As the complexity of supplier relationships increases, so does risk and reward. Following important and time-tested principles will help ensure your supplier networks work for you. That seems to be what Directworks, a Pennsylvania company that offers sourcing software that’s purpose-built for direct materials sourcing, had in mind with a very thought-provoking article, “Creating Shareholder Value from Supplier Relationships”.
Here is the introduction to that article:
“In any business, the creation of shareholder value is fundamentally driven by profitability and return on capital employed. Greater profitability is a function of revenue growth and cost reduction, while return on capital employed can be maximized by more efficient use of both working and fixed capital. Leading manufacturing companies successfully manage their supplier relationships to optimize these performance drivers and create sustained shareholder value.
Specifically, best-in-class OEM’s are enhancing their supplier relationships to grow revenue through successful new product introductions, reduce costs through total-cost sourcing strategies, and improve capital efficiency through inventory reductions and reduced asset intensity. To accomplish these objectives, manufacturers are investing in a new breed of supply chain professional, and providing them with practices and technologies that enable them to build stronger and more valuable supplier relationships”.
Proficient Sourcing helps buyers find these high value suppliers for custom manufacturing needs through a network of companies with a history of on-time delivery, parts built to spec, and with competitive pricing and professional customer service. Once a relationship is established, we help ensure these needs are met in the future. To that end, we were particularly interested in the 5 best practices Directworks identifies:
1. Increase supplier collaboration—for real. Here we are interested in early supplier involvement in new product initiatives, and allowing the supplier to contribute expertise before final decisions are made.
The wise OEM allows the supplier to offer innovations in the area of their expertise. Making this worthwhile to the supplier can be an important stimulus.
2. Improve your understanding of supplier motivations. This means to ensure you understand the relative importance of your business to the supplier. Is there an equal desire to collaborate by each side? Is the supplier’s cost structure available to you? Is there a mechanism for good two-way feedback? And what flexibility is there for your anticipated adjustments?
3. Require full visibility into total cost. This is an analysis similar to that recommended by the Reshoring Institute for evaluating and comparing the total costs of potential supplier countries [Donna—link to our reshoring articles]. In the initial bidding procedure, look at lead time and minimum order quantity as well as component cost. A second pass might include knowing material costs, freight, packaging and tooling. With all those factors known, the buyer may find the best component price is not the best deal for the buyer after all.
4. Understand each supplier’s impact on working capital costs. Understanding inventory requirements by a supplier might lead to improvements through problem solving discussions with the supplier. Naturally, payment terms can also be an area for optimizing the relationship.
5. Master risk assessment. Needed supplier capacity is one risk area, which suggests providing frequent forecasts to suppliers. If significant growth is a possibility, ask the supplier for plans if your requirements increase by X%. You might also ask the supplier to help with contingency planning for such things as commodity shortages, loss of another key supplier, and even geographic disruptions.
As you can see, a full analysis of the supplier relationship can become quite complex, and Proficient Sourcing stands ready to help. We have obtained permission to offer the complete white paper summarized here, as well as a link to the webinar where this subject was presented. Click here for either or both of these, and go to https://www.directworks.com/Home for more information about Directworks.