Best Sourcing Strategy to Mitigate Sourcing Risks

Date: October 28, 2014

Best Sourcing Strategy to Mitigate Sourcing Risks

Sourcing Risk Management: 
What every company should be aware of beforehand.

Sourcing strategy is one of the key things that every company should think about before product sourcing: it can literally make or break your company. A structured decision-making process is important because there are both technical, hard factors that a company must consider, and soft, ancillary factors that could impact upon the manufacturer’s ability to ‘fit in’ with your company’s particular needs.

Firstly, before a manufacturer can potentially become your long-term partner, you should check its supplier qualifications, expertise, workflow, and experience in order to lower sourcing risks. Buyers, especially in U.S., Europe, Japan, and Australia, must also ensure that imported goods comply with the relevant product standards. There are various toys and children’s product regulations as well as textiles regulations, for instance, and these will constantly be updated in each of the jurisdictions.

Furthermore, things that companies need to be aware of when sourcing products will differ depending on the company’s size and existing structure; for example, if a firm enjoys economies of scale, its considerations will be vastly different: you may aggregate orders to enjoy a lower price. This also inevitably involves being highly selective with your supplier choice, eliminating suppliers with poorer matching profiles, and strategically utilizing dual sourcing as a sourcing strategy. Indeed, adopting dual sourcing is also a method of sourcing risk mitigation because it means that, in the event of any disruption to the supply chain, the company can sustain the blow of the possible loss of one supplier by merely ramping up production with the second supplier. This offsets and minimizes production disruption, and is now one of the growing trends in supply chain management.

International sourcing is defined and understood as a process that enables a central buying organization to achieve economies of scale through corporate-wide standardization and benchmarking. For this reason, maintaining quality standards and coordinating common processes, designs, technologies, and suppliers are crucial. If a company enjoys operational efficiency, it is easier to establish and maintain an up-to-date, integrated quality-management system. Obviously, it would be ideal if the manufacturer also had a well-developed quality-management system to minimize the number of defective items and to monitor quality standards before, during, and after production. This is, therefore, another factor worth considering before a company selects a manufacturer, and should be a factor that is incorporated in the company’s product sourcing strategy.

Besides quality management, one of the other trends in supply chain management is for companies to take into consideration a variety of soft factors. After all, even if a manufacturer has the technical capability to produce the items, such a capability is useless if the supplier cannot fully cooperate with the company’s product-development efforts. Soft factors would thus be part of sourcing risk management that should be taken into account as early as possible. One of the most vital factors in this category would be transparency: manufacturers that do not allow a quality inspection or factory audit would constitute a potential risk, as would manufacturers who are tardy in their communications with their client company. It is critical for companies to ensure, at an early stage, that suppliers do not show a tendency to avoid answering certain questions. If they deliberately avoid answering critical questions regarding compliance, manufacturing capabilities and quality, then you should certainly explore the possibility of forming connections with a different supplier.

Companies should also be aware of the fact that most industries are highly concentrated in specific cities or provinces. In China, for instance, there is a high concentration of electronics suppliers in Shenzhen, textiles suppliers in Xiamen, toys suppliers in Shantou, and plastic product suppliers in Dongguan. Manufacturers based in particular industrial clusters are likely to have better access to components, skilled workers, and logistics services, and this is therefore something that companies should also factor into their sourcing strategy. Lastly, one can argue that if manufacturers attend trade fairs, particularly in Europe and the United States, this strongly suggests that the manufacturer’s management has higher ambitions. Overall, this broad spectrum of factors all feed into the corporate decision-making process and would hopefully enable companies to establish relationships with the most suitable manufacturers and would simultaneously minimize the sourcing risks assumed by companies. 

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