There are many effects of the decisions made around purchasing and procurement that impact business strategy, execution and revenue – some more obvious than others. As such, sourcing plays a critical role when it comes to supporting a business. In addition to controlling costs, a well-executed sourcing strategy can directly improve many of the following areas:

• Product quality and reliability
• Supply chain security
• On-time delivery
• Production capacity

When developing an effective procurement plan, it's important to consider all of the factors that go into creating a high-quality product, including elasticity in the supply of individual components, as well as any opportunity costs associated with lead times and supplier reliability.

It's also important to compare the cost of a complete, system-level solution against the cost of individual components. While some suppliers may be able to offer a lower cost per component, a more strategic partnership can lower cost at a variety of levels by providing savings related to specific features or custom attributes as well as design support to mitigate added costs associated with a redesign. For instance, in Wi-Fi technology, this may mean improved efficiency and heat mitigation, or better integration to allow for fewer components and a lower overall bill of materials. Either of these options can improve the total product margin, but there's often more to consider.

Qualifying a Strategic Partner

When deciding on a strategic manufacturing supplier, it's important to look at the long-term health of the business and the stability of their supply chain. Ask yourself the following questions to vet a potential partner:

• Is this supplier investing in the marketspace?
• Is it a growing company? Are they investing in research and development in this segment?
• Do you understand their roadmap and how they’re generating differentiated solutions?
• How does their portfolio/product breadth compare to similar suppliers in the same space?

The supplier you choose should demonstrate technology availability by sharing a roadmap that outlines where they're investing in certain technologies and the status of the business's overall health. A more mature, healthy supplier will likely offer a breadth of technology and differentiation from competitors.

Breadth of product type and availability can translate into opportunities for added integration and support in streamlining your supply chain. Farming out components to too many suppliers may lead to unneeded overhead that affects supply costs and fragments procurement efforts. A supplier with a broad portfolio adds value by consolidating component sourcing, providing faster time-to-market, simpler logistics, and improved purchasing power as order size increases.

It's also important to look at the technical resources available to the field and where design teams are focusing efforts toward research and development. Established providers working toward future design cycles, not just servicing or providing short-term fixes, will support a longer-term commitment and provide stability for business planning.

When determining if a partner can effectively meet your business needs, be sure to give equal focus to each of the following areas:

• Immediate needs – product availability, shipping, cost reductions, biannual RFQ reviews.
• Mid-term review – upcoming design cycles, future requirements, and a roadmap/portfolio review of what’s in production for the next six months.
• Long term collaboration – aligning proof of concept/future architecture, technology summit involving engineering and leadership.

Getting More with Less

Of course, price is not a discussion to ignore. The big question is, how do you determine a good price to pay? When researching potential suppliers, it’s important to consider the cost of the total solution and not focus solely on individual components.

For Wi-Fi applications in particular, it’s helpful to consult the engineering team to look at thermal challenges inherent in designing smaller customer premise equipment (CPE). Consumer demands for sleeker looking products can generate an increase in sales but come with design issues that can be well supported through strategic sources offering design help and integrated modules.

Better thermal performance in routers and set-top boxes, for example, can offer increased savings as less heat produced eliminates the need for additional fans or mechanical vents – items which can quickly add cost to a design. Engineers can often provide insight on component cost savings resulting from the removal of extraneous mechanisms needed to deal with excess power output. Reducing the size and complexity of an end product frequently leads to reducing the overall cost of production.

There are more obvious purchasing implications involved when a component or part becomes scarce, like the current MLCC shortages. Although prices are going up, it might be worth it to pay more to secure a larger supply in the short term. These implications should also be discussed with design engineers, so that everyone is aware of the supply constraints, and alternative design options should be investigated before proceeding further.

While known shortages of materials can be overcome, a sourcing disruption could have a negative impact in the ability to meet the originally forecasted product quantities. To mitigate risk, designers may consider more highly integrated solutions. Such workarounds directly affect product size, complexity, and time-to-market considerations, so working closely with your engineers while maintaining visibility into the supply chain will help minimize costly production delays.

Making the Case for Differentiation

There is yet another way to view the costs involved in producing a successful end product. The capital spent to create a unique product that fits a specialized niche in the market may justify incremental investment – especially if the product offers a differentiated solution that could generate higher margins. For this reason, it's important to have an understanding of the competitive landscape and the support services that currently exist for your product.

For instance, if your Wi-Fi solution doesn’t effectively cover the whole home, a service provider will likely receive complaints that may cost them money in the form of service calls, providing additional equipment like repeaters, and offering extended technical assistance to their customer base. This is a real problem in the market today. The vast majority of service calls received by U.S. broadband providers are related to Wi-Fi issues in the home. If your Wi-Fi solution can provide more reliable equipment that cuts down on operating expenses for the service providers, and improves customer satisfaction, you’re more likely to gain repeat business and improved market share.

Achieving Procurement Objectives

A strategic approach to procurement focuses on more than just the cost of individual components and includes leveraging a good supplier to help you achieve your core business goals. While focus on cost is important, there is also a need to balance performance requirements to achieve ultimate value for the business. Depending on your objectives, here are some practical negotiation options to consider:

• A supplier that may be willing to negotiate around product needs and offer cost savings for a reduction in performance requirements can be a great ally. If, for instance, you need a component reduced from $0.20 each to $0.10 each, asking for a price reduction in exchange for reduced power output for that component may provide an avenue for negotiation.
• If the objective is based on producing a specific sized solution, looking into next generation die shrinkage could be a viable alternative. It may not match the performance required in a larger architecture but might just be the best solution to support a smaller device.
• If the objective is speed-to-market, consider working with a partner that produces the latest models and maintains supply chain lead times that provide the right technology roadmap for your target timeframe.

As a procurement officer, your objectives may move from cost cutting to differentiation when business is profitable. When the focus shifts to the long-term roadmap and technological differentiation capabilities, a strategic partner may not offer the cheapest technology, but could support your business objectives with providing a competitive edge in the market.

However, when the objective is solely cost optimization, it's vital to look at the product holistically from a systems point of view to determine what the threshold is for cost reduction. A focus on high RF integration can often offer a smaller form factor with fewer components, which is likely more cost effective to make, faster to market, and provides a more reliable customer experience.

Ultimately, strategic sourcing can make a truly positive impact on profitability. By starting at the early stages of design, qualifying suppliers carefully, and having deeper conversations about opportunities to meet design requirements, effective procurement makes all the difference in delivering long-term profitability.