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Different Types of Sourcing, its Pros & Cons

When it comes to Sourcing, there are many types and models used by different companies for their supply sourcing needs. The two broad types are in-house model or Insourcing, where a company does its own sourcing with in-house staff or through a group company; and the outsourced model or Outsourcing where it relies on an external agency to fulfil the requirements. There are further subdivisions within these two broad categories that are examined in subsequent paragraphs. What is of relevance here is that each type has certain advantages as well as drawbacks, and strategic sourcing is all about choosing the type that best suits the requirements.

Low-cost Country Sourcing

The trend supply sourcing started when the advanced economies – North America and Western Europe – found manufacturing everything in their countries had become uneconomical due to high costs, and looked at Asian countries – most notably China, but also India – as the low cost alternative. The vendors in these countries capitalised on the low labour and material costs and scaled up manufacturing activities creating huge capacities in the process, and thus became reliable suppliers to OEMs in Europe and the US. While this worked to their advantage, the Industry 4.0 era has changed the equation as developed countries, especially the US, are now keen on Onshoring to create local jobs. The disruption in supply chains caused by Covid-19 has further brought home the disadvantages of vendors in distant countries.

Global Sourcing

Rather than risk dependence on Low-cost Sourcing from a single country, a better alternative is Global Sourcing, selecting vendors from different geographies. This type of sourcing supplies may not result in the lowest price, but is less prone to disruptions while also avoiding reliance on a single country. This also automatically incentivises vendors to be more quality conscious as they now have to compete with other countries, while also keeping costs under check. India is a good example of a strong player in the global sourcing scenario, with a sound manufacturing base and advantages of large labour pool as well as technical skills to be globally competitive. The massive disruption in supply chains caused by the pandemic has worked to India’s advantage with more and more buyers looking for alternatives to Low-cost Country Sourcing. Global sourcing however has its share of disadvantages, which include local tax compliance, risk of patent theft, different work cultures as well as high shipping costs.

Prime/Sub Arrangements

Companies are always looking to maximise gains while minimising the hassles, and hence on the lookout for opportunities to do so. Prime/Sub Arrangements fall in this category, something companies adopt in order to overcome the drawbacks of Low-cost Country Sourcing and Global Sourcing. In this type of supply sourcing, a company uses the Outsourcing model, but with a difference – the job is sub contracted by the outsourcing agency to another company and the actual transactions are between them, saving the parent company of all the hassles of regulatory compliances which happen between the outsourcing provider and the sub arrangements company. This smoothens the sourcing process, but on the flip side, may not be the most economical type of outsourcing, and quality may also suffer in the process.

Captive Service Operations

For companies looking for better control on their equipment sourcing and procurement service, Captive Service Operations offer an alternative. In supply sourcing of this type, it is a group company or subsidiary that is doing the sourcing and procurement and hence allows greater control and trust on the entire process. This also addresses the concerns about patents, and intellectual properties, also maintaining the necessary confidentiality about product launches and future plans. Like other types of sourcing, this too is not free from disadvantages and the obvious ones are cost escalation as well as lack of all-round expertise.

Conventional Agreements

Shorn of all the jargon, Conventional Agreements are well, the conventional way companies conduct business to buy or procure something they need. The agreement involves addressing the same requirements – cost, quality and delivery schedules, meeting all the relevant standards in the sourcing process. Unlike outsourcing which involves multiple parties, the agreement in this case is between two parties and hence a simplified process. The drawback in conventional agreements is the company does not have much control once the agreement is signed and there could be a breach of trust where confidential information, designs and data are at risk.

Regardless of the type of outsourcing, the world is today interdependent with supply outsourcing and procurement a reality in almost all businesses and countries. India figures prominently as a destination for sourcing and subcontracting for high quality, high technology equipment and components. It has a strong vendor base nurtured and cultivated thanks to the long legacy of global MNCs operating in the country, depending on all the above types of outsourcing to fulfil their needs. Sourcing and procurement companies like ESSNPS have facilitated this growth acting as intermediaries in the global supply chain, providing end-to-end services.

With a cumulative experience of hundreds of man-hours, the experts at ESSNPS can help companies in all types of outsourcing requirements, including outsourcing of the total manufacturing process. India is one of the hot destinations for outsourced services today, attracting global companies in the post pandemic era.