Supply Chain

Not all Suppliers contribute equally. The hunt for the “right” suppliers begins in your own backyard.

I’m finding that most 1st and 2nd tier OEM’s are reducing their supplier bases by 50 percent or more. How is reducing your supplier base efficient if you’re not keeping the “right” suppliers? Conversely, operation and supply chain managers who fail to initiate supplier operating partnerships with their best vendors run the risk of their company’s customers, and their company's profitability, to competitors who move first.

Supplier operating partnership- arrangements that involve tightly linked extended supply chains- should be the supply chain goal. They offer tremendous gains for both the supplier and the OEM including; (1) decreased costs (2) a shift to a strategic positioning as a highly service-differentiated supplier [even for companies who are stuck as commodity providers and subject to constant price wars]; (3) a direct relationship with “value-oriented” top vendor executives, rather than “price-oriented” insides sales and field sales reps and (4) a highly defensible competitive position with switching costs.

Model a supplier. Choose a few suppliers and products that are reasonably representative of your current vendors and look carefully at their offerings. Try choosing a large and small vendor, each from a few key commodity segments and volume moving products, from each of the few key product families. Ideally you should have six to twelve representative situations to examine.

Look at the cost drivers for different products. Try different business model configurations such as order frequency, service interval, direct or distribution advantages. Look at cost level and mechanism- altering the product mix and developing a substitution program- this can provide valuable cost levers for cost improvement. Once you found effective cost levers, check your other vendors to make sure you can generalize your findings.

Modeling the effects of cost levers on representative suppliers works well for three reasons: (1) it will identify order pattern; (2) you can call one of your vendors to see what their reaction to the potential change would be and;(3) it can be easier to explain the changes using specific examples when you “sell” the initiative to your colleagues and superiors. Bringing in the wrong supplier will add incremental cost and subsequently decrease profits.

OEM’s should be seeking more intensive operating partnerships with fewer, more capable suppliers. Price should no longer be the primary deciding factor. Companies who develop and offer these arrangements will equally benefit from such planning. Flexibility is the new value-add.

The “right” supplier should try to help evaluate the OEM’s supply chain to see if a tightly linked partnership is probable, the OEM should be asking the right questions and providing information as warranted by the potential supplier. This only helps the OEM and leads to an (eventual) cost productive relationship.

If tightly linked partnerships are available at the distribution level, why would 2nd tier OEM’s want to be direct? Is the decrease in cost from direct to distribution that beneficial?

How can a strategic position help the supply chain? Are large distributors headed towards a CM model? Stay tuned…