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Supply Chain Partnerships Or Supply Chain Management?

Mon, 06/30/2008 - 7:00am
Michael Collins, MPC Management

You see articles in trade journals such as “Supply Chain Superstars” which admonish the virtues of managing your supply chain. The virtues vary from squeezing every last dollar of cost from suppliers to more moderate claims such as “Harnessing Supply Chains To Cut System Wide Costs And Bolster Revenue Growth.”

It is the latest and greatest fad in manufacturing. But is participating in a supply chain a good idea for small manufacturers?

Well, the answer is it depends on the policies of the customer at the top of the chain and your size and sophistication as a supplier.

At the top of the chain the giant companies have everything to gain in Supply Chain Management. Right below them the mid-size companies are generally well prepared to gain revenues by being chosen to play in the game, even though controlling and reducing costs is a big problem.

Let me begin with a definition. Supply Chains as defined by the large manufacturers includes all functions -- from raw materials purchase to the final sales -- including the logistics and warehouse functions.

At IBM for example, “the supply chain group oversees almost $40 billion of annual spending. The group activities include everything from raw materials procurement to manufacturing, logistics, customer support, order entry and collections for IBM’s operations worldwide. That’s 19,000 people, 33,000 suppliers and 2.2 billion pounds of product shipments per year in North America alone.”

For IBM, who is at the top of the supply chain, it seems that they have everything to gain and little to lose by managing their supply chain.

On the other hand the American auto companies tend to take a transactional or adversarial approach to their suppliers, while the Japanese auto companies approach the supplier relationships more as a partnership.

Perhaps John Connor at Delphi in Troy, Michigan, best sums up supply chain management in the auto industry. “I hear grousing by suppliers at automotive conferences that they are getting pinched. But, it’s Delphi’s philosophy that it doesn’t do any good to complain. Suppliers either have to resign themselves to the fact that customers will always squeeze suppliers on price or they can be more proactive and be ahead of the market by coming out with the right product that companies will want to buy.” This “my way or the highway” attitude hasn’t served Delphi very well because they had to file for bankruptcy.

In fact, there is a relentless drive for lower costs and the big manufacturers will get cost reduction even if they have to source products from China or move their production plants anywhere in the world. This is the environment in which U.S. supplier companies must compete.

So which is it? Contractual cost reduction where the customer takes all of the savings or supplier partnerships where they share the savings?

From the supplier’s point of view what are the pros and cons of being in a supply chain?

1. Opportunities for long term contracts

The carrot for many small suppliers is to get a long-term contract that guarantees volume. This is a good thing for many suppliers and allows them to schedule their production. However, many of these 2-3 year contracts come with contractual guarantees to give the customer specific percentages of cost reduction every year. The only way the supplier can make a decent margin is to find some internal way to reduce their costs on a continuous basis.

2. Approach to supply chain integration

The next question is how willing is the customer to work with the supplier to improve supply chain processes, and will they be agreeable to equitable sharing of benefits and burdens. If the customer will share burdens and benefits it is a partnership. But, if all they want is cost reduction it is a one-sided adversarial relationship.

3. Type of Communication

A question seldom investigated by small and midsize manufacturers (SMMs) is what’s the cost of the required communications? The paperwork and communication data is a big deal because large customers are bureaucratic and demand enormous documentation.

The cost to sell and support these type customers requires sizable indirect investments in staff and systems, and the supplier company must absorb the costs.

The smaller manufacturing companies need to develop better cost accounting, production control, and quality systems to even have a chance to get this kind of work.

4. Recognition of supplier quality certification

Most large customer OEMs require specific quality certifications such as ISO 9000 to even qualify as a bidder. The problem is that small suppliers might invest a lot of time and money to get the special quality certifications and then are locked out of future bids or dropped as a supplier.

5. Can the supplier make a profit?

A key question of any supply chain relationship is can the customer be served profitably? As customers continue to drive lower and lower prices down through the supply chain, many suppliers simply can’t compete or survive on slim margins. The second problem is that these large customers create many hidden service costs in addition to low prices and margins.

6. Does the customer care?

Another Key question is whether the customer really cares whether the supplier can stay in business. If the customer doesn’t care about supporting a strong supplier base and only cares about cost reduction, it is a one-sided relationship that is usually not good for suppliers.

7. Customer Selection

SMMs should turn away customers that treat them as adversaries or do not want to work with them as a partner. This means look before you leap. The supplier manufacturer should ask a lot of questions before getting into a relationship that could drive them into bankruptcy. But many SMMs are hurting for business and jump at the chance to get a volume contract.

 In the rush (no it’s really a stampede) to get lower costs and source from anywhere in the world, the large OEMs could inadvertently be throwing the “baby out with the bathwater”. They may be creating problems for themselves in the future by not maintaining a strong supplier base in the U.S.

There are many problems in getting parts manufactured in Asia and back to American plants because of delays, missed ship dates, quality issues, legal problems, etc. If a container of camshafts arrives in a U.S. port with the journals out of tolerance, there is little the customer can do if they use a just-in-time manufacturing process.

Many of the large OEMs who control supply chains are beginning to realize that keeping and supporting a strong American supply chain may be good insurance. And, that giving all of the work to foreign suppliers is putting all of their eggs in one basket.

Robert Lane, Chairman and CEO of Deere and Co. Moline IL, in a speech at the Kellogg School of Management at Northwestern University, Evanston IL, said “just like any customer, we had traditionally expected more or at least the same, for less. In most companies -- ours included -- relationships with suppliers have often been adversarial. But we discovered that didn’t work for either party. We are moving away from the ‘us vs. them’ supplier relationships. Instead, we are teaming up with our suppliers and linking them into our supply chain.”

What we really need is supply chain partnerships not supply chain management.

To really achieve the efficiencies and effectiveness that everyone wants in supply chains will require cooperation between suppliers and customers. Not just cost reduction in a one-sided adversarial relationship. Cooperation that is creative and collectively works continuously at trying to find the best methods to bring products to consumers. This kind of cooperation -- based on American ingenuity -- can only happen if all the parties in the supply chain can realize economic gain.

If we are to prevent American Manufacturing from declining below the critical mass that is needed to keep our economy competitive in the global struggle, we need to change the relationships between suppliers and customers and spend more time on finding ways to work together. If we are going to continue to lead the world with innovative products there must be an incentive for the supplier to do the extraordinary work to make this happen.

I believe that the auto industry has proved that the adversarial relationship is not going to work. We need to maintain a strong supplier base in the United States simply to insure America’s capacity to produce in the future. We need to hang together in the supply chain or we will all hang separately.

Michael P. Collins is president of MPC Management, a manufacturing consulting company, and the author of the book, “Saving American Manufacturing.”

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