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Supplier Management Fundamentals November 6, 2011

Posted by Tim Rodgers in strategy, Supply chain.
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I’ve managed suppliers at multi-national, US-based firms, and I’ve worked for a large electronics manufacturing services company, and those experiences have given me the opportunity to think a lot about the power dynamics on both sides of the table. I know it seems obvious, but it’s important to remember that at the core it’s a business relationship based on a payment for a product or service, or an expectation of an ongoing revenue stream. Suppliers are in business just like you are, and their decisions are based on the same concerns about profit and growth and predictability.

The growth in contract design and manufacturing services has inspired many firms to consider their supply base as an extension of the organization, or even a virtual functional group. Firms encourage their suppliers to act on the firm’s behalf and look after their interests in areas such as quality, technology development, delivery time, inventory management, responsiveness, and adherence to business processes. They’re not suppliers anymore, they’re “partners.”

I think it’s clear that this “partnership” only extends as far as the degree that the business interests of customers and suppliers are aligned. Suppliers care about their customers only because they’re paid to care, either because they explicitly mark-up to provide a premium service, or to assure a long-term relationship that implicitly leads to future business.

For example, while at Hewlett-Packard I used to prefer working with suppliers who were relatively small but eager-to-grow because I believed they would provide better service in order to keep — and perhaps more importantly, advertise — HP as a customer. The relationship was something valuable to the supplier, something that could be leveraged to acquire other customers to support growth and/or profit goals.

This perspective is important for small customers trying to establish a supply base. Big customers are attractive to suppliers because they offer a large volume of business; what can small customers offer? Again, the key is providing something the supplier is looking for to help their business. Two possibilities: (1) consistent, predictable demand that ensures effective asset utilization, and (2) technical or business expertise that can be leveraged.

This is the virtuous view of supplier relations and motives: “Help us because it helps you.” The dark side is: “Help us or we’ll take away our business.” The threat of withdrawing business is only credible when the switching cost of changing suppliers is low. There’s a lot that goes into setting up and running a supply chain, including such things as technical training, purchasing and audit processes, development platforms, and tooling. Changing suppliers can be a significant cost to the customer, with no guarantee of improved net supplier performance at the end of the transition. That’s why it’s a good idea to avoid single-sourcing if you want to maintain competition and retain the threat of switching suppliers.

Suppliers understand the value of switching cost as well. When a social relationship is established between people representing customers and suppliers over meetings and meals and 18 holes of golf, these tie-ups create an emotional bond that can inhibit switching, potentially overcoming a decline in performance.

In the end, you get what you pay for. If you squeeze a supplier on price or other conditions, you shouldn’t be surprised when that supplier doesn’t represent your best interests. If you want a partner, you have to make sure your supplier gets something valuable out of the relationship.

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Comments»

1. Dave Bennie - November 6, 2011

Tim, now that you know and understand these lessons and experiences, are you able to get the management levels above you to buy into what you are saying here, or is this blog just a great way to express to others what you have discovered?

Tim Rodgers - November 6, 2011

I believe I’ve been able to influence higher-level management and strategy through the things I’ve learned along the way, and that’s basically the same material I’ve been sharing in this blog, with some additional detail and exposition. Often it takes a little time and perspective and listening for the insights to emerge. Why am I blogging? It started out as a way to capture my thinking for future reference, perhaps to form the basis for a series of classes I’d like to teach one day. I also enjoy the dialogue with other like-minded people.


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