BA 7051 Logistics and Supply Chain Management

UNIT – 1 INTRODUCTION

Business logistics and supply chain – importance, objectives and drivers. Strategy –
planning, selecting proper channel, performance measurement. Outsourcing- Make vs buy
approach – sourcing strategy

BUSINESS LOGISTICS AND SUPPLY CHAIN

Logistics - (business definition) Logistics is defined as a business planning framework for the
management of material, service, information and capital flows.

Logistics is the art of managing the supply chain and science of managing and controlling the flow
of goods, information and other resources like energy and people between the point of origin and the
point of consumption in order to meet customers' requirements. It involves the integration of information,
transportation, inventory, warehousing, material handling, and packaging.

MILITARY LOGISTICS

In military logistics, logistics officers manage how and when to move resources to the places they
are needed. In military science, maintaining one's supply lines while disrupting those of the enemy is a
crucial some would say the most crucial element of military strategy, since an armed force without
resources and transportation is defenceless

MEDICAL LOGISTICS

Medical logistics is the logistics of pharmaceuticals, medical and surgical supplies, medical
devices and equipment, and other products needed to support doctors, nurses, and other health and dental
care providers

BUSINESS LOGISTICS

• Inventory management

• Purchasing

• Transportation

• Warehousing

This can be defined as having the right item in the right quantity at the right time at the right place
for the right price

BUSINESS LOGISTICS

Business Logistics management is that part of the supply chain that plans, implements, and
controls the efficient, effective forward and reverse flow and storage of goods, services, and related
information between the point of origin and the point of consumption in order to meet customer
requirements
SUPPLY CHAIN

• A supply chain may be considered as network of organizations, connected by a series of trading

relationships. This network covers the logistics and manufacturing activities from raw materials to
the final consumer

• A supply chain consists of all stages involved, directly or indirectly, in fulfilling a customer
request. The supply chain not only includes the manufacturer and suppliers, but also transporters,
were houses, retailers, and customer themselves

Difference between Logistics and Supply Chain

Logistic typically refers to activities that occur within the organization and supply chain refers to
network of organizations that work together and coordinate their actions to deliver a product to market

IMPORTANCE OF SUPPLY CHAIN

Supply chain is about creating value-value for customers and suppliers of the firm, and value for
the firm’s stakeholders. Value in supply chain is primarily in terms of time and place. Productions and
services have no value unless they are supplied to customers when (time) and where (place) they wish to
consume them. Good supply chain management views each activity in the supply chain as contributing to
the process of adding value. To many firms throughout world, supply chain has become an increasingly
important valuea dding process for a number of reasons. They are discussed below.

1. Costs are Significant: Statistics show that average about 12% of worlds GDP accounts supply chain
costs. About 7-9% sales accounts physical distribution costs. Supply chain cost, substantial for most
firms, rank second only to the cost of goods sold. Value is added by minimizing these costs and by
passing the benefits on to customers and to the firm’s shareholders.
2. Increased expectations of the customers: Awareness of customers has gone up. Customers expect
rapid processing of their requests, quick delivery and also expect a high degree of product availability.
Supply chain assures less error rates, lower order processing costs, reduced inventory, minimum cycle
time and lowest transportation costs. To meet the increased exceptions of the present day customer, it is
essential that every firm should implement supply chain management.
3. Supply and distributions lines are lengthening with greater complexity. Today’s trend is towards an
integrated world economy. Firms are seeking, or have developed, global strategies by designing their
products for a world market and producing them wherever the low-cost raw materials, components, and
labour can be found, or they simply produce locally and sell internationally. In either case, supply and
distribution lines are stretched, as compared with the producer who wishes to manufacture and
sell only locally. As this happens, supply chain takes on increased importance with in the firm and can
considerably reduce the other costs.
4. Supply chain is important to strategy: Firms spend a great deal of time finding ways to differentiate
their product offerings from those of their competitors. When management recognizes that supply chain
affects a significant portion of a firm’s costs and that the result of decisions made about the supply chain
processes yields different levels of customer service, it is in a position to use this effectively to penetrate
new markets, to increase market share, and to increase profits. That is, good supply chain management
can generate sales, not just reduce costs.
5. Supply Chain adds Significant Customer Value: Customers become unsatisfied, if the
product/service is not delivered to him/her at the time and place he/she wish to consume it. When a firm
incurs the cost of moving the product toward the customer or making inventory available in a timely
manner, customer value has been created. It is value as surely as that created through the production of a
quality product or through a low price. Supply chain controls two (time and place) out of four values
creating variables.
6. Customers increasingly want QUICK customized Response: Today’s customers expect that
products and services be delivered at very short time. In addition, improved internet service, quick
information systems, and flexible manufacturing systems have led the market place toward customization.
Rather than consumers having to accept the ‘One size fits all” philosophy in their purchase, suppliers are
increasingly offering products that meet individual customer needs.
7. Supply Chain in Service Industry: Service sector of industrialized countries is large and growing.
The size of this sector alone forces us to use the supply chain concepts to untap the potentials so far not
tapped

OBJECTIVES OF SUPPLY CHAIN

The primary objective of any supply chain is to maximize the overall value generated. The higher the
supply chain profitability, the more successful the supply chain. Next objective is management of the
supply chain. Supply chain management involves the management of flows between and among stages in
a supply chain to maximize total supply chain profitability.

DRIVERS OF SUPPLY CHAIN

Facilities: It is the actual physical locations in the supply chain network where product is stored,
assembled, or fabricated. The two major facilities are production sites and storage sites

Inventory: it encompasses all raw materials, work in process, and all finished goods within a supply
chain. Changing inventory policies can dramatically alter the supply chain’s efficiency and
responsiveness. For example ,a clothing retailer can make itself more responsive by stocking large
amounts of inventory and satisfying customer demand from stock.

Transportation: It entails moving inventory from point to point in the supply chain. Transportation
can take the form of many combinations of modes and routes, each with its own performances and
characteristics. For example , a mail – order catalog company can use a faster mode of transportation such
as FedEx to ship products, thus making its supply chain more responsive, but W.W.Grainger, however
,have structured their supply chain to provide the next day service to most of their customers using
ground transportation. They are providing High Level of responsiveness at lower cost

Information: It consists of data and analysis concerning facilities, inventory, transportation, costs,
prices and customers throughout the supply chain. Information is potentially the biggest driver of
performance in the supply chain. For example with information on consumer demand patterns, a
pharmaceutical company can produce and stock drugs in anticipation of customer demand, which makes
the supply chain very responsive because customers will find the drugs they need when they need them

Sourcing : It is the choice of who will perform a particular supply chain activity such as production ,
storage, transportation or the management of information, At the strategic level, these decisions
determine what functions a firm performs and what functions the firm outsources, Sourcing affect both
the responsiveness and efficiency of a supply chain.
 Pricing: It Determines how much a firm will charge for goods and services that it makes available in
the supply chain. Pricing affects the behavior of the buyer of the goods or services, thus affecting supply
chain performances. For example, if a transportation company varies its charges based on the lead time
provided by the customers, it is very likely that customers who value efficiency will order early and
customer who value responsiveness will be willing to wait and order just before they need a product
transported.

STRATEGY OR DESIGN:

Strategy is a grand plan. Supply chain strategy involving decisions how to structure the supply chain
over next several years. It decides what the chains configuration will be, how resources will be allocated,
and what processes each stage will perform. Strategic decisions made by companies include the location
and capacities of production and warehouse facilities, the products to be manufactured or stored at
various locations, the modes of transportation to be made available along different shipping legs, and the
type of information system to be utilized. A firm must ensure that the supply chain configuration supports
its strategic objectives during this decision phase. Supply chain design decisions are made for the long
term and are very expensive to alter on short notice.

Consequently when companies make these decisions, they must take into account uncertainty in
anticipated market conditions over the next few years.

PLANNING:
The supply chains configuration determined in design phase is fixed for making planning decisions.
Companies start the planning phase with a forecast for the coming year of demand in different markets.
Planning includes decisions regarding which markets will be supplied from which locations, the sub
contracting of manufacturing, the inventory policies to be followed, and the timing and size of marking
promotions. Planning establishes parameters within which a supply chain will function over a specified
period of time. In the planning phase, companies must include uncertainty in demand, exchange rates, and
competition over this time horizon in their decisions.
Given a shorter time horizon and better forecast than the design phase, companies in the planning
phase try to incorporate any flexibility built into optimize performance. As a result of the planning phase,
companies define a set of operating polices that govern short-term operations

SELECTING PROPER CHANNEL

(1) The Nature of the Product:

These factors include physical characteristics of a product and their impact on the selection of a particular
channel of distribution.

Various factors under this category are:

(a) Perishability:Products which are perishable in nature are distributed by employing a shorter channel
of distribution so that goods could be delivered to the consumers without delay. Delay in distribution of
these products will deteriorate their quality.
(b) Size and weight of product:Bulky and heavy products like coal and food grains etc. are directly
distributed to the users involve heavy transportation costs. In order to minimise these costs a short and
direct distribution channel is suitable.

(c) Unit value of a product:Products with lesser unit value and high turnover are distributed by
employing longer channels of distribution. Household products like utensils, cloth, cosmetics etc. take
longer time in reaching the consumers.. On the other hand, products like jewellery having high product
value are directly sold to the consumers by the jewellers.

(c) Standardisation:Products of standard size and quality usually take longer time by adopting longer
channel of distribution. For example, machine tools and automobile products which are of standard size
reach the consumer through the wholesalers and retailers. Un-standardised articles take lesser time and
pass through shorter channels of distribution.

(e) Technical Nature of Products:Industrial products which are highly technical in nature are usually
distributed directly to the industrial users and take lesser time and adopt shorter channel of distribution. In
this case after sales service and technical advice is provided by the manufacturer to the consumers.

On the other hand, consumer products of technical nature are usually sold through wholesalers and
retailers. In this manner longer channel of distribution is employed for their sales. After sales services are
provided by the wholesalers and retailers. Examples of such products are televisions, scooters,
refrigerators, etc.

(f) Product Lines:A manufacturer producing different products in the same lines sells directly or through
retailers and lesser time is consumed in their distribution. For example, in case automobile rubber
products this practice is followed. On the other hand, a manufacturer dealing only in one item appoints
sole selling agents, wholesalers and retailers for selling the product. For example, in case of ‘Vanaspati
Ghee’ longer distribution channel in undertaken.

(2) The Nature of the market:

This is another factor influencing the choice of a proper channel of distribution. In the words of Lazo and
Corbin “Marketing managements select channels on the basis of customer wants-how, where and under
what circumstances. The number of buyers of the product affects the choice of a f channel of distribution.

(a)Consumer of industrial market:In case of industrial markets, number of buyers is less; a shorter
channel of distribution can be adopted. These buyers usually directly purchase from the manufacturers.
Marketing intermediaries are not needed in this case.

But in case of consumer markets, where there are a large number of buyers, a longer channel of
distribution is employed. Distribution process cannot be effectively carried out without the services of
wholesalers and retailers.

(b) Number of prospective buyers:If the number of buyers is likely to be more, the distribution channel
will be long. On the other hand, if the number of consumers is expected to be less, the manufacturer can
effectively sell directly to the consumers by appointing salesmen.

(c)Size of the order:If the size of the order placed by the customers is big, direct selling can be
undertaken by the manufacturer as in case of industrial goods. But where the size of the order is small,
middlemen are appointed to distribute the products.
(d) Geographic concentration of market:Where the customers are concentrated at one particular place
or market, distribution channel will be short and the manufacturer can directly supply the goods in that
area by opening his own shops or sales depot. In case where buyers are widely scattered, it is very
difficult for the manufacturer to establish a direct link with the consumers, services of wholesalers and
retailers will be used.

(e) Buying habits of customers:This includes tastes, preferences, likes and dislikes of customers.
Customers also expect certain services like credit and personal attention and after sales services etc. All
these factors greatly influence the choice of distribution channel.

(3) The Nature of Middlemen:

Marketing intermediaries are vital components in the distribution of goods. They greatly influence the
marketing of goods.

(a) Cost of distribution of goods:Cost of distribution through middlemen is one of the main
considerations to be taken into account by the manufacturer. Higher cost of distribution will result in the
increased cost of product. The manufacturer should select the most economical distribution channel.

In finalising the channel of distribution, services provided by the intermediaries must be kept in mind. It
may be pointed out that the manufacturer can select an expensive marketing intermediary because that
may ensure various marketing services which cannot be offered by others.

(b) Availability of desired middlemen:Sometimes desired middlemen may not be available for the
distribution of goods. They may be busy in dealing with the competitive products. Under such
circumstances the manufacturer has to make his own arrangements by opening his branches or sales
depots to distribute the goods to the consumers.

(c) Unsuitable marketing policies for middlemen:The marketing policies of the manufacturer may not
be welcomed by the middlemen the terms and conditions may not favour the middlemen. For example,
some wholesalers or retailers would like to act as sole selling agents for the product in a particular area or
region.

(d) Services provided by middlemen:The manufacturer should select those middlemen who provide
various marketing services viz, storage, credit and packing etc. At the same time the middlemen should
ensure various services to customers.

(e) Ensuring greater volume of sales:A manufacturer would like to appoint that middlemen who assure
greater sales volume over the long run.

(f) Reputation and financial soundness:In appointing middleman, the manufacturer must take into
consideration the financial stability and reputation of the middleman. A financially sound middleman can
provide credit facilities to customers and make prompt payment to the manufacturer.

(4) The nature and size of the manufacturing unit:

The nature and size of manufacturing unit has a great impact on the selection of a distribution channel.
 (A) Manufacturer Reputation and Financial Stability:Reputed and financially sound manufacturing
concerns can easily engage middlemen as compared to lesser reputed and newly established units.
Usually a manufacturing unit having a sound financial base can easily distribute the goods without
appointing middlemen by opening their own sales depots and branches. A financially weaker unit cannot
operate without the help of middlemen.

(B) Ability and Experience of the Undertaking:Industrial undertakings having ample marketing ability
and experience can effectively manage their distribution activities themselves. They have lesser
dependence on undertaking intermediaries. On the other hand, marketing units possessing lesser
marketing ability and experience depend more on middlemen for the distribution of goods.

(C) Desire for Control of Channel:A manufacturer may resort to a shorter distribution channel in order
to exercise effective control over distribution. This is suitable in case of perishable goods and is helpful in
establishing direct link between the manufacturer and the consumer. The cost of distribution may be more
by adopting such a channel of distribution.

(D) Industrial Conventions:Industrial conventions followed influence the selection of distribution

channel. If a particular mode of distribution is adopted in an industry, the same will be followed by every
manufacturing unit in that industry in distribution their products.

(E) Services Provided By the Manufacturers:The selection of marketing intermediaries is also

influenced by various services provided by the manufacturer. These services include extensive
advertisement for the product, after sales services and facilities of credit. The manufacturers providing
these services can easily avail the services of reputed retailers and wholesalers.

(5) Government Regulations and Policies:

Government policies and regulations also influence the choice of distribution channels. The Government
may impose certain restrictions on the wholesale trade of a particular product arid takeover the
distribution of certain products. All these restrictions have a direct impact in selecting the channel of
distribution.

(6) Competition:

The nature and extent of competition prevalent in a industry is another detrimental consideration in
selecting a distribution channel. Different manufacturers producing similar products may employ the
same channels of distribution.

PERFORMANCE MEASUREMENT

MEASUREMENT is the key to performance management since:

If you cannot measure something, you cannot control it

If you cannot control something, you cannot manage it

If you cannot manage something, you cannot improve it

Why Is Performance
Measurement Important?
 Measurement is important, as it affects behaviour that impacts supply chain performance. As such,
performance measurement provides the means by which a company can assess whether its supply chain
has improved or degraded. The importance of using measures to help ensure that a supply chain is
performing well can be illustrated by the following anecdotal story

OUTSOURCING
Outsourcing is subcontracting a process, such as product design or manufacturing, to a third-party
company. The decision to outsource is often made in the interest of lowering firm costs, redirecting or
conserving energy directed at the competencies of a particular business, or to make more efficient use of
labour, capital, technology and resources

Outsourcing objectives

• Focus core activity

• Reduced costs

• Improved operational quality

• Achieve high productivity

• De-risk the business

Reasons for outsourcing

• Cost savings: The lowering of the overall cost of the service to the business. This will involve reducing
the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost
economies through off shoring called “labour arbitrage” generated by the wage gap between
industrialized and developing nations.

• Cost restructuring: Operating leverage is a measure that compares fixed costs to variable costs.
Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also by
making variable costs more predictable.

• Improve quality: Achieve a step change in quality through contracting out the service with a new
service level agreement.

• Knowledge: Access to intellectual property and wider experience and knowledge.

• Contract: Services will be provided to a legally binding contract with financial penalties and legal
redress. This is not the case with internal services.

• Operational expertise: Access to operational best practice that would be too difficult or time
consuming to develop in-house.

• Staffing issues: Access to a larger talent pool and a sustainable source of skills.

• Capacity management: an improved method of capacity management of services and technology

where the risk in providing the excess capacity is borne by the supplier

• Catalyst for change: An organization can use an outsourcing agreement as a catalyst for major step
change that cannot be achieved alone. The outsourcer becomes a change agent in the process.
• Reduce time to market: The acceleration of the development or production of a product through the
additional capability brought by the supplier.

• Commodification: The trend of standardizing business processes, IT services and application services
enabling businesses to intelligently buy at the right price. Allows a wide range of businesses access to
services previously only available to large corporations.

• Risk Management: An approach to risk management for some types of risks is to partner with an
outsourcer who is better able to provide the mitigation.

• Time zone: A sequential task can be done during normal day shift in different time zones – to make it
seamlessly available 24X7. Same/similar can be done on a longer term between earth’s hemispheres of
summer/winter.

• Customer Pressure: Customer may see benefits in dealing with your company, but are not happy with
the performance of certain elements of the business, which they may not see a solution to except through
outsourcing

Impact of outsourcing
Offshore outsourcing for the purpose of saving cost can often have a negative influence on the real
productivity of a company. Rather than investing in technology to improve productivity, companies gain
non-real productivity by hiring fewer people locally and outsourcing work to less productivity facilities
offshore that appear to be more productive simply because the workers are paid less. In contrast, increases
in real productivity are the result of more productive tools or methods of operating that make it possible
for a worker to do more work. Non-real productivity gains are the shifting work to lower paid workers,
often without regards to real productivity. The net result of choosing non-real over real productivity gain
is that the company falls behind and obsoletes itself overtime rather than making real investments in
productivity. From the standpoint of labor within countries on the negative end of outsourcing this may
represent a new threat, contributing to rampant worker insecurity, and reflective of the general process of
globalization. While the “outsourcing” process may provide benefits to less developed countries or global
society as a whole, in some form and to some degree – include rising wages or increasing standards
of living – these benefits are not secure. Further, the term outsourcing is also used to describe a process
by which an internal department, equipment as well as personal, is sold to a service provider, who may
retain the workforce on worse conditions or discharge them in the short term. The affected workers thus
often feel they are being “sold down the river

Advantages
1) Greater flexibility suppliers
2) Lower investment risk

3) Improved cash flow

4) Lower potential labour costs shortage

Disadvantages
1) Possibility of choosing wrong
2) Loss of control over process

3) Potential for guard banding

4) Long lead – times / capacity

5) “Hollowing out” of the corporation

Make Vs Buy Approach

The make-or-buy decision is the act of making a strategic choice between producing an item
internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also
is referred to as outsourcing.

• Make-or-buy analysis is conducted at the strategic and operational level

• Issues like government regulation, competing firms, and market trends all have a strategic impact
on the make-or-buy decision.

• The increased existence of firms that utilize the concept of lean manufacturing has prompted an
increase in outsourcing

• It prescribes that a firm outsource all items that do not fit one of the following three categories:

• (1) The item is critical to the success of the product, including customer perception of important
product attributes;

• (2) The item requires specialized design and manufacturing skills or equipment, and the number of
capable and reliable suppliers is extremely limited; and

• (3) The item fits well within the firm's core competencies, or within those the firm must develop
to fulfill future plans. Items that fit under one of these three categories are considered strategic in
nature and should be produced internally if at all possible.

Make-or-buy decisions also occur at the operational level

• Cost considerations (less expensive to make the part)

• Desire to integrate plant operations

• Productive use of excess plant capacity to help absorb fixed overhead (using existing idle
capacity)

• Need to exert direct control over production and/or quality

• Better quality control

• Design secrecy is required to protect proprietary technology

• Unreliable suppliers

• No competent suppliers

• Desire to maintain a stable workforce (in periods of declining sales)

• Quantity too small to interest a supplier

• Control of lead time, transportation, and warehousing costs

• Greater assurance of continual supply

• Provision of a second source

• Political, social or environmental reasons (union pressure)

 • Emotion (e.g., pride)

Factors that may influence firms to buy a part externally include:

Lack of expertise

• Suppliers' research and specialized know-how exceeds that of the buyer

• cost considerations (less expensive to buy the item)

• Small-volume requirements

• Limited production facilities or insufficient capacity

• Desire to maintain a multiple-source policy

• Indirect managerial control considerations

• Procurement and inventory considerations

• Brand preference

• Item not essential to the firm's strategy

The two most important factors to consider in a make-or-buy decision are cost and the
availability of production capacity.

buying firm will compare production and purchase costs

Elements of the "make" analysis include:

• Incremental inventory-carrying costs

• Direct labor costs

• Incremental factory overhead costs

• Delivered purchased material costs

• Incremental managerial costs

• Any follow-on costs stemming from quality and related problems

• Incremental purchasing costs

• Incremental capital costs

Cost considerations for the "buy" analysis include:

• Purchase price of the part

• Transportation costs

• Receiving and inspection costs

• Incremental purchasing costs

Any follow-on costs related to quality or service

Strategic sourcing

Strategic sourcing is an institutional procurement process that continuously improves and re-
evaluates the purchasing activities of a company. In the services industry, strategic sourcing refers to a
service solution, sometimes called a Strategic Partnership, that is specifically customized to meet the
client's individual needs. In a production environment, it is often considered one component of supply
chain management.

The term "strategic sourcing" was popularized through work with a variety of blue chip
companies by a number of consulting firms in the late 80s and early 90s. This methodology has become
the norm for procurement departments in large, sophisticated companies.

The steps in a strategic sourcing process were defined, in 1994,

1. Assessment of a company's current spending (what is bought, where, at what prices?).

2. Assessment of the supply market (who offers what?).

3. Total cost analyses (how much does it cost to provide those goods or services?).

4. Identification of suitable suppliers.

5. Development of a sourcing strategy (where to purchase, considering demand and supply

situations, while minimizing risk and costs).

6. Negotiation with suppliers (products, service levels, prices, geographical coverage, Payment
Terms, etc.).

7. Implementation of new supply structure.

8. Track results and restart assessment (Continuous cycle)

A slimmed down strategic sourcing process was defined, in 2012, as

1. Data collection and spend analysis

2. Market Research

3. The RFx process (also known as go-to-market)

4. Negotiations

5. Contracting

6. Implementation and continuous improvement

Note that while the modernized process combines the market assessment and cost analyses steps of the
older model into a single "market research" step, and the supplier identification and sourcing strategy
development steps into a single "go-to-market" step, negotiation has split into "negotiation" and
"contracting". This is due to the heightened importance of market intelligence in modern strategic
sourcing, and its ability to deliver value by improving both pricing and contract terms when leveraged
against the identified suppliers.
Note also that, while both descriptions of the sourcing process are accurate to some extent, there is no
standard set of steps and procedures. As strategic sourcing is put in place and practiced over time, many
large, sophisticated organizations will modify the process to better meet their individual corporate needs.

Outsourcing a business practice to another company may also be incorporated into a sourcing strategy for
services. This may involve the transfer of staff and assets to the outsource company. Due to the strategic
and complex nature of outsourcing, many organizations such as Procter & Gamble, Microsoft and
McDonald's have created what is referred to as Vested Outsourcing agreements to help create highly
collaborative win-win business relationships. Researchers at the University of Tennessee provide
guidance on how to create Vested Outsourcing agreements in their book Vested Outsourcing: Five Rules
that will Transform Outsourcing.

Sourcing Plan

The sourcing is the result of all planning efforts on strategic sourcing. Into this planning all sourcing
events are organized and detailed with all tactical and operational information such as, the sourcing team
responsible for each event, when is supposed to begin and end each RFX steps (RFI, RFP, RFQ), the
requirement, specifications of all services or materials and negotiations/cost goals. The objective of
sourcing plan is to manage time and quality of the all sourcing events in the strategic sourcing program.

Sourcing optimization

Operations research is a discipline of applying advanced techniques to help make better

decisions. Optimization, in turn, utilizes mathematical algorithms to rapidly solve a business problem by
evaluating all possible outcomes (or many outcomes) and selecting those ones that yield the best solution.

When applied to sourcing and supply chain operations, optimization helps the sourcing professional
simultaneously evaluate thousands of different procurement inputs. This evaluation can take into
consideration the global market, specific current supply chain conditions, and individual supplier
conditions, and offers alternatives to address the buyer’s sourcing goals.

Cooperative sourcing

Cooperative sourcing is a collaboration or negotiation of different companies, which have similar

business processes. To save costs, the competitor with the best production function can insource the
business process of the other competitors. This is especially common in IT-oriented industries due to low
to no variable costs, e.g. banking. Since all of the negotiating parties can be outsourcers or insourcers the
main challenge in this collaboration is to find a stable coalition and the company with the best production
function. This is difficult since the real production costs are hard to estimate and negotiators might be
tempted to portray their real cost much higher than they actually are in order to demand higher fees for
insourcing. High switching costs, costs for searching potential cooperative sourcers, and negotiating often
result in inefficient solutions.

In popular culture

Strategic sourcing from a professional standpoint is lampooned in the American syndicated comic
strip Sally Forth, in which the titular character's husband Ted Forth is employed within this field for the
duration of the series's run. Sally Forth is currently written by the writer-illustrator team of Craig
MacIntosh and Francesco Marciuliano.