Sourcing of Logistics and Supply Chain Management

Chapter 1
Introduction to Sourcing
Sourcing in procurement is defined as a process to find, evaluate, and engage suppliers based on
set criteria to achieve cost savings and best value for goods and services at a price point & terms
that give the required margin to positively affect the company’s bottom line. The sourcing process
is carried out using a tendering process and is applied at tactical and strategic levels with the intent
to create distinctive value by finding the most appropriate suppliers at the lowest cost to gain a
competitive advantage.
In most organizations, the process of sourcing products or services is the first step in the supply
chain process. Sourcing involves finding a balance between the quality of products and raw
materials required and affordability. The goal for most procurement teams is to spend less and
increase the bottom line.

Meaning : Sourcing is an upstream part of the supply chain: It’s the process of strategically
choosing the right services and goods that a company needs to run their business. Sourcing is also
the act of buying goods, including seller selection, contract negotiation and measuring the long-
term performance of your suppliers.
Sourcing greatly impacts an organization’s operations, so establishing long-term relationships will
help companies gain a competitive advantage. Because after all, suppliers impact a company’s
operations on many levels: finances, inventory levels, quality of goods and timely arrival. A stable
sourcing process ensures your inventory levels will meet market supply and demand.
What is Sourcing?
Typically, sourcing is finding the most suitable supplier that provides the quality of goods or
services at a price point that gives the business owner the profit margins they need. Sourcing and
procurement management fit together like hand and glove. But before you can procure goods, it
is essential to:

• Find prospective suppliers: Identifying potential suppliers that can fulfill particular
product or base material requirements at reasonable prices.

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Sourcing of Logistics and Supply Chain Management

• Implement a rigid vetting process: Carefully verifying the quality, accuracy, and
efficiency of the delivered goods

This ensures that no mistakes are made during the sourcing process because it can be costly to
backtrack. While most business leaders focus primarily on the cost reduction benefits of strategic
sourcing, in today’s competitive market, leading companies have begun to look at creating value
while not ignoring cost and waste reduction.

This procedure includes searching for authentic suppliers who can efficiently provide these
resources while maintaining the required level of quality. This plays a very significant role, as
effective sourcing directly impacts a company’s ability to meet customer demands, affects
operational costs, and maintains a competitive edge in the market.

In today’s business world, customer expectations have increased, and companies have noticed a
sudden surge in requirements. Organizations, regardless of size, prefer agile supply chain strategies
to keep pace with the rapidly changing market. Strategic sourcing is essential in this approach, as
it is necessary to ensure top-notch goods, services, and raw materials for cost-effective
management while maintaining a balance of quality and affordability.

Through strategic partnerships with suppliers, organizations can streamline manufacturing and
distribution processes, resulting in a reduction of overall product costs. This helps the company
beat the competitive pricing that businesses often face.

A firm sourcing process is essential for connecting with the best suppliers for your products or
services, and it is crucial to maintain a backup supplier in case the primary one encounters
difficulties. Efficient sourcing directly impacts your business’s success and financial stability.
Three factors are central to the sourcing process, and these are:

• Cost structure
• Profit margins
• Competitiveness
All three factors affect businesses of all sizes.

The sourcing process involves:

• Collecting data on good quality sources of goods and services

• Negotiating contracts
• Market research
• Product testing for quality
• Considering outsourcing for goods
• Constituting standards that the company will use.
You must keep in mind that the end goal of sourcing is procurement.

Approaches to Sourcing

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Different types of Sourcing

To implement successful sourcing, you must have a thorough understanding of your entire
business strategy, i.e., you need to know what resources are required to deliver that strategy and
the market forces and specific risks associated with implementing particular approaches.

Acquiring cheap goods and services should not be the only goal of sourcing. Instead, procurement
teams should center sourcing activities around developing mutually beneficial relationships.
Depending on your sourcing needs and the goods you are trying to acquire, you can choose to
work directly with wholesalers, manufacturers, or sources from distributors.

That said, what types of sourcing should you consider?

1. Outsourcing
The most practical and straightforward example would be hiring a party outside a company to
perform services or create goods that were traditionally performed in-house. This can also be done
by migrating operations abroad or partnering with a domestic supplier. Both back and front office
functions can be outsourced.

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2. Insourcing
This type of sourcing involves you delegating a job to someone or a team within the company.
Most company leaders prefer this option when available because it is an excellent cost-saving
strategy that allows for on-the-ground monitoring of the quality of goods and services required.

3. Near-sourcing
This involves placing some of your operations close to where your end-products are sold.

4. Low-cost Country Sourcing (LCCS)

LCCS involves sourcing materials from countries with lower labor and production costs. This type
of sourcing focuses on cutting down the overall operating expenses of an organization. China has
become the go-to country for this sourcing method for most global corporations.

5. Global Sourcing
The world is now one giant marketplace. Buying goods and services from international markets
across geopolitical boundaries has become an easy process. This method has many benefits and
exposes your organization to different markets; moreover, you gain insight into how business is
conducted worldwide.

You also can access a new range of skills and resources that may not be readily available in your
country.

6. Prime/Subcontracting Arrangements
This arrangement involves a contract between a contractor and a subcontractor to perform a portion
of work that is part of a larger project. All contracts are dealt with under offshore law because the
agreement is between two offshore entities. Procurement teams can reduce the burden of dealing
with import or export restrictions

7. Captive Service Operations

Some organizations go as far as establishing and operating some form of a partly/ wholly-owned
entity overseas. This method makes room for greater control and allows you to control
confidentiality and security issues. However, your economies of scale will be negatively affected.

8. Professional Service
You can recruit the professional services of occupations in the service sector requiring special
training.

9. Manufacturing
The creation of new products either from raw materials or components.

10. Vertical Integration

Involves the merging of companies at different production and/or distribution stages in the same
industry. So, when a company acquires its input supplier, it is called backward integration; it is
called forward integration when it acquires companies in its distribution chain.

11. Few or many Suppliers

A multi-supplier strategy is commonly used for commodity products, and purchasing is typically
based on price. On the other hand, single-source purchasing refers to purchases from one selected

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supplier, even though other suppliers provide similar products. Sole-source procurement refers to
purchases with only one supplier.

12. Joint Ventures

This is a business entity created by two or more parties. It is generally characterized by shared
ownership, returns and risks, and governance.

13. Virtual Enterprise

This is when a network of independent companies (i.e., suppliers, customers, competitors) are
linked by information technology to share skills, costs, and access to one another’s markets.

As you can see, there are many types of sourcing. The various options mean that the management
of these relationships differs significantly.

Sole Sourcing
Sole sourcing is an approach where businesses use only one supplier to procure products or
services. It helps cut risks and costs by limiting the number of suppliers to deal with.
However, it also means having less choices when the current supplier goes out of business or
underperforms.
At times, businesses single source due to lack of other suppliers, so, one monopolist supplier can
offer the goods and services needed. This could be because of the unique nature of the product or
service, proprietary technology or expertise that cannot be easily replicated by other vendors.
However, there are also downsides to single sourcing. If the supplier experiences issues with
production, quality control or financial difficulties, the company is vulnerable to supply chain
disruptions. Sole sourcing can also limit competition, leading to less innovation and less
competitive pricing.
ADVANTAGES
Sole sourcing advantages:

• Managing one supplier is easier and less cumbersome than managing multiple suppliers
• Access to unique capabilities of the sole source supplier.
• Sole sourcing is not time-consuming. As there is just one supplier that offers the goods or
services, you don’t need to go through the process of finding the most appropriate
supplier.
• The supplier is knowledgeable about the products they produce.
DISADVANTAGES
Sole sourcing disadvantages:

• There is a risk of less buyer-supplier cooperation and high levels of dependence on the
supplier.
• As only one supplier is available, this can run the risk of lower supplier quality.
• Higher procurement costs as there isn’t an option to negotiate a better deal.
• There could be significant delays when choosing to sole source. As the supplier only
produces that product, there could be a hold-up if they experience multiple orders.

Single Sourcing

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Sole sourcing is when businesses deliberately choose a supplier to work with despite having
other options available. This could be because of multiple reasons — the buyer might have a pre-
existing relationship with the supplier, or the supplier has a stellar reputation and track record of
delivering high-quality products or services.
However, the con could be the inability to form deeper supplier relationships. This approach may
not be able to offer businesses the peace of mind that would otherwise come with known
suppliers and their performance and quality.
Compared to sole sourcing, single sourcing has more benefits – mainly because the procurement
teams are in control. Procurement teams can move to better alternatives when current suppliers
underperform and effectively negotiate the terms and conditions.
ADVANTAGES
Single sourcing advantages:

• It’s much easier to negotiate a better deal with different suppliers

• Single sourcing can offer continuous levels of quality and price stability
• Single sourcing can result in reduced order lead times
• Building a strong relationship is easier with just one supplier and helps to build trust
between buyer and supplier
• Single sourcing often means admin costs are reduced as you’re placing orders with just
one supplier
• It’s easy to integrate systems with one supplier
DISADVANTAGES
Single sourcing disadvantages:

•Single sourcing can be a high-risk method as dependency on one supplier increases your
vulnerability of supply.
• If your supplier experiences disruption, this could mean you are not able to get the
supplies you need.
• Single sourcing may mean that you need to benchmark market prices periodically to
ensure you are achieving the best value for your organisation.
• Alternative suppliers may bring new and innovative products into the marketplace that
you may not have awareness of or access to.
What is the difference between single sourcing vs. sole sourcing?

SlNo. Single Sourcing Sole Sourcing

1 It is where a particular supplier is It is where there is only one supplier
chosen by an organisation, even when available for the required product or service
other suppliers are available. that your organisation needs. It’s also
sometimes referred to as monopolistic
supplier.
2 Single sourcing decisions are typically When opting for sole sourcing, you have no
made at top management level. choice but to work with that supplier.
3 It’s usually chosen to reduce costs as This usually has higher costs involved in it.
it’s possible to negotiate a better deal
with a supplier.

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4 When opting for single sourcing, it’s When restricted to sole sourcing, innovation
important to consider your suppliers and thinking outside of the box may offer
prior commitments and if a past options to introduce new materials and
relationship was successful. supply possibilities. This may then offer an
opportunity to remove the monopolistic
supplier from the supply chain.

Dual Sourcing :( A SAFETY NET DURING SUPPLY CHAIN DISRUPTIONS)

Dual sourcing is a supply chain management strategy that involves engaging two suppliers to
provide a specific component, material, product or service. While "dual sourcing" strictly means
using two suppliers, it's often used interchangeably with "multi sourcing," which can involve
more than two sources.

The idea behind this approach is to reduce the risk associated with depending solely on one
supplier. Unexpected factors like adverse weather, material shortages, recalls, natural disasters
and geopolitical issues can disrupt supply chains and spur businesses to adopt dual sourcing.

At its core, dual sourcing entails building relationships with multiple suppliers for a critical
product or component. When a primary supplier faces challenges, businesses can swiftly pivot to
an alternative source, ensuring uninterrupted operations and safeguarding against potential
disruptions.

ADVANTAGES
• Dual sourcing minimizes supply chain risks by engaging two suppliers, reducing
dependency on a single source.
• Benefits include addressing geopolitical challenges, bolstering supply chain resilience,
accommodating capacity needs and shortening lead times.
• Success in dual sourcing hinges on prudent supplier selection, vulnerability identification,
transparent communication, and leveraging technology for real-time visibility.

Fostering Competition and Innovation:

Introducing a secondary supplier stimulates healthy competition among suppliers. This

encourages suppliers to provide competitive prices, enhanced quality, and innovative solutions,
ultimately benefiting businesses by improving supplier value.

Addressing Geopolitical Challenges:

Global business landscapes are vulnerable to geopolitical complexities that disrupt supply chains.
Trade tensions and political disputes can impact a primary supplier's reliability. Dual sourcing

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enables companies to pivot to different sources, reducing vulnerability to geopolitical disruptions

and ensuring business continuity.

Building Resilience:

Dual sourcing's strength lies in enhancing supply chain resilience . By embracing this strategy,
companies create adaptable networks capable of overcoming different challenges. This resilience
extends across the entire business ecosystem, safeguarding operations, customer satisfaction and
market standing.

More Capacity:

Depending on the product and selected supplier, businesses may find dual sourcing necessary to
accommodate increased capacity. When faced with a substantial demand for their product that a
single supplier cannot meet, dual sourcing becomes a viable solution. In some cases, fulfilling
this demand might even require more than two sources.

Shorter Lead Times:

Manufacturers traditionally adhere to a four-week lead time between shipments, an industry

standard accepted by businesses. However, the adoption of dual sourcing provides an alternative
approach. By utilizing multiple sources, companies can stagger their shipping calendar, resulting
in products being shipped every two weeks instead of the standard four weeks.

Support for Different Regions:

For businesses targeting multiple regions, dual sourcing emerges as an invaluable tool. By
engaging two manufacturers situated in distinct regions and segmenting the areas served,
companies can optimize shipping costs related to inter-region product movement. This strategy is
particularly valuable for international companies, potentially providing tariff benefits by
minimizing product imports and promoting local production.

DISADVANTAGES

More Negotiations:

When a business considers engaging with two suppliers instead of one, the workload
significantly increases. This involves conducting thorough research and negotiations with both
suppliers, effectively doubling the effort expended for each supplier. The decision to opt for two

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suppliers should be justified by the potential increase in profits, considering the additional work
required to establish relationships with both.

Discrepancies Among Suppliers:

Despite the intensified efforts involved in collaborating with two suppliers, it's important to
acknowledge that the experience with each supplier may not be uniform. Each supplier operates
with slight variations in their processes. Consequently, businesses need to ensure that the chosen
suppliers run their operations effectively, ensuring seamless collaboration.

Inventory Management:

Managing products sourced from two different suppliers necessitates effective inventory
management systems. Implementing these systems enables accurate tracking of product locations
within the warehouse, facilitating easy retrieval.

Quality Control Challenges:

Discrepancies among suppliers can potentially impact the quality control of products offered.
Quality control is a paramount consideration in product manufacturing and sales. Differences in
production approaches and quality control standards among suppliers can lead to varying product
quality.

Multi Sourcing:

Multi-sourcing, also known as multiple sourcing, is an outsourcing approach in which products

or services are contracted to various suppliers needed to conduct the business instead of using
traditional single sourcing.
The outsourcing model has been popular over the years as companies scale up and require specific
supply needs to accommodate their growth. Yet, many companies have been questioning and
doubting the effectiveness of having one provider meet their procurement objectives. Instead, they
adopt a new approach by having multiple vendors involved, known as “multi-outsourcing.”
Increasingly, many businesses consider outsourcing as a part of their procurement strategy to
maximize performance and gain a competitive advantage.

Leveraging multi-sourcing can create flexibility and mitigate the risks of causing supply chain
disruptions from unexpected events such as natural disasters or the most recent coronavirus
outbreak. On the other hand, working with multiple suppliers adds complexity to the supply chain,
making it challenging to manage suppliers. To get a better understanding, here are some main pros
and cons of multi-sourcing:

ADVANTAGES
• Risk Deduction: Less reliance on any individual supplier increases the flexibility in the
supply chain if something goes wrong.
• Supply Chain Stability: reduce the significant risk across the products or services through
supply chain diversification

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• High Product Quality: Get the highest product and service quality at the best possible
price, thanks to a larger resource pool
• Innovation: build innovation through competition
• Negotiation: Be able to monitor which suppliers perform best, which helps you make a
better deal in the future.

DISADVANTAGES
• Supplier Management: Difficult to build and maintain a good relationship with multiple
suppliers simultaneously.
• Administration costs: Potentially increase the management overhead costs associated
with managing and communicating with numerous suppliers.
• Quality Control: A challenge of keeping track of quality control and efficiency
• Integrations Difficulties: When multiple suppliers take over different parts of a product,
there will be an issue integrating them, resulting in additional costs and time.
Selecting the appropriate sourcing strategy hinges on several factors, including product complexity,
market volatility, and risk tolerance. For instances, intricate products might require multi-sourcing
to ensure quality diversity. In contrast, commodity goods could lean towards single sourcing for
cost efficiency. A comprehensive comparative analysis of the three strategies based on these
factors can guide businesses in making informed decisions aligned with their goals and industry
trends.

Sourcing strategies form the backbone of a resilient and effective supply chain. The choice
between single sourcing, dual sourcing and multi-sourcing is influenced by an array of factors,
each strategy carrying its own set of benefits and risks. By understanding these strategies and their
implications, businesses can make strategic choices that foster growth, mitigate risks, and
withstand the challenges of an ever-changing market. The landscape of sourcing strategies
continues to evolve with emerging trends. Digitalization is revolutionizing procurement processes,
enabling real-time supplier collaboration and efficient demand forecasting. Sustainability
concerns are driving companies to seek suppliers aligned with eco-friendly practices, impacting
multi-sourcing decisions. Noteworthy companies like Amazon are already investing in Al-driven
supplier selection to enhance efficiency and minimize risks.

What is a Purchasing strategy?

A purchasing process describes the steps procurement professionals must go through to procure a
good or service (For instance, performing a vendor risk analysis.) Your purchasing strategy,
however, is the principles that define how you make decisions about purchasing. For example, A
cost reduction purchasing strategy focuses specifically on identifying cost saving Opportunities. It
does not describe the steps one must go through to purchase anything, since that's what the buying
process is for. But it does provide the basis for decision making. For example, a procurement leader
following a cost reduction strategy will weigh 2 potential vendors and choose the cheapest option.
Sometimes companies might go through a holistic approach by implementing multiple purchase

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strategies or single purchase strategies also. For example, you might combine a cost reduction
strategy with a global sourcing strategy which seeks to create vendor relationships worldwide, thus
taking advantage of cost efficiencies Reducing risk by diversifying the vendor pool.

Purpose of Purchasing Strategies?

Companies implement purchasing strategies in order to:

1. make cost effective purchasing decisions from a group of efficient vendors who will
2. deliver quality goods
3. on time and at
4. mutually agreeable terms.

Examples of Purchasing Strategies ...

1. Single Source Procurement

For example some companies may decide to undertake a single source procurement strategy
that involves obtaining excellent dedicated service from a single vendor. These strategies are
predominant when sourcing for IT or indirect purchasing such as office supplies and cleaning.

2. Purchasing Cycle

Other companies may use a procurement strategy of using a core purchasing cycle. This is where
they order from a group of regular vendors and use outsourcing procurement for their larger and
ad hoc purchases.

3. Procurement Auctions

Still others, particularly when they are seeking labor for short-term projects will use procurement
auctions in order to obtain the best pricing levels.

There are few purchasing strategies that most of them implement.

1. Supplier Optimization & Relationship Building

The company chooses an optimum mix of vendors who can provide the best prices and terms. This
process usually means that the less able suppliers who cannot provide a quality service at the terms
and prices required are discarded. This is by far the most common of the various purchasing
strategies.

2. Total Qualify Methods (TQM)

Total Quality Methods, require the vendors to provide an ever increasing quality service with zero
errors. The supplier ensures purchasing best practices using a number of tools such as six sigma.

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3. Risk Management

As more companies obtain their supplies from countries such as China and India, they are more
concerned with the risk management of this supply chain. Whilst these countries can supply
products at very advantageous prices, these advantages can be soon negated by a natural or human
disaster.
• Japan's Fukushima Nuclear Disaster!

Japan's Fukushima Nuclear Disaster in 2011 shook up the supply chain as in the race to provide
better quality at lower prices, manufacturers picked very narrow, optimized supply chain. They
put all their eggs with one supplier that had the best product at the lowest price. This resulted in
production delays, product shortages and higher prices, since manufacturers had not factored risks
from a natural disaster of such a great scale.
• Covid-19 Risks Reversed?!

With Covid-19 in 2020 the situation became 'funny'. When Covid-19 hit China in January 2020
Buyers from Europe were confirming whether their Chinese suppliers could deliver as agreed -
these suppliers were struggling to meet demand due to lock-downs in China.

However 2 months later the situation 'turned-around' because Covid-19 hit Europe, US & other
parts of the world - now the Buyers were asking their Chinese suppliers to delay delivery as they
were not operating due to lock-downs in Europe.

4. Global Sourcing

Large multinational companies see the world as one large market and source from many vendors,
regardless of their country of origin.

Implementing a global strategic sourcing strategy means efficiently sourcing goods and services
from any country that can manufacture the goods or provide the service more economically.

While Global Sourcing is here to stay, organizations need to tread carefully and have plans in place
to manage risks.

5. Vendor Development

Depending on the scale and depth of services or goods a vendor provides, it might be necessary to
work closely with such vendors. Helping in developing processes that assist these vendors to come
with better or cheaper products, helps companies to reduce costs.

Or in cases where a company is dependent upon just one supplier for their products & the supplier
is unable to perform to the required standards, the purchaser may assist the vendor in improving
their service or implement processes to improve their procurement cycle. This ultimately would
help the purchaser/buyer have a reliable supplier and product deliveries.

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6. Green Purchasing

This is one of the more common purchasing strategies for governments and local governments.
This strategy champions the need for recycling and purchasing products that have a negative
impact on the environment.

7. Building & Training People's Procurement Skills

While training people is the soft-side of purchasing & procurement strategies, this is probably the
most important strategy - all the other strategies above would have to be implemented by people,
and if they don't have the necessary skills to deliver the procurement strategy, the strategy delivery
will fail.

For many years since it started in 2014, Deloitte Annual CPO Survey reveals that more than half
of CPO's & Procurement Director's worldwide, say that their teams do not have the necessary skills
& capabilities to deliver their procurement strategy. This number remains more or less constant
regardless of the year the survey is published.

8. Risk management: Risk management purchasing strategy prioritizes reducing risk in purchasing
decisions. Of course, identifying and mitigating risks is essential for all procurement teams,
regardless of your chosen purchasing strategy. However, teams who follow a risk-specific
purchasing strategy are more averse to risk, meaning they’re more likely to choose a more
expensive option if the perceived supplier risk is lower.

9. Cost reduction :A cost-reduction purchasing strategy is reasonably self-explanatory.

Procurement teams prioritize sourcing decisions that reduce costs. The most obvious outcome of
this purchasing strategy is to always side with the cheapest provider, even if other vendors offer
better total value. However, the best procurement teams running a cost-reduction purchasing
strategy examine the total cost of ownership for any potential purchase. Say you’re weighing up
two CRM tools. One costs $9 per month, and the other costs $21 per month. The cheaper option
doesn’t integrate with your email marketing platform, while the more expensive one does.
Choosing the $9 tool would mean you also need to fork out for something like Zapier to build a
custom integration, meaning the total cost of that tool is higher.

10. Centralized purchasing: Centralized purchasing requires a central purchasing team to make all
buying decisions. While individual stakeholders are involved in the purchasing process—they
need to help the procurement team understand the company’s needs—the purchasing team does
the vendor assessment, vetting, and decision-making.

This approach provides several benefits:

• Companies can take advantage of economies of scale by negotiating favorable pricing for
large, multi-department contracts
• Purchasing risk is minimized, as a centralized team is more likely to stay compliant with
internal policies
• Overlapping licenses are avoided because department leaders are not responsible for
independently sourcing software solutions

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11. Decentralized purchasing: Decentralized purchasing, the counterpart to centralized purchasing,

allows branch or department leaders to make purchasing decisions for their teams. While this opens
businesses up to a little more risk and can reduce their ability to access economies of scale,
decentralized purchasing is beneficial in speeding up procurement processes by eliminating red
tape and lengthy sourcing decisions. Department leaders tend to know exactly what they’re looking
for—a newly hired VP of Marketing likely knows which email automation platform they want—
so a decentralized strategy allows them to work quickly.

12. Corporate social responsibility: Corporate social responsibility is a business model that
prioritizes the social accountability of a business beyond simply turning a profit. As a purchasing
strategy, corporate social responsibility includes green purchasing initiatives but also expands to
concerns such as:

• The work conditions and remuneration of employees.

• Their commitment to diversity and equity policies
• The shipping methods the supplier uses
• The social causes potential vendors are committed to or involved in

To adopt this purchasing strategy, you must define which aspects of corporate social responsibility
are most important to your organization and which are non-negotiable commitments. Then, design
a system for assessing and ranking the commitment of potential vendors to those causes and choose
suppliers most closely aligned with your values.

What Do Procurement & Purchasing Strategies Accomplish?

Overall effective purchasing strategies are those that help companies promote their procurement
best practices of ...

• Minimizing costs,
• Maximizing quality, &
• Ensuring that quality products are delivered on time.

What does tendering mean?

One way of procuring contract transport services is through logistics tendering. A logistics tender
is when shippers request carriers to quote for their business (shipping their goods) using an
'invitation to tender'.

The shipment and transport data is prepared before the invitation to tender so carriers can see
how much and what type of cargo the shipper wants to transport and on which lanes. Once the
tender data is prepared, it is sent to the carriers so they can analyse the shippers needs and quote
a price based on their requirements.

Shippers then assess the quotes to determine which service provider has offered the best terms
under the required conditions. They compare the quotes using different scenarios, such as an
incumbent scenario (the cost of staying with the same carriers they're currently using) or a 'best

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price' scenario (the cheapest quote combination).

Shippers will usually choose several carriers to work with for different lanes - or even contract
multiple carriers for one busy lane.

The Role of Tendering in Business

Tendering is an essential part of procurement and supply chain management, and it has a
significant impact on the success of a business. Tendering helps businesses to:
• Get the best value for money: Tendering ensures that the buyer gets the best value for
money by selecting the best bid based on a set of criteria.
• Promote competition: Tendering promotes competition among suppliers, which helps to
reduce costs and improve the quality of goods and services.
• Ensure transparency and fairness: Tendering ensures transparency and fairness in the
procurement process, which helps to build trust between the buyer and the supplier.
• Find the best supplier: Tendering allows businesses to find the best supplier for their needs
based on a set of criteria.
Tendering is a complex process that requires careful planning and execution. It involves a range
of activities, including preparing the tender document, identifying potential suppliers, evaluating
bids, and selecting the best bid. Tendering is an important part of procurement and supply chain
management, and it has a significant impact on the success of a business.

Types of Tenders:

1.Open Tender– an open tender is open to any company to apply to provide the goods or services
required. So long as the potential supplier can fulfil the stated requirements they can apply. This
procedure is generally used where the expected number of responses is likely to be easily
manageable by the management team. The advantage of this procedure is the company can receive
many applications from many potential new suppliers without the additional work of screening
suppliers first. The disadvantage of this procedure is it does leave the requirements open to
interpretation (unless extremely specific) and the company could receive many unsuitable
responses. If a high volume of applications are made this will lead to a lot of administration work
to filter and process each response.

2. Restricted, Limited or Closed Tender – a restricted tender involves screening any new potential
suppliers first to ensure they are suitable to apply before a tender application can take place. This
pre-qualification process ensures only suitable suppliers are short-listed and invited to tender. Any
potential supplier can still express an interest in responding to the tender but they must pass the
pre-qualification process first. This has the advantage of filtering out suppliers that are unsuitable
at an earlier stage which should mean all companies that do respond to the tender will all be capable
of fulfilling the requirement. The disadvantage of this process is the additional administration work
early on – depending on the number of suppliers that express an interest. It can also prevent new
suppliers from responding if they are unfamiliar with the tender process.

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3.Competitive Dialogue – competitive dialogue is similar to a Restricted, Limited or Closed Tender

but has a dialogue stage to discuss aspects of the tender contract. Although adding an additional
stage, this dialogue can help the purchasing company and potential supplier clarify specific details.
This has the advantage of further clarification early on in the tender process. This has the advantage
of further ensuring the most suitable suppliers respond to the tender requirement. The disadvantage
is it will slow the process considerably especially if the contract has a high level of interest, which
could become an issue if there is a time deadline for the requirement.

4.Competitive Negotiation – the negotiated tender procedure will involve assessing potential
suppliers to ensure they meet all required criteria before being invited to apply to tender. This
procedure is much more in-depth than the restricted or competitive dialogue procedure. This
procedure is often used for a ‘known’ or ‘qualified’ supplier that has been used in the past. The
disadvantage of using a single ‘qualified’ supplier is the purchasing company limits it options and
base for comparison. There may be more suitable and cost-effective suppliers available which, for
whatever reason, are not classed and ‘qualified’ and will therefore be excluded from the negotiated
tender contract. This form of tendering can be seen as anti-competitive and exclusive.

Regardless of the tender procedure chosen the company must abide by the tender principles to
ensure fair treatment. Many companies prepare a tender statement outlining the principles and how
they are addressed within the company. This can also be outlined within the tender information
pack.

Intra Company Trading:

Intra company Trading refers to the exchange of goods, services, or information between different
departments or divisions within the same company. Unlike intercompany trading, which occurs
between distinct legal entities. Intercompany transactions happened within a single organization,
albeit between its different parts. These transactions can involve the transfer of products, services,
shared resources, and information. Understanding intra company trading is crucial for managing
internal resources efficiently, optimizing tax strategies and ensuring compliance with legal and
regulatory requirements.

Importance of intra-company trading.

1. Cost reduction and efficiency : Intra Company Trading allows for the internal Transfer of
goods and services at cost or at a reduced margin, leading to significant savings compared
to purchasing from external vendors. This can result in lower overall operational costs and
increased efficiency within the company.
2. Streamlining Operations: by trading internally, companies can streamline their operations
and reduce dependency on external suppliers. This can lead to faster turnaround times,

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better inventory management, and more synchronized production and distribution

processes across different parts of the company.
3. Quality control: maintaining high-quality standards is easier when production and services
are kept within the company. intra-company trading ensures that the quality of goods and
services remains consistent, as the entire process is controlled by a single entity with
uniform standards.
4. Tax optimization: Intra-company trading can be used as a strategy for tax optimization.
By strategically setting transfer prices for goods and services traded between company
divisions in different countries, corporations can allocate profits in a way that minimizes
overall tax liabilities, taking advantage of different tax rates in different jurisdictions.
5. Risk Mitigation: trading within the company can help mitigate risks associated with
currency fluctuations, supply chain disruptions, and geopolitical uncertainties. It provides
a more predictable environment for planning and executing business strategies.
6. Knowledge and Technology Transfer: Intra- company trading facilities, the easy transfer
of knowledge, technology, and best practices across different divisions of a company. This
can accelerate innovations, improve competitive advantage, and lead to the development
of new products and services.
7. Market penetration and expansion: Companies can use intra- company trading to test new
markets with minimal risks. By supplying new regions or segments from an existing
internal source, companies can gauge market demand and preferences before committing
significant resources to external production or supply chain expansions.
8. Financial Flexibility: This can be provided to the company by enabling internal financing
options. Funds can be moved across borders through intra-company transactions,
providing liquidity where it is most needed within the company.
9. Regulatory compliance: in some cases, intra-company trading can help companies comply
with local content requirements or trade regulations. By manufacturing or sourcing certain
components internally from a local division, companies can meet regulatory standards for
local production or content.

Challenges in Intra-company trading:

• Transfer Pricing compliance: one of the most significant challenges is adhering to

international transfer pricing regulations. Companies must ensure that the price charged in
intra-company transactions for goods, services, or intellectual property complies with the
arm's length principle, meaning they are consistent with prices that would be charged
between independent entities. Failure to comply can result in significant penalties and back
taxes alongside reputational damage.
• Complex tax regulations: Navigating the complex web of international tax laws and treaties
can be daunting. Each country has its own rules regarding taxation of intracompany
transactions, and these rules can change. Managing tax liabilities effectively while
minimizing risks and ensuring compliance requires a deep understanding of these
regulations and continuous monitoring of changes.
• Customs and Duties: Intra Company trades the cross international borders may be subject
to customs duties and import taxes, which can vary widely from country to country.

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Managing these costs and ensuring compliance with all relevant customs regulations adds
another layer of complexity to intra- company transactions.
• Currency fluctuations: transactions across borders involve currency exchanges, exposing
the company to foreign exchange risk. Fluctuations in exchange rates can significantly
affect the cost and profitability of intra-company trades. It will require sophisticated
financial instruments and strategies to manage the risk.
• Resource allocation and coordination: coordinating intercompany training activities
requires significant managerial effort and resources. Ensuring that all parts of the
organization are aligned in their objectives, understand the strategic importance of these
transactions and efficiently manage the logistics involved can be challenging, especially in
large and geographically dispersed companies.
• Internal conflicts and Incentive Mis alignment: Different segments of a company may
have competing priorities or incentives that conflict with the overall goals of intra-company
trading. For example, a manufacturing division might be incentivized to maximize its
output and efficiency potentially at the expense of the quality or specifications required by
a sister division in another country. Aligning these incentives requires careful management
of internal performance metrics and rewards.
• Financial Reporting and Consolidation: Intra-Company transactions must be accurately
recorded and eliminated in the consolidation process for financial reporting purposes. This
requires robust accounting systems and practices to track these transactions and ensures
that they do not artificially inflate the company’s revenue or profit figures.
• Operational and Logistical complexity: Managing the logistics of Intra company trade,
including production Scheduling, shipping, inventory management, and compliance with
local regulations, can be operationally complex. This complexity increases with the scale
of operations and the number of countries involved.
• Intellectual Property and Data Security: When intra-company trading involves the transfer
of intellectual property or sensitive data, protecting this information across different
jurisdictions with varying legal protections becomes a critical concern.
• Reputational Risks: Companies must manage the perception of their intra-company trading
practices among stakeholders, including governments, investors, and the public. There is
a risk that aggressive tax optimization strategies or perceived non-compliance with fair
trading practices could lead to reputational damage.

Transfer Pricing Arrangements:Every business has an inherent supply chain according to which
its activities are organized. Such supply chain is designed based on a host of factors, including
both commercial as well as legal. Tax policy is an integral part of the legal factors which help in
shaping a supply chain.

Amongst these factors, TP analysis plays a very crucial role, especially in the case of cross-border
trade between related parties, as it helps in determining the pricing arrangement to be followed
between such parties. In this article, we shall discuss how TP planning plays a pivotal role in
supply chain structuring/ restructuring.

Introduction

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Simply speaking, a supply chain refers to the arrangement of various natural resources, capital,
manpower, technology and other inputs and activities required to produce a finished good or
service in a logical and systematic sequence.

For e.g., the supply chain for a manufacturing concern (as depicted in the figure below) begins
with the research and development activities carried out to design a product which meets
customer's requirements, followed by other activities such as vendor selection and procurement,
processing, marketing and distribution, logistics, and after-sales support.

While the supply chain of an organisation operating in a single country maybe simple in design, it
becomes more complex in case of multinational corporations ('MNCs') having globally integrated
operations.

Different MNCs adopt different form of supply chains. While some go for the 'decentralized' or
'local' business structure wherein all the functions required to operate in a country are located in
such country, others may choose the 'centralized' or 'regional/ global' business structure, wherein
common functions in different countries are consolidated at one place. Similarly, MNCs can also
opt for a mixed version, wherein the business model may have characteristics of both these
structures.

From a taxation standpoint, a global supply chain can throw up various challenges such as checking
applicability of various taxes, enhanced reporting, documentation requirements, etc. However,
such a structure also presents the MNCs with an opportunity to rationalize their tax costs, while
ensuring their commercial objectives are also met.

Understanding the TP aspect of supply chain structuring/ restructuring

Generally, the supply chain of any MNC will involve interaction of various group companies
across national borders in the form of various intra-group transactions. This brings TP regulations
of the concerned jurisdictions into play. Although each country may have certain variations in their
domestic TP Regulations, but ultimately the intent of such regulations is to ensure that income
arising or expenses accruing in their jurisdictions by virtue of intra-group transactions are in line
with the arm's length standard, i.e., are more or less in line with the results which would have
prevailed in a comparable third party scenario.

Taking cognizance of the base erosion and profit shifting ('BEPS') exposure to which a country
can be exposed on account of non-arm's length cross-border transactions between related parties,
increasing number of countries are opting for introducing or revamping their TP regime in order
to plug such revenue leakages.

A detailed and robust TP analysis is much more than determination of the arm's length return
which should have been earned by the transacting entities. It involves multiple stages which may
help an MNC in effectively planning its supply chain. Given below is a broad framework to be
adopted for conducting any TP analysis for supply chain structuring/ restructuring:

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♦ Accurate delineation of the intra-group transactions involved: Accurate delineation of

the impugned intra-group transaction is of utmost importance since this will form the base
for any further analysis. Quite often, what may seem like an ordinary transaction on a prime
facie review, may come out as a complex arrangement having an altogether different
intention.
For e.g.: Co. A in India buys goods from third-party manufacturers in India and resells the
same to its holding company, Co. B, in USA. Prime facie, it seems that Co. A is operating
as a routine distributor, which resells goods to its parent company, and therefore, should be
remunerated as a distributor. However, a deeper analysis shows that Co. B has appointed
Co. A as its procurement agent, wherein Co. A is helping Co. B in procuring goods (as per
the design and specifications laid down by Co. B) from manufacturers in India. The role of
Co. A is purely limited to coordination and liaising with these manufacturers to support Co.
B's procurement activities by performing functions such as identifying potential
manufacturers, explaining product requirement to manufacturers finalised by Co. B, quality
testing, arranging logistic support, etc. Furthermore, Co. A is buying and reselling goods
only for administrative convenience as the third-party manufacturers were not ready to ship
goods to a foreign company. In this case, the accurate delineation of the transaction changes
the role of Co. A from a distributor to a procurement support service provider.
♦ Understanding the functional, asset and risk ('FAR') profile of different entities
involved in the supply chain: The next important step in the TP analysis is to analyse the
FAR profile of the transacting entities. This helps in understanding the role and
responsibility of each entity in the transaction.
♦ Deciding the economic characterization of each entity: The FAR analysis helps in
determining the characterization, i.e., the economic nature, of the entities involved. This
helps in identifying the least complex entity.
♦ Identifying an appropriate pricing model for each entity/ function: Every function
performed, and each risk assumed by an entity may warrant an additional return. Therefore,
the FAR analysis and the consequent economic characterization help in determining the
appropriate pricing/ remuneration model suited for the transaction.
♦ Determining an arm's length remuneration: Once the pricing model has been identified,
a detailed economic analysis is conducted which involves selection of tested party, most
appropriate TP method, and consequent identification of comparable uncontrolled
transaction(s)/ entities to determine the arm's length price.
TP analysis involves a careful consideration of various factors, including the roles and
responsibilities assumed by different group entities involved, in order to understand whether such
entities are operating as risk bearing entities or a risk insulted entities or a mix of both, depending
on the risk and function involved. This is true for most of the commercial functions, be it
manufacturing, trading or provision of services. This identification of FAR profile or economic
characterization then in turn plays a crucial role in determining the arm's length return. For e.g. –
the return which should be earned by a full-fledged technology owning manufacturing entity will
always be greater than a risk insulated contract manufacturing entity which maybe performing
various functions but is operating in a risk insulted environment. It is a well-established economic
principle that higher the functions and risks, higher is the expected return. This relation between
FAR profile and return is also explained in the figure below:

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Therefore, by carefully analysing the FAR profile of different group entities involved in any intra-
group arrangement, an MNC can change the way in which profits are allocated amongst different
entities. It is also important to note that such tax efficient planning can be done even in an existing
structure and is not something reserved for new structures only. Multinational groups can revisit
their existing structures to identify any potential TP challenges in their existing model (such as
mismatch between FAR profile and remuneration model) and make appropriate changes. Similarly,
MNCs can also restructure themselves for other business reasons (such as change in marketing
strategy or business focus), if needed, after properly analysing the impact of such changes (such
as exit charge or other business restructuring implications).

Supply chain planning: Impact of other taxation policies

Whenever an MNC is reviewing or evaluating their existing or proposed supply chain, it is also
advisable to consider the impact of other taxes in detail before making any final decision. Factors
such as regulations and tax rates applicable on different form of legal entities, withholding taxation
regime, impact of international taxation, foreign exchange regulation, indirect tax regime, etc. can
play a critical role in supply chain structuring/ restructuring.

The reason a business needs to consider the above factors is that few simple choices may have a
significant impact on the taxation liability of the group in future. A well thought out and planned
supply chain can help business organisations in reducing their effective tax rate, while at the same
time allowing sufficient flexibility for scalability of operations, cost-effective repatriation and exit
options.

Implications of International Sourcing:

Businesses must constantly source resources, goods, and components from diverse parts of the
world in today's linked world. The practise of "global sourcing" has a number of advantages,

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including lower costs, easier access to more suppliers, and the possibility for innovation. It does,
however, also create a complicated web of difficulties and dangers. Effectively navigating global
supply chains is a key competency for companies aiming to succeed in the global market.

This post will serve as an in-depth resource for worldwide sourcing, including its most important
elements, tactics, and best practises. By the conclusion, you'll have a better idea of how to use
international sourcing to benefit your company.

What Is Global Sourcing?

Global sourcing is the process of obtaining goods and services from around the world to meet the
needs of a business. This can range from sourcing raw materials, to outsourcing production, to
finding new suppliers or distributors. It’s a way for companies to take advantage of different
countries’ resources and capabilities to create a competitive advantage.
Global sourcing has become increasingly popular as technology has made it easier to work with
suppliers and partners from around the world. It’s also become more affordable, as companies
have access to a larger pool of potential suppliers.

Emerging markets sourcing, on the other hand, is a more targeted subset of global sourcing. It
focuses on obtaining products or services from suppliers in developing economies, which are
distinguished by fast economic expansion, industrialization, and, in many cases, reduced labour
and production costs.

Challenges of Global Sourcing

Despite the potential benefits of global sourcing, it also comes with a number of challenges. The
common obstacles include political and economic instability, language and cultural differences,
legal and regulatory issues and currency fluctuations.

Legal and Regulatory Issues

Different countries have different laws and regulations, and it’s important to ensure that suppliers
comply with them. It’s important to do due diligence when working with suppliers from different
countries. This includes researching local laws and regulations and monitoring suppliers for any
issues.

Currency and Exchange Rate Fluctuations

Currency and exchange rate variations can also be challenging when it comes to global sourcing.
Different currencies can fluctuate in value, which can affect the cost of goods and services.
To mitigate this risk, it’s important to monitor these fluctuations and understand how they could
affect your bottom line. It’s also important to consider ways to guard against currency risks, such
as using forward contracts or hedging strategies.

Political and Economic Instability

Changes in government or in the wider economy can affect the cost of goods and services and can
make it difficult to do business.

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To mitigate this risk, it’s important to pay close attention to the political and economic situation in
the countries you’re sourcing from. This includes monitoring news reports and staying up to date
with any changes that could affect your operations.

Language and Cultural Barriers

Language barriers can be a major obstacle when working with suppliers from different countries.
This can make it difficult to communicate effectively and can lead to misunderstandings and delays.
Cultural differences can also create challenges when it comes to global sourcing. Different
countries have different values and customs, and it’s important to be aware of these when working
with suppliers.
For example, a supplier in China might be used to working with a different set of ethical standards
than one in the US. It’s important to make sure that suppliers in different countries understand the
values and expectations of your company.

Benefits of Global Sourcing

Despite the challenges associated with global sourcing, there are also a number of benefits. Here
are some of the advantages of global sourcing:

Cost Savings

One of the biggest benefits of global sourcing is cost savings. By sourcing goods and services from
different countries, companies can take advantage of different economies of scale, access cheaper
labor and materials, and reduce production costs.

Access to New Markets and Suppliers

Global sourcing also allows companies to access new markets and new suppliers. By sourcing
from different countries, companies can find new suppliers with different capabilities and
resources, access new customers and expand their reach.

Opportunities for Innovation

Finally, global sourcing can also create opportunities for innovation. By working with suppliers
from different countries, companies can find new ideas and technologies that can help them stay
ahead of the competition.

Evaluating Your Company’s Capabilities

Before embarking on a global sourcing strategy, it’s important to evaluate your company’s
capabilities. This includes assessing your resources and capabilities, understanding your goals and
ensuring you have the right processes and infrastructure in place to support global sourcing.
It’s also important to assess your risk tolerance. Global sourcing can come with a number of risks,
and it’s important to make sure you’re comfortable with them before you begin.

Establishing Relationships with Suppliers

When it comes to global sourcing, it’s important to establish strong relationships with suppliers.
This includes understanding their capabilities, building trust and setting clear expectations.
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It’s also important to ensure that suppliers understand your company’s values and expectations.
This includes making sure they comply with local laws and regulations, and that they understand
the importance of quality and ethical standards.

Developing a Sourcing Strategy

Once you’ve evaluated your company’s capabilities and established relationships with suppliers,
it’s time to develop a sourcing strategy. This includes assessing your needs, researching potential
suppliers and negotiating terms.
It’s also important to consider the total cost of sourcing from different countries. This includes not
only the cost of goods and services, but also transportation and logistics costs, taxes and other fees.

Managing Logistics and Transportation

Logistics and transportation can be a major challenge when it comes to global sourcing. It’s
important to make sure that goods and services are delivered on time and in the right condition.
This includes researching different transportation methods, understanding the different regulations
and laws and finding the most cost-effective and reliable transport options. It’s also important to
consider the environmental impact of transportation and to make sure that suppliers comply with
environmental regulations.

Risk Management

Global sourcing can come with a number of risks, and it’s important to manage these. This includes
assessing potential risks, understanding their impact on your business and putting in place systems
to mitigate them.
It’s also important to have a system in place for dealing with disputes and resolving issues. This
includes understanding the legal and regulatory framework in each country and having a plan for
dealing with any potential problems.

Monitoring and Evaluating Performance

Monitoring and evaluating the performance of suppliers is crucial. This includes assessing the
quality of goods and services, understanding supplier performance and making sure they comply
with your company’s standards and expectations.
It’s also vital to assess the performance of your global sourcing strategy. This includes tracking
costs, evaluating the effectiveness of different suppliers and understanding the overall impact on
your business.

Key Considerations in Global Sourcing

• Supplier choice

A crucial stage is making the appropriate supplier choices. Think about things like reliability,
quality, capacity, and cultural compatibility. To guarantee adherence to quality standards, do
extensive due diligence and audits.

• Cost-Benefit Evaluation

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International sourcing is primarily motivated by cost reductions, but it's important to do a cost-
benefit analysis that takes into account not only lower prices but also possible hazards like
transportation, tariffs, and currency changes.

• Transportation and Logistics

A solid logistical plan is necessary. Cooperate with seasoned goods forwarders and transporters to
guarantee successful and economical shipment. When making logistical decisions, take
sustainability and the environment into account.

• Risk Administration

Recognise and evaluate risks include supply chain interruptions, natural catastrophes, and
geopolitical instability. Create strategies and backup plans to reduce these risks.

• Compliance and Legal

Know the laws and compliance standards in your own country as well as the nations where your
suppliers are located. This covers things like trade laws, intellectual property protection, and moral
standards.

• Cultural Awarenes

Cultural differences can have an impact on relationship development, bargaining, and

communication. Make an investment in cultural awareness training to promote fruitful interactions
with your international partners.

• Interaction

It is crucial to communicate effectively. By employing multilingual workers or translators and

establishing frequent channels of communication with your suppliers, you may overcome language
hurdles.

• Techniques for Global Sourcing Success

Supplier diversification Dependence on a single provider may be dangerous. Increase the variety
of your suppliers to lessen reliance on a single source.

Just-in-Time Inventory: Putting in place a just-in-time inventory system helps cut waste and
carry expenses to a minimum.

Collaborative Partnerships: Foster solid, long-term partnerships with your suppliers to promote
collaboration. Collaboration can result in reduced costs and increased productivity.

Continuous Improvement: Consistently look for ways to improve your supply chain. Invest in
data analysis and technology to improve supply chain visibility.

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Environmental Sustainability: Think about how your sourcing choices will affect the
environment, and encourage sustainability across your supply chain.

Local Knowledge: Employ specialists or consultants who have local knowledge in the areas where
your suppliers are situated. They can aid in navigating neighbourhood laws and commercial
customs.

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