Chapter 17 – Sourcing
17-1
Chapter 17
Sourcing
Teaching Notes
This chapter begins with describing the importance of sourcing both historically and from
a profit leverage perspective. The goals of sourcing are important for students to consider since
sourcing is not only about getting the lowest price. Total costs and other goals must be
considered such as access to technology, risk of quality or delivery problems, and social goals.
All goals can be quantified through the weighted scoring method. We describe the advantages
and disadvantages of outsourcing and offshoring. Supply base optimization is a topic not often
considered, but an important aspect of sourcing. We discuss the purchasing cycle from the
request by a user to sourcing to bidding to issuing a purchase order to managing the purchasing
relationship. Finally the challenges facing purchasing are described.
In teaching this chapter, we start with an example of a sourcing decision facing an actual
company. Suppose Walmart, for example, is considering sourcing its barbecue grills from China
rather than from the U.S.A. What are the factors they should consider in making this decision?
Students can give their opinions and the discussion will lead to total costing along with other
goals and the risks of offshoring a product. This can be followed by constructing a total costing
example for the barbecue grill using typical numbers for domestic vs Chinese sourcing. Then,
the example can be extended using the weighted scoring method to give some emphasis to other
sourcing goals. Finally, some discussion can follow about supply base optimization and the
purchasing cycle.
Answers to Questions
1. Offshoring has both advantages and disadvantages for the U.S. economy. When U.S.
products are produced offshore and imported to U.S. they typically have lower prices
than the same product produced in the U.S. This benefits the U.S. consumer who can
enjoy a better life with more money to spend on other goods and services. The downside
Chapter 17 – Sourcing
17-2
2. Sourcing decisions are strategic since they are long-range in nature and can have a
dramatic financial impact on the firm. To be considered strategic, sourcing decisions
3. A core competency is what a company does better than any competitors resulting in
superior profits. These competencies often follow the resource-based view of the firm as
4. Offshoring of manufacturing is based on hard assets and converting materials from inputs
to products. Offshoring of services is often associated with Internet or communications
5. Answers will vary depending on sites accessed. One search of Google finds the
advantages and disadvantages of outsourcing business processes:
(https://www.flatworldsolutions.com/)
The Advantages of Business Process Outsourcing
• Swiftness and Expertise: Most of the times tasks are outsourced to vendors who specialize in
Chapter 17 – Sourcing
17-3
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
• Hidden costs: Although outsourcing most of the times is cost-effective at times the hidden costs
involved in signing a contract while signing a contract across international boundaries may pose
a serious threat
• Lack of customer focus: An outsourced vendor may be catering to the expertise-needs of
multiple organizations at a time. In such situations vendors may lack complete focus on your
organization’s tasks.
6. Answers will vary. For example, on August 2, 2007, Mattel announced a voluntary
worldwide recall of 83 products in its Fisher-Price toy lines. The recall of 1.5 million
7. Supply base optimization is concerned with spend analysis, total number of suppliers and
single or multiple sources. Spend analysis determines all the different products or
services provided by the same supplier perhaps to different locations or in different
8. Deciding on a single supplier can have its advantages by getting the best quality and
lower prices due to volume purchasing. One disadvantage is risk. For a single supplier
9. From the textbook, “Preferred Suppliers are designated based on past performance and
low prices. A preferred supplier meets criteria such as proven quality, on-time deliveries,
10. In a reverse auction the role of the buyer and the supplier are reversed. A reverse auction
is where the buyer asks certain pre-qualified suppliers to bid on the price they will charge
17-4
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
service mail to FedEx, UPS and major airlines; and Pennsylvania’s Department of
General Services purchased $30 million in rock salt, saving $2.5 million.
11. Answers will vary. One example of RFP bidding is the I35 bridge collapse over the
Mississippi River in Minneapolis. The Department of Transportation went out for
12. Supplier relationship management begins with periodic performance monitoring, perhaps
using supplier scorecards. Problems that are revealed should be resolved by mutual
13. There are several keys to purchasing becoming more professional. First, purchasing
needs to take on a strategic role in leading discussions on sourcing, offshoring and
outsourcing. They need to do much more than just place purchase orders and manage
Answers to Problems
1. a. 84 profit/823 sales = 0.102
2. a. 24/510 = 0.0470 (profit/sales)
17-5
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
c. The same answer as part a. Profit leverage factor = 21.2
(Every $ of savings in any cost has the same effect on profits as a $21.2 increase in sales)
3. a.
Criteria
Weight
Supplier A
Supplier B
Supplier C
Rating
Score
Rating
Score
Rating
Score
Price
60%
5
3.0
4
2.4
3
1.8
Quality
20%
2
0.4
5
1.0
5
1.0
Delivery
reliability
10%
3
0.3
4
0.4
3
0.3
Social
responsibility
10%
2
0.2
5
0.5
4
0.4
Total Score
100%
3.9
4.3
3.5
4. a. Costs of producing by Mexican Supplier
price of door $83.00
transportation cost 3.30 825/250
b.
Mexican Supplier
In-house
Criteria
Weight
Rating
Score
Rating
Score
Quality and Delivery
16%
3
0.48
4
0.64
Price
60%
5
3.00
4
2.40
Social Responsibility
7%
2
0.14
5
0.35
Currency Risk
17%
3
0.51
5
0.85
Totals
100%
4.13
4.24
17-6
Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
c. It’s best to produce in the U.S. Even though it’s cheaper to make the product in
Mexico, the other goals tilt the comparison slightly in favor of the U.S.
5. a. Total unit costs from China
Direct labor .60(53) = 31.80
Materials .90(122) = 109.80
Overhead .60(49) = 29.40
6. a. Total cost of outsourcing to India
Maintenance $79,000
Support Service 141,000
Chapter 17 – Sourcing
7. a. Costs of outsourcing to the Philippines vs U.S. costs.
Number of employees needed in Philippines 83/.8 = 103.75
Hourly cost in Philippines .6 x 15 = $9.00 per hour.