Manufacturing

Why Strategic Sourcing is the Easiest OEM Job in Purchasing

Paul Ericksen / April 9, 2018

As I said in the previous article, having a Strategic Sourcing function probably makes a lot of sense for Purchasing departments, per the formal definition. Why? Because there is nothing more important than having suppliers that you know will come through for you. My issue with Strategic Sourcing is that all too often it ends up circumventing its own best practices. Let me explain by elaborating on three examples I experienced during my years as an executive in Supply Management.

1) Sourcing by the Rules, but Building Short

As an experienced Materials Manager, I was once asked to take a leave my current job to fill an interim Materials Manager position role at one of our non-U.S. factories. The factory had another person in mind for the permanent position but he wouldn’t be available for about six months.  At the time, this factory had some of the best supply performance metrics in the corporation and when offered the job I was told it would be “a breeze.”

I was surprised when I drove up to the factory to see massive amounts of what appeared to be finished product out in the yard.  During my introduction to the factory, I asked about that equipment and was surprised to learn that it was product that had been built short, i.e., it was missing (primarily purchased) parts. When I asked why the factory had built product without complete parts, he replied that if they didn’t build short, they wouldn’t be building much.  Those partially built machines, by the way, all had to be reworked to complete them using processes outside those of normal production.

When I got settled in the Purchasing Department the first question I asked was, “What’s going on with the purchased part shortfalls? Aren’t you supposed to have one of the top performing supply bases in the corporation?”

Digging into this, I found that quite often there were multiple parts missing on the partially built machines but — an important but — only the first part that was either defective or late was counted against the factory’s Purchasing metrics.  Why? Because — their reasoning went — after one part was late, succeeding ones weren’t the ones holding up production. How I dealt with this is a long story. So, here’s the shorter version to give a feel for how metrics were being handled in that department.

At this factory, I found that a single person was focused on Strategic Sourcing.  He was a young fellow and wanted his next move to be up to shop supervision. This was one of those old-time shops where if you didn’t punch the factory supervision ticket you didn’t progress up the promotion ladder.  He had been tasked by the previous Materials Manager to find sources with lower pricing and told if he did he would easily earn his way into the next open factory supervisory position. When I found this out I approached Human Resources to verify the story and was told that indeed, the arrangement had been agreed to by them. In doing further digging I found out that building short was routine at that factory at the time.

I soon discovered that the parts my Strategic Sourcing person had sourced represented the bulk of those that the product was being built short of.  In other words, we were getting lower pricing-per-part but we weren’t getting usable parts in time to support our production schedule.

When I found this out, I went to the General Manager and explained what had been going on.  I said I’d immediately start working on it and try to get the situation corrected before my successor arrived, which I for the most part was able to do.

2) The Purchasing Performance Management Metric

At one time in our corporation we had a VP of Purchasing unhappy with the small amount of parts being sourced overseas. So, he put out a new Supply Management performance management metric. Namely, going forward, 33% of all newly sourced parts had to be sourced in low wage countries.

This guy’s predecessor had instituted Strategic Sourcing resources at all factories, but it was apparent from this action that the new VP didn’t think they were doing their jobs.  In fact, he thought that company factories had primarily been sending business to domestic suppliers due to an innate resistance to sourcing overseas.  Instead (as those of us at the factory level understood) we had been sourcing domestically because we found better suppliers in the U.S.  — particularly ones that were positioned to respond to short-fuse changes in schedule. This was important, since most of our company’s products were seasonal with short sales windows.

What followed was almost blasphemous.

One of our other divisions re-sourced their entire business from a long-term supplier — a supplier who had recently been named “Supplier of The Year” by my division.  This represented over 25% of that supplier’s total production, which they had pulled out from under them in one dramatic move. I confronted my counterpart in the other division and found out that the re-sourcing wasn’t due to performance or pricing concerns. In fact, the U.S. manufacturer had the same or lower pricing than the overseas supplier who would be getting their business.

Rather, the decision was due to the fact that the product category this supplier participated in — machined parts — was the easiest one to source overseas, and resourcing from the incumbent suppliers would allow that division’s purchasing function to meet the new 33% offshore Sourcing Performance Metric. In order to protect my division’s business with that supplier, I actually helped this supplier replace most of the business he had lost.  In later years, after I had left the company, I heard that they had won the corporate “Supplier of the Year” award.

You know, there ought to be a law against this.

3) Sourcing With a Bias

In our company, I was trying to make the point with the “powers that be” that product demand characteristics should be considered in making sourcing decisions.  For instance, because seasonal products have short selling seasons, forecast accuracy is typically lower, and reacting in time to correct off-target forecasts was difficult — if not impossible — with a long supply chain.  When I made this presentation to our VP of Purchasing (the same one cited above) he took it as just another effort to not source overseas, i.e., where the supply chain lead-time would be longer.

At this time, our company was trying to increase the number of people in Supply Management having MBAs. A colleague at another factory was a primary advocate of significantly increasing overseas sourcing. One of his employees, in fact, was working on an MBA thesis on the overseas sourcing issue. I had doubts about whether the findings would be biased or not but waited to see the final report prior to passing judgment. Guess what? The Buyer had concluded that overseas sourcing made the most sense as a primary purchasing strategy for our corporation, which was the same position as his boss. No surprise.

Since sourcing overseas was the position the Purchasing VP supported, he got the Buyer the opportunity to present his report directly to the CEO.  The end result was that this paper was a supporting factor for the company’s increased overseas sourcing. About that time I took early retirement from this company and moved on. I knew it was time to go.

Piece-Price Perverts Purchasing Initiatives, Regardless

So what can be concluded from the above three examples?

As long as companies view Purchasing’s sole contribution to the bottom line to be obtaining lower piece-prices — no matter the theoretical intent of Strategic Sourcing — any initiative will be perverted to support lower piece-prices. This will happen regardless of all other factors and regardless of intention, even when those perversions don’t benefit manufacturing as a whole or even individual companies.

My next two articles will cover tariffs and their potential impact on small- to medium-sized manufacturers. Stay tuned!

Learn more about Paul Ericksen and his over 40-years in the manufacturing industry here.