Sourcing Guy

Here’s an obvious truth that buyers often overlook in their drive to pressure suppliers to lower prices:

Over the long haul, you can’t make money in any industry unless your suppliers can make money, too.

The U.S. automotive industry has many examples of price myopia. For too many years they have used their volume leverage and power to focus on driving down Tier 1 supplier prices. Many suppliers in the domestic automotive supply chain who needed volume to amortize large investments conceded on price, resulting in margin erosion. At a certain point, those lost margins undermined new investment and created cutbacks in research and development. The result, companies were making products based on older designs using older technologies. That’s a combination that begs for competitors to move in with more efficient processes or better designed products. In some cases, the lost margins simply led to bankruptcy.

In contrast, automakers from Japan are taking a different approach. They focus on cost and cost transparency rather than price. These automakers make supplier development and joint problem solving a key priority. While still demanding cost and value improvement, the focus is on the elimination of cost using approaches such as specification change or waste elimination.

When companies view their suppliers as extensions of their own manufacturing capability, they can take a longer view of their relationships. One good example of continuous cost and value improvement can been seen in the pharmaceutical and biotech industries. Working from patented processes and technological breakthroughs, companies in these industries enter a 15-20 year relationship with suppliers and life cycle pricing models.

Executives will often argue that they have to serve shareholders over stakeholders, but that’s a short term view. Successful executives realize that over the medium to longer term, such a forced choice is inappropriate. It is in the interest of both manufacturers and suppliers to pursue value-added strategies in line with customer expectations and to align business strategies.