I wrote about ideas for avoiding a supplier price increases in last two posts:  9 Ways to Fight a Supplier Price Increase and Supplier price increases — get creative. Avoiding price increases isn’t purely a matter of “just say no”, which doesn’t usually work unless you’re a big gorilla customer with a lot of market clout or are only game in town, so to speak. The rest of us will need to put aside the baseball bat and try other approaches. Realizing that not all suggested approaches are available to every organization or are applicable to every supplier, I’ll suggest a few more approaches that could be effective in staving off a price increase.

Not sure if acronym WIIFM (What’s in it for me)  is used much any more, but it’s a powerful way of thinking about your suppliers by putting yourself in your supplier’s shoes. It can give you a better shot at working out a compromise. One WIIFM approach is to see if increasing the quantity you procure from a supplier would allow them to avoid increasing their price to you. If the supplier gets more of your business, then they may be more amenable to holding the line on pricing.

Another WIIFM approach is improving payment terms to the supplier. One of the most coveted customer behaviors is favorable supplier payment terms. It engenders loyalty and solidifies relationships. And, in some cases, improved payment terms will allow the supplier to avoid or delay passing along a price increase.

All the creativity and kumbaya in the world sometimes just won’t cut it. A price increase is sometimes unavoidable due to many circumstances and market conditions. So what else is left to do? You can try to get the supplier to delay the timing of the price increase and extend the life the current pricing. Or, many companies seriously consider and analyze make v.s buy: would it be worth bringing the manufacture of a product or the delivery of a service in-house?  Organizations may consider doing the detailed analysis to decide on the costs and benefits of having their own staff and facilities perform supplier work. Make vs. buy decisions should not be taken lightly. Both strategic and operational variables need to be carefully considered.

The bottom line is that supplier price increases require a considered response. With key, strategic and critical suppliers, it is important to maintain a strong relationship and to work through price increase requests thoughtfully and often creatively.

-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

At the end of the year, and especially at the end of a decade, many top ten lists are popping up. So I’m joining in this list-making with the top ten reasons why firms should implement supplier performance management (SPM).

1. Find out how well suppliers are really performing
2. Improve supplier performance such as quality, responsiveness, customer satisfaction and delivery
3. Reduce the cost and operational impacts of poor supplier performance
4. Derive value from suppliers beyond lower prices, such as collaborative product development and business development opportunities
5. Better understand the supply base and who the most critical and strategic suppliers are
6. Find out current or potentially risky suppliers
7. Uncover and reduce supplier-induced problems (and cost drivers) such as customer complaints, quality problems and warranty returns
8. Gather the information that will help you set criteria for new supplier on-boarding and approved supplier lists
9. Find and disengage with low-performing suppliers
10. Identify specific, value-added supplier performance improvement opportunities

Supplier performance management is more than the quest for the perfect scorecard. It is a business process for measuring, analyzing and monitoring supplier performance and suppliers’ business processes and practices in order to develop productive customer-supplier relationships and to reduce costs, mitigate risk, drive continuous improvement and leverage supplier value. While firms can certainly derive “quick hits” from SPM, it yields the most value and impact when viewed as a premeditated, ongoing business process with multi-function participation and ongoing care, feeding and continuous improvement.

-Sherry R. Gordon

Yesterday Toyota announced that it is recalling 110,000 Tundra trucks built in 2000-2003 due to rust on the frames that is causing the spare tire to break off. Toyota is blaming a supplier, Dana Corporation, manufacturer of the cross member that holds the tire to the bottom of the truck, for the problem, and Dana is cooperating in the investigation.  This comes on the heels of a 3.8 million-car recall of Toyota and Lexus cars due to an alleged floor mat problem that is supposed to be causing unexplained acceleration. Of course, Toyota immediately suspected the floor mat supplier.  The actual cause of unexplained acceleration is still not definitively attributable to the floor mats. By the way, as an owner of one of the cars in question, a Toyota Prius, I find it hard to believe that the floor mats are causing any problems. On my car, there is a huge clearance between the floor mat and the gas pedal. No way could the floor mat be causing a problem on my car. I personally believe that there is some other root cause and hope that Toyota can get to the bottom of this one.  

These are dark days for the exemplar of quality and the acclaimed Toyota Production System. Its image is beginning to rust a bit, just like those cross members. In each case, the company suspected a supplier problem. The supplier is typically the whipping boy in automotive recalls, as big automakers do not actually make most of the parts that go into a car. But suppliers build to customer specification. It is the customer’s responsibility to ensure the accuracy and robustness of its specs and the supplier’s responsibility to build to these specs. If the specs are a problem, a good supplier should alert the customer and the customer should be open to listening to the supplier’s concerns.  All the more reason to revisit and tune up the practices of supplier relationship management, supplier qualification and supplier evaluation, collaborative product design, and quality control processes. In theory, Toyota practically invented the concept of lean suppliers, the lean supply chain and supplier development. In practice, something has been going awry.

To paraphrase the Bible, “Toyota, heal thyself.”  Toyota has the tools and the know-how to improve its quality and avoid such quality and supplier glitches and potentially dangerous product failures. They had better reaffirm their commitment to quality and strengthen their resolve to fix underlying problems or suffer a decline like some of their American automaker brethren.

-Sherry R. Gordon

In the past couple of months I wrote two guest posts on Spend Matters about an independent  cycling trip that I went on in France. In the first post (An Uphill Battle with a Poor Supplier), I described how the tour company rented us supplier-provided bicycles  that were in less than top condition, ill-fitted, missing air pumps and having other mechanical issues. In a follow-up post, I responded to questions from a reader regarding how the tour company should handle the bicycle supplier in this situation and gave my views on ways to handle an offshore supplier.  The cycling tour company had done a terrific job of planning the lodging, the route and other trip details, but had not done so well with a key aspect of a cycling trip — the bicycles.

In this post, I’d like to report the results of our giving the tour company our detailed feedback about the bicycles (as well as about the positive aspects of the trip). Two months after the trip ended, the response regarding the bicycles was: “I will speak with our local contact about this situation.” WILL speak with the contact? It means that the bicycle supplier still does not know that its performance was unacceptable for the past 2 months and other clients on cycling tours still had to use these bikes. Having quickly and neatly dispensed with my feedback, the email then asked us to become their fans on Facebook and to send them any blog entries about our trip. Hmmm. Should I send them my Spend Matters blog posts? I don’t think that those posts are exactly what they have in mind.

I am disappointed and actually surprised that this company, who did such a good job in every aspect of the trip apart from the bikes,  is so tone deaf to customer feedback about a key supplier, who is absolutely critical to their customers’ satisfaction.

-Sherry Gordon

I recently heard a presentation at the AME Lean Conference that was given by representatives from Hershey Foods and K-Mart (part of Sears Holdings) about customer-supplier collaboration. A K-Mart General Manager and a Hershey Foods sales executive discussed how the two companies worked together on special in-store programs that delivered very strong financial results for both companies. Hershey’s developed special programs, packaging and in-store displays especially for K-Mart, no simple matter for a chain with 1368 stores. At Hershey, the program involved category managers, packaging, logistics, and manufacturing to implement. An example of one of these programs was the Heroes at Home Kisses, which raised money for military families. There are multiple challenges to implementing such a program, such as, for example, shipping constraints, inventory, financial issues, display space in stores, and the overall challenge of new product development and sales. Both companies had to put significant resources behind the programs to ensure success. Hershey needed to invest in dedicated resources, advertising support, specific promotions, customer events, sampling. Sears Holdings had to provide resource support, merchandising, television advertising and invest in new product launches and marketing initiatives.

The programs paid off, with sales at Hershey attributable to these programs rising 7% in the first year of the program and continuing to increase yearly thereafter. Hershey Kisses alone increasing by over 48% from one of these programs. Both companies felt that these collaborative programs contributed to strong and sustainable growth.

Implementing such programs has paid off for Hershey Foods and Sears Holdings. But this type of collaboration is the exception rather than the rule. It seems resource-intense and very risky. How do a manufacturer and a retailer really pull off such a successful collaboration? The secret was trust. It was all about developing a good customer-supplier relationship, not just between a GM and a Sales Manager, which is where it initially began, but among multiple functions in each company working together and across company boundaries. Building upon the trust and the relationships, success bred success. Both teams became energized and mobilized and made the collaboration work.

I asked whether either company has more than one such relationship with a customer or supplier. You can probably guess the answer.

-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.