Today, the business landscape has become more competitive and supply chain professionals have to find new ways to cut back on costs and improve the quality of service at the same time. Strategic sourcing, at its core, is part of the procurement management that makes it possible to achieve supply chain objectives.
In 2021, strategic sourcing is all about understanding and embracing new possibilities. But it takes a wide range of skills to implement strategic sourcing. In fact, there is more than one competency to make strategic sourcing of the company successful and ensure a seamless decision-making process.
With the global marketplace expansion, it has become imperative for companies to adopt a holistic approach and integrate relevant supply chain processes to drive growth. In fact, strategic sourcing has become a specialty area and potential profitability is always on the horizon.
Strategic Sourcing: Challenges and Solutions
Whether it’s freight prices, market inflation, or supply chain issues, strategic sourcing continues to face a rising number of challenges. It is no wonder companies now want to opt for deals with the best quality, delivery time, and price. The terms and criteria fall under the umbrella of the trade-offs game and balancing trade-offs can be tricky.
Keeping that in mind, let’s look at the challenges supply chain professionals face in strategic sourcing:
Total Cost of Ownership and Invoice Price
Oftentimes, supply chain professionals make sourcing decisions on current invoice prices to make the circulation more easy and simple. However, when variables enter the picture, the total ownership cost like freight cost, installation cost, inventory cost, maintenance cost, and duties become too complex to calculate. Not to mention, the total cost of ownership also impacts trade barriers. And when the cost no longer is the main consideration factor, it makes strategic sourcing more complicated.
Off-Shore and Near Shore
The bigger the company, the more complex strategic sourcing will be over time. And that’s because the competencies of professional suppliers vary from one geographic region to another. Near-shoring reduces transportation costs and leads time altogether.
On the other hand, off-shoring is bound to increase overall transportation cost and as well as lead time. Of course, it depends on the company’s situation, but the benefits catch up to the total cost. It is no wonder near-shoring production is gaining more momentum in the U.S.
Moving production to Mexico allows American companies to reap the benefits of low labor costs and short transit time at the same time. It also means companies don’t have to deal with language and cultural barriers. Nearshoring has become a balanced approach when it comes o strategic sourcing. And why wouldn’t it? After all, it optimizes the entire supply chain.
When it comes to managing suppliers, the right answer is not always having as many suppliers as you want. Instead, strategic sourcing requires you to rationalize your supply base to maintain solid supplier relationships for an extended period.
Supply chain professionals analyze vendor profiles, review prices, check the quality, lead time, and redundancy issues for highly personalized products. Once a comprehensive analysis is complete, it becomes easier for supply chain professionals to determine whether or not multiple vendors can produce the same components at the same time.
This is the fastest route to ensure supply base rationalization. But it is vital to understand that supply rationalization doesn’t mean you should reduce your supply base significantly. Besides, the last thing you want is overdependence on a small number of suppliers.
Dual sourcing is another major challenge in the strategic sourcing loop. In most cases, the product is far too advanced with low volume and that makes it harder to find another source. Usually, supply chain professionals opt to mitigate the risk over time.
You can either in-source the complex product or find a high-performance supplier that can develop the required skills. Fortunately, companies can take one or more approaches at the same time to ensure seamless product development.
Risk management is arguably the most overlooked challenge in the supply chain. In terms of strategic outsourcing, you have to invest time and effort to mitigate the impact of potential risks on the ground. Companies develop open relationships with their suppliers to find out about main concerns first hand.
For instance, companies may need to communicate with their employees to find objective evidence. The more information you collect, the higher the chances you can predict an issue before it arises. It makes local strategic sourcing a more realistic option for companies.
Although it is not common, low-cost outsourcing can be a problem for some companies. Commercially sourced products often carry the risk of counterfeits. The best way to deal with this issue is to perform continuous incoming inspections, maintain quality supplier agreements, and ensure safety stock.
Switching to Bigger Vendors
Contrary to misguided perception, sourcing parts from the largest vendor is not always the best solution. Companies often fail to consider their business volume and seek out the biggest vendors. The trick is to look for the perfect match and choose the vendor that offers prompt product delivery, best quality, and market competitive prices.
In some cases, the vendor is not open to change or doesn’t have the skills to change. In fact, companies should assume that over half of the vendors across the world are relatively new in the market. Focus on key principles and make sure the vendor has the capabilities to become your long-term partner.
Predominantly, supply chain professionals want to improve the effectiveness of their complex supply chains. It is crucial to view strategic sourcing as a collective knowledge that helps supply chain managers boost efficiency and decrease costs.
In today’s tumultuous economic order, you have to be relevant and competitive to make a difference. It takes complete focus on cutting-edge tools to make strategic sourcing highly effective. The fact of the matter is that companies that prioritize their supply chain performance have more chances to improve their operational and financial position than their close competitors.