The first sourcing decision for each item is whether to make it or buy it. The decision should take into account long-term business strategy, our own core competencies, the capabilities of optional supply sources, total ownership cost, and quality implications associated with internal vs. external sourcing. Our internal sources should be held accountable to the same supplier certification criteria established in the supplier service policy.
A common supplier sourcing review involves outsourcing component supply. An example is illustrated in Figure 1. The results presented in the figure are from a dated assessment of the cost per vehicle advantage related to component outsourcing among three auto makers. In this assessment Chrysler maintains a $660 per vehicle cost advantage over General Motors and $220 per vehicle cost advantage over Ford due to the outsourcing of major components.
Outsourcing benefits are not always this significant and there can be some loss of quality and customer service in outsourcing. Nonetheless, the benefits are potentially large enough to nearly always warrant a consideration of external vendors.
Once all the items for internal sourcing have been identified, those items should be optimally scheduled and assigned to specific sourcing locations. The emphasis of the remainder of this section is on externally sourced items.