Just how good a customer are you?
"It takes a world-class customer to know and use world-class suppliers."
By Jim Morgan -- Purchasing, 11/19/1998
So says Thomas Slaninka, director of sector sourcing at Motorola Corp. It's also an assertion of a growing number of companies--especially small ones. Their point: Many purchasing departments and their companies are not equipped--mentally or physically--to make use of the many and varied skills and innovative thinking of their best suppliers. Therefore, suggests Ken Stork, Motorola's former director of materials and purchasing, some of the best and brightest suppliers are "getting more choosy about the customers with whom they want to stake their futures. True world-class suppliers have many options when it comes to partnering."Stork's statement is backed up by the marketing and sales manager for a small precision parts manufacturer in Wilmington, Mass. In fact, this manager links his company's marketing strategy to identifying and selling companies that in the future will "become recognized leaders in their fields." It's a successful strategy, he says, but it "depends on finding customers that can do more than 'talk' a good game." He says the 15 years he spent in purchasing and materials management have given him good insights into spotting world-class players--whether suppliers or customers. In his quest to do more business with world-class customers, he has even developed a profile of what a world-class customer looks like and is developing strategies for selling to them.
It's hardly a new idea that the need for world-class customers is just as important as the need for world-class suppliers. Indeed, over the past decade or so such companies as Honda, Ford, Chrysler, Hewlett-Packard, Intel, Caterpillar, and Texas Instruments have developed entire supply strategies around the premise that they need to be better customers in order to attract and hold the world-class suppliers.
In recent years the link between world-class customers and world-class suppliers has become more pronounced as supply/purchasing professionals develop more substantial supply chain strategies. As a result, today even some of the most hardened bid/buy proponents concede that there is some merit in trying to attract world-class suppliers and actually solicit them as suppliers.
One of the first to draw the connection between world-class customers and world-class suppliers was industrial purchasing and supply consultant Edward J. Hay. With a background in purchasing, materials management, and production at such companies as Fram, Bendix, and Singer, Hay has been concentrating for the past decade or so on developing supply improvement at some of the nation's leading manufacturing companies.
As Hay sees it, three basic assumptions about buyer-supplier relations have changed over the past decade. The change in the assumptions are behind the movement toward greater emphasis on being a good customer. In Hayes' estimation the changes look like this:
* Priorities. Where once the goals and priorities of customers and suppliers were considered to be substantially different, there has grown up a recognition that they are substantially the same for buyers and suppliers.
* Control. It is no longer absolutely mandatory for customers to exercise absolute control over their suppliers. As a corollary to this premise, the need to have many suppliers and the need to change them frequently no longer holds true.
* Transactions. The assumption that buyer-seller transactions are random events is no longer valid. Neither is its corollary, that both buyers and sellers must place heavy emphasis on controlling the potential for chaos.
Of the three assumptions, the most difficult for many purchasing departments to change is the first, says Hay. In many business circles, he feels, it has become an ingrained truism that buyers want only low prices and suppliers high margins. In recent years, he feels, the objective of the buyer-seller relationship has been undergoing change to a point where today both sides more often are seeking to identify common goals--not slightly different sets of priorities. Goals more often are being aimed at achieving mutual profit. Buyers may, indeed, be looking for lowest prices and suppliers greater profit, but in the new relationship both aspirations are being equated to the same thing, which is something like mutual profit and mutual success. As this change takes place it will be possible for buyers and sellers to have sets of priorities that are much closer to matching.
Assumption two is based on the presumption that auction-like bidding and buying is the only legitimate vehicle for business transactions. Its major defects: In a sophisticated industrial environment, the bid-buy approach is too crude, it leads to too many adversarial relationships, and fails to address the need to solve buyer-seller problems mutually.
Assumption three springs from the same reasoning and fails to account for the fact that the bid/buy of the auction is an inefficient method of selecting suppliers or even determining prices in most industrial purchasing situations. In fact, says Hay, bid/buy is a highly inefficient approach that creates waste. In most cases assumptions two and three are gradually being replaced by an approach to purchasing that stresses long-term relationships, mutual benefits, fewer suppliers, and better suppliers.
So what are the characteristics of world-class customers? As might be expected, buyers and sellers disagree on specifics, but most of their requirements for being a world-class customer are contained in eight broad characteristics:
1. Total commitment. The need to be a world-class customer must be mandated at the top and supported throughout the organization. There must be commitment from top to bottom to implement programs, policies, and procedures that assure efficient, cost-effective manufacturing and business operations through working partnerships.
In other words, the corporate structure of a world-class customer must be flexible enough to allow and encourage buyers to implement creative partnering programs with its suppliers. In addition to allowing buying professionals to pursue the goal, there must be reasonable expectation that they will be backed up in their pursuit of world-class customer goals.
2. Communications. Open and consistent communications with suppliers are usually more important than they appear. Not only are world-class customers' short- and long-range goals known, but the criteria used in evaluating supplier performance are also well defined and documented. In addition, the world-class customer is able to communicate exactly what is wanted in terms of product, price, and quality and is realistic about what can and can't be done.
A world-class customer also is forthright in giving key suppliers information on where new product lines are heading and is candid in explaining what improvements will be needed in materials and components and what investments will be needed over time in plant, equipment, and technology. Likewise, such candor in outlining future supplier commitments need to be matched by a good degree of detail concerning expected return on investment.
3. Price. A first-rate customer will have a comprehensive qualification program in place for evaluating and selecting suppliers. As a good customer it will not qualify a supplier via a quote sheet or other systems that are driven solely by a bid. A world-class customer qualifies the supplier that best fulfills current and future delivery and quality requirements, then negotiates them.
4. Long-term commitment to suppliers. A world-class customer sets long-term goals and works with the supplier to achieve them. A world-class customer also realizes that progressive programs can only be realized with a long-term commitment.
5. Cost concepts. Top customers have a comprehensive understanding of total cost concepts. This includes being aware of the enormous savings to be realized by 100% on-time delivery, 100% quality, and zero- (or reduced) inventory programs. The world-class customer also understands what 100% inspections, line shutdowns, and too much or too little inventory can cost. A top customer knows for a fact that a $5 part can, and often does, cost more than a $10 part.
As part of this mastery of cost concepts, world-class customers often help their prized suppliers by guiding them through a three-step assessment of costs:
* They identify all costs involved in a production run and separate them out by whether they add value or not. Non-value cost-adders can include such items as excess inventory, material handlers, scrap, rework, even quality-control inspectors. Often these costs are hidden and need to be pulled out and identified. For instance, material obviously adds value, but scrap and rework need to be identified and separated from materials costs.
* They look for ways to get rid of as many non-value cost-adders as possible. For example, can better scheduling reduce material handling and inventories? Can a change be made in a material spec to reduce scrap? Will improvements in machinery and manufacturing process help to reduce rework--or even reduce the number of production-line quality control inspectors?
* Once most of the non-value cost-adders are stripped away, it's time to ask the question: Is the product profitable for the supplier at current prices? If prices don't at least cover variable costs, something must be done. Volume won't help. It's time to hear from the world-class customer.
6. Measurement. World-class customers have come to understand that measuring which suppliers they need to ally with depends on more than the traditional price, quality, and delivery criteria that drive most performance measurement systems today. Where today's most commonly used performance tracking management systems look at such things as defects per million, on-time delivery per shipment, and the price in relation to that of other producers, world-class customers are broadening their horizons. World-class customers are aiming their measurement systems at determining which suppliers have the potential to become the best all-around suppliers in the field.
7. Training. For a growing number of suppliers the mark of a really world-class customer is their commitment to supplier training. Companies in such diverse fields as Motorola, Caterpillar, Chrysler, Hewlett-Packard, and Intel have invested heavily in supplier training, recognizing that. "We understand that our training gives them an advantage when they market their products to other companies," says Intel's director of purchasing, Keith Erickson. But as Intel apparently sees it, the training and the help on quality improvement projects weighs heavily in attracting other world-class suppliers to Intel. It gives world-class suppliers another reason for seeking Intel's business, says Erickson.
8. A "can-do attitude." World-class customers demonstrate a willingness to implement progress programs, knowing that the learning (or implementation) curve will be time consuming and probably difficult. World-class customers generally operate on the premise that the rewards for assurance and patience are significant cost savings, improved products, and satisfied customers.
How to help those critical small suppliers hang on
Being a world-class customer often involves special attention to protecting the really endangered supplier. Unfortunately, some purchasing/supply professionals often fail to make the distinction between small suppliers and weak ones, and there can be a huge difference. Often relatively small suppliers find themselves in peril for reasons that have little to do with technical competence, managerial skills, or productivity. In periods of business uncertainty they often become overexposed by circumstances that exceed their ability to compete.
What can a supply/purchasing professional do to help keep the small, but competent, supplier competitively viable? The following suggestions were collected from a number of top supply/purchasing professionals from around the country:
* Long-term contracts as collateral. Small suppliers with limited track records often go through the tortures of the dammed to win financing. But if they can show lending institutions long-term contracts for business from large, well-established customers it can be a big plus.
* Work-in-progress payments. Normally used with long-leadtime (over a year) items, progress payments can sometimes be used as a method of keeping small but key suppliers viable.
* Multipayment contracts. Inventories often require funds that small suppliers find difficult or impossible to raise. Two-step payments--one covering raw materials and one made at time of delivery of finished parts--are a variation on the work-in-progress payments that put cash in suppliers' hands when needed.
* Outsourcing. Where a high-technology supplier is involved, it often makes economic sense to transfer additional work or procedures to its shop in times of economic uncertainty. In many cases it may even make good cost and quality sense.
* Accounting help. Some small businesses run into trouble because they don't keep good records and don't know where their true costs are. Counseling in this area is sometimes advisable--especially where the supplier has a technology or technical competence that makes the additional hand-holding worthwhile.
* Merger. When it isn't possible to keep a key supplier from going down the tubes, a merger can make sense--especially when the merger assures the services of key talent.
Talkback
Related Content
Related Content
Sponsored Links
View All Blogs
Now Playing:
