Manufacturing has come full circle. At one time, decades ago, the entire production lifecycle in most industries was held in-house, or at a nearby facility. As the era of specialized supply chains evolved, processes were outsourced and distances to factories grew wider. There slowly developed an “us versus them” scenario over time. Often, each transaction had a winner and loser. The loser, usually being the smaller supplier, was squeezed on cost and time.
This mindset still exists in some instances, but for the most part, partnering with suppliers to ensure healthy relationships with trading partners and a healthy business has been proven to be a winning strategy. Suppliers today are once again viewed as an essential part of the business.
Beating Up Suppliers Has an Adverse Impact on Business
Finding the lowest possible cost has long been a focus. Major retailers were famous for pressuring suppliers for the lowest possible price. In addition to cost, companies in consumer goods and manufacturing extended payment terms on suppliers—sometimes from 30 or 60 days out to 90 or 120 days.
There’s danger here. Once companies get into a mindset of thinking only of their own working capital, they lose sight of the big picture and create havoc in the supply chain. Payment term extensions often puts pressure on trading partners, creating risk and resulting in failure to deliver on goods or services.
Taking a step back and looking at the big picture is important. Manufacturers want to pay later and better utilize capital as opposed to tying it up in inventory. Suppliers want to get paid as quickly as possible and with the lowest associated costs. The two sides have conflicting interests, but that shouldn’t be the case.
If optimizing working capital stresses a manufacturer’s vendors, then it is essentially strangling its own supply chain—forcing vendors to take a hit on margins or increase their prices. Thinking holistically about the supply chain and figuring out ways to better collaborate across all parties can pay heavy dividends in the long run.
Allow Suppliers to Take Advantage of Your Size
As the buyer in the supply chain, manufacturers are typically financially stronger than most trading partners involved in their transactions. Some are able to help their suppliers through programs that offer creative supply chain financing and raw materials consolidation. These programs help suppliers access capital and materials they need to deliver goods, without risking delays. Just as important, these programs can eliminate costs from the production lifecycle.
Capital costs from suppliers in emerging regions can be significant. By providing payment to suppliers in seven days instead of 90, in exchange for a discount on the supplier invoice, both parties win. Offering early payment programs to suppliers is a growing trend. It creates a higher return on capital for manufacturers by essentially taking on their own risk, pre-paying their own bills, and getting invoice discounts from suppliers in countries overseas, where cost of capital can be as high as 10%. A 5% early payment program funded by a buyer creates huge savings for its supplier, while providing a significant return compared to the average money market fund.
It’s a win-win scenario. Manufacturers with cash on hand get a better return while reducing capital costs and eliminating risk of delays. Importers also reduce cost of goods sold, thereby reducing duty fees.
An order moves from buyer to supplier and the supplier can either wait until payment due date or select to receive an early payment at a discounted rate. Suppliers electing the program receive payment in as little as seven days, instead of waiting 45 or 60 days. In exchange, the buyer gets a discount on the invoice. Some buyers use their own capital or let a bank provide the financing, or use both. Many buyers have more cash on hand at some periods of the year and less at others, so they offer a mix of bank- and buyer- funded programs to their trading partners.
On the materials side, if the manufacturing giant uses its clout to secure materials and negotiate a lower price, suppliers have access to the materials at a better price. Cost and risk of delay are removed. This can be particularly valuable in industries where certain metals or materials are difficult to secure.
Communicate and Collaborate Earlier and More Often
Being on the same page with suppliers as it relates to plans and purchase orders is essential. Using email and spreadsheets can create challenges for both parties. For example, agreed upon changes to an order aren’t broadcast or reflected across systems. Manufacturers embracing a partnership approach are deploying exception-based collaboration initiatives on forecasts, plans and orders, thereby providing visibility, highlighting differences and aligning the supply chain. Manufacturers and suppliers both benefit from more accurate plans, improved on-time delivery and lower costs.
An automotive manufacturer issues a component forecast to a factory indicating demand by the finished goods suppliers. The goal is to provide visibility in advance to all parties. The finished goods suppliers confirm or update their planned purchases based on their production schedules. The component supplier confirms whether this expected demand can be met. All supply chain parties are aligned to create a more predictable supply chain.
One clear lesson manufacturers have all learned following the economic crisis is that the nature of business today is extremely interwoven. What impacts one company can cause a rippling effect thousands of miles away. Companies should put the same line of thinking toward their supply chains. Think about the supply chain network as an extension of the business. Supply chain partners are the business.
The financial health of a company’s trading partners is key to delivering goods and meeting consumer demand. The ability to share information and documents in an open social media environment that allows more communication more often in the transaction lifecycle is critical to responding to demand signals at the front end of the business.
The ability to give customers what they want is much more than a strong brand or customer experience. In today’s fast moving world, the only way to get closer to customers on the front end of business is by fine-tuning the wheels on the back end of the business—in the supply chain. This all starts with getting closer to trading partners.
Diane Palmquist is vice president of industry solutions with GT Nexus, a cloud-based business network for global trade and supply chain management.