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.

Just as you might go beyond words and try to ready a person’s body language to understand what they mean, the same approach can apply to a customer firm on a supplier site visit. While a quality audit has its rules and rigors, there’s nothing like old-fashioned intuition to uncover what’s really going on. As Norman Black wrote in his article, Supplier Auditing (The 5-minute rule), attitude is everything. Nothing says more about the prospects for a good customer-supplier relationship than the attitude of the supplier, from the associates to the president or owner. It starts, of course, with the leadership. If the company’s leaders do not show a sincere respect for their associates, then the company’s long-term prospects for success are reduced and the chances of their being a good supplier partner are also lessened.

One supplier manager with whom I worked (not the person cited above) also said that he could tell how good a supplier was within the first five minutes of a visit. You can just sense it. We were visiting a supplier that is called, in the vernacular, a “lifestyle company”.  In other words, the company existed mainly to maintain and enhance the lifestyle of the owner. The owner had an obvious disrespect for his associates. The non-native English speakers “couldn’t be that bright” and “you could train monkeys to do their jobs”. He also claimed that his employees never had any ideas to contribute, so it was useless to ask for their input. The supplier visit reminded me of the old Radio Shack slogan, “you’ve got questions, we’ve got answers”. Only in their case it was “You’ve got questions, we’ve got no clue, so we’re going to try to bs you.” The company had tidied up and repainted some areas in honor of the customer’s arrival. But a fresh coat of paint couldn’t hide their reactive, not preventive quality system; their lack of any signs of lean manufacturing, even though they claimed a cell had been put in place by a local college a few years ago. The list goes on.

What really amazed me was their ‘tude — certainly not the attitude of a supplier who cared about being responsive to its customer. We felt particularly unwelcome and uncomfortable. The owner had a pompous attitude, and the associates, including the management team, simply acted reticent and fearful, as they were probably going to get into trouble if the customer found out was was really going on. For an experienced supplier site visit or audit team, this non-responsive attitude shone through like a beacon.

This is not to say that a supplier site visit should be based soley on gut feel. But when your antennae start buzzing and a bad feeling washes over you, you had better take it into account along with the standard questions you are asking at the site visit. They may not be a supplier you really want to deal with. They may end up causing you problems that will take more than a few bucks to correct.

-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

I read today’s WSJ article about how customers are using their suppliers to improve their own cash flow: Big Firms Are Quick to Collect, Slow to Pay  and thought, same old, same old. I addressed this phenomenon in an early blog post: Another Kind of Banker – Your Supplier?  This situation has been going on at many large firms for years, but currently seems to be at its worst. Big firms demand rapid payment from the firms who owe them money and at the same time string out payments to their smaller suppliers for months. It’s the underground banking system. And larger firms seem to get away with this behavior with impunity. Well maybe not quite. And at what cost?

In addition to the financial strain and potential breakdowns of suppliers put under financial duress, using suppliers as banks is a time-honored business practice with a short-term view. But this time the chutzpah of some of the customers has grown to the point where they’re stringing out the payments for long as 120 days. The ethics of this approach are poor.

Considering that in this current economy, smaller companies are unable to get the bank credit of the larger companies who are following this cash generation approach are able to obtain, the potential results are dangerous. These larger businesses won’t have their smaller suppliers to kick around any more. One reason is that the cash crunch has or will put many of them out of business. Or, in the inevitable “what goes around, comes around” cycle of business, the surviving suppliers will never work with these customers again. Memories of poor treatment, forced concessions, and being squeezed are long among suppliers. Even as smaller suppliers continue to work with these deadbeat customers now in order to get paid, supplier service levels and responsiveness will slow out of necessity. The corollary is that memories of good treatment are equally long. Those customers who treated suppliers fairly during bad times will create long-term loyalty and a willingness from suppliers to give concessions in order to continue the relationship.

Supply managers and buyers have always had the challenge not just of finding suppliers but finding suppliers who are both high-performing and “best value”. Numerous supplier evaluation and supplier performance management software solutions are now available, where ten years ago very few options existed. Most options that I’m aware of are either SaaS (software as a service) or licensed software solutions that are typically targeted at medium to large-size companies. The choices for software solutions for evaluating suppliers have certainly increased since the days when I was in the supplier evaluation software business. In fact, the whole supplier information and supplier performance management solutions market has heated up as companies are becoming more concerned about the impact of supply risk and supplier performance issues.  For a further description of this market, you can read an analysis that appeared on the Spend Matters blog.

However, some challenges still remain: finding good offshore suppliers and providing small to medium-size businesses with affordable, yet effective supplier evaluation options.  While there are options for finding offshore suppliers or suppliers from developing countries, there are none that I’m aware of that give buyers a good, cost-effective way to know how good these sources really are. 

I thought I would alert readers to a new site for finding and evaluating suppliers – SupplierEvaluations.com. It is based upon a social networking, B2B approach where a community of buyers and supply managers, using an evaluation template and process provided by the site, evaluates suppliers and shares the evaluations with other members of the community. Supplierevaluations.com expects to be operational by mid-September. Users can sign up now to participate when the site goes live.

Many firms are aware that they are dealing with too many suppliers. So they figure that the first thing they need to do is reduce the number of suppliers. The benefits of a smaller supply base lie in the area of reduced costs: lower prices by leveraging volume with fewer suppliers, fewer transactions to manage, and better collaboration with the “vital few”, high-performing suppliers that remain. The problem is that supply base reduction as a first step may not be the best move.

The last part is key – high-performing. Firms should first be relatively certain that they are already working with the best, most qualified suppliers. Reducing the overall number of suppliers is less important than having the highest quality, most appropriate suppliers to support your business. If you have enough qualified suppliers, rationalization can help you “right-size” the supply base. But while supply base size matters, who the suppliers are and what their capabilities are matter most. Also, some companies may consolidate purchases with one supplier, using them for multiple categories in order to work with fewer suppliers. This strategy may be flawed as well. Some suppliers may be much better at supplying one category than another. Working with suppliers who are most competent in every category they supply is better than sacrificing performance for convenience. There has to be a measurable benefit in using one supplier across categories. Therefore, you may actually need to increase your supply base. 

Having the right suppliers is the first step. Next is weeding out poor performers. Then you are ready to reduce the overall number, as required by your business.

In a survey of  223 procurement, supply chain and supplier relationship management by the consultancy, State of Flux, almost two-thirds said that they did not have a definition of Supplier Relatinonship Management (SRM) in their companies.  The conclusion of Alan Day, Managing Director of State of Flux, a supply chain consultancy in the UK, was that organizations are confusing SPM with SRM. SPM, he asserts, is “about getting what you have been promised in a contract, whereas SRM is about collaboratively driving value as part of a two-way relationship.”  It may be a matter of semantics, but I disagree. There may be no definition of SRM in many companies, as the concept remains amorphous. Senior management often views SRM as “goodness” without a defined ROI and thus does not consider it a priority.

Tracking supplier compliance against contract terms is not SPM, however. It is just one tactical part of SPM. The purpose of SPM is to obtain a result, which is reducing risk and improving performance. Understanding supplier performance is more than ensuring that requirements are met and should involved a two-way flow of information. To the extent that a customer and supplier have a relationship, the more insights a customer firm will have into performance and the more chance that the supplier will improve performance. SPM requires collaboration between customer and supplier to be successful. State of Flux defines both SPM far too narrowly.

Day’s assertion that SRM “tends to be an add-on to the day job of buyers and category managers, rather than a core role” is true in the case of companies that do not have a supplier management function distinct from the sourcing function. Buyers are typically spending their time focusing on new procurement rather than managing and maintaining relationships within the current supply base.

Can you successfully manage performance without having a relationship with a supplier? Not likely. Supplier Performance Management without some type of Supplier Relationship Management is an empty process.

In a recent poll conducted by Supply Management, more than half of buyers (55%) have experienced problems introducing suppliers to e-procurement systems. But the other 45% did not. What was the difference? How the new technology was communicated to suppliers. While some buyers used carrots and others used sticks, which typically worked if nothing else did, communications about the change seemed to help reduce the FUD factor (fear, uncertainty, doubt).

While the results of this poll seem like a no-brainer, it amazes me how many customer firms neglect the communications piece both inside and outside the enterprise. Companies often do not make a concerted effort to communicate about new systems, policies and procedures either to employees or to suppliers or other stakeholders. For example, one supplier manager lamented to me that their suppliers were resisting a new evaluation program. As he explained the new program to me, I learned that they had sprung it on suppliers unexpectedly, with no explanation or advance warning. No wonder the suppliers were wary and uncooperative. They had no idea of what this system meant, why it was being implemented, how they were being rated, and whether they were in danger of losing business. In another example, a company developed a supplier evaluation, but had not told its suppliers or even other internal purchasing people. The several people who had worked on it were contacting suppliers one by one to schedule evaluations. It simply hadn’t occurred to them they needed a more visible, closed-loop process. Clearly this new evaluation had been created and deployed in a vacuum and had very little chance of success.

While these stories may seem stranger than fiction, I’ve found that they are fairly typical. I have various theories about why internal and external communication in some companies can be poor. Usually, it starts with senior management. If they set a tone of open and honest communications with employees, emphasize the importance of it, and model it themselves, then communications become ingrained in company culture and its ways of doing business. If the culture is one of secrecy, withholding information as a way of preserving power, and treating employees with mistrust, then it is likely that this culture may manifest itself in an overall lack of communications, within the company and with suppliers.