Slaying The Price Monster

Dec. 21, 2004
Long-term supplier relationships suffer when cost is the only consideration.
Kyouzon, kyouei is a Japanese phrase that roughly translates to "coexistence and mutual prosperity." When applied to the value chain, coexistence means that organizations band together and help one another survive, especially in times of crisis. And mutual prosperity means that no one gets rich at the expense of their customers or suppliers. Such mutually beneficial relationships are especially difficult to maintain in times of economic or organizational crisis. Suddenly it becomes every company for itself. That point was driven home in early January when DaimlerChrysler AG's Chrysler Group, once highly regarded for its cozy supplier relations, demanded across-the-board, 5% price cuts from its 2,000 suppliers, aimed at cutting its annual $40 billion parts and materials bill. The problem is largely one of measurement. In the absence of other measures, price wins out. One of the projects under way at the National Initiative for Supply Chain Integration Ltd. (NISCI) is determining how to measure performance across the supply chain. "If you were to take the accumulated material cost, the accumulated direct labor costs, and the accumulated transportation costs, the transportation costs could be the biggest piece, bigger than the materials piece," says Mike Doyle, founder of NISCI. Freight costs are hidden in the piece price at every transaction point. If such costs were more visible, and companies could calculate the total cost of ownership or economic value added across the whole value chain, in theory it then could be tracked and managed. "If I can't measure economic value across the chain, I can't know if I'm improving the whole chain, instead of individual links," Doyle explains. Where price is all that matters, such nonstrategic, commodity-type items are increasingly being processed through electronic exchanges. However, these wide-open markets are not the place for forming long-term, cooperative relationships. In fact, in a sample group of companies currently participating in such exchanges, forming collaborative relationships was at the bottom of the list of desired capabilities, reports AMR Research Inc., Boston.

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