Untitled notebook

Strategic sourcing is more complex and interesting than it sounds. It involves making high-stakes decisions about what to outsource and who to trust with crucial aspects of a business. Cost is important, but other factors like expertise and technology also play a role. Companies measure success by creating value through supply chain surplus. However, there are risks like broken processes and loss of internal capability. Strategic alignment is crucial, as outsourcing should fit into a bigger picture and align with a company's goals. Apple is an example of successful outsourcing, where they outsource manufacturing and assembly while keeping control of key components. Total cost of ownership is important, as it factors in hidden costs beyond the initial price. Tailored sourcing recognizes that there is no one-size-fits-all approach and requires flexibility. Building strong relationships with suppliers is key, with transparency, trust, and communication being important. Risk sharing strate All right, ready to go behind the scenes. Today, we're diving deep into strategic sourcing. Strategic sourcing, more exciting than it sounds. It really is. Before you think, oh, spreadsheets, logistics, and hit that 30-second skip button, trust me. Don't skip. This is where the business world gets interesting. We're talking about how companies make those high-stakes calls about what to outsource, who they trust with those crucial pieces. And who they trust is a big deal. It's not always about cutting costs, either. It's way more intricate. That's exactly what we're going to unpack today. We're going deep. Beyond the surface, this deep dive is all about understanding that balance, cost, efficiency, those crucial supplier relationships. Every product, every service, it's all gone through this web of sourcing decisions. Untangling those decisions tells you a lot about a company, its priorities, what it's worried about, even its vision. So we start with outsourcing. And the assumption is always cheaper, right? Find the lowest bidder. But what do our sources tell us? It's not that simple. No, it's not that simple at all. Cost matters. But it's not the only thing, not even always the most important. Sometimes it's about expertise, the kind that takes years to build in-house. Sometimes it's about tech, cutting-edge stuff. Why shoulder that R&D burden? So it's about using someone else's strengths to boost your own. Exactly. We even see companies outsourcing to manage risk, offloading responsibility to those better equipped to handle it. Like a strategic chess game. Like a chess game. You've got to position yourself for maximum impact. OK, that makes sense. But how do companies measure the success? How do they know it's working? It can't just be checking boxes. Right, it's about value, creating value. That's where supply chain surplus comes in. It's the overall value the supply chain generates. And you want outsourcing to actually increase that surplus. OK, so how does bringing in another company create more value? Explain that. Imagine a company managing its own inventory, like trying to fill a pool with a bucket. Slow, inefficient. But a third party company, they're like a fire hose, aggregation. They optimize capacity, inventory, relationships, things a single company just can't. So instead of smaller, less efficient operations, you tap into this larger, optimized network through a third party. That's fascinating. But with all this potential, there's got to be risk, right? Handing over control like that? There are definitely risks. Our sources talk about broken processes, for example. Basically, miscommunication, misaligned goals leads to huge inefficiencies, costs go up. Things getting lost in translation. Exactly. And then there's the loss of internal capability. Rely too much on outsourcing, and you risk losing the skills you've built up. Losing that muscle memory, because someone else is always lifting the weights for you. That's a great way to put it. And these aren't just hypothetical risks. Our sources have real world examples of companies tripping over these hurdles. It highlights how important it is to be strategic about outsourcing. It's not just about cutting costs. And that takes us to this idea of strategic alignment. Our sources emphasize that a lot. It can't just be outsourcing for outsourcing's sake. Right, got to have a plan. Every decision has to fit into a bigger picture. The company's goals, its vision. And they use Apple as a case study, right? Yeah, Apple's interesting. Known for innovation, but they outsource a lot of their production. You'd think they'd want to keep everything in house, be in control of the tech. You'd think so. But it's actually a smart strategy. They keep a tight hold on the key stuff. Processors, software, that's all Apple. But the rest, manufacturing, assembly, they leverage their partners. So they play to their strengths, trust others to handle the rest. Exactly. And the numbers back it up. They're all about inventory terms, how fast they move product. They don't want capital tied up. And they get their suppliers on board too. Incentivize them to invest in capacity. Got to meet that Apple demand. It's like this carefully planned dance. External expertise, but they never lose sight of what's essential to Apple, their identity. That's how they succeed. And that's where total cost of ownership comes in, TCO. OK, break that down, TCO. Why should we care? It's about looking beyond the sticker price. Don't just see the initial cost. You got to factor in everything, the whole life cycle. Like with a car, right? There's the price, but then there's insurance, gas, repairs, all adds up. Exactly. TCO includes those less obvious costs, ownership stuff, inventory, storage. What if there's quality issues? Even post-ownership, like warranty claims, environmental impact. So it's about getting the full picture, not just that first number. Right. Our sources use this cement plant example. Really illustrates it well. Cement plant, right, right. They were looking to buy these grinding balls, pretty standard purchase. Had quotes from three suppliers, one European, one Turkish, one Asian. Let me guess, the Asian one seemed like the obvious choice. Lowest price, right. Seemed like a no-brainer. But it's a trap. Most procurement decisions, they stop there. Just look at the initial price. So what happened? They dug deeper. Ran the TCO numbers, whole different picture. What'd they miss? What were those hidden costs? Taxes, for one. The Asian product had a 30% import tax. Immediately adds up. Then payment terms. Asian supplier wanted cash up front. The European offered a 60-day term. Huge for cash flow. Suddenly, cheaper isn't so cheap if you're strapped. Exactly. But the biggest thing, consumption rates, energy efficiency. Those cheaper Asian grinding balls wore out faster. Used more energy, too. So more replacements, higher energy bills. Those hidden costs really get you. They add up. This example shows why TCO is so important. See the whole picture. Avoid those costly mistakes. It's not about the lowest price tag. It's about the real cost. And that leads to tailored sourcing, right? Another thing our sources talk about. Now, this is where it gets interesting. Tailored sourcing means recognizing that there's no one-size-fits-all. No magic formula. Nope. You've got to be flexible, strategic. How you choose suppliers, how you manage those relationships. One supplier for a high-volume, predictable product might not be right for a specialized, variable-demand item. So understand what you're sourcing. Choose the approach that fits. Exactly. For a mature product, stable demand, maybe you prioritize cost efficiency. Offshoring might make sense. Lower labor costs. But something new, innovative demands all over the place. You need flexibility, speed. On-shoring, near-shoring, keep it closer to home. React quickly to the market. Product life cycle, that's a factor, too. Huge factor. Early stage, your supply chain needs to be agile. Mature product, you optimize for cost. Adapt to the challenge. That's what matters. So many factors. Volume, flexibility, where it's made. Like we said with Apple, those Asian suppliers. Speaking of Apple, they highlight another crucial thing, something we haven't even touched on yet. It's about the relationship with your suppliers. It's not just about signing the deal and you're done. Nope. You've got to build something strong, collaborative. Both parties invested in each other's success. A two-way street. Absolutely. If your incentives aren't aligned, you're going to have problems. Hurts the whole supply chain. Our sources gave this perfect example. The supplier who kept information back, right, helped them short-term, but long-term, everyone suffered. That's the one. Transparency, trust, communication, that's how you avoid those issues. Build a partnership that works. So how do you do that? How do companies build those win-win situations? What are the actual strategies? How do you do that? How do companies build those win-win situations? What are the actual strategies? That's where risk sharing comes in. Instead of one side taking on all the risk, you find ways to spread it out. Encourages everyone to work together, build a stronger partnership. Our sources mention buybacks, revenue sharing, quantity flexibility. How does that actually work? Take buybacks. Imagine a music store. They're ordering CDs from a manufacturer. OK, classic example. Right, so normally if the store overstocks can't sell those CDs, they're stuck with a loss. Tough break. But with a buyback agreement, the manufacturer says, hey, we'll buy back some of that unsold inventory. So they share the risk. The music store isn't left holding the bag. Exactly. The store is more likely to stock up, try new things knowing they have that safety net, and the manufacturer. They might get higher orders, new ways to sell their product. Everybody wins. Both sides are invested. That's the key. It's not just a transaction anymore. It's a partnership. Makes a lot of sense. Now, the exact methods, revenue sharing, quantity, flexibility, those will vary. Different industries, different companies, different agreements. But the principle is the same. Align your goals. Share the responsibility. This has been eye-opening. We went from sourcing being this dry, behind-the-scenes thing to it's like a strategic game. High stakes, big rewards. It's way more than just prices and contracts. You've got this whole web of relationships. The global economy runs on it. Collaboration, transparency, thinking strategically, that's what matters. So what are the big takeaways? What should our listeners remember? Whether they're negotiating a deal or just trying to make sense of the business world. First, remember, sourcing is strategic. You can use it to achieve all sorts of things. Get expertise, manage risk. It's about aligning those decisions with your big picture goals. Finding partners who are on the same page. Not just about the cheapest option, it's about the right relationship. Exactly. And don't be afraid to ask questions. Dig deeper. Why is a supplier proposing something? What happens down the line? Those choices have a ripple effect. They really do. Affect the bottom line, even the products we use every day. Absolutely. It makes you think, with all these technologies popping up, AI, automation, how's that gonna change things? Will sourcing be more efficient or will there be new challenges, new risks to manage? It's a question worth pondering. It really is. No easy answers, but at least now we've got the fundamentals. Thanks for joining us on this deep dive into strategic sourcing.