June 1st, 2021
Pre-COVID-19, manufacturers still needed to enhance their sourcing strategies, but they certainly had different priorities and greater leeway than they have today. Most opted to focus on cost reduction and were not typically facing split-second decisions on a weekly basis. And even though we’ve started to move away from the more extreme high-intensity situations that many companies experienced during the onset of COVID-19, we’re now moving into the “new normal.” That is, relatively speaking, a highly competitive race to supply chain optimization.
Manufacturers today have learned (and continue to learn) from recent experiences and are doing everything in their power to increase supply chain agility as quickly as possible. For most, this means redefining their sourcing strategy to ensure that any and all supplier relationships are strategically built and can withstand both major and minor disruption.
This is the first part of our blog series on strategic sourcing. Check back for more.
What Is Strategic Sourcing?
Strategic sourcing is a procurement method that utilizes in-depth analyses at various levels to drive profitability and boost agility. Therefore, strategic sourcing and (strategic) procurement are one in the same. In general, it requires a thorough market-level analysis, a detailed analysis of every current and potential supplier, as well as a broad supply chain analysis at both the operational and financial level. All of these activities are ongoing.
In light of recent events, many manufacturers are looking to adopt a strategic sourcing process to reduce costs and set themselves up for long-term success. With strategic sourcing, manufacturers are able to identify potential risk factors and develop procurement plans that mitigate them. All in all, strategic sourcing is necessary for increased flexibility and the ability to respond to external factors.
Single Sourcing vs. Multiple Sourcing
An increasingly important aspect of strategic sourcing is diversifying your sources. Or, in other words: Don’t put all your eggs in one basket. This goes along with the above explanation of strategic sourcing and the current market state in that manufacturers are hoping for the best but planning for the worst. Little by little, every manufacturer’s strategic sourcing process is eliminating full reliance on any one supplier and implementing a multiple sourcing strategy instead. Here’s why:
Single sourcing is a manufacturing strategy in which a manufacturer relies on a single supplier for one or more raw material(s) needed to build the finished product. Unlike sole sourcing, which indicates that there is only one supplier that produces the particular item, single sourcing is not based on necessity. Even though there are (many) other suppliers available, the manufacturer chooses to give all of his business to one party.
The reason for this could be price-related or other, but price is most common. Manufacturers often choose to adopt a single sourcing strategy when purchasing products from developing countries—no other suppliers can match the price, let alone beat it. The problem with single sourcing, especially if the component is critical for production, is that there’s no back-up plan. The risk is high.
Multiple sourcing is when a manufacturer has a business relationship with multiple suppliers, all of which are capable of producing one or more raw material(s) needed for the finished product. There’s lower risk involved with a multiple sourcing strategy for many reasons, including less reliance on any single supplier, more bargaining power due to increased competition, and a reduced chance that you’ll run into supply and demand complications.
As opposed to single sourcing, multiple sourcing enables manufacturers to diversify their sources, and, therefore, mitigate risk. In having the option to purchase the same (or similar) item from various suppliers in multiple locations, there’s a very low chance of experiencing disruption.
The Importance of Strategic Sourcing
Even though there were indications that a natural disaster such as the COVID-19 pandemic could take place, no one saw it coming and no one was prepared. When the first coronavirus outbreaks were discovered in Wuhan, all production in China shut down shortly after. This was a shock to most manufacturers, and they’ve since realized that they can’t afford another setback of this degree.
The pandemic awakened a heightened sense of urgency for supply chain optimization, especially in terms of sourcing. Today, manufacturers are still concerned with lowering supply chain costs, but they’re also interested in how their decisions will impact supply chain agility and resilience. Strategic sourcing enables them to address each of these concerns simultaneously.
The importance of strategic sourcing is that is pulls everything together—market trends, supplier analyses, supply chain costs, operations, and more—and allows manufacturers to adopt agile methods. It’s also important to remember that strategic sourcing begins with digitalizing all documents that flow in and out of your supply chain. This will provide a transparent overview and populate invaluable data that can be used to identify potential risks as well as opportunities for cost savings.