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Challenges in Strategic Sourcing

Einstein once said on the definition of Insanity: doing the same thing over
and over again and expecting different results.
In Supply Chain Management & Strategic Sourcing this could not be more
true. For far too many years the industries of the world have had somewhat
common practices for Cost Reductions, Vendor Selection, Evaluation and
Approval of Vendors and so on. However, the World and the industries have
changed so much in the last 20 years, just to pick up a date.
Some of the Industries Best Practices have been denominated a World Class
Operations/Practices, however, these tend to apply mainly to large
corporations that have unlimited resources both financially and of head
count. Where do all of all the companies that are not at that level stand?
What do they do in order to be successful?
In his Theory of Evolution, Charles Darwin mentioned that the fittest species
were the ones that adapted better to change. We can translate this to Supply
Chain Management: how does my company cope with an ever changing
world? How do we move from a locally sourced supply chain to an
International one, or go from an International one to a regional one? What
are the drivers?
The Market its a great starting point. What is your overall plan to satisfy your
customers? What gives you that competitive advantage above your
competitors and similar products/services? Is it Price? Availability? Turn
Around Time? Quality? All of the above? Most Executives will say "All of the
Above", but there is a price to pay to get everything your need at the right
time, in the right quantities and the perfect price. It is a very difficult juggling
act to accomplish.
Here is a list of elements to review by any Supply Chain Executive:

1.

Near-Shore vs. Off-Shore: The world has changed dramatically and


every day there are new players in each industry that have learned and
adapted better to the new game conditions. Not always Near-Shoring
will be an answer to reduce lead times while at the same time keeping
your costs down. There are some components or parts that you will still
need to source from afar. The indicator would be cost and quality, and
how soon can you procure those materials locally or abroad.
2. Developing or Switching Vendors: There are some cases that the
vendor's organization will not be willing to change or do not have the
elements to change. However, we can assume that centennial
companies are by far less in number versus new ones. So, we can
assume that 80% of the companies in the world are fairly new in their
market or in the world, and what made them be a successful company
was perhaps orientation to detail or quality and as the volumes of
product grow year after year, these principles wear thin. So, the
challenge is to define if your vendor is "partner" material to develop as
such, or if eventually you will have to switch to a more fit vendor. It is
socially responsible as an Strategic Sourcing agent to get in touch with
each vendor and assess their capabilities. Some companies did not
know they were underperforming until I approached and tell them
"shape up". Not all are success stories, but many have proven worthy to
be business partners; and in some cases, as I have moved from one job
to another in different industries, they have followed me to continue
doing business.
3. Know your Game: If you fail to do your homework and stay up to
date on who's who in your market, then you will be destined to fail. You
have to keep learning and know what are you buying, what drives the
price of the item or part. Is it a commodity, and if so, what prices index
affects your final price. As in everything in life, you cannot stop learning
and trying new things. That way you will make your organization
successful by having knowledge and be ever watchful of changes in the
horizon, in order to adapt to the new trends.
4. Total Cost of Ownership vs. Invoice Price: Most organizations do
carry out a Total Cost of Ownership (TCO) analysis because Invoice Price
tends to be only a glimpse of the real cost. You are not assessing
Freight, Transit Times, Conflicts in Ports Entrance, Minimum Order

5.

6.

7.

8.

Quantities, Inventory Turns, E&O, Operation Hours, Trade Barriers,


Political Turmoil, and so on so forth.
Vendor Consolidation: How thing can you reduce your supply base?
Do you have redundancy? Are your materials highly custom made or
can they be made by more than one company with different price and
lead times, but same or better quality? Personally, I do not believe in
single sourcing because you are making your company "hostage" of
that single vendor. This can be adverse in many ways: price, supply,
quality, terms and other variables. So, perhaps you can have two
vendors for the same part number producing it simultaneously or you
can have two or even three vendors of the same commodity supplying
you equal or arbitrary percentages of the business in that commodity. It
is having a Plan B or even a Plan C. Yet more than three makes it
difficult to manage.
Bigger is Better: Not always sourcing your parts from the biggest
vendor is the best solution, because although they might be the largest
of them all, your business volume might not be that attractive to them.
So you have to find your right match, find the vendor that will jump over
hoops to get your product on time, at the best price and quality possible
and with a Can-Do attitude.
KISS Principle versus Overkill: There are some industries that have
a disease called Overkill in their specifications. This is an awful
approach to quality and engineering design. Keep It Simple Stupid as
much as possible. If you design a part with the precision of the Space
Shuttle to be used in a vacuum cleaner, then that is going to be one
very expensive machine only to be used in the International Space
Station. When need be, set your specifications to the best in class for
your product, but don't apply that very narrow tolerance for machined
metal to a cardboard box.
Collaborative Design: If you have been successful in point #3, then
most likely you can approach your partner and state your problem with
your product, and your partner -ever the expert in his field-, will work on
a solution. Let the shoe maker do the shoes and you do the supply chain
management or the design of your end product. If you make your
"almost partner" participate in helping you solve the problem, they will
employ all their knowledge and resources in providing a solution, so

that your company can be successful and they will also be successful. It
is a Win-Win approach and that is the only one that prevails time over
time.
9. Be an Enemy of the Status Quo: "We have done things like this
forever" is one of the worst answers in any industry. Maybe in has some
cultural significance to do things in a certain way. However, that
practice could have been successful 20 or even worse, 5 years ago.
Question if that is the right approach to manage your supply chain and
see if there is something you can benchmark either from your
competition or successful companies in other industries. That change in
the mindset of the operation can transform into a competitive
advantage. You have to be careful as not to portray a "Rogue Associate"
but rather an Agent of Change that will enhance your product, improve
the performance of your supply chain, but most importantly, make your
company prevail in a world that grows by the minute into a larger and
more complex Leviathan.
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