Advanced Sourcing: A Direct Materials Case Example

Putting all of these areas together in practice that we explored last week (Advanced Sourcing: The Basics – Who, What, Where and How), one BravoSolution customer shared their experience applying these different elements to sourcing 10,000 line items of electronics and electromechanical commodities, including semiconductors.

The complexity of the supply chain was important, as the company had a history (and reason) to buy from both distributors and manufacturers in the past for these line items. Distributors offered the advantage (at a cost, of course) of bundling in freight and material storage/stockholding into the cost equation, along with better payment terms than going manufacturer direct.

Historically, the company had tried to calculate these cost advantages and disadvantages in a massive spreadsheet and set of pivot tables. But even with this effort, they did not have the bandwidth to “touch the bottom 20%” of the spend. But “when these bottom SKUs when off contract and prices went up 50%,” it was still costly to the business.

Using the advanced sourcing approach, the company was able to address all of the line-items while also shaving 1-2 months off the bid analysis time (let alone the data gathering efforts). Moreover, they were able to factor into account the challenges of the market, including the fact that not every distributor could distribute every product around the globe, because certain ones had exclusive distribution agreements by region. This required individual distributors to work with different manufacturers in different regions. Moreover, in certain regions freight prices were included. In others, they were not.

The sourcing effort involved gathering all of these individual price points from manufacturers and distributors alike (including freight, payment terms, order quantity, etc.). The next step is applying a set of constraints to figure out the best options, which are based on internal requirements such as rationalization supply options, while still maintaining coverage across all SKUs in best total cost award scenario. So, essentially, at one time this advanced sourcing event considered:

  • Cost of different multi-tier supply chain alternatives on a per SKU basis
  • Logistics / freight costs
  • Inventory / holding costs
  • Cost of capital / payment terms
  • Cost of full coverage vs. partial coverage for SKUs
  • Bundled discounts and rebates offered by suppliers based on volumes and commitments
  • A range of internal constraints

Now go ahead. Try and auction that!

The total cost savings by applying this approach compared with auctions can be 5-10% higher (or more), based on our own research and experience. But the point is not just savings. It’s the internal acceptance of the sourcing process and optimal award scenario with product engineers/designers, manufacturing engineers, plant managers, operations managers, finance, supply chain/logistics – and others! – that leads to better implemented savings, because everyone gets on the same page as part of the process.

Which brings us to the next installment in this series. Stay tuned!

See also (PRO Subscription Required):

Strategic Sourcing’s Evolution: A Roadmap For the Next Decade (Part 1)

Strategic Sourcing’s Evolution: A Roadmap For the Next Decade (Part 2)

Direct Material Sourcing and Supplier Management Platforms (Part 1)

Direct Material Sourcing and Supplier Management Platforms (Part 2)

Strategic Sourcing: Criteria for Selecting an E-Sourcing Provider

Our Evaluation Process: An Optimal RFP For E-Sourcing Solutions

E-Sourcing: What’s Changed in the Past Five Years?

E-Sourcing: What’s Changed in the Past Five Years (Part 2)

See also (free downloads):

Evaluating the Capabilities of ERP Providers Compared to Independent Vendors: Know Your Size
 Before Trying on the Suit

Making Sourcing Savings Stick: New (and Not-so-New) Strategies to Drive Savings Implementation

A Foundational Look at the Evolution of Sourcing Technology and Platforms

Advanced Sourcing Technologies and Platforms to Broaden a Portfolio

Minimizing Commodity Volatility Through Advanced Commodity Management and Hedging Approaches

A Personal Lesson: Reaching the Limits of Reverse Auctions and Strategic Sourcing: When Collaborative and Quantitative Approaches Would Have Delivered More

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