Finally, avoid the transactional costs associated with managing many suppliers. Each supplier, particularly one far away from a customer’s locations, requires valuable and often expensive resources in purchasing, engineering, and other functions to manage purchase orders and financial transactions, to review and discuss quality and delivery performance, and to work on innovation and product design changes. The larger the supply base, the more resources are required to manage transactions, control supplier performance, and address issues in the relationships. These resources could be better spent on valuable activities such as working on an innovative or lower-cost product design.
3. Work jointly with your suppliers on continuous improvement. Focus on developing suppliers’ capabilities and advancing their competitiveness over time. Set ambitious but realistic targets for better performance in cost, quality, delivery, or innovation, and work with your suppliers, not against them, in achieving those goals. Successful continuous improvement requires agreed-on objectives, clear communication about current and anticipated costs and processes, and an open exchange of ideas about how to improve.
Large customers often have internal knowledge about advanced concepts such as lean manufacturing that many low-cost suppliers have not yet developed. Improving low-cost suppliers’ capabilities in that regard can pay off for both parties. If you have a smaller, more dedicated supply base, you can afford to invest in relationships and ensure a higher level of coordination in the entire supply chain.
The GM Advantage
General Motors Corporation’s sourcing program in China reflects both the demands and the benefits of knowledge-based sourcing. GM is very active in China: The company has a joint venture in Shanghai with SAIC Motor Corporation and sells a million vehicles a year in China, making it the number one player in the market. GM also purchases US$2 billion worth of parts each year from Chinese manufacturers to ship to its plants in Asia and North America. In addition to staff assigned to the joint venture with SAIC, Bo Andersson, GM’s group vice president of global purchasing and supply chain, has put in place a veritable knowledge-based sourcing blitz: Two hundred and fifty GM purchasing professionals in China work with suppliers to monitor and upgrade their capabilities, as well as to build strong relationships that can redound to GM’s advantage.
GM’s goal is to find local entrepreneurs and take an active hand in the evolution of their businesses. “It may take us 10 years to develop them, but we’d rather do that and have loyal suppliers forever,” Andersson explains. “Our strategy is based on the fact that we are willing to do a lot of work with people who have the right mind-set and the right culture and the right cost structure, versus just sourcing from China.”
The ability to adopt and use a knowledge-based sourcing approach takes on particular urgency in view of the rising currency and changing cost structure in China. Companies that want to hold their margins and maintain access to that fast-growing economy must increase the efficiency of their Chinese supply base. Even those manufacturers and retailers that choose to simply shift their supply base to a lower-cost country, such as India, Vietnam, or Thailand, would do well to observe the essential truths of knowledge-based sourcing. As these emerging economies prosper, it is very likely that they will go through the same evolution that China is going through now. When that happens, the winning multinationals in those countries will be those that learned from their experiences in China and implemented best practices in sourcing from the start. 
Ronald Haddock is a Booz & Company partner based in Zurich. He has been with the firm since 1994, including 10 years in Asia in the China, India, and Korea offices. During his recent assignment in Shanghai, he led the auto and industrials practice in greater China.
Michael Pfitzmann is a principal with Booz & Company in Chicago. He serves automotive and other industrial clients and specializes in sourcing, competitive cost analysis, manufacturing strategy, and operations management.
Reid Wilk is a senior executive advisor with Booz & Company based in Detroit. He leads the firm’s sourcing business in the automotive/industrial market and works with a variety of automotive, industrial, and consumer products clients. He has nearly 20 years of experience in sourcing and business strategy in the automotive industry.
