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Supply Chain Insights

Maximizing cost savings through strategic sourcing

Maximize your cost savings through strategic sourcing - tips, examples, and the role of a strategic sourcing manager. Learn more with Amplio.

As electronic hardware companies strive to remain competitive, one key area that can be targeted for cost savings is the supply chain. In this blog post, we'll explore tips on maximizing cost savings through strategic sourcing.

Strategic Sourcing Definition

What is strategic sourcing? Strategic sourcing is an analytical approach to procurement with an eye to identifying the critical products and services needed to run a business and then finding the suppliers who can provide these products or services at the best price, quality, and delivery. 

It involves deeply analyzing needs for goods or services, recognizing a wider range of potential sources and suppliers, evaluating a variety of offers, negotiating contracts from a position of strength, and closely managing supplier performance. Through strategic sourcing, companies can find opportunities to reduce costs while simultaneously improving the quality of materials they use.

By optimizing an organization's supplier base, businesses can create a competitive advantage and improve bottom line performance. Strategic sourcing plans focus on identifying opportunities to reduce total cost of ownership while improving quality and service levels. To be successful, organizations must have a clear understanding of their spend profile, objectives & goals, and use data-driven analytics to support decision making.

The objectives of strategic sourcing are to: 

  • Find and take advantage of cost savings 
  • Reduce supply chain risk 
  • Improve service levels 
  • Increase process efficiencies 
  • Build strategic partnerships with vendors 
  • Ensure global coverage

Examples of Strategic Sourcing

Strategic sourcing comes in many forms, giving procurement teams many avenues to pursue to improve their results. Here are some of the most common strategic sourcing examples:

  1. Centralizing Procurement: Companies often consolidate purchasing activities in order to leverage their buying power and negotiate better deals with suppliers. This may involve consolidating suppliers across different business units or departments.
  2. Category Management: This approach involves breaking down the procurement process into specific categories, such as IT, marketing, or facilities management. Each category is then managed by a dedicated team that focuses on optimizing sourcing strategies, identifying cost-saving opportunities, and negotiating contracts.
  3. Supplier Relationship Management: Building strong relationships with key suppliers can help companies achieve better pricing, quality, and delivery terms. Strategic sourcing involves identifying these critical suppliers and developing partnerships that are mutually beneficial.
  4. Using smart procurement software: Leveraging technology to streamline the procurement process can help companies save time and money. E-sourcing tools enable companies to manage bids and proposals, analyze supplier data, and negotiate contracts online.
  5. Outsourcing: Outsourcing can be a strategic sourcing approach to transfer specific business functions to third-party service providers who can perform them more efficiently and cost-effectively. This may include outsourcing IT, customer service, or manufacturing.
  6. Global Sourcing: Companies may source products or services from countries with lower labor or production costs. This can help companies achieve significant cost savings, but it also involves managing the risks associated with global sourcing, such as supply chain disruptions, quality issues, or cultural differences.

The Role of a Strategic Sourcing Manager

A strategic sourcing manager is responsible for developing and implementing strategic sourcing initiatives that support the organization's goals. The strategic sourcing manager will lead initiatives from the examples above and focus on testing, learning, and then implementing impactful changes that will improve supply chain KPIs.

Often, this manager’s role will include identifying cost-saving opportunities, analyzing market trends, selecting and managing suppliers, and negotiating contracts. This critical role can have a huge impact on the wider business – done well, strategic sourcing will drive down COGS, reduce supply chain risk, and open up new opportunities for growth. 

Since their role involves creating change in the business, the strategic sourcing manager must be able to work collaboratively with cross-functional teams, including finance, legal, and operations, to ensure alignment across the organization. Perhaps more than any other function, the supply chain is the lifeblood of a manufacturer; without a steady flow of parts in, there is no flow of finished goods out. It’s critical that the strategic sourcing manager ensure that the changes that they put in motion are well understood across the business so that other functions can adapt their plans accordingly.

The Strategic Sourcing Process

A strategic sourcing process is a structured approach that involves the following steps: identifying spending categories, analyzing spending patterns, developing a sourcing strategy, identifying potential suppliers, evaluating and selecting suppliers, negotiating contracts, and managing supplier performance. The process can be complex and time-consuming, but it can lead to significant cost savings and operational efficiencies.

To make the process more tangible, let’s go through an example of a supplier analysis. When setting out to identify opportunities to improve their supply chain with new suppliers, a strategic sourcing manager should go through these processes:

  1. Spend Analysis: The first step in the process is to analyze the spend data to identify the categories of spend and the suppliers that the organization is currently using. This analysis will help identify areas of opportunity for cost reduction, consolidation, and supplier rationalization. If you capture Purchase Price Variance (PPV), that’s a great place to start – any inputs with a high PPV are great opportunities to reduce COGS.
  2. Market Analysis: The next step is to conduct a market analysis to understand the supplier landscape and the market trends. This analysis will help identify potential suppliers, their capabilities, and the competitive landscape. Many companies work off of a relatively small Approved Vendor List (AVL), which oftentimes means that they miss opportunities to work with suppliers that can offer components at a better price or with more reliability.
  3. Supplier Prequalification: Once potential suppliers have been identified, the next step is to prequalify them based on a set of criteria such as financial stability, quality, delivery, and environmental sustainability. This step will help narrow down the list of potential suppliers to a shortlist of qualified suppliers.
  4. Request for Proposal (RFP): The next step is to issue a request for proposal (RFP) to the shortlisted suppliers. The RFP should provide detailed information about the organization's requirements, evaluation criteria, and contract terms and conditions.
  5. Bid Evaluation: Once the RFP responses have been received, the next step is to evaluate the bids against the evaluation criteria. The evaluation criteria should be based on a weighted scorecard that takes into account the organization's priorities, such as price, quality, delivery, and supplier capabilities.
  6. Negotiation: After the bid evaluation, the next step is to negotiate with the selected suppliers to finalize the contract terms and conditions. This step involves identifying areas of potential cost savings and negotiating favorable terms and conditions for the organization.
  7. Contract Management: Once the contract has been awarded, the final step is to manage the supplier relationship and monitor their performance. This involves developing a supplier performance scorecard, setting up regular performance reviews, and ensuring that the supplier complies with the terms and conditions of the contract.

Defining Strategic Sourcing and its Objectives

In conclusion, strategic sourcing is an important process for companies looking to reduce costs and improve efficiency in their supply chain. It involves identifying opportunities to optimize supplier selection, contract negotiation, and supplier management. Although it can be challenging, with the right tools in place, it can drive significant savings for your organization. A strategic sourcing manager plays a crucial role in overseeing the entire strategic sourcing process and achieving its objectives. 

Amplio helps its clients with strategic sourcing by uncovering opportunities to drive down COGS and reduce risk through wider supplier selection. Many electronics manufacturers build strong relationships with a small set of vendors, and then they rarely purchase from others. This is a great strategy for everyday purchasing, as it reduces complexity, increases purchasing power, and improves delivery reliability. It breaks down, though, when components become hard to find or when a vendor doesn’t have strong access to certain parts. Amplio’s software connects to hundreds of suppliers of electronic components, so we keep our eye on almost the entire market at once. When our clients are threatened by a shortage or by high Purchase Price Variance, we can instantly identify different suppliers that can mitigate the risk of the shortage and drive down COGS. 

We’re a watchtower for our clients, opening up new avenues for strategic sourcing while providing procurement peace of mind.

Written by
Terry Jeffords

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