Tag Archives: supplier relationships

Understanding value: to leverage or not to leverage, that is the question

Yesterday I read in a Bloomberg article by Christopher Jasper, Benjamin D Katz, and Julie Johnsson that “General Electric Co., the world’s biggest jet-engine maker, said it’s not prepared to enter a three-way race for turbine production on Boeing Co.’s planned mid-sized plane because a fragmented market wouldn’t justify the investment needed. Should Boeing opt for more than two suppliers, “we’re out,” David Joyce, head of GE’s aero-engines arm, said at the Paris Air Show, adding that his company still carries “scars” from being one of three engine providers on the Airbus SE A330 two decades ago.”

Often procurement professionals are quick to drive for cost reduction by leveraging competition among suppliers. When there’s more than one supplier, they go forward without thinking of the position of the category in the portfolio segmentation analysis. In an industry like aerospace where suppliers must deliver capacity, investment and innovation value, there is extreme risk in losing a strategic partner when procurement tries to leverage those suppliers. Yesterday Boeing revised its 20-year industry forecast to 41,030 jetliners; to send the capacity of a key supplier to a competitor could result in a costly failure to deliver.

It’s always important to assess the strategic nature of suppliers when adding competition. It’s especially important to understand the relationship and value that is received. In strategic procurement, it’s critical to assess the industry 5- 10 years into the future. If the supplier has built a strategic relationship and is delivering significant value, you could really undermine or kill the relationship by adding competition. The best rule of thumb is to maximize competition when you are confident you are dealing with a commodity.

Corporate memories are long! One client I worked with used competition incorrectly many years before and, when the industry consolidated to two suppliers, this company was stuck with a sole source (the wronged supplier would not do business with them) for 17 years until the management of the alternate supplier retired.

Do you threaten strategic suppliers with competition?

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How are you perceived?

Ten rules to keep you off the asshole list

Today I read Anthony Bourdain’s ‘No Asshole’ Rule: Life’s Too Short To Work With Them by Darius Foroux. The article speaks to those of us who have turned down money to work with difficult people. Bourdain recalls a story of working in a family business when his farther turned down a large assignment with a high return. The team and family were astonished and, when asked why he turned the business down, he replied because they are assholes. The reality is that Bourdain’s father classified the customer as a supplier hopper.

I, too, have chosen to not work with assholes. Sometimes it took me a while and a lot of money to learn the person was a jerk, and sometimes it was after the first meeting. Here are a few examples of my experiences.

In my corporate career, a fire extinguisher sales person visited me to extol the benefits of Halon fire protection. He pulled lighter fluid from his pocket and then lit my desk on fire–in a paper mill. Good thing for me, the Halon worked. I wanted to yell at him, but politely explained that he violated our safety protocols and would be barred from visiting again.

Early in my consulting career, I was invited to a global bank to present how our firm would build a global transformation program. We were asked for a detailed proposal so our global team spent about 100 hours getting the details right. After receiving our proposal, the bank’s VP of Procurement and Administration told us that we were the supplier of choice asked us to present our proposal to the team. We brought in 4 people from the regions where the transformation would take place to do the presentation of the roll out plan. There was limited feedback during the presentation and this episode was repeated at least three more times. At a conference, it was interesting to see that VP, who had been promoted to CPO, give a presentation on how to turn your employees into consultants. The cost of the proposals, presentations and visits to the prospective customer was over $75,000 to my company with $0 of resulting revenue. This person became notorious in the consulting world for gleaning free consulting on how to roll out programs; we were not the only suckers.

Another potential customer in the pharmaceutical industry send me a request for proposal. The choice was narrowed and I was lucky to be selected to make a presentation. The cost for the trip was about $2,000 and I was told that we were the leading contender, but the firm would do an auction, during which the auction software malfunctioned causing the auction to last about 4 hours. I was told that my firm won the auction, but a week later, the pharmaceutical firm explained that they were more comfortable with the incumbent, who had thought about it and now was willing to meet the auction price. Two months into the assignment, the supplier failed and the company asked me to help recover the program. I was not anxious to rebid the program.

After reading my book, the famous owner of several the major casinos in Las Vegas asked me to meet with his CPO. I went to the front office for the meeting and learned that the CPO’s office was in the basement of the casino. He came out and told me he was a busy man, directed me to wait, so I sat in his office for 50 minutes waiting for him to meet with me. His opening statement on his return was that he was the king of the casino business and while I had extensive experience with companies like GE, Microsoft, Birdseye and ConAgra, I was at the bottom of the food chain and would have to go to the small casinos then work my way up before I was worthy of his time. He then pulled out a drawing of a cow and asked me to break it into its parts. Having worked in the food business and consulting for two large food companies in the meat business, I could have told him what area of the cow each cut comes from, but I chose to leave that meeting and never return.

Whether you’re the seller or the buyer, being perceived as an asshole doesn’t make you a tough negotiator and certainly doesn’t deliver value for you or your company. Here are 10 rules to keep you off the asshole list.

  1. Always operate with integrity
  2. Never mislead suppliers
  3. Always outline events, timetables and your true motives
  4. Always give straight, timely feedback: good or bad
  5. Be respectful of other’s feelings and time
  6. Always be fair and firm
  7. Never exploit suppliers; the situation can reverse
  8. Be prompt for meetings and use time wisely
  9. Keep in control
  10. If you’ve been an asshole, acknowledge it and move forward

Let’s face it, we all can be assholes. I certainly can, especially when someone cuts me off on the road. I’ve learned how small the world is, so I work hard at maintaining professional relationships. Years ago, I had just accepted a position to lead procurement in a food company. Imagine how shocked I was when my new boss called one of the suppliers to gauge my relationship skills. Unfortunately, he chose a supplier that was uncompetitive in a major bid and had lost about $5,000,000 in business. I was surprised when the account manager gave me a great recommendation, explaining that he had lost a major contract, but couldn’t compete with the new offer. My new boss was happy that I could change a supplier out and still maintain the relationship. That was a big lesson: you never know who will show up and how relationships impact your career.

Do customers or suppliers think you’re an asshole?

The Diminishing Value of the Sales Representatives in a Self-Service World

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This week I read that Wendy’s has ordered 1,000 Kiosks to replace workers at 1,000 of its store locations. Lowes building supply stores have been trialing customer service robots since 2014 and now are rolling out LoweBots in California to handle simple customer requests and provide real-time inventory monitoring. This made me think; if retailers are replacing their customer-facing sales teams, what is the future of sales representatives to industrial buyers? The more I research, the more I realize the future is grim for the old-style sales person.

To challenge my thinking, I asked a group of purchasing professionals in the electronics industry their thoughts on the topic and the results are not surprising. Many said that they have little time to devote to meeting sales people and they feel no need to spend time and effort on a conversation about products that they can see and evaluate online.

Forrester research forecasts over 1 million salespeople involved in business to business transactions will lose their jobs to self-service e-commerce by the year 2020. The procurement professionals I polled would rather research and buy online than through a sales representative. Many are demanding that their suppliers improve and automate the sales/purchasing process. No doubt this is a reflection of how we’ve been spoiled as consumers by the instant gratification of online buying with same or next day delivery.

There is hope for the sales representatives if they can become consultative, offering solutions that provide information and value. This requires the representatives get new training, understand the technical aspects of their products, innovate, solve problems and bring solutions that add value to the customer. Another essential element is that the sales people become a trusted advisor working with the customer’s organization as a quasi-team member rather than an external, uninformed contact person.

This is a tall order for most old-style sales representatives and, unfortunately, many won’t make the grade. The days of shooting the breeze to gain a relationship, golfing and lunches are long gone. Most procurement pros have limited time, increased requirements for revenue generation, speed to market, cost and value improvement, scarce resources and a global footprint. Time management is critical with no time to waste.

Are the days numbered for the traditional sales representative?

What the Holidays Can Teach You About Supplier Relationships

bluescreen

This time of year we focus on relationships. Often it’s thinking of how to get through the holidays without a disagreement with a certain family member or how to manage time with your family and your spouse’s without damaging relationships. In either case, if feathers are ruffled, you’re more likely to try to repair the relationship than to replace it.

It seems we’ve become a replacement society. It’s more likely the appliance repair person will replace a board rather than repair it. Last week, when a Windows 10 update failed and a laptop would not boot, the Microsoft support recommendation was to reset the PC back to its factory settings, wiping out all files, then reinstall (replace) Windows 10 and all programs and files. Since my wife is technical and actually seemed to know more than the Microsoft support person, she stepped in, formatted a USB drive, booted to bios, dusted off her old DOS capability to issue a string of commands, repaired the defective system files and the computer started normally with all files intact. It took time and effort, but the result of being able to repair the operating system rather than replace all files was well worth it. She will lecture on back-ups, but that’s another story…

The replace mindset carries over to buyer/supplier relationships, too. In many of the industries I work in, I am sad to see that there is less and less reliance on relationships, even though they are at the very core of business success and failure. Many buyers develop a “what have you done for me lately” attitude, believing that the grass is greener in the next pasture. Nothing can be further from the truth. The reality is that the existing supplier has tribal knowledge about your business, the cost to switch suppliers is relatively high, but this is rarely calculated in cost savings projections in the “switch suppliers” business case. The learning curve is long and the investment to onboard a new supplier is often not a consideration in sourcing decisions.

If results aren’t what is expected, should you repair or replace a supplier relationship? The answer depends on the response to these questions:

  1. What is the total cost of the change?
  2. How will you develop and manage a new supplier to increase value delivery?

In many cases there is no supplier relationship plan and the relationship drifts along until the company is ready to replace the relationship again. Repairing relationships and extracting maximum value takes hard work; if you put in the work and build the process, existing suppliers can increase value delivery. It’s an easy solution to replace, but a better value to repair relationships.

I wish everyone a happy holiday and safe new year. I am thankful for the relationships have in business and appreciate those clients and business relationships that made Aripart Consulting successful in its first year.

Take a little time to repair the next time you’re tempted to replace.

Sole Source Suppliers? Your Future Depends on Supplier Relationship Management

SRM maize blue

You’ve tied the knot; is it effective?

Today, procurement and supply chain managers focus more time and energy on managing sole source suppliers than I’ve ever seen in my 30+ years in the profession. Typically these suppliers provide a technological edge, are locked in by regulatory requirements or are the sole survivor of a massive industry consolidation. Many supply chain practitioners aren’t effectively managing these supplier relationships that are so critical to their business’ success. As a result of the mismanagement, the supplier exercises a strong influence on the business as a whole, has a tremendous amount of power in the business, maximizes revenue and profit and takes advantage of the fragmentation of procurement and supply chain managers across a global business. The key to survival is effective supplier relationship management; as Joe Payne, in his MyPurchasingCenter.com post last month says “the future of procurement is SRM.”

Many clients have asked me to develop development programs for their teams to better manage sole sources of supply. During my 23 year consulting career, I have recorded a commonality among the companies managing sole sources of supply, which I’ve listed below.

Characteristics of Ineffective Sole Source Supplier Management

  1. No formal rigid performance metrics to drive continuous improvement that have been agreed by the business
  2. Fear of upsetting the supplier
  3. Fragmented management among the technical, executive, marketing, operations and supply teams with limited leadership
  4. No defined process, defined leader or coordinated cross-functional approach
  5. Supplier holds the power in the business relationship and defines the value delivered to the customer
  6. Rarely budget or dedicate teams to focus on generating cost and value opportunities with the sole source suppliers
  7. Typically the relationship with the sole source has tension and is somewhat adversarial
  8. Create a vacuum of leadership, causing the relationship to be technically driven verses commercially driven
  9. Focus on price rather than value extraction
  10. Develop tactical contracts with remedies for failure, rather than a principle-based agreement focusing on the relationship and formulas for success

While there is a great deal of challenge managing sole source suppliers, companies can go a long way to extend value delivery through strategic rather than tactical relationship management. It would take a tremendous cost and effort to strategically manage all suppliers; the more strategic a supplier is, the more of a company’s resource it will consume. Therefore, it’s critical that a company focus its efforts on the highly strategic suppliers.

To become effective with strategic supplier relationship management:

  • Renegotiate using the principles that will drive the relationship in the future. (My wife, @SourcingChick, uses this tip: contracts tend to contain penalties for non-compliance, while principles provide the framework for success. Maybe that’s why we’re still married after working together for so many years.) Some examples are:
    • Speed to market
    • Exclusivity
    • Innovation
    • Speed of response
    • Joint customer and supply chain integration
    • Principles around cost transparency, margins, and investments
  • Nominate a relationship leader and build a cross functional team that accommodates the technical, commercial and supply chain integration processes.
  • Create joint value targets and incentives for both sides.
  • Develop closer business integration.

With the amount of acquisitions and mergers, companies exiting from products and markets and the continuation of true globalization, supplier relationships will require close management and integration. Training and development programs have moved from functional training to cross-business training. I am hoping by sharing my thoughts on sole source management that companies will start to get a vision for the future and think about how to prepare their teams.

The Future is Now

Capturing Innovation – More Than a Concept

Everybody talks about capturing supplier innovation, but rarely is it a reality in many companies. An article in CEO magazine inspired this blog, and a post by Dave Henshall just this morning spurred this last minute mention before posting; both are worth your time for further reading. Just as CEOs have to create the conditions for innovation in a company, purchasing and supply chain leaders must create the conditions to drive and capture innovation from suppliers. Our companies’ futures depend on it.

In my career, I have been able to capture innovation multiple times. One occasion, driven by a problem, had a profound impact on my thinking. Vlasic Foods had just purchased a BBQ sauce product from General Foods. When tamper-evidence became a requirement, it was a challenge for food and consumer products, and for us the efficiency of the equipment applying shrink bands was no greater than 68%. We purchased the closures for this product from Brown-Forman, a leading manufacturer of spirits. When discussing the problem with the closure supplier, they offered to help by inviting our team to visit their plant in Louisville, where their engineers analyzed our shrink band and advised us that it was size too small to fit on the jar. They further showed us equipment that they had innovated for their own product to score and glue the band on the jar. By early the next week, we ordered the right size band, received new equipment from the supplier and our efficiency became greater than 92%. This would have taken our company several months and many dollars to resolve without supplier innovation.

The story is only important if we understand what drives supplier innovation. In this case there was total trust between the companies, a supplier relationship that was strong and growing. The personal styles of the management were similar and there was an open discussion about the issues. In addition to these factors, the Vlasic operations and engineering teams were open and accepting to the ideas.

This is only one example of many, but I think it is important to understand the motivation and conditions for innovation will be required for survival in the future. Innovation is a process that needs to be deliberate, managed and focused with the right mindset and attitude.

Is your company ready to make innovation a reality?

GM CEO Appears to be listening

General Motors CEO Dan Akerson recently told Automotive News that it had to be more upfront about telling its suppliers about its product plans, adding “we have to be willing to say that, if they’ll bring a good idea to us first, we’d be willing to pay for it.” (Quote as reported in Crain’s Detroit Business.)
Congratulations.  We’ve been saying for years that a well-managed supply chain is a source of innovation as well as cost improvements. In it’s most simple expression — you can’t expect suppliers to bring their best ideas to their worst customers.
Sounds like that message has finally arrived in the corner office at GM.