Management Notes

Reference Notes for Management

Which sourcing strategy is particularly common when the products being sourced are commodities

Which sourcing strategy is particularly common when the products being sourced are commodities


A. few suppliers
B. many suppliers
C. keiretsu
D. vertical integration
E. virtual companies

The Correct Answer Is:

  • B. many suppliers

When sourcing commodities, particularly common sourcing strategy is to engage with many suppliers. This approach aligns with the principles of commodity procurement and offers several advantages. Let’s delve into why “many suppliers” is the correct strategy for sourcing commodities and then discuss why the other options are less suitable in this context.

Why “Many Suppliers” Is the Correct Sourcing Strategy for Commodities:

1. Price Competition:

One of the primary reasons for choosing many suppliers when sourcing commodities is to stimulate price competition. Commodities, by definition, are widely available and standardized products, and numerous suppliers often compete in the market.

Engaging with many suppliers encourages them to offer competitive prices to win contracts, which benefits the sourcing organization by driving down costs.

2. Diverse Sources:

Relying on many suppliers for commodities diversifies the sources of supply. This diversification can be a risk mitigation strategy. It reduces the vulnerability to disruptions caused by factors such as natural disasters, geopolitical events, or supplier-specific issues. If one supplier encounters a problem, the organization can turn to others to maintain a steady supply.

3. Ensures Availability:

Commodities are essential raw materials or components for many industries, and their availability is critical for business continuity. Engaging with many suppliers reduces the risk of shortages. If one supplier faces supply chain disruptions, the organization can quickly source from alternative suppliers to meet its needs.

4. Negotiating Power:

When a buyer sources commodities from many suppliers, it typically has a stronger negotiating position. The competition among suppliers and the buyer’s ability to switch between them can lead to more favorable terms, such as better pricing, more flexible delivery schedules, or improved quality control.

5. Adaptability to Market Changes:

Commodity markets can be subject to price fluctuations due to various factors like changes in supply and demand, global economic conditions, and geopolitical events. By having relationships with many suppliers, organizations can more easily adapt to market changes. They can take advantage of price decreases or pivot to different suppliers when prices surge.

6. Quality Control:

Engaging with multiple suppliers allows for comparisons not only in terms of pricing but also quality. Organizations can assess the quality of commodities provided by different suppliers and make informed decisions to ensure that the products meet their standards.

Why the Other Options Are Not as Suitable:

A. Few Suppliers:

This strategy is generally more suitable when sourcing specialized or custom products where there are limited suppliers with the necessary expertise. In such cases, a few suppliers might have a monopoly, making it difficult to achieve price competition. However, for commodities, it’s advantageous to have multiple suppliers to benefit from competitive pricing and a diverse supply chain.

C. Keiretsu:

Keiretsu is a Japanese business network model where a company aligns with a set of preferred suppliers. It is often used for long-term relationships, trust, and collaboration.

Keiretsu is not typically associated with commodities sourcing, as commodities are generally standardized products with numerous suppliers. Keiretsu is more applicable in situations requiring specialized or unique components where close collaboration is essential.

D. Vertical Integration:

Vertical integration involves a company expanding its operations to include activities along the supply chain. While it provides control over the entire process, it can be resource-intensive and is generally not the primary strategy for sourcing commodities. It’s more applicable to industries where control over the supply chain is a strategic advantage, such as in manufacturing or energy.

E. Virtual Companies:

Virtual companies, also known as network organizations, outsource most or all of their functions to other companies. They might not directly engage with commodity suppliers. Virtual companies focus on assembling and coordinating resources and partners to deliver products or services. This approach is less about direct commodity procurement.

In summary, sourcing commodities from many suppliers is a common and effective strategy. It leverages price competition, diversifies sources, ensures availability, enhances negotiating power, and allows for adaptability to market changes.

These benefits are crucial in managing commodity procurement, where standardization and widespread availability create an environment where multiple suppliers can be engaged to the organization’s advantage. The other options might have their merits in specific contexts but are generally less suitable when sourcing commodities.

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