Supply Chain Solutions No.19 – Key Points to Strategic Sourcing Success
Sourcing an individual supplier is only part of the sourcing equation, key success comes when you have a strategic supplier matrix that covers all product categories, brand price points and meets business goals and objectives. The supplier matrix is your tool to deliver brand success and customer satisfaction.
The supplier matrix is the road map that dictates the business need, current reality and future success. It follows the business process and mission to clearly state what the vendor nation needs to look like over a short period regionally but longer period globally.
Below are the six key elements to building a supplier matrix;
- Vendor type; high mix low volume or low mix high volume
- Quality level based on brand customer perceived value
- Social and ethical compliance level
- Margin – Total Cost of Goods Sold, objectives by brand category
- Sourcing Market; Innovation, expertise, lead-time, political stability, risk eversion & global trade advantage
- Capacity and flexibility; ensure enough stock will be delivered to meet customer demand and maximise store sell-through
First, you need to understand your businesses need and objectives, what will the brands, product, quantity, quality and margin goals be for the coming short and long terms, this establishes the path that must be taken. The six above elements then need to be applied to the supplier matrix to formulate the road map which ensures the path taken is a success.
The map is a continual improvement instrument governed by vendor monthly KPI or scorecard achievement versus business outcomes. Example; the vendors margin and quality are excellent, but they are always late missing key into store dates effecting sell through and budget attainment, the course of action reduce vendor. Second example; the vendors margin, quality and delivery, are all acceptable, their deliveries have excellent sell-through because the product finishing is one step above other vendors, course of action mutually increase capacity and buy quantity.
Consistently managing the supplier matrix and developing the overall plan based on monthly results will ensure the business has a strong vendor base capable of delivering business objectives and success.
Now let us explore each of the six elements in detail and how those elements govern which vendor is the correct fit for the matrix;
- Vendor type high mix low volume or low mix high volume – a vendor manufacturing a high mix low volume will need a larger development centre and potentially a larger team to maintain the process, additionally the production lines will be configured differently based on the quantity to gain some level of efficiency. Low mix high volume doesn’t need as large development centre, but it does need manufacturing lines that will ensure production is made in an agreed time frame. Efficiency becomes critical in driving price and margin. Larger multi-workshop vendors may have greater flexibility to manage both business models.
- Quality level based on brand value – process, control points, technical expertise along with experience and passion for the product will determine the quality output.
- Social and ethical compliance level – depending on the customer market the level of compliance can change. The higher level of compliance the greater the management team to manage it and related cost, compliance needs to be set at the right level necessary per the customer market and brand value.
- Margin – Total Cost of Goods Sold – Total cost of ownership must include all costs from purchase to delivery at the final warehouse. Example; through a resourcing project you find vendor options that are further in distance from the sea-freight port, this will incur addition trucking costs, and quality control costs will skyrocket if there are no other vendors in the same vicinity due to related travelling and man-hour cost. If the procurement is in different regions import taxes and ocean freight charges will be different, sea freight transit time must also be a consideration.
- Sourcing Market – Multiple sourcing markets are a good way to exploit low-cost countries to create competition, reduce market single risk or service customer markets where the sourcing market offers favourable tariffs or other trade advantages. Some markets are experts in given raw materials or production methods and can provide innovation that other markets cannot. Where business is not large enough to sustain multiple markets, you need to be wary of the additional indirect costs that can occur. Can you leverage enough volume to gain maximum reward in a new sourcing market.
- Capacity and flexibility – Capacity is one of the main components of the sourcing matrix, it insures that you have the correct ratio of vendor to business sell-through. I work on the principle of 40% maximum of an outsourced vendor’s capacity, the volume of the category will then determine the number of vendors with allowance for vendors in trial and seasonal fluctuations. Lead-time and flexibility are important; vendors must be large enough to produce last minute injections and handle unplanned demand.
Managing a supplier matrix across these six core areas will assist in ensuring a healthy supply chain capable of handling unforeseen abnormalities. Monthly matrix review along with maintaining a core group of sustainable vendor partners will add to the success. Defining a secondary group of vendor partners that takes up the slack and a tertiary group of vendor partners that are in a trial, will maintain healthy competition and reduce risk. Losing or replacing your vendor partner’s costs money when vendors are underperforming best practice is to reduce quantity slowly until the vendor stabilises unless quick action is necessary.
Are you getting what you need from your current vendor base? Regardless of your current vendor strategy, do you have a supply base that is compliant, fit for market and delivers value?
ID Global Concepts have been involved in building, deploying and managing vendor matrices for raw materials and finished goods for consumer goods. We can add value to your sourcing operation either through consultancy or management contract to ensure your business is using a vendor that is the right fit for your business and meets your value expectations.