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Winning a Supplier Award Could Wreck Your Business

Feb. 6, 2015
Too often we hear of a company winning a Supplier of the Year Award and then losing a substantial amount of the OEM's business.

This column is a follow-up to my last one, “Giving Credit where Credit is Due,” which focused on employees. Here I will focus on how this concept should—and should not—be applied to suppliers.

The conclusions of that preceding column were primarily threefold:

1. Effective employee motivation goes above and beyond a paycheck.

2. Understanding and satisfying the motivational drivers of high-performance employees should be a manager’s prime focus.

3. Managers that define and deliver on such drivers create the environment needed for a high-performance work group.

I guess the first question that needs to be asked is, “Do these same conclusions relate to management of suppliers?” I believe that the answer to this is a resounding YES. After all, a “supply chain” is just another form of “work group” and lean supply chain performance (the goal of Next Generation Supply Management) is just another way to say high-performance supply chain.

Another question then that needs to be asked is, “Do the same recognition strategies that effectively motivate most employees have a similar impact on suppliers?” If you look at current original equipment manufacturer (OEM) supply management practices you’d think that the answer to that second question is also “yes.” After all, most large OEMs spend considerable money and effort on programs to recognize supplier performance under the expectation this will motivate suppliers to improve performance in the same way it does employees. Such programs are often highlighted by annual awards dinners along with the naming of “suppliers of the year” in various categories. While employees tend to highly value this type of formal recognition, I’m not sure that suppliers do. This point will be the focus of the remainder of this column.

Most suppliers I’ve talked to—as opposed to employees—ARE primarily motivated by their version of a “paycheck,” i.e., purchase orders. So, while they may enjoy being “wined and dined” for that one night of the year, what they’d really prefer from their OEM customers in reward for superior performance is additional business. At a minimum, they’d like some sort of assurance that superior performance will not lead to a cut in business. Bottom line: Suppliers may regard recognition at award dinners as “nice,” but by themselves they have very little motivational value.

I’ve been around the profession a long time and have experienced or heard of just about everything that happens in supply management. One thing I’ve never heard of is an OEM’s supplier recognition program that has actual guidelines for increasing a supplier’s portion of the business for superior performance. Sure, there is usually a general OEM intent for this but, unfortunately, that intent rarely translates—at least directly—to increased business. In other words, today’s OEM supplier recognition programs do NOT give credit where credit is due to suppliers in a currency they value. In fact, there are all sorts of horror stories about suppliers that, having been recognized for outstanding performance, actually have their business reduced immediately afterwards!

You might ask, “How can that be?” Wouldn’t that be the antithesis of what’s needed to motivate a supply chain to higher performance? Let me relate a few examples and then you can ask yourself if your company has ever acted this way.

A friend of mine once worked for a corporation with several operating divisions. One of their suppliers jumped on the bandwagon of this OEM’s supplier continuous improvement program and—over a period of years—brought their performance up to the point of actually being recognized as Supplier of the Year simultaneously by multiple divisions, something previously unheard of. Shortly after this one of those divisions resourced the vast majority of their business from them. My friend later found out that the re-sourcing hadn’t been due to lack of price competitiveness or any of the other normal standards of supplier performance. In fact, as their awards signified, no other supplier in their commodity—domestic of foreign—could compete with them based on performance.

The reason for the move turned out to be that all divisions within this company were under a corporate mandate to annually source a certain dollar amount of their business to low-cost country suppliers, and the path of least resistance for this division to hit their mandated number was to resource overseas business from their Supplier of the Year. The end result was that while prices stayed largely the same, the OEM incurred significant unexpected costs (both indirect and direct) due to order fulfillment hiccups due to lengthening their supply chain from a couple hundred to over 6,000 miles.

Another acquaintance of mine worked for a company with a similar Supplier of the Year recognition award. Historically, in a commodity important to this OEM’s product, a single supplier had a dominant share of their business. Competitors were reluctant to enter their domain because of the significant capital investment that would be required. That was until a previously minor player took up the challenge and worked—again, through that OEM’s supplier continuous improvement program—to upgrade their performance such that they could contest the dominant supplier’s position. As their performance soared this supplier was rewarded with an increasing portion of the OEM’s business. In fact, after several years, their efforts culminated in them being named the OEM’s Supplier of the Year. At the annual awards dinner they even got to sit at the same table as the OEM’s president and senior vice-president.

While this was all happening, though, the former dominant player could see their business eroding and decided to do something about it. Rather than competing through overall performance they came up with an alternative strategy. Shortly before the annual awards dinner—the one where their competitor would be named Supplier of the Year—they came in with a low-ball quote on their competitor’s portion of the business. The strategy worked with the OEM unable to resist accepting the pricing windfall. A week after having been feted and eating dinner with the OEM’s top executives, the recently named Supplier of the Year was called in and told they were losing the vast bulk of their business.

The end result was that the low-ball quote returned the supplier to their former position as the dominant supplier in their commodity and they have not been seriously threatened since. And I suspect with the loss of significant competition this company will, if they haven’t already, surely be able to make up financially what they had to spend in buying back their business in increased pricing.

Both of the above examples resulted in more than just an isolated sourcing change. If you don’t think there is a “supplier grapevine,” think again. News like this always travels fast across supply chains and when it does it only reinforces supplier suspicion that OEM recognition programs don’t really mean much.

You might think that examples like the ones cited above are the exception to the rule. The reality is that I hear regularly of similar instances from the suppliers I work with. And the incentives for the OEM taking such actions are almost always the same, being either a windfall type of financial gain or one needed to satisfy some tangential metric that was never meant to result in the type of result it led to.

Bottom line, recognition only motivates suppliers when they are rewarded with what is important to them, i.e., more business. In my opinion, OEMs that give credit where credit is due to suppliers by automatically increasing the portion of business with companies recognized for superior performance in their supplier award programs should: a) incent most suppliers to do whatever it takes to become lean, and b) weed out those that aren’t really interested in becoming world-class.

I’ll end by looping back to the topic of giving employees credit where credit is due. I find it interesting that while the suppliers I talk to usually couldn’t care less about things like awards dinners in the absence of increased business, many employees value such recognition almost on par with their compensation. Yet, how many OEMs do you hear about having annual employee awards dinners or naming Employees of the Year? I haven’t heard of many. If you are aware of one or work for one, I’d like to hear about it and how it’s working out.

Additionally, if you are aware of an OEM who has formal guidelines for increasing supplier business based on their supplier recognition programs I’d like to hear about that, too, and how it’s working out. I suspect such a program would be very effective.

The next couple of columns will focus on a subject I’m sure is near-and-dear to the hearts of many supply management professionals—the use of leverage in sourcing.

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