Why doesn’t management understand?

Suppliers are not a source of incremental profit

If a strategic category-sourcing manager has done her job, she has a full cost analysis, understanding of the supply base and global market place for the category. Every one understands that companies need healthy supply chains where their suppliers are reinvesting, innovating and buying automation to reduce cost. Yet, in some companies, the drive from top management is cost reduction. The lesson that suppliers must be profitable rather than leveraged to the edge was learned by the automotive industry when most of the domestic supply base was either bankrupt or close to it.

When buyers turn their focus to value extraction and not just cost reduction, the results are outstanding. I am writing a book entitled “The Best Customers Get the Best Ideas”. The preliminary research shows that companies with truly integrated supply chains have a high degree of supplier-led innovation, lowest cost of production and lean, flexible responsive suppliers. Two examples that come to mind are Apple and Toyota, but there are many more.

If you are a purchasing and supply chain executive whose focus is cost reduction, you will find that you have a short life in the job. It is difficult to extract 10% a year from the supply base, especially when you run out of ideas or have a unstable supply chain with constant change and high switching cost.

Supplier relationship management is a skill that all commodity managers, procurement and supply chain executives need to assure longevity in the job and a stable productive supply chain.
Think about the value-add that your strategic suppliers can bring to the table. They can bring R&D, new processes, new products, exclusivity, speed to market and supply chain integration.

Time to make the change to value management rather than cost reduction. Remember:

the best customers get the best ideas!

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