As business firms evolve from start-up enterprises to established companies, the relationships they develop, particularly with their suppliers, become more and more important.
For a company with products that are growing in popularity and demand, having a reliable supply of needed raw and packaging materials is a no-brainer. Sudden demand swings can make it difficult for vendors to deliver against finite capacities and organizational capabilities. Likewise, lower-than-expected purchases may compromise the business viability of vendors and altogether negatively affect costs as well as supply. In both scenarios a supply management strategy and process needs to be defined and put in place.
Supply management is the process that involves the activities surrounding the flow of goods and services from suppliers to manufacturers or customers. This includes sourcing and selecting suppliers, negotiating and contracting, and assuring supply. An effective supply management process enables the manufacturer to focus on business building activities such as product development or market expansion. On the other hand, a constrained supply management process redirects the energy of the firm to fixing supply issues which hampers its ability to generate sales revenues.
Supply management is not a new concept, but it is completely different from the traditional way companies deal with suppliers. Discussed below are some of the key differences.
High Degree of Cooperation. Instead of the usual adversarial relationship and price-haggling, both supplier and manufacturer explore ideas on eliminating non-value-adding expenses to reduce total product cost. The supplier's employees visit their manufacturing customer's facilities to see how their materials are used and thereby suggest savings opportunities. In one export firm, for instance, a paint supplier suggested that the exporter return the five-gallon pails the paint is delivered in. The supplier could clean and reuse the containers, which would reduce packaging costs.
Single or Few Suppliers. The traditional way of getting a lower price is to invite many suppliers and award the contract to the one who bids the lowest quote. Such an exercise entails an enormous workload, as the manufacturer has to deal with numerous vendors. This practice also does not provide for a cooperative environment between vendor and customer. Manufacturers would have more success in bringing down costs if they can focus their cost reduction efforts with fewer suppliers.
Long-Term Agreements. A supplier would unlikely invest time and resources with a manufacturer who awards the business on a short-term basis and who frequently changes suppliers. In most cases, suppliers are more than willing to invest in additional capacity and new technology if supply agreements last for years rather than months.
Extensive Information Exchange. Information exchange should not be limited to purchased orders and delivery dates. Plant production schedules, new technologies, material usages, inventory information, and even new product development initiatives should be shared between the customer and its few suppliers.
This enables the manufacturer to benefit from new processes and technologies the key supplier may offer. The supplier, meanwhile, benefits from the visibility of the manufacturer's production schedules and the exclusive participation in new product initiatives, as the information provides concrete bases for capacity and resource planning.
We've seen in recent current events how supply management can turn a business around either positively or negatively. Apple recently held top-level meetings with its manufacturing contractor, Foxconn, to align strategies not only regarding future product initiatives but also to ensure both firms comply with US labor standards. Apple obviously considers Foxconn a critical partner in manufacturing the best-selling iPhone and iPad to the extent that both firms have been developing a stronger relationship that works toward similar goals and strategies, beyond just simply discussing production quantities at least cost.
Boeing, for its part, developed partnerships with key parts suppliers to ensure delivery reliability at optimal cost. The aerospace firm learned the hard way during development of the 787 Dreamliner that relationships with suppliers aren't just about meeting deadlines.
Boeing improved communication ties with vendors to establish realistic schedules and contingencies against disruptions. The company also holds awarding ceremonies annually for best-performing suppliers in what has become a visible symbol of Boeing's focus on supply management.
Supply management is an opportunity area for start-up enterprises and established organizations to further grow their businesses. It involves setting up an environment of mutual trust and the decisive commitment to partner with key suppliers for the long term.
Jovy Jader is a consultant and regional speaker on supply chain management. He has directed and implemented supply chain management projects both local and international, which have resulted in company-wide improvements in inventory, total cost, response time, quality, and on-time delivery. Mr. Jader was formerly with Procter & Gamble Philippines and Coopers & Lybrand/PricewaterhouseCoopers. For questions or comments, e-mail email@example.com.
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