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Price Vs. Cost: OEM And Supplier Knowledge-Sharing

Tue, 06/03/2014 - 10:25am
Joe Woods, Fluid Power Segment Manager, Trelleborg Sealing Solutions

We have all been on the receiving end of a sales pitch that put emphasis on the concept of “value” to us, the customer. In fact, all but the absolute lowest priced supplier needs to use value as part of their approach. Although we know that value is important, few can succinctly define it and fewer still can quantify it. As a result, this unique model demonstrates an innovative approach that can deliver value to contribute to the success of any organization through a more disciplined approach to defining and determining business value so that business executives can make intelligent business decisions.

Original equipment manufacturers (OEMs) as well as systems integrators and all entities involved in the supply chain down to the end user need forward-thinking suppliers to reach their goals. The “Trelleborg Solution” looks at people, processes and products for a total value assessment to achieve productivity increases, cost reductions, quality improvements and new innovations — all in a quicker response time. This translates to tangible business benefits.

Joe Woods, Fluid Power Segment Manager, Trelleborg Sealing SolutionsPrice vs. Cost

One of the key decisions a business accelerator model can affect when making a major investment for a manufacturer is in choosing between up-front price versus long-term cost from a supplier. Cost-conscious manufacturers tend to focus heavily on the lowest possible up-front purchase price without significant concern for long-term value. Unfortunately, this traditional business model neglects to consider benefits like increasing productivity, better efficiency in their manufacturing processes, reducing overall number of SKUs, reducing number of vendors, increasing throughput via lean manufacturing and technical reliability.

Take the example of a mid-market OEM exploring the idea of converting its mechanical system to a hydraulic control system to keep up with industry competition. If a supplier begins discussing the technical features of its upgraded system, the OEM might be intrigued, but will ultimately balk at the cost of the hydraulic control system, which for the purposes of our example, is generally two-to-four times greater than the mechanical system. However, if the supplier can explain the value-added benefits, the OEM will realize by using the new hydraulic system over the mechanical one — benefits such as improving throughput and machine reliability, reducing the number of extraneous components, and opening the door to new customer markets — validates the rationale in selecting a total value of ownership (TVO) strategy over the lowest price.

Choosing to purchase the lowest-priced material in the short term may mean you are underestimating the long-term costs associated. There are related costs that may not be reflected with managing more SKUs and inventory of parts. For instance, this is apparent when having to use multiple vendors and manage the logistics and supply of many part variations. The model we have described allows for the use of multiple variations, but with just one product and one SKU, which streamlines engineering and manufacturing processes. Several analysts contend that the bulk of the total cost of ownership of most capital equipment purchases increase substantially if selected solely for price versus looking at the long term impact of increased costs arising from having selected a supplier’s material based on the lowest price. 

What was determined after several studies from ARC Advisory Group was that nine times out of ten, the better choice for an OEM is to evaluate the longer term value. It comes in many different forms — from better service life, which means less down time, less maintenance costs, and better reputation with end users — especially when evaluating this decision’s impact throughout the entire supply chain. 

The Framework for Rethinking Profitability

The business accelerator model supports all of the constituents involved from the choice of materials to the design process to manufacturing. Purchasing and supply management that have traditionally focused on price are starting to take heed of a bigger value proposition and a more overall holistic view of their materials purchasing and supplier selection criteria. The model we are depicting fills the gap that traditional suppliers have yet to offer — rethinking profitability and how to achieve it. It has been developed to bring an over-arching deeper understanding of the value a supplier can bring to impact the entire supply chain, and has proved to have “revenue-enhancing” effects on its customers’ business.

The approach captures total cost considerations as well as performance advantages gained by the manufacturer in being able to create further value for its customers and receive additional revenues that otherwise could not be realized. Going further beyond the first apparent approach in being price conscious, the model embraces a manufacturer’s need to reduce the overall business costs and bring finished products to market. It was developed from the concept of the value of a true partnership, which touches on the total value of ownership (TVO) theoretically and ends in a conceptual framework to benefit OEMs.

This framework has manifested itself in several positive ways such as direct manufacturer support, eliminating the need for a middleman. Both the value of the supplier and manufacturer relationship is a critical component. It even extends beyond that because it factors in the condition of the facilities in terms of whether state-of-the-art equipment and test facilities are available to produce the materials required in the design. In fact, product design decisions are integral to the end result’s ultimate success or failure. This is becoming all the more relevant given the increased emphasis for manufacturers on value-based market offerings, both from the supplier and the customer point of view.

OEM and Supplier Information Sharing

The concept of value of an offering is often perceived as being almost equivalent in importance to the value of a relationship. According to the ARC Advisory Group, a relationship has value for the business executive, because firstly, exchanges between the supplier and manufacturer become predictable and reassuring since both supplier and manufacturer have learned how they each organize their business operations and secondly, the interactions and knowledge sharing exchanged often lead to an adaptation in the relationship resulting in new product or service solutions. This is why the model is interwoven at the base level design of its materials for an OEM, machine builder or device maker’s benefit. It ensures a successful result that was fundamentally designed from its core.

Sharing knowledge makes for more efficient supply chains (with lower costs and quicker speeds) and more effective organizations (with higher quality outputs and enhanced customer service). ARC Advisory Group studied how knowledge sharing can enhance the performance of partnerships and build stronger supply chains in the global marketplace. They sought to understand not only which companies benefit from cross-border knowledge sharing but also the conditions that lead to knowledge sharing in global supply chains. Many people see knowledge sharing as the result of customer or supplier needs when in fact it is more likely to be influenced by market structures or organizational similarities and dissimilarities between manufacturers and suppliers. 

Creating a collaborative environment can create more agility, adaptability and alignment, which is really only possible when partners promote knowledge flow between the highest areas of impact within the supply chain. In other words, the flow of knowledge is what enables a supply chain to come together in a way that creates a true value chain for all the stakeholders.

Knowledge flow creates value by making the supply chain more transparent and by giving involved parties a 360° view on customer needs and value propositions. Increased demand visibility can provide such benefits as a better understanding of market trends, better product design, planning and development.

Lean Manufacturing to Increase Throughput

All lean improvements ultimately result in increased throughput of goods. The greatest culprit in reducing throughput is waste, which can translate to machine downtime, lost time waiting for materials, out-of-stock supplies, operator errors and poorly-designed processes. 

The model delivers lean improvements that ultimately result in increased throughput for an OEM or component manufacturer. It supports a leaner environment because of its unique design, which decreases the need for product variations in inventory, simplifies logistics (less SKUs to manage) and delivers on quality, flexibility and modularity. The solution provides improvements that have a direct cumulative effect on overall throughput.

Bottom Line Results

Long-term value has little to do with the lowest price, and everything to do with the way the purchase allows the customer to modify business practices and processes for overall efficiency. As previously described, the model has been architected to reduce overall cost to bring finished products to market and reach the objective outcomes:

  • Meet or Exceed Current Seal Performance
  • Incorporate “Base Level” Design
  • Product Coverage for all Application Conditions
  • Reduce Overall Number of SKUs
  • Reduce Number of Vendors
  • Increase Throughput via Lean Manufacturing
  • Supply Chain Advantages and Savings
  • “Shoulder to Shoulder” Design and Testing

A supplier’s track record is earned in part based on additional services and solutions that lower a manufacturer’s costs and deliver bottom-line results. Furthermore, as a supplier, it is important to identify real needs only when they exist and address them with appropriate solutions. This requires a true understanding of customers’ needs. Then, it is critical to identify issues that fall within the realm of the supplier’s competence so that desirable results are achieved. It is also key that suppliers streamline business operations, collaborate with customers to identify areas throughout the organization where they can offer better materials or execute a value-add service that will improve performance and efficiency. Examples of such strategies could be advanced delivery services, inventory management and stocking programs. This allows the customer to focus on their core competency.

Suppliers who go beyond to help their customers succeed will help win new business. Ultimately, solutions and services should help customers improve their product development cycle and reduce their cost to design, develop and deliver, while bringing greater value to the end product, attracting prospects and increasing the sales of the component manufacturer. For example, helping customers with a product standardization program, which is one of the model’s aims, can help customers become more flexible and responsive to their market dynamics and improving their manufacturing efficiency. These efforts will reduce their costs, while helping to expand their customer base and ultimately position the component manufacturer as a leader in their market.

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