Supplier cost seldom is a per unit issue:
General tendency of companies in a downturn is to attempt to squeeze their supplier costs. Predominantly this reduction is done on the basis of per-unit price across the product line. This results in confrontations, backlashes from the suppliers who are having problems of their own in this uncertain economic environment. Companies need to evolve in their approach to be more strategic as from a maturity perspective managing and utilising supplier relationships is a baseline necessity. Long-term supplier and buyer relationship emphasises that final frontier of mutually beneficial arrangement is developing score cards for the delivery, quality (specification) metrics, etc., with strategic arrangements of sharing benefits or losses.
Even outsourcing work to a lower cost supplier in such situations is no different. Within a supply chain it may reduce costs of the said activity or product. Often this narrow focus on cost leads to lack of focus on other inefficiencies such as overheads etc. In addition, there is always a probability that these moves may drive up total costs through reduction in quality of service and concerns that come from a non-strategic partner. Simply going for savings in one part of a supply chain may fail to improve its overall performance unless an integrated tactical approach is not commissioned. Answer to the issue of reckless pressure on suppliers could be to look beyond the transactional price of a product/service and understand the cost of doing business with the supplier with equal weight to the intangible attributes.
No doubt, lowering costs across the value/supply chain should be one of the strategic objectives; however companies must focus on strategic supplier relationships and improvement in structure to achieve strategic cost reduction. Companies should start focusing on identifying ways to develop the relationships to the point where a supplier is willing to take risk for mutual benefit.
This can be achieved in many ways. Three ways to do it are as below:
Collaboration: In companies management utilises fair bit of time visiting dealers and customers, but often do not interact with their strategic partners (vendors). Without understanding across the table perspective, focus solely on purchasing is often the issue. This tussle over the cost/per unit results in adversity in the supplier relationships. The focus shifts from the improving efficiency to impulsive per unit cost reduction. Instead, the relationships should be elevated to the point where it is easy to reduce structural costs by understanding better the needs of the end customer as well as customising product/service design to avoid unnecessary costs.
Strategic Alignment: As a company all critical stakeholders need to be on the same page to understand what the organisation requires from the suppliers. Whether it is IP or costs or is it competing demands, suppliers must be aware of the issues that the company is trying to tackle. If the suppliers are disengaged with the buyers then neither knows where they are going and that result in the cost pressures being put on the suppliers. Is the supplier knows what the buyer wants and is sensitive to its needs, it can provide accurate services at the most optimum coasts. That understanding needs efforts from both parties to build that relationship being simply more than price/cost negotiation.
Profit Sharing: As discussed earlier companies tend to push their suppliers to reduce per-unit cost without really understanding how the supplier business will deal with it. As a consequence vendor relationships tend to be purely transactional. It is not always necessary that supplier is a high volume business. Here a supplier buyer relationship business need to be at a level where the supplier is working against a score card and is willing to take the risk together with the buyer to identify and satisfy new opportunities as well as take the hit in proportion to the buyer if the market sours.
Supplier relationships that are based on sharing and strategy are to benefit the supply chain much more than simply trying to reduce product unit cost. In 1997 Toyota was able to recover from a fire disaster in five days after the fire. Read the pinnacle of supplier-buyer relationship (http://www.rbbi.com/company/toyota/fire.htm).
It is obviously more effective to improve margins, develop competitive opportunities and consistency in market requirement. Some of the benefits as a result could be:
- Supplier scorecards are maintained and used to gauge improvements
- Strategic alliances are established with key suppliers
- There is a clear understanding of cost build-up and waste reduction opportunities
- A benefit sharing arrangement is in place and supplier progress in tracked
- Suppliers provide feedback on product changes to improve product/ supply chain costs
- Supplier selection is based on lean assessments at select suppliers
- Materials delivered directly to where they will be used
- Continuous focus on lead times for supplier processes and efforts are ongoing to work on reducing costs while improving quality.
Note: The suggestions in the article are author’s personal opinions. The article does not represent in anyway the ideas or opinion of any other legal entity or company