STRATEGIC SOURCING WITH AN INDUSTRIAL AUTOMATION PARTNER

Corporate procurement, or sourcing, is moving away from its traditional focus on transactional unit costs and towards the strategic goal of building strong, effective supply chains that deliver great overall value to an organization at the lowest total cost.

This guide to strategic sourcing for the procurement professional in manufacturing will give insight into why this shift is occurring, discuss its potential benefits and the elements necessary for success, and describe what qualities to look for in strategic partners.

 

This free white paper includes:

  • The basics of strategic sourcing
  • The benefits of strategic sourcing for industrial automation
  • How to create a sourcing team
  • How to analyze spending
  • Qualifying suppliers with a Request for Information (RFI) and Request for Proposal (RFP)
  • Negotiations and scope
  • Managing supplier performance
  • What to look for in a strategic sourcing partner

Download a copy for later by completing the form to the right – or read it now below.

 

Guide to Strategic Sourcing with a Contract Manufacturing Partner

Table of Contents

Executive Summary

Introduction

1. What is Strategic Sourcing

2. Benefits of Strategic Sourcing

3. Elements of Strategic Sourcing

4. What to Look for in a Strategic Sourcing Partner

Conclusion

Executive Summary

Corporate procurement, or sourcing, is moving away from its traditional focus on transactional unit costs and towards the strategic goal of building strong, effective supply chains that deliver great overall value to an organization at the lowest total cost. This guide to strategic sourcing for the procurement professional in manufacturing will give insight into why this shift is occurring, discuss its potential benefits and the elements necessary for success, and describe what qualities to look for in strategic partners.

Introduction

Gone are the days when unit cost was the overriding factor that went into an original equipment manufacturer’s (OEM’s) decision to source parts, equipment, and services. This is because industry is more complex than ever before, as the result of increased globalization, a much higher level of technology and greater use of digital data in manufacturing, more capable competitors, faster-moving markets, aging workforces, increased governmental regulations, and other factors.

In this environment, although low unit prices remain important, OEMs must balance them with a broader set of supplier considerations that take into account today’s complexities in flexible, scalable ways. Thus, the sourcing function is growing from its roots in the purchasing department into a strategic corporate activity that requires cross-functional planning and collaboration across the entire organization.

1. What is Strategic Sourcing?

An OEM is engaged in strategic sourcing when it works proactively to seek out knowledgeable, experienced, and trustworthy partners with whom it can work collaboratively to build a robust, economic, and flexible supply chain.

It follows, then, that finding the right partners is critical to success. An OEM must ensure that prospective suppliers are not only knowledgeable, technically competent, and experienced, but also flexible, opportunistic, and willing to work together on product specifications and changes. In addition, they must have adequate production capacity and supplies to ensure on- time delivery.

Moreover, supplier business practices must be transparent and must support an OEM’s requirements in areas such as data collection, analysis, and access; project management; subcontractor relations; minimization of scrap and waste costs; environmental stewardship; quality certifications; and so forth.

The right solutions provider will help the OEM address the many variables that impact production; plan an efficient manufacturing process before production actually begins; work with subcontractors and vendors to procure the necessary materials, parts, and subassemblies; and build and install the required systems. This frees OEMs to focus resources in more strategic areas such as product R&D, design, marketing, and sales, instead of having to devote time and resources to plan, specify, negotiate with vendors, purchase, install, qualify, integrate, maintain, and troubleshoot new capabilities themselves in-house.

2. Benefits of Strategic Sourcing

The strategic sourcing approach enables OEMs to more easily tap into a global supply base to implement leading-edge solutions to reduce costs and improve factory output, quality, and on-time performance. It provides OEMs with benefits such as:

  • Opportunities to share best practices
  • Access to technical innovations developed in the supply chain
  • Access to new, best-in-class suppliers
  • Access to production facilities in specific geographies
  • Cost savings though greater operational efficiency and/or near- or off-shoring
  • More standardized pricing
  • Product lifecycle management support

Many different industries are making use of strategic sourcing methods today, including aerospace and defense, consumer packaged goods, electronics, energy, food and beverage, general industry, medical device/equipment manufacturing, and pharmaceuticals, to name a few. For example, medical device manufacturing is a highly specialized, highly regulated field where lapses in product quality can have life- threatening consequences. Yet, no medical device manufacturer is immune to ever-increasing competition from new, lower-cost competitors. This means that the need to reduce costs without short-changing quality has taken on greater urgency.

Suppliers who are well-versed in the complexities and unique nature of the medical device industry can help a medical device OEM better understand the details and implications of its current “spend” (i.e., how it is currently deploying its budgets), and help it optimize its operations for lower costs and high quality.

Such experienced partners, acting not in a transactional way, but in a longer-term and more strategic way, can assess components and vendors, evaluate current production facilities and offshoring/near-shoring opportunities, explore opportunities for consolidation of existing suppliers, perform make-or-buy analyses to identify further opportunities, improve processes and procedures, and so forth, helping the OEM to achieve its goals faster, better, and at less overall cost than otherwise.

3. Elements of Strategic Sourcing

Although no two companies will go about it in exactly the same way, here are the steps that typically go into the strategic sourcing process.

Create the sourcing team

Teams should include the input/participation of personnel from all areas of the organization that have a stake in the outcome (e.g., finance, engineering, operations, human resources, IT, health/environmental/safety, marketing, etc.). Have an Executive Sponsor who “owns” the initiative and drives it forward. Establish specific objectives, timelines, and milestones, and decide how the team will convey progress to stakeholders.

Spend analysis

In this analysis, data from all impacted parts of an organization needs to be included and consolidated in order to understand the overall spend that is taking place, and to project future needs. Define and understand everything possible about the targeted area, including the required products, their specific characteristics, the quantities needed, etc. Also define the users: Who are they, where are they located, what do they want? Then, how much is the organization currently spending overall to address their needs?

Supplier qualification

Determine which suppliers should be considered. A Request for Information (RFI) is often used to gather data on issues other than pricing (e.g., suppliers’ digital expertise, quality programs, financial stability, service capabilities, plant locations, safety record, references, etc.). Using this information, identify potentially suitable suppliers and solicit commercial proposals from them via a Request for Proposal (RFP). Prior to short-listing suppliers, be sure the sourcing team has agreed-upon understandings of the total cost of ownership and total system cost of the products and services being sourced. Develop performance metrics for suppliers (e.g., on-time delivery performance, quality benchmarks, warranty terms, customer satisfaction survey targets, etc.).

Scope and negotiations

The team short-lists the suppliers with which it intends to negotiate, and conducts negotiations. It’s generally a good idea to present the short list to the appropriate business unit manager prior to contacting suppliers in case the manager already has a favored supplier in mind, rather than after contact has already been made. That way, if the supplier isn’t selected, the team can explain to the manager in detail why not. Also, because it takes time to develop trust and good working relationships, it is often useful to take a longer-term view in complex projects, giving suppliers the chance to develop innovative solutions.

Supplier performance management

Often, once the sourcing team has gone through a detailed and sometimes difficult vendor selection process, it disbands. This makes it difficult to continue cultivating the supplier relationship. Therefore, an effective ongoing performance management program is needed to focus on important tasks such as contract execution, ongoing implementation of new ideas or processes, and to refine the original performance metrics as needed.

4. What to Look for in a Strategic Sourcing Partner

Turnkey projects can be quite complex. Therefore, OEMs will benefit greatly by working with partners who offer not just technology, but also the experience and know-how to successfully use it to develop lean, cost- effective, customized solutions that will deliver the desired results.

Suppliers who can do this will offer the following capabilities:

  • Relevant and recent experience.
  • Highly experienced personnel, in adequate numbers, who can provide the necessary engineering and technical support to achieve the desired levels of performance and quality, and for future upgrades or extensions
  • Powerful, networked IT systems that provide for modeling/simulation of manufacturing processes and that enable data-driven production, so that high-quality, lot-to-lot consistency, low costs, and higher output can be achieved.
  • Single point of contact and comprehensive project management practices to ensure that projects stay on track and on budget.
  • Training and other support to quickly familiarize the OEM with the systems.
  • Knowledge of/certification with appropriate quality, safety, and environmental standards.
  • A problem-solving mindset.

Conclusion

In today’s increasingly complex and constantly evolving business environment, traditional sourcing and procurement processes are becoming outdated. Stra- tegic sourcing is the way forward because it is a systematic process whose goal is to continuously re- evaluate and improve an organization’s purchasing activities to deliver the greatest overall benefit to an OEM, not necessarily the absolute  lowest  purchase costs for good and services. A structured, collaborative strategic sourcing  methodology  is  particularly beneficial for complex projects, where the goal is to enhance an OEM’s  manufacturing capabilities  by adding capacity and flexibility at the lowest total cost. Strategic sourcing can make a tremendous positive contribution to companies of all sizes.

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