Use your purchasing clout to get better customer service
Best price is only one thing to ask from suppliers. Other support may be just as important.
By Jim Carbone -- Purchasing, 8/13/2009 2:00:00 AM
Purchasers at most major electronics OEMs are skilled at getting the best possible price for the large volumes of commodities that they buy.
However, not all OEMs optimize their purchasing clout with suppliers and some don't take advantage of their leverage to obtain more favorable delivery or payment terms, vendor managed inventory programs or to receive the first look at new technology the supplier may be developing.
"In the procurement world, you always have to be aware of the leverage you have. You have to be intellectually aggressive, not just emotionally aggressive," says Daniel Hawtof, vice president of performance at researcher iSuppli in El Segundo, Calif. He advises purchasing organizations on supplier relationships.
"You can't just bang your fist on the table and say 'I need a better price because I am giving you all this business,'" he says. Buyers need to insist on both "world-class pricing and support," according to Hawtof.
Support means getting an edge with a supplier's resources and access to a supplier's new technology. "We want the A-team in terms of engineering support and sales representatives," says Tom Linton, chief procurement officer at LG Electronics in Seoul, Korea.
"Innovation cycles are so fast. If you get better people and the upper hand in innovation" over your competitors, it enables a company to introduce new products faster, says Linton. "Having better people and faster time to market, dwarfs the advantages that you get from volume and spend leverage," he says.
Influencing technology
By gaining early access to a supplier's up and coming technology an OEM can influence the direction of the technology.
For instance, if a supplier has a chip under development, "you might have some influence on some of the design rules or some process technologies that would be used," says Linton. "The more you can bend the technology to your favor, the better."
Besides influencing technology, a major OEM with buying clout can influence the actual products a supplier ends up manufacturing. For instance, a major smart phone manufacturer may want to add video functionality to its phone.
The OEM may want a chipset that supports very-low-power video manipulation and maybe there isn't one on the market. "The buyer at the company may go to a video chipset supplier and say, 'I need to get a low power chipset for a new product you have built for PCs, but I need you to come out with a low-power one and I need it by September of 2009,'" says Hawtof. The chip is developed and goes into production because the supplier knows volumes will be large.
To gain insight into a supplier's new technology, most major OEMs have regular technology roadmap meetings with suppliers. "We encourage suppliers to be proactive when they have new technology," says Winnie Sun, vice president of production procurement sourcing at Armonk, N.Y.-based IBM. "They present us with their roadmaps, and what they have today, but they are working on for the future. Its technology that may be designed into some of our systems down the road," she says.
The engineering support that a large OEM receives from a supplier isn't just for new product development. "Engineering support also includes getting assistance when things go wrong," says Hawtof. "Oftentimes if you are a major customer, the supplier will send their lead engineers to wherever you need them in the world and they will camp out there for weeks on end to solve a problem with a product," he says.
Preferred delivery
Besides gaining access to the technology plans of suppliers, OEMs with large purchasing volumes can also demand "delivery preference," says Hawtof. Deliver preference means that a company will receive parts during shortages because it purchases a large amount of components from a supplier.
"Delivery preference isn't a big issue right now but can be in a shortage situation," says Hawtof. "However, even now there are products that are on allocation that are difficult to get."
He notes some suppliers have reduced inventories or have shut down one of their factories, resulting in tighter supply for some parts. "At some point, the OEMs are vying for that available product and if you are a preferred customer with large volumes, you are more likely to get the parts," says Hawtof.
Besides moving to the front of the supply line during allocations, OEMs with large volumes can insist suppliers have facilities near the OEM's facilities. "Proximity to suppliers is important," says Linton. "It's better to have supplier engineers jumping in cars instead of planes to work with our R&D folks," he says.
Many suppliers will have hubs near major customers because a hub needs to handle large volumes of parts to make the cost of a hub worthwhile for the supplier.
"There is the fixed cost of the hub as well as the cost of the facilities management. To do that, you have to have the volume to recover that investment," says Linton.
In addition to preferential delivery arrangements, some OEMs insist on preferential payment terms, pushing suppliers for 60-day or longer payment term.
But buyers need to be careful because if they have a large spend with the supplier, delaying payment "can have a material impact on a supplier's corporate performance," says Linton. An OEM obviously wants a key supplier to stay financially healthy and delaying payment may affect the supplier's financial health.
That's especially true with smaller suppliers or diversity suppliers, which may have few customers. A single large OEM customer may represent a high percentage of the supplier's revenue. If payment is delayed it could ruin a small supplier.
The need to share
While OEMs have a right to demand world-class prices and service from suppliers, OEMs should share planning, market and technology information with key suppliers, says Hawtof.
OEMs insist on suppliers sharing their technology roadmaps plans, but OEMs also need to share with suppliers where their product technology is heading. "OEMs really need to talk openly with key suppliers about the OEM's roadmap and what it will take to support them and their expected volumes and marketing plans," says Hawtof. He says suppliers are always trying to figure out what products they need to introduce and build in large volumes.
"It takes a long time to develop some of them. A semiconductor can take years to develop. The sooner and the more information they get from their OEM the more likely they will come out with the right products," says Hawtof.
He notes that sharing such information doesn't actually cost the OEM anything, but it is a huge value to the supplier.
Some OEMs are better than others at sharing their own technology roadmap information with suppliers. "We have a two-way dialogue on technology," says Sun of IBM. "We have regular meetings with them and share our roadmaps to the extent that we believe is relevant."
Besides sharing technology roadmaps, Hastof says OEMs should also provide suppliers with feedback on their performance and how they compare to other suppliers.
"Give them comparison information about how they are doing from a supply chain perspective, sales, marketing, customer support, a whole range of different things," says Hawtof.
He adds OEMs are in a "perfect situation to provide feedback to their supplier in exchange for price delivery and other types of support."
Most major companies provide such feedback through supplier scorecards, but not all OEMs take the scorecard process as seriously as they should to provide meaningful feedback on suppliers' performance.
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