Purchasing is the unsung hero of the supply chain. After engineering finalizes the task of designing an end-product, purchasing has the chore of locating, pricing, and coordinating a bill of materials and then troubleshooting a hundred things before components hit the manufacturing line.
There are a lot of sources for components and assistance in the supply chain, but the most effective source simply makes a buyer's life easier.
Buyers' options are as varied as the products they source. In some cases, dealing directly with suppliers provides good pricing and good visibility into technology roadmaps. Customers want to be important to component makers, so this direct visibility also helps. One of the problems for buyers, though, is that they have to deal with numerous suppliers and manage all those relationships. If the customer isn't at the uppermost tier volume-wise, getting a supplier's attention could be difficult.
Another strategy involves distribution. Distributors carry anywhere from several to hundreds of product lines. Traditionally, distribution has been the preferred source for small to midsized companies that don't warrant supplier-direct attention. In some cases, suppliers transition customers to the channel because supply chain management is not the component maker's core competence — developing technology is. Distribution has the advantage of providing a single point of contact for many of the components a purchasing department needs.
Most buyers use a combination of supplier-direct and distribution for their sourcing. Other key players in the system are EMS companies and independent distributors. EMS companies buy parts in huge volumes and therefore get preferred pricing from suppliers. They can source commodities that are common to many customers and parcel them out as needed. EMS companies at various times have tried to manage customers' supply chains by sourcing from suppliers and managing inventory. This has had varying degrees of success, however: EMS companies have largely opted to focus on manufacturing and manage selective types of inventory.
Independent distributors are most often a source for hard-to-find components that aren't available from suppliers or authorized distribution channels. Their position in the channel for any given customer varies with market supply and demand and other factors.
In developing a bill of materials (BOM), buyers have a lot of options. The first line of assistance is buying tools that search for parts, compare performance and price, identify and locate inventory, and, often, ensure compliance with environmental and trade regulations. In theory, once a product's BOM is determined, a buyer can type the desired part numbers into a tool that automates the rest of the process. In reality, it's never that easy. Buyers often have limitations such as approved vendors, pricing parameters, end-of-life (EOL) issues, and lead times to contend with, so inputting a BOM is the first in a series of challenges.
Many of these tools have been developed by distributors or third parties. Some of them are positioned as BOM scrubbers — programs that take a BOM and eliminate unavailable or EOL components or flag errors in part numbers. These are usually subscription-based or fee-for-service. Research has found that many companies still use Excel spreadsheets for their BOMs, so most of these tools enable downloading and uploading, regardless of the format.
Distributors have developed tools that go one better: Some retain historic information for comparison purposes, automatically input contract prices, provide second sources for components that aren't available, and offer a variety of other services. Some enable instant purchasing. Most of these tools are free, as buyers are likely to fill any gaps with components carried by the distributor.
Buyers then have to consider a number of variables regarding the BOM. End-products are rarely assembled in only one location, so a BOM often has to be split apart and shipped to different locations. Component lead times have to be factored into these delivery schedules, which have to be coordinated so parts arrive at the right place at the right time. Forecasts have to be developed, and the number of parts ordered has to be as exact as possible so overages or shortages don't occur. MRP and ERP systems are available to manage a large number of these functions.
This phase of the supply chain process is the most complicated for component makers, buyers, and OEMs. The variables are infinite, and planning for these variables only goes so far. Risk management is now an issue that all parties are facing, and, as with parts themselves, there's a variety of options to choose from. In upcoming blogs, I'll look at how buyers integrate this function into their responsibilities and where the most effective solution resides.