Chapter 4
Ethical and Sustainable
Sourcing
Introduction
Sourcing - all of firm’s activities used to manage
external resources.
Strategic sourcing - managing the firm’s external
resources to support firm’s long term goals.
Drivers of Strategic Sourcing
Reduce costs & delivery cycle times
Improve quality & long-term financial performance
Increase number of global competitors
Increase customer focus
Reduce high costs of globalization & materials,
Deliver more innovative products more frequently &
cheaply than competitors
Ethical and Sustainable Sourcing
Strategies
Business Ethics is the application of ethical
principles to business
Corporate Social Responsibility is the practice
of business ethics
Ethical Sourcing is that which attempts to take into
account the public consequences of organizational
buying or bring about positive social change through
organizational buying behavior
Ethical and Sustainable Sourcing
Strategies (Continued)
Ethical Policies should include –
Determining where all purchased goods originated
and the manner in which they were made
Knowledge of the suppliers’ workplace principles
Inclusion of ethics as a performance rating
Independent verification of vendor compliance
Report of supplier compliance to stakeholders
Provision of detailed ethical sourcing expectations to
suppliers
Ethical and Sustainable Sourcing
Strategies (Continued)
Sustainable Sourcing
Green purchasing is aimed at ensuring products or
materials meet environmental objectives e.g. waste
reduction, reuse and recycling
Sustainability is the ability to meet current needs of
the supply chain without hindering the ability to meet
future needs in terms of economic, environmental,
and social challenges
Considers worker safety, wages, working conditions, human
rights
Ethical and Sustainable Supplier
Certification Programs
Supplier certification programs are used to
identify strategic supplier alliance candidates
Firms use in-house formal certification programs,
& most require ISO 9000 / 14000 or similar
certifications as part of the certification process
Buyers can monitor quality assurance methods &
specify the type of acceptance sampling &
statistical process control methods used
Outsourcing Products and
Services
Outsourcing allows a firm to –
Concentrate on core capabilities
Reduce staffing levels
Accelerate reengineering efforts
Reduce management problems
Improve manufacturing flexibility.
Risks associated with outsourcing, include –
Loss of control
Production decisions & intellectual property
Increased reliance on suppliers
Increased need for supplier management
Outsourcing Products and
Services (Continued)
In-sourcing (backsourcing) –
Reverting to in-house production when quality, delivery,
and services do not meet expectations
Co-sourcing (selective sourcing) –
The sharing of a process or function between internal
staff and an external provider & provides flexibility to
decide what areas to outsource, when, and for how
long.
Early Supplier Involvement
Early supplier involvement (ESI) highly effective
supply chain integrative techniques
- Key suppliers become more involved in the internal
operations of the firm, particularly with respect to
new product & process design, concurrent
engineering & design for manufacturability
techniques
Value engineering activities help the firm to reduce
cost, improve quality & reduce new product development
time
Early Supplier Involvement (Continued)
Vendor managed inventory (VMI) –
Suppliers manage buyer inventories to reduce inventory
carrying costs & avoid stockouts for buyer
From the buyer-firm’s perspective –
Supplier tracks inventories
Determines delivery schedules and order quantities
Buyer can take ownership at stocking location
From the supplier’s perspective –
Avoids ill-advised customer orders
Supplier decides inventory set up & shipments
Opportunity for supplier to educate customers about other
products
Early Supplier Involvement (Continued)
Electronic data interchange (EDI)
Allows a supplier to profile demand & determine accurate
forecasts
EDI also provides reorder point data to permit timely
deliveries
Supplier co-location or JIT
Supplier’s employee is embedded in buyer’s purchasing
department to forecast demand, monitor inventory & place
orders with access to sensitive files & records
Strategic Alliance Development
Alliance development, an extension of supplier
development refers to increasing a key or
strategic supplier’s capabilities.
Supplier alliances result in better market
penetration access to new technologies &
knowledge, & higher return on investment
Alliance development eventually extends to a
firm’s second-tier suppliers, as the firm’s key
suppliers begin to form their own alliances.
Negotiating Win-Win Strategic
Alliance Agreements
Collaborative negotiations (aka integrative
negotiations) –
Both sides work together to maximize the outcome
or create a win-win result
Requires open discussions and a free-flow of
information between parties
Distributive negotiations –
Refers to a process that leads to self-interested,
one-sided outcome
Negotiating Win-Win Strategic
Alliance Agreements (Continued)
Steps Description
Gain an understanding of both parties’ interests;
1. Build preparation
brainstorm value-maximizing solutions; identify objective
process
criteria to evaluate fairness of agreement.
2. Develop Review previous negotiations to catalogue standards,
negotiation practices, precedents, metrics, creative solutions used,
database and lessons learned.
3. Design Create an environment to work together to create a
negotiation shared vocabulary, build working relationships, and map
launch process out a shared decision-making process.
4. Institute feedback Create process to provide feedback to negotiating teams
mechanism and capture lessons learned.
(Table 4.4)
