Driving Value with Improved Supplier Partnership
Seems like every month, there is new data pointing to manufacturing productivity slowing.
- US Manufacturing output at six year low
- Manufacturing output in India grew at its slowest pace in five months in May
- UK industrial sector under pressure as manufacturing output slumps
- Malaysia’s output fell to its sharpest rate of decline over 3½ years due to poor market conditions and a fall in demand
As economic indicators continue to face headwinds, the Organization of Economic Co-operation & Development has predicted that the global economy is stuck in a “self-fulfilling” low-growth trap. But, what does that mean? Well, manufacturing companies see demand for their products fall and decide that they better hold on to that extra cash, rather than investing it to expand or build new factories, automation, or even to further train employees. Sure, this is costly up front, but this short term way of thinking handcuffs manufacturers from achieving future innovations or efficiency gains down the line. And what happens when headlines like the ones above pop up on twitter feeds across the world? Consumers decide that they’re going to spend less because, hey, the economy isn’t doing so hot right now. Companies hold off on investing, consumers hold off on spending and the dog continues to chase its tail. The OECD is calling on central banks to rethink raising interest rates and is also asking for governments to increase spending to spur investments. Given the current public sentiment about the role of government, it is unlikely policy makers will agree on the right approach. So, where does this leave companies looking to break out of this infinite loop?
Friend Request: Your Supplier
Historically, manufacturing organizations have not focused on developing relationship with suppliers, as they’ve been treated like adversaries who should be nickel and dimed to get the best price. I spent some time consulting for various DOD procurement offices and the relationship with suppliers was, in many cases, purely transactional. The conversation would typically go like this:
Procurement Officer: “Thanks for being a valued supplier. For the next contract, we’ll need to reduce cost by 30%. Oh by the way, the requirements are still the same and we’ll need delivery 6 months faster than last time. We’ve also opened this bid up to other companies. Good luck!”
“Valued” Supplier: “Geez, they really know how to make us feel special.”
Granted, there are strict contracting rules in place that may require the bid to be opened up to others, however, without engaging in a partnership with suppliers and truly understanding their capabilities, there is a good chance that the additional asks will result in price, quality, and delivery risk.
To drive home the point, I recently had conversations with a global construction company that was managing their procurement process in a very disjointed manner. Each of their 18 regional offices had their own way of identifying and managing suppliers, as well as requesting quotes. Of the 18 offices, only 2 had the same supplier management system, but there was a total lack of supplier spend visibility across the organization as a whole.
Enhancing the working relationship with communication and trust is key to establishing a powerful, long-standing, successful partnership.
The Road to a Successful Partnership
Get to know them
Before going full steam ahead with a purchase order, establishing a working relationship with the suppliers is important. Engage with them face-to-face to develop deeper bonds by dropping by their offices, or inviting them to yours. Ask them for references to get insight on quality and performance over time. Understanding supplier strengths and weaknesses will help manufacturing companies better determine the capacity for which a certain supplier would perform best. If you are a global manufacturing organization and need a supplier that can provide materials to facilities in Asia, then working with a US-based, regional supplier would be challenging, especially if scheduling is a concern — which it most often is.
Not only is it important to understand the capabilities of a supplier, but getting to know what their needs are should equally be a priority. What are some of their goals and how can this partnership help achieve them? Purchasing organizations can help them grow by establishing favorable payment terms, investing in infrastructure, or consolidating purchases. If the supplier has been meeting schedule and quality marks, this is a great way to expand the relationship and enable success for both parties.
Keep them in the loop
In any good relationship, communication drives its success or failure. This also rings true when dealing with suppliers. One way of doing this is to provide suppliers with an understanding of your company’s strategic initiatives and communicating how your suppliers can help address them. Suppliers can be very crafty and resourceful in helping solve those complex issues, even if they can’t do it themselves. In one example, a jewelry retailer I was consulting for was creating a new line of rings that were much more complicated and intricate than any of their current suppliers could produce. By sharing their needs with their current stable of suppliers, they were able to gather a list of potential partners that could help with the new line. By leveraging these existing relationships, the company saved time to research and investigate new supplier capabilities from scratch, which in turn helped them introduce the rings to market 3 months faster than expected…just in time for Valentine’s Day.
Reward good performance
If a supplier is performing well on key metrics – quality, cost, timing, etc., then it makes sense to explore ways to reward them. One way of doing this is to rationalize spend across the portfolio. This could be for the same stuff the supplier currently provides or expanding the scope to other raw materials or finished products. Not only is your supplier now gaining more of your business, but more of your trust as well. Establishing this type of rapport, can help bring down purchasing cost as volume consolidation can lead to discounts as you increase spend with one supplier.
It Seems Simple, But…
To establish these successful partnerships, manufacturing organizations must be able to answer some seemingly simple questions at an enterprise level:
- Who are my suppliers?
- How much am I spending with them?
- What am I buying from them?
- Have they been delivering on time?
- Have their costs increased? By how much?
- Has quality been an issue?
While working with a tier-one automotive parts supplier, they readily admitted to not knowing how much money they spent with their indirect suppliers annually. The question “what was your total indirect spend for FY15?” garnered numerous responses with a delta of $1.5B! This gap in understanding means that identifying top suppliers by spend and discovering opportunities to derive supply chain value is virtually impossible for them. Managing data on suppliers in a holistic and top-down manner is the first step in helping organizations determine which suppliers can be partners and which relationships to reevaluate.
How clean is your supplier information and what opportunities can you leverage with better data?