is no longer just a matter of finding low-cost providers. Sourcing
is an increasingly strategic function responsible for determining an organization’s value
chain, the flow of productive activities involved in bringing a product or service to
market, including both the supply of goods as well as complementary services like after-
sale support, maintenance, and repair.
A typical value chain might be depicted as
Procurement → Inbound Logistics → Component Manufacture → Assembly
→ Outbound Logistics → Warehousing → Retail Operations.
function to an organization in another country; the subcontractor may be part of
the same firm (captive offshoring) or an outside provider (offshore outsourcing).
Outsourcing and offshoring have similar motivations, although the latter is usually
driven by the desire to exploit labor or cost arbitrage. Because our central interest
here is the partitioning of work between internal and external sources, whatever
their geographic location, we will use “outsourcing” to describe work done by an
outside supplier, whether onshore or offshore. Figure 1 explains the differences
between these similar terms.
Value Chain versus Supply Chain
The terms value chain and supply chain are often used synonymously. In this and
other Core Readings, we use the term value chain when we are focusing on the
entire sequence of activities performed to bring a product to market (and, when
necessary, to dispose of it after use).
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 5
This value chain is independent of the different organizational entities or functions that
perform each of these steps. For a highly vertically integrated organization, they might be
performed by a single corporate entity, or they might be split among many such entities.
We use the term “supply chain” when we are focusing on the different entities (functions
and/or organizations) as well as on the activities. (See sidebar “Value Chain versus Supply
Chain.”)
Sourcing decisions touch on issues that are fundamental to a firm’s identity: What
resources and capabilities should the firm make or control? What will it allow other firms
to make or control? Where are the firm’s boundaries? These decisions also raise questions
about how the firm will manage itself and its partners: What will be the nature of the
relationship with the supplier? Will it be arm’s-length or incorporate some degree of
integration? What will be the supplier’s specific responsibilities? How will the
organization manage the procurement relationship? This view of sourcing as a strategic
measure, one that can be employed to achieve and support many organizational goals, is
known as strategic sourcing.
The concept of strategic sourcing overlaps with both supply chain design and supply
chain management. (For more information on this topic, see Core Reading: Supply Chain
Management [HBP No. 8031].) Supply chain design, however, tends to have a narrower
focus on the question of where to source goods and how to move them, while supply
chain management takes a broader look at not just strategic issues but also operational
and tactical ones.
We begin the Essential Reading with an overview of strategic sourcing decisions, both
where and how procurement should occur and issues of strategic fit. We then consider a
framework for deciding where to procure, in terms of geographical location and with
respect to firm boundaries. The framework considers the demand landscape (which
includes customer preferences and other marketplace attributes) and the supply
landscape (which includes the supply options, including the firm itself where applicable)
in the context of the macro environment. We then look at operational and strategic
considerations—the trade-offs—these sourcing decisions entail. What are the implicit
costs of outsourcing, supply chain visibility, customer relationship management, and a
range of risk exposures? Sourcing decisions have dynamic effects on the organization’s
market—enabling competition, commoditizing components, and shifting control of
resources and capabilities. In the Supplemental Reading: A Primer on Make-or-Buy
Research, we consider the various research streams that influence the sourcing decisions
of organizations.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 6
2 ESSENTIAL READING
The strategic sourcing decisions of an organization determine where and how it procures
the products and services that it needs. Managers choose the resources and capabilities
the organization will establish and maintain internally and those it will develop externally.
These decisions must align with the organization’s operations strategy (the features that
characterize primary and peripheral operations) and its business strategy (how the
organization competes and is perceived in the marketplace).
Resources are assets tied to an organization, such as specialized factories and
production methods. They are embodied both inside organizations and within firms in
the supply base. Explicit resources are well-understood and documented, such as
intellectual property in the form of product designs and patents. Know-how, or practical
knowledge, is generally tacit in nature, and although organizations depend on it to get
things done, they rarely fully comprehend it. A cookie recipe and an oven are explicit
resources for a bakery, whereas an experienced chef ’s ability to look at the cookies and
know if they’re done is a tacit resource. Tacit resources are often contained within people,
plant, and equipment, such as relationships with suppliers or an intuitive sense of
production, and will be lost if the explicit resource itself is lost. However, if this
knowledge is formalized, it becomes explicit and easier to transfer. Trade secrets and
process designs can be tacit or explicit.
An organization’s capabilities are embodied in its processes and routines for getting
work done. Processes turn resources into goods and services that are delivered to
customers. Examples of processes and routines include product development, order
fulfillment and logistics, service delivery, and the payment of sales commissions. Like
resources, capabilities may be explicit or implicit. In some processes, workers are
physically involved in production, often called direct labor in manufacturing or customer-
facing roles in service industries. Other processes include activities like support services,
often called indirect labor or noncustomer-facing roles, such as payroll, tax collections
and remittances, and information technology.
Determining where to procure products and services involves two distinct decisions.
The first decision is whether to source from within the organization or from an external
supplier. The make-or-buy decision, as this is often called, is a core strategic issue for
managers. When should an organization invest in building specific resources and
capabilities, and when is it better to buy them from a supplier that may also be serving
your rivals? Is it important for Volkswagen to design and manufacture its own engines, or
can it source them from an independent designer like Ricardo? What are the strategic and
operational implications for Volkswagen and how might they change over time? Should
Ford continue to source hybrid power trains from Toyota, or is that unwise over the long
term?
The second where-to-procure decision involves the geographic location of the supply
of goods. Proximity to resources or other organizations can endow a value chain with
specific strengths.
The decision about how to procure products and services is equally important. While
the where-to-procure decision presents specific opportunities and vulnerabilities for the
value chain, the how-to-procure decision ensures the realization of those opportunities
2.1 An Overview of Strategic Sourcing
Decisions
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 7
and the management of those vulnerabilities. In an external sourcing situation, will the
relationship be arm’s-length or will it exhibit degrees of integration? How many suppliers
will the organization buy from? What kind of contracts will establish the relationship?
What information will customers and suppliers share and how? With insourcing, what
mechanism will be used for the transfer of goods within the organization? If transfer
prices are used, how will they be set? What incentives will managers have?
Consider vendor managed inventory (VMI), in which a buyer shares end-customer
demand information with the supplier (vendor), and the supplier then makes inventory
replenishment decisions for the buyer. This reversal of the classic “buy” relationship (in
which the buyer controls its own inventory replenishment decisions) addresses
vulnerabilities from the distortion of information that usually accompanies buyer-
generated orders.b
Now let us consider the alignment of sourcing with an organization’s operations and
business strategy. As we’ve said, this is what makes sourcing strategic. An operation’s
strategy emphasizes one or more competitive priorities—in manufacturing these are
typically cost, flexibility, the ability to innovate, quality, and speed.2 The alignment of
strategic sourcing with the operations strategy reinforces those priorities and ensures the
congruence of goals across the value chain.
For example, the Toyota Production System, as an expression of the company’s
operations strategy, prioritizes conformity in product quality and low cost. Toyota’s
sourcing strategy encourages one-to-one supplier relationships in the flow of materials
that feed the company’s production lines. In one famous case, Johnson Controls, a
supplier of seats to Toyota, had an assembly line synchronized with Toyota’s vehicle
assembly line, roughly half an hour away, and so was able to deliver different colors and
styles of seats to be inserted into cars in the corresponding vehicle production sequence in
a remarkable just-in-time manner. Sourcing from a single supplier exposes the supply
chain to disruption from natural disasters or other interruptions, but it increases
accountability for material flow and makes it easier to both identify quality problems in
sourced parts and to work with suppliers to eliminate root causes.
The alignment of a sourcing approach with operations strategy does not ensure
alignment with business strategy, especially as supply chains become more global,
fragmented, and complex. Whereas operations strategies tend to focus on optimizing the
operational aspects of sourcing arrangements, business strategies are based on
environmental threats and opportunities and the organization’s relationship to
stakeholders such as employees, local and global communities, governments, and so on.
Offshoring, for instance, may fit with an operations strategy that emphasizes low costs,
but it may not mesh well with a business strategy that values the relationship with
communities that would lose jobs if an offshore sourcing strategy were implemented.
Many high-profile organizations, such as Apple and Nike, have found themselves rushing
to repair damage to their reputations when sourcing arrangements were publicly seen to
be at odds with their business strategies or values—in particular, when they procured
goods from suppliers whose alleged practices, such as substandard treatment of workers,
were deplored by their customers or customers’ governments.
b See Core Reading: Supply Chain Management (HBP No. 8031) for a more detailed discussion of supply-
chain coordination models.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 8
The challenge of strategic sourcing, then, is the issue of multiple levels of fit, or
alignment, between where to procure and how to procure, and between the sourcing
approach and the organization’s operation and business strategy. It is extremely difficult
to capture all the linkages that must be considered in just one framework, so in this
reading we focus primarily on the question of where to procure as an introduction to the
many issues managers must grapple with in strategic sourcing.
Strategic sourcing is a crucial process for configuring a value chain. It provides a link
between the needs and requirements on the demand side and the various resources on the
supply side (see Figure 2). For the sake of exposition, we will use “good” to refer to any
sort of product or service, and “component” to be any subsection of a good. In the
sections ahead, we will look at each piece of this framework to understand where an
organization should procure and the strategic consequences of those decisions.
Figure 2 Strategic Sourcing Framework
Focusing on core competencies and relying on outside providers to make up the rest
of the value chain forces decisions about which resources and capabilities to hold onto
and develop and which ones to divest. Such decisions can take managerial courage,
because divestment of capabilities is generally difficult or impossible to reverse. There is a
natural inclination to hold onto capabilities that took many years to develop or played a
major role in the organization’s history. Yet in many cases those are precisely the
capabilities that have become widely available, often at a lower cost, from specialized
suppliers.
Demand Landscape
Product structure and attributes, customer preferences, variability in demand, customer
bargaining power, and market structure can strongly influence where an organization
procures goods and components. Organizations building new value chains, or
restructuring existing ones, should start by looking at these features.
Product structure, the way a good is subdivided and organized, is a key attribute in
sourcing decisions. Modularity is the degree to which a product can be divided into
distinct subsystems with well-defined boundaries. In such instances, design rules codify
the way parts fit and work together, specifying the interfaces and interactions among
them and allowing subsystems to be designed and produced by independent producers
that do not need to coordinate with one another. The same can be said for processes: If
2.2 A Framework for Strategic Sourcing:
Where to Produce
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 9
large complex processes can be broken down into smaller tasks with standardized “hand-
off ” (interfacing) procedures, then they are modular and so pieces (subsystems) can be
outsourced as well.
If a product is modular, standardized components or subsystems can often be
sourced from competing suppliers. For services, such standardization might take the form
of well-documented process instructions, such as scripts used in a call center.
Modularization is often driven by the need to manage complexity by empowering parallel
teams of specialists to work independently on subsystems, both in design and production.
Often these parallel teams include sourcing partners that can develop specialized skills
and assets well beyond what an organization could hope to do on its own internally. Lean
start-ups can turn to sourcing partners for much of the heavy lifting in specialized
manufacturing or services that might otherwise take them years to build. “Fabless”
semiconductor companies, such as Qualcomm, that do not own a factory (“fab”) but do
only design work, and semiconductor “foundries,” like Taiwan Semiconductor
Manufacturing Company (TSMC), that do only manufacturing, are both examples of
modular partitioning. Similar divisions are popular in the food and beverage industry
between manufacturing and sales and distribution; in pharmaceuticals between drug
development and the running of clinical trials; and in apparel, shoes, and toiletries
between manufacturing and design and marketing.
Modularization also offers the opportunity to design products that use common
components and to perform late customization (also referred to as delayed differentiation
or postponement). Dell did this with desktop PCs, offering a wide variety of options in the
finished product.c
Tradability is a key product attribute. If a good can be sold in a location that is
different from where it is produced, it is said to be tradable. The comparative level of
tradability is determined by the transport cost relative to the total value of the good,
sometimes referred to as the value density, as well as that good’s shelf life. The greater the
value density and the longer the shelf life, the more tradable the good. Electronic goods,
shoes, and clothing are tradable; restaurant meals and haircuts are not. The
containerization of cargo has vastly expanded the size of the tradable sector. A half
century ago, it would have been unimaginable to source large forgings and castings
abroad for the U.S. market because of the low value density of such items, but
containerization made shipping inexpensive, thereby expanding what was tradable.
Technology, especially the type that increases the speed and lowers the cost of
transporting physical goods and information, has increased the size of the tradable sector.
The Internet enables doctors in New Zealand to read medical X-rays taken in the United
States, rendering medical opinions tradable. Most medical transcriptions have been
outsourced to India and the Philippines because digitized voice recordings and the
resulting text transcriptions are readily transportable. Network management, PC software
product support, tax preparation, and accounts payable processing are all tasks that were
traditionally done within the walls of an organization but are now tradable and
commonly outsourced. The service value chain has been disaggregated; services that used
to be performed at one location have been broken down and spread across organizational
and geographic boundaries.
Tradability of a good or its components allows an organization to choose
geographically dispersed suppliers.
c For more on delayed differentiation, see Core Reading: Supply Chain Management (HBP No. 8031).
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 10
Figure 3 The Trade-offs of Outsourcing
The resource content of the tradable good can also influence the geographic location
of suppliers. For example, high labor content might suggest the opportunity for labor
arbitrage, the relocation of work (usually through offshoring) to take advantage of labor
cost differentials. Labor arbitrage can overcome the incremental coordination costs
(inventory risks, logistics, import duty, etc.) as long as labor cost is a significant
percentage of the total bill of materials (BOM) for the good.
In Interactive Illustration 1, you can adjust the labor cost differential between
onshore and offshore sourcing. A differential of 10, for example, means that onshore
labor costs are 10 times higher than offshore labor costs at a chosen location. You can
adjust how much of the product’s costs are attributed to labor. For the purposes of the
example, we arbitrarily assume 10% of the BOM is attributed to incremental duty and
logistics costs for work that is offshored, and 5% of the BOM for incremental inventory
risks. Try changing these two parameters and notice their effects on relative production
costs. The reference cost is 100% for full domestic in-house production.
Interactive Illustration 1 Labor Content and Tradability
Another product attribute of importance in strategic sourcing decisions is the
presence of complementary goods. Complements, often sold individually, are either
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2pI82RJ
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
https://s3.amazonaws.com/he-assets-prod/interactives/050_labor_content_tradability/Launch.html
http://bit.ly/hbsp2pI82RJ
https://s3.amazonaws.com/he-assets-prod/interactives/050_labor_content_tradability/Launch.html
8037 | Core Reading: STRATEGIC SOURCING 11
necessary for or enhance the usability of a good. Personal electronic devices, such as
computers and smartphones, for example, require application software (complements) to
function. Outsourcing complementary goods is often advantageous. Consider Apple’s
decision to source mobile applications (apps) externally, which greatly expanded the
market of available apps, increasing the utility of both the mobile operating system and
the device it sits on. In this case, the complements are specialized, meaning that apps are
written to run on a specific operating system. The platform and complements may even
be cospecialized, such as when Apple and application developers make mutual
investments to build apps that can be used only on an Apple platform. Complementary
goods can also be generic, that is, not tied to a particular platform.
Customer preferences and requirements are important attributes of the demand
landscape. Further specialization may be economically attractive in some industries, such
as electronics and fashion, that have short product life cycles, high demand for specialized
knowledge or assets, and fast design cycles. The speed or frequency with which
preferences change, coupled with changes in technology from the supply side,3
determines how much flexibility the sourcing strategy must provide. Some products, such
as commercial aircraft, have very long lifetimes in the market, while others—mobile
phones and seasonal goods, for instance—may go from inception to obsolescence in a
matter of months. Rapidly changing preferences tend to suggest that goods might be
sourced externally in order to shift the capacity risks away from the organization.
However, this strategy can work only if the dynamics in the supplier market allow
suppliers to absorb these risks by, for example, pooling capacity across multiple
customers.
Some goods, especially seasonal ones, exhibit high demand variability. Many
manufacturers use outsourcing to accommodate the variable portion of demand. They
keep a baseload of production in-house and outsource the peaks to providers—often
located in emerging markets—that can manage labor arrangements and capacity
utilization more flexibly. This helps avoid in-house employment peaks and valleys. Other
firms simply outsource their entire production and let the supplier cope with the
variability. In regions with low labor flexibility, this can be a compelling strategy.
Interactive Illustration 2 How Much Should I Outsource?
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2ur7k06
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
https://s3.amazonaws.com/he-assets-prod/interactives/049_outsource/Launch.html
http://bit.ly/hbsp2ur7k06
https://s3.amazonaws.com/he-assets-prod/interactives/049_outsource/Launch.html
8037 | Core Reading: STRATEGIC SOURCING 12
Customer buying power and market size and structure are also important features of
the demand landscape. Ease of substitution (low switching costs) translates into buyers’
power to set prices and terms of trade, which favors outsourcing. This power can also
arise from sheer scale. Prior to Hewlett-Packard’s acquisition of Compaq, both companies
relied on a network of suppliers in Taiwan for finished desktop and notebook computer
systems. By consolidating purchasing and using procurement auctions, the combined
company was able to extract significant cost concessions from those same suppliers.4
Supply Landscape
The supply landscape offers choices of where an organization sources the goods and
components it needs. Those choices are governed by opportunities to leverage scale, the
nature of the industry’s supply base, the organization’s physical footprint, and financial
considerations.
An industry supply base can operate at the level of components and raw materials, or
it can provide subsystems or complete products. Electronic manufacturing services (EMS)
companies provide product design and industrialization capabilities (the steps required to
design and implement a manufacturing process). Original design manufacturers (ODMs)
offer complete turnkey product designs, while IT outsource providers supply not only the
facilities and hardware but also the staff to run a network of data centers. Contract
research organizations (CROs) run clinical trials on behalf of pharmaceutical and biotech
companies, and global delivery service providers supply staffed call centers.
The decision about how much capacity to maintain internally versus how much to
use from sourcing partners is a crucial managerial decision about size and scale. This is
generally dependent on an organization’s ability to capture or leverage scale efficiencies.
Economies of scale are decreases in per-unit cost that result from expanding the volumes
produced or processed. Factors that lead to economies of scale include increased
negotiating power on the cost of inputs, the spreading of fixed costs over more
production, the processing of larger batch sizes, and increased labor efficiency due to
higher levels of specialization. Economies of scale are not constant. Increasing production
from 100 to 1,000 widgets may reduce the per-unit cost dramatically, but moving from
1,000 to 2,000 widgets may reduce the per-unit cost only slightly. This phenomenon is
called diminishing marginal returns.
AriZona Iced Tea
When Ferolito, Vultaggio & Sons, a New York beer distributor, wanted to move
into the bottled ice tea business in 1992, it went to the G. Heileman Brewing
Company, a beer brewer in La Crosse, Wisconsin, because it did not have any
manufacturing resources of its own. After Heileman installed tea-making
equipment in three of its plants, Ferolito, Vultaggio & Sons launched AriZona Iced
Tea. Two years later, the company reached sales of $300 million, without ever
having to build a bottling plant.
Sourcing manufacturing capacity is a popular strategy for new-age beverage
companies such as Snapple and SoBe, as well as microbreweries and food
companies like Hain Celestial Group (a maker of herbal teas and organic foods).
Hain outsourced 60% of its manufacturing, while Apple & Eve, one of the largest
privately held juice companies, outsourced almost all of its production. In turning
to manufacturing partners, these companies can focus their energies on brand
building, sales, and distribution without having to worry about establishing or
quickly growing manufacturing capacity to meet demand.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 13
In production organizations, the simplest scale economies arise when there are high
setup costs and relatively low run costs per unit of output so that amortizing setup costs
over larger run volumes improves labor and asset utilization.d Economies of scale exist
outside of production contexts as well, such as in transportation (sending full truckloads
instead of partial loads) and in administrative tasks (batch processing invoices). When
there is potential for economies of scale but the organization does not have sufficient
demand to achieve them, sourcing from an electronic manufacturing services (EMS)
provider, contract manufacturer (CM), or shared services provider can help by
aggregating demand from multiple clients, thus lowering costs for all of them.
A competitive supply base is one that includes multiple suppliers with similar
resources, capabilities, and efficiencies due to size and scale. The existence of such a
competitive base can make outsourcing a very attractive option. However, if the supply
base is concentrated, an organization’s decision to outsource may depend on other factors
that provide leverage, such as its size. Some organizations have strategically outsourced to
small suppliers or to those that do not possess all the requisite resources or capabilities in
an effort to help such suppliers develop and eventually to provide competition in a
concentrated supply base.
Location is an important consideration in sourcing decisions. Arbitrage, the
exploitation of price differences between markets, is a big factor in the global sourcing of
commoditiese and labor, so regional differences can have important (albeit often
unpredictable) consequences on sourcing choices.
Physical proximity can be important for ensuring short supply chains, cementing
customer relationships, managing vendors, or gathering market intelligence. When there
is an especially strong talent pool or supplier base in a region, it can be critical to
establish a physical presence there. Walmart, for instance, opened procurement offices in
Shenzhen, China, to be close to its suppliers. For products or services that require prompt
delivery, such as fashion goods or product repair, the origination point for the good or
service is a key component in the cost of rapid delivery. In such cases, an organization’s
physical and tactical assets are central to success.
d For more information on this topic, see Core Reading: Process Analysis (HBP No. 8007).
e Commodities in this context refers to goods such as textiles, electronic components, and
intermediates—that is, goods with higher value-added than raw material commodities such as iron ore
and copper.
Pooling IHI Corporation and Commercial Jet Engines
Visitors to IHI Corporation’s Soma Aero-Engine Works near Fukushima, Japan,
cannot help but be struck by the percentage of the world’s commercial jet aircraft
engines that have some of their components manufactured there. The plant
produces turbine blades, disks, main shafts, and other components for GE
Aviation’s GEnx (used on the Boeing 787 and 747-8), GE90 (used on the Boeing
777), and CF34 engines, as well as the Rolls Royce Trent 700, 800, and 900 (used
on the Airbus A330, Boeing 777, and Airbus 380, respectively), the Pratt and
Whitney GP7200 (used on the Airbus A380), and the V2500 (used on the Airbus
A320 family).
GE Aviation, Rolls-Royce, and Pratt & Whitney together dominate the
commercial jet engine market and are fierce competitors. Yet the Soma Works can
pool the volumes of the three clients and balance workloads with its workforce
across their aggregate volumes. All firms benefit in the process through more
efficient production and lower costs.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 14
For some industries, it may be crucial to set up production or product development
facilities close to the most demanding customers, who may have changing tastes and
needs. Toyota established Calty Design Research in 1973 in southern California to “gain
inspiration from the unique trendsetting California spirit.”5 Its goal was to research
market trends and create vehicle designs that reflected U.S. tastes.
Financial considerations are often at the heart of sourcing decisions. Capital or start-
up costs often drive the choice about what part of the value chain to internalize, especially
for organizations that are just starting out or that wish to build products or services
requiring deep technical capabilities. Because few semiconductor chip designers have the
financial resources to build a state-of-the-art factory to manufacture the products
themselves, they turn to a foundry such as TSMC or GlobalFoundries. Similarly, few
start-up airlines have the capital to finance a fleet, while leasing companies like GE
Capital Aviation Services (GECAS) and International Lease Finance Corporation (ILFC)
specialize in turning high initial fixed costs into variable costs associated with monthly
lease payments.
Leasing companies highlight another financial consideration for a firm assessing its
sourcing alternatives. Organizations have different sensitivities to owning assets; some
may be in a better position than others to make use of the cash flows from depreciation.
Public companies are often compared using capital efficiency metrics, which were
developed to quantify how well a company leverages available capital to drive an increase
in value. The outsourcing of manufacturing or IT data centers is a good way to get assets
off the books. Similarly, many retailers rely on third-party logistics (3PL) companies to
distribute their products. Many of these 3PLs process goods with their own facilities and
fleets, thus easing their clients’ capital burden.
Macro Environment
Large-scale changes across global markets—such as technological, process, or policy
changes that affect the tradability of goods, and fiscal, currency, trade, and regulatory
policies—have a heavy influence on value chain design.
Shifting exchange rates, factor costs (the costs associated with things like wages, fuel,
and other inputs to production), and transportation costs cause shifts in the tradability
equation. Opportunities for labor arbitrage do not last forever; when they lessen, a
reversal in the location of work—reshoring—or a move to new locations to take advantage
of changing arbitrage opportunities can be appropriate.
Trade barriers are also a factor in tradability. Tariffs, quotas, security concerns,
bureaucracy, and other obstacles make it harder to move goods. The global delivery model
is a term coined in the 1990s by Indian IT outsourcing firms to describe the remote
execution by a globally distributed team of such activities as software and call center
support. It is successful because the Internet circumvented bureaucratic and legal
obstacles that often plague businesses operating in India, making much work tradable.
“All we needed to do business was a wire and some computers,” commented Nandan
Nilekani, a cofounder of Infosys, the Indian IT services firm. “We worked outside the
controls that stifled companies in manufacturing and agriculture.”6
Governments and the policies and regulations they promulgate influence an
organization’s location choices. Fiscal and tax policy and its impact on economic growth,
exchange rates, and infrastructure investments lay the groundwork for important factor
costs in different regions. Differing tax policies drive sophisticated corporate structures
and location choices aimed at minimizing overall tax burdens. This often results in
complex shipment schemes—say, shipping pharmaceuticals manufactured in the United
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 15
States to Ireland for packaging to take advantage of a lower tax rate on the finished
product, where the highest value-add for tax purposes is claimed.f
Sourcing decisions (re)configure the value chain, creating or destroying value through
their impact on factors such as supply chain visibility, business disruption risk, and
product quality and cost. Coordination costs refer to the various costs of coordinating
materials with build plans—that is, ensuring the right components are available at the
right time in the right place. These include administrative overhead and the costs of
maintaining buffer inventory. Similarly, the value chain configuration determines
exposure to issues such as business or supply chain disruption, brand and security risk,
and erosion of customer goodwill. Longer-term impacts on an organization’s competitive
position, supplier relationships, and the commoditization of products are discussed
below, and we consider a framework for assimilating all these factors into a strategic
sourcing plan.
Coordination Costs
As we have discussed, organizations can realize scale and marginal cost benefits from
their sourcing strategies, but external sourcing also generates new overhead costs because
of the need to monitor and coordinate with suppliers. New overhead may also emerge
from a need to buffer against longer lead times by holding more inventory. Instead of
decreasing, overhead costs can actually increase with outsourcing, and because they are
now spread over fewer remaining internal functions, they can appear even higher.
Underestimation and misattribution of sourcing costs often drive a cycle of increased
outsourcing: Managers look for more cost savings by outsourcing additional processes,
but this incurs more costs that may seem to indicate the need for yet more outsourcing.
Production Coordination
Most firms that enter into outsourcing arrangements have to add vendor/supplier
management staff to monitor suppliers and respond to quality, reliability, cost, and other
performance issues. They also face less visible coordination costs, such as the increased
burden placed on IT systems to communicate with supplier networks and to keep track of
f This has obvious implications for the setting of transfer prices and the repatriation of offshore profits.
2.3 Operational and Strategic Considerations
Reshoring
Reshoring is the reversal of offshoring decisions, usually as labor arbitrage
opportunities decrease. From 2009 to 2013, reshoring efforts have been observed
in the United States in some manufacturing subsectors, such as appliances, and
other subsectors seem to be paying attention. For example, in February 2013, Ford
announced plans to move its 2-liter EcoBoost engine to its Cleveland plant by the
end of 2014. The argument for reshoring to the United States rests on the increase
in labor costs in countries such as China and India, the increase in transportation
costs due mostly to rising fuel costs, and the high labor productivity of U.S.
workers. Reshoring efforts are retarded by factors that include availability of
capital, access to manufacturing skills, and access to a local supply base. 7
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 16
store supplier information such as bids, capabilities, and physical locations. Lastly, one-
off costs associated with new product or process introductions, disruption recovery, and
management turnover are more burdensome when planning and response actions span
multiple organizations.
Inventory Pipeline
Sourcing from the supply base usually results in increased inventory holding costs,
especially when the supplier is offshore. Longer lead times and increased lead-time
variability add costs resulting from higher work-in-progress and/or safety-stock
(inventory) requirements. In addition, the cost of inventory-in-transit is borne by the
organization, either directly or indirectly. While inventory holding costs can be reduced
by buying premium freight service for faster transport, many goods—especially lower-
value density goods from Asia bound for Western markets—are now moving by sea
instead of by air because of the escalating cost of fuel. This has meant not only more
inventory in the pipeline but also increased value lost from obsolescence, general price
declines, or other forms of spoilage. Managers must be sure that the sustained overhead
increases don’t surpass the marginal cost savings from outsourcing.
Risks
Supply Chain Visibility and Risks of Disruption
Anticipating the risk of a business disruption, such as an unexpected delay in production
or in the flow of products or services to customers, is an important part of strategic
sourcing. Business disruptions can include natural disasters, supply interruptions, or
dramatic changes in the costs of producing goods. A disruption to supply often causes
stock-outs and lost sales. In more serious cases, customers and market share may be
permanently lost because of concerns about product availability going forward.g
Externally sourced components increase disruption risk for an original equipment
manufacturer (OEM) by adding new potential failure points to the supply network,
degrading an OEM’s relationship with sources of raw materials and reducing control over
its supply. A supplier may choose to change its component suppliers, known as second-
tier suppliers to the OEM, without the OEM’s knowledge. A-B-C fragmentation of the
value chain occurs when members of a production network each outsource slices of their
parts of the value chain, creating new supply tiers between each existing tier. Interactive
Illustration 3 demonstrates the exponential growth of complexity (expressed in
communications costs) that occur with each new level of suppliers outsourcing to
suppliers. The resulting expansion of the network can mean that the OEM has no end-to-
end visibility. While organizations often know who their second-tier suppliers are, they
rarely have visibility beyond the third or fourth tier. This lack of visibility was apparent
following Japan’s Tōhoku Earthquake in 2011, when automotive manufacturers stated
that it might take up to two weeks before they knew the full impact of the disaster on their
supply chains. Many organizations have introduced processes to maintain a better
understanding of their supplier networks, looking several tiers upstream—to the suppliers
of their suppliers and beyond—to assess their vulnerability to external disruption risks.
g See Core Reading: Supply Chain Management (HBP No. 8031) for a more detailed discussion of supply
chain risk.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 17
Interactive Illustration 3 Supply Chain Tiering
In addition to pushing for more transparency in upstream supply chains, OEMs have
also been auditing the business continuity plans of their first- and even second-tier
suppliers. In doing so, the OEMs are seeking not only to get an accurate map of their
upstream supply chain but also to get involved in the disruption planning of key suppliers
and to use the presence of business continuity plans as a criteria in supplier selection. All
this increases sourcing costs, and it isn’t clear how well OEMs are positioned to analyze
the effectiveness of such plans. Because they opted not to produce the components
themselves, they may not have the technical and tacit knowledge to fully appreciate the
implications of some disruptions or the efficacy of suppliers’ planned responses.
Additional risk mitigation steps include engineering and design choices that increase
the number of suppliers that can be used or allow for more component substitution
among products, which enables more flexible responses to shortages. Often organizations
match the sourcing patterns of their competitors, which ensures that they are no worse
off—but no better off, either—in the event of a disruption.
Physical, Brand, and Security Risks
External sourcing adds new points of vulnerability to a value chain. When more parties
handle components and finished goods along longer supply chains, the risk of physical
loss or damage increases. Variability in supplier quality can harm a firm’s brand. So can
outsourcing downstream supply chain functions such as logistics and distribution, which
makes it harder to catch quality issues early on because customers’ feedback must travel
through multiple intermediaries before reaching the OEM. The result can be heavily
publicized product recalls.
The same technology that increased the tradability of goods also increased data
security concerns. As more and more information about specific customers and goods is
captured, digitized, stored, and shared with sourcing partners, it becomes accessible to
many more people over whom the OEM has little control, increasing these risks.
Moving production outside an organization opens up several potential sources of
defects, such as miscommunication, incentive misalignment, and intentional deviation
Scan this QR code, click the image, or use this link to access the interactive illustration: bit.ly/hbsp2DYwKS5
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
https://s3.amazonaws.com/he-assets-prod/interactives/048_supply_chain_tiering/Launch.html
http://bit.ly/hbsp2DYwKS5
https://s3.amazonaws.com/he-assets-prod/interactives/048_supply_chain_tiering/Launch.html
8037 | Core Reading: STRATEGIC SOURCING 18
from performance specifications.h As an example of this, consider Baxter Laboratories’
experience in 2008 sourcing heparin, an anticoagulant used by patients undergoing
kidney dialysis. Baxter sourced the heparin from Scientific Protein’s plant in Changzhou,
China, which (apparently) received raw materials contaminated with poisonous
substitutes from a deviant supplier. The product caused serious problems for Baxter’s
patients, including septic shock and, in several cases, death.
Customer Relationship Management: Outsourcing Customer-Facing
Functions
The global delivery model, which we described earlier, made the outsourcing of
customer-facing functions, such as product support, IT system management, and
maintenance, increasingly popular. Outsourcing customer-facing functions can be an
attractive proposition to all involved. McDonald’s, for instance, has had great success
using centralized call centers to take drive-through orders, freeing up on-site staff to
assemble orders and conduct payment transactions more quickly. Similarly, Dell opted to
outsource its on-site commercial field service to ensure competitive response times and
make service costs variable rather than fixed. However, erosion of quality, loss of market
intelligence, and the resulting impact on customer satisfaction and retention may
outweigh the margin improvement and efficiency benefits for Dell. As with many
upstream-sourcing coordination costs, these costs are more difficult to quantify than the
labor savings resulting from outsourcing.
New techniques for mitigating many of these concerns are emerging from two
streams of literature. First, service science researchers have been working to understand
and estimate the impact of various attributes of customer interaction on customer
satisfaction, retention, and willingness to pay. Frances Frei, for example, introduced the
concept of the service wrapper, which segments the service process and highlights the key
steps an organization must control in order to maintain customers’ perception of quality.8
In a second stream, researchers at the intersection of marketing and computer science
have considered how to use structured customer feedback and behavior, such as survey
data, purchasing patterns, and web traffic, to recover the market intelligence lost when an
organization doesn’t talk with customers directly. On the cutting edge of this work are
attempts to classify and interpret unstructured data, particularly customer and market
intelligence data generated outside of the organization, such as customer phone calls and
Twitter feeds. Big data analytics seeks to make the best use of this unstructured data and is
a growing practice, particularly in the retail sector.
Long-Term Impacts
Spillovers and Competition
Many benefits of outsourcing also become liabilities when their impact on the supply
landscape is considered. For example, an organization that sources components externally
may end up strengthening the supply base, thereby endowing future competitors with
stronger sourcing options. The same marginal cost savings, lower capital investment, and
access to know-how conferred to organization A when sourcing from supplier B will also
be conferred to competitors who use B. If A trains B with its own resources and
capabilities, A is increasing the capabilities of the potential supply pool for A’s
competitors. A stronger supply pool lowers barriers for new entrants, increasing their
ability to source for speed in a virtual organization model. A veteran organization like A
h For a discussion about incentive alignment, see Core Reading: Supply Chain Management (HBP No.
8031).
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 19
often finds it very difficult to compete with the more nimble virtual firms it has indirectly
enabled.
Hewlett-Packard (HP) incurred substantial costs and invested significant effort to
upgrade the quality and design practices of Taiwanese computer manufacturers such as
Arima. When HP chose to source a large part of its needs elsewhere, Arima then chased
after work from HP’s competitors to fill the excess capacity in its plants. These
competitors had a free ride on HP’s investment in Arima. Arima had no other choice than
to do what it did; it had stranded capacity that had to find a productive use.
It has also become increasingly common for a supplier to become the direct
competitor to an organization like A, particularly when the supplier was set up to perform
low-value-add functions and leverage low-factor costs. There are also examples of
organizations that knowingly share their capabilities with suppliers that are also
competitors. When Piaggio sourced its motorcycle engines from Zongshen Industrial
Group in Chongqing, China, the engines were manufactured on a line adjacent to the line
that made Zongshen-branded motorcycles. Piaggio helped Zongshen improve its
manufacturing practices and quality to meet Piaggio’s customers’ standards, and by doing
so upgraded an important long-term global competitor.
Both examples illustrate the trade-off between immediate concerns like cost, speed to
market, and market access and (long-term) strategic concerns like competitive advantage
and barriers to entry.
Resources and Control Points
Control of key resources or complements within a good’s value chain has a major impact
on the success or failure of sourcing decisions. The decision to outsource part of the value
chain can shift market power to an organization’s suppliers, which may now control
access to a key complement. Companies using a modular product structure, for example,
must pay attention to which modular subsystems they choose to make. Clayton
Christensen and Michael Raynor9 identify performance defining subsystems as the ones
that are critical to control because these subsystems ultimately drive differentiation and
profits. The other modules are good candidates for outsourcing because they are
commodities that can be sourced from multiple suppliers.
The concentration of suppliers, capacity constraints (on natural resources, supplier
aggregate capacity, or key ingredients, for example), and share of the component’s market
volume consumed by the organization will determine the severity of the power shift.
A buyer can slow the growth of a supplier’s power by outsourcing only a portion of
required volumes to it and either producing the rest internally or splitting demand across
multiple suppliers. Sourcing from multiple suppliers improves the competitive supply
base and reduces the impact of business disruptions but may add substantial cost in
industries with high fixed costs for production. In some cases, a supplier and buyer
become dependent on each other in order to remain going concerns—that is, to stay
afloat financially—because a large portion of their respective businesses are linked.
Ceding control of resources to suppliers with higher-priority customers has several
additional risks. Consider organization A’s decision to source components from supplier
B when 60% of B’s volume is sold to organization Z. In this scenario, B is captive to Z. Z
has more leverage than A when requesting expediting, increased production volume, or
component design features. Z also has the power to put B out of business. If B suffers a
disruption in production, A may end up waiting for its components while Z receives its
complete order. The best case for an organization is to be the first best customer of a
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 20
supplier in order to guarantee that its orders and needs remain a priority over the
supplier’s other customers.
Control points, the parts of (or the complements to) a product or service that
contribute most to the company’s monetization strategy, can also be a crucial issue in
sourcing decisions. An organization should internalize or otherwise maintain control of
those control points when making sourcing decisions. When IBM introduced its Personal
Computer (PC) in 1981, its control points turned out to be the key components that it
chose to outsource, including the microprocessor (to Intel) and software (to Microsoft).
When the strategy was unveiled, it was hailed by analysts as brilliant because the open
architecture created a readily acceptable market standard, and through outsourcing IBM
was able to reach the market very quickly, acting in the style of a virtual organization.
Over time, though, it mattered less and less whether IBM’s brand, or the brand of a lesser-
known company, was on the PC. IBM started losing money in PCs even as Intel and
Microsoft reaped enormous profits, and it ultimately sold its PC business to Lenovo in
2005.
It becomes increasingly difficult for an organization to reverse the decision to source
externally. Once organizations lose knowledge or ownership of processes and resources,
it takes considerable time and resources to rebuild them.
Commoditization
Sourcing decisions may result in the commoditization of major components of a good, or
even of the good itself. If an organization achieves a cost advantage by outsourcing a
particular component, competitors will feel pressure to achieve cost parity, often by
sourcing that component as well and often from the same suppliers. As more
organizations shift from internally to externally sourced components, scale economies
and specialization will increase the supplier’s production efficiencies and capability
enhancements. Volume aggregation speeds the movement along the learning curve, and
the large market for a standardized component brings in competitors, driving
commoditization. In the electronics industry, this has been the case with many electronic
components such as LCD display modules. Formerly a very profitable business,
standardization and multisourcing have made LCD displays a low- or no-profit
commodity.
Component commoditization is a mixed bag. On the one hand, it creates a more
competitive supply base, reducing sourcing costs and increasing the organization’s
margin. When the savings are passed on to consumers in the form of lower prices for
finished goods, the market often expands. On the other hand, commoditization degrades
entry barriers by creating a common, cheap resource for components. The negative effects
of commoditization are highest for control points or performance-defining components.
Kraljic’s Matrix
Peter Kraljic10 created a useful framework for classifying components in a good. This
framework integrates many of the forces detailed above to aid managers in minimizing
supply vulnerability while making the most of potential buying power—guarding against
supply disruptions while coping with continuous change.
Kraljic suggests that an organization’s sourcing strategy depends on two factors:
supply risk, which is determined outside of the firm, and the impact of the component on
the business or on its profits, which is an internal issue. The first factor considers the
strategic importance of purchased components in terms of value added by product line,
the percentage of raw materials in total costs, the impact on profitability, and so on. The
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 21
second factor assesses the nature of the dependency on the supplier, due to the
component’s complexity or dependence on the supplier’s capabilities in designing and
producing the component.
The component’s impact on profitability and supply risk are organized in a two-by-
two matrix (see Figure 4), with a high or low impact on each dimension. Thus if both
dimensions are high—a firm depends on a supplier for a complex or unique component
or the supplier holds key specialized assets and substitution is difficult—strategic
cooperation with that supplier is an important long-term strategy (see the upper right
quadrant). But if there are multiple suppliers and substitution is relatively
straightforward, the firm might take a different approach, using its purchasing leverage to
get the best deal when the product has a high impact on profitability (upper left
quadrant). For components with a low-profit impact, operational objectives like efficiency
may be emphasized over saving every last cent.
Figure 4 Impact on Profitability and Supply Risk
High Classification of Purchase Items
Im
pa
ct
o
n
Bu
si
ne
ss
(
In
te
rn
al
Is
su
es
)
Leverage: Best Deal
(High profit impact, low supply risk)
• Unit cost management important
because of volume usage
• Substitution possible
• Competitive supply market with
several capable suppliers
Critical/Strategic: Cooperation
(High profit impact, high supply risk)
• Custom design or unique
specification
• Supplier technology important
• Changing source of supply costly
or difficult
• Substitution difficult
Non-Critical: Efficiency
(Low profit impact, low supply risk)
• Standard specification or
“commodity” type items
• Substitute products readily
available
• Competitive supply market with
many suppliers
Bottleneck: Supply Continuity
(Low profit impact, high supply risk)
• Unique specification
• Supplier technology important
• Production-based scarcity due to
low demand and/or few sources
of supply
• Usage fluctuation not routinely
predictable
• Potential storage risk
Low Supply Risk/Supply Market Complexity (External Issues) High
Source: Exhibit adapted from Peter Kraljic, “Purchasing Must Become Supply Management,” Harvard Business Review, 61, no. 5
(Sept. 1983): 111, Exhibit 1. Copyright ©1983 by the Harvard Business School Publishing Corporation; all rights reserved. Reprinted
by permission of Harvard Business Review.
Kraljic’s matrix categorizes the differences in power and dependence between buyers
and suppliers. In using this framework, firms would first look at all the parts of their value
chain that they source externally and classify them in terms of profit impact and supply
risk. They would then develop purchasing strategies for each quadrant in the matrix: form
partnerships for critical/strategic products, ensure supply for bottleneck products, exploit
power for leverage products, and ensure efficient processing for noncritical products.
While Kraljic focused on one managerial prescriptive for each quadrant, numerous
other researchers11 have elaborated on some additional approaches (see Figure 5). Thus
for a sourced piece of the value chain that falls in the critical/strategic quadrant, firms can
either maintain the strategic partnership, recognizing and accepting the fact that the firm
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 22
was tied to a supplier and had no alternatives to that supplier, or terminate the
partnership and find a new source. For sourced components in the noncritical quadrant, a
firm can pool requirements to develop more leverage, and so on.
Figure 5 Additional Approaches to Value Chain Partnerships
High Classification of Purchase Items
Im
pa
ct
o
n
Bu
si
ne
ss
(
In
te
rn
al
Is
su
es
)
Leverage
6 Exploit Buying Power
7 Develop a Strategic Partnership
Critical/Strategic: Cooperation
1 Maintain Strategic Partnership
2 Accept Locked-in Partnership
3 Terminate, Find New Supplier
Non-Critical: Efficiency
8 Pooling of Requirements
9 Individual Ordering,
Pursue Efficient Processing
Bottleneck: Supply Continuity
4 Accept Dependence Reduce
Negative Consequence
5 Reduce Dependencies and Risk,
Find Other Solutions
Low Supply Risk/Supply Market Complexity (External Issues) High
Source: Marjolein C.J. Caniels and Cees J. Gelderman, “Purchasing Strategies in the Kraljic Matrix—A Power and Dependencies
Perspective,” Journal of Purchasing and Supply Management 11, nos. 2–3 (March–May 2005): 141–155. Copyright ©2005. Reprinted
and adapted with permission from Elsevier.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 23
3 SUPPLEMENTAL READING
Management researchers have long been interested in how work is organized within an
organization or across multiple organizations. Their research has given practitioners a
foundation for deciding what activities are best performed, or assets owned, within the
walls of an organization and which activities or assets might be more effectively provided
outside those walls, either in related or unrelated organizations. Many of these ideas have
become core management tenets, so it is useful to understand how they are interrelated
and how they have evolved over the years.
This extensive work is published in multiple streams of literature (see Figure 6). One
stream centered on transaction cost economics, which suggested that firms would make
decisions on vertical integration based on the costs incurred in coordinating external
market-based sourcing versus the costs of doing things internally. A parallel stream
started with the question of where firm boundaries should be drawn—which resources or
capabilities should be internal and which should be external. This stream is associated
with the resource-based view and was developed into the knowledge-based view and the
concept of core competencies and dynamic capabilities. A quick overview of these
research fields provides us with some context for strategic decision making.
Transaction Cost Economics
Transaction costs are the costs incurred in making economic exchanges, such as
purchasing or selling goods and services. In the transaction cost economics (TCE)
literature, the transaction is the basic unit of analysis, and assessing governance structures
(of which firms and markets are the major alternatives) as a way to minimize such costs is
central to the study of organizational boundaries. Ronald Coase11 introduced the idea that
exchanges inside firms (internalized production) and market exchanges (buying and
selling on a market) were simply alternative ways of coordinating production. He
observed that the operation of a market incurred contracting costs and that having an
“authority” (like that of an entrepreneur) inside a firm that directed resources could lead
to savings.
Understanding the behavior of the parties involved in a market transaction was the
next step. Simon12 introduced the notion of bounded rationality, an idea that managers
making decisions are limited by the information available to them and the finite time they
have to make choices. Thus managers work with a limited, simplified model of the real
situation, their “definition of the situation,” which is a result of their own and others’
psychological and sociological processes. Williamson13 examined opportunism, the act of
taking selfish advantage (with little regard for the consequences for others) in a
transaction, arguing that it is difficult to distinguish between counterparties who will
behave opportunistically and those who will cooperate in a transaction. Bounded
rationality and opportunism raise the risks, and hence the costs, in a “buy” transaction.
3.1 A Primer on Make-or-Buy Research
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 24
Figure 6 Taxonomy of Research Streams in Transaction Cost Economics
Williamson and Riordan looked at other characteristics of transactions that
influenced make-or-buy decisions.15 Asset specificity—the extent to which parties to an
exchange make investments that support that transaction, such as building a factory to
supply specialized components—imposes a real cost on a transaction in the form of risk.
He tied this to opportunism as one of the many uncertainties facing external transactions.
Many researchers expanded on this work. Klein and Lefler16 looked at the
relationship between partners and the possibilities of opportunistic hold up. Teece17 and
others applied TCE to multinational firms that internalized operations (through vertical
integration) when doing so lowered their costs.
Williamson18 also provided a helpful framework that tied together transaction costs,
asset specificity, and preferred organization structure (governance) outcomes. If a buyer
must invest in specific assets in order to execute a transaction—for example, by building a
flat panel TV factory next to a glass factory because it is difficult to ship large sheets of
glass—the buyer is exposed to hold up by the supplier. The reverse can also occur when a
supplier must purchase specific tooling or build dedicated capacity to serve a particular
buyer. Not all suppliers behave opportunistically, but because of bounded rationality and
uncertainty it is not possible ex ante to know who will and who will not act in an
opportunistic way. In circumstances of high asset specificity, there is a greater risk of hold
up, and TCE predicts that organizations will favor a hierarchical approach to
governance—namely, vertical integration. In cases of low asset specificity, a market-based
approach using external contracting will be preferred, and a hybrid approach will be
preferred for circumstances in the middle. This logic is expressed in Figure 7, which
shows the differing governance cost curves as a function of asset specificity for different
organizational forms.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 25
Figure 7 Governance Cost Curves as a Function of Assets Specificity for
Different Organizational Forms
Resource-Based View of the Firm
The resource-based view of the firm provided an influential theoretical framework that
focused on how firms’ internal organization influenced the way they achieved and
sustained competitive advantage.19 Different firms have different “bundles” of resources,
such as brands, in-house technology and know-how, skilled personnel, trade contacts,
machinery, efficient procedures, and capital. Over time, these differences contribute to
competitive advantage. To the extent that these resources are valuable, rare, inimitable,
and nonsubstitutable (the VRIN framework), competitive advantage can be maintained
by implementing value-creating strategies that are difficult to copy—for example,
outsourcing tasks that do not require VRIN attributes and allow the organization to focus
on developing and maintaining those attributes.20
Knowledge-Based View of the Firm.
Proponents of the knowledge-based view of the firm argued that knowledge-based
resources are complex and difficult to imitate and therefore are the major determinant of
sustained competitive advantage.21 Grant highlighted several characteristics of the varied
types of knowledge within an organization:
• Transferability, with “knowing how” embodied in tacit knowledge and
“knowing about facts and theories” embodied in explicit knowledge.
• Capacity for aggregation, which embodies an organization’s ability to add
knowledge to that which it already possesses, what Cohen and Levinthal
described as absorptive capacity.22
• Appropriability, or the ability of the owner of a resource to receive a return
on the value created by that resource.
• Specialization in knowledge acquisition, recognizing the limited capacity to
acquire and process knowledge and, therefore, the need to specialize.
• Knowledge requirements of production—namely, that knowledge is a critical
input into production.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 26
The sourcing decision then represents an attempt to provide the organization with a
knowledge set that generated a competitive advantage.
Dynamic Capabilities
Teece, Pisano, and Shuen22 introduced the dynamic capabilities framework to explain
why certain firms are better able than others to respond in environments of rapid
technological change. The ability to dynamically integrate, build, and reconfigure internal
and external competencies to address shifting demands has become a source of
competitive advantage. Grant23 and Kogut and Zander24 added that the manipulation of
knowledge resources and capabilities is of particular importance. Eisenhardt and Martin25
tied this framework to the resource-based view by pointing out that dynamic capabilities
alone are not sufficient, but to the extent that they can be used to enhance or build new
resource configurations, they can help an organization maintain competitive advantage.
Together, this research provided a theoretical foundation for outsourcing, highlighting
the importance of reconfiguring an organization’s assets to meet changing needs and
challenges.
Competing on Core Competencies
By selecting which capabilities and processes to keep internally and which to outsource,
organizations can increase their flexibility and responsiveness to changing markets. Core
competencies, capabilities that are central to how an organization delivers value and that
represent its collective learning, provide a useful framework for designing a value chain
strategy. Focusing investment on core competencies drives resources to areas that have
the most promise for differentiation and enables the organization to earn superior
returns.
Prahalad and Hamel26 prescribed three criteria for determining whether a capability
is a core competency. First, core competencies enable access to a wide variety of markets,
serving as a common platform for goods and services that use that expertise. Second, they
translate into benefits customers can perceive. Finally, they are difficult for competitors to
imitate. These three criteria are often satisfied in complex systems. Specialized knowledge,
capabilities, or production skills might be required to integrate advanced technologies.
Benchmarking with external competitors, or in some cases testing competitive positions
by selling core components on the open market, also allows organizations to determine
their core competencies.
Virtual corporations—a very small set of internally held core competencies linked
with externally sourced functions—are an extreme outcome. In a rapidly changing
marketplace, virtual structures allow organizations to reconfigure capabilities, lower the
levels of needed investments, and be more responsive to customers. Organizations are
moving more and more toward this virtual model, investing in core activities and
outsourcing the rest. Some start-ups achieve this by strategically sourcing all but a few
functions from the outset. (For a classic example, see the following sidebar “Nike.”) Firms
that historically have been vertically integrated have been chasing this paradigm as well by
outsourcing functions that have traditionally been internal. Major U.S. automakers spun
off component operations into stand-alone entities such as Delphi Automotive (from
General Motors) and Visteon (from Ford), and major computer manufacturers like IBM
sold their manufacturing operations so that they could focus on design, software, sales,
and marketing.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 27
Table 1 Examples of Core Competencies
Attribute Honda Motor Company Amazon.com
Enable access to
a wide variety of
markets
Expertise in efficient high
power to weight ratio small
gasoline engines helped it
expand from the motorcycle
market to cars, lawnmowers,
generators, all-terrain vehicles
and other outdoor power
equipment.
Operating scale and
efficiency
Translate into
perceived
customer
benefits
Engines were noted for their
efficiency, smooth running,
and reliability. Consumers
favored equipment powered
by Honda gasoline engines.
“Earth’s Biggest Selection.”
Low prices, accessible, and
easy to use
Difficult to
imitate
Honda’s design expertise and
manufacturing scale made it
difficult to challenge.
Network effects make it
difficult to replicate the
scale
Chesbrough and Teece29 caution that some managers have taken the virtual idea too
far and that it is critically important to understand the type of innovation the firm is
engaged in. They argue that innovations that are stand-alone and not intimately linked
into the structure of a good are much better suited to a virtual model, in which a
decentralized organization can manage commercialization tasks quite well. For
innovations with a high level of dependency among components, virtual organizations do
not perform as well.
Nike
Nike is the world’s largest seller of athletic shoes and apparel, yet it owns no
factories. It began by outsourcing shoe production in Japan and eventually built a
supplier network across Asia. Today, virtually all its footwear production is
contracted outside the United States. Nike’s Air-Sole cushioning components are
manufactured by Nike IHM Inc., a wholly-owned subsidiary, as well as by
independent contractors in China and Taiwan. Apparel is manufactured by
independent contract manufacturers in 33 countries.28 Sojitz Corporation of
America, a subsidiary of a large Japanese trading company, provides import-
export financing services. Because footwear is a fashion good that can experience
volatile and hard-to-predict demand, Nike can maintain a great deal of production
flexibility by managing its mix of contractors. It concentrates its own activities in
preproduction (research and development) and postproduction (sales, marketing,
and distribution), areas in which it excels.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 28
4 KEY TERMS
Capabilities: The ability to perform actions, generally embodied in processes within a
firm.
Core Competencies: Capabilities that are central to how an organization delivers value;
they represent an organization’s collective learning, and they provide a useful framework
for designing a value chain strategy.
Make-Or-Buy Decisions: Processes that lead to the selection of internal or external
organizations for the provisioning of goods or services.
Modularity: Degree to which a system made up of components can be separated into
distinct subsystems with well-codified interfaces.
Offshoring: Subcontracting of a business function to an organization in another country.
The subcontractor may be part of the same firm (“captive offshoring”) or an outside
provider (“offshore outsourcing”).
Outsourcing: Subcontracting of a business function that was previously done internally
to an outside supplier.
Sourcing: Act of procuring a system, component, or capability from another firm.
Vertical Integration: Ownership or control of multiple points on the production path for
a product or service.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 29
5 ENDNOTES
1 C.K. Prahalad and Gary Hamel, “The Core Competence of the Corporation,” Harvard Business Review
68, no. 3 (1990): 79–101.
2 W. Skinner, “Production Under Pressure,” Harvard Business Review 44, no. 6 (1966): 139–146; P.T.
Ward et al., “Competitive Priorities in Operations Management,” Decision Sciences 29, no. 4 (1998):
1035–1046.
3 C.H. Fine, “Clockspeed-Based Strategies for Supply Chain Design,” Production and Operations
Management 9, no. 3 (2000): 213–221.
4 P. Moody, “With Supply Management, Technology Rules,” Supply Chain Management Review 10, no. 4
(2006): 41–48; T.I. Tunca and Q. Wu., “Multiple Sourcing and Procurement Process Selection with
Bidding Events,” Management Science 55, no. 5 (2009): 763–780.
5 “Calty Design Research, Inc.,” http://www.toyota.com.about/careers/calty/index.html.
6 Nandan Nilekani, Imagining India (New York: Penguin, 2009).
7 Robert Schoenberger, “Reshoring: Are Manufacturing Jobs Coming Back to United States?” Cleveland
Plain Dealer, March 09, 2013, http://www.cleveland.com/business/index.ssf/2013/03/reshoring_
conference_to _study.html, accessed March 20, 2013.
8 Frances X. Frei, “Breaking the Trade-Off Between Efficiency and Service,” Harvard Business Review 84,
no. 11 (2006): 92–101.
9 C.M. Christensen and M.E. Raynor, The Innovator’s Solution: Creating and Sustaining Successful
Growth (Boston: Harvard Business School Press, 2003).
10 P. Kraljic, “Purchasing Must Become Supply Chain Management,” Harvard Business Review 61, no. 5
(1983): 109–117.
11 A.J. Van Weele, Purchasing Management: Analysis, Planning and Practice (London: Chapman & Hall,
2002); R. Syson, Improve Purchase Performance (London: Pitman, 1992); T.I. Ellicott-Shircore and P.T.
Steele, “Procurement Positioning Overview,” Purchasing and Supply Management December (1985):
23–26.
12 R.H. Coase, “The Nature of the Firm,” Economica 4, no. 16 (1937): 386–405.
13 H.A. Simon, Models of Man: Social and Rational (New York: John Wiley & Sons, 1957).
14 O.E. Williamson, “Markets and Hierarchies: Some Elementary Considerations,” The American
Economic Review 63, no. 2 (1973): 316–325.
15M.H. Riordan and O. E. Williamson, “Asset Specificity and Economic Organization,” International
Journal of Industrial Organization 3, no. 4 (1985): 365–378.
16 B. Klein and K. B. Leffler, “The Role of Market Forces in Assuring Contractual Performance,” The
Journal of Political Economy 89, no. 4 (1981): 615–641.
17 D.J. Teece, G. Pisano, and A. Shuen, “Dynamic Capabilities and Strategic Management,” Strategic
Management Journal 18, no. 7 (1997): 509–533.
18 O.E. Williamson, “Markets and Hierarchies: Some Elementary Considerations,” The American
Economic Review 63, no. 2 (1973): 316–325.
19 E.T. Penrose, The Theory of the Growth of the Firm (Oxford: Blackwell, 1963); R.P. Rumelt, “Towards
a Strategic Theory of the Firm,” in Competitive Strategic Management, edited by R.B. Lamb (Englewood
Cliffs, N.J.: Irwin, 1984), pp. 131–145; C.K. Prahalad and G. Hamel, “The Core Competence of the
Corporation”; R.R. Nelson, “Why Do Firms Differ, and How Does It Matter?” Strategic Management
Journal 12, no. S2 (1991): 61–74; M.A. Peteraf, “The Cornerstones of Competitive Advantage: A
Resource-Based View,” Strategic Management Journal 14, no. 3 (1993): 179–191; D.J. Teece, G. Pisano,
and A. Shuen, “Dynamic Capabilities and Strategic Management.”
20 T.R. Holcomb and M.A. Hitt, “Toward a Model of Strategic Outsourcing,” Journal of Operations
Management 25, no. 2 (2007): 464–481.
21 R.M. Grant,“Prospering in Dynamically-Competitive Environments: Organizational Capability as
Knowledge Integration,” Organization Science 7, no. 4 (1996): 375–387.
22 Wesley M. Cohen and Daniel A. Levinthal, “Absorptive Capacity: A New Perspective on Learning and
Innovation,” Administrative Science Quarterly 35, no. 1 (1990): 128–152.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 30
23 G. Teece, G. Pisano, and A. Shuen, “Dynamic Capabilities and Strategic Management.”
24 R.M. Grant, “Prospering in Dynamically-Competitive Environments: Organizational Capability as
Knowledge Integration.”
25 B. Kogut and U. Zander, “What Firms Do? Coordination, Identity, and Learning,” Organization
Science 7, no. 5 (1996): 502–518.
26 K.M. Eisenhardt and J.A. Martin, “Dynamic Capabilities: What Are They?” Strategic Management
Journal 21, nos.10–11 (2000): 1105–1121.
27 C.K. Prahalad and G. Hamel, “The Core Competence of the Corporation.”
28 Nike, Inc., 2011 Annual Report, p. 5, http://investors.nikeinc.com/files/doc_financials/
AnnualReports/2011/index.html, accessed May 2013.
29 H.W. Chesbrough and D.J. Teece, “Organizing for Innovation: When Is Virtual Virtuous?” Harvard
Business Review 74, no. 1 (1996): 65–73.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 31
6 INDEX
Page numbers followed by f refer to figures. Page numbers followed by i refer to
interactive illustrations. Page numbers followed by t refer to tables.
absorptive capacity, 25
aircraft manufacturers, 12
Amazon.com, 27t
apparel manufacturers, 9, 27
Apple, 3, 11
Apple & Eve, 12
appropriability, 25
arbitrage, 13, 14. See also labor arbitrage
Arima, 19
AriZona Iced Tea brand, 12
asset specificity, 24, 24f, 25f
AT&T, 3
automobile manufacturers, 7, 14, 15, 26
Baxter Laboratories, 18
benchmarking, 26
beverage companies, 12
big data analytics, 18
bounded rationality, 23, 24f
brand risk, 15, 17
business continuity plans, 17
business strategy, 6, 7, 8
buying power, 12, 20, 22f
buy transactions, 23–24, 24f
call centers, 9, 12, 14, 18
Calty Design Research, 14
capabilities, 3, 4, 5, 6, 8, 12, 13, 14, 16, 18–19, 20, 21, 23, 26, 28
capacity constraints, 19
capacity decisions, 12, 24
capacity for aggregation, 25
capacity risks, 11
captive offshoring, 3–4, 4f, 28
China, 3, 13, 15, 18, 19, 27
Christensen, Clayton, 19
Coase, Ronald, 23
commoditization, 20
Compaq, 12
competition, 4, 5, 7, 13, 15, 18–19
competitive advantage, 19, 25, 26
complementary goods (complements), 11
complexity, 9, 16–17, 17i, 21f
component (components), 8, 9, 12, 15, 16, 17, 19–20, 21, 21f, 28
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
8037 | Core Reading: STRATEGIC SOURCING 32
computer manufacturers, 3, 11, 12, 19, 20, 26
containerization, 9
contract manufacturers (CMs), 13, 27
contract research organizations (CROs), 12
control points, 20
coordination costs, 10, 15–16, 18
core competencies, 4, 8, 23, 26–27, 27t, 28
costs. See coordination costs; factor costs; fixed costs; fuel costs; governance costs; overhead costs;
sourcing costs; start-up costs; transaction cost economics (TCE); transportation costs
customer buying power, 12
customer-facing functions, 6, 18, 28
customer feedback, 17, 18
customer preferences, 5, 8, 8f, 11, 19
customer relationships, 14, 15, 16, 17, 19–20, 26
customer relationship management, 18
customization, 9
data analysis, 18
data centers, 12, 14
data security risks, 15, 17
decision making. See make-or-buy decisions; sourcing decisions; where-to-procure decisions
delayed differentiation, 9
Dell, 9, 18
Delphi Automotive, 26
demand landscape, 8–12, 8f
demand variability, 11
design rules, 8
diminishing marginal returns, 13
direct labor, 6
disruption risks, 7, 15, 16–17, 17i, 19
dynamic capabilities framework, 26
economies of scale, 12–13, 15, 20
electronic manufacturing services (EMS) companies, 12, 13
electronics industry, 11, 20
explicit resources, 6
ExxonMobil, 3
factor costs, 14–15, 19
factories, 6, 9, 14, 24, 27
fashion industry, 11, 13, 27
Ferolito, Vultaggio & Sons, 12
financial consideration, in sourcing decisions, 14
financing services, 27
first best customers, 20
fixed costs, 12, 14, 18, 19
flexibility, 4, 7, 11, 17, 26, 27
Ford, 15, 26
Frei, Frances, 18
fuel costs, 14, 16
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
For the exclusive use of j. lu, 2020.
This document is authorized for use only by jiadi lu in Supply Change Management IE-GY 7993 taught by THOMAS MAZZONE, NYU Tandon School of Engineering from Feb 2020 to Jun
2020.
<<
/ASCII85EncodePages false
/AllowTransparency false
/AutoPositionEPSFiles true
/AutoRotatePages /None
/Binding /Left
/CalGrayProfile (Gray Gamma 2.2)
/CalRGBProfile (sRGB IEC61966-2.1)
/CalCMYKProfile (U.S. Web Coated \050SWOP\051 v2)
/sRGBProfile (sRGB IEC61966-2.1)
/CannotEmbedFontPolicy /Error
/CompatibilityLevel 1.5
/CompressObjects /Off
/CompressPages true
/ConvertImagesToIndexed true
/PassThroughJPEGImages true
/CreateJDFFile false
/CreateJobTicket false
/DefaultRenderingIntent /Default
/DetectBlends true
/DetectCurves 0.0000
/ColorConversionStrategy /LeaveColorUnchanged
/DoThumbnails true
/EmbedAllFonts true
/EmbedOpenType false
/ParseICCProfilesInComments true
/EmbedJobOptions true
/DSCReportingLevel 0
/EmitDSCWarnings false
/EndPage -1
/ImageMemory 1048576
/LockDistillerParams true
/MaxSubsetPct 99
/Optimize true
/OPM 1
/ParseDSCComments true
/ParseDSCCommentsForDocInfo true
/PreserveCopyPage true
/PreserveDICMYKValues true
/PreserveEPSInfo true
/PreserveFlatness true
/PreserveHalftoneInfo false
/PreserveOPIComments false
/PreserveOverprintSettings true
/StartPage 1
/SubsetFonts false
/TransferFunctionInfo /Preserve
/UCRandBGInfo /Remove
/UsePrologue false
/ColorSettingsFile ()
/AlwaysEmbed [ true
/Gotham-Black
/Gotham-Bold
/Gotham-Book
/Gotham-ExtraLight
/Gotham-Medium
/Gotham-Ultra
/MinionPro-Bold
/MinionPro-BoldCn
/MinionPro-BoldCnIt
/MinionPro-BoldIt
/MinionPro-It
/MinionPro-Medium
/MinionPro-MediumIt
/MinionPro-Regular
/MinionPro-Semibold
/MinionPro-SemiboldIt
/Palatino-Bold
/Palatino-BoldItalic
/Palatino-Italic
/Palatino-Roman
/TradeGothicLTStd-Cn18
/Whitney-Black
/Whitney-BlackItalic
/Whitney-BlackSC
/Whitney-BlackSCItalic
/Whitney-Bold
/Whitney-BoldItalic
/Whitney-BoldSC
/Whitney-BoldSCItalic
/Whitney-Book
/Whitney-BookItalic
/Whitney-BookSC
/Whitney-BookSCItalic
/WhitneyIndexBlack-RdBd
/WhitneyIndexBlack-RdCnLt
/WhitneyIndexBlack-RdLt
/WhitneyIndexBlack-RdMd
/WhitneyIndexBlack-SqBd
/WhitneyIndexBlack-SqCnLt
/WhitneyIndexBlack-SqLight
/WhitneyIndexBlack-SqMd
/WhitneyIndexWhite-RdBd
/WhitneyIndexWhite-RdCnLt
/WhitneyIndexWhite-RdLt
/WhitneyIndexWhite-RdMd
/WhitneyIndexWhite-SqBd
/WhitneyIndexWhite-SqCnLt
/WhitneyIndexWhite-SqLt
/WhitneyIndexWhite-SqMd
/Whitney-Light
/Whitney-LightItalic
/Whitney-LightSC
/Whitney-LightSCItalic
/Whitney-Medium
/Whitney-MediumItalic
/Whitney-MediumSC
/Whitney-MediumSCItalic
/WhitneyNumeric-Black
/WhitneyNumeric-BlackItalic
/WhitneyNumeric-Bold
/WhitneyNumeric-BoldItalic
/WhitneyNumeric-Book
/WhitneyNumeric-BookItalic
/WhitneyNumeric-Light
/WhitneyNumeric-LightItalic
/WhitneyNumeric-Medium
/WhitneyNumeric-MediumItalic
/WhitneyNumeric-Semibold
/WhitneyNumeric-SemiboldItalic
/Whitney-Semibold
/Whitney-SemiboldItalic
/Whitney-SemiboldSC
/Whitney-SemiboldSCItalic
]
/NeverEmbed [ true
]
/AntiAliasColorImages false
/CropColorImages true
/ColorImageMinResolution 150
/ColorImageMinResolutionPolicy /OK
/DownsampleColorImages false
/ColorImageDownsampleType /Average
/ColorImageResolution 600
/ColorImageDepth -1
/ColorImageMinDownsampleDepth 1
/ColorImageDownsampleThreshold 1.50000
/EncodeColorImages false
/ColorImageFilter /DCTEncode
/AutoFilterColorImages false
/ColorImageAutoFilterStrategy /JPEG
/ColorACSImageDict <<
/QFactor 0.15
/HSamples [1 1 1 1] /VSamples [1 1 1 1]
>>
/ColorImageDict <<
/QFactor 0.76
/HSamples [2 1 1 2] /VSamples [2 1 1 2]
>>
/JPEG2000ColorACSImageDict <<
/TileWidth 256
/TileHeight 256
/Quality 15
>>
/JPEG2000ColorImageDict <<
/TileWidth 256
/TileHeight 256
/Quality 15
>>
/AntiAliasGrayImages false
/CropGrayImages true
/GrayImageMinResolution 150
/GrayImageMinResolutionPolicy /OK
/DownsampleGrayImages false
/GrayImageDownsampleType /Average
/GrayImageResolution 600
/GrayImageDepth -1
/GrayImageMinDownsampleDepth 2
/GrayImageDownsampleThreshold 1.00000
/EncodeGrayImages false
/GrayImageFilter /DCTEncode
/AutoFilterGrayImages false
/GrayImageAutoFilterStrategy /JPEG
/GrayACSImageDict <<
/QFactor 0.15
/HSamples [1 1 1 1] /VSamples [1 1 1 1]
>>
/GrayImageDict <<
/QFactor 0.76
/HSamples [2 1 1 2] /VSamples [2 1 1 2]
>>
/JPEG2000GrayACSImageDict <<
/TileWidth 256
/TileHeight 256
/Quality 15
>>
/JPEG2000GrayImageDict <<
/TileWidth 256
/TileHeight 256
/Quality 15
>>
/AntiAliasMonoImages false
/CropMonoImages true
/MonoImageMinResolution 1200
/MonoImageMinResolutionPolicy /OK
/DownsampleMonoImages false
/MonoImageDownsampleType /Average
/MonoImageResolution 600
/MonoImageDepth -1
/MonoImageDownsampleThreshold 1.50000
/EncodeMonoImages false
/MonoImageFilter /CCITTFaxEncode
/MonoImageDict <<
/K -1
>>
/AllowPSXObjects false
/CheckCompliance [
/None
]
/PDFX1aCheck false
/PDFX3Check false
/PDFXCompliantPDFOnly false
/PDFXNoTrimBoxError true
/PDFXTrimBoxToMediaBoxOffset [
0.00000
0.00000
0.00000
0.00000
]
/PDFXSetBleedBoxToMediaBox true
/PDFXBleedBoxToTrimBoxOffset [
0.00000
0.00000
0.00000
0.00000
]
/PDFXOutputIntentProfile (None)
/PDFXOutputConditionIdentifier ()
/PDFXOutputCondition ()
/PDFXRegistryName ()
/PDFXTrapped /False
/Description <<
/CHS
/CHT
/DAN
/DEU
/ESP
/FRA
/ITA (Utilizzare queste impostazioni per creare documenti Adobe PDF adatti per visualizzare e stampare documenti aziendali in modo affidabile. I documenti PDF creati possono essere aperti con Acrobat e Adobe Reader 5.0 e versioni successive.)
/JPN
/KOR
/NLD (Gebruik deze instellingen om Adobe PDF-documenten te maken waarmee zakelijke documenten betrouwbaar kunnen worden weergegeven en afgedrukt. De gemaakte PDF-documenten kunnen worden geopend met Acrobat en Adobe Reader 5.0 en hoger.)
/NOR
/PTB
/SUO
/SVE
/ENU ()
>>
>> setdistillerparams
<<
/HWResolution [600 600]
/PageSize [612.000 792.000]
>> setpagedevice