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Supplier strategy refers to the methods of supplier merchandise marketing, supply conditions, prices, transportation, promotion and other means that have a positive effect on the purchase behavior of middlemen and promote their purchases.

Supplier Strategy

Right!

Supplier strategy refers to suppliers

1. Brand strategy ^[1]

The most successful supplier strategy must be built on four elements: competitive suppliers, commitment, coordination, and a way of thinking about cost analysis. ^[2]

1. Cost analysis thinking

What is the thinking method of cost analysis? This is a broader and strategic way of thinking about the supplier economy: what is affecting the supplier's material cost, production cycle, and personnel arrangements; what is affecting Its inventory, and other related costs; how manufacturers product specifications and supplier management strategies affect supplier costs, and more.

The difference between "controlling prices" and "controlling costs" is an important first step, but the cost analysis must go deeper. Cost analysis is not just from an accounting point of view, but from a factory point of view, focusing on manufacturing and design technology, production planning, loading and unloading, product processes, and all links from the supplier's plant to the customer's container terminal , All those factors that determine the overall cost of production.

When the manufacturer has a considerable understanding of the total cost of the "supplier-customer system" and formulates a supplier management strategy accordingly, the manufacturer can begin to consider the supplier as an extension of its own manufacturing process, from design and production From quantity planning to ordering mode, all links cooperate with each other. The money saved by this method is far greater than the 2% -3% cost saved by traditional purchasing methods each year. Cost analysis-oriented supplier strategies may trigger overall system redesign or product re-engineering, with savings ranging from 10% to 30%.

A New York-based equipment manufacturer decided to introduce a more analytical approach to managing the supply chain and reducing procurement costs with a goal to reduce the rate of failure. The rate mirror is an expensive and extremely important component. This company is quite satisfied with the quality of the products provided by the current supplier, but it always seems too expensive.

Therefore, the company consists of a team of experts and managers who visit the supplier to explain to the other parties what factors they want to achieve and to find ways to reduce costs. As the manufacturer promised to treat this supplier as a strategic partner and was willing to share the reduced costs, the supplier agreed to cooperate.

The team visits the supplier's operations and tracks each step of the production process, including raw material costs, direct labor costs, equipment depreciation, installation time, ordering processes, production planning, and marketing costs. They found that direct manufacturing costs were only 30% of the total product cost, and the other 70% were hidden in other non-direct support functions, such as marketing, development, engineering, testing, packaging, and shipping. However, what indirect functions are causing the cost increase? Why?

To answer this question, the team conducted interviews with many members of the supplier, including the engineering department, production managers, quality managers, and other members of the New York company, including even senior executives. They found that most of the indirect costs can be attributed to two factors: irregular and inefficient ordering methods, and excessive and unnecessary post-production requirements for quality inspection and testing.

The team then made some adjustments to this: commit to a certain long-term quantity, improve forecasts, coordinate the size of orders, modify inefficient or repetitive quality specifications. As a result, the total product cost was reduced from $ 7,300 to $ 4,000, a decrease of 46 %.

As this case shows, cost analysis thinking can reduce the cost of supplier management, but it cannot work alone. Manufacturers must treat suppliers as partners, and both parties should understand each other's economic form and cost factors, and both intend to adopt new cooperation methods. Senior executives must endorse this strategy and advance the needed reforms politically and practically.

For many purchasing managers, the risk of this strategy seems high. However, by committing to each other and adopting a cost analysis-oriented coordination strategy, in fact, the company can better understand and control the supply key from beginning to end. To minimize risk.

2. Competitive supplier

To reduce overall costs, maximizing purchases is often the most critical factor. When a company obtains goods or services from several selected suppliers, instead of splitting the order among multiple suppliers, the potential quantitative efficiency is dispersed, so that it can often get more revenue for less. . Working with a few suppliers, or even just one, is not only feasible, but also very smart. Many companies understand this and are beginning to reduce the number of suppliers in search of more favorable prices, better products and higher consistency.

However, purchasing from 5-6 suppliers in the past, and now relying on one or two suppliers, also increases the risk of the company, especially when the company makes a poor choice. To evaluate a supplier, you must select it using the same criteria as if you were looking for a merger:

Is this supplier competitive and how does it rank in the industry?

Can the supplier meet our requirements?

Can this partnership be easy to agree with, or will it take a while?

What is the success rate of this supplier? What is the quality of the management team?

Does the supplier have engineering or technical experts inside that can add value to the company's products?

Consider the following case:

Company A is a manufacturer of scientific instruments. It outsources circuit boards to a low-cost, efficient manufacturing assembly factory. Although the supplier lacked design or engineering resources, Company A was not looking for engineering support. It wanted a circuit board manufactured at a low cost. Circuit boards need capacitors that meet industry standards. Suppliers purchase capacitors from three other suppliers at a cost of 5 cents each.

However, with the change of industry standards, two of the manufacturers of capacitors changed to other products, leaving only one supplier. One year later, the cost of R & D rose to two dollars each. In order to pay the order placed by Company A, the supplier had to pay this amount. Before Company A noticed the problem of skyrocketing costs, the price of Rongchuang Electric Co., Ltd. even climbed to $ 10 each, or even out of stock. Without the circuit board, there is no way to deliver within 6 months.

Another competitor, Company B, also outsourced the circuit board to the third party, but it chose a supplier with added value. Although the supplier's offer was high at the beginning, it has a team with design and engineering capabilities, with up to a dozen members. Company B felt that it would be worth paying a little more to work with a well-trained and experienced team.

It's right. When the number of suppliers of capacitors changed from three to one, the value-added supplier of Company B predicted that such capacitors would probably be eliminated soon, and the circuit board was redesigned immediately. 5 cents. The modification of the entire design is actually trivial, and it costs no money. Therefore, Company B can continue to produce circuit boards at a very competitive price, even if the original capacitors can no longer be supplied continuously.

This case illustrates the importance of careful supplier selection. As this example shows, if price is still the most important consideration when choosing a supplier, the benefits of reducing the number of suppliers are very limited. Especially in fast-changing, technology-sensitive industries, suppliers must be able to recognize environmental changes quickly in design and product portfolios, and be flexible as partners. If you find a supplier of bulk products and give them a high added value responsibility, they often fail to complete the mission, but in the end they have to pay the price of the manufacturer.

3 committed to

To reduce costs, the biggest opportunity is often in the supplier's organization. However, to identify these opportunities and make the most of them, the responsibility is not solely on the supplier, it is also on the manufacturer. Regardless of the supplier or the manufacturer, a thorough understanding of the cost elements of the supplier and then developing a supplier management strategy can often save considerable costs. However, in order to explore the cost factors inside the supplier and let the supplier know the manufacturer's situation, the two sides must establish a basic commitment.

This is easier said than done, especially since the relationship between supplier and manufacturer has been hostile for so many years. The so-called "commitment" may mean letting the supplier know your patented technology and other sensitive information, as well as facing situations that make many companies feel like sitting on a needle. At the same time, in order to have long-term returns, some short-term investments may be required.

However, as the following cases show, commitments can often bring high returns.

Company C is a manufacturer of lighting equipment. It purchases nickel components and parts by adopting the lowest standard every year to select suppliers. It has changed suppliers every year for the past 4 years. It is full of confidence and believes that every conversion allows the company to get the product at the lowest price.

Manufacturer D takes a different approach. The company chooses a supplier that they consider to be competitive, and together they build a unique and long-term relationship. The Massachusetts company promised 100% of the supplier's quantity and signed a contract with time limits, cost determination, and quality and service that would not slip. The supplier invested $ 19 million to build a modern facility to supply Company D's best nickel process. The new equipment's nickel smelting process is faster, the nickel flakes produced are larger, and the production cost is greatly reduced. Manufacturers and suppliers can share the cost savings.

For six consecutive years, company D has maintained a cost advantage of 16% over company C.

When a manufacturer makes a real commitment to the supplier, the supplier will also reciprocate, make a commitment to the manufacturer, and invest in the manufacturer's business and products. Regardless of whether this commitment is for people, machines, technology upgrades, or other forms, when suppliers make direct investments to provide better products and services to key customers, both parties can gain a lasting competitive advantage.

4 coordination

The results of most cost analysis studies suggest that manufacturers adopt cost savings programs that are fully coordinated with the supplier. However, there are surprisingly few companies that actually adopt this approach. Many companies still just pass the order, regardless of the size of the order, the form of the order, the design of the product, and different product specifications, regardless of how much it will affect the operation, efficiency, and even cost of the supplier.

Therefore, the final key to a successful supplier management strategy is coordination: develop cross-functional teams to reduce all inconvenience and bureaucracy that may increase costs. The team shall consist of personnel from both the supplier and the manufacturer. When both parties face the goal of saving costs or improving performance, they should focus on quantitative integration, reliable forecasting, product design, component standardization, and other overall cost-saving strategies. In the early stage of cooperation, the relationship between suppliers and manufacturers can move forward in the right direction through these teams, and can also improve the efficiency of supplier management. At the same time, it can also meet the requirements of manufacturing products in the south.

Case 1: Company G, which manufactures medical systems, purchases $ 13.2 million worth of metal fiber sheets from 35 suppliers. Its approach is to purchase from the lowest-priced supplier separately. This approach can be said to be due to small mistakes, and its competitor H company coordinated with a supplier on the design aspect. As a result, the new design required fewer parts than the original.

Because there are fewer parts, less metal is required, which reduces the amount of fragmented scrap, reduces labor costs, requires less assembly time, and reduces welding steps.

What happened? Company C paid $ 550 for each metal fiber sheet, while competitor H only paid $ 430, a cost difference of 28%. After coordination between H manufacturer and a single supplier on the design aspect, annual savings of $ 2.4 million can be achieved.

Case 2: Company E is an engine manufacturer. The way it orders pumps from suppliers is calculated in almost an hour. It often changes the original order and requires prompt delivery. Because of this uncertainty, a small amount of Purchasing methods, suppliers must produce pumps in an inefficient way.

Competitor F also sourced pumps from the same supplier. It better understands the manufacturing process of the supplier-the economic scale of the production pump is 100, and the components are in stock before the final assembly. Company F will estimate a larger number of orders based on a longer period of time. After placing the order, Company F rarely changed.

The result: Company F paid $ 9,500 for each pump, and Company E paid $ 10,700, which saved 13%. As long as a large amount of 90 days is used to coordinate pump orders, Company E could have saved $ 2.6 million a year.

As these two cases show, developing closer and more cooperative working relationships can lead to better coordination and higher manufacturing efficiency, thereby achieving great cost savings.

5. Implementation Strategy

In the above supplier strategy, it seems that each step is very straightforward-find a competitive supplier, establish a commitment to the supplier, analyze the overall manufacturing process, and the supplier with a cost analysis thinking method. Fully coordinated so that the benefits can be maximized. This sounds simple. In fact, adopting such a strategy often means that companies must adjust the way they do business-the purchase of procurement personnel, the way they approach suppliers, the way they operate across departments, and the way they evaluate overall performance. Adjustment. Just like any major organizational change, a successful supplier management strategy requires the full support and guidance of senior executives; new training and implementation of new compensation programs for procurement personnel; executive assistance to facilitate and guide the entire change .

Outsiders are often able to help identify areas for improvement, and this is often the starting point for motivating senior executives to invest in this new strategy. New policies and partnerships may be less formal at first, but companies must immediately write them clearly and in writing as a training tool and a new declaration of corporate commitment. This declaration is very important for the purchasing team after refocusing. After all, if they are told to treat suppliers in a different way, and they are required to save 2% of the cost each year, the purchaser will find that their role is still at best a bargainer, a partner of both parties. Relationships will soon break down.