Reducing Supply Chain Costs While Enhancing Performance

The rewards for undertaking a supplier development initiative are well worth the effort. For example, some of the benefits of an effective supply chain development program include:

  • Sourcing cycle time reduced by 25-30 percent
  • Time-to-market reduced by 20 percent
  • Costs lowered by 25-50 percent
  • Improved quality, reliability, and manufacturability of products and services
  • Increased responsiveness to customer needs and market dynamics
  • Improved collaboration and knowledge sharing

Thus, a supplier development program must be aimed at improving suppliers performance, not browbeating them into charging less or simply auditing and rewarding them. Instead, supplier development is all about providing suppliers with what they need to be successful in the supply chain. Two of the most important functions of a supplier development program are:

Providing information about products, expected sales growth, etc. Poor communication is one of the biggest mistakes. Lack of information translates into additional costs (usually in the form of just-in-case inventory). Suppliers need to become extensions of their customers.
Training and subsequent support in the application of Rapid Results improvement   tools. Asking suppliers to drop their price without giving them the know-how to lower their costs through process improvement is not sustainable long-term.

This paper provides supply chain professionals with a time-tested approach towards reducing costs through a formal supplier development program that involves engaging the culture through a series of Rapid Results projects.

The Author’s Journey To Supplier Development

My career began in an industry that was characterized by adverse customer-supplier relationships. At times, I sometimes thought that that some of my colleagues felt that suppliers were the enemy and not business partners. Audits, attempting to beat suppliers into cost reduction submission and constant conflicts were common. This resulted in a less than optimal situation where some suppliers told me that they actually added on to the cost of their products / services for the “grief” that my company gave them.

I left that industry and became Director of Quality for a small metals manufacturer. This allowed me to experience things as a supplier (I was on the other side of the fence then). Of the many customers that I serviced, two had very effective supplier development programs where they actually invested in key suppliers and helped them to improve their processes. One customer actually supplied us with some badly needed equipment when my company was cash poor. I began to notice that numerous benefits ensued for these two companies, such as:

  • Improved quality levels / high employee motivation – employees spent extra time and effort to ensure that this product was of superior quality
  • On-time delivery
  • Employees actually interrupted ongoing tasks in order to work on these two customers’ products.
  • Price reductions were granted for future orders, or at least we would not even think of a price increase during inflationary times.
  • An enhanced sense of partnership, cooperation and loyalty ensued

I then worked for two Fortune 500 corporations with a worldwide supply base. One organization had a significant supply base in China as well at other locations worldwide. Formal supplier development programs were implemented at selected key suppliers with the following results:

  • 9% cost reduction
  • 16% schedule performance improvement
  • 30% quality level improvement
  • 10% lead time reduction
  • 32% reduction in incoming inspection at our assembly plant
  • Increased flexibility relative to schedule changes

“What gets measured gets improved”

Once key suppliers are selected and Rapid Results projects are agreed to, the next vital step is to jointly establish metrics. These measures should be in financial units, so that potential and actual savings can be seen. This is to be accomplished prior to launching projects so that there is an understanding of the current performance and there is a system in place to track improvements. In many cases, immediate improvement ensues as individuals tend to pay attention to items that are tracked.

Achieving Rapid Results

Rapid Results methodology, validated over many years, achieves immediate results and develops implementation strategy. These projects are designed for a team to achieve some measurable results quickly, within 30 to 60 days (much less than a traditional Six Sigma or LEAN project). The objective must be urgent and compelling with a bottom line goal. Projects are selected such that the team can do it with the available resources and authority. The facilitator performs training as the team needs it, and the improvement tool introduced is applied immediately, thus reducing investment and accelerating results. Innovative methods are tested and the organization quickly gains confidence with more Rapid Results projects being launched.  Success is achieved quickly so there is quick pay back for both the customer and supplier and fast gratification for the team members. This method adapts to various world cultures rather than making the culture adapt to the method.

It is not right or wrong, good or bad, it is just different!

The quote above was a response I gave during a personal interaction after a trip to Asia.  I was telling a family member about something experienced while there.  She responded with a negative remark (I cannot remember just what it was, but it was something like -“that is terrible”).  The above was my response.  The point here is that one will encounter different behaviors and communication methods while travelling abroad.  It is wise to not judge these differences, just accept them.  Also, what we do and accept as normal will very often seem strange to foreigners.

Over the past two decades, I have witnessed many cultural blunders that caused organizations to suffer financially. One such example is as follows:

Lack of Cultural Awareness = Paying a Higher Price for Products!

Recently I was assisting a start-up international corporation with their operations in Asia.  Their Asian Division (not China) was buying kits from China and performing final assembly in their country.  During my engagement with this client, I noticed many instances of miscommunication due to lack of cultural aptitude.  They handled their Chinese counterparts as if they were part of their own culture and made no attempt to learn and apply Chinese culture.  I needed to spend most of my time on the ground in China, constantly resolving conflicts between my client and the prime Chinese supplier. The relationship suffered. Most of these issues could have been avoided with the application of some cultural savvy.

When the world recession hit in 2008, material prices dropped significantly. The main supplier was asked to lower its prices because material was the major cost component. This supplier refused to lower their prices. The owner told me “unofficially” that she was not willing to lower her prices because of the difficulty in doing business with my client. The root cause of this “difficulty” was mostly cultural.

One example of the above is the manner in which these Asians communicated with the Chinese. There were many instances where direction was given to either my clients’ personnel in China or a Chinese supplier and actions did not occur due to some misunderstanding.  They responded by using the term “I told you very clearly.” Just because some verbiage is clear to the sender does not mean that it is clear to the receiver (especially one who is not using their native language). There was a failure to realize that the Chinese did not possess the same level of English proficiency as these other Asians and that one must confirm understanding and resultant actions by a follow up phone call.

My client paid a higher price and had an unmotivated supplier due to their lack of cultural sensitivity and application. This division eventually failed and went out of business.

When introducing and implementing Rapid Results projects with suppliers with different cultures be sure to tailor your approach to fit the particular culture that you are involved with. Understanding and applying culture results in the following benefits:

  • Enhances communication and action
  • Establishes Immediate Rapport / Builds Positive Relationships
  • Relationships are more important in low cost regions than in the west
  • Enhances Team Motivation / Buy-in
  • Enables cooperation
  • Postures both organizations for success

The best option is to invest in cross cultural training for all the stakeholders involved in dealing with foreign/different cultures.  This will pay dividends over and over!

A Key Supplier is your extension

Treating suppliers as an extension of your business will prove beneficial. Provide them what is needed for joint success. Share company direction and provide them with information relative to new projects. Securing their input relative to new designs/services will result in development time reduction and additional cost savings. One avenue typically used by organization with superior supplier development programs is to hold periodic supplier conferences. It is recommended that this option be implemented.

Getting Started

Successful implementation of a successful supplier cost reduction program using a Rapid Results approach requires some up stage setting. A strategy to ensure organizational buy-in is needed along with a detailed implementation plan. Resources, including a competent facilitator are necessary. The facilitator needs skill in both the use of Rapid Results tools and the ever important team facilitation skill. When a Supplier Cost Reduction project fails, a frequent reason is inadequate facilitation skill. If a trained and experienced facilitator is unavailable, it is wise to contract this service. Now it is time to get started with supplier development and the resultant cost reduction!