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Tuesday, September 2, 2014

Is Your Supplier Management Strategy Evolving Fast Enough?

Credit: Stuart Miles at FreeDigitalPhotos.net

Credit: Stuart Miles at FreeDigitalPhotos.net

Very few sourcing and procurement topics have been researched and discussed as much as supplier management. Industry consultants have dedicated their entire practices to it. There always has been a scholarly and academic side to this precarious topic, as well; a search of the Harvard Business Review website returns almost 1,000 pieces of content on supplier management.

For many organizations, the approach to supplier management has focused on segmenting suppliers and developing strategies and actions based on the segment. Variances from the plan have been kept to a minimum. This approach worked well especially when the primary role of sourcing and procurement was to drive down costs, while some resources were allocated to monitor major areas of risk.

Times have changed, however. Buyer-supplier relationships are advancing from tactical ones, where the primary focus was lower cost, to a more strategic focus on areas of innovation and competitive differentiation. Therefore, the mission of supplier management is evolving especially for manufacturers. Three factors are driving this evolution.

1. Lengthening of the Supply Chain

Supply chains have become lengthy and complex. Long gone are the days when tier one suppliers handled all or the majority of parts and assembly creation. Supply chains today can cut across continents. With globalization has come the challenge of not always knowing everyone involved in the supply chain.

Supplier management is now about managing all suppliers, going back to the mines to determine the origins of the raw materials that are utilized in products. A great deal of information and visibility is needed to manage supplier relationships. Unfortunately, this information can be difficult to collect, maintain, and manage.

2. Exponential Growth in Supplier Risk 

As more and more suppliers are added to the supply chain, they tack on a manufacturer’s supplier-related risk. Manufacturers need to be concerned with not only the financial stability of upstream suppliers but also their ability to meet capacity demands, regulatory requirements, and quality standards.

In addition, recent history has taught us that manufacturers can no longer ignore low-probability risk events such as typhoons, earthquakes, etc. If such an event impacts a supplier that holds a key role in the supply chain and no contingency plan is in place, it can cripple the manufacturer’s production line.

3. Erosion and Loss of Brand Loyalty

This is a manufacturer’s worst nightmare, and it has become a reality. Many buyers (consumer or corporate) no longer possess the brand loyalty that was often leveraged by sellers to get them through difficult times. In the past, buyers were slow to change brands as long as the product met their needs. But times have changed.

Difficult economic conditions drove buyers to weigh cost more heavily. And as production practices became standardized across a multitude of industries, we have seen less differentiation and similar quality among competitors. Buyers realized that they had options and no longer considered purchase history as a driver of what to buy next. So if your product becomes unavailable due to production issues or the buyer does not like your commitment to sustainability, it feels comfortable looking at alternatives.

All three factors have had significant impact on the relationships between manufacturers and their suppliers. Suppliers now have more influence on the brand, reputation, quality, and profits of manufacturers than ever before. And supplier management programs must evolve in order to get the most out of supplier relationships. So how is your progress?

Below are some areas to consider. Score yourself along the pre-evolution-to-evolved journey.

 

Pre-evolution Evolved state
Supplier segmentation schemes are based on size of spend, profit, and “importance” of the item sourced from the supplier. Manufacturers are using three- and four-dimensional segmentation schemes. In addition to the traditional factors, manufacturers are evaluating suppliers along these three dynamics:

  1. Willingness to collaborate
  2. Willingness to assist with innovation
  3. Ability for the manufacturer to replace the supplier with limited loss of functionality, quality, cost, etc.

 

Sourcing and supplier management are handled at the plant, region, or commodity level with limited sharing of information across company lines. Manufacturers are collecting, sharing, and analyzing information across the company, creating a global view of all activity and greater visibility for senior executives. Capacity and inventory are managed collectively, risk assessment is clearer, and better pricing can be achieved in exchange for higher volumes.
Suppliers are only engaged by manufacturers when they need data from them – quotes, capabilities information, available capacity, quality data, etc. Manufacturers are working with suppliers on an ongoing basis by exchanging and collaborating on information that enables both parties to achieve their goals. Both parties work to understand each other’s motivations and objectives and determine if a win-win scenario can be created.
Suppliers are brought into a project after most product design decisions are made in order to confirm feasibility and cost. Manufacturers are involving suppliers earlier in the product design process to tap their domain expertise on design decisions and material selection. The right supplier has the knowledge and experience that can be leveraged to achieve target costs without giving up quality.
Capacity is assessed through supplier Q&A documents based on single-quote data and static assumptions by manufacturers. Capacity assessments are based on detailed analytics. Manufacturers collect detailed data in an ongoing fashion from suppliers, go onsite and verify data and processes, and calculate anticipated supplier capacity levels at a global level.
Manufacturers provide feedback to their suppliers on what they do well and what they need to improve on, often heavily skewed to achieving cost savings. Manufacturers are participating in 360-degree reviews with suppliers to understand what they need to do on their end to help make the supplier relationship as successful as possible. Feedback is discussed and consolidated across the entire manufacturer. Supplier development programs are also utilized.

 

Mcross currentMichael Cross is the senior manager of solutions marketing at Directworks, a leading provider of cloud-based sourcing and supplier management software for manufacturers. With a sole focus on the manufacturing industry, Michael dedicates significant time and energy studying how industry trends, drivers of change, and emerging market conditions impact supply chain, sourcing, and supplier management processes. Michael has generated a variety of articles, white papers, webinars, and blog posts on the topic. Michael holds a PhD from the University of Pittsburgh.   

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