Whether you are a re-seller with an e-commerce site or a product designer looking to source components for your product, having a product sourcing strategy is critical for success. Navigating the supply market can be challenging and intimidating, especially with the fact looming over you that choosing the wrong product sourcing strategy can mean the difference between success and failure. There are 3 critical steps to take when developing a product sourcing strategy and each one requires careful consideration and proper diligence.
Determining Market Requirements
What do your customers want and what are you proposing to offer them?
Cost, quality, and speed are 3 important competitive priorities to consider when developing your product sourcing strategy. What price does your product need to be offered at, what are the quality requirements and how fast do your suppliers need to deliver? Different answers will require different suppliers and are an important first step in identifying what your customers want and what you are proposing to offer them.
How many products will you offer? Consumers prefer many choices and different product mixes will require different supply chain management. You can choose to have a high mix of many different products, or you can choose to specialize in a low mix of a limited number of products. Volumes of these mixes should also be considered as both the product mix and the volume will determine which manufacturing methods will be most attractive for your needs.
Manufacturing Your Products
Will you be a re-seller of finished goods, or will you own the designs of your products? For re-sellers, their suppliers are typically wholesalers or distributors, whereas companies that design products will typically work directly with their contract manufacturers. Based on your customers’ requirements, you will have determined what your product mix and volume will be.
For low product mix and high volumes, fabrication methods like injection molding will be the most attractive as they can afford the ability to produce high volumes of identical units at very low unit costs. In contrast, a fabrication method like 3D printing can quickly and cost-effectively produce low volumes of high mix products. If your customers desire highly customized products in lower volumes, 3D printing can offer some serious value. To be sure, each of these must be carefully considered as the manufacturing method that the product requires will determine how the sourcing strategy will be developed.
Finding a Supplier
Once you have determined what your target customers need and what you intend to deliver, it is time to engage the supply market. There are a variety of sources for information on finding suppliers including: directories, referrals, and searching for online content. Directories are lists that typically are conveniently organized by the type of products and services that they supply: drop-shipping, warehousing, metal fabrication, plastic fabrication, assembly, etc. These are great places to start to get more information and list of possible places to start and ask for more information.
Good suppliers will also provide a lot of online content to help their customers learn more about the process of finding and contracting with a supplier. These can include blog posts, whitepapers, and YouTube videos and they are a natural place to start when you begin your research. This content exists for educating potential customers on the manufacturing options that are available and what they specialize in. Utilizing search engines is a good place to start when finding suppliers as you can both learn more about manufacturing and find suppliers to request information from down the road.
The best method for finding a supplier is to get a referral from a previous customer. It is harder to find referrals, but they are one of the best ways to find suppliers as you have a third party that can vouch for their capabilities and performance.
Domestic vs International Suppliers
This is a critical supply chain decision faced by many companies, manufacture products near the customer or abroad to cut costs. Both have advantages and disadvantages that should be carefully considered when deciding where to source products.
There are a few advantages to using domestic suppliers including: higher quality, better labor standards, easier communication, better marketing appeal (“Made in USA”), faster lead times, better IP protections, more payment security and more options for recourse when operations do not go as planned.
The main advantage of offshoring manufacturing operations is to achieve cost savings. However, there are some potential drawbacks that could come from offshoring, including lower perceived quality, lower labor standards, little IP protection, communication difficulties, costly/difficult to visit on-site, longer lead-times, customs requirements for imports, and fewer options for legal recourse when disagreements arise. Additionally, there also could be governmental/political blowback from the domestic government because of offshoring jobs to other countries.
Developing a Sourcing Strategy
Starting the RFx Process
Once you have researched the supply market and identified a short-list of suppliers that you believe may be capable of supporting your requirements, a request for information should be sent to the supplier. This can be sent via phone, email, or a contact form on the supplier’s website. This is an important step because it is the first stage of engaging with suppliers to try and match up their service offerings with your specific needs. You will also learn more about the company and what they can do for your specific needs than you would be able to ascertain from their website alone.
Sole Sourcing vs Competitively Bid
Based on the information collected from your research and the RFI responses, you then need to determine who you believe will be capable of meeting your requirements for quality, cost, and on-time delivery. It is critical to utilize a competitive bid process, if possible; however, there are instances when one supplier offers a unique, and often proprietary, product offering, that cannot be obtained anywhere else in the market. Single source situations should be avoided if possible but are sometimes necessary and should be carefully managed.
Request For Quote
Once the requirements have been firmed and the bid list formulated, it is time to request a quote from the chosen suppliers. Relevant information that should be requested and provided is the cost for sample/prototype products, production parts, design hours, lead time and terms. Hopefully, you will have gotten multiple bids from multiple suppliers so that you can compare pricing and lead time. However, if only one bid is obtained it is important to run this against your cost analysis and determine how much it will affect the price that you will need to charge your customers to make a profit. Is it a price that you think your target market segment will be willing to pay? If not, negotiations will need to be conducted to try and obtain more favorable pricing and terms.
Dual Sourcing vs Single Sourcing
Although it sounds like competitive bidding vs sole sourcing, dual and single sourcing refer to how many suppliers you expect to award a contract to. You can competitively bid the manufacturing work among multiple suppliers and award a contract to one or multiple suppliers. There are a few advantages and disadvantages to each method.
The main advantage of dual sourcing is the reduction of risk and increase in the assurance of supply. If one supplier goes out of business or cannot complete your orders, then you always have another source of supply to utilize. The disadvantage is that you are splitting up the volumes among multiple suppliers. The effects of this are that each supplier will accelerate up the learning curve at a slower rate and your unit pricing will not be as favorable because you are buying in lower quantities.
The advantage of single sourcing is that you are leveraging your entire volume requirements across the business to try and drive down unit pricing. This single supplier will be able to devote more resources to your project and accelerate up the learning curve faster. The disadvantage is that you are opening the company up to supply shortage risks because if this single supplier suddenly becomes unable to support your requirements, then you will not have any products to sell to your customers.
Product sourcing strategy is a challenging, but critical process of identifying where your products will be sourced, how the suppliers will be selected, and which suppliers will be utilized. Great sourcing strategies lead to high quality products that meet cost expectations and deliver on time for customers. Bad sourcing strategies can lead to sub-par quality, cost overruns and late deliveries that can negatively impact brands and reputation. Check out our post on supply chain management for more information on manufacturing, sourcing, and logistics.
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