Explain how tailored sourcing can be used to improve profitability.

In tailored sourcing, firms use a combination of two supply sources, one focusing on cost but unable to handle uncertainty well, and the other focusing on flexibility to handle uncertainty, but at a higher cost. For tailored sourcing to be effective, having supply sources where one serves as the backup to the other is not sufficient. The two sources must focus on different capabilities. The low-cost source must focus on being efficient and should only be required to supply the predictable portion of the demand. The flexible source should focus on being responsive and be required to supply the uncertain portion of the demand. As a result, tailored sourcing allows a firm to increase its profits and better match supply and demand. The value of tailored sourcing depends on the reduction in cost that can be achieved as a result of one source facing no variability. If this benefit is small, tailored sourcing may not be ideal because of the added complexity of implementation. Tailored sourcing may be volume-based or product-based depending on the source of uncertainty.

In volume-based tailored sourcing, the predictable part of a product's demand is produced at an efficient facility, whereas the uncertain portion is produced at a flexible facility.
In product-based tailored sourcing, low-volume products with uncertain demand are obtained from a flexible source, while high-volume products with less demand uncertainty are obtained from an efficient source. Product-based tailored sourcing may be implemented with a flexible facility focusing on new products, and efficient facilities focusing on the well-established products.