Over the years, I’ve contributed about 90 articles to IndustryWeek. One of them “It Takes Two to Tango,” from 2015, dealt with the fact that in supply chain negotiations, there is middle ground if both sides are willing to compromise.
The headline, suggested by my then-editor, was a bit of a stretch for me; I didn’t understand how it related to the content of the article. But now I know what he was getting at. Tango dancers must coordinate and collaborate to the nth degree to successfully execute the dance.
I think you can see where this is going relative to OEM-supplier relationships. Times have changed since the tango was popular. Today’s dancing seems less about coordinating with a partner—where the sum is greater than the whole—and instead positioning partners for individual outcomes. As a result, the beauty of the dance is compromised, at least in my opinion.
When I started out as a technical buyer in the late 1980s, the dance between customer and supplier resulted in each party contributing to the value of the purchased product, such that it became better in terms of safety, function, reliability and piece-price.
Over the years, as I moved “up the ladder,” I saw every factor in the negotiation dance except one—piece price—fade into the background. In my opinion, this was the result of the rush to find overseas sources, which precluded building relationships based on collaboration. What I saw, instead, was a move to arm’s-length OEM request-for-quotes from suppliers, and sourcing decisions made strictly on piece-price. In many instances, sources were selected without OEM buyers having even having visited the proposed source to understand their overall operation or communicate with them on possible changes to the specifications that could improve part safety, function or reliability—or reduce cost.
Once this started happening with overseas suppliers, I saw OEM’s starting to work with their domestic suppliers in the same manner, with the result today that you’ll have buyers basing sourcing decisions strictly based on quote data—again, primarily piece-price—without having any real understanding of the total value-add available from their the array of sourcing options. Because of this, they are not getting all of the value-add suppliers have to offer.
OEM customers and their suppliers must coordinate to the nth degree to get the best overall outcome. I’ve had reader feedback, however, that while this is an exemplary goal, don’t hold your breath.
I’m not so sure. Why? Because I’ve been working on in supply chain management for over 30 years and I’ve never seen “the planets” so aligned for facilitating a change in procurement. The tariffs on China have been a real jolt to U.S.-based OEMs and given many pause about their current strategies and practices. For instance, many who had placed a significant portion of their “spend” exclusively in China now realize that back-up plans should be part of supply management planning and—regardless of how the tariff situation ends up—are looking to establish such Plan Bs.
There are also tools—such as SAP, among others—that now allow assigning more of the real overall cost of purchased material to specific sources. Because of this, OEMs are starting to understand sourcing costs not only based on piece-price but also on internal overheads.
Paul Ericksen's columns are part of IndustryWeek's Supply Chain Initiative, providing thought leadership on OEM supply management practices and highlighting how small- and medium-sized manufacturers can positively impact their OEM customers.
Finally, there are business cases out there, and others being developed, that show additional benefits available—such as increased revenues due to incremental profits—so that OEMs are looking more for lean supply chain performance (not just lean supplier factories; there is a big difference) in order to have more ability to react quickly to change in market demand in either quantity or SKU.
I’ve also become aware of instances where some state governments are starting to question their own economic development strategies. How, you might ask? Instead of primarily focusing on attracting new OEMs to their state, i.e. smokestack chasing, they are starting to understand that economic development needs to start with their own small- and medium-sized supplier manufacturers. In other words, while new OEM factories add jobs and result in increased tax revenue, more jobs and more tax revenue can be created by focusing on helping the “small guy,” with the goal of OEMs sourcing more of their purchased material from supplier/manufacturers in the state. Over the next year, I plan on writing about some of these instances.
Based on historical pre-low-wage-country-sourcing results, it is pretty clear that collaboration between OEMs and their suppliers can result in products with more value than the OEM-designed parts. It is also pretty clear that a large percentage of OEMs have departed from a collaborative practice and base most of their sourcing decisions primarily on a piece-price quote without supplier input to the design or processing. The question is whether OEMs and their supply management professionals are willing to break this mold—as they did when they began sourcing with overseas suppliers based on piece-price—and start creating examples of the product and financial benefits a collaborative relationship with suppliers will product. This will take some internal fortitude, but a portion of true leadership is usually based on that.
Paul Ericksen is IndustryWeek’s supply chain advisor. He has 38 years of experience in industry, primarily in supply management at two large original equipment manufacturers.