Elements of Strategic Sourcing Strategy – When do you start?

Most think that the strategic sourcing process should start when it’s time to introduce product into production, making decisions about where to source components and what the assembly strategy should be, right?

No, wrong!  The component sourcing strategy needs be aligned with the overall business strategy, a fact recognized in countless publications but missed by many OEMs.  The detailed work will need to begin during the product design process.

Developing the sourcing strategy in parallel with the new product development will encourage component selections that match availability and the application requirements of the product life cycle.  It’s tempting to work with the local manufacturer or distributor to design their latest device into your leading edge product, but they have a vested interest and bias in making their product attractive, and this may not be advantageous to the product.  These critical decisions need to be made without time pressure and influence from vendors.

Often the latest in component technology is designed into a new product without considering availability for volume manufacturing in time to support the production ramp.  Sometimes the component manufacturer has quality issues that arise prior to general market availability that stalls the entire release process, endangering not only their product introduction, but also those of anyone designing in that device.

A design department might find this themselves, but a Supply Chain Strategist can be focused on such matters and assist in identifying alternate sources to mitigate the risk of such an event occurring.  Being the vigilant and slightly pessimistic lot that they are, Supply Chain Strategists will most always be planning for the worst and hoping for the best, knowing that a ‘Plan B’ should always be available.

This is an example of where a Supply Chain Strategist can provide enormous value.  By working side-by-side with the product engineering team, they can develop a supply chain that is consistent with product demands, and recommend relationships with suppliers that bring specific, applicable expertise.  This strategy may provide co-development opportunities with suppliers that can result in best-in-class products, reduced time to market, and integration with the supply chain from the very beginning.  This strategic sourcing strategy and plan can yield an efficient, low cost solution because both companies are working together, aligned to one common goal.

The OEM wins because:

• expectations are set and formally agreed at the beginning of the relationship, driving both parties to a common set of goals
• the cost of development can sometimes be shared with the supplier
• with the supplier’s expertise they can provide the best solution or multiple solutions to a given design challenge
• the supply chain is being developed in parallel with the product, which significantly reduces the development lead-time
• the supply chain can allow for contingency planning in regard to component supply from the very beginning

The supplier wins because:

• they have assurance of future business if their design is approved by the client company
• they have a more robust partnership with the OEM

It can be the perfect scenario, but only if certain elements are managed very carefully.

The supplier selection process is obviously very critical.  At a minimum, the right supplier will be financially stable, with a long history of such relationships, able to protect your IP and theirs, and be willing to design beyond their own manufacturing capabilities.

The design should not maximize the supplier’s product content at the cost of compromising product quality or features, but should meet the OEM’s desired goals.

After selecting the best suppliers and design partner, the entire supply chain can be developed and managed during the design process itself.

In conclusion, a component sourcing strategy should not be an afterthought or derivative of the design process.  Because the supply chain for any given product can drive between 35 and 80% of the cost of goods sold (COGS) and most of the time-to-market constraints, sourcing must be seriously considered during the product development cycle in order to be effective and provide optimum performance.

Supply chain specialists should be involved early in the product cycle to prevent issues negatively affecting product cost, timing of market introduction, production scalability, and the overall sustainability of the product life cycle.

Never underestimate the value and importance, or overanalyze the cost, of early inclusion of your supply chain team.  These supply chain guys can have a hugely positive impact on your products ability to meet its goals in terms of performance, market penetration and of course cost of manufacture.