3 Strategic Sourcing Lessons from one OEM’s $7B Supply Chain
Strategic Sourcing is a primary focus when running a $7B global supply chain. An Original Equipment Manufacturer (OEM) that outsources relies heavily on their supply chain to survive and thrive. They must have clear and concise goals with each and every supplier. They need to have transparent sourcing strategies to achieve these goals. Each goal is balanced with the knowledge they need a viable set of suppliers to create a resilient supply chain.
What can other high technology companies that outsource take away from their experiences and the resulting lessons? Gaining insight into how these companies implement strategic sourcing and leverage their supply chain helps — whether you are employing a global contract manufacturer to build and source parts — or you choose to source parts directly.
Strategic Sourcing Goal #1: Cost Reduction
A key area of strategic sourcing includes reducing the number of suppliers to reduce costs. In four years, the OEM reduced their set of 150 suppliers in one category of parts to 50. By giving each supplier more volume, they were able to reduce their cost per unit. The supplier benefited through larger orders that allowed them to fully burden their fixed assets. Each supplier must agree to specific conditions to participate in any lucrative supply chain. With respect to cost, each supplier must agree to quarterly cost reviews. The OEM customarily expects cost reductions during each negotiation cycle.
One sourcing strategy that mitigates risk involves making sure each component in a single category must have at least two qualified sources. This allows for alternate, or split-sourcing, in case a supplier cannot deliver parts for any reason. In order to cultivate a viable supply chain, the OEM needs to understand the margin requirements of the supplier to increase the odds that each supplier stays financially solvent. This requirement is amplified when they rely on fewer suppliers. Bringing a new source onboard takes time, money, and expertise, so once a supplier is approved, all parties are more likely to negotiate fair contracts.
- Treat your sourcing partners as integral members of your delivery team
- Articulate cost goals and fair terms in your contracts
- Delineate both penalty and reward clauses
- Understand the supplier’s margins
If you decide to outsource 100% to one or more EMS providers, understand they are taking on the responsibilities to source and manufacture, allowing you to focus on developing and marketing new products. As an example, a sourcing manager at this particular OEM is responsible for two essential custom components worth about $500K annually that are supplied by four different sources. He works with design engineers from each product line who use the components. The sourcing manager meets with strategic customers who require a feature that requires one of those components. He also works with quality engineers and manufacturing engineers to optimize the source’s performance.
Strategic Sourcing Goal #2: Quality
In order to meet quality goals, the strategic sourcing teams must ensure that suppliers are closely integrated with the OEM. This integration begins with an intense qualification process. The potential source goes through a series of steps starting with component testing, followed by system testing. Once they pass this initial stage, the OEM works with the supplier to meet other targets. A corporate team of manufacturing engineers goes onsite to ensure the facilities meet a variety of standards ranging from cleanliness to safety to systems capabilities.
This qualification process reveals not only the basic capabilities of the potential sourcing partner, but it also shows how well they collaborate on reaching a goal. Once a partner has started to manufacture for the OEM, they should have systems that capture yields in real-time. This data is sent to Supplier Quality Engineers at the OEM for analysis. If an issue is uncovered, the supplier and OEM execute a quality process to resolve the issue as soon as possible. This collaborative effort may result in a change to the supplier’s process or even a change to the product design.
- When qualifying strategic sourcing partners, measure not only the output but the inputs and systems used to get the output.
- Be prepared to monitor results and collaborate to solve problems.
- Tackle quality issues jointly in a holistic and integrated manner.
Strategic Sourcing Goal #3: Innovation
Strategic sourcing professionals understand that innovation benefits all stakeholders. The OEM provides the customer with technology that enables them to improve their services and products while lowering costs. In turn, the OEM provides the supplier(s) with more orders. The customer historically rewards the more business to the OEM who demonstrates first to market innovation.
Whether the innovation comes from a designer, supplier, a customer, or internally, the supplier must be able to work with the OEM to ensure the product works as designed. The OEM needs to have systems in place to collaborate and help innovate. The supplier who provides more value is then rewarded with larger contracts. Innovation can help reduce costs and improve quality. Innovative solutions may also result in higher performance or a new, better way to solve customer’s problems.
- Leverage your suppliers’ expertise by proactively requesting recommendations. Because manufacturing is typically done outside your time zone, you need to be deliberative to benefit from this information.
- Have systems and procedures in place to capture supplier’s knowledge so you can deliver a better product.
- If you are using an EMS provider, you may be able to leverage some of their lessons learned from other clients.
- Know who your supplier’s suppliers are so you can leverage their expertise as well.
- Communicate with suppliers using cost-effective, secure solutions that aid in mitigating IP theft.
Strategic Sourcing Goals – How Arena PLM Can Help
Meet your strategic sourcing goals by managing your product data with Product Lifecycle Management (PLM). Here are some ways we can help.
- Cost Reduction: Cut scrap, rework, and Return Merchandise Authorization (RMA) with fast, accurate product data to your supply chain.
- Quality: Facilitate continuous improvement by involving all stakeholders in problem identification and resolution with an embedded holistic solution.
- Innovation: Collaborate with all suppliers, including your supplier’s suppliers to leverage expertise to improve your products in a cost-effective, secure environment.
Although you may not have the same leverage that an OEM with a $7B supply chain budget has — you can learn strategic sourcing lessons from their strategies and tactics to compete more effectively.