For years the notion of “Made in China” has been a contentious sourcing alternative. Today, for small businesses it has become an absolute imperative to engage in the global economy in order to survive locally.
Under current market environments, many small business owners are disillusioned about the prospect of moving some or all of their manufacturing to China. They fear the unknown and the unfamiliar. However, the reality remains that in order to endure in the new global market economy we must re-evaluate and reengineer our sourcing and procurement strategies.
As a business owner, can you imagine paying an employee an average of .80 cents per hour instead of 25 dollars per hour? How competitively could you price your product at these reduced costs of goods? Small business owners are beginning to understand that procurement is a key part of the business and supply chain process. It is typical for businesses to spend more than 60 percent of revenue purchasing goods and services; and it is estimated that approximately 70 percent of all potential savings from purchasing can only be achieved through the strategic sourcing process.
Cost reduction is typically the primary goal of most strategic sourcing initiatives because savings in cost of goods sold (COGS) fall directly to the bottom line. For example, let’s assume that a business reduces COGS by $1 million. If that business has a 10% margin on sales, it must sell $10 million worth of products to achieve the same $1 million in reductions or savings. Again, every dollar from reducing COGS comes directly off of the bottom line. This is critical in a business environment where it is more difficult to increase revenues. The results of a well-managed strategic sourcing initiative can be impressive and the benefits can be extended well beyond cost reduction.
When properly executed, a strategic sourcing strategy focuses on total costs and not just the purchase price. Often, procurement professionals consider the ‘sticker price’ versus the price of the complete lifecycle. However, other costs should also be taken into account such as carrying costs, service and repair expenses, and end-of-life/disposal costs.
So the notion of strategic sourcing becomes a real tool in the creation of direct bottom line savings and competition.
The main concepts of strategic sourcing include:
- Total cost, not just purchase price: from shipping, customs, tariffs, storage and disposal costs, there is more to the cost of a product than its perceived price. In determining the feasibility of the product we must scrutinize all associated costs of procuring products and parts from different parts of the globe by implementing specific methodologies.
- Consolidating purchasing power: if everyone in your business joined different health insurance companies, they would probably pay more for premiums than they might get by banding together and negotiating a discounted fee with one insurance company. The same can facilitate a strategic sourcing business to lower its costs on everything from office supplies to component parts.
- Collaborative supplier relationships: by narrowing the number of suppliers used in the business, and entering into mutually beneficial contracts, suppliers can work together with a strategic sourcing business to achieve standardization and improvements in cost, quality and time.
- Improved teamwork: detailed information about products, markets and the buyers’ and sellers’ needs is essential to strategic sourcing. By creating cross-functional teams that can include suppliers, a business can overcome organizational barriers and inspire collaboration.
While this may sound like a dream come true, we must still review some of the hazards that a small business owner may have to overcome. How are you going to identify the correct supplier from among the many global manufacturers? How will you avoid getting taken advantage of by deceitful ones? Do you have sufficient intellectual property safeguards in place? Will you be able to recognize which manufacturers are independent and which are government-owned and usually of lower quality output? How will you contend with the language and cultural differences that make doing business globally so challenging?
Most business owners stop at this point. Given this list, many small business owners give up. Others, however, turn to consultants who specialize in global outsourcing and offer one-stop shopping.
The major consulting companies advise multinationals on these issues and charge huge fees. They are not set up to help the small and medium-size business owners. These small business owners are left to fend for themselves in an environment that is completely foreign and unknown.
So, how do you, the small business owner, overcome this monumental task? You must first develop a strategic sourcing strategy.
What does it mean to have a strategic sourcing strategy and why do you need it? A strategic sourcing strategy aligns a small business’s overall business strategy with the sourcing objectives. When properly defined, a strategic sourcing strategy assists the business by gaining a true understanding of its necessities, knowing how it must diagram the existing supply market, and then develop a plan for both short and long-term sourcing objectives. Having a clearly defined strategic sourcing strategy will significantly improve both the quality of the results and the speed required to achieve a company’s sourcing objectives.
It is an ongoing venture to evolve both internal and external processes to obtain the highest level of strategic benefit for a business. When done correctly, the results are immense and ultimately position a business to achieve a competitive advantage in the local marketplace through its global suppliers.
For example, one advantage ascribed to a well-coordinated strategic sourcing initiative is gaining an understanding of how competencies and processes support a clearly defined business strategy. Obviously, it’s impractical to meet the requirements of a business without first understanding them. A strategic sourcing initiative presents the opportunity to clarify and communicate the business’s goals and objectives. It also is a means to define and document what a business’s competencies are and what they should be. Non-value functions that waste significant time, resources and necessitate financial support can be recognized and outsourced or eliminated.
As companies grow, many redundancies tend to occur. These redundancies can be in the form of distributed activities that mirror each other, or they may take the form of similar products being itemized and purchased separately. After these redundancies are identified, corrective measures can be taken and consolidation of similar products or activities can occur. The processes and workflows can also be redesigned to eliminate the non-value work. In due course, a business will opt for suppliers based on their ability to support and assist in improving a process, providing a product at a lower total cost, or offering a better product that helps the business differentiate itself from the competition.
Successful strategic sourcing requires a relationship that is mutually accommodating. The strategic sourcing partner will offer expertise and best practices in customer service, technology and cost management. This partner should also have a local presence in the lower cost country, to maximize its viability to the business owner’s needs. It should know how to facilitate the furtherance of business with the local governmental and cultural nuances.
Your business brings subject matter expertise and experience. The two together form a relationship that will lead to a successful venture. As a client, you must invest the time and resources into helping your strategic sourcing partner understand the nuances of your business and act as a mentor to create an effective bridge between the two.
You should expect the strategic sourcing partner to offer proactive solutions based on their experience. Strategic sourcing partners have typically experienced the same issues with multiple clients and industries. Expect them to recognize the need to address problems before they happen.
The strategic sourcing partner should be able to continually meet the following criteria:
- Ongoing quantitative demonstration of the value of the relationship.
- Continual improvements as they learn your business and your customer’s needs.
- Ongoing, proactive alignment with your stated objectives.
- Continuous refinement of roles, responsibilities and performance measures.
Identifying the right strategic sourcing partner requires time, due diligence and clearly established and communicated goals and objectives. A successful relationship will be one that lowers your costs, increases your service levels and improves satisfaction among your customers.
The realignment of strategic sourcing strategies allows you, as the small business owner, to continually improve the bottom line. It allows you to succeed in the local market place due to your ongoing engagement in the global market.