L4M4's first learning outcome is about the options for sourcing requirements from suppliers. Before comparing single/dual/multiple sourcing or award criteria, the examiner expects you to be clear on what sourcing is, how it differs from outsourcing and offshoring, and how a make-or-buy decision is reasoned. Aligned to AC 1.1.
1. What sourcing is — strategic vs tactical
Sourcing is a critical activity used at both tactical and strategic levels. It is concerned with what needs to be purchased, why, when and where. Lysons and Farrington describe it as "the process of identifying, selection and development of suppliers."
- Strategic sourcing deals with top-level, longer-term decisions for high-risk strategic and bottleneck items, and with long-term policies on core competences, make-or-buy, the shape of the supplier base, partnership sourcing and ethical issues.
- Tactical and operational sourcing deals with lower-level, short-term, adaptive decisions about how and from where specific requirements are met.
The distinction matters because the examiner often tests whether a given decision (e.g. choosing a single partner for a critical sub-assembly) is strategic or merely operational — the answer drives who decides and how much analysis is justified.
2. Outsourcing, offshoring and nearshoring (AC 1.1)
Outsourcing is "the process of contracting with the most suitable expert third party service provider" (CIPS). It is the operational transfer of one or more business processes to an external provider who becomes accountable for the agreed tasks. Two terms are routinely confused with it and with each other:
- Outsourcing always requires a third party.
- Offshoring (moving work to a foreign, usually low-cost, country) does not necessarily involve a third party — it can be internal to the firm (a captive overseas operation).
- Nearshoring is work transferred to a nearby country.
So an organisation can offshore without outsourcing (its own overseas plant) and outsource without offshoring (a domestic third-party provider).
3. Make-or-buy decisions (AC 1.1)
Key factors when deciding whether to make/do in-house or buy in include:
- Whether the item is strategically important or core to the business
- The relative cost of making in-house versus buying in
- Differences in quality or timescales
- Availability of in-house competencies and capacity
- Availability of capable external suppliers
- Risks of sub-contracting (loss of control, in-house knowledge, confidential information and IP)
- Human-resource impacts (redundancies, or recruitment and training costs)
- Opportunity cost of using in-house capacity on this rather than on something else
- Potential CSR issues of using suppliers with poor labour records
Core competencies (Prahalad and Hamel) are central corporate skills, based on knowledge and experience, that distinguish a company and give long-term competitive advantage. The decision rule the examiner rewards: keep core, distinctive activities in-house; outsource non-critical work to capable suppliers.
4. Supplier appraisal terms — keep them apart
The module distinguishes three stages that students frequently merge:
- Pre-qualification / appraisal — evaluates potential bidders before tenders are invited, against criteria, so only those meeting defined standards may bid (reducing procurement cycle time). It is a backward-looking examination of a supplier's general suitability and capability.
- Vendor rating — assessment of a supplier's performance after the contract is awarded.
- Supplier development — working with a supplier to raise its capability over time.
5. Drivers, risks and the legal frame on transfers
Why organisations outsource (CIPS drivers): quality drivers; cost drivers; business-focus drivers; financial drivers (free up capital); relationship drivers (reduce conflict by clarifying responsibility for shared services); and human-resource drivers (acquire skills faster than in-house recruitment). Beyond cost, the recurring themes are access to capabilities (talent, process excellence, resources) and strategic benefit (flexibility, capital, new markets, changing the rules of competition).
Why outsourcing goes wrong: failing to distinguish core from non-core; selecting an unsuitable supplier; unrealistic expectations of the provider; inadequate contract terms or weak KPIs/SLAs; lacking the management skills to control supplier performance; and gradually surrendering control to the contractor. The literature also flags loss of control over quality, inability to meet demand fluctuations, the risk of a supplier becoming a competitor, damaged employee morale, and loss of critical or cross-functional skills.
Risks of outsourcing therefore include loss of control and in-house expertise; difficulty ensuring service quality, consistency and CSR; over-dependence and 'lock-in'; loss of control over confidential data and IP; and employee-relations issues such as TUPE. Three UK statutes govern employees' terms when work transfers:
- TUPE 2006 applies on a relevant transfer; the new employer takes over employment contracts and cannot dismiss because of the transfer unless there is a sound economic, technical or organisational (ETO) reason.
- TULRCA 1992 requires consultation with employee representatives over redundancy.
- ERA 1996 sets out employee rights on dismissal, unfair dismissal, parental leave and redundancy.
Currency note: outsourcing/make-or-buy here is operational, not procurement-regime law — no PA-2023/Incoterms issue on this page. TUPE 2006, TULRCA 1992 and ERA 1996 remain the current employment statutes. (Public-sector sourcing procedures — covered on the compliance pages — are now governed by the Procurement Act 2023, commenced 24 Feb 2025.)
§12 trap box: (1) Outsourcing ≠ offshoring — outsourcing always involves a third party; offshoring always involves a foreign location but need not involve a third party. (2) Pre-qualification is backward-looking — it concerns a supplier's general suitability, not the specific means by which it would perform this contract. (3) Keep appraisal (pre-award) and vendor rating (post-award) distinct.