SUPPLIERS AS ADVERSARIES
In conventional textbook treatments, managing the supplier is couched in terms of “minimizing your input costs,” and assumes that you principally are concerned with prices and quantities while maintaining an arm’s length bargaining position with your supplier.
For example, the classic “make-or-buy” decision (whether to acquire sup plies on the open market or to integrate backward into production) requires you to consider the gain from recapturing the supplier’s margin versus the investment costs of self-manufacture. Similarly, determining the optimal “economic order quantity” for inventories is a model for minimizing supply and inventory costs (subject to constraints of stockouts).
Hence, the adversarial view of suppliers suggests finding ways to minimize their bargaining power in order to obtain better terms. The following prescriptions are part of the adversarial recipe and often are suggested as ways to keep suppliers in line and supply agreements favorable:
- Locate and exploit alternative sources of supply. This will reduce your dependency on any one supplier, and mitigate against the likelihood of a single source becoming a significant portion of your unit cost.
- If only one or two suppliers exist, reduce their bargaining leverage over you by actively seeking or promoting the emergence of substitute suppliers (e.g., plastic containers instead of glass).
- Demonstrate that you are capable of integrating backward (by making some of your supplies yourself). Thus you have the potential of becoming a competitor to your supplier instead of simply a customer. In addition, your experience with self-manufacture gives you precise information about your suppliers’ manufacturing and raw materials costs: hence you will be an informed bargainer at contract time.
- Whenever possible, exclude from your product’s design any critical component not available from multiple sources.
- Select suppliers that are small relative to you. Your purchases will be an important part of their revenues, making you very important to them; but they will lack the capacity to lean on you.
SUPPLIERS AS PARTNERS
The cooperative model of supplier relationships-often labelled a Japanese invention but common in Western Europe, too-assumes that you principally are interested in stability of supplies, consistency of quality, and maintaining a long-term but flexible relationship. This may require trading off absolutely low input costs when it gives you a competitive advantage in design, delivery, or features, or even if it is done to enable your supplier to survive and prosper. It recognizes, for instance, that your inventory decisions and delivery terms become part of the supplier’s cost structure and affect the relationship itself in the long run. Managing suppliers as partners is a negotiating rather than a bargaining arrangement.
Advocates of cooperative relationships with suppliers emphasize practices that are rather different from the adversarial ones. While the price/quantity mix is important, it takes a back seat to policies that encourage a mutually beneficial relationship:
- Consider longer-term contracts with suppliers rather than episodic discrete purchases. This has the advantage for both parties of building some certainty into the future of the supply relationship. In many instances, sup pliers may be willing to enter into exclusive longer-term contracts, which has the added advantage of denying their supply to your competitors.
Contracts need not build out strategic flexibility as some would complain: a well-prepared longer-term contract requires thinking through the contingencies and “what-ifs” that the future may bring (such as demand changes, product line extensions, service, and customization requirements of customers), and working out a mutual understanding of what both expect of one another in such eventualities.
This will have implications for how you specify inventory and delivery terms, supply specifications, even the number, mix, and location 93 of Since this is what strategic thinking is about, why not extend that intellectual habit to supplier management?
- Invite your supplier to join you in “getting close to your customers.” You are downstream, after all, from the supplier, and hence you are closer to the end user. Your customer intelligence can be useful to the supplier in helping him serve your needs (and ultimately the customer’s) more effectively.
Additionally, a demonstrated strong supplier relationship itself can be a competitive advantage. For example, I know a large printing concern that specializes in consumer product packaging, both paper and plastic. When working with their customers (all large food, beverage, and tobacco companies), the firm takes care to involve their suppliers of paper, plastic, ink, and film color separations to produce the industry’s best quality to customer specifications.
- Share your supplier’s risk. This is the “upstream” version of servicing and customizing for your customer’s needs. For example, work closely with your suppliers to promote the introduction of quality improvements or manufacturing practices that may lower his (and your) costs. Sometimes this may even include investing in the supplying firm to assist in the acquisition of new technology or capacity expansion.
This works in reverse, too: aluminum companies actively helped can manufacturers acquire the process equipment that accelerated the shift from three-piece steel cans to two-piece extruded aluminum containers. Many companies have undertaken joint ventures with their suppliers in research and development or to penetrate new markets.
MANAGING YOUR SUPPLIERS
What can we learn from the two models that can help you manage supplier relationships? It’s unlikely that your situation exactly fits either model: if you are purchasing strictly commodity-like supplies and serving extraordinarily price-sensitive customers, your relationship may look very much like the classic adversarial bargaining situation. If, on the other hand, you face changing customer expectations, evolving technologies, or have a need for balancing stability with flexibility at the supply end, you may draw on elements of both models or begin to look very much like the cooperative model. In any case, managers and planners should consider some of the following practices in order to help avoid pitfalls like the ones in our opening examples:
- Develop a supplier intelligence capability. Firms have become quite sophisticated in customer and market more recently, analysis of competitors and competitive dynamics has come into vogue, Supplier analysis by comparison is in its infancy. Basic information about a supplying industry would certainly include: The number, mix, and availability of alternative sources of supply or the possibility of locating suppliers of acceptable substitutes.
The amount that your purchases contribute as a percentage of the supplier’s revenues. This is a proxy measure of how important you are to the supplier. The supplier’s interest in and capability of integrating forward into your industry, becoming your competitor.
The terms and conditions of suppliers’ arrangements with your competitors.
Other components of supplier intelligence suggest the kind of attention sophisticated firms give market and competitor analysis and would include:
What is the supplier’s strategy? For example, if the supplier desires high growth or increased share while you are in a mature industry, you’ll be less attractive to the supplier than a growing competitor unless you can demonstrate some unique potential that exploits the supplier’s strategic capabilities.
What is the supplier’s cost and manufacturing structure? Is the supplier equipped to customize, to meet your needs in terms of cost, delivery, etc.? The information is essential if one is an adversarial bargainer, but may also reveal potential competitive advantages.
Can the supplier give you a technical or design advantage? For example, are there ideas in the supplier’s research pipeline that you could translate into a market opportunity as a new product or as an improvement on a current product?
What is the supplier’s financial capacity? Is the supplier able to help you buffer your working capital and inventory requirements; or are there opportunities to solidify and stabilize your supplier relationship by offering such help to the supplier?
- Link your supply strategy to your overall strategy. In one of our opening examples, the American car maker’s practice of rewarding its vender on price/volume considerations clearly was at odds with its intentions to boost product quality. Coordinating purchasing with your strategy is no different from linking other functional areas (sales, finance, etc.) with strategy, and bears similar pitfalls. Purchasing is a function, and in large complex organizations, purchasing agents may have particular parochial views or beliefs. And because purchasing is principally a staff function, purchasing managers (like human resource managers) frequently are excluded from strategy making and line of business decisions. And as we have seen, the reward system often motivates purchasing managers to treat vendors as adversaries, rather than managing them as partners.
- Similarly, consider your supply strategy when other strategic decisions are made. For example, a decision to advance your process technology may have important implications for your supply relationship, such as changing delivery or packaging specifications, product form, inventory quantities and timing, or financial needs.
- Finally, think about your suppliers as a resource with the potential to help you develop or sustain a competitive advantage:
By improving your cost position if your strategy is to be an industry price leader.
By helping with features or design if product attributes are important to you.
By managing inventory and delivery arrangements if service and availability are part of your strategic thrust.
The price/quantity mix is the classic economic treatment of the supplier/buyer relationship, the basis of all the “tools of the trade.” But minding p’s and q’s is only part of thinking strategically about managing your suppliers.