• 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

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.

Smaller firms who do not pay attention to important suppliers can suffer consequences such as not being able to satisfy their own customers and losing business. Another way to view this challenge is: what are the risks of doing nothing? Most approaches and software solutions in supplier performance management (SPM) are oriented toward larger companies. Smaller firms typically do not have the budget or the bandwidth to implement a comprehensive SPM process. Often small companies buy from supplier firms who are far larger than they are and whose attention seems fruitless to try to get.  What, if anything, can a small firm do?

Here are 5 ways small companies can evaluate and manage supplier performance:

1. Determine who your most important and strategic suppliers are. You want to focus on the vital few, not all suppliers. Focus your efforts on those suppliers who could potentially impact or even cripple your business from a performance failure, such as late deliveries, poor quality, or general lack of responsiveness.
2. Develop relationships with important suppliers, even your larger ones. There is no silver bullet for improving the performance of a much larger supplier firm. However, good relationships with several contacts at a larger firm help open the lines of communication to solve problems and can help you develop internal advocates for your company when problems arise. For more information on this subject, see my previous blog post on this subject.
3. Make it easy for your suppliers to do business with you. Some approaches include making sure that suppliers understand your requirements (exactly what you need and when) and communicating any problems that may impact their ability to do a good job for you (e.g., schedule changes, financial issues, etc.). And if you cause a supplier problem, find out why. Then make the changes necessary in your firm to prevent a recurrence.
4. Track and share supplier performance with suppliers. If you are small and can’t buy a supplier performance management solution, there are alternatives. If your enterprise management system has a supplier scorecard function, use it to track several rudimentary KPIs (Key Performance Indicators). If not, try an inexpensive or free approach such as: Tracking your top 10 suppliers using a spreadsheet.  Or, use a simple supplier performance evaluation template, such the ones available for free at SupplierEvaluations.com or here.
5. Communicate with key suppliers: your goals, your requirements, your performance expectations, performance feedback, and generally about ways to solve mutual problems.

Putting SPM and supplier relationships onto your firm’s agenda is vital to the health of a business of any size. Here’s another recent article on the subject, “Working with Vendors” by Eric P. Bloom.

-Sherry R. Gordon, Author of Supplier Evaluation and Performance Excellence

How about using this approach in the area of marketing? or product development? Sound crazy? Well that’s exactly what a company called Crowdcast is doing. Their product works on this very premise: that the people who do the work know best — even the answers to predicting what products and product features customers will buy. An article in MIT’s Technology Review explains how this approach works. Basically, employees within a company play the Crowdcast game, complete with play money, to compete in predicting marketing outcomes. In the case of one company cited in the article, their employees, video game developers and testers, were actually 32 percent more accurate than higher level employees. In fact, the accuracy of predictions was in inverse proportion to a person’s level in the corporate hierarchy. That is, the higher level the person, the less accurate their predictions. So what else is new? many of you would say.

This came as no surprise to me, given my involvement in this area, both as a lean practitioner and a software company founder. When I was running my previous software company Valuedge (a supplier evaluation  software solution acquired by Emptoris), our methodology was based on a very similar premise. In assessing a supplier’s performance, we would provide employees from multiple functions and at both management and non-management levels, a series of detailed questions about their company’s business practices and processes. What we found most interesting was the discrepancies among how management and non-management personnel answered the very same questions. In fact, we had a management vs. non-management report that highlighted those differences. This was one of the more insightful tools we provided. We found that if you asked only management people process and performance-related questions, you often got a much different picture than the lower-level associates would give you. Being lean enterprise experts, we were looking for the insights of the rank-and-file employees, since they were closest to the processes.

Now the firm Crowdcast has turned this approach into a clever and successful prediction methodology. It affirms the validity of the approach.

-Sherry R. Gordon

But how do you actually begin to calculate the ROI? One approach that I use is an Excel model for estimating the amount of additional revenue a firm would need to make up for the cost of poor quality and delivery performance. Calculating the cost and revenue leakage caused by poor supplier performance really helps put the problem in neon lights. I suggest several other approaches for calculating ROI in a previous post on this blog.  But whatever approach you choose, be disciplined about pursuing it and communicating the results.

-Sherry R. Gordon

Some feel that the insider trading investigation has gone too far in implicating research firms. Certainly these research firms can manipulate stock prices with their reports. While I’m not sure where one draws the line in these cases, I am bothered by the sheer parasitic, non-value added nature of such activities. Making money from both predicting and manipulating the market at the same time? Well, this is America, as some like to say. While channel checkers can create wealth for themselves and those who buy their research, they don’t create jobs.

Manufacturing is an engine of wealth and jobs. For example, the fact that Massachusetts’ jobless rate has remained lower than the rest of the country and is decreasing more rapidly has been attributed to the growth of its manufacturing sector. I wish more resources and focus would be placed on the manufacturing sector. In a blog post on the future of manufacturing, Robert Reich once asserted that “it doesn’t make sense for America to try to maintain or enlarge manufacturing as a portion of the economy.” Unfortunately, this point of view seems to be fairly widespread in our society. Manufacturing is dirty and working-class, while service jobs are more preferable. Having worked in manufacturing, I can attest that this belief is simply not true.

I was recently in Shanghai where I was giving workshops to several groups of supply chain and purchasing executives. Every single workshop participant worked for a manufacturing company, many of which were the Chinese plants of multinational corporations. When I give talks or workshops to groups in the U.S., there is no longer a group composed of 100% manufacturers. The rapid economic growth that manufacturing is fueling in China is palpable.

It strikes me as sad that we’ve got the channel checkers and China has the manufacturing.

-Sherry R. Gordon

1.       They sound a heck of a lot like insurance salespeople. Insurance is just plain boring. “Hey mister, the supply chain part of the sky is falling down. Wanna buy a supply chain risk protection policy?” Yawn. By the way, this is no coincidence. Some supply risk experts ARE insurance industry folks. And while there are insurance solutions, they are largely inadequate.

2.       The origins of risk management are in the financial services area. And we know where their risk management techniques took us and our whole economy. Perhaps the SCRM crowd is afraid to go there.

3.       How motivating is continual doom and gloom, even if it is of the more exotic supply chain risk variety?  SCRM sounds like Chicken Little and people get inured to it after a while.  Sound the alarm too many times and people begin to ignore it. Or at least try to hide their heads in the sand for a while until a risk event comes by to bite them in the keister.

4.       How many times do people have to hear the name of an unpronounceable volcano invoked in the name of supply chain risk before they book a trip to Iceland out of curiosity to see it, drink some Reyka vodka and totally forget about the supply risk part?

5.       SCRM seems too challenging. One person or one department (i.e., Purchasing) can’t adequately address supply chain risk management by themselves. But Purchasing is where people turn to and where SCRM typically begins.  SCRM requires the usual suspects:  senior management involvement/support and cross-functional participation.  This means convincing C-level execs of SCRM’s value and ROI.

6.       Most senior executives know they need to do something. Awareness is the first step. But as usual, it’s the early adopters who actually DO something. SCRM is still in the early adopter phase.

7.       What can you actually DO about supply risk? You can wring you hands in despair. You can buy software. But many companies have not yet reached the level where they can address supply risk organizationally, let alone use a software solution to address it.

8.       SCRM has ROI. Both addressing the risk and NOT addressing it cost money. However, it needs to be figured out and demonstrated for a particular firm’s supply chain situation.  And for the impatient crowd, ROI isn’t realized overnight.

9.       There is too much emphasis on the bad things that can happen and not enough on how to address supply chain risk.

10.   There are currently two silos in SCRM:  supply risk “tree” people (those who focus on risky suppliers) and the supply risk forest people (risk in the supply chain, but not individual suppliers). SCRM needs to address not just the trees, but the entire forest including the trees. Current tools are inadequate.

Hopefully both business practices and risk management tools (software and other) will evolve further and become more accessible, and firms will turn fear and awareness into action.

-Sherry R. Gordon

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

Also, please stay tuned to the next issue of AME Target, the magazine of the Association for Manufacturing Excellence. Coming out in the September issue is a feature article that I wrote about two companies and their supplier evaluation processes and journeys, “Supplier Performance Management: It’s More than Scorecards.” I’ll add an update to this blog as soon as the issue is published.

-Sherry R. Gordon