Most of us are aware of American technical
giant, Apple and the high market value and reputation they have generated over the
years. Among its many popular products, Apple iPhone have
contributed hugely to company’s
revenue.
A few years back, www.economist.com published
an article explaining manufacturer’s wise contribution of making
a famous apple product, the Apple iPhone 4. If you will look closely in the graphic
here, you will find names of multiple countries like Japan, Taiwan,
China, etc. contributing different components for the final
product.
At the bottom
of the image, you can observe the share
of Apple in the total selling price, a whopping $368 out of sales
price of $560 for an iPhone4.
This feat was possible primarily because of two
reason, the high market value of brand Apple which allow them
to sell their product at a premium and the global sourcing policy by Apple leveraging
strength of multiple countries around the world. The second reason of Apple's Success, the strength of a sound sourcing policy has often been ignored.
Before dwelling further in Sourcing
methodologies, let us understand where it fits into a supply chain model. A
typical supply chain model look like this:
It Start
with planning followed by sourcing and other activities finally leading to
customer. The concept seems simple. A manufacturer buys raw material, process
them and then deliver the final product to customer. Common sense tells us that
any manufacturer over a period of time will get to know who the supplier in
market are and he can simply place his order as per demand. So what’s the need
of any separate policy? Well the India industry started working with this
framework only in the starting. They do had certain rules related to purchasing
of items but that was it. Most manufacturer were producing their final product
as well as their components in-house and the only material requirement was of
some basic raw material like iron, steel, coal, etc. in case of a manufacturing
firm. However, over a period of time, especially
post-independence, Indian industries started growing in terms of variety as
well as scale. The new concept of economies of scale started gaining momentum.
According to this principle, cost of manufacturing an item decreases with
increasing number of items in production. However, with ever increasing product
variety of products, manufacturer were finding it difficult to produce multiple
products and at the same time retain cost advantage. In other words companies started
shifting from traditional vertical
integration to horizontal integration
and sometime a mix of both.
Horizontal and Vertical Integration:
According
to Wikipedia Horizontal integration is “the process of a
company increasing production of goods or services at the same part of the
supply chain. A company may do this via internal expansion, acquisition or
merger. The process can lead to monopoly if a company captures the vast
majority of the market for that good or service” and vertical
integration is an arrangement in which the supply chain of a company
is owned by that company itself.
Have a look at the attached graphic depicting
features of horizontal and vertical integration.
Deciding the sourcing policy: The Sourcing Design Matrix
Sourcing policies
for items are traditionally categorized into various types based on three
parameters as depicted in chart shown. The parameters are:
- Contact Duration: It is duration for which a customer and a vendor shall remain in business or in general till the time product is delivered.
- Specificity: It means how many substitutes are available for the product.
- Transaction cost: The cost incurred in executing the contract
Understanding
the major policy types in Sourcing:
Request for proposal:
More commonly known as RFP, this type of policy is used for purchasing items
that are more complex and expensive and where there may be number of potential
vendors. This sourcing policy is very popular in Indian context particularly
with Indian government and PSUs. Let us try to understand this process in
details.
As it is
visible, the transaction cost will be high as the whole process is cost
intensive. In some cases when less vendors available for given product,
companies may decide to open tender by publishing RFP in newspapers. This is
also a very prevalent method in India to increase number of competitors and
reduce price during reverse auction/ negotiations. These types of contracts are
usually on one time basis and hence have lower contract duration. As number of
vendors are high, specificity is low.
Strategic
Alliances: This is another very prevalent sourcing policy
in Indian context. Buyers who have dealt with suppliers in past or on-boarded
new suppliers using RFP methods may decide to have an extended contract thereby
uncertainty in future primarily on account of price and sometime to counter
uncertainty of supply. Since this sourcing policy deal with single vendor,
specificity is high. Also transaction costs are higher as the process involves
lot of paperwork and other technicalities
Vendor
Managed Inventory: Also known as VMI, here customer actually
allow the supplier to manage the inventory policy of an item or group of items.
Supplier is given the basic data about company requirements in future and
supplier is given the freedom to decide the replenishment schedule. This method
is evolved after JIT wherein inventory is minimized by reducing waste. In this
case the waste is delay in supply and excess inventory. This sourcing policy
provide vendor with better coordination and thus reducing the variability in
demand, popularly known as “Bullwhip effect”. This methodology is particularly
popular in automobile sector where the numbers of parts are huge and thus
maintaining optimum level of inventory is better managed by multiple VMI
systems rather than the automobile company
Conclusion:
The list of
sourcing policy mentioned above is not exhaustive. There are some other types
as mentioned in design matrix and possibly more with some variations of
existing ones. However it can be concluded that in past few decades sourcing
policy has taken a pivotal role in an organization policy design. With a fast
paced competitive environment like today, most companies are looking for an
edge over their competitors. Sometime it is brand driven while some time, it
may be cost driven. Apple managed to do both and look how successful they
become. Clearly an effective sourcing policy is the “edge” organization need to
make the difference they wanted.
http://www.economist.com/blogs/dailychart/2011/08/apple-and-samsungs-symbiotic-relationship
http://ashasmaritimenews.blogspot.in/2012/04/supply-chain-in-container.html
http://ashasmaritimenews.blogspot.in/2012/04/supply-chain-in-container.html
Author of the article is Vaibhav Gupta, 2nd year PGDM student from IIM Calcutta.He can be reached at: vaibhavg2017@email.iimcal.ac.in
Great article.
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