Sourcing business model

A sourcing business model is a type of business model that is applied specifically to business relationships where more than one party needs to work with another party to be successful. Sourcing business model theory stems from research at the University of Tennessee originally funded by the United States Air Force. (Content copied from Sourcing; see that page's history for attribution.)

Sourcing business model theory is primarily targeted for procurement professionals seeking a modern approach for achieving the best fit between buyers and suppliers. Sourcing business model theory was developed through a unique, collaborative collaborative research effort by the University of Tennessee (UT), the Sourcing Industry Group (SIG) the Center for Outsourcing Research and Education (CORE), and the International Association for Contracts and Commercial Management (IACCM). Their work formed the basis for the 2015 book, Strategic Sourcing in the New Economy: Harnessing the Potential of Sourcing Business Models in Modern Procurement.

Sourcing business model (SBM) theory states that strategic sourcing resides along a continuum that guides procurement professionals to the best possible outcomes when buying goods and services through the use of seven business models designed to fit a business situation and relationship. Each of the seven sourcing business models is based on a combination of two principles: the contractual relationship framework a company uses with its supplier (transactional, relational, investment based), and the economic model used (transactional, output or outcome-based). SBM theory is grounded in the work of Oliver E. Williamson, the Nobel Prize laureate for his work in transaction cost economics. This paradigm is one of the most highly cited models used in the sourcing research literature, and posits that buyer-seller relationships range from highly competitive marketplaces to establishing corporate hierarchies through insourcing.

SBM Theory is notable because it "is completely focused on the future," says Robert Handfield, PhD, the Bank of America University Distinguished Professor of Supply Chain Management at North Carolina State Poole College of Management, and director, Supply Chain Resource Cooperative. He adds that SBM theory "adopts a diametrically opposite view to the notion that power is the basis for buyer-seller relationships. In fact, the introduction of the book begins by acknowledging the contribution that Michael Porter, Peter Kraljic and the firm A.T Kearney (which espoused the term “strategic sourcing” to focus on leveraging volume to reduce price). But then the authors go on to note that their time has passed, and a new approach is needed for proactive procurement strategies to emerge."

SBM Theory was featured in Strategic Outsourcing: An International Journal, which concluded that "experience demonstrates that alternative Sourcing Business Models are viable approaches to the conventional transactional methods."

Seven Sourcing Business Models

The seven sourcing business models (as detailed Strategic Sourcing in the New Economy) fall into the three categories along a sourcing continuum outlined by Nobel laureate Oliver E. Williamson.

Transactional

• Basic Provider Model
• Approved Provider Model

Relational

• Preferred Provider Model
• Performance-Based/Managed Services Model
• Vested outsourcing Business Model

Investment

• Shared Services Model
• Equity Partnership Model (e.g. joint venture, subsidiary)
  

Short descriptions of the sourcing models follow:

The transactional models (basic provider and approved provider) are best suited for buying low-cost, standardized goods and services. The key difference is that in the approved provider model, goods and services are purchased from pre-qualified suppliers that meet certain performance or other selection criteria.

As the nature of the supplier’s work becomes more strategic or risky in nature, organizations can shift along the sourcing continuum to a relational contract approach. The most common relational model is the preferred provider model. A preferred provider [sourcing] model typically uses longer term contracts where there the supplier is providing value-added services to meet the buyer’s strategic objectives. Preferred provider relationships still use transactional-based economics (pay per unit, per shipment, per hour, per mile).

Two relational sourcing business models are starting to get traction. These are the performance-based model and the Vested outsourcing model. A performance-based agreement is generally a formal, longer-term supplier agreement that combines a relational contracting model with an output-based economic model. It seeks to drive supplier accountability for output-based service-level agreements (SLAs) and/or cost reduction targets and typically creates incentives (or penalties) for hitting (or missing) performance targets. A Vested sourcing business model is a highly collaborative relationship that combines an outcome-based economic model with shared value (win-win) economics in order to achieve transformational, collaborative and/or innovative objectives. These arrangements are designed to create and share value for buyers and suppliers above and beyond conventional buy-sell economics of a transaction-based agreement. The Vested model works well when the buying organization is seeking innovation and/or operates in an environment that requires a great deal of flexibility.

Investment models—shared services and equity partnerships—involve the development of internal organizations or acquisitions and joint ventures when organizations do not opt for direct outsourcing.

Determining the Right Model

Determining the most appropriate sourcing business model comprises two components: the most appropriate relationship model and the most appropriate economic model. A four-step business model mapping process is a tool developed by the University of Tennessee to help guide sourcing and procurement professionals make the proper sourcing decision.

Stakeholders assess (or “map”) 25 key attributes across seven dimensions using a Business Model Mapping toolkit that will indicate which Sourcing Business Model is the right choice. (The Toolkit is available at http://www.vestedway.com/tools/)

The Four Business Model Mapping steps

1. Select the defined spend category/categories you are sourcing or potentially sourcing.
2. Use the Business Model Mapping template to determine the best relationship model for what you are sourcing (map the first 14 attributes on the first page of the template).
3. Use the Business Model Mapping template to determine the best economic model for what you are sourcing (map the 11 attributes on the second page of the template).
4. Use the Business Model Mapping matrix to develop a consensus view of the Sourcing Business Model that is right for you. The best Sourcing Business Model will combine your chosen relationship and economic models.

References

This article "Sourcing business model" is from Wikipedia. The list of its authors can be seen in its historical and/or the page Edithistory:Sourcing business model. Articles copied from Draft Namespace on Wikipedia could be seen on the Draft Namespace of Wikipedia and not main one.

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