Both delivery and product financial performance can be improved through greater sourcing flexibility, shows a broad empirical study of 336 European and US manufacturing firms co-authored by Professor Feryal Erhun of Cambridge Judge Business School.
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
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.
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.
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.