Suppliers or Good Customers:
Which is More Important?
Everyone knows any successful enterprise needs good customers. But what
happens if they don't have good suppliers? It is only a matter of time
until the enterprise has trouble quickly delivering a defect-free product
on time at a competitive price. And the good customers will disappear.
The answer to the question is an enterprise needs both good customers
and good suppliers.
But are suppliers and customers treated with equal importance, attention
and respect? In most cases, the answer is no. Is the new e-commerce practice
of managing the supply base supportive of keeping a good stable of suppliers?
Let's start the discussion by developing a profile of the ideal supplier.
A "quality" supplier means they meet all of the customers expectations.
As a customer, what do you expect of suppliers? What is the profile of
a good supplier? The ideal profile includes these seven key characteristics:
1. On-time delivery. Late supplier shipments are costly in many
ways. The customer's customers will likely get late deliveries also. Costly
informal systems pop up to minimize late delivery damage, including buffer
inventories. Perpetual late deliveries will likely lead to lost business.
2. Frequent deliveries without price penalty. The ability of a supplier
to frequently deliver, i.e. deliver a day's usage every day (or close to
it ) without any price penalty can be a huge capital and cost advantage.
For example, if a quality problem is discovered, only a small quantity
needs to be reworked, replaced or returned. And another delivery is already
in the pipeline. Smaller quantities take up less space!
3. Reasonable price. Purchased material often accounts for as much
as 60% or more of the cost of goods. Minimizing this cost can add a lot
to the bottom line.
4. Minimal paperwork to do business. Ever think about all the documents
involved in doing business with suppliers? Purchase orders, requisitions,
requests for quotations, quotations, invoices, bills of lading, etc. Looks
like a real threat to our national forests! The ability of a supplier to
do business without all this paperwork can be a tremendous cost savings.
5. Quick response. Forecasts are never accurate and customers seldom
know exactly what they need and when. The ability to quickly respond to
unanticipated needs can be a huge advantage. Supplier lead times often
make up 80% or more of the lead time for a company to respond. Short supplier
lead times are a big advantage. Less buffer inventory is needed, for example.
In many cases, this ability to respond quickly to get incremental business
may be more valuable than a 3-5% purchase price reduction.
6. Inspection not required. The last activity by the supplier is
often also the first activity by the supplier -- inspect the material.
Reliable quality can eliminate this costly, time-consuming step.
7. Technical ideas. This may be the most significant characteristic
on the list. If we are using a bearing, packaging material, seals or whatever,
in our product, why not depend on the experts in those businesses to design
and define what is needed to most effectively get the job done? Many companies
could reduce the engineering staff and get lower costs, more effective
purchase material if they would only utilize and listen to their suppliers
engineers. Early involvement in the product design is necessary to take
advantage of this free resource. This means the supplier must be selected
before the specs are written.
In short, suppliers are a significant part of an effective supply chain.
Over the past decade, industry has recognized the need to replace adversarial
relationships with supplier partnerships. The selection of suppliers on
price alone and single measurements such as PPV (Purchase Price Variance)
have been replaced with a more holistic focus and measurements such as
total purchase costs (see Hot Info archives). The results have been impressive!
does this all fit with today's e-commerce approach of competitive bidding
over the internet? Not very well! Notice that auctions to award business
focuses solely on price -- just one of the seven criteria for an ideal
supplier. Have we become so enamored with internet technology that we are
abandoning Best of Class supplier practices? Perhaps. But this approach
is rapidly gaining momentum, driven by industry giants such as GM, Ford,
Boeing, and others --right or wrong!