Will Purchasing Change Ever Happen?

In my forty-plus years in industry—most of them working in purchasing—I’ve never seen as many Original Equipment Manufacturers (OEMs) publically stating that they will be re-evaluating their procurement strategies and processes. This, of course, is in response to Covid-19 and the supply chain disruptions it caused across the globe. I wonder about this stated intent in at least three ways:

1.)   Will OEMs actually follow through on this?  I suspect many will not.

2.)    Will those that do, make an effort to define and address the root causes of the disruptions?

3.)    Will the changes implemented deliver a competitive advantage?

The remainder of this column will address these three questions.

Follow-Through

Over the years I’ve seen a lot of companies announce their intention to re-engineer their supplier management strategies and processes. One of my areas of expertise is supplier development, and it is my belief that all OEMs should dedicate resources to this type of supplier collaboration. Why? Supplier development is essential for developing a world-class supply chain—which, after all, is a necessary requirement for an OEM to be considered a world-class manufacturer.

Continuing on this vein, to be successful in supplier development, an OEM needs to have the trust of its suppliers. The amount of this trust is primarily based on an OEM’s track record of working with their strategic suppliers; i.e. those that to resource from would necessitate significant expenditures of both monies and manpower, and/or have the potential to introduce order-fulfillment risk. For instance, the trust relationship is different between OEMs who work with their suppliers based on a strategy of increasing the size of the transaction “pie”—so that both sides can feel they’ve benefited—as opposed to a positional approach; i.e., one in which one side must “lose” in order for the other side to “win.”

A positional relationship—which is what I’ve seen in most OEM’s I’ve worked with—is a barrier to the level of supplier-customer collaboration needed for successful supplier development collaboration. This is not to say that companies that have historically relied on positional negotiating can’t have successful supply development initiatives. It does imply, however, that such collaboration must be seen by suppliers as having a quantifiable financial carrot to obtain their serious commitment to it. This type of incentive can take many shapes, but the best supplier development strategies I’ve seen were based on a sharing of the savings resulting from the project. For example, allowing the supplier to retain their profit on the impacted parts. This has the impact of increasing supplier margins while at the same time reducing the OEM customer’s price. What’s not to like about that?

In addition, it is my experience that there is a strong grape vine within a supply chain, and when a collaborative supplier development engagement occurs with one supplier, it shortly becomes a signal to the entire supply base that the OEM may be adopting a more collaborative approach going forward.

Root Causes

As any quality engineer knows, only by identifying and addressing the root cause of a defect can that defect be avoided in the future. And in fact, many OEMs quantify a supplier’s on-time delivery performance in terms of “defects in parts-per-million defects.” Even with this parallel, however, many such order-fulfillment-related defects are addressed in a Band-aid-type manner. Why?  Because it usually takes more resources, time and effort to go after real underlying problems. And addressing root causes often requires changing an overall strategy and/or process.  Let me give a couple of examples of what I mean by this.

When COVID-19 first started disrupting Chinese based supply chains, many OEMs reacted by working to re-source from Chinese suppliers to sources in other overseas, low-wage countries. This didn’t address the root cause of the problem for a couple of reasons. First, it should be obvious from the negative impact the virus has had on manufacturing worldwide that viruses don’t recognize country borders. Since COVID –19 is a pandemic, moving from one country to another will not address the root cause of non-performing Chinese suppliers.

Second, many OEMs recognize that they can reduce supply chain risk by reducing the length of their supply chain; i.e., shorter “true” lead-times reduce exposure to the types of issues that can disrupt a supply chain (“true” lead-times are those achieved without heroic efforts). In an attempt to address this, they’ve purchased expensive logistics packages that promise to streamline transportation time between supplier and customer. Such packages, unfortunately, don’t significantly reduce travel time from overseas sources.

Similarly, many OEMs have used warehouses “local” to their operations to hold safety stocks of pre-built, pre-positioned purchased parts. It goes without saying that this does not address the root cause(s) of order-fulfillment defects, nor does it always keep OEM customers’ production lines up and going. For instance, it can be near impossible for an OEM to foresee the volume or mix of the purchased parts it needs to support product and/or the occurrence and duration of disrupting events.

I guess I’ll end this section by saying something that my friends in logistics and material handling—as well as the companies that sell products to streamline logistics and manage pre-built and pre-positioned inventory—may not like hearing. In my mind, logistics and warehousing are nothing more than Band-aid attempts to reduce order fulfillment risk. They do not address the root causes of what causes the related defects and are often incremental; i.e., do not provide a competitive advantage, as discussed below.

Competitive Advantage

It would be a competitive advantage for a company to address order-fulfillment-related defects by identifying root cause(s), versus those that elect to only apply Band-aids. And it should be said that there was plenty of COVID-19-related supply chain disruptions in the United States. But there were also quantifiable differences between addressing disruptions in overseas supply chains and in domestic ones. 

Specifically, U.S.-based suppliers/supply chains were, in many cases, able to effectively react in days or weeks to these disruptions. This was because supplier location facilitated collaborative resolution efforts, and transportation time between supplier and OEM customer was not a significant barrier to overcome. And, in fact, almost a year later, Chinese suppliers are still not providing the order-fulfillment support their American OEM customers need to meet market demand. If you doubt this, you haven’t been shopping lately where prices—at least in the Pacific Northwest—are starting to increase noticeably; i.e., supply cannot keep up with demand. For instance, the price of some off-the-shelf drugs has almost doubled in the last year. So at least in this instance, OEMs sourcing “locally” was a significant, quantifiable competitive advantage. 

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Here’s a couple of examples that I am aware of that illustrate this.

The first involves an electronics OEM that buys most of its components and sub-assemblies in China.  They were planning introduction of a new product to the U.S. consumer in September of 2020.  The primary changes needed for this introduction were in the product of one of their Chinese sub-assembly suppliers of. Consequently, this required an intensive amount of product and process development collaboration between the OEM and this supplier. Part of the interaction between these two companies consisted of two-hour weekly Zoom meeting. Starting at the end of January 2020, the Chinese supplier stopped signing in to these meetings. Nor did it respond to phone calls or emails. Because it was located in a COVID–19 hot spot, this supplier basically “fell off the face of the earth” for four months for their U.S. OEM customer. As a consequence, the product launch had to be delayed until the fall of 2021. This had a significant negative effect on the OEM’s financials results. Definitely not a competitive advantage.

Opposed to this, there are several instances when U.S.-based suppliers were able to react and provide order fulfillment support to their U.S. OEMs within a few weeks. Many of these instances became public knowledge since the products involved were related to this country’s COVID–19 response. Others, related to both consumer products and transactions between companies, were not noted in the press, but they did happen. The ability to collaborate closely with suppliers was a competitive advantage.

What does this imply? The developers of logistics software have it right in that supply chain lead-time is a main contributor to order-fulfillment disruption. As discussed above, the impact of their products has minimal impact on overall “true” lead-time. The root cause of long lead-times is sourcing with overseas suppliers. I know, I know. If a company regards the sole positive contribution its purchasing function can have on company financials is through piece-price reduction, they’ll tend to want to continue sourcing overseas in low wage countries. But here’s the rub. Purchasing’s contributions to positive company financials aren’t recognized within most corporations. You only need to look at corporate organizational structures to understand that corporations tend to slot purchasing into a second-tier, tactical location.  For instance, I once worked at an OEM whose purchasing function reported to product engineering who, in turn, reported to manufacturing!!! Think about what that implies.

While I’ve talked of this in many past columns, my upcoming book, Better Business:  Breaking down the Walls of the Purchasing Silo, will discuss the above in detail as well as lay out how a company can initiate changes in purchasing strategy and process that will give their purchasing function the potential to become a more strategic corporate player.