The sourcing function of an organization is stereotypically looked at as a function concerned with purchasing at the lowest cost. With the passage of time, sourcing function has evolved and given a strategic importance to the organization. Strategic sourcing eliminates sourcing based on unjustified preferences, opinion, or complacency by introducing a strategic approach, focusing on getting the best long-term value. It requires an analysis of what an organization is buying, from whom, at what price, and at what quantity. Moreover, it doesn’t only concern the price of purchasing but also its total cost of ownership, emphasizing the entire life-cycle of a product. In short, strategic sourcing can be defined as a continuous process, where decisions are based on facts, analysis, and market intelligence to bring about savings.
Challenges for Strategic Sourcing
Companies are always on the lookout to get the best deals in terms of price, quality, and delivery time. It is not possible to get the best in terms of all three criteria and is a game of trade-offs. The balancing act of such tradeoffs is difficult to accomplish. Here are some of the challenges faced by a supply chain executive in following strategic sourcing:
Total Cost of Ownership VS. Invoice Price
A supply chain executive can be tempted to take sourcing decisions based on invoice price as it’s easy to calculate and less complicated. But when different variables come into play that affects the total cost of ownership such as freight cost, inventory cost, installation cost, maintenance cost, MOQ’s, trade barriers, duties, and E&O, the calculation becomes complex. Since cost is not the only factor to consider, it makes strategic sourcing far more complicated.
Off-Shore Vs. Near Shore
Sourcing in bigger companies has gotten more complex as the competencies of the supplier vary as per geographic region. Near-shoring can help reduce lead time and cut down on transportation costs, but it is possible to get the part or object at a reduced cost from far away location. Off-shoring may increase the lead-time and transportation cost, but depending on the situation, the benefits can far outweigh the cost. A growing trend in the US market that is gaining traction is that of nearshoring the production to Mexico as labor prices are lower than that of China. Also, as a result of this, the transit time is also cut short and the companies have to deal with fewer cultural and language barriers. All in all, making a balanced decision regarding strategic sourcing will help optimize the supply chain.
Supplier Base Rationalization
The principle of “the more the merrier” doesn’t always hold true in the case of managing a base of suppliers. In strategic sourcing, it’s a good practice to rationalize the supplier base to manage relationships more effectively. A supply chain executive can start by analyzing the current profile of vendors, find redundancy, check price, lead time, and quality, and check if any of them provide highly customized products. After such an analysis, it is easy to identify if multiple vendors are producing the same parts simultaneously, making it easier to perform supplier base rationalization. However, supplier base rationalization doesn’t mean reducing the supplier base to an alarmingly low level, which induces a high level of dependency on the suppliers.
Supply chain executives face many challenges while implementing an effective sourcing strategy. Apart from the challenges mentioned above, supply chain executives also have to make decisions on collaborative designing, fixing the requirement specification, and switching to new suppliers. Consequently, practicing strategic sourcing will equip the company with a competitive advantage and improve the overall efficiency of the procurement function.
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