Rethinking OEM Sourcing Solutions

Beyond Global Offshore Sourcing

Global sourcing has shaped the strategic sourcing conversation for the past two decades. This practice of sourcing materials and parts across geopolitical boundaries was originally motivated by the aim to exploit global efficiencies in the delivery of a product or service.  This was the highly visible off-shoring movement, as manufacturers looked to exploit the low costs of manufacturing in developing economies.

Today, previously low cost sourcing solutions based in China, Latin America and Eastern Europe are reaching cost parity with developed manufacturing bases. Add in rising anti-import sentiment, and relying on the same old sourcing strategy is no longer tenable.  Maintaining the status quo exposes OEMs to higher risk of supply chain cost increases and disruptions.  To combat this, OEMs are applying new strategies to their global sourcing approach.  Today, we’re going to highlight two emerging global sourcing solutions:

Localizing Regional Supply Chains

While localizing may sound like the reverse of global sourcing, it’s really the idea of evolving the global chain by creating regional “hubs” for your worldwide network.  Localizing OEMs will continue to have global reach, but centering product specific chains on locations where components are sourced carries a compelling business case.  Localizing immediately helps minimize vulnerabilities and costs due to long distance shipping.  Additional value is derived from carrying a smaller inventory buffer due to the reduced travel time in shipments. 

Isuzu Motors India recently announced an initiative to source local components for their Indian pick-up truck being built in Andhra Pradesh instead of utilizing their existing partnerships.  This localized sourcing solution allows them to sidestep costly importing tariffs and to hand pick local suppliers to collaborate with on vendor development.  Long-term, they want these suppliers meeting global component requirements in order to foster competition with their current international exporters.

Read more on “reshoring” here.

Relationship-based Supply Chains

In the offshoring model, the OEM’s finished product requires contributions from thousands of different connected entities before hitting the market.  Managing this network involves sourcing decisions, risk analysis, quality standards and cost management.  At a point, continually squeezing suppliers on margin or sacrificing on quality is not a sustainable sourcing solution.  Instead, re-imaging the supplier relationship by bringing them into the innovation process earlier has reaped benefits for OEMs like General Motors.  By becoming part of the development process from the beginning and building part requirements collaboratively, suppliers are able to bring their ideas to the table and plan effectively for new rollouts.   This “value engineering” has created win-win relationships and fostered trusting, long-lasting partnerships with their suppliers. 

Ultimately, companies don’t compete against companies anymore – supply chains compete against supply chains.