A Commodity or Not a Commodity—That Is the Question

April 20, 2020
What does a supplier have to do to be considered strategic?

I often get asked “How can I demonstrate to my customers that I am not a commodity supplier?”  To answer this, I believe you first need to answer the question “What is a strategic supplier?” Why? Because by most definitions, strategic suppliers are not considered commodity suppliers.

Regardless of the products you sell, most OEMs would tend to see you as a strategic supplier under the two following considerations:

1. It would take a lot of time and resources to change to another supplier.

2. It would introduce significant order fulfillment risk (quality and on-time delivery) especially during the transition from the incumbent to the new source.

The definition above may seem a bit harsh at first blush, but that’s how I see the reality of the matter.  The point here is that for strategci suppliers, neither of the above statements fully apply. This begs the question, “What does a supplier need to do to make a customer consider the above two points valid for their situation?

In the late 1990s when I first became a factory materials manager, I saw the above as a fundamental issue, especially in light of the pressure at that time to resource overseas. To help guide my department, I put together a list of what I considered characteristics of a strategic supplier. Below, I lay out and describe what I consider some of the most important.

Product Development

Knowledge of the industry the supplied parts are to be used in.  Suppliers often supply similar parts to customers participating in a specific industry. Because of this, they have developed tribal knowledge of that industry so that they understand the best design options regarding cost vs. safety, function, reliability, etc. This can be valuable in advising OEM product development engineers on designing and/or spec’ing a part.

Knowledge of processing costs. There is usually more than one process that can be used to make the different features on a part. For instance, processing costs can vary depending on a feature’s tolerance specification.  Suppliers that can lay out the processing/cost trade-offs can also help design personnel make decisions regarding those specifications.

Tooling expertise. New or redesigned parts often require new tools for their manufacture.  Suppliers that can develop tooling with shorter lead-times and reduce prototyping lead times ,contributing to a shorter conception-to-market time.

Supplier Processing

Approach to quality control. Suppliers that base their quality system on defining process capability—understanding whether the tools and equipment used to manufacture a part can produce it on target and in control—reduce a customer’s reliance on receiving inspection to ensure the quality of received parts. Based on this, customers can reduce or even eliminate receiving inspection on a particular supplier’s parts, thus reducing internal purchasing related costs. Suppliers can also reduce the cost of their overall quality control program, increasing their pricing competitiveness.

Technology.  A multitude of equipment and apps is available to make for more efficient manufacturing.  Suppliers that are able to stay on the cusp of new technology and the benefits it offers will be better sources over the long run.  I’ve found that many suppliers—particularly small- and medium-sized ones—tend to rely on traditional processing rather than staying up to date.  Eventually this will contribute to their losing overall competitiveness, so that they will eventually be replaced in the supply base.

Understanding manufacturing costs. Suppliers that can break down the cost contributions of specific cost drivers—rather than grouping them in generic overhead accounts—have a better grasp of how to work on continuous improvement, something all OEMs look for in companies they purchase from. This is not to say that I expect suppliers to break down these cost drivers in their quotes; i.e., cost management, but suppliers up front should be asked to demonstrate they understand the specific elements of their manufacturing costs.

Order Fulfillment

What is the maximum capacity of the parts being sourced from a supplier? Knowledge of this is especially critical when customers have seasonal demand for their products and want to build as close to that demand as they can.  Can a supplier provide documentation of this?  Note: It’s amazing how many buyers don’t ask whether potential sources can support a customer’s own maximum production capabilities! Its even more amazing that some buyers don’t know their company’s own maximum production capability.

What lead-times are needed to increase delivery quantities above rolling schedule amounts, and to what extent can quantities be increased?  Does a supplier rely on pre-built, pre-positioned finished parts to support demand that comes in over forecast?  Can the supplier produce documentation that shows this, i.e. value stream maps and/or maps showing “true” lead-times.

Can a supplier provide tactical support, such as increasing the frequency of deliveries; using returnable containers; delivering directly to the point-of-use; point-of-use management and restocking of the parts they supply; efficient and competitive service parts support; etc.? Note: I have seen manufacturers that would traditionally be considered commodity suppliers—for instance, suppliers of hardware—transform  themselves into strategic suppliers by becoming competent and offering customers several of the above types of support.

In my mind, OEM customers should be asking the types of questions outlined above prior to making sourcing—or resourcing—decisions. Suppliers should ask a potential customer what types of capabilities and support—above and beyond piece-price—will be of value to them. If the answer is the traditional pyramid of price, quality and delivery, then that is an indication that the customer treats all sources as suppliers of commodities. If the OEM says they are interested in things like design support—but don’t have infrastructure in place to facilitate a supplier’s input—then they really aren’t.

Read more of Paul Ericksen's supply chain management articles

Unfortunately, many OEMs take the position, in reality if not philosophically, that everything they purchase should be treated as a commodity. If you have the capability to provide value to customers above and beyond piece price, quality and on-time delivery, but your customer isn’t interested in taking advantage of your total value proposition, I recommend finding new customers who will.  If you read through this article and find out that you for the most part are a commodity supplier—but don’t like being treated like one—figure out how to differentiate yourself from your competition. That is your responsibility.

Paul Ericksen is IndustryWeek’s supply chain advisor. He has 40 years of experience in industry, primarily in supply management at two large original equipment manufacturers.

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