LGT5015 Chap.6 Procurement, Outsourcing and Sourcing
Procurement, Outsourcing and Sourcing
Price is one line in the decision
Procurement protects continuity, quality, service, inventory and total cost. This chapter expands a supplier quote into total cost of ownership and separates outsourcing from offshoring.
It tests make-or-buy choices against core competence, product architecture, capacity, knowledge dependence, risk and the sourcing arrangement required after the spreadsheet.
Build the external total
A supplier quote must be extended through freight, duties, administration, inspection, defects, inventory, coordination and expected disruption. Compare that figure with internal cost that would actually disappear.
Allocated overhead that remains after outsourcing is not a saving. Use the same period and volume for both choices, and keep uncertainty visible rather than hiding it inside an unexplained contingency percentage.
Separate ownership from geography
Outsourcing moves work across the organisational boundary. Offshoring moves work to another country.
A firm can offshore within its own facilities or outsource to a domestic supplier. The distinction matters because outsourcing creates control and knowledge dependence, while offshoring adds distance, legal, currency and geopolitical exposure.
A case can contain both, but the risks should not be collapsed.
Core competence protects the future
A capability is strategic when it contributes distinctive customer value, combines skills or resources competitors cannot readily copy and can support more than one offering. Outsourcing it may lower today's cost while weakening learning, bargaining power or future innovation.
Modular, widely available work is easier to buy; integral components and proprietary processes deserve a stronger internal or partnership case.
Use more than a binary choice
The firm can keep a reference line while buying overflow, dual-source a critical component, partner for technology or outsource a modular item under performance controls.
After choosing, specify qualification, quality, continuity, ownership of improvements and review. The sourcing arrangement must continue working after the initial cost comparison, so implementation and recovery belong in the recommendation.
What this chapter covers
- 01
Procurement objectives
- 02
Total cost of ownership
- 03
Outsourcing and offshoring
- 04
Core competence
- 05
Make-or-buy logic
- 06
Strategic sourcing
Worked example · free
Build an external total cost
- 3Add external cost lines.
- 2Compare with internal cost.
- 2State qualitative exposure.
Key terms
- Total Cost of Ownership
- The complete cost of acquiring, coordinating, using and supporting a purchase.
- Outsourcing
- Choosing an external party to perform work not done internally.
- Offshoring
- Moving an activity to another country, with or without outsourcing.
- Core Competence
- A distinctive combination of skills and resources creating customer value.
- Total Landed Cost
- Purchase and delivery cost of bringing a product to its destination.
Procurement, Outsourcing and Sourcing FAQ
Why is the cheapest quote not always cheapest?
Freight, duties, administration, inspection, defects, inventory, delay and disruption can outweigh the quoted saving. Build the external total on the same basis as avoidable internal cost. Then assess knowledge, capacity, product architecture and dependence separately, because forcing strategic exposure into an unsupported dollar estimate can make a precise spreadsheet less truthful.
Can a firm offshore without outsourcing?
Yes. Moving an activity to a foreign facility owned by the firm is offshoring while control stays internal. Outsourcing changes the organisational boundary, whether the supplier is domestic or abroad. A case can contain both choices and both exposures.
When should production stay internal?
Internal production is stronger where the activity protects a core competence, integral architecture, future learning or unacceptable dependence. Capacity and modularity can support partial or dual arrangements. Compare a reference line, overflow purchasing and dual sourcing before forcing a binary choice, then specify how knowledge and continuity are protected.
Exam move
For every sourcing case, make one quantitative total-cost column and one qualitative exposure column. Do not turn qualitative risks into invented scores; explain how they change the arrangement. In the cost column, begin with the supplier quote and add freight, duties, administration, inspection, defects, inventory, coordination and expected disruption.
Compare it with internal cost that would actually disappear, not allocated overhead that remains. In the exposure column, test core competence, product architecture, knowledge dependence, capacity, speed and resilience. Practise classifying four configurations: internal domestic work, internal offshoring, domestic outsourcing and offshore outsourcing.
Then redesign a binary make-or-buy choice as a reference line, overflow purchase, dual source or governed partnership. Finish with supplier qualification, continuity, ownership of improvements and review timing. This routine keeps the arithmetic honest while preserving strategic factors that should be explained rather than forced into an invented numeric score.
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