Strategic Sourcing—Waking Up to Supply Chain Inefficiencies

The Economist talks at length about how the lack of innovation and a heady brew of other macroeconomic factors have impeded global growth over the last decade. Total factor productivity on a global level has not witnessed much movement since 2007, astonishingly taking a dip last year. Prior to the crisis, however, it was on an upward trajectory of 0.9% per year. The ecosystem is already reacting to this situation. The Wall Street Journal observed that industrial manufacturers are “squeezing suppliers for lower costs and shifting existing factories to cheaper locales as they seek to maintain profit margins”. This is a direct reflection of enterprises attempting to treat strategic sourcing and procurement as a core competency area rather than a peripheral activity. Critical Errors – Practice in Loop For the last 20 years or so, the majority of enterprises have been using common tactical sourcing practices to reduce costs and manage vendors, without having achieved much in terms of business outcomes. Due to these ineffective sourcing strategies, even well-designed supply chains have met with a false start. Until such time enterprises recognize this, ill-conceived strategic sourcing and supply chain management (SSCM) programs will continue to plague overall operations.

Consider a product’s lifecycle – once it has been successfully designed, it is time to identify vendors capable of delivering critical materials and assembly support. This is the stage at which strategic sourcing gains relevance. From an operational perspective, it is a powerful tool, which, if implemented accurately, can have a positive impact on an organization’s bottom line and annual P&L report. It does not however involve playing hardball – bargaining with suppliers for every cent. Instead, strategic sourcing focuses on forging and fostering long term relationships with suppliers, and increasing collaboration. Collaboration is central to the success of supplier relationship management. Many are already employing strategies like purchasing small suppliers that provide critical parts or services. Other players are following suit to reduce cost per component and consolidate their supplier ecosystem. With an intervening engineering team, SSCM can further improve business outcomes. In conjunction with design for manufacturability (DFM) and value analysis/value engineering (VAVE), insights into component prioritization (critical vs. non-critical) can reduce component count, in turn, improving production efficiency. As an integral activity across a product’s lifecycle, strategic sourcing is capable of reconciling engineering, manufacturing, sales, and management goals. It can shorten the development timeframe and meet cost targets to make manufacturing of a quality product in a competitive market a repeatable reality. From an aftermarket service delivery standpoint, agile sourcing conventions form an inherent part of strategic sourcing. Complying with them requires a thorough analysis of service considerations and forecasted sub-assembly design changes to deliver cost-effective maintenance and modification solutions.

Traditional linear SSCM models based on discrete progressions were optimized based on four variables – volatility, volume, velocity, and visibility. While achieving cost efficiencies and reducing time-to-production continue to be key objectives, CPOs should begin to focus on implementing digital technologies. Towards this end, developing ‘always-on’ digital supply networks (DSNs) could help thread together every silo in an existing supply chain and assimilate ecosystem partners seamlessly. Fueled by information from multiple sources and locations, an open DSN can be used to create virtual simulations of the sourcing and supply network, which can be leveraged to inform the physical world. This will enable CPOs to develop and implement key business decisions quickly, and at reduced risk. DSNs deliver an integrated view of the network and rapid scenario-based latency responses to volatile situations. Going forward, the digital epoch will cause further mutation – sourcing is likely to deviate away from its traditional cost-based approach, and focus more on talent acquisition to drive such transformation. Although it might seem like an OPEX burden to invest in cultivating or retaining subject matter experts, it will prove worthwhile to shift towards a more fluid, service-driven supply chain model with less reliance on actual infrastructure. To jumpstart this transition, businesses need to engage outsourcing SSCM partners to help their task force with back-office operations. Once operations stabilize, outsourcing volumes can be tapered off to the minimum.