Manufacturing companies frequently outsource 60 to 80 per cent of their average cost of materials, components and services, so sourcing flexibility – the ability to react rapidly to changing supply requirements – has long been considered important.
By shortening lead times through sourcing flexibility, the Spain-based fashion retailer Zara has been able to limit sales at markdown prices to 15 to 20 per cent of total sales, compared to up to 40 per cent for rival retailers in Europe and the US, while Intel has also benefited from sourcing flexibility for capital equipment procurement.
Yet despite these prominent examples of sourcing flexibility, the link between sourcing flexibility and a firm’s supply chain and product success had not been empirically tested widely.
A new study co-authored by Feryal Erhun, Professor in Operations and Technology Management at Cambridge Judge Business School, addresses this by looking at the benefits of sourcing flexibility on a broader empirical scale. The study, based on a survey of 336 manufacturing firms in Europe and the US, shows the benefit of sourcing flexibility to both delivery and financial performance.
“The strong associations between sourcing flexibility, delivery performance and product financial performance underscore that sourcing flexibility merits the attention of supply chain managers during supplier selection and purchasing decisions,” says the study recently published in the International Journal of Production Economics.
The study – entitled “Determinants of sourcing flexibility and its impact on performance” – is co-authored by Stephan M. Wagner of the Swiss Federal Institute of Technology in Zurich, Pan Theo Grosse-Ruyken of Credit Suisse in Zurich, and Feryal Erhun of Cambridge Judge Business School.
Feryal Erhun, Professor in Operations and Technology Management at Cambridge Judge, discusses some of the study’s findings and conclusions:
We found that companies should make firm decisions on whether to pursue sourcing flexibility or not. The relationship between flexible sourcing and delivery performance suggests that companies should pursue either high or low levels of flexibility, but medium levels are undesirable. Superior performance can come through rigid sourcing or flexible sourcing, but a cautious or hesitant approach should be avoided. This implies intensive investment in sourcing flexibility, or no investment at all.
Companies that choose high sourcing flexibility may want to choose local suppliers. Under flexible sourcing, suppliers need to be able to adjust their logistics to meet short-term delivery volume changes and product mix, and distance can be important in this regard.
Firms should consider incentives linked to sourcing flexibility and product financial performance. There seem to be few such incentives today, but the study’s findings will hopefully encourage a rethink given the better product financial performance that emerges from high delivery performance.
Companies need better systems that consider flexibility in evaluating and choosing suppliers. Companies need a broad and balanced set of criteria developed by supply chain managers in choosing new suppliers.
Investment in purchasing information systems, including digitisation and big data analytics, can help improve sourcing flexibility. The databases in such improved systems should be able to predict demand volatility and share forecasting and planning data with suppliers. In order to boost responsiveness from suppliers, firms should also integrate their information systems with their supply chain suppliers.