Executive Briefings

How to Select the Right Sourcing Strategy

Successful sourcing consists of more than just picking the most competitive bid among prospective suppliers, says Kate Vitasek, member of the faculty at the University of Tennessee's Center for Executive Education. In fact, she says, there are six "tools in the toolkit" that are available to sourcing professionals, depending on the nature of the materials and the closeness of the relationship with suppliers.

Vitasek bases many of her observations on the work of Oliver E. Williamson, an American economist and Nobel Prize winner who pioneered a theory of transaction costs. Williamson said that outsourcing "is a continuum," according to Vitasek. The optimal approach for any company depends on a variety of elements and business models, from ranging from insourcing to a pure market-based operation. Companies can deploy strict competitive bidding, but they can also forge closer links with approved or preferred suppliers. Beyond that, they can enter into performance-based relationships and, ultimately, "vested outsourcing." Both are focused on the outcome of a sourcing arrangement, not just the up-front price. Scorecards closely track supplier performance, with an eye toward ensuring customer satisfaction. With "value-based" sourcing, Vitasek says, "the buyer and seller have a vested interest in each other's success."

Vested outsourcing isn't for everyone; it's just one of the options in the sourcing professional's toolkit. Development of a business-model mapping tool was one of the goals of a white paper developed jointly by the University of Tennessee, the Sourcing Interest Group, International Association for Contract and Commercial Management and the Center for Outsourcing Research & Education. They found that the more critical types of materials are better off using a performance-based or vested outsourcing model.

To view video in its entirety, click here

Successful sourcing consists of more than just picking the most competitive bid among prospective suppliers, says Kate Vitasek, member of the faculty at the University of Tennessee's Center for Executive Education. In fact, she says, there are six "tools in the toolkit" that are available to sourcing professionals, depending on the nature of the materials and the closeness of the relationship with suppliers.

Vitasek bases many of her observations on the work of Oliver E. Williamson, an American economist and Nobel Prize winner who pioneered a theory of transaction costs. Williamson said that outsourcing "is a continuum," according to Vitasek. The optimal approach for any company depends on a variety of elements and business models, from ranging from insourcing to a pure market-based operation. Companies can deploy strict competitive bidding, but they can also forge closer links with approved or preferred suppliers. Beyond that, they can enter into performance-based relationships and, ultimately, "vested outsourcing." Both are focused on the outcome of a sourcing arrangement, not just the up-front price. Scorecards closely track supplier performance, with an eye toward ensuring customer satisfaction. With "value-based" sourcing, Vitasek says, "the buyer and seller have a vested interest in each other's success."

Vested outsourcing isn't for everyone; it's just one of the options in the sourcing professional's toolkit. Development of a business-model mapping tool was one of the goals of a white paper developed jointly by the University of Tennessee, the Sourcing Interest Group, International Association for Contract and Commercial Management and the Center for Outsourcing Research & Education. They found that the more critical types of materials are better off using a performance-based or vested outsourcing model.

To view video in its entirety, click here