Session 3: Sourcing under
Uncertainties
Instructor: Prof. Govind Kumawat
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Agenda
• Outsourcing strategies
• Case: The sourcing decision at Forever Young
• Supplier management
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Recap…Vertical integration
• Bergerac Systems
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Recap…Sourcing strategies
Cost vs Quality
High
Consider creating a new
business
Outsource for
lower cost
Outsource for
better quality
Outsource
Your
quality
Low
Low
High
Your cost
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Recap…Sourcing strategies
Krajlic Matrix: Segmenting items
High
Leverage items
(Use power and
negotiate)
Strategic items
(Develop long-term
collaboration)
Non-critical items
(e-procurement)
Bottleneck items
(Carry safety stock)
Profit
Impact
Low
Low
Supply Risk
High
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Recap…Sourcing strategies
Krajlic Matrix: Power dynamics
High
Exploit
Exploit
Balance
Buyer
Medium
power
Exploit
Balance
Diversify
Low
Balance
Diversify
Diversify
Low
Medium
Supplier power
High
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Total cost of ownership
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Focus on speed or cost in the sourcing
Responsive Source
Low-Cost Source
Product life cycle
Demand volatility
Early phase
High
Mature phase
Low
Demand volume
Product value
Low
High
High
Low
Rate of product obsolescence
Desired quality
High
High
Low
Low to medium
Engineering/design support
High
Low
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Onshoring, Near-Shoring, or Offshoring
Onshore
Near-Shore
Offshore
Rate of innovation/product variety
High
Medium to High
Low
Demand volatility
High
Medium to High
Low
Labor content
Low
Medium to High
High
Volume or weight-to-value ratio
High
High
Low
Impact of supply chain disruption
High
Medium to High
Low
Inventory costs
High
Medium to High
Low
Engineering/management support
High
High
Low
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Bharti Airtel: Outsourcing of network operations
• In 2004, Airtel decided to outsource
• Network management to Ericsson, Nokia, and Siemens
• IT management to IBM
• Customer service call centers to Hinduja TMT
• In 2013, Airtel ventured into its company-owned-companyoperated (COCO) stores.
• IDEMIA Secure Transactions makes Airtel SIMs.
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Outsourcing at IIM Udaipur
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Evolution of outsourcing strategies
• Traditional approach
Everything
Insourcing
Need-based
Outsourcing
• Modern approach
Need-based
Insourcing
Everything
Outsourcing
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The sourcing decision at Forever Young
• Selling price: $11.5/unit
• Cost: $10/unit (USA) and Yuan 55/unit (China)
• Order size: Flexible (USA) and 1150 units (China)
0.50
700
Exchange
rate:
Y6.5/$
Demand:
1000 units
0.50
0.50
1300
0.50
6.175
6.825
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Supplier Management
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Components of supplier management
• Supplier performance management
Define KPIs aligned with your business objectives and regular performance reviews, and
key metrics related to supply quality, delivery, and cost.
• Supplier relationship management
Establish clear communication channels and protocols, co-development, price
transparency, and joint innovation initiatives.
• Supplier risk management
The identification, assessment, and mitigation of supplier-related risks.
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Supplier risk management: Various risks
• Financial risk
• Ethical risk
• Environmental risk
• Political risk
• Economic risk
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How do you manage supplier risk?
Identification
Assessment
Mitigation
o What products or services does the supplier provide?
o What is the total value of our purchases from the supplier?
o What is our dependence on the supplier?
o What is the supplier’s financial health?
o What is the supplier’s track record?
➢ What are the consequences of a disruption in the supply chain?
➢ How likely is it that the supplier will experience a disruption?
❑ Diversification
❑ Redundancy
❑ Contracts
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Swiss Cheese Model
• Failures typically result from a combination of factors rather than
a single root cause.
Slice 1
Slice 2
Slice 3
Supplier
selection
Production
Quality
control
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Boeing 787: The Dreamliner
Value propositions
• Low cost
• Fuel efficient
• Comfort (Humidity and pressure)
• Less noise
Boeing’s strategy for 787
• Build to print → Build to perform
• Modular design
• Snap subassembly
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Benefits of effective supplier management
• Value creation
Long-term relationships with key suppliers, organizations can negotiate volume discounts and
favorable payment terms.
• Improved quality and reliability
Regular communication, performance monitoring, and collaborative problem-solving lead to
improved product quality and consistency.
• Increased operational agility
Integration of systems and processes with key suppliers can lead to more efficient order
processing, inventory management, and forecasting.
• Risk mitigation
By maintaining a diverse supplier base and developing contingency plans with key suppliers,
you can better handle supply disruptions, price volatility, and even geopolitical risks.
© govind.kumawat@iimu.ac.in
Thank you!
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