Shopping on price is a thing of the past for electronics procurement departments, which today have to factor in the total cost of ownership (TCO) of the orders that they place. Whether those orders are being used by internal team members, external customers or a little of both, they have to meet the needs of customers when it comes to timely fulfillment of the right products.
In some cases, shopping around for the lowest price doesn’t help procurement professionals achieve this delicate (but necessary) balance. After all, prices can fluctuate over time, complex projects may call for different types of resources and poor supplier performance may force buyers to make last-minute pivots to ensure the most reliable supply.
How Did We Get Here?
Credit events like the global pandemic and the chip shortage with forcing more procurement departments to think beyond price. “Suddenly, chief procurement officers (CPOs) weren’t just looking to negotiate for a better rate with suppliers—they were strategically rethinking their entire supply chains,” Focal Point’s Anders Lillevik writes in Forbes. “They were forced to near or reshore operations, use data to overcome chronic shortages and mitigate high container prices and delays.”
Lillevik goes on to describe how procurement has transitioned from being a “cost-savings function” to a key strategic enabler that helps to mitigate risk and build trust and goodwill with customers. In a recent procurement report, McKinsey & Co. says today’s CPOs are also identifying potential vulnerabilities, focusing on real-time visibility, optimizing their end-to-end operations and building new capabilities for resilience.
For example, McKinsey says CPOs are “refreshing” their category strategies in a way that drives resilience and efficiency. “For active management of costs and risks, such as those relating to labor and logistics, procurement needs to apply market feedback quickly to capture emerging opportunities and work differently with suppliers,” the firm says. “New relationships need to focus on developing innovative specifications, improving sustainability, reducing emissions and waste, and building capabilities.”
5 Selection Factors to Consider
In the electronics industry, smart buyers are broadening their evaluation criteria beyond just cost. Those buyers who ignore this step can miss out on opportunities while also unknowingly infusing more risk into their supply chains.
“While price will always be a significant consideration in any procurement decision, focusing solely on it leads to missed opportunities for strategic competitive advantages and long-term value creation,” says Fernando Spada, chief marketing and revenue officer at Orbweaver, which provides an end-to-end quoting, sales automation and data integration solution for the electronic parts industry.
Historically, buyers have given considerable weight to price when making purchasing decisions. This is understandable, says Spada, because keeping costs low directly impacts profitability. However, experienced procurement teams in the electronics industry are increasingly considering other factors in their decision-making.
For example, criteria like quality, performance and the supplier’s innovative capabilities can significantly affect the end product and the organization’s competitive standing. Spada says buyers in the electronics sector should consider a mix of quantitative and qualitative criteria in their decision-making frameworks, including:
- Quality and reliability. A less expensive component that fails can cost much more in the long run due to repair costs, downtime and reputational damage.
- Delivery times and supply chain resilience. Experienced electronics buyers increasingly consider how well suppliers adhere to delivery commitments and handle disruptions. “In an industry where time-to-market is crucial, delays are costly,” Spada points out. “Many organizations and, more specifically, buyers in the industry have significant scars from dealing with suppliers that failed to deliver reliably after offering the lowest price.”
- The vendor relationship. Suppliers should be more than just transactional entities; they should be strategic partners. “Buyers should be working with high-impact suppliers to constantly assess their communication, transparency and willingness to collaborate,” says Spada.
- Technological innovation. Does the supplier invest in research and development? Can it offer competitive pricing and remain profitable enough to invest in research and development? And does it offer advanced features or improved performance that can give your organization a competitive advantage? These are all important questions to ask as you assess buyers and place orders with them.
- Compliance and sustainability. “More than ever,” Spada says, “ensuring that the parts that you’re sourcing meet all regulatory requirements and align with your organization's sustainability goals. This has become a key priority for procurement organizations.”
Buyers are increasingly aware of their responsibility to move beyond cost-cutting and increase their focus on long-term sustainable growth. In return for their efforts, electronics buyers are gaining long-term value, better risk mitigation, improved vendor relationships and better alignment with their companies’ overall strategic objectives.