How to leverage the "hidden factory" as part of your winning team.
Suppliers and vendors. Yes, the words are to some degree synonymous, and it even may be a matter of semantics, but in my world there is a distinct difference between the two.
Many years ago, when I was dumber than I am today, I would constantly interchange the terms, until one day my supply chain sensei stopped me to explain the difference: “A vendor is a transactional provider like a hot-dog vendor on the street, while a supplier has a personal relationship with you.”
I am certain that your list of procurement sources are a combination of vendors and suppliers, but if your list is heavily weighted towards vendors, then you are likely having supply chain issues. So let us explore the qualities that distinguish the two.
Since a vendor relationship is transactional, the item you purchase is likely either a commodity or something with little or no Intellectual property. This then motivates procurement personnel to pursue a low-cost-country (LCC) sourcing strategy where they typically are only concerned about the actual component cost and often ignore the cost of logistics and even quality.
Make no mistake, there are a lot of companies that follow this model, as can be witnessed through the backlog of container ships waiting to be unloaded in many ports. To work with a vendor is “easy,” as expressed by a member of the merchandising department at a furniture retailer/manufacturer where I led continuous improvement efforts.
That person stated, “Richard, it is easier to hop on a plane to China and just go shopping. Once we find something that we feel will appeal to our local consumer, we just purchase a container or two of the stuff and have it shipped back to North America… Much easier than having to work with you and your team going through several design reviews, creating quality expectations and providing design details for cover cutting, sewing and final upholstery.”
The sad part is that these folks will just move from one global geographic region to another depending on price which they think is providing value. We are currently seeing the migration of production from China to Vietnam, India and Africa, where the standard of living is much cheaper.
Typically, purchasers working with vendors feel those items are widely available and most likely from multiple sources, so they ignore the need to create a true supplier relationship. This is why you see many companies suffering directly from chip shortages while others can still sustain production.
Make no mistake, it requires a significant investment to develop a strong and happy supplier relationship. Like a marriage, the relationship needs to be developed from a foundation of trust—a lot of trust.
Here are some takeaways from my experiences developing suppliers:
Showing up means something: No supplier should realize that they have a quality concern until I show up standing in their lobby. I am not there to discipline them but rather to collaborate to resolve the concern permanently.
The supplier is my hidden factory. Typically for every person I employ, there will be at least 10 people externally supporting my employee. So it only makes sense to engage everyone to enhance my success, which will also accelerate their success.
Communication is everything. I know this is a common theme within leadership regarding internal protocols, but it is important to have the same level of communication externally with suppliers as well.
At the furniture company, we had great success hosting regular STEP workshops (STEP=Supplier Technical Exchange Program).We would gather our suppliers into one forum and share customers’ desires for new features and options in our products.
In exchange, our suppliers would share what they were seeing as advances within their particular industry sectors. This allowed our design team to collaborate with the designers within our supply base and incorporate new concepts into our designs. The result is that often we were able to be first to market with advanced features, creating a competitive edge through a strategic differentiator.
The supplier should be clear on their value. As we shared our intellectual property with our suppliers, they were very cognizant of how as an organization they were positioned within their Industry sector: either as a leader, follower or commodity provider. They worked closely with us on pricing to insure that collectively we could provide a true value solution to our end customers.
Taking risks can pay off. If you truly trust your supplier, bring them closer by blurring the lines between your organizations, including them in design-team planning and… are you ready?… let them place purchase orders themselves.
Crazy? Perhaps. Several years ago, I was facing a labor crunch and decided it was more effective to train my suppliers to act as my ERP Planners but specific to their commodity. They operated from my site doing planning, attending to quality issues, attending forecasting meetings. They were part of my team and yes, ultimately, they did place purchase orders on my behalf on themselves.
Of course, the accounting department practically went into immediate cardiac arrest. I had to explain that the inherent controls we had in place to police ourselves would also automatically police our suppliers. Those controls included scrutinizing our purchase price variance (PPV) so if a supplier increased the price, we would be automatically notified and could accept or invoke some remedial action. We also monitored our inventory levels like hawks and if our inventory investment saw an increase, it would be worthy of a discussion.
Our benefits were astronomical and exceeded every expectation.
1. Stock-outs virtually disappeared since our Suppliers were able to see our actual and forecasted demand and use that data to play into their schedules. They took into consideration vacation schedules and other anomalies that our ERP system was too stupid to sense electronically.
2. Inventory decreased—really!!! As our suppliers adjusted their schedules to harmonize more closely to the cadence of our consumption, surplus inventory no longer became an issue.
Quality improved as our suppliers truly started to understand our critical quality requirements and adjusted their production methodologies. They even helped us adjust our drawings to reflect more realistic expectations.
The other benefit is that we eliminated most receiving functions, including incoming inspection, as our supplier trust increased and the supplier accepted full accountability of their product and service until the conclusion of final assembly.
Cost savings came fast and furious through our commodity managers which was wonderful, but did place additional burden on our internal engineering resources. Honestly, we did not have the internal resources to focus on constantly identifying the cost savings these folks found. So we immediately agreed to give back 50% of the found savings if they facilitated an approved change through our internal procedures. We then gave them 50% of the 50% in Year 2 and finally sunset the savings in Year 3. We could not have found the millions of dollars in savings we harvested on our own. We stole this trick with pride from Bose, which was doing something very similar but calling it JIT III.
Preferred treatment mattered. Like all companies we had competitors, but our commitment to our suppliers and a preference to only single source gave us an unexpected benefit. If a supplier had to make a decision to either provide us or a competitor with a product or quote, we may not have received a preferred price but we always received a much better procurement lead time.
So, Vendor or Supplier?
In some cases we did convert vendors to suppliers even though they supplied us with commodity-type products like fasteners. But ultimately we were more nimble, agile and competitive because we took the time to invest, believe and trust our suppliers.
Just as there is no “I“ in Team and a team will always create a better solution than an individual, I encourage you to minimize vendors in your supply-chain strategy. It will lesson supply woes while leveraging that hidden factory called “supplier” as your winning team.
As I am constantly reminded by my friends at Wal-Mart, their only role is to act as a contract purchasing agent for our household. Ultimately, we the consumer will make the final decision based on what we select to purchase off the shelf and we all are constantly looking for maximum value—which explains the high amount of imports from low-cost countries.
I still positively feel that organizations with strong supplier networks can become very competitive while remaining here in North America. We have the design capability, the thirst for innovation and skills for automation that, when combined, can position us to be locally and globally competitive.