What is Strategic Sourcing and Why Is It Important?

There are few industries more dependent on a reliable supply of components than electronics manufacturing. Every supply chain has its own model for the procurement of components, but just because a business has always operated a certain way, this is not enough of a reason to continue to do so. This is especially true when finances can be used more effectively. Here’s how strategic sourcing could help.

What is strategic sourcing?

Strategic sourcing is a holistic approach to developing channels of supply that considers all activities within the procurement cycle to secure the best possible total cost, rather than just the lowest purchase price for those goods.

Strategic sourcing allows businesses to consolidate their purchasing power to achieve the lowest possible total cost of ownership and minimise risk to the supply chain. The approach is a long-term process that is dependent on a continuous re-evaluation of the business’s sourcing activities, analysis of the market and aligning business goals and requirements with those of the suppliers.

The 7-step strategic sourcing process

1. Profile the product category in as much detail as possible, including the spending patterns and departments involved.
2. Analyse the market, identifying potential new suppliers, both local and global.
3. Develop a sourcing strategy based on the goals of the business, deciding where to buy whilst minimising risk and cost.
4. Select the sourcing process by defining your request for proposal criteria for soliciting bids.
5. Negotiate with and select suppliers after reducing to only the valid bids.
6. Work with the new suppliers to integrate them into the existing processes, using the communication plan to integrate improvements to specifications or processes.
7. Benchmark the current state of the category by tracking performance metrics and the effectiveness of the sourcing plan. This leads back to step one as the marketplace evolves.

Why is strategic sourcing important?

Adopting strategic sourcing can bring significant benefits to businesses in the electronics manufacturing industry, the most noticeable being cost savings. Sourcing suppliers with this method and continuing to analyse the evolving market means that businesses can ensure they are always achieving high cost savings.

This method also allows companies to align their component sourcing with their business goals, which increases efficiency and minimises risk within the supply chain. The process of analysing suppliers on more than just their initial product cost also means that these business goals can be matched with the best possible suppliers in order to achieve them, creating high value at low cost.

At the heart of strategic sourcing is the opportunity to build long-term relationships with suppliers. Because suppliers are selected based on their capability and their compatibility with the business’s needs and goals, an efficient transaction model between supplier and OEM is established. This dependability leads to more benefits than just getting the right components at the time they are expected; it also motivates the OEM to consider the supplier for other sourcing decisions, and the supplier to continue the pattern of reliability so they can ensure future business.

These strong relationships make it easier to identify risk, forecast sales, and cope in times of component shortages.

What are the benefits of strategic sourcing?

Strategic sourcing is an advanced approach to procurement, designed to optimise an organisation’s purchasing activities by considering more than just the cost. It’s a holistic method that offers a host of benefits:

• Cost Savings: At its core, strategic sourcing aims to reduce costs. By analysing spend data and consolidating purchases, organisations can negotiate better terms and discounts with suppliers, leading to significant savings.
• Enhanced Supplier Relationships: Instead of a transactional approach, strategic sourcing fosters strong, long-term relationships with suppliers. This collaborative approach can lead to better terms, improved quality, and even joint innovations.
• Risk Management: With a comprehensive understanding of the supply chain, companies can better identify potential risks, from geopolitical shifts to supply chain disruptions. This proactive approach ensures that contingencies are in place, thereby reducing vulnerabilities.
• Improved Quality: Strategic sourcing emphasises the total cost of ownership, which includes the quality of goods or services procured. This means that procurement decisions are made with quality as a key consideration, leading to better end products and fewer defects or issues down the line.
• Sustainability and Ethical Procurement: Modern consumers are increasingly concerned with the sustainability and ethics of the products they purchase. Strategic sourcing allows organisations to select suppliers that align with these values, enhancing brand reputation and meeting regulatory standards.
• Increased Efficiency: With clear processes and criteria in place, the time taken for procurement activities can be significantly reduced. This means faster decision-making and the ability to respond agilely to market changes.
• Data-Driven Decision Making: Utilising robust data analytics, strategic sourcing provides valuable insights into spending patterns, supplier performance, and market trends. This data-centric approach ensures decisions are made based on facts and not just intuition.
• Competitive Advantage: An effective strategic sourcing function can be a differentiator in the market. By sourcing efficiently, maintaining strong supplier relationships, and ensuring consistent quality, organisations can establish themselves as leaders in their respective sectors.

Strategic sourcing examples

Let’s look at an example of strategic sourcing in the context of a mobile phone manufacturer.

A leading mobile phone manufacturer identifies a need to procure a specific type of microprocessor that powers its next generation of smartphones. Instead of making a straightforward bulk purchase based on price, the company adopts a strategic sourcing approach:

• Supplier Evaluation: The company conducts thorough research to identify and evaluate potential suppliers. This encompasses factors such as the supplier’s capacity, technological expertise, delivery times, quality assurance processes, and historical performance.
• Total Cost of Ownership (TCO) Analysis: Rather than focusing purely on the unit price of the microprocessor, the company examines the total cost of ownership. This includes considerations like warranty costs, transport costs, potential import duties, after-sales support, and even costs related to potential production delays if the component fails.
• Supplier Collaboration: Recognising that this microprocessor is crucial to the product’s success, the company collaborates closely with the chosen supplier to co-design the component. This ensures it aligns perfectly with the technical and performance requirements of the new smartphone.
• Risk Management: The company identifies potential risks in the supply chain, such as geopolitical issues, potential for component scarcity, or logistical disruptions. To mitigate these risks, they source the component from multiple suppliers or ensure there’s a backup plan if the primary supplier faces issues.
• Contract Negotiation: Instead of a short-term procurement contract, the company negotiates a long-term agreement with the chosen supplier. This includes clauses around price stability, capacity guarantees, and first access to any innovations the supplier might develop.
• Performance Monitoring: Post-purchase, the company continuously monitors the supplier’s performance in terms of component quality, delivery timeliness, and adherence to the agreed terms. This feedback loop helps in refining the sourcing strategy over time.

By taking this strategic approach to sourcing the microprocessor, the mobile phone manufacturer ensures a reliable, cost-effective, and high-quality supply of a critical component, positioning itself for success in a competitive market.

Future Trends in Strategic Sourcing

In the constantly evolving world of business, it is vital for organisations to stay abreast of the latest trends that might influence their operations, especially in the realm of strategic sourcing. As we look to the horizon, several key trends are emerging, poised to reshape the landscape of sourcing in profound ways.

The Role of AI and Machine Learning

Artificial Intelligence (AI) and Machine Learning (ML) are no longer the stuff of science fiction; they are rapidly becoming integral to numerous sectors, including strategic sourcing. These technologies are transforming the way companies analyse data, identify patterns and make predictive decisions.

For instance, through AI and ML, firms can now anticipate supply chain disruptions or identify potential suppliers more efficiently than traditional methods. These technologies can also automate routine tasks, allowing procurement professionals to focus on more strategic aspects of their roles. The upshot? Faster, more accurate and more efficient sourcing decisions that can give companies a notable competitive edge.

Sustainability and Green Sourcing

With the growing emphasis on environmental concerns, organisations are increasingly under pressure from both consumers and regulators to adopt more sustainable practices. Green sourcing, or the consideration of environmental factors in sourcing decisions, is becoming a priority.

Companies are now looking for suppliers that adhere to sustainable practices, from reduced carbon footprints to ethical labour practices. This not only helps to mitigate environmental impacts but also positions companies as responsible and forward-thinking entities in the eyes of consumers, potentially boosting brand reputation and loyalty.

Geopolitical Changes and Their Impact

In an interconnected global economy, geopolitical shifts can have profound impacts on strategic sourcing. Trade wars, tariffs, regional conflicts, and even global health crises can disrupt supply chains and create uncertainties in the procurement process.

Organisations must remain agile, diversifying their supplier base and staying informed about global events. This can help in not only navigating immediate challenges but also in anticipating future shifts, ensuring a more resilient sourcing strategy that can withstand the ebbs and flows of global geopolitics.

The Integration of Blockchain in Sourcing

Blockchain, the technology behind cryptocurrencies like Bitcoin, is making its way into strategic sourcing. It offers a secure and transparent way to track transactions across the supply chain. For companies, this means enhanced traceability of products, ensuring that what they’re sourcing aligns with their stated standards and values.

Furthermore, blockchain can expedite payment processes and enhance the trust between suppliers and buyers, as every transaction is verifiable and immutable. As more organisations recognise the potential of blockchain in mitigating risks and improving transparency, its adoption in the realm of strategic sourcing is likely to soar.

How Rebound Electronics can help with strategic sourcing

It is important to use an independent supplier to help with strategic sourcing, as they have the most flexibility when it comes to sourcing components and the ability to make decisions on sourcing, financing and stocking without being answerable to shareholders.

Here at Rebound, we are experts in helping businesses employ strategic sourcing for their procurement processes. We can source components globally, meaning that in times of shortages, production lines can keep moving and supply chains can continue to realise product sales. We can also work with businesses to buy excess components so that cash flow and warehouse space are freed up.

The scale of our business, our understanding of the market, and our flexible approach also mean we are well placed to get the best possible price on the electronic components we source. You can find out more about our services here.

FAQs

What is strategic sourcing in the context of electronic components?

Strategic sourcing is a holistic approach to developing channels of supply that considers all activities within the procurement cycle. It aims to secure the best possible total cost, rather than just the lowest purchase price for goods. In the context of electronic components, it ensures that businesses consolidate their purchasing power to achieve the lowest possible total cost of ownership and minimise risks to the supply chain.

Why is strategic sourcing crucial for businesses in the electronics manufacturing industry?

Strategic sourcing offers significant benefits, including cost savings, aligning component sourcing with business goals, increasing efficiency, minimising risks, and building long-term relationships with suppliers. This approach ensures that businesses achieve high value at low costs and can cope during times of component shortages.

How does strategic sourcing differ from traditional sourcing in supply chain management?

Unlike traditional sourcing, which often focuses on obtaining the lowest initial purchase price, strategic sourcing takes a comprehensive view of the entire procurement cycle. It considers factors like total cost of ownership, supplier relationships, business goals alignment, and long-term value, ensuring a more sustainable and efficient supply chain.

What role does strategic procurement play in supply chain management?

Strategic procurement is an integral part of supply chain management. It involves the systematic process of planning, implementing, evaluating, and controlling strategic decisions related to an organisation’s external acquisitions. By aligning procurement activities with strategic objectives, businesses can achieve better value, reduce risks, and enhance overall supply chain efficiency.

How can businesses build strong relationships with suppliers through strategic sourcing?

Strategic sourcing emphasises selecting suppliers based on their capability and compatibility with the business’s needs and goals. By establishing an efficient transaction model and ensuring mutual benefits, businesses can foster long-term relationships, leading to better risk identification, sales forecasting, and coping mechanisms during component shortages.