5 Strategic Sourcing Myths Debunked

The array of myths swirling around the Strategic Sourcing function is truly mystifying. As with many myths, there may be a true historical basis. Archeologists have excavated business caves proving the evolution of supplier/customer relationships from “antagonistic & confrontational” to “partnerships along the value chain”. The supply chain world has evolved. The death of vertical integration has blurred the distinction between customers and suppliers. Customers will be fired when the opportunity cost of kowtowing to their onerous demands is too high. Time to market and total cost of ownership, have supplanted achieving the lowest possible part cost.

Following are 5 common myths that prevent Supply Chain Managers from embracing the “new normal”.

Myth #1: Contract Manufacturers should manage sourcing.

This myth seems to make sense on the surface. Contract Manufacturers, by nature of their business, must have an expertise in global sourcing. Why not leverage those available resources? Strategic Sourcing is the first and often most complex part of the product to market supply chain path. It can be a relief to let the CM do the driving.

Abdicate Strategic Sourcing to the Contract Manufacturer and you lose independence, control, transparency, cost savings, an opportunity to build relationships, and valuable learnings from DFMA supplier partnering. A CM’s first priority is to optimize the supply chain for themselves. Nothing unethical going on. Their incentive is to eke out an extra few % profit margin, and share some of the cost reduction with their customers. A global sourcing market survey and supplier selection process, specific to each customers’ requirements, is typically not part of the program.

Myth #2: E-auctions will lower cost and optimize supplier selection.

Trying to reduce costs by holding a bidding war online is only attacking the suppliers’ profit margin. This is a recipe for souring relationships. 70% or more of costs are designed into a part. The over budget & over designed horse has already left the barn by the time a reverse auction is held. Supplier selection based narrowly on the lowest bid is a sure loser. Think Total Cost of Ownership with every “cost reducing” supply chain strategy you implement. The most effective way to lower cost and improve quality is DFMA supplier partnering during the earliest stages of design.

Myth 3: Everything should be dual sourced.

Volume production discounts and economies of scale are often sacrificed on the altar of dual sourcing. This ideology conflicts with another myth: “consolidating sources improves supply chain efficiency”. Have you ever felt ping-ponged between “we have too many suppliers” and “why are we single-sourcing so many parts”? When it comes to the number of sources being the right number, it should always be analyzed on a case-by-case basis. No corporate policy, developed at 50K ft and peanut buttered around, will match every situation. Dual sourcing and supplier consolidation as policies, need to be viewed through a strategic lens, and not run on autopilot.

Myth 4: Include cost reductions in supply agreements:

Negotiating annual cost reductions in advance is a great way to make sure the most competitive price is never offered up-front. Future cost reductions will be built into the present price. In addition, when the suppliers develop ways to save costs, they are less likely to share the savings. Unfortunately, the reward systems for Sourcing Managers are often based on cost reductions. Bonuses will be higher if a cost is reduced from $10-$7 during the first three years of production. “Pay no attention to that man behind the curtain” telling you the cost could have been $7 from day one.

Myth#5: Supply agreements should be as one-sided as possible.

The classic “start high and leave yourself room to negotiate” ploy, as the best way to gain an advantage. This myth is a cousin to the “win-win negotiations are for wimps” school of thought. Including requirements on a standard contract that are always pushed back on, meets the definition of insanity. Is it worth all the legal fees and ill will, for that one in a hundred supplier who agrees to give you their first born? An onerous contract proposal and antagonistic negotiations will be interpreted as a prelude to doing business with your company. Some excellent suppliers may decide to take their marbles and go home. Before a contract is sent, give it the “would I sign this for my company ?” test.

Conclusion:

There are many of these mythological fire-breathing dragons flying around supply chain departments wreaking havoc. The winners in today’s hotly competitive markets will be those companies able to integrate positively with their supply bases. Procurement cultures that cannot shift to the new paradigm, will damage important supplier relationships,Total Cost of Ownership, and impede the product to market cycle. Become dragon slayers, and do not allow conventional wisdom to block more effective approaches.