Wednesday, January 30, 2008

Looking beyond costs - Strategic Sourcing and Supplier Collaboration

The dynamics of the global market has changed so ever recently that the conventional Supply procurement is almost non-existent. Bulk over-seas and cross-border trading has led to development of newer, more radical strategies. Earlier, Bulk Ordering and Long term agreements meant better Pricing. The picture today if not totally, is different from then. Strategic sourcing Plans are being put in place to cut down on Supply Risks to ensure Supply Continuity. So what do we mean by Supply Risks?

With more organizations moving towards the Lean approach and reduced inventories, the buffer as well as safety stocks maintained by manufacturers have gone down. Also, as per “Just in Time” Strategy - The next batch of supply is only scheduled to arrive when it is needed; not before to avoid Inventory inflation and definitely not late to avoid stock outs. In such a scenario, Delays caused by the supplier in providing the goods on time can be catastrophic and can disrupt the delivery cycle completely.

Another risk associated to Lean manufacturing techniques is the defect ratio and probability in the incoming supply. As per TQM, a particular assembly or manufacturing unit expects to receive parts with zero defects from its preceding unit or supplier. In such a scenario, a defect is only discovered at later stages of Assembly and many times when the product is finished. Manufacturing units and assembly plants can with quite an amount of flexibility can control the Quality checks inter to its organization but has only a limited control over his Vendors.

Also, with Suppliers spread across the globe - there is a significant order lead time associated with supplies. So in case of inaccurate forecasts of demand would lead to an inaccurate forecasting of Supplies which cannot be fulfilled immediately due to Cross border trade restrictions. This would make the manufacturers doing more spot buys at a premium price from the local market during crunch time. This cuts down their profit margins in order to meet customer demands.

Finally, international trade relationships can also be affected with the civil as well as governmental climate of a country. A break of war or civil disruptions in the countries involved in exports or logistics can affect your supply continuity.

Veterans of strategic sourcing more or less agree that more than price, a control over these parameters is more critical. Of course, in spite of the above implications price still seem to be the deciding factor because in the end it's all about making profits. But consider this - a Control over your forecasting and sourcing capabilities with lesser defect turn out in Supply would ensure that you save money if not in cost but in inventory holding costs, lesser defective products and lesser stock outs.

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