Long-Term Supplier Relationships Yield Short-Term Value for Manufacturers

By involving suppliers early, procurement can accelerate the qualification, design, and contracting processes to shorten the product release timeline.

As more businesses fail, stock markets tumble, and economies face rising unemployment and dwindling credit, the economic landscape is looking grimmer by the moment. For the ambitious supply management professional, the recent financial turmoil represents a unique opportunity to entrench their position as a key driver of strategic value in their organization.

During a financial crisis, innovative organizations seek to secure sustainable advantage and impact financial liquidity through an improved top line by fostering deep, long-term relationships with suppliers -- becoming an integral part of the product management and development lifecycle. The procurement organization supports this process on both a strategic and tactical level throughout the cost-estimation and sourcing process. The procurement organization's visibility to existing or new sources of supply and recommendations based upon experience with the supply base drastically slashes evaluation and make-buy decision making timelines. By involving suppliers early, procurement can accelerate the qualification, design, and contracting processes to shorten the product release timeline.

Managing Costs -- Together

When driving innovation and new product introductions, procurement must assist suppliers with process improvements necessary to improve products and manufacturing processes and seize cost savings opportunities. By supporting the suppliers' strategic sourcing and supply management activities, companies can both dramatically improve their relationships with suppliers while gaining better prices for finished products and more visibility into the economics of their supply base.

Procurement can further reduce capital investments and maximize working resources by actively cultivating internal product innovation while promoting supplier-based production innovation. Opportunity to shift capital expenditures, manufacturing line changes, and other production innovation costs move to the supplier, freeing up working capital for their customers to focus on product innovation.

This key activity shifts procurement's role from a reactive mode of just trying to contain costs to that of a proactive agent of change. Procurement teams now also take on the role of marketing and selling investments/innovation to suppliers in order to encourage them to absorb the cost of improving their operations.

Supporting the Entire Product Lifecycle

While the introductory stage is likely to be the area of the product management lifecycle that gets the most immediate attention, procurement has an impact at every stage of the process, particularly when helping to manage long relationships and contracts.

During the growth curve stage, procurement can help to accelerate innovation through a comprehensive supplier relationship management process that provides complete visibility for both suppliers and their buyers into the key performance areas that drive the relationship. These should include a mix of qualitative and quantitative metrics that offer a big picture look at the health of the overall relationship, and that include feedback from and about both sides of the table.

Procurement can continue to support the maturity stage of the product management lifecycle by continuing to support and manage best practices in managing production and commodity costs. It is critical for procurement to stay involved in driving sourcing innovation and cost containment at this stage, where costs often tend to drift upwards due to poor oversight.

Finally, procurement groups can assist with asset re-allocation and disposition alternatives through the decline stage, working with suppliers to ensure that retiring or unused assets are properly managed to maximize productivity and control costs across product lines.

Anticipate Volatility

This sort of partnership approach clearly must go hand-in-hand with longer term relationships. In order to motivate suppliers to take on the additional cost and risk associated with becoming involved earlier in the product management lifecycle, procurement groups must be prepared to enter into longer agreements. Given the current volatility in the marketplace, this may seem like a disagreeable option, but the costs associated with longer agreement are often worth the immediate impact of the working capital improvements that manufacturers can realize.

When dramatic price decreases occur, manufacturers find themselves locked in at a higher price. It's the responsibility of the procurement team to ensure that the supply base is well diversified enough to realize some benefit from price drops while insulating against the worst of any price increases.

Most organizations have a precise strategy for managing volatility in commodity goods, but volatility can impact non-indexed supply as well. For this supply, procurement groups must balance volume commitments and contract lengths across the supply base to keep their prices competitive.

When determining the right balance of long-term and short-term contracts, several factors come in to play:

  • How much volatility can be absorbed? Is it better for your business to have a stable, if high contract price, or can you handle some volatility in exchange for the possibility of dramatic price drops?
  • How critical is the product to the overall business? For tremendously critical products, a higher price may be worth the reliability of supply.
  • How volatile is the price of the end product? If sales prices are also impacted by volatility, it may be necessary to absorb this on the supply side.

Weighing all of these factors, supply management teams can identify the optimal blend of short- and long-term arrangements on a category by category basis for their strategic purchasing categories.

In the current economic crisis, the role of procurement has never been more crucial. Procurement professionals have a unique opportunity to step into the spotlight and deliver tremendous value for their companies. At such a time, it is important to be able to move quickly in order to deliver immediate impact to the organization and cement procurement's strategic value.

Jim Wetekamp is SVP for Solutions Strategy at BravoSolution, a global supply management solutions provider. www.bravosolution.com

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