Can Smaller Companies Outsource Strategically?

The Core

With core parts there might only be one, two, or three suppliers to choose from. After all, a few or no suppliers to choose from is what defines a core part. Also, if it is core, chances are you need to go with one supplier because using more than one might be too complicated and sensitive. Companies, especially smaller ones, should resist the temptation of using competitive bidding when they outsource core parts. Why? One, how do you use competitive bidding if there are only one or two suppliers to choose from? You cannot. Have you heard about the government awarding multibillion dollar contracts to suppliers with no bids? People often ask why don’t they use competitive bidding to get the best price. It is often because there is only one supplier that can give the government everything they need and want.

Also, with core parts, price is usually not the most important evaluation criterion. Everyone of course cares about price. But how much does a smaller firm know about price with something as complicated as a core part? It is not a commodity like a widget. The buying organization should establish cost target goals and reward the supplier if they exceed those goals. Usually, strategic outsourcing of core parts is about performance (e.g., quality, service, and flexibility). Smaller firms should use negotiation to find a supplier for core parts. Smaller firms should use inexperienced junior buyers for competitive bidding of commodities. However, smaller firms need to tap into the experience and skills sets of senior buyers that can negotiate the terms and conditions of a contract with suppliers for strategic parts.

For example, do not assume that you are getting the best price and cannot do better because it is a commodity. You might outsource steel pipes to a distributor and only pay $1.00 per piece because that distributor buys steel pipes from the mill in bulk. It would cost you $1.20 if you bought directly from the steel mill. That is strategic sourcing, but it never stops. Raw material costs for all types of mills have been escalating at very rapid rates and these mills refuse to sell products at a loss and go out of business. They are better managed today and have surcharges for cost increases that are out of their control such as raw materials. If the steel mill has a 15% surcharge that is passed on to the distributor and the distributor marks up that 15%, then your new cost will exceed $1.15.