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At one point in my career, I got a call from an associate who had been appointed head of purchasing in another division of my company. The corporate vice president of supply management had suggested that he connect with colleagues from around the company to get their perspective on just what the focus of a progressive supply management function should be, and I was one of the people he reached out to.
I first laid out that I classified suppliers into three broad categories and then explained how I managed each. And that for certain suppliers in certain categories, supplier development was key. And that essentially for these suppliers—usually the most important suppliers in a supply base—supplier development was supply management. When I had finished, he all but laughed, saying he had never heard of such an approach. His program ended up having very little alignment with what I was doing.
Supplier Categories
1. A strategic supplier would require expensive and/or an extensive manpower commitment to replace—and losing that supplier could expose the OEM customer to significant order fulfillment risk. There would also be difficulty finding another, comparable source because of the incumbent’s expertise and/or proprietary property in design and manufacturing.
2. A commodity supplier would be easy to replace without significant cost, effort or increased exposure to order fulfillment risk. Why? Because a commodity requires neither special design nor manufacturing expertise to produce. Consequently, there are many capable alternatives for re-sourcing.
3. The third category is not as straightforward as the other two. There is a spectrum between being either a supplier of true commodities or being fully strategic. Suppliers in this third category are situated in the middle of the spectrum and share characteristics with both commodity and strategic suppliers. The issue, then, becomes whether or not the supplier shows potential for moving towards one or the other end of the spectrum.
I, along with most purchasing professionals, manage commodity suppliers through positional “win-lose” price negotiations. Conversely, I work with strategic suppliers through development of collaborative “win-win” relationships, i.e., those that “increase the size of the pie” so that both sides can benefit financially.
It takes a revolutionary change in a commodity supplier’s business model to move towards the strategic end of the supplier category spectrum. But it can be done.
For example, when I was a buyer in the late 1980s, suppliers of fasteners were considered commodity suppliers. Now, not so much. Why? Because progressive fastener distributors added value to the “package” they provided customers above and beyond competitively priced product. How? By assuming responsibility for customer production-line support and agreeing to own fastener inventory until assembled onto the customer’s product. And while an individual fastener may still be considered a commodity part, it becomes very difficult to re-source from a fastener supplier that has been integrated into the very fabric of a customer’s operation.
I believe the onus is on commodity suppliers to make the changes necessary to transition toward the strategic end of the supplier category spectrum.
While I believe the primary onus lies with suppliers in the middle of the supplier category spectrum to differentiate themselves from other competitors by adding to their value equation, I also believe progressive customer supply-management functions have some responsibility to recognize suppliers that have potential to move up the strategic spectrum. This mostly occurs when a supplier is an expert in one area but falls short in others that, for the most part, are easily addressed, with a little supplier development assistance.
Suppliers in the middle third of the product category spectrum should be managed according to whether they seem to be moving toward the commodity or strategic ends of that spectrum.
Read more of Paul Ericksen's supply chain management articles.
For instance, I once did business with supplier that was exceptional in individual manufacturing processes but couldn’t effectively mesh them together to efficiently manufacture product. Their on-time delivery was typically around 40% and we had taken to ordering parts early so the parts had a better chance of being on-hand as needed. Many OEM customers might have moved on from this supplier, but we saw potential. It ended up being relatively easy, with supplier development support, to address their manufacturing flow issues. Within six months, their on-time delivery exceeded 97%. A few years later, they were named corporate Supplier of the Year.
Strategic suppliers, for all intents and purposes, should be managed in a collaborative, “increasing the size of the pie” manner.
Collaborative management implies that strategic suppliers be managed and treated in the same way that an OEM’s internal staff manages their own factory departments. And, on top of this, these suppliers should be given the type of support a customer would provide internally to improve their own operations.
For example, OEMs set both internal and supply chain performance improvement goals in many areas, including cost reduction. The price-reduction goals they set for their suppliers are typically significantly higher than the cost-reduction goals they set for inside departments. Suppliers seldom hit their goals, while internal improvement goals are more reasonable and usually met. This just doesn’t make sense.
Collaborative supply management should also work to intertwine supplier planning and operations so that they mesh with the customer’s own order-fulfillment strategies. This means OEMs educating suppliers on how their factories are managed, how accurate their past forecasts have been as well as the order-fulfillment strategies they’ve adopted to maintain customer fill rates. It makes a lot of sense to link suppliers with end-use customers in this way.
For instance, if an OEM has a lead-time goal for their own operations, this same lead-time goal should be extended to their strategic suppliers, with suppliers’ lead-time reduction efforts supported—as needed—through application of supplier development resources. This will improve supplier agility, thereby reducing their costs, as well as position their OEM customer to reduce their own internal costs. Most supply management functions don’t recognize that supplier agility impacts the OEM’s own overhead.
How should suppliers in component third of the supplier category spectrum be managed? If they are not world-class, prospect for a world-class replacement and re-source from them.
Similarly, how should suppliers in the middle of the supplier category spectrum be managed? Customers needs to decide whether the supplier has the wherewithal to move toward the spectrum’s strategic end, or not. The former should be worked with to improve their chances of becoming strategic, while the others should be put on a “watch list” and—should they not progress towards the strategic end of the spectrum—be replaced, as convenient.
It should be noted that suppliers who may consider themselves strategic—such as generic job shops—may not be considered strategic by their customers. These suppliers need to honestly assess how easy it would be for their customers to move business from them and act accordingly.
I’ll end by making a couple of points.
No OEM can be considered world-class without having a world-class supply chain. A world-class supply chain cannot be “developed” through a strategy of “win-lose” pricing negotiations
OEMs should set both internal and supplier order-fulfillment agility goals such that both have build-to-demand capability; i.e., being able to support customer fill rate goals without excessive amounts of pre-built, pre-positioned inventory. And be willing to assist suppliers in achieving this capability.
OEMs should have a goal of creating a supply chain capable of lean performance, meaning that a critical mass of strategic suppliers are build-to-demand capable.
And oh, by the way, the performance of suppliers in my division greatly outpaced the suppliers in the “new” director’s division. In fact, our division had the best-performing supply chain in the corporation during my tenure as a manager in supply management.
Paul Ericksen’s book is Better Business: Breaking Down the Walls of the Purchasing Silo. Ericksen has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.
