Summary by Alberto Gonzalez
Master of Accountancy Program
University of South Florida, Fall 2004
As the economy increases in complexity, it has become more difficult for organizations to adapt to marketplace changes. Organizations can no longer efficiently possess all expertise in-house. The result is a greater dependence on interrelationships with outside organizations that can provide the expertise these organizations may be lacking. In particular, manufacturing companies may find it advantageous for suppliers to provide products and services rather than performing them in-house. Outsourcing is a supplier agreement that may come to mind for most readers. However, there are several types of supplier agreements a company may rely upon. One such alternative is cosourcing. This article describes cosourcing and compares cosourcing to other supplier agreements.
Before moving on it is important to establish a basis of measurement that will allow for comparison between cosourcing and other supplier agreements. Two measurements are used in the article: 1) Supplier Closeness and 2) Control Risk Loss. Supplier closeness “Benefits a manufacturer because closeness helps suppliers achieve a good understanding of the manufacturer’s operations to better meet their needs.” Control risk loss refers to how much control over a process a manufacturer cedes to a supplier.
What is Cosourcing?
The article defines cosourcing as “A partnership between a customer and outside vendor involving intense teamwork and collaboration.” This may sound similar to consulting but there is a key difference between the two. Consulting does not involve a lot of active participation by the company’s own personnel. The consultant works independently of company staff. In contrast, cosourcing involves active participation between the vendor and company personnel. Features of cosourcing in manufacturing include the following:
Manufacturers and suppliers share resources. Suppliers may share their staff and
specialized tools while manufacturers may provide suppliers floor space in
their facilities. Suppliers may also lease tools and capital assets to the manufacturer.
Cosourcing agreement involves a process the manufacturer may not be able to perform in-house and the supplier has unique expertise.
Relationships may vary in length. The supplier may provide services for an indefinite period or may gradually turn over the process to manufacturer as its staff becomes proficient.
Manufacturers never cedes ownership and control of processes to the supplier.
Manufacturers rapidly expanding and/or entering into new markets will find cosourcing beneficial since it will allow them immediate access to expertise and reduce the need for costly expansion of their own staff. Cosourcing combines high supplier closeness along with low control loss risk.
Other Supplier Arrangements
Manufacturers attempt to find the lowest-cost supplier and forming long-term relationships is not an important factor. The manufacturer is completely independent from the supplier and maintains full control of their operations. Control Loss Risk: Low; Supplier Closeness: Low
Such agreements encourage long-term relationships with suppliers. The supplier usually agrees to certain quality levels, delivery levels, and performance of specific tasks. This type of agreement is used for JIT systems where steady supplies of quality items are required. Control Loss Risk: Low to Medium; Supplier Closeness: Medium
Vendor Managed Inventory (VMI) and JIT II:
VMI is “the process by which the vendor manages the inventory of its products in its distribution system.” What this means is that purchasing and inventory management is essentially outsourced to the vendor. VMI allows the manufacturer to shift these costs over to the vendor resulting in short-term cost savings. However, in such an agreement the vendor may be tempted to manipulate inventory levels and quality to achieve favorable sales figures. Without adequate controls. VMI can result in significant risks that may outweigh the savings. Control Loss Risk: High; Supplier Closeness: Medium
These companies are “Non-specific organizational form but usually project oriented.” Virtual companies are formed for short-term projects and are dissolved after project completion. It may have characteristics similar to cosourcing except for the absence of a long-term relationship. Such short-term mentality carries significant risks since “The supplier may become a competitor using skills learned from the prior project in a subsequent project.” Control Loss Risk: High; Supplier Closeness: High
In this type of agreement, the manufacturer gives up control over an entire process. In turn, the supplier assumes control for all aspects of the process except output specifications. Manufacturers usually resort to outsourcing as a way to cut costs. However, there are serious risks to this approach. The manufacturer may become so dependent on a single supplier performing a specialized task that a viable alternate supplier may not be found if there are any problems with the current supplier. It may not be possible for the manufacturer to assume these responsibilities since they may possess neither the expertise nor capital assets to do so. Control Loss Risk: High; Supplier Closeness: Medium
In this alternative, the supplier is purchased by the manufacturer or the manufacturer takes the process in-house. Similar to cosourcing, this agreement offers both low control loss risk and supplier closeness. However, vertical integration may not work since it usually requires extensive capital to purchase suppliers or to develop an infrastructure to perform the tasks in-house. In addition, there are usually problems related to integrating a supplier into the manufacturer’s corporate structure. Control Loss Risk: High; Supplier Closeness: High
Developed in Japan, keiretsu networks operate “As multi-company affiliations operating as parent-subsidiary.” It is similar to vertical integration but the main difference is that the supplier and manufacturer are legally separate. In essence, these networks are informal agreements based on strict cultural norms where “The supplier works and exists solely to serve the manufacturer.” The supplier cannot work for any other company except the manufacturer. Similar to cosourcing, keiretsu networks maintain low control risk loss and high supplier closeness. However, this type of agreement will never work in competitive markets such as the United States. Control Loss Risk: High; Supplier Closeness: High
The various supplier arrangements are summarized in the table below.
|Supplier Arrangements Summary*|
|Many Suppliers||Tradition approach. Typically uses a bid system. Suppliers not viewed as a strategic issue.||Little or no closeness or loyalty. Transaction based relationships.||Buyers and suppliers are independent.|
|Wide range of relationships.||Closeness is encouraged with emphasis on quality.||Buyers keep control, but suppliers are more active in the buyer's activities. Loss of control is greater than in a traditional system, Keiretsu, vertically integrated or cosourcing arrangement.|
|JIT II and VMI**||In-plant supplier reps. Equivalent to outsourcing the purchasing function.||Close formal in-house arrangements.||Buyers keep control of manufacturing, but suppliers control inventory and purchasing functions.|
|Keiretsu Networks||Culture based affiliations where families of companies in a closed-loop system serve in a supply chain hierarchy.||Extreme closeness where the suppliers exist to serve the parent in a cultural family type arrangement.||Buyer controls suppliers who exist to serve the buyer.|
|Virtual Companies||Usually short term project oriented with supplier serving an exclusive buyer.||Close in terms of purpose, but temporary.||Control by project leader where buyer and supplier work together on a common project.|
|Outsourcing||Supplier controls the processing.||Close relationship where buyer is dependent on supplier.||Buyer loses control except for output specifications.|
|Vertical Integration||Parent-subsidiary relationship with sub serving as supplier.||Ultimate closeness.||Buyer maintains control by purchasing suppliers.|
* Adapted from Clinton and Del Vecchio Exhibit 2, p. 8.
** Vendor managed inventory.
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