Business has overlooked sourcing as a strategic asset for decades. Seen as an operational function, it was concerned with making sure necessary inputs of materials and services were ready and waiting for required business operations. Purchasing was a support role responsible for negotiating prices and managing invoicing with suppliers that rarely changed.
Today we’re seeing that sourcing in a global economy can be a much more volatile thing. With an ever-changing world stage of fluctuating monetary, trade and political influences, sourcing today has to be ready for anything.
Recent events have focused new importance on supply flexibility
The news seems to throw new challenges at supply chains every day.
The Trump administration has caused headaches for many companies recently over trade talks with two of our biggest trade partners: China and Mexico. First, discussions broke down between the US and China over the trade deficit between the two countries and the ongoing government subsidizing of China’s high-tech industries. When the US government slapped a 25% tariff on US imports of Chinese goods, some sourcing professionals were in a hurry to find workable alternatives. Then China threatened to embargo its supply of rare earth minerals, which would further complicate manufacturing in electronic components, glass and automobile assemblies like catalytic converters in the States.
In 2017, the UK faced a similar scramble when construction giant Carillion became insolvent almost overnight over almost £1.5 billion in debt. The company left 420 large public contracts in the void. To pick up the pieces and get operations back on track took months of work and cost the UK government £148 million.
Government operations had become highly dependent on Carillion for several things, including military housing maintenance, building a high-speed rail line, and providing meal services for over 200 schools. In a flash, these varied projects and services had to be re-sourced and contracted.
Strategic or Tactical?
Sourcing used to be more ‘tactical’ than ‘strategic’. Manufacturing businesses often used tactical sourcing, where purchasing was managed as a reactionary process. Instead of planning for optimal supply chains, building in redundancy and working with suppliers to develop collaborative solutions, procurement focused tactical sourcing efforts on getting the best price and eliminating problems as they occurred.
With the fast-pace of world events and shortened product life cycles, running your sourcing in ‘reactionary’ mode may put your company at risk.
Strategic sourcing balances TCO with risk
Strategic sourcing takes a much more holistic view of the supply chain than does tactical sourcing. Looking at your sourcing process as a strategic asset instead of an operational necessity can help you find ways in which your supply chain can not only reduce costs but help you manage risks by building flexibility in your vendor relationships.
In the 1980s, sourcing was operational and concerned primarily with managing inputs of materials and services. Engineering or design gave purchasing their requirements for components and work that was needed from outside suppliers, and it was purchasing’s job to find the vendors. By the 90s, sourcing had changed this ‘arms-length’ relationship into a more collaborative system of working with suppliers to find the best balance of cost, complexity and risk for both the buyer and the vendor.
Taking the Long View
The problem with implementing a strategic sourcing system is that it isn’t something that often drives immediate gains. “Strategic sourcing involves a longer-term focus,” says Fran Porter, Associate Strategic Sourcing Manager at Trimble, Inc. “While it does keep availability and price at the forefront, it focuses on the entire purchasing life cycle.” So while tactical purchasing is more focused on finding the best deal from a company’s vendors, strategic sourcing takes a more high-level view of the overall purchasing process to find a balance between the lowest total cost of ownership (TCO) and the lowest risk to the company’s supply chain. By building in flexibility, strategic sourcing can create a sourcing process that can recover from any unforeseen disruptions while still managing costs in the short-term.
Another key to managing the delicate balance between costs and risks is managing supplier contracts effectively. In talking about the evolution of the relationships between buyers and vendors in the Journal of Physical Distribution & Logistics Management, James Hoyt and Faizul Huq said, “Buyer‐supplier relationships play an important role in an organization’s ability to respond to dynamic and unpredictable change. If the relationship is too restrictive, flexibility will be difficult to achieve and, if it is too lenient the risk of opportunism will be present.”
Using strategic sourcing to maintain a flexible supply chain
Besides maintaining flexibility with your current vendors, it’s also important to always have backup availability in addition to your traditional sources. Current changes in trade arrangements show that supply chains can be thrown into turmoil very quickly. While helping to keep costs in line, planning for alternate capacity is also a strategic method of risk management.
Your supply chain management solution should provide you with a robust set of data on your current supply chain, highlighting potential vulnerabilities. Using this data will show you where you should focus your search for backup suppliers.
Adam J. Shayevitz of Strategic Sourcing Dynamics says that sharing data with your supply chain partners is one of the key ways in which strategic sourcing differs from the old tactical approach. Shayevitz says, “Strategic sourcing calculates the total cost of ownership, works with suppliers to keep costs down, and shares cost information with [your] suppliers for mutual benefit.”
Supply chain management data allows you to review and rate your suppliers on a variety of factors. For example, ProcurePort’s supplier management software contains an effective checklist system for rating each supplier. From a strategic standpoint, this allows you to identify suppliers who offer you the best TCO balanced with a solid collaborative relationship. If trouble occurs in your supply chain, having this data handy will give you a quick list of suppliers you can utilize to fix the problem.
Balancing risks and costs also involves keeping an eye on the market so you have backup suppliers available when your primary sources aren’t working as planned. One way to keep this information at hand is through reverse auction software. By running regular reverse auctions, your sourcing will be updated with new vendors who can service your contracts, you’ll see availability in the market, and you’ll be able to keep up-to-date on the latest in capabilities from your current vendors and possible new partners.