Is your Supplier an ASSET or an EXPENSE?
As an “Asset” your supplier is blurred into your daily operation with a common focus on success. The supplier fully understands that their success is based on how successful you become within the market. As an “Expense” the customer is constantly beating on the supplier for a better and lower price.
Ultimately, the situation distills down to “trust” and is “value” truly visible. This where the first segregation transpires by defining the difference between a “Vendor” and a “Supplier”
A “Vendor” is someone you conduct a transactional exchange with … like the purchase of peanuts from the street vendor. You may not have much of a relationship with the vendor other than the consistency of ongoing transactions, or geographic location (it is on your way to work) but it is likely something that if you cannot access it is easy to find an alternate or substitution.
A “Supplier” is someone instrumental to your success. They bring to your equation a unique product, technology or service.
When we treat our Supplier as an “expense” it has several visible attributes:
We will never trust our supplier.
Let us constantly be searching for a better cheaper source.
Let us not pay our supplier on time… ever … even after we dictate extended payment terms.
Let us never acknowledge their contribution to our business.
Consistent quality is a given.
Once we have a low price let us negotiate an even lower price.
The result of this “expense” attitude towards your supplier gives you the following:
·Excessive inventory at your location, at their location and with WIP.
Supplier initiates a Low-Cost Country Strategy … shops the world for cheap labour.
Lack of transparency from your supplier.
Typically, lower product yields or increased incoming inspection costs.
Supplier will leverage every opportunity to get more money from you.
All of the relationship energy is focused on keeping everyone honest instead of working together to grow the business. The cost component is always driven by essentially three factors, material, labour and overhead. Labour and overhead costs can be significantly lower using a Low-Cost Country strategy but this needs to be traded-off against the cost to finance these costs through your supply chain and your potential loss of flexibility and agility. There is also a good chance that once you are in this rut you will be constantly shifting your supply source … today it could be China, then perhaps Vietnam followed by India or Australia … where ultimately the supplier will never get to know your business or the cost to manage your supply chain gets oblique against the actual procurement unit cost.
Traditional accounting methods can be the biggest asset or liability in this scenario … how can you justify waiting 16-22 weeks for goods when you could have a supplier located next door? When you look beyond unit cost and calculate your Total Cost of Procurement … the decision to source local may make more sense. For example, add the cost to visit a supplier in China instead of across the street, the cost to finance inventory, the cost of logistics, design review challenges, time zone differences and manage quality … when you add it all up your Total Cost of Procurement can actually tabulate to be double or triple of the actual procurement unit cost.
Ultimately Value is defined by you by what you are willing to pay for. You cannot blame Wal-Mart for being one of the largest conduits of cheap China imports to North America when in reality the role Wal-Mart plays is to be your household purchasing department and you make the final decision as you opt to get maximum value for your hard-earned dollars but still want to be insanely compensated for your contribution to society.
A Supplier when used as an asset can really be a competitive advantage and can be evidenced in the following manner:
No inventory commitment (you pay as you consume, as an example, every-time, a rim and tire is installed on a vehicle an automatic electronic payment is issued to the supplier).
No incoming quality inspection, everything is source inspected and validated by the supplier.
Supplier is committed to your success.
Transparency and blurring of the lines of your relationship.
Harmonious design reviews where emerging technologies can be harnessed together to provide an advanced Value Proposition to the ultimate customer.
When I view a Supplier as an asset, I normally take into consideration the following:
They are committed to my success.
They are my hidden factory, and have I optimized their capability?
Typically for every person doing the final assembly, there exist 10 other people upstream.
They are transparent and very open to sharing.
We now have a combined R&D resource and opportunity be further define our competitive edge.
They are willing to take risk(s) or partner with us to achieve a challenge.
Ultimately, the market will dictate the price based on value and the price difference between companies can usually be measured within a few percentage points. Competitors tend to keep a pretty close eye on each other so as a third party my approach is to work with a supplier to leverage this knowledge to my advantage.
I truly enjoy working with suppliers as we combined focus on how to grow our businesses while giving more value to the customer than constantly living in fear about my current pricing. In the immortal words from a previous colleague “I only want our supplier to know they have a problem is when I arrive in their lobby with a cadre of engineers to help solve the problem.”