Wanted: Perfect suppliers for long-term business
By Christopher Reilly -- Purchasing, 1/13/2000
The raw-material supply base in the CPI has undergone massive consolidation in recent years. Mergers, acquisitions and changes in corporate strategies have combined to place more pressure on buyers at soaps and detergents manufacturers to do business with suppliers that can meet ever-increasing demands on quality, cost, delivery, global reach and other factors.Effective supplier consolidation has proved to be a sound purchasing strategy when implemented properly. Consolidation places more business in the hands of fewer suppliers, and the natural reaction by suppliers that make the cut is to pay more attention and provide superior service to that customer.
But key to successful supplier reduction efforts is selecting the very best suppliers. In the past five years, supply-base reduction has been very positive for Colgate-Palmolive, a major producer of soaps and related products. According to Charles (Chuck) Beck, vice president of global materials, logistics and sourcing. "We continue to have [supply case reduction] as a major emphasis," he says.
According to Beck, "The 'must haves' for suppliers are quality, customer service and competitive cost." But beyond that, Beck outlines some questions he asks to determine which are best suited for contracts and the development of strategic partnerships with his company. They include:
- Which suppliers have demonstrated that they are innovative and creative in their supply strategies?
- Which suppliers have a global reach?
- Which suppliers provide value-added services, such as supplier-managed inventory and EDI?
- Which will work through a certification process? Or better yet, which have the necessary certifications already in place?
- Which have continuous improvement programs that are compatible with our own?
- With which suppliers have we developed close relationships, where they fully understand our requirements and we fully understand their capabilities?
"We do an analysis and end up with some automatic selection (where suppliers that don't measure up are eliminated) and as a result, we end up with fewer suppliers," Beck says. "I'm fostering an approach where, if we're doing very well with one supplier in one area, we'll look to that supplier first to handle our material needs in other areas," he says.
"For us, opportunities increasingly come with globalization, and we continue to look at sourcing from developing countries," Beck says, adding that the world markets are increasingly moving toward free trade. Purchasing professionals at soap and detergents companies are exploring foreign regions for new sources of materials. "In this regard, China and India are a reality today," Beck says. "Sourcing materials from Africa and Russia will become a reality in the not-too-distant future.
"In some instances, we're looking for suppliers to grow with us in different markets and regions of the world." Beck explains that, in this scenario, another common question is whether suppliers treat customers with the same level of service from one region to another, or do they defer to regional organizations? In the case of the latter, "problems caused by uneven standards can sometimes occur," he says.
"In essence, we're looking for the perfect suppliers," Beck adds. "We have some that are very good," he says, but acknowledges that there is always room for improvement.
"Perfect suppliers anticipate the types of things that we need," Beck says. "The word, 'Proactive' comes up a lot," says Beck. "It's a buzzword, but its meaning is very important to us."
Beck defines a proactive supplier as one who, through a sound understanding of the supply chain and his company's needs, continuously offers suggestions for process improvements. He contrasts these suppliers with those that he must bring in and explain what they need to improve using key performance indicators.
With the understanding that no two relationships with suppliers are exactly the same, Beck says he critiques suppliers' performance and has made some findings. "Some are very innovative, but they may fail from time to time in the areas of quality and delivery," he says. "Others may be outstanding in providing consistent quality, availability of materials and pricing, but they don't anticipate our needs or offer innovation."
How do you deal with these suppliers? "If you're going to continue to work with them, you have to spend a fair amount of time developing suppliers, encouraging and influencing them through regular meetings and daily interactions," Beck says.
Working together
One way that Colgate-Palmolive's Chuck Beck was able to work with a supplier resulted in a mutually agreeable pricing mechanism that helped control prices within certain parameters, regardless of changes in the market and feedstock costs.
"One problem we have had in the past," according to Beck, "is that pricing for certain chemicals would fluctuate and we would constantly spend time and energy fighting supplier price increase proposals."
To combat this, Beck says that he has worked with some suppliers on an approach based on feedstock costs. "We look at various cost drivers," he says, "And develop parameters to limit the drastic ups and downs of pricing." Where appropriate, Beck says that an added benefit of this system is that the company was forced to do some very deep total-cost analysis of certain products.
"This type of system also fosters open, candid conversations about what factors impact the supplier's business and what we can expect with regard to pricing over our long-term contracts," he says. "We have had some success in these areas, taking some price sensitivity out of the system."
Another example of Colgate-Palmolive's success in working with suppliers to smooth the bumps in supply involved suppliers building new manufacturing and distribution plants on or near Colgate's sites, where the company has major volume needs. "This system was essentially modeled after the similar business model used by the automotive industry," Beck says. "And we have had some particular success in eliminating much of the cost of shipping and logistics," Beck says.
"Obviously, to make this kind of a commitment, you have to have entered into a long-standing business relationship," he says.
"By doing this, the supplier is telling us that they are going to continue to be competitive for our business, and one of the advantages they will provide is the fact that their facility is conveniently located right on your property, or right next door," he says.
Amway looks long term
Richard (Dick) Fisher, director of purchasing at Amway Corp., a detergent and homecare manufacturer based in Ada, Mich., says he has worked with suppliers to develop some multiple-year agreements, blanket orders and rebate programs currently in place.
In setting up these long-term agreements, Fischer explains that soaps and detergent manufacturers (and the suppliers that sell to them) are beginning to recognize that being more global has value. "This may be driven by the economics of the entire industry," he says.
For Amway, one strategy that has seen some particular success involves Fischer working with suppliers to choose third-party distributor organizations to help penetrate foreign markets and handle the logistical aspects of supply.
Fischer explains, "If we're looking to manufacture an existing product in a foreign country where we have a plant, but our supplier doesn't, we may be faced with finding another local supplier who can satisfy our needs," he says. "But, usually, we have conducted many qualifications with our existing supplier and shared proprietary information with them. The downside is that we would have to find and qualify a new supplier and share our proprietary information, though we have developed no history with that new supplier," he says.
"To solve this problem, our preference has been for the existing supplier to designate a representative to aid us in getting the material supplied," Fischer says. "This way, the supplier and representative carry a great part of the responsibility and effort of getting the material into the foreign locality," he says. "The distributor makes sure that the product gets into the country and deals with government regulatory requirements for sourcing of materials, as well as the cultural issues involved," he says.
"This is compared to Amway having to secure the material from the supplier and export it to its overseas location in smaller quantities. It also eliminates the need for the supplier to set up a foreign sales organization for the materials we use," Fischer says.
The impact of consolidation
While buyers continue to evaluate their suppliers to determine which are the best for strategic partnerships, today's ever-changing market environment, rife with mergers and acquisitions of suppliers and customers alike, has cast a veil of uncertainty on the development of future and existing long-term supply relationships.
The fact that many suppliers have neither the same structure, strategy, nor name than they did just a few years ago has made buyers more skeptical in entering into future contracts, and it has also forced them to ask more probing, strategic questions of the supply chain.
Amway's Dick Fischer says that, like many buyers, he is faced with the question of which companies to align with in the future. "Who do you invest in or share your trade secrets and long-term strategy with? What horse do you ride in the race, so that you can have innovation and long-term consistency if the game keeps changing?" he says.
"[Consolidation] has made developing long-term contracts very challenging," says Fisher. "Last week we shared strategies, this week the supplier announced that it is divesting segments of its business," he says. Buyers may agree that this scenario is probably not too much of an exaggeration.
"Everyone says that they're consolidating to improve performance and increase the value of service they provide," says Amway's Fischer. "The concern I have is whether companies are actually improving performance as a result of consolidation," Fischer says. "What we're really seeing is more of a leveraging from the operations side.
"Yet, the potential for supplier consolidation forces purchasers to ask more strategic questions of suppliers, to determine which are best suited for partnering," says Fischer. "When you cast your lot with a supplier development program or an alliance with a supplier, you want to be sure that they're going to be there for the long term," he says.
Being strategic often involves asking the right questions of the right people within the supplier organization.
"Buyers need to ask questions that are as much organizationally, financially and strategically driven as they are focused on products and innovation," Fischer says. "Focusing more on supplier management and strategy is a change we're making," Fischer says.
Some of these questions, according to Fischer, include:
- Where are suppliers investing and where are they not investing?
- What future emphasis will be made by suppliers and in which particular product areas?
- Which areas will no longer get the same level of emphasis?
- What is the level of activity within the suppliers' company?
- What issues are suppliers dealing with and how do they apply to your own operations?
Other effects of M&As
Consolidation of suppliers in the soaps and detergents market has caused some other challenges for purchasers. As these companies restructure, there is often a period of adjustment where the companies (in the event of a merger) get to know one another and become familiar with operations. During this period, customers may sometimes have to wait for production problems or inefficiencies to be put to rest. In fact, a recent PURCHASING Magazine survey revealed that about half of polled buyers who had a supplier involved in a merger or acquisition reported performance problems related to the corporate change.
"We went through a period of redefinition of our business," says Fischer, "and we had the normal ancillary issues to contend with. By this I mean that after the merger announcements and after the stocks move up or down, companies have to look at practical things--getting down to business. Problems during this period can make the business disruption effects of the merger linger," he says. "And that can impact product and service quality and other tactical issues."
Also, consolidation often results in workforce reduction. This can also lead to disruption in program continuity between supplier and buyer, in terms of the business relationships that have been built.
"You get a consolidation," says Fischer, "and the first question is, 'Whose name will be on the front of the supplier's building?' The next question is, 'Who are the people that I will be dealing with in the future?'" he says.
"It's not necessarily the executive vice president position that is the key role," Fischer says. "Often, it's the A, B and C persons in the order processing and customer service areas that take the early retirement package or decide not to move to another city. All these factors come into play," he says.
Protect yourself
How do buyers protect themselves from entering into agreements, only to have them quashed by supplier strategy changes that can come with consolidations? Amway's Fischer offers some advice: "You have to keep your ears open and try to stay on top of what's going on in the marketplace," he says. "Also, you should try to be very observant in your tours of suppliers' plants or visits to their office locations--noting that they're adding people to one section of the business or laying off people at another section could tip off a change in strategy."
Another way to protect yourself is by having developed strong relationships with senior management of the suppliers' organizations. "That is what's going to preserve the strategic approach to your business," Fischer says. "If you have a good relationship within the higher management levels of the supplier you're dealing with, you may get some indication that the supplier may be planning some significant changes to their organization. If you only have a relationship that is very tactical and low level within the organization, that is what will be perpetuated as consolidations come about. If you're not one of the major accounts of this combined organization, you may have to be a little more attentive to these issues," he says.
In addition, Fischer points to some clauses (such as notice of change and the provision to change the contract significantly if business situations change, etc.) that buyers can add to their contracts with suppliers. These clauses are either specific to the organization or specific to the product being developed with the supplier. "Here's where having a keen understanding of contract law can help buyers protect their companies from the problems surrounding a suppliers' change in strategy resulting from a consolidation," he adds.
A positive word about ERP
In addition to its close work with suppliers, Colgate-Palmolive has been hard at work in the past four years installing an enterprise resource planning (ERP) business processing system developed by SAP AG.
"I think most people are aware that an ERP system installation is a rather massive undertaking--one that involves a significant changeover," says Charles (Chuck) Beck, vice president, global materials, logistics and sourcing. "And it takes a lot of dedicated resources to implement," he says.
But where some companies have tried such a systems integration and failed (you may have heard some horror stories), Beck says that his company is succeeding. Colgate has taken a cautious approach to the system's implementation, taking it one step at a time.
"From a business standpoint," says Beck, "Our installation and processing has gone very well. We haven't missed a beat in terms of sales reporting, the basic information needed for profit and loss, etc.," he says.
"Right now, we're in phase two" of the implementation, Beck says. This phase involves a second look at all data that exist in the system, so that the company can begin to extract meaningful management information that will optimize the system and our operations.
Beck explains that much of the difficulty companies have with ERP may come from the way in which it is implemented.
Beck says that he has heard some stories about ERP implementation gone sour. "It's speculation, but it seems that some companies may have failed because they tried to do everything from plant operations control, to providing information and data forecasting and all the systems that hang from the side of, and are related to, SAP," he says. "It seems that many companies try to install all this along with SAP in one fell swoop," he says.
"When you do that, you have analyzed [and changed] your business process, and then you have installed a new information system that yields all new information that you've never had to deal with before," Beck says. "That can be a recipe for disaster.
"We are a divisionalized company," says Beck, "So we phased in the system by division. The U.S. operations were first, followed by Europe and Asia-Pacific," he says. "Now, the majority of our divisions and our key subsidiaries have moved over to SAP," he adds.
Beck says that the company's next step is to extract that information (Colgate is currently looking at SAP's Business Warehouse product in order to do this) in order to create multi-variable, multi-complex reports.
"What I like about the SAP system is that we are building on a foundation now that has the same basic components," Beck says. "There are some differences, but the foundation has been established. As we continue to put our information technology and supply chain management efforts up against it, we're going to wind up ahead in the long run," he says.
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