Good purchasing practices are an integral part of small business success, and few factors are as vital in ensuring sound purchasing methodologies as the selection of quality suppliers. Indeed, finding good suppliers and maintaining solid relations with them can be an invaluable tool in the quest for business success and expansion. In fact, a business can only be as good as are the suppliers with whom it works. Suppliers provide the materials a company uses to produce its own goods and/or services. Suppliers provide the transportation of those materials. Suppliers provide a company with the services it uses in providing goods and service to its customer. Without a solid relationship with its suppliers, a company can not offer its own customers a consistently high quality product or service.
For many procurement organizations, suppliers have become an important factor in their planning. Suppliers are often a procurement organization's secret competitive weapon, their hidden resource, their competitive edge. These competitive gains can manifest themselves in a wide range of areas, from better prices and delivery times to increased opportunities to consider and implement innovative practices. Such improvements will not be realized without meaningful leadership from business owners and executives. Leading companies develop tailored supply strategies that are directly linked to their corporate strategies. These leaders emphasize shareholder-value creation, revenue growth, and cost competitiveness, and establish specific programs with their key suppliers in order to ensure that these priorities are addressed. Whenever possible, business leaders use suppliers to maximize their own product competitiveness, going beyond the narrow focus of cost reduction.
SUPPLY CHAINS AND PARTNERSHIPS
In recent years, countless management experts and analysts have touted the benefits that businesses of all sizes can realize by establishing "partnerships" with their suppliers. Under such a plan, which is also sometimes referred to as "supply chain management," distribution channels are set up across organizations so that all the members of the channel, from suppliers to end users, coordinate their business activities and processes to minimize their total costs and maximize their effectiveness in the marketplace. But while this trend has become more prevalent in today's business environment, it is still practiced in only spotty fashion in many industries. Common impediments to establishing true business partnerships with suppliers include: attachment of greater importance to other initiatives; comfortable relationships with existing suppliers; dearth of cross-business unit cooperation; doubts about the benefits of instituting such practices; lack of cross-functional cooperation; poor monitoring and control systems; inexperience at managing improvement programs; and distrust of suppliers. Companies that feature many of these characteristics typically cling to old competitive bidding practices that center on perfectly legitimate concerns about price, but at the exclusion of all else.
As a result, these businesses miss out on the many benefits that can accrue when effective partnering initiatives are established with suppliers. Suppliers can be an important source of information on ways in which both small and large businesses can improve performance and productivity. Five general categories exist in which supplier involvement can help buyers compete in the marketplace:
- Improvement of products through contributions to product design, technology, or ideas for producing new products. In most such instances, suppliers help buyers by pointing out ways in which designs can be improved or more desirable materials can be used.
- Improvements in product quality. In addition to providing design recommendations that result in improved products, suppliers are often sources of suggestions that allow buyers to hold consistent tolerances in production.
- Improvements in "speed to market." Some of the most significant contributions in this area came from suppliers to original equipment manufacturers.
- Reductions in total product cost, either through streamlining of work processes (inventory management, new product design, scheduling, etc.) or replacement of costly components with less expensive—but still effective—ones.
- Improvements in customer satisfaction.
Analysts indicate that suppliers receive some benefits in the emerging purchasing dynamic as well. Reduced paperwork, lower overhead, faster payment, long-term agreements that lead to more accurate business forecasts, access to new designs, and input into future materials and product needs have all been cited as gains. Other observers, meanwhile, point out that some buyer-supplier relationships have become so close that suppliers have opened offices on the site of the buyer, an arrangement that can conceivably result in even greater improvements in productivity and savings. Of course, companies are not going to form such "partnerships" with all of their suppliers. Some form of the traditional purchasing process involving bidding and standard purchase orders and invoices will continue to exist at almost every company, and especially at smaller companies that do not have the financial clout to pressure suppliers for price or delivery concessions.
But many management consultants and business experts contend that even those businesses that are not ideally positioned to create partnerships with suppliers can benefit from the establishment of effective supply chain management practices. Buyer-seller alliances unleash a capacity for innovation that far outweighs the short-term cost savings offered by arm's-length competitive bidding. Businesses should explain their overarching needs to several dedicated suppliers and open lines of communication with them rather than simply defining their requirements and waiting for a flurry of bids that are primarily—or exclusively—concerned with submitting the lowest bid.
Potential Drawbacks of Supplier Partnerships
Establishing close relationships with suppliers, though, means that buyers have to conduct the necessary research to make sure that they select the right companies. Purchasers need to know a great deal more about suppliers' capabilities than they did when everything depended on a bid/buy relationship. Today's emphasis on partnerships is contingent on suppliers who can become part of a whole supply system. In fact, major suppliers need to be critically screened and evaluated before they are brought into any supply chain system. Thriving small-and mid-sized businesses that are already well-established will be better able to take on such tasks than will fledgling businesses, but even start-ups should take the time to learn more about their suppliers than their prices.
Of course, desired supplier traits vary somewhat depending on who is being surveyed. For example, design engineers tend to place the most weight on product quality when analyzing suppliers, while purchasing professionals place greater importance on cost considerations in conjunction with product quality. Criteria to be evaluated will also vary depending on product category. The objective of all evaluations is the same: To compare all potential suppliers in a market segment to determine the one best qualified partner with whom to work. The evaluation of potential suppliers should include an assessment about whether the supplier is suited to assist the purchaser to meet its prime business objectives. Typical the objectives to which the supplier should provide assistance include inventory reduction, quality improvement, elimination of paperwork, and improved handling of incoming goods.
Companies that do not do the necessary legwork, on the other hand, may find themselves linked to a poor or untrustworthy supplier that can erode a business's financial fortunes and industry/community reputation in a remarkably short span of time. Poor supplier performance is not the only risk a purchaser faces in situations where it has linked with a bad supplier. Another potential threat that arises when partnering with suppliers is the loss of trade secrets to competitors. Additionally, a supplier may venture out on its own once it has acquired new abilities and may in fact become a competitor. A company that abdicates too much to its suppliers may weaken itself. All of these risks are especially great in fast-moving, knowledge-intensive industries, which are precisely those for which integrated supply chains may be of particular usefulness. Given these potential pitfalls, businesses seeking to establish partnerships with suppliers are urged to proceed with caution.
Whether searching out new suppliers or benchmarking the performance of current suppliers, businesses are urged to consider the following when evaluating their options:
- Commitment to quality—Not surprisingly, product quality is regarded as an essential factor in selecting a supplier. Specifics in this realm include the suppliers' statistical process control methods, its QS-9000 registration, its approaches to problem solving and preventive maintenance, and its methods of equipment calibration.
- Cost-competitive—Competitive pricing is another huge factor, especially for businesses that are smaller or experiencing financial difficulties.
- Communication—Suppliers that do not maintain a policy of open communication—or even worse, actively practice deception—should be avoided at all costs. The frustrations of dealing with such companies can sometimes assume debilitating dimensions. Moreover, constant exposure to such tactics can have a corrosive effect on internal staff.
- Timely Service—Businesses' strategies are predicated on schedules, which in turn are based on receiving shipments at agreed-upon times. When those shipments slip, business strategies suffer. The blow can be particularly severe if the supplier is negligent or late in reporting the problem.
- Flexibility and Special Services—Many purchasers express appreciation for suppliers that take extra measures to satisfy their customers. These "perks" can range from after-hours accessibility to training or inventory support.
- Market Knowledge—Suppliers with extensive knowledge of market conditions and mastery of contemporary issues impacting your business can be immensely valuable in helping small companies chart a course to sustained financial success.
- Production Capabilities—the supplier's capacity for program management and production should be considered, including its ability to integrate design and manufacturing functions, its approach to design changes, and its program measurement features.
- Financial Stability—Businesses that allocate large sums for purchasing materials often prefer to make long-term deals with suppliers that are financially stable. Such arrangements not only convey security, but they allow companies to learn about one another and gain a fuller understanding of each business's needs, desires, operating practices, and future objectives.
- Logistics/Location—Supplier capabilities in this area include transportation capacity, sourcing capabilities, and 'just-in-time' performance.
- Inventory—Evaluation of this consideration is dependent somewhat on the supplier's business. If the supplier is a distributor, the emphasis will be on how well his inventory is set up to avoid stockouts. With a manufacturer, emphasis has to be on inventory accessibility. If the supplier has a just-in-time program with 24-hour assured delivery, it's in better condition than the manufacturer with a lot of raw material inventory and an eight-week lead-time for raw material.
- Ability to Provide Technical Assistance—Suppliers with top research and development capacities can be quite valuable to buyers, providing them with significant savings in both price and quality.
OTHER KEYS TO SUCCESSFUL SUPPLIER RELATIONSHIPS
A common lament of suppliers is that buyer organizations all too often have unrealistic expectations about the supplier's ability to anticipate buyer needs. As one purchasing executive admitted to Purchasing, "In new technology areas we have great difficulty getting the users in our own company to define what they want. Most have an attitude of 'I'll know it when I see it.' And many of these users keep changing their minds."
Honesty on both sides is another important quality in effective buyer-supplier relations. Small business owners hate being misled by their suppliers, yet they are often less than above-board in their own communications with suppliers. This is most common when the business is grappling with past-due payments, but entrepreneurs should avoid subterfuge and be upfront with suppliers about their situations. "Instead of lying and saying the check's in the mail, tell suppliers what's happening and what you propose to do about it," one small business owner told Nation's Business. "If you have a note that's due, you call them, instead of waiting for them to call you. They appreciate that. Business people are afraid to make that phone call; they want to make it all sound rosy. But … if you owe them, suppliers are eager to find a way to work with you."
see also Competitive Bids; Cooperatives; Inventory Control Systems; Supply Chain
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Hillstrom, Northern Lights
updated by Magee, ECDI