In one of my previous articles, entitled, “Should Procurement Have a Seat at the Table?” I posed the question of whether or not the supply management function at your company had “a voice in decisions regarding strategic direction, financial goals and how those directions and goals should be pursued.” That question is very similar to the issue that will be discussed in this article on supplier development. Specifically: If you have a supplier development function, is it positioned to play a significant role in aligning suppliers with your company’s strategic plan? If you don’t have supplier development resources available to facilitate this, I’m curious about how you expect it to happen.
This article will take the position that supplier development should have “a seat at the table” in progressive OEM supply management organizations, playing the most critical of roles.
The goal of Next Generation Supply Management is the development of a world-class supply base. A supply base can only be considered world-class if its suppliers have the capability to effectively support an OEM customer’s overall corporate strategic plan. For the procurement function to align with such corporate plans they need to be translated into supplier capabilities and performance that support them. These expectations, then, become the basis of a supply management strategic plan as well as the basis for the measurement of procurement’s operational effectiveness. The bottom line is that world-class supply base only occurs when supplier capabilities are aligned with corporate-specific strategies. Because of this, individual suppliers may be “world-class” for some OEM customers and not for others.
Unfortunately there are a lot of “cookie cutter” type supply management strategies that do not support company-specific strategic goals. Such strategies (what most consultants sell, by the way; see my previous article, “The Consulting Game and How Not to Lose at It”)—for all intents and purposes—are identical regardless of the product an OEM manufacturers or the market it participates in. For instance, countless company procurement functions have an almost exclusive focus on piece-price reduction when reduced piece-prices are in fact NOT the critical factor to generating additional supply chain-related revenue.
So I’ll start this discussion of supplier development by asking the question, “Is your supply management strategic plan tailored to align with your corporate strategic plan?”
First, though, I’ll submit the opinion that if piece-price reduction is the primary focus of your procurement function, then either:
a) Your company itself participates in a commodity-type business, or
b) Its supply management strategy is not optimally aligned with the corporate strategy.
In other words, an exclusive focus on piece-price aligns with an overall strategic plan only when the OEM itself competes primarily on piece-price. If your strategic plans—either corporate or supply management—position your procurement function for operating in a commodity-based market you don’t need supplier development since you don’t have what would be called strategic suppliers in your supply base, i.e., commodity suppliers don’t get developed, they are resourced from. You only develop strategic suppliers.
Why? If you are a regular reader of this column you know that Next Generation Supply Management categorizes suppliers as strategic when “resourcing business from them exposes a purchaser to excessive cost or order fulfillment risk.” These are the suppliers that need inherent capability to support your corporate strategic plan if you are to be successful since you are pretty much joined-at-the-hip with them. Supplier development’s role is to translate your company’s strategic plans into the operational capability your strategic suppliers need to help you succeed.
Before you can translate strategic plans to focused goals you need to understand them and the onus those plans put on procurement. I was very fortunate to have worked in a division with a very forward-thinking president. Our division was committed to moving towards build-to-demand operations. Let me share a portion of a speech he once gave at a supplier conference and you can see how I was able to take this strategy and translate it to a supplier performance metric.
“We will be looking to the supply base to parallel our efforts by supplying materials as needed in this revised [build-to-demand] manufacturing environment. We need to work carefully with each of you to assure that you are able to also concentrate your production of supply materials in a like period, thereby avoiding your need to carry underutilized assets. Merely transferring our asset investment to you would not solve anything. We truly need to eliminate this investment throughout the supply chain.”
It was pretty clear to me based on this statement that what supply management needed to be working with strategic suppliers on was reducing their “true” lead-times, i.e., Manufacturing Critical-path Times (MCTs).
There are two important points I want to make relative to our president’s speech:
• It showed suppliers that we were not just “talking the talk” but were also “walking the walk”. That is the essence of the concept of extended enterprise.
• It told suppliers we didn’t intend to transfer costs back to them and further implied that they could expect the same cost reduction benefits that we were expecting. In other words, it showed them there was something for them in making this change.
In other areas of the speech our president detailed the build-to-demand business case—specifically being able to support incremental sales—such that suppliers understood a successful implementation of it offered everyone involved higher sales potential. Again, suppliers could see they were being offered the same kinds of financial benefits we were hoping to obtain.
But to implement this “new environment” it was understood that we needed to assist our suppliers based on the lessons we had learned in our own transition to build-to-demand. Our order fulfillment goal was that suppliers would be able to support delivery of increased volumes with two-week’s notice by being able to deliver 20% more than was in the rolling 90 day production schedule. Supplier development became the tool for facilitating this and over a seven year period supplier MCTs went down, on average, by an amazing 78%. As a result 100% of our suppliers—through a combination of reduced MCTs and minimal strategic inventory—were able to support the upward flex our build-to-demand strategy needed. And our division became the one manufacturer in our industry that was able to fulfill unanticipated orders through manufacturing-to-demand rather than through forecast and building ahead.
The additional revenue build-to-demand capability delivered to the division vastly outweighed what could be expected through piece-price reductions. None of this would have been possible without a supplier development function that was aligned on our company’s strategic plan.
I suspect that most OEMs would not admit to being a company that produces commodity type products and/or participates in markets where the customer’s primary buying decision is based primarily on retail price. Yet most OEM purchasing departments focus almost exclusively on reducing piece-prices. Go figure. This definitely represents a disconnect between overall corporate strategies and procurement. The good news is that the disconnect—if recognized and acted upon—reflects opportunity for increased bottom-line contributions by the procurement function. The downside is that very few companies are willing to effect the needed change.
The next column will focus on how NOT to pursue a supplier development function.