Sourcing Approaches Analysis of Etihad Airways - Case Study Example

Sourcing Approaches Analysis: Etihad Airways Student’s Name Institution Affiliation Table of Contents Executive Summary……………………………………………………………………………………………………………………………3 Introduction……………………………………………………………………………………………………………………………………...4 Etihad Airways Supply Chain……………………………………………………………………………………………………………..4 A. Single- Sourcing Option..………………………………………………………………………………………………..5 B. Dual Sourcing Strategy…………………………………………………………………………………………………..6 C. Multiple Sourcing Approach…………………………………………………………………………………………7 D. Global/ International Supply Sourcing…………………………………………………………………………..7 Supplier Appraisal Checklist for Global Sourcing Option…………………………………………………………………..9 Conclusion……………………………………………………………………………………………………………………………………….10 References……………………………………………………………………………………………………………………………………….1 Executive Summary This paper is focused on identifying four possible supply sourcing options that is adopted by Etihad Airways in its spending towards IT infrastructure. Such crucial sourcing options as single; dual; multiple and global/international sourcing have been fairly described and effectively portrayed on how they are adopted by the firm. for instance, it has been successfully indicated that Etihad Airways engages such vendors like IBM and Cognizant separately to conduct specific digital work in a single source framework and later; contract them to perform a similar task for the purpose of ensuring that there is relative reliability at all times. Most, if not all, of the suppliers of IT infrastructure are international companies hence the need to expound on this supply sourcing option that companies have recently adopted in order to benefit from competitive environment that emanates from contracting world-wide vendors. Introduction The process related to procurement-related activities, to a larger extent, assists a company’s inbound logistics and is considered to be of paramount importance to value creation. On the contrary, the long-term effects of improper supply management are indeed far-reaching given that it impacts both company’s overall performance as well as market value. Considering the fact that any given company spends at least 55% of its total revenues on purchased materials, possible disruptions that emanate from supply inadequacies could result to a major impact on its profitability level (Lu, Huang, & Shen, 2011). Certainly, a company’s operation’s strategy as well as its financial livelihood focuses on their preselected supplier pool capacity while effective decisions relating to suppliers are deemed to be a fundamental process to overall successful supply chain management as a whole. It is important to note that a company’s sourcing strategy is notably characterised by three fundamental decisions that include; developing a criterion for establishing a supplier base; criteria for selecting suppliers that will be engaged in receiving orders from the company; and devising the level of goods that will be ordered from each of the supplier selected. Scoring models are, in most cases, used for the purpose of evaluating suppliers for inclusion within the base (Yu, Zeng & Zhao, 2009). Basically, the model ranks each of the selected supplier in regards to their objectivity and later focused on a relative weighting of each of the objectives so that an overall score for each of the potential supplier is derived. The focus of this paper is on evaluating four possible sourcing options for Etihad and embark on establishing how its spend on IT related supplies within the organisation. Etihad Airways Supply Chain The critical goals and objectives of Etihad Airways in procurement and supply management include; improving the underlying quality of purchased products and services; decreasing the lead-time and thereafter, improving on-time delivery process; formulating long term relations with all key suppliers like TCS, IBM and Cognizant, as well as adhering to a global competitive pricing. For purposes of accomplishing these goals and objectives, Etihad Airways has managed to put much emphasis on the supplier rationalisation by way of assessing and formulating supplier’s for a long period; making sure to always provide continuous feedback for purposes of improving future performance. It is also engaged in reducing supply focused on eliminating inefficient suppliers. In the course of selecting the type of IT activities to be purchased and, which to treat as an in-house process requires that treating the entire IT activities as a portfolio. Successful sourcing commences with the analysis of a business contribution of numerous IT-related activities. Traditional stipulations requires that a company hold commodity IT functionalities like payroll and data centre operations are potential outsourcing activities while strategic functions like on-line reservation systems should be retained in-house. A. Single- Sourcing Option It is important to note that single-sourcing strategies always seek for partnerships between buyers, which our case is Etihad Airways, and the supplier; IBM, for all IT-related purchases. This sourcing option fosters fairly-well coordination between the company and supplier that is required for successful just-in-time (JIT) inventory initiatives (Yu, Zeng & Zhao, 2009). These initiatives facilitates exemplary supplier alliances in order to streamline the overall supply network while it tends to shift underlying supply relations towards this sourcing option. It is arguably right to note that the process related to the management of more than one single source supplier option is indeed a cumbersome activity in comparison to only when dealing with a single source. However, the development of a web-based SCM application that enables closer management of diversified suppliers is able to streamline overall supply chain processes and, pushes the relative supply costs down altogether (Yang, 2012). For this case, Etihad Airways in 2015 entered into a single sourcing partnership agreement with IBM for a duration of 10 years. The deal is expected to costs the company a total of $ 700M for a distinctive range of information technology services and infrastructure (Khaleej Times, 2015). In fact, the deal is expected to avail access to the latest cloud-based technologies and services for the airline, its group of companies and equity partners as well. The supplier being IBM will solely be involved in the delivery of a significant portion of secure and efficient technological services thereby fostering Etihad Airways and its partners to transform their IT infrastructure into a modernised and internationally-acclaimed status. It is also tasked with the delivery of flexible cloud-based platforms for purposes of improving their guests and employees at all times. The company’s current data centre, IT infrastructure, applications and security operations will likely moved into a newer data centre in Abu Dhabi while the activities related to disaster recovery will be effectively overseen at IBM Cloud Data centre that is located in Europe. The delivery of this supply will focus on allowing the airline to scale and manage its overall IT resources in a more efficient manner while ensuring that the airline is able to continue with its business operations more effectively. Despite the fact that this single-sourcing model between Etihad Airways and IBM has proved to improve the level of communication due to the existing relationship and could result to a lower cost as result of economy of scale; it has been established that the risks related to buying-selling conditions makes the adoption of dual/ triple and multiple sourcing strategies a reasonable and well-thought out strategies. B. Dual Sourcing Strategy The adoption of dual sourcing strategy by the airline is entirely based on the fact that the usage of some of the parts required in developing airbuses can be effectively delivered by more than one supplier (Yang, 2012). Considering the fact that single-sourcing can result to immense monopoly that could result to many problems, an option to go ahead and adopt a dual sourcing is imminent. In the event that the single source has a significant lead-time means and variances, a dual supply sourcing will be less expensive as the supplier would likely offset costs related to safety and cycle inventories as well as transportation costs by way of providing a discount price (Yang, 2012). In this case, the company will have to make two fundamental decisions on whether to give a section of its order to another supplier and when it does; then to establish the degree of discount that should be negotiated as well as the overall percentage of the entire order that should be placed at any given moment in time. It is safe to remember that dual sourcing involves the use of two preferred suppliers in order to avail a similar product or even service. Etihad Airways engages in a decision-making process to ascertain whether to single or dual source before issuing a tender on a specified level of assumptions. The capacity to adopt a dual source lies with the fact that it results to lower risk levels given that there will always be a qualified supplier that is up and running in the event that the other fails to perform their tasks. For our case, Etihad Airways extended its supply partnership with IBM with formulating another delivery deal with Cognizant to improve on its overall customer’s digital experience. To be specific, Cognizant manages the company’s existing web applications and portals while making sure to incorporate them into a rather new digital platform. In essence, Cognizant has been engaged extensively to develop a digital centre of excellence in order to catapult the aspect of innovation with the airline’s such key technological partners like TCS and IBM. The three-year agreement of the company seeks to have both Cognizant to share the order placement with IBM to conduct an all-inclusive analysis of Abu Dhabi-based Etihad’s existing operational business and technological framework in order to assist with the creation of the efficient infrastructure that facilitate it to conduct a multi-channel distribution; assist with comprehending individual clients and, also adopt a personalised marketing technique. The decision to choose Cognizant lies with the fact that it currently enjoys a leadership supply position in matters related to digital transformation initiatives, in-depth travel and hospitality sector experiences as well as a long-term partnership with digital technology leaders in the market. C. Multiple Sourcing Approach Multiple sourcing supply option is mostly considered to be a possible solution in order to shield against possible disruption in supply. However, since the 1980s, most companies have made lots of efforts to possibly reduce the level of supplier base and a great number of them have been reluctant to adopt a multiple sourcing option (Costantino & Pellegrino, 2010). It is important to note that the process related to the determination of a given number of suppliers is indeed a fundamental aspect of supplier management for any given company. In comparison to single-sourcing, multiple sourcing is able to protect the buyer in the course of possible material shortages; or even other emergencies; act as a back-up source as well as sustain a level of competition (Costantino & Pellegrino, 2010). The decision to adopt a multiple sourcing approach in Etihad Airways is highly dependent on such parameters as overall market structure; the type of products as well as overall cost of the structure in place. A critical factor that is mostly adopted on using this form of supply option is sourcing costs involved. In the event that there is a higher indirect level of costs, the aspect of single sourcing is recommended given that a higher degree of involvement with a sole supplier allows for the possible reduction of related expenses (Burke, Carrillo & Vakharia, 2007). On the other hand, in the event that there is a low indirect sourcing costs, multiple sourcing as well as competitive bidding is vehemently adapted for purposes of reducing the underlying prices. Most certainly, the suppliers’ structure should be formulated in a way that fosters alignment with general principles of purchasing strategies that has already been selected. For the case of Etihad Airways, the ability to adopt a multiple sourcing option lies with the fact that there is a need for cutting down on possible costs related to development of IT-related infrastructure. There are cases when each of the digital supplies require a possible unique purchasing strategies hence a need for multiple sourcing framework. D. Global/ International Supply Sourcing There has been an increase in the percentage of companies using global sources in the course of obtaining raw materials and components as well. The pattern is also replicated in the case of the European set of manufacturers and it is an imminent indication of a growing degree of awareness that relate to purchasing managers of the modern competitive nature of supply markets across the world. It is important to note that international procurement decisions are noted as being a strategic initiative that seeks to be enhanced through a fundamental series of phases. In the initial phases, it is ascertained that the foreign supply frameworks only exists due to a response that cannot be effectively achieved using domestic supply markets. As time progresses and during development process, the activity related to purchasing may formulate a proactive inclusion of international sources in relation to potential new markets thereby resulting to a holistic and well-incorporated and coordinated system of global sourcing requirements for purposes of optimising the overall purchasing leverages. Most of the modern theories indicate that internationalisation is a section of natural process of growth postulate that the activity involved with internationalisation involves interplay between the overall knowledge about foreign markets as well as operations. Despite this fact, it has become evidently clear that global sourcing is not a necessity for all purchasing conditions. However it should be adopted by companies that are facing a significant pressure of competitive performance improvement. In this regard, globalisation is able to affect all categories of companies regardless of their size. An efficient assessment of the overall nature of competitive forces; customer requirements, international market opportunities as well as supply-base location is the initial phase in the determination of a company’s strategic position leading to an adaptive restructuring of its international sourcing networks. In the initial phase of this progression, local or rather domestic purchasing managers are entirely faced with issues related to the evaluation of international sources and thereby soliciting for bids without prior advantage of organisation-wide support. In this case, a company is allowed to formulate a global sourcing base however; it has not developed communication connections; coordination mechanisms as well as logistics and personnel capacities that are deemed proper for an implementation on a wider scale. For the case of Etihad Airways, the IT management have opted to source for international companies like TCS and IBM, which are located in international markets. The management team in this situation is clearly aware of the need for considering of alternative international sources for purposes of obtaining the required degree of quality; that is able to accomplish the overall schedule requirements as well as broaden the underlying supply base. By way of considering these level benefits, management is faced with a number of implicit trade-off that is attributed to the use of overseas foreign sources. In overseas or rather global sourcing, the IT management team is however faced with a great deal of challenges that include; cultural and communication restrictions, increased lead times, probable uncertainties that relate to the sharing of newer technologies; as well as increased set of transport costs. In essence, it is established that companies that are making efforts to formulate just-in-time purchasing systems that require relatively insignificant and more frequent deliveries as well as a decreased level of inventories is exposed to a longer lead time and logistics issues whenever they are confronted by the overall decision to adopt a foreign international supply source. On the contrary though, global sourcing is faced with lots of issues that include; first, higher rate of costs related to international sourcing. It is important to note that whenever dealing with foreign firms, a new management team possibly encounters a great deal of restrictions to the overall implementation process (Steinle & Schiele, 2008). There is a possibility of there being additional level of costs that cannot be associated with local purchasing. This type of costs can be effectively managed through ensuring that international supply sources provides quotations necessary for bidding and quotations of all specifications. Secondly, this sourcing option can result to managerial issues. It is likely possible that management team might face issues while making global sourcing decisions related to formulating the channel of distribution and the mode of contact of the supplier (Steinle & Schiele, 2008). Supplier Appraisal Checklist for Global Sourcing Option Criterion Detail Checklist Performance Attributes Helps to evaluates the reliability and efficiency of global source suppliers, the management team makes a fundamental analysis of a number of performance attributes that would be collected through plant visits; financial reports as well as other related data. The global supplier selection process then greatly involves implicit ranking of numerous performance criteria, which is then followed by selection process and thereafter further negotiations. This checklist criterion is considered to be a critical factor needed for determining a sustainable advantage over possible rivals. The single most performance attribute that is used as a criterion to assess global sourcing suppliers is quality, which fosters delivery performance and, also formulating imminent partnerships with suppliers. Yes/No Just-in-Time Purchasing Ability It involves testing the ability of supplier’s ability to deliver directly to the company; possible elimination of receiving and inspection processes as well as the capacity to execute electronic ordering system. JIT implementation should always initiate with a consolidation of supply base. JIT purchasing initiative is however; a challenge to implement with certain foreign sources due to the issues related to coordination of logistic systems. Yes/No Regional Performance Attributes For this case, the attributes that are analysed within each region from where the IT suppliers emanate include; their imminent capacity to uphold product quality, process technology; trustworthiness; and schedule flexibility. Yes/No Technical Maturity For this attribute, the level of technical maturity is used for purposes of determining the supplier’s capacity to define its immediate requirements. It is important to understand that IT activities are considered to be of low maturity whenever the underlying technology set for adoption is deemed to be new and unstable and whenever it is ascertained that the existing business framework has little or no form of experience with a technology that can be sourced from elsewhere Yes/No Conclusion From this discussion above, it can be noted that Etihad Airways engages in a different set of sourcing options in order to enjoy discounted price, break-down possible monopolistic tendencies and ensure regular supply of raw materials all-year round. The paper has successfully noted that the company has ensured to adopt single, dual, and multiple as well as global/international sourcing options of its spending in IT infrastructure. Such notable vendors like TCS, Cognizant and IBM have all been contracted by the company to offer a different set of digital informational services. While in some cases, these vendors are allowed to provide supplies without any form of rivalry, in other cases; Etihad has been seen to involve more than one vendor at a time in order to ensure that it enjoys reliability of supply process. The paper has also provided a possible checklist criterion that Etihad adopts for its international vendors. These vendors or rather suppliers are checked in regards to the capacity to portray exceptional performance attributes like quality; hold a significant position in regional performance attributes; be able to efficiently adopt a Just-in-Time purchasing ability as well as their level of technical maturity. References Burke, G. J., Carrillo, J. E., & Vakharia, A. J. (2007). Single versus multiple supplier sourcing strategies. European Journal of Operational Research, 182(1), 95-112 Costantino, N., & Pellegrino, R. (2010). Choosing between single and multiple sourcing based on supplier default risk: A real options approach. Journal of Purchasing and Supply Management, 16(1), 27-40. Khaleej Times. (2015). ‘Etihad signs $700 M IT deal with IBM’. Retrieved from http://www.khaleejtimes.com/business/aviation/etihad-signs-700-million-it-deal-with-ibm Lu, M., Huang, S., & Shen, Z. J. M. (2011). Product substitution and dual sourcing under random supply failures. Transportation Research Part B: Methodological, 45(8), 1251-1265 Steinle, C., & Schiele, H. (2008). Limits to global sourcing? Strategic consequences of dependency on international suppliers: Cluster theory, resource-based view and case studies. Journal of Purchasing and Supply Management, 14(1), 3-14. Yu, H., Zeng, A. Z., & Zhao, L. (2009). Single or dual sourcing: decision-making in the presence of supply chain disruption risks. Omega, 37(4), 788-800 Yang, Z., Aydın, G., Babich, V., & Beil, D. R. (2012). Using a dual-sourcing option in the presence of asymmetric information about supplier reliability: Competition vs. diversification. Manufacturing & Service Operations Management, 14(2), 202-217 Read More