In my last post, 9 Ways to Fight a Supplier Price Increase, I listed approaches to handling a supplier price increase. These involved pushing back.  These days, commodity prices may be at the heart of increases. They can be volatile and unpredictable and offer little room for black and white approaches. Besides using hedging, a technique that only someone who really knows what they’re doing should attempt, other ways to tackle increases can be considered. Sometimes it takes a collaborative effort between customer and supplier to figure out how to avoid the price increase and even to reduce the price by reducing underlying costs. It isn’t done by threatening or bludgeoning the supplier into submission.  Here are 5 approaches for a buyer who is faced with a price increase. Not all are appropriate to every situation, but can be considered, depending upon the circumstances.

• Use competition. This is useful only under some circumstances. If you’ve got a supplier with a highly value-added product or service or one who is sole source, this may not be feasible. If the product or service falls more into the leverage category (rather than strategic or bottleneck), you may be able to hold a sourcing event using software or else use an alternative source whom you’ve wanted to try. Competition can be a useful tool if used cautiously and wisely with suppliers who provide products and services that are more readily available in the marketplace.
• Alternative materials/services. Perhaps the supplier can use a different, less costly material to make the product. Or for a service supplier, a less costly service will meet your requirements than the current one that you are buying. Being creative about alternatives may save you money.
• Value analysis/value engineering. Have you and the supplier done a value analysis of the product? If not, the supplier in particular, may be able to come up with creative ways to make the product more cheaply and potentially improve it at the same time. This can result in mutual benefit to both customer and supplier. Many suppliers, who know their product better than their customers do, are willing and even eager to do a value analysis but are rarely asked.
• Longer-term agreement/contract.  Some suppliers are willing to give their customers a better price in return for a longer-term contract. Extending the contract period can give a supplier the predictability and stability to offer a product or service at a more favorable price.
• Packaging and transportation. Can anything be done to reduce the amount of packaging or make it less costly? Can transportation costs be reduced? Are customers paying inbound transportation markups?  For example, many suppliers make a profit on outbound transportation to the customer by not passing along their savings to their customers.

In Part 2, we’ll look at 5 additional ways to handle supplier prices increases.

Sherry R. Gordon

Back in the day when I was running New England Suppliers Institute, a regional non-profit industry organization that worked to improve performance by improving the customer supplier relationship via lean enterprise, supplier development, education, and networking, one of our board members was the procurement manager at a semiconductor equipment manufacturer. He used to give an excellent and very popular presentation about how companies both large and small could fight a supplier price increase. This talk was very popular and its principles still hold true today:

1. View a price increase notification as a proposal that is still open to discussion. It’s not a done deal until it’s accepted.

2. Question the price increase.

3. Don’t accept a price increase verbally.

4. Never accept a form letter or a “dear customer” letter.

5. Request a written, detailed explanation from the supplier about why they are asking for the price increase. This should be a written explanation that is:

–specific to the product that your company buys

–includes all data relevant to the price increase

–and, is signed by the supplier’s senior management

6. Do your own homework. Don’t rely solely on what the supplier tells you. Become an expert in the categories you buy.

7. Be imaginative and creative (more about ways to do that in a future post).

8. For commodities that significantly impact product cost, involve other functions that can help you prepare for a negotiation. For example, can engineering find a substitute product?

9. Negotiate, negotiate, negotiate.

I couldn’t resist making a few comments about the new show on NBC, “Outsourced” which aired last week. For those of you who haven’t heard of it or seen it, the show is about a call center in the U.S. being outsourced to India. If you think about it, do you know of any Americans who are neutral about jobs being outsourced? Do you know of anyone who is not emotional about the subject?  Outsourcing of American jobs is a sore point. And many of us have had first-hand experience calling customer service and realizing that the rep at the other end was on the other side of the globe. The thought enrages many people, who have been known to get so angry about an outsourced call center that someone wrote an article, “I made an Indian girl cry, and you can do it too.” It provides instructions on how to be so rude to call center employees that they quit. The idea is that if enough of them quit, the jobs will come back to the U.S.

So when I saw that there’s an actual show on NBC about an outsourced call center, I wondered whether it will be a hit or cause anger, outrage, and be quickly canceled.  (The show’s staying power remains to be seen).  The premise is that a manager comes back from management training to find his office empty and workers gone. He is told that the call center had been outsourced to India and that if he wants to keep his own job, he’ll have to move to India to train the new call center manager over there. If outsourcing had a bad name to most Americans before, this show won’t help its image, even with its many funny moments and disturbingly realistic details which are more “funny peculiar” than “funny ha-ha”.

While I was driving I heard the NPR show “Here and Now” where journalist Emily Yellin, author of the book, “Your Call Is (Not That) Important to Us: Customer Service and What It Reveals About Our World and Our Lives” was being interviewed.

According to Yellin, we make 43 billion customer service calls a year. Despite outsourcing and a prolonged a lapse where we seem to have been from taken from “the customer is always right” mantra back to the era of Lily Tomlin as belligerent customer service rep, customer service is a growing industry in the U.S. Businesses are realizing again, that companies need to get customer service right. In addition to rising labor costs in India and other low-cost countries which have made them less advantageous financially, companies are finding that good customer service is a competitive weapon. Poorly considered and poorly done outsourcing to save on labor costs in the end may not save, besides enraging and alienating customers. Apparently some customers have been angry enough to produce videos against the offending company, like the 5 Stages of Comcast , a public relations nightmare. And there are websites for many major companies that have the company’s name followed by “sucks”, which provide outlets for angry customers.

So while outsourcing is done to save labor costs – and not just in the area of call centers – it needs be carefully considered and well-executed. Or it will produce short-term cost savings and longer term loss of business through the exodus of valuable customers.

-Sherry R. Gordon

Supply chain failures seem inevitable these days, but are especially disconcerting when they indicate a larger systemic problem in critical equipment that is supposed to save lives. The U.S. Army just announced a recall of 44,000 Advanced Combat Helmets (ACH) manufactured by ArmourSource LLC (formerly Rabintex) due to concerns that they provide substandard ballistic protection. Another similar recall of 34,218 ACHs manufactured by Gentex Corp. occurred in May 2009. The Army did not reveal exactly how they discovered these defective helmets and what led them to quarantine some of the inventory. This recall affects about 4 percent of the one million ACHs in inventory. The helmets do not meet Army specifications. According to an announcement by the Army, “There is evidence that ArmorSource and Rabintex ACHs were produced using unauthorized manufacturing practices, defective materials and improper quality procedures which could potentially reduce ballistic and fragmentation protection.” The Army is not sure about either the exact risk to soldiers wearing the recalled helmets or whether any are being worn in a war zone. In the Gentex recall, the company alleged that a subcontractor had falsified certificates of compliance for the steel screws that it supplied. The exact nature of the ArmourSource recall has not been reported yet.

This situation highlights supplier management and supplier performance issues that the Army needs to address and raises more questions than answers. Some of these questions are:

• How does the U.S. Army in particular and the U.S. military in general determine whether suppliers are meeting its specifications and meeting its quality standards on an ongoing basis?
• How will the Army determine that the defective helmet problem is not more widespread than reported, particularly if so many aspects of ArmourSource’s manufacturing practices and process seem to be out of control?
• What is the Army doing about sub-tier supplier risk? What processes and practices are companies such as Gentex using to manage their suppliers and ensure that these suppliers are complying with their standards and government standards? How are these standards communicated to suppliers?
• How does defective sub-tier supplier material get into the product in the first place? And how do these quality escapes to the end customer, our troops, occur?
• How does the military track and trace products in the field? In the case of products critical to the lives and safety of U.S. troops, why is there no traceability? Soldiers have been give instructions about how to determine whether they are using a defective helmet so that they can exchange their helmets, but there seems to be no tracking system in place to know immediately where defective product has been deployed.

While the suppliers in question are saying that the defects affect a very small percentage of the helmets, why did it take the customer, the Army, not these prime contractors, to discover the defects and in this case, long after the fact? And how did these suppliers allow the defective product to escape to the customer? The supplier management and supplier quality systems do not appear to be in control, and the chances of more widespread problems are very high. The Army needs to do a thorough investigation of its procurement, supply management, and quality processes and practices and uncover how such situations can occur and potentially overhaul its approach to supply management and quality management. Then, it needs to take the necessary preventive measures to avoid these risks in the first place. Quality should not be left to the end user, our troops, to uncover defects in the equipment that their lives depend on. The recalls and finding solutions to these problems are costly to all. But no one should have to pay with their lives.

For more information on sub-tier management, here are a few of my previous posts:

Supply risk: the sub-tier or multitier challenge

Sub-tier supplier challenges loom even for the savvy

Sub-tier risk factors: trying to control the uncontrollable 

-Sherry R. Gordon

If you didn’t think space exploration was dangerous enough, here’s something else to worry about. NASA has been looking into outsourcing parts of the space exploration program to outside suppliers, reasoning that this is the best way to speed up rocket development and to save money. They reasoned that private contractors would be able to provide the rockets that would carry astronauts into space much more efficiently and cost-effectively. A recent Wall Street Journal article reports that the Aerospace Safety Advisory Panel, an outside safety watchdog for NASA, has cautioned against this approach. They questioned the safety of this approach, especially the technical challenges that private firms would have to overcome. Many of the potential suppliers have rockets that are unproven and still on the drawing boards. So the advisory panel has recommended that  NASA stick with government-run rather than privately operated manned ventures.

Space contractors Boeing and Lockheed Martin are lobbying NASA not to outsource more of the space program. Interesting that Boeing in particular, which has a huge self-interest in keeping its share of space contracts, is playing the “don’t outsource” card. Boeing’s own outsourcing missteps with the Dreamliner are testimony to the issues inherent in outsourcing a complex system, although I’m sure that Boeing is not  going to emphasize their own supplier management challenges in relation to the the NASA outsourcing issue.

What are some of the important factors in making a decision such as this one?

• Outsourcing does not reduce the responsibility for managing the process or the outcomes. There is still a mangement and coordination function that would need to be performed. NASA would need to make certain that its subcontractors’ product development and other key business processes are robust and can produce the required outcomes.  NASA would need to be able to orchestrate supplier schedules and input so that the project comes together as planned. According to the WSJ, the advisory panel members have expressed concern about NASA’s “hand-off approach” in allowing development of private cargo spaceships. Outsourcing does not mean hands off. Successful outsourcing, especially in real mission-critical products, must be decidedly hands on.
• Contracting in this environment would be extremely complex. Liabilities seem problemmatic. Who is responsible if a rocket blows up and kills people? But on the other hand, if the private contractor is not liable, can NASA take on the liabilities for unproven technologies and unknown supplier performance to contract?
• Sole source issues. What are the incentives to a private firm to invest in technologies so specific to NASA that they might be totally captive to it and might be driven out of business by changing political winds (if the program is reduced or disbanded) or by having no other customers of its products. Or, if NASA finds a subcontractor incompetent or not meeting expectations, how can they fire them? What would be the alternatives?
• Protection of intellectual property. How can NASA be certain of not losing any of the intellectual property and technological capabilities to entities outside the U.S.?

Whether or not NASA outsources, the buck still stops with them. They still need the skills to manage the development of complex technologies, either internally or externally. It just seems that the risks are higher if these activities are external. The public sector has always held the private sector as the role model to be emulated when running a business. Recent events in the financial sector have again proven that idea a myth. Boeing’s challenges in managing its suppliers in a technologically complex product design, development and manufacturing scenario should provide a cautionary tale to NASA and the government about taking on such technologically challenging and complex outsourcing.

-Sherry R. Gordon

I am in Covington, Kentucky attending the AME International Lean Conference, Journey to Greatness. Attendance is excellent despite the economy and its adverse impact on other conferences this year.  This may be due to various lean journeys presented by practitioners and couldn’t be more relevant in a down economy.  AME (Association for Manufacturing Excellence) puts on a great lean conference, and this one seems to be continuing the trend.

I will be writing about some of the companies whose presentations and stories I’ve had a chance to hear. For example, today I attended session in which a huge retailer and a manufacturer recounted a story of their unparalleled collaboration together.

On Friday, October 23, I’ll be presenting a workshop, “Managing and Improving Supplier Performance in a Lean Environment”. AME allows people to go to the pre and post-conference workshops without signing up for the conference. The learning objectives for this interactive workshop include:

• Align supplier performance expectations and criteria with the needs of your business
• Develop a supplier evaluation process that fits your company
• Create an understanding of what a lean supplier is in your company’s environment
• Develop strategies for developing lean suppliers
• Manage critical suppleir relationships to maximize value to your company
• Get from strategy to evaluation to action to lean supplier development and performance improvement

This workshop can be delivered on-site, too.

If you are attending the conference, drop me a note at sgordon at valuechaingroup dot com.

-Sherry Gordon

The Purchasing Management Association of Canada (PMAC) is offering a monthly webinar series on various topics of interest. As the second in the series, I am giving a webinar entitled: Evaluating Your Suppliers: Practical Approaches to Getting Results. It runs from 12:00 pm until 1:30 pm ET on Thursday, October 15th. This is a practical overview of the whys, whats, and hows of evaluating supplier performance. Attendees will have the ability to submit questions before, during and after the webinar.  I’ll be covering the following: 

• Why you should measure supplier performance
• What should you measure and how to figure that out
• Examples of commonly measured areas
• Why you need to use leading indicators, not just lagging indicators
• Why supplier risk has become so critical and ways address it
• How to segment your supply base in order to decide which suppliers to measure
• Common sources and types of supplier information and evaluation approaches
• Supplier evaluation implementation examples and success factors

I hope you’ll join me and PMAC. I’m told that signup has been excellent, but that all the attending companies, not surprisingly, are Canadian so far. It is open to all.  So I thought I’d mention it here for those outside of Canada who don’t get PMAC notices. Hope you can join me.

To sign up and to learn about other upcoming PMAC webinars, visit this link.

One of the greatest challenges in selecting the right suppliers for your company is know what you’re looking for. In order to know what you’re looking for, you need to have a supplier selection strategy that is linked to the priorities and strategies of your firm. Then this strategy needs to be translated into specific requirements and criteria for choosing suppliers.

As companies get bogged down in the day-to-day, they will tend use a piecemeal approach for selecting suppliers. For example, if there is a need for a supplier in a particular commodity, they will try to find suppliers in that commodity that meet the immediate needs at the best price and/or best value. The selection criteria may vary depending on the needs of the day or may be ill-defined. Business pressures push us more toward action rather than planning, or toward ”ready-fire-aim”.

Developing common objectives for supplier selection among multiple functions that are impacted by suppliers is challenging. One challenge is other functions’ lack of understanding of the importance of their participation and view supplier selection as soley the domain of purchasing/sourcing people.  Another is a lack of a communicated or formal corporate strategy from which to derive supplier selection and sourcing strategies. Also, the fast pace of business in many companies often relegates this type of planning to the back burner with present issues taking priority.

The risks of poor or unsustainable choices increase without a robust supplier selection system. The work done up front saves a lot of problems and costs later on.

The government has helped bail out Chrysler. The government has not bailed out its suppliers. And now Chrysler is looking to get back in the game on the backs of its suppliers, who, if they are still in business, are not eager become lenders to their customers. Chrysler has received over $10.4B from the government so far. And now it is asking its suppliers to develop and make new parts for Chrysler’s new, smaller cars that it is planning to build under its Fiat management. But there’s a catch. Chrysler is asking suppliers to take much of the risk. Basically, suppliers need to spend their own cash to develop and make the new parts, but in a change of Chrysler’s (and the other big automakers’) policy, the suppliers will not be offered the usual production volume guarantees. Production volume guarantees ensure that the supplier is allowed to get more money for a particular part if the agreed-upon production volume is not reached. This policy helps mitigate the risk for the supplier, particulary important when producing new parts for a customer.

Some people might wonder why Chrysler doesn’t just go out and find other suppliers if current suppliers will not meet these terms. Certainly the worldwide downturn in auto sales has left suppliers hungering for new business. Not so easy.  Automotive suppliers have been financially battered and many have gone out of business during the downturn. Funding a customer’s new models may simply not be financially feasible for most suppliers. So it’s not like there are lots of suppliers waiting in the wings who are able to invest in their now less than financially-stable customers.  

And there’s the issue of switching costs. For many key parts, it’s not that easy to find and qualify a new suppliers. And switching to new suppliers is certainly both costly and in some cases risky.  After all, these days, autos are just the sum of their parts. Automakers don’t make the parts for cars. They just assemble supplier parts to make cars. Supply risk has never been higher for potential quality problems, safety problems and part recalls.

Something is going to have to give. And it’s doubtful that the giving is going to come from Chrysler’s suppliers. The challenges are more than just financing new part production. The breach of trust that has occured in this industry between suppliers and their customers may be the biggest challenge going forward. Even if they are able, will suppliers bet on the same customers who treated them as adversaries in the past and squeezed out cost on their backs, while at the same time, not always reducing the cost structure of their own businesses?

My guess is that Chrysler will have to offer its suppliers some incentives to take the risk of producing new parts. Otherwise, it will find itself unable reinvent itself as a company and its decline will continue.