With the advancement in IT and improved transportation the world has drastically shrunk and the companies have started thinking globally in all aspects of business, be it procurement of raw materials or sales of finished goods. This has given the companies an opportunity to source its raw materials from anywhere in the world and thus obtaining the best quality product at the cheapest possible option.
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But sourcing globally isn’t as simple as local procurement. It involves various considerations and also involves higher risks.
Generally having high market intelligence and local know-how in all the parts of the world is difficult to possess for a company finding sourcing opportunities for its raw materials. The companies also generally don’t have enough scale or required volumes to take advantage of global sourcing. This has created opportunities for intermediaries to step in and facilitate the companies for procuring from the best source globally and also earn a margin. Intermediation is dealt in detail in the next section.
Termed as middle men, intermediary is traditionally considered as a disadvantage and it is always advised to by-pass any kind of intermediation. But in Global Sourcing, it is inevitable to bring in intermediation.One perspective that boils down on this idea is that the companies should focus on their core competency and outsource all other activities in order to be competitive in the market. This stems from the idea of specialization and division of labour. The other perspective explains the advantages the intermediary gain in comparison to a company sourcing directly.
Both the perspectives are explained below
Focus on Core Competency:
In this era of outsourcing and off-shoring, more and more companies are outsourcing their non-value added tasks to other companies who can perform those tasks better and at a cheaper cost. The companies are centralizing all their activities and focussing on their core-competency. For instance, most of the companies in the US have outsourced their call centre services to the companies operating in the developing countries like India and China. Similarly manufacturing firms concentrate on optimising their manufacturing capabilities and outsource the other activities like marketing, sales and sourcing. By outsourcing global sourcing, we mean buying from the traders who source the commodities globally and sell locally.Hence the companies do not have to take the burden or spare their resources on global sourcing, they generally are trending to buy from the traders who do the job for them.
Opportunistic sourcing and the degree of control:
The other perspective is about the advantages that the intermediary establishes as compared to a company sourcing directly. Intermediaries usually establish high scale and they have sourcing capabilities and sales offices world-wide.
Thus they interact with large number of buyers and suppliers. This is depicted in the following diagram
This provides them with two important benefits
In such cases the intermediary has options to source from the best possible source which is generally not possible for a company sourcing directly as they also need to establish a long term relationship with the supplier and hence end up paying higher prices. The intermediary generally has high volumes to source and hence it sources maximum volume from the cheapest source and distributes rest of the demand among the remaining suppliers thus maintaining relationship with all the suppliers. This kind of sourcing wherein the intermediary redistributes the quantity to be sourced among the suppliers is called opportunistic sourcing.
Owing to this, it brings out the following benefits for all:
For Suppliers:
For Buyers:
For intermediaries:
Challenges that lie in the presence of the intermediary
All these challenges can be overcome in case of total transparency of information throughout the channel. Thus if the intermediary doesn’t misbehave, it is always beneficial to source globally by having an intermediary who can optimise the process.
The article has been authored by Soham Vaghela and Abhijeet Parikh, MDI Gurgaon
References
http://www.insead.edu/facultyresearch/research/doc.cfm?did=48174
http://www.sfu.ca/~schmitt/intermediaries.pdf
http://wiki.answers.com/Q/Advantages_and_disadvantages_of_using_intermediaries
http://mba.tuck.dartmouth.edu/pages/faculty/andrew.bernard/IIT.pdf
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