Value Chain

Companies have typically viewed suppliers as a source of cost that needs to be reduced, as supplier costs directly impact the bottom line. And it’s a given that procurement is always under pressure to fulfill the cost reduction mission. But in the process of viewing suppliers as big dollar signs that need to be squeezed, firms neglect some significant opportunities to derive value from suppliers in addition to reducing costs. Here are 6 ways that suppliers can add value.

• Contribute to product and process innovation. Using suppliers as a source of new technology in areas that complement a customer firm’s own competencies is a way derive value from suppliers. Working jointly with suppliers to develop new technologies expands the capabilities of internal new product development functions. Because IP is at stake, this type of collaboration is based on a good customer-supplier relationship and requires both trust and legal agreements. At Boeing, for example, working with product development suppliers is considered critical to its future.

• Help customer firms enter new markets. Because of their location or type of product or service, suppliers can help provide an entrée to new markets and new customers for a customer firm.

• Provide incremental revenue and profits. Suppliers can help their customers enhance products and product features that will generate additional revenue.

• Help improve end-customer satisfaction. As suppliers’ order-to-delivery velocity increases, their customer will benefit in several ways. Since purchasing lead time depends on supplier cycle time, improved velocity at suppliers provides competitive advantage in a customer firm’s own market responsiveness.

• Free up inventory dollars and improve cash flow. Improving supplier cycle time velocity exposes many other issues such as excess inventory and quality problems. As purchased part lead times and quality problems decrease, the customer firm will need to keep less inventory as safety stock. Cycle time reduction may require supplier development projects with key suppliers. At first the supplier may reap more benefits, but ultimately the customer will benefit from improved supplier performance and faster supplier cycle times and responsiveness.

• Contribute to business process and practice innovations. Jointly solve problems with suppliers and share ideas and best practices. Suppliers may provide solutions to problems that a customer firm has no capability to solve alone. Some customer firms are so entrenched in the mindset of managing suppliers as a one-way flow of information and expertise that they forget that suppliers may have valuable practices or processes worth adopting.

When trying to prove to senior management that supplier relationship management is more than just goodness or the right thing to do, companies should play the value card. The opportunities for making money through additional supplier value can be greater than focusing only on cost reduction. Saving money is essential. But as the saying goes, you can’t save your way to success.