University of Salford

Salford Business School

Strategic Sourcing for Sustained Competitive Advantage -
Make or buy decision



By
Ashish Sunil Mhatre (@00252507)


Supervisor: Barry Crocker (MSc Programme Leader)


Dissertation submitted in partial fulfillment of requirements for the degree of
MSc in Procurement, Logistics and Supply Chain Management at
University of Salford, 2011.

Submitted: J anuary 2011
i

Declaration
I declare that no part of this dissertation has been taken from existing published or
unpublished material without due acknowledgement and that all secondary material used
therein has been fully referenced.

Ashish Mhatre
ii

Abstract
This dissertation aims to analyse and identify the major benefits of strategic sourcing for
competitive advantage. The research data was obtained from random organisations
operating in manufacturing, retailing, logistics, etc. from the US, the UK and India.

The population sample for this research was selected to be 785 organisations.
Accordingly, emails and other forms of electronic notifications were sent out. The data
collected from this survey will be analysed in accordance with the objectives of this
study. The response rate expected was to be 26 percent; however, only 179 responses
were received back from which 155 feedbacks were usable thus giving a response rate of
19.75 percent.

The feedbacks received from the respondents emphasises that most organisations with a
dedicated purchasing department were successful in reaping the rich benefits of
outsourcing whereas those without a dedicated purchasing function were not able to
capitalise on the benefits offered by outsourcing.

Some of the most evident benefits of strategic sourcing are lower prices, better quality,
focus on core competences, and increase in the number of sourcing options as well as
access to worldwide technology.

On the other hand, some of the risks and challenges include loss of core competence,
inability to evaluate suppliers, improper portfolio analysis, and reluctance to share
information, lack of commitment from top management as well as inability to measure
and evaluate benefits.
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Table of Contents
Declaration .......................................................................................................................... i
Abstract .............................................................................................................................. ii
Preface .............................................................................................................................. vii
Chapter 1: Introduction ................................................................................................... 1
1.0. Chapter introduction ................................................................................................ 1
1.1. Research background ............................................................................................... 2
1.2. Research context ...................................................................................................... 3
1.3. Research aim, objectives, and question ................................................................... 4
1.4. Structure of the dissertation ..................................................................................... 5
1.5. Chapter summary ..................................................................................................... 6
Chapter 2: Literature Review .......................................................................................... 7
2.0 Chapter Introduction .............................................................................................. 7
2.1 Definition of Strategic Sourcing ............................................................................. 8
2.2 Streamlining the sourcing process ........................................................................ 11
2.3 Strategic Sourcing Model ..................................................................................... 18
2.4. Make or Buy decision ........................................................................................ 28
2.4.0. Generic Sourcing Model ............................................................................... 31
2.4.1. Outsourcing Process Model from Lonsdale and Cox ................................... 33
2.4.2. A framework for evaluating outsourcing decision ........................................ 36
2.4.3. Decision flowchart for strategic sourcing .................................................... 39
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2.4.4. Model for management of outsourcing process ............................................ 41
2.5. Benefits and justification ................................................................................... 45
2.6. Managing the risks and challenges ................................................................... 48
2.7. Best practices and implementation ................................................................... 50
2.8. Chapter summary .............................................................................................. 54
Chapter 3: Methodology ................................................................................................. 56
3.0. Chapter introduction .............................................................................................. 56
3.1. Chosen methodology .............................................................................................. 57
3.2. Data collection method .......................................................................................... 62
3.3. Research design ..................................................................................................... 66
3.3.1. Questionnaire development ............................................................................ 66
3.3.2. Selecting samples ............................................................................................ 72
3.3.3. Survey process ................................................................................................ 75
3.4. Data analysis methods ........................................................................................... 75
3.5. Chapter summary ................................................................................................... 76
Chapter 4: Research Results .......................................................................................... 77
4.0. Chapter introduction .............................................................................................. 77
4.1. Background of respondents companies and the functions of the respondents ..... 78
4.1.1. Background of the respondent companies ...................................................... 78
4.1.2. Background of the functions of respondents ................................................... 83
4.2. Review of core competence analysis and supplier relationship management
practices ........................................................................................................................ 85
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4.3. Benefits of strategic sourcing and inherent risks ................................................... 91
4.3.1. Inherent risks associated with strategic sourcing ........................................... 91
4.3.2. Benefits of strategic sourcing .......................................................................... 93
4.3.3. Causes of failure ............................................................................................. 95
4.4. Current trends in strategic sourcing and satisfaction levels ................................. 98
4.5. Chapter summary ................................................................................................. 103
Chapter 5: Discussion ................................................................................................... 105
5.0. Chapter introduction ............................................................................................ 105
5.1. Adoption of strategic sourcing in organisations .................................................. 105
5.2. Review of core competence analysis and supplier relationship management
practices ...................................................................................................................... 107
5.3. Benefits of strategic sourcing and the risks associated with outsourcing ........... 109
5.3.1. Risk of skill-set loss in employees ................................................................. 109
5.3.2. Benefits of outsourcing ................................................................................. 110
5.3.3. Causes of failure ........................................................................................... 112
5.4. Current trends in strategic sourcing and satisfaction levels ............................... 114
5.5. Limitations of the research .................................................................................. 117
5.6. Chapter summary ................................................................................................. 118
Chapter 6: Conclusion and Recommendations .......................................................... 119
6.0. Chapter introduction ............................................................................................ 119
6.1. Research aim, objectives, and question ............................................................... 119
6.2. Conclusion ........................................................................................................... 120
vi

6.3. Recommendations for future work ....................................................................... 123
6.4. Recommendations for organisations .................................................................... 124
Appendix ........................................................................................................................ 127
Questionnaire .............................................................................................................. 127
Bibliography .................................................................................................................. 133
vii

Preface
I became interested in supply chain management while I was working with Syntel Ltd.
(www.syntelinc.com) on a supply chain project for Hospital Corporation of America
(HCA) (www.hcahealthcare.com). SCM fascinated me and it was then that I decided to
pursue my Masters in supply chain management from the University of Salford. I was
determined to select a masters dissertation topic that satisfied both my academic and
supply chain interests.
Analysing the topic of strategic sourcing for me was a challenging yet a rewarding
experience. Hence I have gained a better understanding of procurement procedures and
policies as well as a good insight into the importance of core competences, make or buy
decisions and global outsourcing. Furthermore I became more conscious about supplier
relationship management and its importance to the overall business success.

The research project, however, would not have been possible without the support of
many individuals. Firstly, I would like to thank my programme leader and dissertation
supervisor Mr. Barry Crocker, for his guidance, ongoing inspiration, constructive
feedback and patience throughout the dissertation process. His teachings have inspired
and motivated me to achieve my goals and think big.

I also heartily thank Giorgian Rusu for his continued support, friendship and for sharing
various ideas and supply chain literature throughout the MSc programme. His positive
attitude and hard working nature have always been a constant source of inspiration for
me. And how can I forget my roommates (Aditya, Pratish, Varun, Gautam and Arun)
who have been with me through all my highs and lows and supported me with this
dissertation.
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Next, I would like to thank the administration of Salford Business School for admitting
me as a Postgraduate student, which provided me with a valuable learning opportunity
and an unforgettable experience.
I would also take this opportunity to thanks all the participants of the survey for their
valuable contribution, especially to organisations like Syntel Ltd., H.C.A., Wincanton,
Argos, NHS, etc.

Above all I would like to thank my parents for their loving care, constant support and
unshakable faith in me. I am indebted to them for inculcating in me the dedication and
discipline to do whatever I undertake well. You have always been a great source of
strength to me.
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Excellence is an art won by training and habituation. We do not
act rightly because we have virtue or excellence, but we rather have
those because we have acted rightly. We are what we repeatedly do.
Excellence, then, is not an act but a habit.
- Aristotle
1

Chapter 1: Introduction

1.0. Chapter introduction
Purchasing function involves the acquisition of raw materials, components, goods and
services for conversion, consumption or resale. In many organisations, purchasing is still
part of a segmented, departmentalised structure in which the procurement of supplies is a
discreet activity in the sequence of activities from the acquisition of supplies to the
delivery of a finished product to the ultimate user. The challenge of global competition
is, however, increasingly leading many organisations to replace segmented structures
with integrated structures in which purchasing is part of a larger grouping, such as
materials, logistics or supply chain management. Such structures emphasise the
importance of cross-functional decision making (Lysons and Farrington, 2006).

Strategic supply management is a vital component in the corporate planning process.
Michael Porter considers the element of strategic purchasing as a vital component in the
corporate planning process aimed at gaining competitive advantage (Chadwick and
Rajagopal, 1995).
Strategic sourcing is the identification of strategic mix of suppliers to fulfil an
organisations commodity and services demand with improved cost and service (Berger
and Gattorna, 2001).

In this chapter, four main parts are included: research background, research context,
research aim and question, and the structure of the dissertation. It starts with a general
introduction to strategic sourcing and supply management, which is followed by a brief
2

overview of the risks and benefits of strategic sourcing. Then, the research context is
provided, where the current trends are emphasised along with the satisfaction levels of
outsourcing. The research aim and question are clearly identified in the next section.
Lastly, the structure of the dissertation is provided.

1.1. Research background
Companies seeking to be competitive in todays global economy are re-evaluating the
role of procurement. Once a narrow, administrative function, procurement is now being
moved to the centre of business decision-making and is creating a new source of value.
Procurement is a broad activity: it involves the material management of goods and
services in addition to purchasing transactions. Strategic sourcing takes the process even
further, focusing on developing channels of supply at the lowest total cost to the
company, not just the lowest purchase price. In strategic sourcing, all purchasing
activities are assessed for their impact on the company and the companys goals
(Gattorna, 1998).

To achieve strategic sourcing, companies have to understand what are their most
important goods and services and how vital they are to their day-to-day operations, as
well as achieving longer-term business goals (Gattorna, 1998). Strategic consideration of
make or buy decisions, with regards to goods and services, is central to supply chain
positioning for organisations in both private and public sectors. The outcome of a firms
investigations of these issues will define the scope of that part of the chain which falls
under direct control and which will require resource investments in order to develop its
internal capabilities. Thus, strategic changes of direction with regard to positioning in the
supply chain can affect purchasing and supply (Saunders, 1997).
3

According to Rajagopal and Bernard (1994), the most important benefit of international
sourcing is achieving lower price followed by better quality of products/services. The
other benefits of strategic sourcing are strategic focus/reduction of assets, complementary
capabilities/lower production costs, strategic flexibility, and avoiding bureaucratic costs
(Kotabe et al., 2008).

However, the risks associated with strategic sourcing cannot be overlooked. Even though
sourcing plays an important role in protecting the firms competitive advantage, one must
take care not to jeopardise the firms core skills and capabilities by outsourcing key
process or products which can result in loss of that skill (Spekman et al., 1994).
Researchers have found that interfaces/economies of scope, hollowing out the
competitive base, opportunistic behaviour by the external suppliers, rising transaction
and coordinated costs, limited learning and innovation as well as higher procurement
costs due to fluctuating currency exchange rate are the inherent risks that an outsourcing
firm has to face when sourcing activities (Kotabe et al., 2008).

1.2. Research context
Minevich and Richter point towards the fact that more than 80% of the major global
multinational corporations have an offshore presence. Additionally, more than 75% of
the medium-size to large companies across Europe will be outsourcing services. The
study also predicts that 80% of U.S. companies will be seriously consider outsourcing
their critical IT services to service providers from India and China (Minevich and
Richter, 2005).

4

Information technology (IT) is considered to be the most popular area for outsourcing.
For many organisations in the manufacturing and retailing field, IT is not a core activity
and therefore there is a strong possibility to outsource IT to other firms. This is followed
by outsourcing facilities management, logistics and finally procurement (Kakabadse and
Kakabadse, 2002).
Satisfaction levels related to outsourcing are not yet clear. Extensive literature written in
the past indicates that almost 70% outsourcing ventures were unsuccessful. However
recent surveys and analysis depict a changing picture wherein more and more companies
are being satisfied with the outsourcing activity.

1.3. Research aim, objectives, and question
From the above description, it can be noticed that strategic sourcing is gaining
acceptance and importance in purchasing departments worldwide. The main aim of this
dissertation is the use of strategic sourcing as an effective tool for sustained competitive
advantage. Additionally, importance of make or buy decisions when implementing
strategic procurement will be investigated. The research objectives include:
Understanding the concept of strategic sourcing and the significance of make or
buy decisions for competitive advantage
Streamlining the sourcing process through the implementation of strategic
sourcing models
Frameworks and flowcharts for managing the sourcing process
Benefits and justifications of strategic procurement
Managing the risks and challenges as well as understanding the causes of failure
Best practices and implementation of strategic sourcing

5

Thus, in this study, the research question to be addressed is: What influences make or
buy decisions in strategic sourcing and its implications for sustained competitive
advantage?

1.4. Structure of the dissertation
This dissertation is divided into six chapters, such as:

Chapter 1: Introduction
In this chapter, the general background of the research is provided. Also, an overview of
the research context has been given to provide a general understanding of the
dissertation. Lastly, the research aim, objectives, and questions are stated.

Chapter 2: Literature Review
Broadly, this chapter outlines a critical literature review that presents the theoretical
foundation of the research covering strategic sourcing and purchasing policies. It
comprises of a brief overview of strategic sourcing followed by a way to streamline the
sourcing process. Next, the make or buy process is explained in detail along with the
various souring models proposed by different authors. The chapter is concluded by
enlisting the best practices, benefits and inherent risks of strategic sourcing.

Chapter 3: Methodology
This chapter includes the research methodology chosen for this dissertation. It provides a
clear picture of data research design, particularly the objectives and structure. Moreover,
the main reasons for choosing the questionnaire survey approach are mentioned and
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compared to case study methodology emphasising the limitations and benefits. Then, the
analytical tools are introduced and the main concepts explained.

Chapter 4: Research results
In this chapter, questionnaires included in the survey are analysed. The analysis is carried
out by statistical method by the use of SPSS software. The outcomes are clearly
highlighted both in written form as well as in the form of pie charts and bar graphs.

Chapter 5: Discussion
This chapter includes the summary and implications of the results that are extensively
discussed. Also, the limitations of the research are stated.

Chapter 6: Conclusion and recommendations
In this chapter, the results of the survey are referred back to the objectives of this
dissertation and the main conclusion is outlined. Furthermore, recommendations for
future studies as well as recommendations for organisations are clearly stated.

1.5. Chapter summary
In this chapter, an overview of the entire dissertation is given. It starts with the research
background and context. Then, the research aim, objectives, and question are expressed.
Lastly, the structure of the dissertation is introduced.
7

Chapter 2: Literature Review

2.0 Chapter Introduction
The purpose of this chapter is to attempt to outline an overall picture of the impact of
strategic sourcing on organisations and the choice between make and buy decisions for
competitive advantage. The review has eight sections and it starts by defining Strategic
Sourcing and understanding the key purchasing tasks. Next, the review examines the
process of streamlining the sourcing operation by considering an organisations core
competencies and procurement competence.

Then we look into the concept of a sourcing model and how firms develop and adopt
these sourcing models. This section also analyses the importance of strategic planning for
successful strategic sourcing. Thereafter, we analyse the importance of make/buy
decisions for sustained competitive advantage and how core competencies form the basis
of these make/buy decisions. A detailed explanation follows that highlights various
sourcing models that are widely used in the supply chain environment with a methodical
framework to manage the sourcing process.

Finally we look into the benefits and justifications of implementing strategic sourcing
within an organisation. This is supplemented by a write-up on managing the risks and
challenges that an organisation would face if not implemented appropriately. Best
practices and implementation form the next section wherein we look into the importance
of analysing core activities of an organisation along with total cost analysis and top-
management support.
8


We conclude the review by presenting a brief chapter summary on the importance of
leveraging strategic sourcing by organisations for achieving competitive advantage.

2.1 Definition of Strategic Sourcing
A new study of leading European businesses by benchmarking specialist PIMS
Associates and the Chartered Institute of Purchasing and Supply (CIPS) reveals that an
effective purchasing strategy can add up to 4 per cent of sales value or 30 per cent to
profitability. More importantly, it also identifies that few businesses seriously assess their
purchasing activity or invest in its development, so that usually this source of value
remains untapped (Thompson, 1996).
The objectives of purchasing as mentioned in the CIPS policy statement are given below:
All purchasing activity aims to achieve the best possible value. Value includes not only
the initial purchase price, but continuing costs over the lifetime of the goods or services,
such as financing, maintenance, quality and reliability of the goods or services and the
timeliness and reliability of delivery. To improve all these aspects, work with suppliers to
create relationships within which we can help them to meet requirements, and they can
be encouraged to invest in improving their products, prices, quality, and service(CIPS,
2010).

According to Sysons, the key objectives of purchasing are illustrated in the figure
below:-
9

Innovation in
products and
processes
TASKS
Maintaining
continuity of
supply
Contributing to
cost reduction
Minimising long
term
vulnerability in
supply markets
Presenting the
company as an
attractive
trading partner

Fig 2.1. Key purchasing tasks (Syson, 1992)

A strategic approach to procurement is proven to enhance the effectiveness and
efficiency of organisations operations as well as saving revenue through effective
sourcing, transaction cost reductions and standardised procurement processes. Sourcing
refers to the value added process of selecting suppliers and the respective cooperation
scheme and it must be supported by advanced analytics & market intelligence, supplier
performance information and a concrete and well-developed strategy. On the other hand,
procurement refers to the transactional of the relationship and should be streamlined as
much as possible in order to achieve efficiency (Deloitte, 2010).

Strategic sourcing is considered as a continuous improvement process intended to
enhance the purchasing activities of an organisation. Insight Sourcing Group defines
strategic sourcing as The application of a rigorous methodology to a single category of
10

goods or services in the pursuit of market leading total costs and quality relative to a
company's spend volume and unique requirements. (Insight_Sourcing_Group, 2010)

According to Thomas Group, strategic sourcing is a process that helps companies take a
fresh look at how they purchase products and services to lower costs, improve profits and
improve supply chain management. While most organizations implement strategic
sourcing initiatives for the purpose of saving money, other reasons include improving
acquisition process, supplier performance and minimizing risk (ThomasGroup, 2010).

Another view presented by Spekman, Kamauff and Salmond indicates towards the fact
that managers have been directed and implored to become more strategic in their view
and proactive in their contributions. The company management argues that the strategic
firm must include purchasing and supply considerations in its planning, development,
and operations. This view is seen as especially important to firms attempting to improve
their competitive positions in truly global arenas (Spekman et al., 1994).

Purchasing is concerned with strategic issues, therefore forecasting, long-term planning
and the realisation of corporate objectives are important considerations. Researchers
within or outside the purchasing function should devote time to gather information and
analysing trends. Purchasing plans and objectives can take new developments into
consideration, thus ensuring that the company adopts a strategic focus (Trim, 1994).

Kocabasoglu and Suresh believe that strategic sourcing emerged out of two needs. First,
the introduction of new manufacturing and information technologies prompted a need to
closely align buying cycles with production requirements. Second, as cost containment
started to become an absolute necessity to remain competitive, managers realised major
11

savings could be achieved if purchasing and supply management activities were
streamlined and non-value-adding tasks were eliminated. In addition, strategic sourcing
gained increasing attention over the years, owing to the general trend towards
outsourcing, thus creating reliance on suppliers for critical materials and components
(Kocabasoglu and Suresh, 2006).

Strategic sourcing therefore includes the concepts of core competency analysis as well as
determining the make or buy decision for an organisation (McIvor et al., 1997;
Clemons et al., 1997). While cost is always important in any business decision, managers
should consider strategic and technological issues in conjunction with the decision.
Companies that continue to make sourcing decisions based solely on cost will eventually
fail to remain competitive. Conversely, thoughtful use of the strategic sourcing model, in
conjunction with a rigorous cost analysis, can help companies make the sourcing
decisions that will move them toward world-class stature (Welch and Nayak, 1992).
However, strategic sourcing is not just limited to the above two concepts and extends to
aligning the companys buying policies, procurement positioning, global sourcing,
reverse auctions for achieving low costs as well as understanding the buyer-supplier
relationships (Beall, 2003; Sharma and Loh, 2009; Hawkins et al., 2010; Emiliani, 2006;
Swoboda et al., 2009).

2.2 Streamlining the sourcing process
Purchasing or sourcing is traditionally considered to be a transactional activity which is
divided into three distinct phases. They are as follows:
The identification phase - Wherein a requisition is issued by the by the potential
buyer and a bill of materials is issued by the equivalent department.
12

Ordering phase - After sending a requisitions to the suppliers, quotations will be
received from the providers and the appropriate vendor will be contacted through
a purchase order. The vendor may then send an acknowledgement to ensure that
the order has been accepted on the agreed terms and conditions.
Post-ordering phase - Advanced Shipping Notification (ASN) would be sent by
the supplier to inform the buyer about the impending delivery. On receiving the
goods, they will be checked for the desired quantity and quality. Finally, the
vendor will be paid after receiving an invoice for the delivered commodities.
(Lysons and Farrington, 2006)

Early purchasing functions had no strategic directions and primarily reacted to the
requests of other functions. They were characterised by high proportion of purchasers
time being spent on quick-fix and routine operations where purchasing functions and
individual performance were based on efficiency measures. Moreover, very little inter-
functional communication took place because of purchasings low visibility. Another
characteristic of early procurement functions placed emphasis on price and availability
for supplier selection instead of the total cost of ownership (TCO) and quality (Baily et
al., 2008; Tan, 2001). However, the intense global competition in the 1980s forced many
organisations to offer high quality products at affordable costs and it was at this point of
time that firms began to realise the importance of procurement function as an integral
part of being commercially competitive (Tan, 2001). As a result, purchasing functions in
many organisations have moved from being clerical to strategic in nature. With the
advent of cutting edge IT deployment and adoption of e-commerce technologies,
procurement can now be seen as proactive and value adding function for a company
where cross-functional and cross-enterprise teams make joint decisions on purchasing
and supply (Zheng et al., 2007; Knudsen, 2003).
13


The only way to streamline the procurement process and enhance the supply competence
is by understanding the causes of business success through significant strategic and
operational influence in the business. As demonstrated in the figure below, procurement
and supply competence ultimately flows from knowing three things:
First, practitioners must know what are the full range of tools and techniques
available for practitioners to use to achieve effective leverage over supply chain.
Second, practitioners will understand the significance of contingent
circumstances that confront them.
Finally, practitioners who have procurement and supply competence will also
possess a knowledge and understanding of appropriateness.
(Lamming and Cox, 1999)
14

Procurement & Supply
Competence
Knowledge (1) Knowledge (2) Understanding
Strategic Clarity
Knowing what are
the universal
procurement tools
and techniques
available to
practitioners
Appropriateness is
about understanding
when to use
particular tool and
technique under
specific
circumstances to
deliver corporate
goals operationally
Knowing in detail
the range of
contingent supply
chain and market
circumstances
which face the
practitioners
Strategic goals about means and ends must be
clearly articulated in supply chain terms

Fig 2.2. Procurement and Supply Competence (Lamming and Cox, 1999)

Closely linked to the basic question of relationships with suppliers are the supporting
strategies designed to achieve control of performance with regard to basic requirements
of quality, delivery, cost and service. Policy guidelines for topics such as purchasing
research, single versus multi-sourcing, intra-company purchasing, reciprocal trade,
international purchasing and purchasing ethics are also relevant (Saunders, 1997).
Additionally, if a proactive approach to planning is adopted then the success of the
strategy will depend on the availability of concise and accurate up-to-date information
which is relevant to the buying organisation and its supply environment. The emphasis in
15

the development of a purchasing information system should be on data which assists
buyers in making decisions in line with the organisations competitive strategy.
Information gathering and processing systems are a vital part of any strategic approach to
management (Chadwick and Rajagopal, 1995).

According to some researchers, the sourcing function has changed from a supportive role
to strategic activity and has made significant progress to improve the competitive
advantage of an organisation. Strategic sourcing elements are built upon the set of
interrelated core values namely leadership involvement in strategic sourcing, focus on
core competency and life cycle cost, develop sourcing strategies, manage suppliers in
strategic sourcing and finally continuous improvement in strategic sourcing (Chan et al.,
2007). By emphasising on the above mentioned points, sourcing function within an
organisation can be made into a strategic tool that will positively contribute to the firms
bottom line.

Bartezzaghi and Ronchi argue that the internet could streamline inefficient procurement
processes by removing the manual, paper-based, administrative and bureaucratic
elements inherent in traditional purchasing systems. Internet adoption determines the
overall reduction of transaction costs: products are easier to describe, specificity of assets
has been reduced, and information transfer on the markets is far more efficient.
Purchasing departments adopting a private purchase approach present a clearly lower
procurement cost reduction than all the other clusters, in terms of price, scouting and
negotiation costs. In general, the supplier-based approach seems to reach higher
performances than all the others both in terms of procurement costs, process efficiency
and process effectiveness (Bartezzaghi and Ronchi, 2004).

16

Sourcing is said to assume a strategic importance when the following three criteria are
perceived to be critical:-
Significance how important are the potential differences, positive and negative,
that could result from the decision to outsource?
Scope how localised will be the impact of the decision? In terms of both the
organisations breadth of activities and its future options, will the impact be
limited or will it have a pervasive knock-on effect throughout the organisation?
Intent is the decision a one-off or part of a wider pattern of enabling moves
currently being undertaken?
If the decision makes a significant difference to the current organisation, has few
ramifications and can be reversed with relative ease (scope), and is not designed as a
central part of a set of actions (intent), then it is strategic. Such buying decisions should
be taken after careful considerations (Kippenberger, 1997).

The analysis to determine which activities to outsource and which to retain internally can
be summarised as shown in the following figure and accompanying text.
17


Fig 2.3. Competence vs Keeper in relation to strategic sourcing

An activity that represents both a keeper and a competence will be termed as a
strategic competence where there is no need to motivation to outsource these
activities.
An activity that after risk assessment appears to be a keeper, and that after
competitive benchmarking is determined to be poorly done internally, is not a
candidate for outsourcing. Such strategic incompetence activities should be
improved but retained internally.
A non-strategic competence can be kept internally if performing it does not
distract management focus. However, it can be outsourced if this appears to offer
significant benefits.
Non-strategic incompetence activities that are neither a keeper nor a corporate
competence if done poorly have to be outsourced. Outsourcing offers
18

opportunities for performance improvement, and the risks associated with
outsourcing are limited and can be managed.
(Clemons et al., 1997)

Additionally, a study conducted by Kocabasoglu and Suresh indicate towards the fact
that strategic sourcing is based on the status of the purchasing function within the firm,
the level of internal coordination of purchasing with other functions within the firm,
information sharing with key suppliers and development of key suppliers (Kocabasoglu
and Suresh, 2006).

Thus, streamlining the sourcing process has immense benefits to both the buyers as well
as the suppliers. These advantages may be summarised by saying that an effective
partnership will allow buyers to achieve advanced levels of quality and service such as
faster product and services development, a commitment by the supplier to quality
improvement and technical development, delivery on time and a commitment by the
supplier to design cost out. On the same lines, advantages for the suppliers include long
term agreement, improved management capability, marketing advantage, improved
technological capability and financial stability including payment on time. Mutually
applicable benefits to both parties include reduced total cost, lower inventories and
reduced logistics (Carter and Kirby, 2006).

2.3 Strategic Sourcing Model
In the seminal article titled The Future of Purchasing and Supply: A Ten-Year Forecast,
the authors emphasise on the importance of tactical purchasing where the future will hold
tremendous changes in purchasing activities and how they are accomplished. However,
19

tactical purchasing activities such as ordering, quoting, expediting, and so forth will be
automated and/or outsourced. Make or buy decisions will be regularly made as part of
the strategic sourcing process. A single cross-functional executive group will establish
what work will be done internally and what will be done externally (Carter et al., 2000).

Kippenberger believes that many outsourcing decisions are taken on a straightforward
value for money basis. Security office cleaning, printing and travel arrangements are
frequently better provided by external suppliers who specialise in such activities, than
handled by the internal support staff. Economies of scale, centralised buying, market
knowledge and socialised experience enable external suppliers to make a profit yet
deliver such services at lower costs to the users (Kippenberger, 1997).

The recent managerial trends advocate focusing on core competencies and outsourcing
other activities in order to gain and retain competitiveness in a supply chain environment.
According to Quinn and Hilmer, a major strategic concept in sourcing decisions is core
competency (Sislian and Satir, 2000). Core competencies are the collective learning in
the organisation, especially how to coordinate diverse production skills and integrate
multiple streams of technology (Prahalad and Hamel, 1990). Strategic sourcing models
revolve around an in-depth analysis of ones core competencies and outsourcing the non-
core activities. One needs to fully comprehend an organisations competitive strategy in
order to assess whether or not a given activity is a source of competitive advantage - any
activity that enhances the competitive advantage must be identified as critical and
therefore should be insourced (Sislian and Satir, 2000).

Multiple sourcing models have been proposed due to the complexity and number of
interrelated tasks that compose the integrated process of strategic sourcing. Novack and
20

Simco (1991) cited in An Analysis of the Integration of Strategic Sourcing and
Negotiation Planning were two of the earliest authors to propose a sourcing process via
a four-step model. Subsequently, many firms, both consulting and industrial have
developed sourcing models, each with a variety of antecedent and consequential steps or
stages (Smeltzer et al., 2003).

As stated by McIvor (2000); Probert (1996) has attempted to rectify the situation by
proposing a four-stage process to the make or buy strategic decision. The various stages
in his methodology are:
1. Initial business appraisal. Data collection on company, competitors and suppliers,
as well as an evaluation of strategic issues which face the firm.
2. Internal/external analysis. Identifying major component families, manufacturing
processes, cost allocations and alignment of parts and technologies on the
technology competitiveness/importance matrix.
3. Evaluation of strategic options. Assessment of the various sourcing options which
are identified in Stage 2 in conjunction with data obtained in Stage 1.
4. Choose optimal strategy. Applying financial decision support models to evaluate
the various sourcing strategies and to identify the most appropriate fit with the
organisation's current and future operations.
(McIvor, 2000)

Following are the reasons why companies outsource their activities:-
21


Fig 2.4. Why firms outsource (Crocker, 2010)

Prahalad and Hamel compare a diversified corporation with a large tree - the trunk and
major limbs are core products, the smaller branches are business units; the leaves,
flowers, and fruits are end products. Core competency is as much about harmonizing
streams of technology as it is about the organisation of work and the delivery of value.
The force of core competence is felt as decisively in services as in manufacturing. The
authors stress on the fact that core competence is communication, involvement, and a
deep commitment to working across organisational boundaries. The skills that together
constitute core competence must coalesce around individual whose efforts are not so
narrowly focused that they cannot recognise the opportunities for blending their
functional expertise with those of others in new and interesting ways. Core competence
does not diminish with use. Unlike physical assets, which deteriorate over time,
competencies are enhanced as they are applied and shared. Core competencies are the
glue that binds existing business. They are also the engine for new business development
(Prahalad and Hamel, 1990).
22



Fig 2.5. The corporation, like a tree, grows from its roots. Core products are nourished by
competencies and engender business units, whose fruit are end products (Prahalad and
Hamel, 1990)

What the authors do stress is the fact that cultivating core competences does not mean
outspending rivals on research and development. The renowned example the authors give
is when Canon surpassed Xerox in worldwide unit market share in copier business in
1983, its R&D budget was a small fraction of Xeroxs. Building core competencies is
more ambitious and different than integrating vertically. Managers deciding whether to
make or buy will start with end product and look upstream to the efficiencies of the
23

supply chain and downstream towards distribution and customers. However, the author
points out that core competency are not effectively identified by the organisations to
leverage their position. Therefore the authors propose three tests to identify core
competencies in a company. First, a core competence provides potential access to a wide
variety of markets. Second, a core competence should make a significant contribution to
the perceived customer benefits of the end product. Finally, a core competence should be
difficult for competitors to imitate. Core competences can be lost, however the costs of
losing core competences can be only partly calculated in advance. Additionally, since
core competencies are built through a process of continuous improvement and
enhancement that may span a decade or longer, a company that has failed to invest in
core competence building will find it very difficult to enter an emerging market.
Therefore it has to be understood that core competencies constitute the focus for strategy
at the corporate level and only if the company is conceived of as a hierarchy of core
competencies, core products, and market-focused business units will it survive the
competition from other companies (Prahalad and Hamel, 1990; Srivastava, 2005).

The critical competence framework seeks to make the concept of core competence
work to the benefit of organizations. Critical competence can be equated to a skill for
operationalising and managing the competencies for the benefit of the firm. The critical
competence framework comprehensively covers all the aspects related to competencies
and skills in a firm. It provides a holistic, intuitive framework for designing the
enterprise-wide strategic architecture of the firm and provides answers to the reasons for
differences in performance of firms that seemingly posses identical resources (Srivastava,
2005).

24


Fig 2.6. Critical Competence Framework (Srivastava, 2005)

(i) Competencies Pool: Resources in the form of intangible assets are skills which
help the firm in performing its activities. The competencies pool at any given
point in time enumerates the capabilities of the firm (useful as well as not so
useful).
(ii) Competencies Hunt: The firm should identify its key business processes,
manage them centrally, and invest in them heavily looking for a longer term
payback as these distinctive competencies set apart the organisation from its
competitors.
(iii) Competencies Enlightenment: Identifying the competencies of an
organisation makes them easier to manage. The competencies enlightenment
25

paves the way for future strategy to be followed by the organisation.
Normally, successful firms will posses not more than a couple of these
generic competencies as they many have conflicting objectives.
(iv) Deploy: Once the process of identification of competencies is over, these
competencies should ideally be deployed in diverse businesses of the firms.
Successful firms leverage their position by deploying these competencies to
their business.
(v) Nurture: Competencies reflect the specialised expertise of an organisation
resulting from its collective learning. However, if these capabilities and
competencies are not nurtured, they will erode with time. The author argues
that organisations should nurture core competencies and not squander its
resources in nurturing its non-core competencies.
(vi) Develop: For sustained competitive advantage, organisations must continually
learn and enhance their core competencies. If constant renewal does not take
place, other organisations will imitate and make the competencies which led
to competitive advantage obsolete. Therefore the need arises to develop and
maintain the core competencies of a firm.
(vii) Abandon: The dynamic nature of competencies suggests that some
competencies may become obsolete with time. It is imprudent to nurture an
unutilised core competency because nurturing a competency demands
substantial resources. Hence non-core or non-strategic activities should either
be outsourced or abandoned.
(Srivastava, 2005)

According to Carr and Smeltzer, it is important to firstly define Strategic Purchasing with
the help of Porters wheel of competitive strategy. The goals represent the firms broad
26

definition of how the firm will compete. It addresses the firms specific objectives for
profitability, growth, market share, and social responsiveness. In the spokes of the wheel
are the firms policies that are established by the functions such as finance and control,
research and development, purchasing, labour, manufacturing, distribution, marketing,
and product line. By identifying purchasing as a spoke in the wheel of competitive
strategy, Porter acknowledges that strategic role of purchasing in achieving the firms
competitive strategy (Carr and Smeltzer, 1997).
External
Environment
Internal
Environment
Corporate Mission &
Strategic Plans
Business Unit Strategies & Goals
Functional Strategies & Operating Plans
Short-term Decisions & Daily Activities

Fig 2.7. Strategic planning in the firm (Carr and Smeltzer, 1997)

In order to develop a strategic purchasing model, Carr and Smeltzer assumed the
following four hypotheses:-
Hypothesis 1: The status of the purchasing function is positively related to the
level of strategic purchasing in the firm.
Hypothesis 2: Purchasings knowledge and skills are positively related to the
level of strategic purchasing in the firm.
27

Hypothesis 3: Purchasings willingness to take risks is positively related to the
level of strategic purchasing in the firm.
Hypothesis 4: Purchasing resources are positively related to the level of strategic
purchasing in the firm.
(Carr and Smeltzer, 1997)

Based on the above hypotheses, a strategic purchasing model has been developed that
shows the relationships between the different entities.
Status Status of the purchasing function includes other functions view of
purchasing; purchasing is viewed as a functional peer; top managements view of
purchasing
Knowledge and Skills Purchasing knowledge and skills includes purchasings
knowledge off supplier markets and analytical skills; purchasing performance
measurements.
Risk Purchasings willingness to take risks includes purchasings willingness to
identify and take advantage of new opportunities; purchasing foresight
Resources Purchasing resources includes purchasings access to information;
use of information technology
Level of Strategic Purchasing Level of strategic purchasing includes alignment
of goals with corporate, other functions and suppliers; purchasing involvement in
developing strategic plans; purchasing sets and implements strategic plans.
(Carr and Smeltzer, 1997)
28

Status
Knowledge and
Skills
Risk
Resources
Level of Strategic
Purchasing

Fig 2.8. A model of strategic purchasing (Carr and Smeltzer, 1997)

2.4. Make or Buy decision
According to Welch and Nayak, for U.S. manufacturing establishments, the cost of
purchased inputs amount to about 50% of sales revenue, while labour costs amount to
only 10%. While unionised manufacturers have decidedly less flexibility for outsourcing,
these companies may often overlook make-or-buy opportunities. Further, unionised
manufacturing workers are a relative minority, comprising only about one-quarter of all
plant labourers (Welch and Nayak, 1992).

Ford and Farmer examined what are commonly known as industrial make-or-buy
decisions as the project stemmed from the simple idea that decisions as to which
activities should be carried out within the company and which should be contracted out
29

can be crucial to business effectiveness. Ford and Farmer found that make-or-buy
decisions are often taken without a strategic perspective wherein a large majority of firms
appear to take an operational/cost based approach based on a limited analysis of the issue
of make-or-buy (Ford and Farmer, 1986).

Beyond static cost issues, there are longer-term, strategic considerations intertwined with
the make-or-buy decision that are of even greater importance. The authors explain the
importance of considering strategic variables like process technology and its relationship
to competitive advantage, maturity of process technology and competitors process
technology positions (Welch and Nayak, 1992). Moreover, Sweeney has found that many
companies who are in search for a competitive advantage look beyond their national
boundaries for a source of components or finished products. Many organisations have
reported global sourcing to be a competitive weapon for strategic procurement, but little
research has been carried out to examine the cost and service reasons for manufacturing
offshore instead of using a third party supplier or whether it would be advantageous to
return production back to the country of marketing and distribution (Sweeney, 1994).

The figure below shows that there are three types of sources of manufactured product.
These options are home country manufacturing, direct inward investment and third party
supply. The choice of sourcing strategy to use is dependent upon the competitive
advantage that each offers. Home country manufacturing is often adopted because of
proximity to the market and it ensures absolute control over manufacturing performance
and supply. Offshore owned production provides the opportunity to minimise labour
and material costs, when both are locally supplied, and the retention of responsibility for
manufacturing control. Third party manufacture is a competitive source of product
supply when the complexity of production control has significantly reduced the cost
30

competitiveness of the firm. The contracting out of lower volume or lower margin
product manufacture to smaller specialist producers can allow the contractor to focus on
its core manufacturing business (Sweeney, 1994).
Sourcing Strategy
Home
Country
Manufacture
Third
Party
Manufacturing
Offshore
Manufacturing
in Owned
Facilities through
1. J oint Venture
2. Acquisition
3. Direct Inward
Investment in a New
Factory

Fig 2.9. Product Sourcing Options (Sweeney, 1994)

It has been observed that many do not have a firm basis for evaluating the make or buy
decision. Research done by Blaxill and Hout have found that many firms make sourcing
decisions primarily on the basis of overhead costs. The choice of which components to
outsource is made by ascertaining what will save most on overhead costs, rather than on
what makes the most long-run business sense. Companies today are failing to consider
issues such as:
Should the company strive to maintain and build its capability in a particular
technology or turn to the best-in-class source?
Does the necessary capacity exist within the company to provide the item?
Do the company internal design and manufacturing capabilities lag behind
potential suppliers?
31

Is the item part of an intergraded production route involving several stages of
manufacture? If so, can outside manufacture be satisfactorily co-ordinated with
internal production schedules?
If there is a disparity between purchaser and supplier, how much investment is
required internally to match the capabilities of the suppliers?
(McIvor et al., 1997)

Moreover, sourcing decisions can have an impact on flexibility, customer service and the
core competences of the organisation. Hamel and Prahalad postulate that companies who
measure competitiveness in terms of price only are inviting the erosion of their core
competencies. However, too many companies have unknowingly relinquished their core
competences by cutting internal investment in what they mistakenly thought were cost
centres in favour of outside suppliers. Outsourcing may provide a shortcut to a more
competitive product, but it typically contributes little to build the people-embodied skills
which are needed to sustain future product leadership (McIvor et al., 1997).

After considering the above explained core competence frameworks along with a firms
purchasing policies, various sourcing models can be proposed. Some of them are
explained in detail below.

2.4.0. Generic Sourcing Model
The outsourcing model consists of four major elements as seen in the figure below. They
are outsourcing subject, outsourcing object, outsourcing partner, and outsourcing design.
32


Fig 2.10. A generic outsourcing model (Arnold, 2000)

Outsourcing subject is the economic institution which plans to outsource (or not). The
subject has to make the strategic outsourcing decision. Outsourcing objects are processes
or process results which might be outsourced. With regard to the activities of a company
we distinguish between
(i) The company core (all activities which are necessarily connected with a
companys existence)
(ii) Core-close activities (directly linked with core activities)
(iii) Core-distinct activities (supporting activities)
(iv) Disposable activities (activities with general availability)
Outsourcing partners are all possible suppliers for the activities considered for
outsourcing (Arnold, 2000).


33

2.4.1. Outsourcing Process Model from Lonsdale and Cox
An outsourcing model that is extremely useful for making sourcing decisions is the
Lonsdale & Cox (1998) outsourcing process model.

Fig 2.11. Outsourcing Process Model from Lonsdale & Cox (Lonsdale and Cox, 1998;
Crocker, 2010)

The model outlines the following steps that will ensure successful outsourcing strategy:-
1. Decision to source: Here the company would have to look into the potential
advantages and disadvantages of outsourcing. The benefits of outsourcing can
provide the buyer with greater flexibility. It decreases the companys design-
cycle times and in the same vein, it spreads the companys risk for component
and technology developments among a number of suppliers. Outsourcing has
therefore become a major strategy to leverage internal technical capabilities and
to tap the rapid response and innovative capabilities of small enterprises (Hilmer
and Quinn, 1994).
34

However, outsourcing can generate new risks such as loss of critical skills or
developing the wrong skills, the loss of cross-functional skills, and the loss of
control over suppliers. These risks are especially pertinent when the suppliers
priorities would not match the outsourcers needs. Furthermore, outsourcing has
led to a loss of skills and corporate memory (Kakabadse and Kakabadse, 2000).
2. Internal assessment of business activities: It is imperative that outsourcing firms
assess their business activities to identify their core competencies while focusing
their attention towards outsourcing non-core activities. Therefore by developing a
few well-selected core competencies of significance to customers, the companies
can substantially leverage outsourcing (Hilmer and Quinn, 1994).
3. Assessment of external supply: The outsourcing firm needs to carry out a market
survey before they outsource their services to other organisations by finding out
the best vendors in the market as well as the market maturity level. Market
analysis is an important factor that influences the success or failure of
outsourcing. Typical to a standard evaluation process for any potential business
partner, request for proposal will establish a formal format for response by
potential vendors (Duffy, 2001).
4. Selection of appropriate types of external supplier relationships: Depending on
the assets of the company, they can be separated or segregated into competencies
of high, medium and low importance. According to the nature of these assets,
different types of contractual relationships can be defined and maintaining
(McIvor, 2000).
Cox provides a summary of the different types of contractual relationships in the
diagram below with respect to the asset specificity. The figure clearly
distinguishes whether an asset lies at the low end of the spectrum or the high end
(Cox, 1996; McIvor, 2000).
35


Fig 2.12. A typology of internal and external contractual relationships (Cox, 1996)

5. Supplier selection and supplier management: It is important that outsourcers
select a supplier who can complete the project in time and will work on a long
term basis with the company. Moreover, managing suppliers and their contracts
can translate into massive gains for the company (Miller and Fogle, 1996).
6. Re-tender or return in-house: One has to take this step when the originally
selected vendor for outsourcing does not deliver the desired results or still worse
there is deterioration in quality and service levels. The outsourcing company in
this case has two options. Either to re-tender the process again and select new
vendors, or bring the activity in-house where it could be developed within the
36

organisation. Sometimes, the companies believe they have build necessary
competencies or consider the activity of strategic importance and therefore
advocate in bringing it back in-house (Hilmer and Quinn, 1994).

2.4.2. A framework for evaluating outsourcing decision
An excellent framework for making outsourcing decisions is given by McIvor as
illustrated on a decision tree in Figure below (McIvor, 2000).
37


Fig. 2.13. McIvors framework for evaluating outsourcing decisions (McIvor, 2000).

Stage 1 - Defining the core activities of the business
This stage is involved with identifying the core and non-core activities of the
organisation. A core activity is central to the company successfully serving the needs of
potential customers in each market. Distinguishing between core activities and non-core
38

activities is a complex task, and care must be taken to ensure the long-term strategic
considerations and true benefits are assessed (McIvor, 2000). Once these core and non
core activities have been distinguished, the firm can take a decision to outsource the non-
core activities whereas the core activities should be kept aside for further analysis. There
could be cases where a non-core activity cannot be outsourced due to political/legal
concerns. Such activities should therefore be performed internally.

Stage 2 Evaluate the relevant value chain activities
Once all the core and non-core activities have been identified, the next step is concerned
with analysing the competencies of the company in these core activities in relation to
potential external sources (McIvor, 2000). If an organisation believes they can develop
these activities in-house which can then be a major value-addition to their companys
services, then these activities should not be leased. However, if the company believes
that it does not have the necessary knowledge and skills to develop these activities
indigenously; it should be outsourced where the vendor can make sure the service adds
value to the organisation.

Stage 3 Total cost analysis of core activities
This stage involves attempting to measure all the actual and potential costs involved in
sourcing the activity internally or externally. It encompasses all costs associated with
the acquisition of the activity throughout the entire supply chain and not just the purchase
price (McIvor, 2000).
Now, there are two ways in which an organisation could proceed with this stage:-
(i) If the market research and vendor analysis do not give the desired results and
suggests that the total spend on non-core activities cannot be reduced below a
certain value (taking into consideration the Total Cost of Ownership), then there
39

is no point in outsourcing that activity rather perform internally. Additionally, it
could so happen that the market would not be mature enough. In this case, it is
advisable to invest to carry out that activity indigenously.
(ii) If there is a mature market and competent vendors, the activity could be
outsourced. Again, depending upon the criticality of the activity, either it could be
directly outsources, or in case of strategically important competencies, the
functions could be Strategically Outsourced after extensive relationship
analysis.

Stage 4 Relationship Analysis
This stage has to be carried out if an organisation plans to outsource its core activities or
activities of strategic importance to the firm (McIvor, 2000). If an organisation does find
a number of compatible suppliers with little threat of competition, then such an activity
should be strategically outsourced after careful consideration. Similarly, if there are no
compatible suppliers, then the best solution is to invest into building those capabilities
within the organisation and perform such tasks internally.

2.4.3. Decision flowchart for strategic sourcing
Sislian and Satir (2000) have proposed a new strategic sourcing framework where the
elements of the framework are discussed in terms of primary factors (competitive
advantage and demand flexibility) and secondary factors (process capability, process
maturity, and strategic risk). A decision flowchart incorporating these factors is given to
illustrate the functioning of the proposed framework (Sislian and Satir, 2000).
According to the authors, five factors are incorporated into the sourcing framework that
has to be taken into consideration. They are as follows:-
Competitive advantage
40

Demand flexibility
Process capability
Process maturity
Strategic risk
The framework involves a two-stage decision process:
(i) The sourcing decision and
(ii) The managerial actions required to implement the decision.
The sourcing decision will be based on the first two of the five factors. The last three
factors will be utilised in determining the nature of the managerial actions that will
follow the sourcing decision (Sislian and Satir, 2000).

A decision flowchart for a strategic sourcing framework incorporating all the primary
and secondary factors is presented in the figure below. Managers can use the flowchart to
arrive at sourcing decisions based on the primary factors. Actions required to implement
the sourcing decision can be based on the secondary factors. The first step in the
flowchart is to access the impact of a particular activity on competitive advantage based
on product differentiation and focus. The rest of the flowchart pertains to implementing
the sourcing decision through a set of actions in the context of secondary factors (Sislian
and Satir, 2000).
41


Fig 2.14. Decision flowchart for the strategic sourcing framework (Sislian and Satir,
2000)

The above flowchart is intended to provide some structure to the sourcing decision of
organisations seeking product differentiation or focus. The framework enables a
sequential decision making process for the sourcing decision and identifies the necessary
actions to be taken to implement the sourcing decision (Sislian and Satir, 2000).

2.4.4. Model for management of outsourcing process
Franceschini et al. has proposed an intergrated model to manage the implementation of
an outsourcing process from the outsorced point of view. The main aim is organising
42

all elements that could have impacts on strategic decisions, economic factors,
organisation and human resources (Franceschini et al., 2003).
This model as seen in the figure is organised into four main steps: internal benchmarking
analysis, external benchmarking analysis, contract negotiation and outsourcing
management. These steps can be further developed in detail as shown in the next figure.
The first step is the internal benchmarking analysis. The outsourced monitors his
processes, analyzes their efficiency and evaluates what to outsource, considering his core
competencies. The external benchmarking analysis regards all the interactions between
outsourced and outsourcers, from their selection up to the strategy of relationship
management. The outsourcing time evolution is the structured outlet of the method, and
the contract negotiation is simply the result of these previous analysis and decisions. The
last step is outsourcing management that should result in the realisation of planned
outsourcing process (Franceschini et al., 2003).

Fig 2.15. Scheme of a general model for the management of outsourcing processes
(Franceschini et al., 2003)
43


The expansion of the above mentioned model can be done as shown in the figure below.
The evaluation of core competencies is the first step that organisations take while
performing internal benchmarking analysis. Once the core competencies have been
identified, the firm has to take a decision as to which activities it can outsource and
which functions will stay in-house. If an activity is to be outsourced, it is vital for the
outsourcing firm to gauge the type of relationship that exists between the company the
provider. Once this is known, the activities can be stratified according to their nature.
External benchmarking analysis comprises of outsourcer selection and service level
agreement efficiency curves. This step helps an outsourcing firm to gauge the market
situation and select the appropriate service provider.
The contract negotiation stage will come into the picture when deciding about service
level agreements and temporal evolution. Besides, dispute resolution clauses are also a
part of this stage.
The final stage is outsourcing management that is concerned with the management of the
outsourcing processes.
(Franceschini et al., 2003)
44


Fig 2.16. Main steps of the proposed model for management of outsourcing processes
(Franceschini et al., 2003)
45

2.5. Benefits and justification
Studies have identified links between technology and strategic sourcing levels, and
between product complexity and strategic sourcing decisions. High levels of technology,
product complexity, and international competition increase reliance on strategic sourcing.
Strategic sourcing has also been identified as an important influence on manufacturing
strategy with positive implications for manufacturing flexibility (Narasimhan and Das,
1999).
Strategic sourcing targets the acquisition of supplier capabilities in alignment with
purchasing, manufacturing, and corporate needs, with considerably lower risk exposure
and greater responsiveness. Moreover, the findings by Narasimhan and Das highlight the
benefits of integrated supply chain management and suggest the creation of a set of
strategic flexibility capabilities, using strategic sourcing and advanced manufacturing
technology (Narasimhan and Das, 1999).

Strategic sourcing if done at an international level can help an organisation immensely
reduce cost while boosting profits and efficiency. A study conducted for assessing the
sourcing strategies in the Swedish apparel industry reveals that companies with good
purchasing departments and deep understanding of international procurement have been
benefiting from sourcing their activities to Asian and East European countries (kesson
et al., 2007).

Increased competitive intensity of business environment is forcing firms to continually
innovate to deliver differentiated offerings, search for new markets, and improve
operational efficiencies. As managers explore ways to improve efficiency and efficacy of
business activities, three broad options emerge:
optimise activities locally through initiatives such as re-engineering;
46

leverage scale and expertise of an external vendor;
or relocate activities to exploit geographical advantages.
The researchers found that the firms are going beyond their organisational as well as
home country boundaries in search of greater value leading to an increase in scale and
scope of global sourcing. Increasingly, firms are leveraging offshore to create greater
value than mere cost savings based on labour arbitrage. Thus global sourcing is an
important phenomenon which will only increase in importance in the future (Sharma and
Loh, 2009; Rajagopal and Bernard, 1994).

Moreover, a study conducted by Rajagopal and Bernard has indicated that achieving
lower prices is still the most important reason for outsourcing a companys activities.
Increased competition and better quality follow with access to worldwide technology
being the least important factor (Rajagopal and Bernard, 1994).

Table 2.1. Benefits of International sourcing (Rajagopal and Bernard, 1994)

Arguments that have been made for outsourcing are as follows:
1. Strategic focus/reduction of assets Through outsourcing activities, a firm can
reduce its level of asset investment in manufacturing and related areas.
Furthermore, outsourcing can help the management of a firm redirect its attention
47

to its core competencies, instead of having to possess and keep updating a wide
range of competencies.
2. Complementary capabilities/lower production costs External suppliers are often
highly specialised in the production of components or products, allowing them to
produce at lower costs than the outsourcing firm could due to scale of economies.
3. Strategic flexibility Global outsourcing may increase the firms strategic
flexibility. By using outside sources, it is much easier to switch from one supplier
to another.
4. Avoiding bureaucratic costs Rising production costs are associated with internal
production. More generally, there is a lack of a price mechanism and economic
incentives inside a firm.
5. Relational rent In recent years, researchers have argued that certain
relationships with external suppliers can deliver competitive advantage. By
outsourcing items and then building idiosyncratic and valuable relationships with
suppliers, firms may be able to innovate, learn, and reduce transaction costs.
(Kotabe et al., 2008)

Fig 2.17. J ustifications for outsourcing (Crocker, 2010)

48

2.6. Managing the risks and challenges
Researchers have proved that sourcing plays an important role in protecting the firms
competitive advantage, as it helps set the parameters of information sharing and
knowledge transfer between the partners. However, one must take care not to jeopardise
the firms core skills and capabilities by outsourcing key processes or products which can
result in loss of that skill. The outsourcing firm must also keep a watchful eye on partners
that learn from their experience and gain information that places them at a competitive
disadvantage (Spekman et al., 1994).

The fear of losing control over the transactional services haunts organisations that are
thinking about outsourcing a portion of their operations. Tony McCarthy of British
Airways believes that people like absolute control, yet according to him there is probably
more control with outsourcing that because its a contractual relationship. By handing
over the responsibilities, once can manage the performance and focus on driving what
really matters. In short, strategic sourcing places executives firmly in the driving seat.
The outsourcing provider looks after day-to-day management of operational transactions
on a clients behalf, leaving the client in control of their performance on the one hand,
and, on the other, free to concentrate on fully exploiting the core, or competitive
intangibles of their business (Hesketh, 2008).

The top five conditions that are important in successful implementation of international
purchasing strategy are:
cost/resource opportunity;
experience;
ability to evaluate suppliers;
49

measurement and evaluation of benefits;
top management commitment.
(Rajagopal and Bernard, 1994)

Table 2.2. Importance of conditions for effective implementation of international
sourcing strategy (Rajagopal and Bernard, 1994)

The above conditions are very important if international sourcing has to be successful.
Failure to address any of these conditions can result in poor sourcing that can result in an
undesirable outcome. These risks have to be taken into consideration while implementing
international sourcing strategies (Rajagopal and Bernard, 1994).
Kotabe, Mol and Murray in their research have found that interfaces/economies of scope,
hollowing out the competitive base, opportunistic behaviour by the external suppliers,
rising transaction and coordination costs, limited learning and innovation as well as
higher procurement costs due to fluctuating currency exchange rates (in case of
international sourcing) are the inherent risks that an outsourcing firm has to face when
sourcing activities (Kotabe et al., 2008).

When an organisation tries to outsource one of its operations, the firm has to be very
careful while selecting the appropriate vendors. Most companies these days employ
reverse auctions to select the prospective vendors. These reverse auctions if not carried
50

out correctly can permanently damage buyer-supplier relationship which will be
detrimental to the sourcing firm. Further, the use of reverse auctions can have unintended
consequences such as reducing the long-term competitiveness of both the outsourcer and
outsourcee by reinforcing behaviours that degrades current capabilities or discourages the
development of new competencies (Emiliani and Stec, 2002).
Such a risk has to be considered while sourcing manufacturing/services to a firm through
reverse auctions.

While outsourcing is a growing trend, there were more than 30 percent of the
respondents to a 2004 Booz Allen Hamilton survey reported that they were less than
satisfied with their outsourcing results; while more than 20 percent of the attendees at the
2004 Outsourcing World Summit said that they were losing a quarter of the value of their
outsourcing contracts. The reasons for these predictions of poor performance and absence
of optimism for the future is a lack of understanding as to what processes are good
candidates for outsourcing (Dobrzykowski et al., 2010).

2.7. Best practices and implementation
Organisations have to make efforts to place their purchases in a hierarchy of strategic
importance a critical input into the make or buy decision. This is illustrated in the
figure below.
51

Leverage Items
Non-Critical
Items
Strategic
Items
Abundant
Abundance
Scarcity
Scarce and/or
High Value
Mainly specified
components
Commodities
Example Supply
Long term
Variable depending
upon availability vs.
short term flexibility
trade offs
Limited: normally 12
months or less
Time Horizon
Long term cooperation
and/or strategic
partnership
A committed best-in-
class partner
Active sourcing
Short term contracts
Multiple suppliers
Minimise effort and
attention
Establish local or
national suppliers
Strategy

Fig 2.18. Hierarchy of strategic importance (McIvor et al., 1997)

It is crucial to make this categorisation in order to match the purchasing strategy with the
relevant purchased item. Without this categorisation, when companies are making
sourcing decisions they find themselves over-investing in non-critical components and
disregarding the core activities of their business. A research carried out in the UK, USA,
Australia and Canada found that the senior management involvement was also low and
the strongest emphasis in make or buy decisions was on short-term, cost-based criteria.
Make or buy decisions were found to be handled solely by the purchasing function and
based on short-term strategic analysis (McIvor et al., 1997)
Based on the hierarchy of strategic importance, a make or buy decisions can be
evaluated. This can be divided into four stages that are explained as follows:-
(i) Defining the core activities of the business This stage involves identifying
the core and non-core activities of the organisation. Non-core activities of an
organisation should be candidates for buying.
(ii) Profiling the appropriate value chain links A key strategic issue in the make
or buy decision is whether a company can achieve a sustainable competitive
advantage by performing a core activity internally on an ongoing basis.
52

(iii) Total cost analysis This stage involves measuring all the actual and
potential costs involved in sourcing the activity internally or externally.
After benchmarking the competencies of the core activities, a decision can be
made whether to maintain the capability internally/invest internally in case of
no capable external sources or to look for partnership sourcing.
(iv) Analysis of potential suppliers for partnership When a company is
considering forging a close collaborative relationship with a supplier for a
strategic item, the supplier assessment process is crucial. Depending on the
outcome of this assessment, the firm could buy if there are a number of
compatible suppliers with little threat of competition.
Likewise, the organisation could decide in investments to make internally if
the conditions are unfavourable for outsourcing.
(McIvor et al., 1997)

It is important to note that devising a sourcing strategy and developing a purchasing
model will not deliver the desired results. Likewise it is also necessary to implement the
strategy and model appropriately within the organisation to extract benefits.
Purchasing competence is the latent capability to coordinate, organise, and develop the
industrial buying effectively in a way that produces value to the firm. Specifically, the
degree of purchasing competence of a firm is defined as the degree of purchasing
interaction with other functions and key suppliers, the degree of purchasing internal
importance, and the level of purchasing activity execution. The proposed measurement
model is presented in the figure below, which shows that the relationship of the
underlying dimension to the proposed construct purchasing competence (Rodrigues et al.,
2006).
53


Fig 2.19. Conceptual model: Dimensions of purchasing competence (Rodrigues et al.,
2006)

Purchasing interaction is captured in terms of purchasing access to information generated
by other functions, purchasing participation in decisions made in other functions, and
supplier involvement.
Purchasing importance is defined by the perceived status and recognition versus other
functional areas, and by perceived top management support.
Finally, purchasing task execution is measured in terms of execution degree of the
buying activities: search for information, use of analysis techniques, proactive focus, and
procedural control.
It is important to note that the top management support has a significant impact in the
way the function is perceived, and that perception induces the purchasing involvement in
strategic decisions (Rodrigues et al., 2006).

The purchasing manager should be the primary contact person between the firm and the
outsourcee company through whom the initial scope and nature of the partnership is
negotiated and implemented. One has to remember that the nature of these negotiations
have a significant consequence for the resulting structure of the relationship. In addition,
the purchasing professional must develop the skills and techniques to cultivate and
nurture mutually beneficial relationships (Spekman et al., 1994).
54


One must also ensure that an organisation allocates a supplier/sourcing champion whose
job is to understand the suppliers expectations and demonstrate an acceptable level of
competence on the tools and techniques, and be capable of disseminating that knowledge
to the rest of the organisation. If a champion moves out of his/her role, the company must
designate a new champion that is certified in the appropriate training sessions (Handfield
et al., 2006).

Another tool that is used frequently while sourcing good/services externally is
purchasing portfolio positioning. While the portfolio model has been criticised in the
past, it has been proved that its usage is associated with purchasing sophistication. The
companies that are lagging behind in terms of professionalism and position of the
purchasing organisation seem not to use the portfolio model since the application of
purchasing portfolio techniques requires skills extending beyond traditional
administrative competences. In addition, the purchasing needs to have a clear presence
and position within the organisational hierarchy (Gelderman and Van Weele, 2005). A
purchasing portfolio model implemented after taking the above mentioned points into
consideration will yield positive results for an organisation.

2.8. Chapter summary
In this chapter, the recent literatures of strategic sourcing and purchasing models are
provided. The chapter began with the definition of strategic sourcing and the important
tasks that constitute strategic sourcing. Then we looked at the process of streamlining
purchasing by suggesting that purchasing should be looked upon as a strategic activity
rather than a transactional one. By implementing modern tools and techniques, one can
55

enhance the procurement and supply competence of an organisation. Moreover, a Kraljic
matrix can be used to distinguish between competence vs keeper when sourcing.

Then, we look into the strategic sourcing models that are based upon the analysis of core
competence wherein core activities of an organisation should be nurtured and refined
internally whereas the non core process should be outsourced. The reason behind this
philosophy is to concentrate on the core activities of a firm in order to remain
competitive in the market.

Following the strategic sourcing models, there was a review on make or buy decision that
stems from the simple idea of which activities should be carried out within the company
and which should be contracted out. Then an overview of a generic outsourcing model is
presented followed by the outsourcing models from Lonsdale and Cox, McIvor, Sislian
and Satir and Franceschinis model for management of outsourcing.

Finally, a section has been devoted to the benefits and justification for strategic
outsourcing prominently seen to reduce price, increase competition and to improve the
quality. However, one has to also look at managing the risks and challenges associated
with outsourcing mainly the loss of skills and fear of losing control over an activity. To
avoid the pitfalls associated with strategic purchasing, best practices have been proposed,
highlighting the importance of core competence analysis and top-management
contribution. Overall, these essentials reviews give good guide for following the research
parts.
56

Chapter 3: Methodology

3.0. Chapter introduction
As it was mentioned previously, the implications and contributions of strategic sourcing
will be discussed in this dissertation. What are the key challenges of implementing
strategic sourcing will be further analysed. The next step, however, is to decide the
overall research strategy (the methodology).
Research methodology can be defined as a way to deal with the overall research process,
ranging from the theoretical side to the way of collecting data to the final analysis of the
data (Collis and Hussey, 2003; Collis and Hussey, 2009).

Fig 3.1. The research process (Bryman and Cramer, 1999).

57

Hence, three sections will outline this chapter in order to provide a thorough
methodology that is most suitable for the research problem labelled at the beginning.
Next, we will be listing the reasons for choosing the survey methodology, but also the
strengths and weaknesses of the chosen methodology will be highlighted. Lastly, the
planning process of data collection method is detailed, in particular, the questionnaire
survey is characterised.

3.1. Chosen methodology
Yin (2003) states that the primary step for distinguishing among different types of
research methodologies is the identification of the question being asked. According to
Collis and Hussey (2009), a research question can be defined as a specific question the
research is designed to investigate and attempt to answer. Broadly, the research question
can incorporate one of the following series: who, what, where, how, and why
(see Table 3.1).











58

Strategy Form of Research
Question
Requires Control
of Behaviour
Events?
Focuses on
Contemporary
Events?
Experimental How, Why? Yes Yes
Survey Who, What, Where,
How many, How
much?
No Yes
Archival analysis Who, What, Where,
How many, How
much?
No Yes/No
History How, Why? No No
Case Study How, Why? No Yes
Table 3.1. Relevant situations for different research strategies (Yin, 2003)

Moreover, if the research questions are mainly concentrating on what questions, mean
that is an exploratory approach (Saunders et al., 2007; Saunders et al., 2009). A similar
research question is being asked in this dissertation, What influences make or buy
decisions in strategic sourcing?
Yin (2003) also notes that such question provides a justifiable rationale to manage and
organise an exploratory research, which is mainly focused on developing hypotheses and
propositions for further inquiry, and where the use of questionnaire survey is appropriate.

According to Saunders (2007), an exploratory study is a valuable means of finding out
what is happening; to seek new insights; to ask new questions and to assess phenomena
in a new light. It is particularly useful if you wish to clarify your understanding of a
problem, such as if you are unsure of the precise nature of the problem.
59

There are three principal ways of conducting exploratory research:
a search of the literature;
interviewing experts in the subject;
conducting focus group interviews.
(Saunders et al., 2007)

Collis and Hussey (2003) argue that a case study is an extensive examination of a single
instance of a phenomenon of interest and is an example of a phenomenological
methodology. The importance of the context is essential and it is a research study which
focuses on understanding the dynamics present within single setting. Case studies are
often described as exploratory research, used in areas where there are few theories or a
deficient body of knowledge. However, this is not their only form and Scapens cited by
Collis and Hussey (2003) adds the following types:
descriptive case studies where the objective is restricted to describing current
practice
illustrative case studies where the research attempts to illustrate new and
possibly innovative practices adopted by particular companies
experimental case studies where the research examines the difficulties in
implementing new procedures and techniques in an organisation and evaluating
the benefits
explanatory case studies where existing theory is used to understand and explain
what is happening.
(Collis and Hussey, 2003)
Yin (1994) cited by Collis and Hussey (2009) identifies the following characteristics of
case study research:
60

The research aims not only to explore certain phenomena, but to understand them
within a particular context
The research does not commence with a set of questions and notions about the
limits within which the study will take place
The research uses multiple methods for collecting data which may be both
qualitative and quantitative.
(Collis and Hussey, 2009)

However, on the other hand, Collis and Hussey (2009) point out that a case study
research is a very time-consuming process, where deciding the purpose of the study can
be seen as a major obstacle. Additionally, the researcher is required to understand the
past or better said the history where many events have taken place, so in-depth
knowledge of the subject at study is of paramount importance.
Therefore, as a full time student there is not sufficient research time given for
approaching an organisation and conducting a case study, where there is no prior contact.
According to the reasons stated above, the case study approach is inappropriate for this
dissertation and therefore the questionnaire survey approach will be undertaken.

Ghauri and Grnhaug argue that surveys refer to a method of data collection that utilises
questionnaires or interview techniques for recording the verbal behaviour of respondents.
The survey is an effective tool to get opinions, attitudes and descriptions as well as for
getting cause-and-effect relationship (Ghauri and Grnhaug, 2005). Furthermore,
Saunders has emphasised that a survey strategy is commonly correlated with the
deductive approach (Saunders et al., 2009). According to Collis and Hussey, a survey
can be defined as positivistic methodology whereby a sample of subjects is drawn from
61

a population and studies to make inferences about the population (Collis and Hussey,
2003).

The purpose of survey research in description is to find out what situations, events,
attitudes or opinions are occurring in a population. Survey research aimed at description
asks simply about the distribution of some phenomena in a population or among
subgroups of a population. The researcher's concern is simply to describe a distribution
or to make comparisons between distributions. Analysis stimulated by descriptive
questions is meant to ascertain facts, not to test theory (Pinsonneault and Kraemer, 1993).

The survey approach can be applied to a large population from whom it will be obtained
an impressive amount of data. The survey strategy permits the quantitative data
collection which can be analysed through the use of different statistical tools, such as
Statistical Package for the Social Sciences (SPSS) (Bryman and Cramer, 1999). Also,
this strategy can be very straightforward in terms of explanation and understanding, and
it provides a thorough comprehension of the relationships between variables. Moreover,
this survey called as the analytical survey is one of the two major types of surveys
conducted (Collis and Hussey, 2009; Saunders et al., 2009).

While we look into conducting surveys through questionnaires, one must keep in mind
that questionnaire methods have several disadvantages. The prevalence off a
disadvantage depends on a number of factors such as:
Application is limited One main advantage is that its application is limited to a
study population that can read and write.
Response rate is low Questionnaires are notorious for their low response rates.
If one plans to use questionnaires as a part of their research, one needs to keep in
62

mind that the sample size will be reduced as not everyone responds to the
questionnaires.
There is a self-selecting bias Not everyone who receives a questionnaire
returns it, so there is a self-selecting bias. If the response rate is very low, the
findings may not be representative of the total study population.
Opportunity to clarify issues is lacking If the respondents do not understand
some questions, there is no opportunity for them to have the meaning clarified.
Spontaneous responses are not allowed for Mailed questionnaires are
inappropriate when spontaneous responses are required.
It is possible to consult others With mailed questionnaires; respondents may
consult other people before responding.
A response cannot be supplemented with other information An interview
can sometimes be supplemented with information from other methods of data
collection such as observation. However, a questionnaire lacks this advantage.
(Kumar, 2005)

3.2. Data collection method
Overall, a survey approach can be used to collect quantitative data (primary data).
According to Collis and Hussey (2003), the major advantage of such an approach is that
data collection activity can be handle with a very fast pace, which can help the entire
research. On the other hand, quantitative data collection methods can be expensive.
Please refer to the figure below for an overview of data collection process.
63


Fig 3.2. Overview of the data collection process

One of the main advantages of a quantitative approach to data collection is the relative
ease and speed with which the research can be conducted. However, if one adopts a
quantitative approach to data collection, the analytical and predictive power which can be
gained from statistical analysis must be set against the issues of sample
representativeness, error in measurement and quantification, and the danger of
reductionism. This means that the richness of the data and its contextual implication may
be lost, thus contributing to a narrower and less real interpretation of phenomena
(Collis and Hussey, 2009).

Therefore, due to the nature of this research and the above stated reasons, the data
collection method used in this dissertation is the questionnaire survey as a research
instrument which will be justified throughout this research. In particular, we are going to
undertake a self-administrated questionnaire that will include internet and email
questionnaires (Saunders et al., 2007).
64

Questionnaire
Self-administered Interviewer-administered
Internet and intranet-
mediated
questionnaires
Postal
questionnaire
Delivery and
collection
questionnaire
Telephone
questionnaire
Structured
interview

Fig 3.3. Types of questionnaires (Saunders et al., 2009)
3.2.1. Designing questionnaires for data collection
Many of the data collection methods rely on questions as the vehicle for extracting the
primary research data. When designing questions, it is essential to bear in mind the
potential audience. The general rules for designing questions are as given below:
(i) Explain the purpose of the interview or questionnaire to all participants
(ii) Keep your questions as simple as possible
(iii) Do not use jargon or specialist language
(iv) Phrase each question so that only one meaning is possible
(v) Avoid vague, descriptive words such as large and small
(vi) Avoid asking negative questions as they are easy to misinterpret
(vii) Only ask one question at a time
(viii) Include relevant questions only (do not be tempted to include every question
you can think of)
(ix) Include questions which serve as cross-checks on the answers to other questions
(x) Avoid questions which require the participant to perform calculations
(xi) Avoid leading or value-laden questions which imply what the required answer
might be
(xii) Avoid offensive questions or insensitive questions which could cause
embarrassment
65

(xiii) Avoid questions which are nothing more than a memory test
(xiv) Keep your interview schedule or questionnaire as short as possible, but include
all questions required to cover your purposes
(Collis and Hussey, 2003; Collis and Hussey, 2009)

Indeed there are many advantages, and according to Saunders et al. (2007), this approach
offers a means for targeting a large sample prior to quantitative analysis. Additionally,
Foddy (1994) points out that questionnaires are perceived as an effective way of
capturing and contrasting attitudes that can be further analysed. The analysis of this data
can be carried out as shown in the schematic diagram below:

Fig 3.4. Analysis of questionnaires (Foddy, 1994)

However, Yu and Cooper (1983) acknowledge the fact that despite this method being
very efficient, the response rate is still low. The authors state that most of the techniques
used to increase response rates have resulted in qualitative reviews being extremely
difficult to perform and their results are usually imprecise. The research conducted by the
authors indicates the superiority of telephone and personal interviews over mail surveys
66

for generating responses. Monetary incentives, whether prepaid or promised, are found to
facilitate responding (Yu and Cooper, 1983).

3.3. Research design
A research design is the strategy for answering the questions or testing the hypotheses
that stimulated the research in the first place. Survey designs may be distinguished as
cross sectional or longitudinal, depending upon whether they exclude or include explicit
attention to the time dimension. The classic cross-sectional design collects data at one
point in time from a sample selected to represent the population of interest at that time.
One can generalize safely the findings from the sample to the population at the point in
time the survey was conducted. Cross-sectional designs limit causal inferences because
the study is conducted at one point in time and temporal priority is difficult to establish
(Pinsonneault and Kraemer, 1993).

3.3.1. Questionnaire development
Questionnaire development is a crucial stage in a research. If appropriate questions are
not asked, one will not be able to collect suitable data and arrive at sensible conclusions.
In a positivistic study, a specific research question should be followed by a number of
hypotheses. In a phenomenological study there may only be one research question, which
one needs to refine during the course of the research. The figure below shows a simple
model of how one can develop research questions (Collis and Hussey, 2003).
67


Fig 3.5. Developing research questions (Collis and Hussey, 2003)

There is need to distinguish between the questions of fact and questions of opinion. For
example, biological details such as age, level of education or length of service are
reasonably factual. Second, there is the distinction between open and closed questions. If
for example, one wishes to find out how a manager felt about her company as an
employer, this would be a descriptive answer; whereas a close question with the same
focus might be: Do you consider to be a good employer? and the response would be
limited to circling either a yes or no (Easterby-Smith et al., 2002).
It is also possible to construct open questions which provide some structure to the
answers and close questions can be constructed to allow more discrimination than a
straight Yes/No choice. One of the most common forms is known as a Likert scale where
variables like agree strongly, agree, undecided, disagree and disagree strongly
are weighed on a scale from 1 to 5 (Easterby-Smith et al., 2002).
Easterby-Smith et al. (2002) suggest four ways in sending out questionnaires, such as
email, telephone, post, and face-to-face (to collect later). Internet-based questionnaires as
well as those managed as emails offer a greater control due to the openness and
68

flexibility of the people. Yet, Saunders et al. (2009) highlight that through their nature,
people are relatively unlikely to answer those self-administrated questionnaires.
For the purpose of research in this dissertation, we will be extensively using web-based
facilities for surveying like surveymonkey.com and emails as well as networking sites
like facebook.com and linkedin.com to collect primary data and to encourage the
response rate so that it becomes more convenient for the respondents.

There are many similarities between online and postal surveys, stemming from the
common methodology of self-administered questionnaire. However, they differ in the
means through which they have been carried out. A significant advantage of email
surveys is the speed of data collection. This is at a very low cost to the researcher, instant
access to a wide audience, irrespective of their geographical location, which makes it
very appropriate for cross-sectional studies and/or international comparisons. A web-
based survey is appropriate for a wide audience, where all the visitors to certain websites
have an equal chance to enter the survey (Ilieva et al., 2002).

If not properly addressed, online surveys also have the following potential weaknesses:
(i) Perception as junk mail Many respondents have a tough time distinguishing
between a legitimate survey and a spam message.
(ii) Skewed attributes of internet population Until recently, users of the internet
and email were not truly representative of the general population in countries
around the world.
(iii) Questions about sample selection (representativeness) and implementation
Heavily criticised sampling methods are blanket emailing and volunteer
samples. Blanket emailing often resembles spam when messages are sent to
huge numbers of potential respondents in an unsolicited manner.
69

(iv) Respondent lack of online experience/expertise Although internet
population is becoming more representative, there may still be survey
difficulties due to the lack of familiarity of possible respondents with internet
protocols.
(v) Unclear answering instructions Because online surveys are self-
administered, answering instructions must be extremely clear. If not, some
people may be frustrated and exit a survey without finishing the entire
questionnaire.
(vi) Impersonal As with mail surveys, there is usually no human contact in
online surveys. This can limit the ability to probe in-depth as a skilled
interviewer could do.
(vii) Privacy and security issues Respondent privacy concerns remain important.
With regards to security, many respondents are hesitant to open e-mail
attachments for fear that they may be infected with a virus.
(viii) Low response rate Several researchers have examines the low response
rates of many online surveys. Researchers state a popular conclusion that
there is limited evidence in literature that online surveys generally obtain
higher response rates than do other survey types.
(Evans and Mathur, 2005)







70

The pros and cons of online survey are summarised in the figure below:

Fig 3.6. Strengths and weaknesses of online surveys (Evans and Mathur, 2005)

The questionnaire (see Appendix) for this dissertation comprises 16 concise questions
with open-ended questions, but also closed answers. This questionnaire provides both
quantitative and qualitative data responses that will help an in-depth analysis, and is
structured into two sections:
General information;
Specific information.
71


The first section incorporates basic information regarding the companys background,
and includes the name of the company, contact number and area of operations.
Additionally, in order to increase the reliability of the findings and to provide a
professional research, the questionnaires include the respondents title and the number of
years spent within the industry.

On the other hand, section two contains 11 specific questions. Taking the literature
review into account, the second section starts with questions related to the purchasing
department within the organisation and the availability of trained purchasing staff. The
next question is related to the company outsourcing its activities to other firms. This is
followed by a query to gauge the revenue spent on sourcing. We get a clear picture when
we compare the revenue spent with the total annual turnover as it provides us with the
percentage of income spent on outsourcing. Question 10 asks the participants about their
preference for strategic souring followed by Question 11 that delves into the possibility
of core competence analysis before sourcing an activity. Question 12 explores the
reasons for companies outsourcing their activities to other firms. The next question tests
the respondents views on loss of skill-sets when outsourcing a function. It has been well
documented that not all outsourcing ventures are successful and some yield undesirable
results. Question 14 tries to find out the causes of failure. Questions 12 and 14 have been
constructed under five-point Likert scale techniques (Brace, 2008). Question 15 probes
into the importance of supplier relationship management while implementing sourcing
strategies. The next question tried to find out the kind of activities that firms
predominantly outsource to external vendors followed by respondents views on
satisfaction levels for the outsourced functions.

72

The last two questions encourage the respondents to provide any valid comments and ask
the participants to offer an email address if they require an executive summary of this
research. Also, in order to improve the response rate, a covering letter is enclosed where
the purpose of this questionnaire survey is mentioned and it has been stated that all
respondents will receive the final results of this research. Moreover, the participants have
been assured complete confidentiality and anonymity of data in accordance with the Data
Protection Act (1998) (Iversen et al., 2006).

3.3.2. Selecting samples
A sample is defined as the number of people, objects or events chosen from a larger
population on the basis of representing (or being representative of) that population.
Sampling and sampling theory are important facets of survey research (J anet, 1993).
Sampling decisions are made whenever a researcher cannot continuously observe and
record all the outcomes and opinions of the general population (Altmann, 1974).

As this dissertation focuses on quantitative study for research, the sampling is crucial.
The issue of sampling is important because it is rarely the case that one has sufficient
time and resources to conduct research on all of those individuals who could potentially
be included in a study. By and large, researchers will want to form a representative
sample that is, a sample that can be treated as though it were the population. It is rare
that perfectly representative samples can be created, but the chances of forming a
representative sample can be considerably enhanced by probability sampling. With
probability sampling, each unit of a population has a specifiable probability of inclusion
in a sample. Likewise, in case of non-probability sampling, there is a strong chance that
the sample is not representative of the entire population. In such a scenario, the
73

researchers ability to generalise the findings to the population from which it was selected
is sharply curtailed (Bryman and Cramer, 1990).

In experimental research, it is necessary to calculate the precise minimum sample size.
This calculation assumes that data will be collected from all cases in the sample and is
based on:
how confident one needs to be that the estimate is accurate
how accurate the estimate needs to be
the proportion of responses one expects to have some particular attribute
The formula for calculation of minimum sample size is as follows:

... (Formula 1)
where
n is the minimum sample size required
p% is the proportion belonging to the specified category
q% is the proportion not belonging to the specified category
z is the z value corresponding to the level of confidence required
e% is the margin of error required.
(Saunders et al., 2007)

For this dissertation, the level of confidence assumed is 90%, therefore the value
associated with z is 1.65 (Saunders et al., 2007). Besides, we will take into consideration
a 5% margin of error (e%). Furthermore, the determination of p% and q% is based on the
survey conducted by Minevich and Richter pointing towards the fact that more than 80%
of the major global multinational corporations have an offshore presence. Additionally,
more than 75% of the medium-size to large companies across Europe will be outsourcing
2
%
% %

=
e
z
q p n
74

services. The study also predicts that 80% of U.S. companies will be seriously consider
outsourcing their critical IT services to service providers from India and China (Minevich
and Richter, 2005).
Even the recent trends indicate that nearly 70% of 600 attendees at the International
Association of Outsourcing Professionals (IAOP) conference held in February 2010 said
they (or, in case of service provider, their customers) were pursuing more outsourcing
opportunities than just a year earlier (Cohen, 2010).
From the above observations, trends become clear where it has been surveyed that
around 70 to 80 percent organisations outsource some functions/activities to other firms.
Therefore lets take the sample population to be 75%. As the value of p% is 75, q%
becomes 25.

Now, the sample size is calculated by the following formula:
re%
100 n
n
a

= ... (Formula 2)
where
n
a
is the actual sample size required
n is the minimum sample size
re% is the estimated response rate.
(Saunders et al., 2007)

The response rate taken for this research is assumed to be 26 percent, as an average, of
previous studies undertaken in the field by Chan et al. (2007) (15.5%); Fan (2000)
(64.0%); Khan & Pillania (2008) (26.95%); Narasimhan & Das (1999) (12.5%);
Rajagopal & Bernard (1994) (21.7%); Arnett & J ones (1994) (17.0%); Maltz (1994)
(21.5%); and Carr & Pearson (2002) (22.0%).

75

Hence the minimum sample size required for this dissertation, according to formula 1 is
calculated to be 204.1875 that can be approximated to n = 204. Therefore by using
formula 2, the actual sample size calculated is 785.34 that can be rounded off to n
a
=785.

3.3.3. Survey process
The targeted population were the executives, managers and purchasers who were
involved in strategic sourcing assessments and make or buy decisions from India, the UK
and the US. For the web based survey, emails with covering letters and questionnaires, as
well as a suitable web link for undertaking the survey (surveymonkey.com) were sent.

A total of 785 questionnaires were sent out in J anuary 2011 in electronic mail format to
India, the UK and the US.

In the following two-week period, 117 delivery failure messages were received which
implied that some respondents could not be reached due to change in their email
addresses or other unforeseeable circumstances. As a result, the sample size of the
population was reduced from 785 to 668.

3.4. Data analysis methods
Quantitative data in raw form is of no meaning since it does not convey the outcome of
the research. Hence quantitative analysis techniques such as graphs, charts and statistics
have to be used to explore, present, describe and examine relationships and trends within
the data (Saunders et al., 2009). A statistical program package like Minitab or SPSS
(Statistical Package for the Social Sciences) will be of considerable help while analysing
76

quantitative data. Computer programs like these enable the researcher to conduct a wide
range of analysis, carry out statistical tests quickly and accurately and present the results
in the form of tables or charts (Collis and Hussey, 2003).

We will be limiting our scope to exploratory data analysis (also known as descriptive
statistics) for the research on this dissertation. In exploratory data analysis, techniques are
applied to data as part of a preliminary analysis or even a full analysis, if great statistical
rigour is not required or the data does not justify it. Graphical presentations do not
merely present the data in a different, more compact form but the form positively aids
subsequent hypothesis detection/confirmation (Collis and Hussey, 2003).

3.5. Chapter summary
To summarise this chapter, there was a discussion for the chosen methodology, the
research design, and data analysis. The questionnaire development was explained in great
detail highlighting the benefits and drawbacks of using questionnaires for a survey. A
section was also dedicated for calculating the minimum sample size and the population
sample. Although, there are some limitations with the chosen methodology, a well
planned and executed study can give the researcher a thorough understanding of the
current business environment, providing a clearer picture of the latest trends in strategic
sourcing.

The next chapter will delve into data analysis from the survey and the findings obtained
will be discussed.
77

Chapter 4: Research Results

4.0. Chapter introduction
In this chapter, the data collected from the survey will be analysed according to the
objectives of this research, which is obtained from 179 respondents from India, the UK
and the US. Although a total number of 785 questionnaires were sent out, 117 emails
were not delivered to the intended recipients. Hence the total number of deliveries made
was 668. From 668 confirmed deliveries, we received 179 responses; however, only 155
feedbacks were usable as collected from the web based system.

Therefore, the findings emphasise that the feedback success rate was only 19.75% (based
on 155 usable feedbacks) which is lower than estimated feedback rate of 26.00%
assumed in the methodology.

The research results were based on the questionnaire formulated to address the issues and
trends concerned with strategic sourcing (see Appendix). Therefore, the data has been
divided into four large groups. They are as follows:
(i) The background of the respondents companies and the functions of the
respondents
(ii) Review of core competence analysis and supplier relationship management
practices
(iii) The benefits of strategic sourcing as well as the risks associated with
outsourcing of an activity
(iv) Current trends in strategic sourcing and satisfaction levels
78


4.1. Background of respondents companies and the
functions of the respondents
This part includes the following sections: the background of the respondents companies
and the main function of the respondents.

4.1.1. Background of the respondent companies
To analyse the background of the respondents companies, the respondents were asked
certain questions that would assist in knowing which industry sector has what
preferences when it comes to strategic sourcing. From the 155 respondents, 66 (42.6%)
were from the manufacturing industry followed by 46 (29.7%) replies from respondents
belonging to retailing. Supply chain solution providers followed next with 34 (21.9%)
replies, whereas 9 (5.8%) respondents do not belong to any of the specified types of
business.
What is the main activity of your company?

Frequency Percent Valid Percent
Cumulative
Percent
Valid Manufacturing 66 42.6 42.6 42.6
Retailing 46 29.7 29.7 72.3
Supply chain solution
provider
34 21.9 21.9 94.2
Other 9 5.8 5.8 100.0
Total 155 100.0 100.0

Table 4.1. Frequency analysis for main activity of the company

79


Fig. 4.1. Pie chart depicting the main activity of the company

On the analysis of company sizes, an interesting trend was recorded wherein most of the
respondents belong to the small and medium enterprise companies (SMEs). The largest
number of contributors to this survey belongs to the organisations having employees
between 500 and 999 with 71 (45.8%) responses. This was followed by 38 (24.5%)
responses from companies having less than 100 employees. Large organisations with
more than 1000 employees contributed with 33 (21.3%) responses and the lowest number
was from organisations having 100 to 499 employees with only 13 (8.4%) feedback.






80

Company size (in employees)

Frequency Percent Valid Percent
Cumulative
Percent
Valid <100 38 24.5 24.5 24.5
100-499 13 8.4 8.4 32.9
500-999 71 45.8 45.8 78.7
>1000 33 21.3 21.3 100.0
Total 155 100.0 100.0

Table 4.2. Frequency analysis for company size (in employees)

The surveys also found out that majority of the companies were having a turnover in
excess of 1 million USD as reported by 52 (33.5%) respondents. This was followed by
companies earning between 11-100 million USD with 45 (29.7%) feedbacks and 38
(24.5%) responses for companies having a turnover between 1-10 million USD. The
lowest respondents in this group were employees of firms having a turnover of less than
1 million USD with only 19 (12.3%) responses.
Annual turnover (in US Dollars)

Frequency Percent Valid Percent
Cumulative
Percent
Valid <1M 19 12.3 12.3 12.3
1-10M 38 24.5 24.5 36.8
11-100M 46 29.7 29.7 66.5
>100M 52 33.5 33.5 100.0
Total 155 100.0 100.0

Table 4.3. Frequency analysis for annual turnover (in million USD)

81


Fig. 4.3. Pie chart for annual turnover (in million USD)

A larger annual turnover implies higher operating margins which may translate into
healthy profits. If one compares the cross tabulation of company size and annual
turnover; then about 33.5% of respondents have stated their companys annual turnover
to be greater than 100 million USD whereas 29.7% respondents have mentioned their
companys annual turnover to be between 11-100 million USD. One has to note that
45.8% of the respondents belong to the group of 500-999 company size whereas 21.3%
responses belong to the company size greater than 1000.





82

Company size (in employees) * Annual turnover (in US Dollars) Crosstabulation

Annual turnover (in US Dollars)
Total

<1M 1-10M 11-100M >100M
Company size (in
employees)
<100 Count 19 12 7 0 38
% of Total 12.3% 7.7% 4.5% .0% 24.5%
100-499 Count 0 2 11 0 13
% of Total .0% 1.3% 7.1% .0% 8.4%
500-999 Count 0 21 24 26 71
% of Total .0% 13.5% 15.5% 16.8% 45.8%
>1000 Count 0 3 4 26 33
% of Total .0% 1.9% 2.6% 16.8% 21.3%
Total Count 19 38 46 52 155
% of Total 12.3% 24.5% 29.7% 33.5% 100.0%
Table 4.4. Cross tabulation between company size and annual turnover

Using Spearmans Correlation (value =0.660), a moderate correlation and therefore a
substantial relationship exists between the size of the company and the annual turnover.
Hence companies with a larger workforce tend to earn higher margin and therefore are
more likely to outsource their activities to other firms. Smaller firms with a lower
workforce will not be outsourcing their activities as they have a very limited scope of
operations.






83

Correlations

Company size
(in employees)
Annual turnover
(in US Dollars)
Spearman's rho Company size (in
employees)
Correlation Coefficient 1.000 .660
**

Sig. (2-tailed) . .000
N 155 155
Annual turnover (in US
Dollars)
Correlation Coefficient .660
**
1.000
Sig. (2-tailed) .000 .
N 155 155
**. Correlation is significant at the 0.01 level (2-tailed).
Table 4.5. Spearmans correlation between company size and annual turnover

4.1.2. Background of the functions of respondents
In this survey, the designation and field of work of the respondents are equally important.
This data will enhance the reliability of the study and will provide a professional
perspective, such as shown in the table below:
Respondent's title?

Frequency Percent Valid Percent
Cumulative
Percent
Valid Supervisor 24 15.5 15.5 15.5
Assistant manager 47 30.3 30.3 45.8
Manager 31 20.0 20.0 65.8
Director 20 12.9 12.9 78.7
Other 33 21.3 21.3 100.0
Total 155 100.0 100.0

Table 4.6. Frequency analysis for respondents title

84

The analysis shows that 47 (30.3%) of the respondents were assistant managers followed
by 31 (20.0%) of the respondents who were managers. Supervisors and directors have
contributed 15.5% and 12.9% respectively. 21.3% of the candidates who took the survey
did not belong to any of the above mentioned groups.

As far as the experience of the respondents is concerned, the majority (n =70; 45.2%) of
them have an industry experience between 4 to 9 years; while 33.5% respondents do not
have experience above 3 years. 21.3% of the respondents have an experience of more
than 10 years that mainly comprises of managers and directors.
Respondent's title? * How many years of experience do you have? Crosstabulation

How many years of experience do you
have?
Total

1-3 years 4-9 years
More than 10
years
Respondent's title? Supervisor Count 14 10 0 24
% of Total 9.0% 6.5% .0% 15.5%
Assistant manager Count 13 34 0 47
% of Total 8.4% 21.9% .0% 30.3%
Manager Count 2 18 11 31
% of Total 1.3% 11.6% 7.1% 20.0%
Director Count 0 2 18 20
% of Total .0% 1.3% 11.6% 12.9%
Other Count 23 6 4 33
% of Total 14.8% 3.9% 2.6% 21.3%
Total Count 52 70 33 155
% of Total 33.5% 45.2% 21.3% 100.0%
Table 4.7 Cross tabulation between respondents title and years of industry experience

85

An independent samples t-test was conducted to investigate the relationship between the
number of years of work experience and outsourcing of the companys operations to
other firms. The results indicate that there is no significant difference between the means
observed for companies that outsource their operations (M =1.8824) and those that do
not outsource (M =1.8611) for t(153) =0.152 in relation to the number of years of
experience of the employees.

4.2. Review of core competence analysis and supplier
relationship management practices
The respondents were asked if their organisation had a dedicated purchasing department
with trained purchasers, the response was mixed with 85 (54.8%) acknowledging the
presence of a purchasing department and trained purchasers, whereas the remaining 70
(45.2%) respondents stated that their company did not have a dedicated purchasing
department.
Does your organisation have a dedicated purchasing department with
trained purchasers?

Frequency Percent Valid Percent
Cumulative
Percent
Valid Yes 85 54.8 54.8 54.8
No 70 45.2 45.2 100.0
Total 155 100.0 100.0

Table 4.8. Frequency analysis for organisation having a dedicated purchasing department

Additionally, an overwhelming majority of participants (n =119; 76.8%) confirmed that
their company outsources its operations to other firms whereas a small portion of the
86

respondents (n =36; 23.2%) said their company does not currently outsource any of its
functions to external service providers.
Does your organisation outsource any of its operations to other firms?

Frequency Percent Valid Percent
Cumulative
Percent
Valid Yes 119 76.8 76.8 76.8
No 36 23.2 23.2 100.0
Total 155 100.0 100.0

Table 4.9. Frequency analysis of outsourcing to other firms

A Chi-Square test was conducted to assess the correlation between the presence of a
dedicated purchasing department and the outsourcing activity of an organisation. Using
Pearsons Chi-Square test (value =27.588, df =1, p =0.000) a significant relationship
was found to exist between the two parameters under test. Hence from the data, one can
conclude that organisations having a dedicated purchasing department outsource more
activities as compared to those who do not have a dedicated purchasing department with
human resources trained in procurement strategies. This can be perhaps contributed to
the fact that having trained resources helps an organisation understand the benefits of
outsourcing and limits the risks.







87

Chi-Square Tests

Value df
Asymp. Sig. (2-
sided)
Exact Sig. (2-
sided)
Exact Sig. (1-
sided)
Pearson Chi-Square 27.588
a
1 .000

Continuity Correction
b
25.617 1 .000

Likelihood Ratio 29.033 1 .000

Fisher's Exact Test

.000 .000
Linear-by-Linear Association 27.410 1 .000

N of Valid Cases 155

a. 0 cells (.0%) have expected count less than 5. The minimum expected count is 16.26.
b. Computed only for a 2x2 table
Table 4.10. Chi-Square test - 1

Fig. 4.4. Bar graph showing a relationship between the availability of purchasing
department vs. outsourcing operations
88


The participants were asked the following question in the survey:
Do you think core competence plays an important role in deciding the sourcing
strategies within an organisation?
After performing a frequency analysis, the majority of respondents who have agreed or
strongly agreed (n =83; 53.6%) acknowledge the importance of studying the core
competences of the company before outsourcing any function to external vendors.
Do you think core competence plays an important role in deciding the sourcing
strategies within an organisation?

Frequency Percent Valid Percent
Cumulative
Percent
Valid Strongly Disagree 7 4.5 4.5 4.5
Disagree 31 20.0 20.0 24.5
Undecided 34 21.9 21.9 46.5
Agree 50 32.3 32.3 78.7
Strongly Agree 33 21.3 21.3 100.0
Total 155 100.0 100.0

Table 4.11. Frequency analysis of significance of core competences

An independent samples t-test proves that there is a significant difference between the
means observed for companies with dedicated purchasing departments (M =3.9412) and
those without a devoted purchasing functions (M =2.8714) for t(153) =6.391 in relation
to the core competence studies. This implies that companies with a dedicated sourcing
department have a better understand of core competences and will outsource an activity
only after understanding the firms key strengths. On the other hand, companies that did
not have a separate purchasing function were either unaware of core competence analysis
or did not consider it to be important.
89


A survey to gauge the importance of maintaining healthy relations with service providers
was included in the questionnaire. 53 (34.2%) respondents considered supplier
relationship management to be important whereas 32 (20.6%) respondents affirmed it to
be very important. 40 (25.8%) respondents were uncertain about the importance of
managing supplier relationships, while 25 (16.1%) and 5 (3.2%) participants perceived
managing supplier relationships unimportant and very unimportant respectively.
Does your organisation have a dedicated purchasing department with trained purchasers? * How
does your organisation percei ve supplier relationship management when sourcing
products/services? Crosstabulation

How does your organisation perceive supplier relationship
management when sourcing products/services?
Total

Very
unimportant Unimportant Uncertain Important
Very
Important
Does your
organisation have a
dedicated
purchasing
department with
trained purchasers?
Yes Count 4 4 14 38 25 85
% of
Total
2.6% 2.6% 9.0% 24.5% 16.1% 54.8%
No Count 1 21 26 15 7 70
% of
Total
.6% 13.5% 16.8% 9.7% 4.5% 45.2%
Total Count 5 25 40 53 32 155
% of
Total
3.2% 16.1% 25.8% 34.2% 20.6% 100.0%
Table 4.12. Cross tabulation between availability of dedicated purchasing department and
supplier relationship management
90


Fig. 4.5. Bar graph showing a relationship between availability of dedicated purchasing
department vs. supplier relationship management

An independent samples t-test proves that there is a significant difference between the
means observed for companies with a committed purchasing department (M =3.8941)
and those without a devoted procurement unit (M =3.0857) for t(153) =4.936 in relation
to the perceived supplier relationship management practices of those companies while
sourcing products/services. The outcome of this test can therefore be interpreted by
stating that organisations with dedicated purchasing departments consider supplier
relationships to be important and managing these relations is critical for a successful
sourcing strategy. However, firms that do not have a purchasing department are
indifferent towards the importance of supplier relationship management.


91

4.3. Benefits of strategic sourcing and inherent risks
For the discussion of this topic in an effective way, we will subdivide it into 3 sub
sections namely: inherent risks, benefits achieved and causes of failure of strategic
sourcing.

4.3.1. Inherent risks associated with strategic sourcing
In order to analyse the topic of risks that one associates with strategic sourcing, a
question was included as a part of the survey to determine the threat of losing skill-sets in
employees when an activity is outsourced to external vendors.
Frequency analysis of the responses collected through the survey indicates that 28
(18.1%) respondents strongly agree that outsourcing results in a loss of skill-sets in
employees while 60 (38.7%) answerers agree with this danger. The percentage of
undecided candidates was 17.4% (27 responses) whereas 40 (25.8%) assenters do not
think that outsourcing results in loss of skill-sets.
Do you think that outsourcing results in loss of skill -sets in employees?

Frequency Percent Valid Percent
Cumulative
Percent
Valid Strongly Disagree 8 5.2 5.2 5.2
Disagree 32 20.6 20.6 25.8
Undecided 27 17.4 17.4 43.2
Agree 60 38.7 38.7 81.9
Strongly Agree 28 18.1 18.1 100.0
Total 155 100.0 100.0

Table 4.13. Frequency analysis of loss of skill-sets in employees

92


Fig. 4.6. Pie chart for criticality of skill-set loss

For the purpose of comparing the means between the loss of skill-sets in employees upon
outsourcing and the presence of trained purchasers/dedicated sourcing department, an
independent samples t-test was performed. It was determined that there is a significant
difference between the means observed for companies with dedicated purchasing
departments (M =3.7765) and those without a devoted purchasing function (M =3.0286)
for t(153) =4.217 in relation to the loss of skills-sets in employees. This denotes that
companies who believing in employees losing their skill-sets have knowledge about
outsourcing and core competence analysis since they have a dedicated sourcing
department. On the other hand, it was found that smaller companies with no dedicated
resources for sourcing disregard the dangers of loss of core competences when
outsourcing an activity.

93

4.3.2. Benefits of strategic sourcing
Frequency analysis carried out from the survey indicates that achieving low prices along
with better quality are the prime reasons for strategic outsourcing. 79 (51.0%)
respondents each have stated that low price and better quality are the most important
reasons for outsourcing an activity.
For lower prices

Frequency Percent Valid Percent
Cumulative
Percent
Valid Unimportant 3 1.9 1.9 1.9
Uncertain 13 8.4 8.4 10.3
Important 60 38.7 38.7 49.0
Very Important 79 51.0 51.0 100.0
Total 155 100.0 100.0

Table 4.14. Frequency analysis for lower prices

For better quality

Frequency Percent Valid Percent
Cumulative
Percent
Valid Uncertain 21 13.5 13.5 13.5
Important 55 35.5 35.5 49.0
Very Important 79 51.0 51.0 100.0
Total 155 100.0 100.0

Table 4.15. Frequency analysis for better quality

Meanwhile, 52 (33.5%) respondents strongly believe that outsourcing helps an
organisation focus on its core competences as outsourcing the non-core activities frees
94

the available resources to contribute in a positive way in enhancing the core
competences.
Focus on core competences

Frequency Percent Valid Percent
Cumulative
Percent
Valid Very unimportant 1 .6 .6 .6
Unimportant 6 3.9 3.9 4.5
Uncertain 45 29.0 29.0 33.5
Important 51 32.9 32.9 66.5
Very Important 52 33.5 33.5 100.0
Total 155 100.0 100.0

Table 4.16. Frequency analysis for focus on core competences
By adopting strategic sourcing, an organisation can increase the number of available
sources to procure goods/services. However, only 46 (29.7%) respondents consider an
increase in the number of sources as an important benefit of outsourcing; in fact 52
(33.5%) feedbacks were found to be uncertain regarding the benefits achieved by
increase in the number of supply sources through outsourcing.
To increase the number of sources

Frequency Percent Valid Percent
Cumulative
Percent
Valid Very unimportant 14 9.0 9.0 9.0
Unimportant 20 12.9 12.9 21.9
Uncertain 52 33.5 33.5 55.5
Important 46 29.7 29.7 85.2
Very Important 23 14.8 14.8 100.0
Total 155 100.0 100.0

Table 4.17. Frequency analysis for increase in the number of sources
95


The least important benefit that respondents have cited is access to worldwide
technology. Only 15 (9.7%) respondents have considered it to be very important while 43
(27.7%) assenters are still uncertain about the benefits it brings. In fact 26 (16.8%)
participants consider access to latest technology to be unimportant when outsourcing an
activity.
To access worldwide technology

Frequency Percent Valid Percent
Cumulative
Percent
Valid Very unimportant 15 9.7 9.7 9.7
Unimportant 26 16.8 16.8 26.5
Uncertain 43 27.7 27.7 54.2
Important 43 27.7 27.7 81.9
Very Important 28 18.1 18.1 100.0
Total 155 100.0 100.0

Table 4.18. Frequency analysis for access to worldwide technology

4.3.3. Causes of failure
Not all outsourcing/strategic sourcing ventures are highly successful. In this survey the
causes of failures were deliberated upon and a consensus was built on the critical causes
of failure. After performing a frequency analysis, it was found that 65 (41.9%)
respondents considered the inability to evaluate suppliers as an important reason for
failure of sourcing policy. This was followed by 62 (40.0%) answerers who considered
improper portfolio analysis as an important cause for the failure of sourcing strategy that
essentially results in unwanted activity to be outsourced.

96

Inability to evaluate suppliers (No vendor ratings/supplier appraisal)

Frequency Percent Valid Percent
Cumulative
Percent
Valid Very unimportant 6 3.9 3.9 3.9
Unimportant 14 9.0 9.0 12.9
Uncertain 35 22.6 22.6 35.5
Important 65 41.9 41.9 77.4
Very Important 35 22.6 22.6 100.0
Total 155 100.0 100.0

Table 4.19. Frequency analysis for inability to evaluate suppliers

Improper portfolio analysis resulting in unwanted activity to be outsourced

Frequency Percent Valid Percent
Cumulative
Percent
Valid Very unimportant 6 3.9 3.9 3.9
Unimportant 14 9.0 9.0 12.9
Uncertain 42 27.1 27.1 40.0
Important 62 40.0 40.0 80.0
Very Important 31 20.0 20.0 100.0
Total 155 100.0 100.0

Table 4.20. Frequency analysis for improper portfolio analysis

Next, 58 (37.4%) candidates said that reluctance to share information between the buyer
and the supplier was one of the major causes for the failure of sourcing strategies.



97

Reluctance to share information

Frequency Percent Valid Percent
Cumulative
Percent
Valid Very unimportant 9 5.8 5.8 5.8
Unimportant 21 13.5 13.5 19.4
Uncertain 30 19.4 19.4 38.7
Important 58 37.4 37.4 76.1
Very Important 37 23.9 23.9 100.0
Total 155 100.0 100.0

Table 4.21. Frequency analysis for reluctance to sharing information

Lack of commitment from the top management within the company (n =56; 36.1%) was
cited as one of the reasons for the undesirable results achieved while outsourcing.
Finally, inability to measure and evaluate benefits was mentioned as the least important
factor with 43 (27.7%) respondents stating it as important while 45 (29.0%) answerers
are quite uncertain about its impact on sourcing policies.
Lack of commitment from top management of the outsourcing firm

Frequency Percent Valid Percent
Cumulative
Percent
Valid Very unimportant 8 5.2 5.2 5.2
Unimportant 24 15.5 15.5 20.6
Uncertain 38 24.5 24.5 45.2
Important 56 36.1 36.1 81.3
Very Important 29 18.7 18.7 100.0
Total 155 100.0 100.0

Table 4.22. Frequency analysis for lack of commitment from the top management

98

Inability to measure and evaluate benefits

Frequency Percent Valid Percent
Cumulative
Percent
Valid Very unimportant 10 6.5 6.5 6.5
Unimportant 22 14.2 14.2 20.6
Uncertain 45 29.0 29.0 49.7
Important 43 27.7 27.7 77.4
Very Important 35 22.6 22.6 100.0
Total 155 100.0 100.0

Table 4.23. Frequency analysis for inability to measure and evaluate benefits

4.4. Current trends in strategic sourcing and
satisfaction levels
In order to analyse the current trends in strategic sourcing, one has to perform a
frequency analysis on the query that respondents have answered for the activity they
consider to be a strong candidate for strategic sourcing. One observes that 60 (38.7%)
respondents consider Information Technology to be an ideal candidate for outsourcing.
This is followed by a response from 38 (24.5%) candidates that consider Facility
Management to be a prime candidate for strategic sourcing. Logistics followed by
Manufacturing and Assembly are next in line with 13.5% and 12.3% responses
respectively.
Procurement was the least favoured activity that the respondents consider for outsourcing
as just 12 (7.7%) assenters think it can be consider for outsourcing. The reason for this
can be attributed to the fact that procurement to date remains a capital intensive activity
that companies prefer to keep in-house rather than outsource it externally. A meagre 5
99

(3.2%) respondents have other activities than those mentioned previously as an option for
strategic sourcing.
Which of these functions do you consider a strong candidate for strategic sourcing?

Frequency Percent Valid Percent
Cumulative
Percent
Valid IT Services 60 38.7 38.7 38.7
Facility Management 38 24.5 24.5 63.2
Manufacturing and Assembly 19 12.3 12.3 75.5
Logistics 21 13.5 13.5 89.0
Procurement 12 7.7 7.7 96.8
Any Other 5 3.2 3.2 100.0
Total 155 100.0 100.0

Table 4.24. Frequency analysis for candidates considered for strategic sourcing


Fig. 4.7. Pie chart for candidates considered for strategic sourcing
100


A Chi-Square test was conducted to address the correlation between the main activity of
the respondents company and the functions they consider a strong candidate for
outsourcing. Using Pearsons Chi-Square test (value =26.412, df =15, p =0.034) a
significant relationship was found to exist between the two parameters under test.
Chi-Square Tests

Value df
Asymp. Sig. (2-
sided)
Pearson Chi-Square 26.412
a
15 .034
Likelihood Ratio 25.008 15 .050
Linear-by-Linear Association .903 1 .342
N of Valid Cases 155

a. 13 cells (54.2%) have expected count less than 5. The minimum
expected count is .29.
Table. 4.25. Chi-Square test - 2

Furthermore, an analysis was conducted to understand the kind of activities the
respondents company sources to external service providers. The frequency table
indicates that 45 (29.0%) respondents mention critical supporting functions are sourced
from external providers. On the same note, non-critical supporting function contributes
24.5% to the survey whereas strategic activities contribute 21.3% to the total responses.
21 (13.5%) respondents have said their company outsources activities that are sensitive
to intellectual property rights while only 18 (11.6%) answerers said their company
outsources activities that affect most of the organisation.


101

What kind of acti vities does your company predominantly source to external service
providers?

Frequency Percent Valid Percent
Cumulative
Percent
Valid Critical supporting fuction 45 29.0 29.0 29.0
Non-critical supporting
function
38 24.5 24.5 53.5
Affecting most of the
organisation
18 11.6 11.6 65.2
Strategic 33 21.3 21.3 86.5
Sensitive to intellectual
property rights
21 13.5 13.5 100.0
Total 155 100.0 100.0

Table. 4.26. Frequency analysis for the kind of activity outsourced to external service
providers

For the purpose of comparing the means between the kind of activity sourced and the
importance of deciding sourcing strategies based on core competences, an independent
samples t-test was performed. It was determined that there is no significant difference
between the means observed for companies that disagree on importance of core
competence analysis (M =2.6452) and those who agree with the significance of core
competences (M =2.7800) for t(79) =-0.377 in relation to the activities outsourced by
the respondents company. This indicates that some organisation do not outsource their
activities on the basis of core competences. As discussed previously, outsourcing without
understanding the firms core competences can result in undesirable outcome from
outsourcing as well as loss of skill-sets in employees. Hence critical, strategic as well as
activities sensitive to intellectual property rights should be outsourced only after careful
consideration of core competence skills.
102


Additionally, a moderate correlation and therefore a substantial relationship has been
found to exist between the annual turnover of the company and the revenue spent on
outsourcing by using Spearmans Correlation (value =0.601). Hence it can be stated that
companies with higher turnovers tend to spend more on their outsourcing as compared to
those with lesser capital resources.
Correlations

Annual
turnover (in US
Dollars)
How much revenue is spent on
outsourcing these operations
annually?
Spearman's
rho
Annual turnover (in US
Dollars)
Correlation
Coefficient
1.000 .601
**

Sig. (2-tailed) . .000
N 155 155
How much revenue is spent on
outsourcing these operations
annually?
Correlation
Coefficient
.601
**
1.000
Sig. (2-tailed) .000 .
N 155 155
**. Correlation is significant at the 0.01 level (2-tailed).
Table 4.27. Spearmans correlation between annual turnover and revenue spent on
outsourcing operations annually

The respondents were asked about their organisations experience and satisfaction levels
for the outsourced functions. When the results were analysed, it was found that 58
(37.4%) respondents mentioned that they had a positive experience. Similarly, 58
(37.4%) assenters had mixed experience with outsourcing. Negative reviews were
reported by 39 (25.2%) respondents which is lower than those who had a positive or a
mixed experience.
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Share your organisation's experience and satisfaction levels for the outsourced
function?

Frequency Percent Valid Percent
Cumulative
Percent
Valid Mostly positive 58 37.4 37.4 37.4
Mixed 58 37.4 37.4 74.8
Mostly negative 39 25.2 25.2 100.0
Total 155 100.0 100.0

Table 4.28. Frequency analysis for outsourcing satisfaction levels

An independent samples t-test proves that there is a significant difference between the
means observed for companies with a committed purchasing department (M =1.6235)
and those without a devoted procurement unit (M =2.1857) for t(153) =-4.742 in
relation to the organisations experience and satisfaction levels for the outsourced
function. The result of this test can be interpreted by stating that organisations with
dedicated purchasing departments are said to have a better and mostly positive
experience when outsourcing as compared to those firms that do not have a dedicated
purchasing department and are therefore likely to have a mixed or unsatisfactory
experience.

4.5. Chapter summary
In this chapter, the research results were provided in great detail and therefore it draws a
clear picture of the strategic sourcing trends and practices around the world. The main
focus was on providing and presenting an informative analysis of data and the
conclusion.
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The data collected from the survey has been divided into four sections, such as the
background of the respondent organisations and the function of the respondents; a review
of core competence analysis and supplier relationship management practices; benefits of
strategic sourcing and its inherent risks; and finally the current trends in strategic
sourcing and satisfaction levels.
The next chapter will provide ample discussion on the research results with the help of
supporting secondary data.
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Chapter 5: Discussion

5.0. Chapter introduction
The findings outlined in chapter four are useful for a thorough understanding of the
current trends in strategic sourcing/outsourcing field. In this chapter, the data collected
and analysed from the survey has been aggregated, categorised and discussed by taking
into account the results of previous surveys (secondary data) by other authors mentioned
throughout this dissertation. This discussion will be examined by looking into the
following sections:
(i) Adoption of strategic sourcing in organisations
(ii) Review of core competence analysis and supplier relationship management
practices
(iii)Benefits of strategic sourcing as well as the risks associated with outsourcing
(iv) Current trends in strategic sourcing and satisfaction levels

Finally, a section is devoted to the limitation of this research.

5.1. Adoption of strategic sourcing in organisations
CAPS research says that half of firms will have a global spend of over 40 percent with
nearly one-fifth spending over 80 percent of their annual spend globally. According to
U.S. government statistics, U.S. trade with the world increased 241 percent between
1990 and 2006 resulting in popular locations for global sourcing in recent years being
China (primarily for goods) and India (primarily for services) (Atkinson, 2008). Quinn
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and Hilmer believe that strategically outsourcing and emphasizing a companys core
competencies can help managers leverage their firms skills and resources for increased
competitiveness. Determining core competencies and knowing the activities that are best
performed externally are crucial for effective strategic sourcing (Quinn and Hilmer,
1995).

A survey conducted by Minevich and Richter indicates that more than 80% of the major
global international corporations have an outsourcing presence. Additionally, more than
75% of the medium-size to large companies across Europe will be outsourcing services
(Minevich and Richter, 2005). Additionally, nearly 70% of 600 attendees at the
International Association of Outsourcing Professionals (IAOP) conference held in
February 2010 said they were pursing outsourcing opportunities than just a year earlier
(Cohen, 2010). From these figures, it is evident that organisations today are sourcing
close to 75% of their activities which in itself is quite a big number.

A comparative study of the results achieved during the survey supports this trend. An
overwhelming majority of the respondents agreed that their organisation outsources it
operations to other firms. This figure comprises of 119 (76.8%) respondents against a
figure of only 36 (23.2%) participants stating their firm does not outsource its functions
to external vendors. Hence it can be stated that these results are in accordance with the
secondary data that have been stated in various literatures.

It is important to mention here that majority of the participant were from the
manufacturing sector followed by retailing. Hence, it appears that these two sectors of
the industry have readily adopted strategic sourcing as compared to other divisions.
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One also notices that majority of the respondents are from the middle tier companies
hinting towards the fact that outsourcing is not just for large organisations, but can also
be adopted by medium sized enterprises.

Finally, the most important factor that decides the adoption of modern sourcing policies
and principles has been found to be linked with the presence of a dedicated purchasing
department and trained purchasing professionals (Kraljic, 1983). A purchasing
department of low sophistication will be viewed primarily as a clerical function with
little decision-making power. Pearson and Gritzmacher believe that a positive perception
of the purchasing function will encourage innovative co-operative decision making
throughout the organisation and with the suppliers (Pearson and Gritzmacher, 1990).
This is endorsed by the survey research wherein 79 (51.0%) respondents said their
company has a dedicated purchasing department and also outsources its operations to
other firms. This proves beyond doubt that a proactive purchasing department has a
positive impact on the sourcing policies of an organisation.

5.2. Review of core competence analysis and supplier
relationship management practices
Core competencies are the crown jewels of a company and therefore should be carefully
nurtured and developed (Hafeez et al., 2002). According to Prahalad and Hamel (1990),
core competence provides potential access to a wide variety of markets and makes a
significant contribution to the perceived customer benefits of the end product. Most
importantly, core competence should be difficult for competitors to imitate. A research
conducted by Lacity et al. (2008) found that clients who considered additional business,
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economic, and technical factors of non-core capabilities were more frequently satisfied
by their sourcing decisions. (Prahalad and Hamel, 1990) (Lacity et al., 2008)

Thus, it has been identified that core competence plays an important role in deciding
sourcing strategies and in make/buy decisions. The participants of the survey too were
asked about the importance of core competence analysis wherein 33 (21.3%) respondents
strongly agreed to the significance of core competence analysis while 50 (32.3) assenters
agree that core competencies should be studied before outsourcing an activity. Moreover,
the survey revealed that companies that did not have a separate purchasing department
were either unaware of core competences analysis or did not consider it to be important.

Similarly, a research carried out by Carr and Pearson mentions about the importance of
buyer supplier relationship on strategic purchasing. It was determined that buyer supplier
relationships have a positive impact on strategic purchasing and therefore contribute
immensely to the firms financial performance (Carr and Pearson, 1999). The benefits of
supplier relationship management are stated as optimising supplier relationships, creating
competitive advantage and drive revenue by jointly bringing new, better and more
customer centric solutions to market faster, lengthening and strengthening critical
supplier relationships as well as driving profit enhancement through reduced supply
chain and operational costs while maintaining quality (Poirier, 2010).

In the dissertation research, 53 (34.2%) respondents considered supplier relationship
management to be important whereas 32 (20.6%) respondents thought it to be very
important. A correlation was established between the presence of a purchasing
department and perceived importance of supplier relationship management wherein
24.5% respondents with purchasing departments viewed supplier relationship
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management important contrary to 13.5% and 16.8% answerers who said it was
unimportant and uncertain did not have a dedicated purchasing department. Correlating
these two parameters revels that organisations with dedicated purchasing departments
consider supplier relationships to be important and managing these relations is critical for
a successful sourcing strategy. However, firms that do not have a purchasing department
are indifferent towards the importance of supplier relationship management.

5.3. Benefits of strategic sourcing and the risks
associated with outsourcing
This section will be covered by dividing it into three subtopics as follows:
1. Risk of skill-set loss in employees
2. Benefits of outsourcing
3. Causes of failure

5.3.1. Risk of skill-set loss in employees
The notion that sustained outsourcing denigrates the firms existing skill set, and thereby
its long-term competitiveness, is reflected in Lei and Hitts (1995) research. It has been
found that a firm needs its own set of scientists and technical staff to understand changes
in technologies and processes. That is because they are most familiar with the firms
idiosyncratic routines, procedures and complex social phenomenon (Lei and Hitt, 1995).
Outsourcing has been found to generate new risks, such as the loss of cross-functional
skills and corporate memory, loss of critical skills or developing the wrong skills, and the
loss of control over suppliers. These risks are especially pertinent when the suppliers
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priorities do not match client needs (Kakabadse and Kakabadse, 2000; Greer et al.,
1999).

The primary research conducted revels that 28 (18.1%) respondents strongly agree that
outsourcing results in a loss of skill-sets in employees while 60 (38.7%) answerers agree
with this danger. Additionally, a strong relation was established between companies with
dedicated purchasing departments and loss of employee skill-sets. Hence smaller
companies with no dedicated resources for purchasing disregard the dangers of loss of
core competences when outsourcing an activity.

5.3.2. Benefits of outsourcing
Previous research has identified benefits gained by strategic sourcing. Rajagopal and
Bernard conducted a study to identify the benefits achieved through international
sourcing. The most important reason for outsourcing according to the respondents of the
study is to benefit from lower prices. This appears to be the reason why companies
outsource their operations to countries like India and China where a large talent pool can
be harnessed at lower operating costs (Rajagopal and Bernard, 1994).

The second most important reason identified by the researchers has been attributed to
improving service quality. Better quality offerings have a direct impact on sales and
therefore companies strive to provide the best quality at the most affordable prices.
Outsourcing helps organisations achieve better quality at reasonable costs thus making
the product competitive in the market (Kakabadse and Kakabadse, 2002).
Analysis of primary data revels that achieving low prices along with better quality are the
prime reasons for strategic outsourcing. 79 (51.0%) respondents each have stated that
low price and better quality are the most important reasons for outsourcing an activity.
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Thirdly, by outsourcing non-core activities, companies can focus on core competences
helps leverage the critical, inimitable skill-sets developed within that organisation. As a
rule of thumb, non-core activities should be the candidates for outsourcing whereas core
functions need to be kept in-house in order to not lose the acquired skill sets (Prahalad,
1993; Kakabadse and Kakabadse, 2002). Research carried out for this dissertation found
that 52 (33.5%) respondents strongly believe outsourcing helps an organisation focus on
its core competences as outsourcing the non-core activities frees the available resources
to contribute in a positive way in enhancing the core competences.

Primary analysis revealed that 46 (29.7%) respondents consider an increase in the
number of sources as an important benefit of outsourcing. Increase in the number of
sources offered through global sourcing is the next popular reason for companies
outsourcing their operations. For example, a particular country or geographical area may
not have many vendors to provide a particular product or service. In such a situation,
there can be a monopoly in the market where a few dominant vendors influence and
control the flow of goods and services as well as the costs related to those goods and
services. Outsourcing offers companies opportunity to access untapped markets thus
increasing the number of available sources and reducing dependency on monopolistic
service provider (Fisher, 2003). It is also worth mentioning that 52 (33.5%) feedbacks
were found to be uncertain regarding the benefits achieved by increase in the number of
supply sources through outsourcing.

The survey analysis carried out for this dissertation indicates that least important benefit
that respondents have cited is access to worldwide technology. Only 15 (9.7%)
respondents have considered it to be very important while 43 (27.7%) assenters are still
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uncertain about the benefits it brings. The results are in harmony with the studies
conducted by various researchers where it was found that companies with a niche
offering are sought out as outsourcing partners since they possess technologies and
intellectual property rights that are difficult for other to offer or imitate. However, this is
not a very common practice and hence it is rated lower than other potential benefits of
outsourcing (Rajagopal and Bernard, 1994).

5.3.3. Causes of failure
One major aspect of the purchasing function is vendor selection, the acquisition of
required material, service and equipment for all types of business enterprise. Hence, the
most important purchasing decisions are the selection and maintenance of a competent
group of suppliers. For many firms, purchases from outside vendors account for a large
percentage of their total operating costs. The raw material purchased for most U.S. firms
constitutes 40-60% of the unit cost of a product. Hence inability to select and evaluate
suitable vendors/service provider can have a crippling effect on the company (Weber et
al., 1991; Karamouzis, 2003).
Olsen and Ellram cite Porter as a proponent of using portfolio models to analyse
competitors, customers, and suppliers (Olsen and Ellram, 1997). These days
multinational firms are engaged in global sourcing. These firms are more likely to have
worldwide production facilities, design centres, and marketing and sales activities. One
possible way to organise global sourcing and to manage a global supply base is through
the use of a purchasing portfolio model. Kraljic categorised products in a 2x2 matrix thus
providing a comprehensive portfolio approach for purchasing and supply management.
Of the larger companies, some 80% are using some kind of portfolio approach. Portfolio
management results in appropriate activities being sourced and avoids core competency
losses (Gelderman and Semeijn, 2006).
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It was discovered that organisation consider inability to evaluate suppliers as the major
reason for the failure of sourcing policies. After performing a frequency analysis, it was
found that 65 (41.9%) respondents considered the inability to evaluate suppliers as an
important reason for failure of sourcing policy. This was followed by 62 (40.0%)
answerers who considered improper portfolio analysis as an important cause for the
failure of sourcing strategy that essentially results in unwanted activity to be outsourced.

Studies have proven that in a buyer-supplier relationship, communication or flow of
information is important for the success of the partnership. Information sharing results in
reduced inventory levels and provides immense cost savings leading to an improved
supply chain performance. It has been proven that bullwhip effect (fluctuations in
demand information or amplification of demand information) exists in decentralised
supply chains. By linking these islands of information, one can not only eliminate the
bullwhip effect, but improve the overall performance of the supply chain (Yu et al.,
2001).

In the dissertation survey it was found that 58 (37.4%) candidates said reluctance to share
information between the buyer and the supplier was one of the major causes for the
failure of sourcing strategies.

Experience in dealing abroad, ability to evaluate foreign sources, measuring the benefits
gained and having top management commitment all require a long-term perspective on
entry to the international supply market. This long-term perspective must be supported
by top management to assure the commitment of appropriate resources to develop an
adequate foundation for the international undertaking (Rajagopal and Bernard, 1994).
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Lack of commitment from the top management within the company was cited as one of
the reasons by 56 respondents for the undesirable results achieved while outsourcing.
Finally, inability to measure and evaluate benefits was mentioned as the least important
factor with 43 respondents stating it as important while 45 answerers are quite uncertain
about its impact on sourcing policies.

5.4. Current trends in strategic sourcing and
satisfaction levels
Information technology (IT) is considered to be the most popular area for outsourcing.
For many organisations in the manufacturing and retailing field, IT is not a core activity
and therefore there is a strong possibility to outsource IT to other firms. According to the
research carried out by Kakabadse and Kakabadse, European companies tend to
outsource IT functions more often than the US firms. Likewise, US companies pay
greater attention to outsourcing facilities management than do European companies.
Manufacturing comes in at the third position with US based firms outsourcing more than
their European counterparts.
A large difference was observed when it came to outsourcing logistics since US based
firms consider it to be a very important activity and rate it highly whereas European
companies do not give much preference to logistics for outsourcing. Procurement is
considered the least popular activity to be outsourced since purchasing has assumed
strategic importance in many organisations and firms like to leverage this to their own
benefit (Kakabadse and Kakabadse, 2002).

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The results of the primary research are in accordance with those of the secondary survey
mentioned above. 60 (38.7%) respondents consider Information Technology to be an
ideal candidate for outsourcing. This is followed by a response from 38 (24.5%)
candidates that consider Facility Management to be a prime candidate for strategic
sourcing. Logistics followed by Manufacturing and Assembly are next in line with 13.5%
and 12.3% responses respectively.
Procurement was the least favoured activity that the respondents consider for outsourcing
as just 12 (7.7%) assenters think it can be consider for outsourcing. The reason for this
can be attributed to the fact that procurement to date remains a capital intensive activity
that companies prefer to keep in-house rather than outsource it externally. A meagre 5
(3.2%) respondents have other activities than those mentioned previously as an option for
strategic sourcing.

The survey conducted by Kakabadse and Kakabadse highlight the importance of
outsourcing processes, activities and functions that are seen as critical to the future
survival of the enterprise, particularly for European companies. Even those outsourced
activities that are viewed as non-critical to the future functioning of the organisation,
senior managers in the survey consider that alignment exists between those activities
outsourced and the strategies being pursued by the organisation. Sourcing policies that
affect most/all of the organisation come next on the list followed by sourcing activities
that are strategic and sensitive to intellectual property rights of the establishments. It can
be understood that companies do not outsource their intellectual property rights to other
firms since this could lead to the outsourcee gaining an edge over the outsourcing firm
and becoming a competitor in the long run (Kakabadse and Kakabadse, 2002).

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The results obtained from the primary data mimic the trends of the secondary data. The
frequency table indicates that 45 (29.0%) respondents mention critical supporting
functions are sourced from external providers. On the same note, non-critical supporting
function contributes 24.5% to the survey whereas strategic activities contribute 21.3% to
the total responses. 21 (13.5%) respondents have said their company outsources activities
that are sensitive to intellectual property rights while only 18 (11.6%) answerers said
their company outsources activities that affect most of the organisation.

Recent literature on outsourcing reports high levels of dissatisfaction. One study
indicated that nearly 70% of companies who have undergone outsourcing are unhappy
with one or more aspects of their relationship with suppliers. However as per the studies
conducted by Kakabadse and Kakabadse, majority of the US and European companies
indicate that they are satisfied with their agreed outsourcing agreements. Less than 6%
report dissatisfaction with their experiences of outsourcing (Kakabadse and Kakabadse,
2002).

Even though the primary research for this dissertation exhibits the same trend, the
satisfaction levels are not as high as those suggested by the secondary data. In fact the
number of respondents who has a positive experience and those who reported mixed
satisfaction with outsourcing are the same. In this case, 58 (37.4%) respondents each
cited mostly positive and mixed satisfaction. Negative reviews were reported by 39
(25.2%) respondents which is lower than those who had a positive or a mixed experience.

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5.5. Limitations of the research
As it was mentioned in the above research, there are many benefits overall. However,
there are also some limitations of this research and include:
Sample size Even though the sample size was comprised of 785 organisations,
in this survey the response rate is only 19.75% (based on 155 usable feedbacks),
which is lower than expected, and might not reflect the entire industry. Moreover,
the results of this survey may not be accurate. This low response rate of online
surveys has been attributed to many reasons such as perception as junk mail,
unclear answering instructions, skewed attributes of internet population, privacy
and security issues to name a few (Evans and Mathur, 2005).
Targeted countries The questionnaires for the survey were sent only to three
countries namely the US, the UK and India. Hence this research reflects the
general trends prevalent in these countries only. The greatest response rate was
from India followed by the UK and then the US. The outcome of the survey could
have been different if a larger population sample was considered for the
dissertation survey.
Incompleteness of data Some data collected was incomplete due to unclear
questions or statements. For instance, in order to provide a consistent currency
value, the dollar ($) was preferred over sterling pound (). Furthermore, a very
limited research was conducted to understand the importance and impact of
buyer-supplier relationships on make or buy decisions. Additionally, the
importance of vendor appraisal and supplier evaluation was not discussed in great
detail which could have given this dissertation a much broader perspective.
Time availability The data collection has taken place between December 2010
and J anuary 2011, so only three weeks have been allocated for conducting this
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survey. Overall, the survey process was not conducted in a very well-planned
manner. A pre-questionnaire telephone contact has not taken place in order to
increase the response rate.

5.6. Chapter summary
In this chapter, the results of the survey were compared with the secondary data from the
studies and literatures of other authors and a comprehensive trend analysis was carried
out. Overall, the above mentioned findings represent the current scenario in the field of
strategic sourcing and its influence on make or buy decisions. Due to incompleteness of
some data or ambiguous statements (questions) and low response rate, the results may
not reflect the reality and may not be accurate. However, there were mentioned the
limitations of this research to indicate the reliability and validity of the results.
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Chapter 6: Conclusion and Recommendations

6.0. Chapter introduction
In this chapter, we will have a quick overview of the original objectives of this study and
the research results achieved. Thereafter we will present a meaningful conclusion for the
dissertation as well as the lessons learned. Finally, recommendations for future work and
managerial implications of the study are given.

6.1. Research aim, objectives, and question
The main aim of this dissertation is the use of strategic sourcing as an effective tool for
sustained competitive advantage. Additionally, we also investigate the importance of
make or buy decisions when implementing strategic procurement. The research
objectives include:
Understanding the concept of strategic sourcing and the significance of make or
buy decisions for competitive advantage
Streamlining the sourcing process through the implementation of strategic
sourcing models
Frameworks and flowcharts for managing the sourcing process
Benefits and justifications of strategic procurement
Managing the risks and challenges as well as understanding the causes of failure
Best practices and implementation of strategic sourcing

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In this study, the research question to be addressed is: What influences make or buy
decisions in strategic sourcing and its implications for sustained competitive advantage?
During the research process, the methodology chosen was the survey approach, whereas
the questionnaire, as a research instrument, was undertaken and fully justified. The
research results have answered the questions and achieved the objectives of this
dissertation, wish some interesting outcomes. Lastly, the conclusion of the research is
summarised in the next section.

6.2. Conclusion
Based on the analysis of the responses received, the conclusions are summarised as
follows:
Adoption of strategic sourcing in organisations It has been observed that an
overwhelming majority of respondents stated their organisation outsources its
operations to other firms. Additionally, most of the respondents that participated
in the survey were employed in middle tier companies hinting towards the fact
that outsourcing is not just for large corporations, but can also be adopted by
medium sized enterprises. Besides, majority of participants were from
manufacturing sector followed by retailing. Therefore it appears that these two
sectors of the industry have readily adopted strategic sourcing as compared to
other divisions.

Best practices and implementation Organisations take efforts to place their
purchases in a hierarchy of strategic importance. Based on the hierarchy of
strategic importance, make or buy decisions can be evaluated. It is important to
note that devising a sourcing strategy and developing a souring model will not
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deliver the desired results. By ensuring that top management supports the firms
purchasing policies and that the organisation allocates a supplier/sourcing
champion, one can cultivate and nurture mutually beneficial relationships with
the vendors. Moreover, purchasing portfolio is used frequently while sourcing
goods/services from external vendors. It has been found that appropriate
implementation of sourcing policies and following best practices can only be
successful if the organisation has a dedicated purchasing department with trained
purchasing professionals. It has been conclusively proved in the survey that a
proactive purchasing department has a positive impact on the sourcing policies of
an organisation.

Benefits of strategic sourcing The most important benefit that strategic sourcing
brings to the organisations is lower price followed by improvement in quality of
the product/service. 51% respondents in the survey have stated either low price or
better quality as the most important reasons for outsourcing an activity. It has
been found that companies outsource their non-core activities in order to focus on
their core competences as outsourcing helps firms release available resources
working on non-core functions to contribute in a positive way in enhancing the
core competences. Likewise, increase in the number of available sources as well
as access to worldwide technology are the other reasons for companies to
consider outsourcing.

Risks of strategic sourcing and causes of failure The inherent risk that one
needs to take into consideration while outsourcing is loss in the skill-sets of
employees. It has been found that almost 57% respondents consider this to be the
main risk associated with strategic sourcing. Failure to conduct thorough core
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competence analysis results in core activity being outsourced thus affecting the
skills of employees and the outcome is loss of corporate memory. Moreover, it
has come to light that improper core competence analysis coupled with poor
supplier relationship management should be eradicated if sourcing policies have
to succeed.
Not all sourcing ventures are highly successful and this dissertation tries to find
out the causes of failure. The inabilities to evaluate suppliers followed by
improper portfolio analysis are considered to be the most important causes for
failure of sourcing strategies within an organisation. Reluctance to share
information with the vendors upstream has been cited as another reason for the
failure of outsourcing. Lack of commitment from the top management and the
inability to measure and evaluate benefits are the other factors that have been
quoted as the causes of failure in sourcing.

Current trends in strategic sourcing and satisfaction levels The survey indicates
that IT services followed by facilities management remain the two most important
candidates for outsourcing today. A trend analysis of activities outsourced by
organisations revels that the market for outsourcing critical supporting functions
has now matured and this is the most outsourced activity today. Non-critical
supporting activity is the next most outsourced function followed by those
functions that affect the working of an entire organisation. Activities that are
strategic in nature or those sensitive to intellectual property rights are the least
sourced functions since there is a danger of losing core competencies if they are
outsourced.
Finally, it has been analysed that the number of the organisations having a
positive experience and those that have a mixed experience when outsourcing is
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almost the same. However, respondents reporting negative reviews were lower
than those who had a positive or a mixed experience.

This proves that outsourcing if done properly brings immense benefits to an organisation
and leverages its position to gain competitive advantage in a highly aggressive business
environment.

6.3. Recommendations for future work
Taking into account the outcome of this research, it is recommended that the following
areas to be given extra attention and therefore a similar research to be conducted in the
future:
A detailed survey can be carried out covering the important steps in enhancing
the strategic sourcing process. Due to the constrains of time and data, an in-depth
research could not be carried out on the impact of buyer-supplier relationships on
outsourcing as well as the relevance of portfolio positioning in a broader aspect.
There can be a greater focus on the financial side of strategic sourcing where one
could look into the capital spent on make/buy decisions and evaluate the best
possible solution based on the total cost of ownership concept.
It would be beneficial to examine the organisational changes that take place
within a firm before, during and after undertaking strategic sourcing, which can
be complemented with structured interviews.
The survey was carried out by sending questionnaires to companies in the US, the
UK and India. Hence the population size was limited to respondents from these
countries only. Therefore a suggestion would be to carry out research between US
and EU or developing countries like India or China where India is known to be a
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services outsourcing leader while China is renowned to be a manufacturing hub
for the world.

6.4. Recommendations for organisations
In the current business environment, management concepts are evolving quickly and
therefore organisations must be innovative and adaptive to the ever changing corporate
scenario. The customers expectations are in a continuous change and so all business
players must be able to respond quickly if they want to stay in business.

Therefore, the research undertaken leads to the following recommendations that can be
made to organisations:
Organisations must view purchasing as a strategic function and not as a
transactional one. The a major reason for firms not being competitive today is due
the fact that purchasing departments do not have decision making power and
therefore are under the direct control of finance department. Moreover,
purchasing department will be an asset to the company only when the purchasers
are well trained and motivated to do their job.
Companies must pay more attention when it comes to analysing their core
competences. This is an important step in recognising and distinguishing the core
activities from the non-core ones. Thus it is critical to understand the companys
strengths and weaknesses and its vision and mission.
Another issue related to outsourcing is loss of control over the transactional
services that are being outsourced. This has been attributed as a one of the major
risks of outsourcing. However, by handing over the responsibilities, one can
manage the performance and focus on driving what really matters.
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While implementing a new sourcing policy or changing an existing one, it is
crucial to make sure that the policy is firstly implemented on a pilot basis to
observe the effects on the organisation and then executed organisation-wide in a
phased manner.
The cross-functional concept can make the difference in these challenging
economic situations, so it is important to communicate appropriately and to
provide transparency throughout the supply chain. Importance of buyer-supplier
relationship has been emphasised throughout this research for better end
productivity.
The importance of selecting appropriate vendors for outsourcing products and
services cannot be ignored. Vendors that not compatible with the outsourcing
companys goals and objectives will not be able to provide the best possible
solution for the outsourced activity. Moreover, selection of vendors on the basis
of lowest price necessarily does not save costs for the company and may lead to
permanent damage for the buyer-supplier relationship if selection procedures like
reverse auctions are not carried out correctly.
In relation to the above mentioned point, outsourcing firms should not just look at
the lowest price but should instead focus their attention towards total cost of
ownership. An analysis of total cost of ownership tries to find out the hidden or
latent costs associated with sourcing that particular activity. Companies that are
outsourcing their functions should look for the lowest total cost of ownership
instead of the lowest price.
It is critical to set benchmarks by the users so they can achieve the identified
benefits of strategic sourcing, but also to understand the risks involved and how
to avoid them. Common causes of failures should be identified and users should
be warned about the pitfalls.
126

Organisations should note that devising a sourcing strategy and developing a
purchasing model will not deliver the desired results. Likewise it is also necessary
to implement the strategy and model appropriately within the organisation to
extract benefits.
Purchasing importance is defined by the perceived status and recognition versus
other functional areas, and by perceived top management support. Sourcing
policies should be driven by the senior management within an organisation. The
importance of purchasing can only be realised when the top management is
convinced of the potential benefits of strategic sourcing and strive for continuous
improvement in sourcing policies.
Appropriate training should be provided to the users when it comes to operating
the IT systems for various purchasing tasks. Similarly, the organisation should
create awareness amongst its employees about the use of simple tools and
techniques that assist in leveraging the purchasing power of that enterprise.

Finally, the success of sourcing strategy depends on calling the right shots between
keeping an activity in-house and outsourcing it to external vendors. Thus a sustained
competitive advantage can be achieved by implementing proactive sourcing strategies
within the organisation.
127

Appendix
Questionnaire

Objective: This research is being undertaken to identify the influences of make or buy
decisions on strategic sourcing. It is being carried out as a part of MSc dissertation
programme at University of Salford Business School, Greater Manchester, UK.

Please mark in the appropriate box and provide data as accurate as possible.

Section I
1. Company Name ..................................................................................
Contact Number ...................................................................................

2. What is the main activity of your company? (Please select only one)
(a) Manufacturing
(b) Retailing
(c) Supply chain solutions provider
(d) Other






128

3. Respondents title?
(a) Supervisor
(b) Assistant manager
(c) Manager
(d) Director
(e) Other

4. How many years of work experience do you have?
(a) 1-3 years
(b) 4-9 years
(c) More than 10 years


5. Company size (in employees):
< 100 100-499 500-999 > 1000

6. Annual turnover:
<1M 1-10M 10-99M > 100M (U.S. Dollars)

Section II
7. Does your organisation have a dedicated purchasing department with trained
purchasers?
(a) Yes
(b) No


129

8. Does your organisation outsource any of its operations to other firms?
(a) Yes
(b) No

9. How much revenue is spent on outsourcing these operations annually?
25-50K 50-100K 100-250K > 250K (U.S. Dollars)

10. Which of these functions do you consider a strong candidate for strategic
sourcing? (Please select only one)
(a) Procurement
(b) Manufacturing and Assembly
(c) Logistics
(d) Storage
(e) Any Other (Please specify)



11. Do you think core competence plays an important role in deciding the sourcing
strategies within an organisation?
(a) Strongly Disagree
(b) Disagree
(c) Undecided
(d) Agree
(e) Strongly Agree

130

12. According to you, why do organisations outsource their operations to other firms?
(Please rate from 1 to 5; with 1 very unimportant, 2 unimportant, 3
uncertain, 4 important, and 5 very important) (State all that apply)
(a) For lower prices
(b) To increase competition
(c) For better quality
(d) To increase the number of sources
(e) To access worldwide technology

13. Do you think that outsourcing results in loss of skill-sets in employees?
(a) Strongly Disagree
(b) Disagree
(c) Undecided
(d) Agree
(e) Strongly Agree

14. Sometimes, outsourcing does not yield the desired results. What according to you
are the major causes of this failure? (Please rate from 1 to 5; with 1 very
unimportant, 2 unimportant, 3 uncertain, 4 important, and 5 very
important) (State all that apply)
(a) Reluctance to share information
(b) Inability to evaluate suppliers (No vendor ratings/supplier appraisal)
(c) Improper portfolio analysis resulting in unwanted activity to beoutsourced
(d) Inability to measure and evaluate benefits
(f) Lack of commitment from top management of the outsourcing firm

131

15. How does your organisation perceive supplier relationship management when
sourcing products/services?
(a) Very Unimportant
(b) Unimportant
(c) Uncertain
(d) Important
(e) Very Important


16. What kind of activities does your company predominantly source to external
service providers? (Please select only one)
(a) Critical supporting function
(b) Non-critical supporting function
(c) Affecting most of the organisation
(d) Strategic
(e) Sensitive to intellectual property rights

17. Share your organisations experience and satisfaction levels for the outsourced
function?
(a) Mostly positive
(b) Mixed
(c) Mostly negative





132

18. Do you have any other valid comments, please mention them below.
(a) Yes
(b) No



19. Do you wish to receive an executive summary of this research? If yes, please
provide your email address below.
(a) Yes
(b) No


All the information given in this questionnaire will be treated anonymously and with
complete confidentiality in accordance with the Data Protection Act (1998).

Thank you for taking time to complete this questionnaire!
133

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