Page 207 - DMGT206_PRODUCTION_AND_OPERATIONS_MANAGEMENT

Production and Operations Management

Notes 10.4.1 Multi-sourcing Strategy

Traditional purchasing was dominated by a multi-sourcing strategy. This meant that the firm
had business relationships with a number of suppliers. The base of suppliers was large and the
duration of contracts was short. Suppliers would be sent enquiries and they would respond with
quotations, meeting the demands and specifications of the firm, and negotiate with purchasing
for the contract.

This approach was based on the perception that certain advantages accrue to the buying company.
These include:

1. Creating competition by playing one supplier against another.
2. Obtaining bids with low prices and shipping costs.
3. Increasing leverage over suppliers.

4. Greater degree of flexibility in technical areas, and
5. With a number of sources, it provided protection in times of shortages against failure at
any one supplier’s plant.
From the buyer’s point of view, the responsibility to maintain the necessary technology, expertise,
and forecasting abilities plus cost, quality, and delivery competencies lay with the supplier.
However, dealing with several suppliers required a longer time in negotiation that could often
result in a delay or disturb the buyer’s production schedules.
The approach placed emphasis on achieving the lowest possible price for a particular product.
Long-term partnership was not the goal of the buying firm and the initial price was more
important than the total price of a product.
The multiple sourcing was, therefore, a preferable and suitable purchasing alternative.
Transactional relationships were the desired outcome. In today’s environment, multiple sourcing
is generally limited to and used for commodity items, non-strategic buying and standard items.

There has been a change from the traditional model. The number of suppliers to use for one type
of purchase has changed to the use of fewer, reliable suppliers and even to the extent of using
sole or single suppliers.
Buyer-supplier relationships, in integrated supply chains, have evolved into trusting,
cooperative, and mutually beneficial long-term relationships. Firms’ today reduce their supply
base to only the best suppliers, while further developing suppliers who are continuously
improving their quality, delivery, service, price, and information performance.

10.4.2 Network Sourcing Strategy

Many firms have successfully consolidated their supplier bases by using a phased approach.
This hybrid is often termed networking.
In networking, bought in content of the final product is based on the skills and specialized
knowledge of different tiers of subcontractors. The supply network is a hierarchical pyramid.
The top tiered suppliers are the most skilled and possess the most advanced technologies, while
the suppliers at the bottom have adequate skills for their particular operations. Communication
is shared between the buyer and all the suppliers within the network.

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