Category Archives: Supplier Relations

The cost of being a bad customer

If John Henke’s calculations are accurate, General Motors could boost its operating income by $400 million per year just by improving its relationships with its suppliers. For Ford the number is $327 million, and Chrysler, $308 million.

We are not alone in claiming that suppliers don’t give their best stuff to their worst customers, but Henke, who is a Ph.D. and president and CEO of Planning Perspectives, Inc. has finally projected a dollar cost for bad relationships. He’s been studying supplier relationships and cost concessions within the automotive industry for many years, and he developed an index to measure it.

For the first time ever, however, Henke used proprietary data his firm has collected, public records, and media reports to calculate the costs when suppliers do such things as shift their innovations, A-Team support, or added value service to other customers. Foreign automakers have been able to take advantage of those shifts and have saved significantly over time as a result, according to Henke.

You might quibble with Henke’s formula, but the conclusion is pretty solid for any manufacturer in any sector. Beating up suppliers on price is a short-term tactic, not a long-term strategy for profitability. Are the Big Three listening? Here’s an Automotive News video report with Ford’s chief purchaser sounding like he’s read the study and is trying to catch up, while Toyota’s purchasing chief is taking steps to shore up his declining supplier scores.

 

White House endorses quicker supplier payments

One of the maxims of this blog is, “Suppliers don’t offer their best ideas to their worst customers,” and one of the quickest routes to the category of “worst customer” is stretching out payments to 60, 90 or  120 days — as has been fashionable in the automotive and other industries. We generally applaud the idea of thinking like a CFO when you are a supply manager, but too often the finance-department led idea of pushing the cost of money onto suppliers by delaying payments results in tighter margins for the supply base that stifle reinvestment in equipment or research and development.

Apparently President Obama has come around to our thinking on the topic because he recently endorsed an organization of companies that have pledged to pay suppliers quickly, or help them find lower cost working capital.

In the White House announcement, the Administration claims its QuickPay program of paying small government contractors quickly has saved them $1 billion since 2011. The private business version of the program, called SupplierPay is an opportunity not just to save money, but to create better relationships that foster innovation.

 

Back to basics with three R’s

Strip away all the sophisticated software, instant communications tools and reams of data we can now incorporate into our decision-making and a simple truth remains: people are still the key to good procurement, and relationships among people still count.
Chris Jones at DC Velocity reminded me of that recently in a column he wrote about the three Rs of supply chain competitiveness. He says he heard them from a former professor nearly 20 years ago, and they haven’t changed much since. They are:
> Responsiveness
> Reliability
> Relationship
These are good principles to guide decisions about how we use all the procurement tools we have at our command. Will a big data analysis really help us respond quicker to changing conditions or anticipate possible risks? Does the vendor management software package make us a more reliable customer? How do faster communication channels help us build our relationships?
We often assume that whatever is new or “trending” is better, and data can often obscure as well as uncover a truth. So it’s good to have a few basic principles to guide us through all our metrics, and these are three that have stood the test of time.
They aren’t just good for supply management, they apply in general to business — and life.

Be the Best Customer

We have been saying for quite some time that suppliers won’t give their best stuff to their worst customers, and here’s another voice chiming in with the same message. Smartblog on Food and Beverage with supported research from SCM World indicates that innovative ideas and marketing only come when there is a targeted audience that will respond/engage. It is difficult to harvest creativity for customers that won’t notice or care — which is another way of saying, “listen to your suppliers because they are listening to you.” SCM World also states that collaborative relationships between brands/businesses for great ROI are only successful when there is the right market. Their tips for successful business relationships range from sharing strategic information to measuring and rewarding success.

To Become a CPO, Think Like a CEO

For a number of years we’ve been watching the trend of supply managers to think more strategically, for instance, looking for ways that relationships with suppliers can bring innovations that could increase sales instead of simply reducing costs. The Hackett Group recently released a research alert that confirms that trend. Read it here.
The report is based on an annual survey of procurement leaders, and this year’s survey found supply managers looking past cutting or containing costs to more strategic priorities as expanding the scope of procurement’s influence on spend and tapping suppliers for innovations.
The Hackett Group Global Managing Director and Procurement Advisory Practice Leader Chris Sawchuk said, “We believe many procurement organizations have reached the upper limit of cost reductions possible in categories they are actively sourcing today. So they’re looking for ways to reinvent their value proposition. A key part of this is expanding their influence, and taking a life-cycle approach to category management. This requires working more effectively with spend owners, executives, requisitioners, suppliers, and other stakeholders. It also calls for skills that are outside procurement’s traditional areas of expertise.”
The big idea from this research is that long term success for supply managers comes when they think like a CEO. However, as we all know, if you are stuck in the swamp it’s darn hard to see what it looks like from the mountaintop. To get from here to there it may take investments to raise your skills and those of the team around you. It may take a continuous process improvement approach to the work your department does, and it may take investments in technology to reduce the transaction costs of non-strategic purchases. In short, you may have to start thinking like a CEO of your team before you can align with the CEO of your organization.

 

 

 

 

Ford seeks innovation from partnership with minority supplier

We regularly write about using your supplier base to bring innovation to your company, but here’s a twist on that theme. According to Crain’s Detroit Business, Ford patented a process for welding aluminum, then shared it with a supplier to develop the technology for production. The deal was made under the umbrella of minority supplier development because the supplier is minority-owned. But it also takes advantage of the supplier’s knowledge and experience. Who better to take an idea from the lab to the assembly line than someone who is already fabricating aluminum in production volumes?
There was a time when automakers would develop a new process from beginning to end, then simply dictate to suppliers how it would be implemented. In practice, that approach only gets you to the starting line. Sharing development responsibilities sets a better foundation for improvements even after the process is production-ready.
Automakers have a bad reputation for supplier relationships, so it’s good to see evidence of more collaborative approaches.

120-day payments? Maybe not in the UK

A few years ago when the global economy was in a funk, companies could point to their own cash-flow problems as they extended their payment cycles to 90 or even 120 days. That’s a pretty hard case to make now that the economy has been growing for more than four years straight (according to the ISM Report
On Business™).
Nevertheless, it’s apparently not that uncommon still. In fact, British Prime Minister David Cameron has started talking about legislating limits to late payments. Here’s the coverage a Twitter follower of mine found in The Guardian.

Pushing payments out to four months certainly gives a boost to factoring companies, which will advance funds based on invoices. And it may help a company to winnow out weaker suppliers for components or services that are easy to source. However, for critical parts or strategic suppliers that are bringing your company innovations or unique value — slow payments are a good way to dry up the working capital your suppliers’ need for expansions, replacing equipment or R&D. Or worse, drive them to take their unique value to your competitors.

Apple’s Supply Chain Skills Can Still Score

Apple may be getting beat up by critics for falling behind Samsung in sales and new features, but a recent tear-down of the iPhone 5S reveals that it still has a knack for fostering innovation from its suppliers.

The blog All Things D recently wrote about the tear-down by consulting firm IHS.

According to the report of the IHS analysis of the iPhone 5s 16G, Apple is likely paying about $191 for its components and another $8 for assembly. That means the iPhone’s manufacturing costs are no more than the $199 subsidized price consumers pay for a unit with a two-year contract. Whatever the carriers are paying Apple is all margin. Not bad.

However, that’s not the most interesting SRM story. Buried in the 5S components is a unique set of radio-frequency chips from as many as six different companies that are all collaborating with Apple. Considering the effort that it takes to create a strategic relationship with one supplier, you can imagine what it might have taken to bring six suppliers into an innovation-driven collaboration.

The result may have been worth it. The iPhone 5S has an integrated RF system that can be used in many parts of the world that have different LTE wireless standards. According to one analyst quoted, older Apple models might have been able to connect to five different LTE systems, the new one, 13. That means one model can be sold in many more global markets, and more international travelers are more likely to be able to use their own phones wherever they go. Simplifying manufacturing schedules and inventory in distribution could turn into nice savings for Apple. And the feature could be a nice benefit to people who travel extensively.

It may not have the head-turning appeal of the fingerprint sensor or snappy new graphics, but creating a more global-friendly iPhone could be a big win for the Apple supply chain team.

GM’s Carbon Fiber Diet

I have a friend who trains and races on several light-weight, high-tech bicycles. He calls them his “carbon fiber diet.” I know golfers who have a similar appetite, and now General Motors seems to have acquired a taste for carbon fiber as well.

According to the Wall Street Journal, “General Motors and Tokyo-based Teijin Ltd. on Thursday disclosed plans to jointly develop lightweight automobile components using an advanced carbon-fiber materials process.”

WSJ reported that GM Vice Chairman Steve Girsky admitted that GM’s internal capabilities were limited in the new technology, so it went looking for a new strategic partner. That’s a significant statement coming from GM. Considering its long history of rocky relations with suppliers, this is another sign that GM is recognizing the value of the supplier community in delivering innovation as well as cost savings. We’ve been hearing executives talk the talk in the past, but this is concrete (or should we say carbon fiber) evidence that they have begun to walk the walk. What do you think?

BMW Gets It — Suppliers Bring Value Beyond Cost Savings

In a news release, BMW recently announced it has launched a supplier innovation award program — recognizing nine suppliers for outstanding technological advances. The innovations included a new automatic transmission, a camera-based driver assistance system, fully adaptive LED headlamps, and a new way to fuse lightweight aluminum sheets for greater structural strength.
BMW cut to the chase in a statment, “With its new award, the BMW Group aims to demonstrate that innovation is a crucial success factor for the company. Working closely with suppliers is extremely important to the BMW Group in expanding and reinforcing its leadership in the field of innovation.” That’s about as strong a statement as you are likely to see that recognizes the value of suppliers as an extension of a company. I think it’s very significant that BMW, which has a brand already so strongly associated with innovation, was willing to essentially share that recognition with its supplier community.  It is not likely that BMW would take such a step unless it had strong strategic relationships with those suppliers and felt comfortable that no competitor would be able to break them.