Supplier Management as a Source of Competitive Advantage
Supplier relationships have evolved to become an opportunity for creating market-winning competitive advantages, or allowing competition to leverage those advantages to the detriment of your company.
Realization of this emerging reality has resulted in the increasing adoption of the principles and processes of strategic sourcing. Suppliers are a competitive weapon in the arsenals of world class companies with the realization that strategic sourcing builds supply chains that win against the best of the best.
Companies can no longer afford to assume that a supply of materials will be there when and where they need it, and in the quantity they need, and at the price they’ve come to expect. Forces on a global scale have made such comfortable assumptions a thing of the past. Compliance with increasingly complex environmental requirements, supply uncertainties resulting from political unrest, and accelerating global levels of competition for critical materials, are just a few of the material supply complexities that companies must face and overcome continually.
Add to this the fact that companies are increasingly competing on a global supply chain level, while entrusting an ever increasing share of their added value to suppliers, including suppliers that provide outsourcing services, and you have challenges on a daunting level of complexity unimagined only a decade ago. American industry must come up to speed in sourcing on a strategic level, evolving their suppliers into an extension of themselves, regarded on the same (in some cases higher) level of importance than even their own internal value creation capabilities.
Known Values of Strategic Sourcing
Fortunately strategic sourcing is not new to the scene. It is a business process developed over the last 20 years that has proven its ability to create optimized total cost of supply, market-winning global supply chains, and accelerated new product introduction. Here are a few of the values sourcing materials strategically has demonstrated:
- Lowest total cost of supply across the entire supply chain.
- Fastest product time to market and to volume production.
- Global supply reach and capability.
- Market-winning supply chain reliability and responsiveness.
- Supply chain compliance with labor, materials governance/regulatory requirements.
- Product and supply chain quality of performance exceeding customer expectations.
Strategic Sourcing Collaboration Enablement
The early adopters of strategic sourcing, who are now realizing its wide range and depth of competitive advantages, realized that suppliers are a resource, and as such, are a variable resource. How suppliers are integrated into the company determines the values they provide. A simple concept, but one whose implications greatly influence the ability to compete or even survive.
The best suppliers are becoming ever more selective in whom they support. Suppliers also gain from longer-term strategic relationships with customers enlightened to pursue the benefits of strategic sourcing.
They are seeking customers that they can consider strategic in the mutually successful environment of strategic sourcing.
Supplier-accelerated value adds yet another layer of complexity that strategic sourcing has demonstrated it successfully addresses. Vertical integration has given way to the expanding concept of defining and sticking to core competencies and having suppliers provide all values not defined as a core competency. Combined with that is the expansion of globalization and moving up to compete on a supply chain level.
Strategic sourcing as a core competency marshals suppliers into a tightly knit, highly leveraged competitive weapon that enables companies to compete globally on a supply chain level where their outsourcing providers are being managed and performing on a strategic level.
The engine behind strategic sourcing creating market-winning competitive advantages is enabling collaboration between customers and suppliers. Collaboration applies the resources of both sides into a relationship based upon trust, long-term business intentions, and the creation of a wide range and depth of mutually beneficial values.
Creating Sustaining, Value-Generating Relationships
A strategic relationship, created and continually improved for both sides through strategic sourcing, is the underpinning of achieving an environment in which collaboration can be initiated and thrive. Collaboration is a process where two or more parties expend resources in seeking to define and implement value creation processes that will be of value to both sides. Collaboration cannot exist unless the parties first regard their relationship as long term and mutually beneficial and it is strategic sourcing that establishes that foundation. Look at companies that have failed to achieve the tremendous benefits of deep collaboration with their suppliers and you will find lacking the enabling strategic relationship. Supply chains frequently have not met expectations and those disappointments can usually be traced back to the lack of effective customer/supplier collaboration.
| The Core Processes of Strategic Sourcing Strategic sourcing is not black magic. It is a series of processes that when orchestrated on a program level will develop, manage and improve over time an overall supply strategy and execution, achieving optimized supplier value integration. Those values have been demonstrated, will create market-winning|
competitive advantages, and are driven with proven strategic sourcing best practices including:
American industry has been slow to adopt relationship-based supplier integration. The emphasis to optimizing supplier values has been on information technology (IT) customer/supplier interfaces, offshore sourcing, outsourcing and supply chain development.
IT tools have many very valuable applications that optimize both the efficiency as well as effectiveness of customer/supplier interfaces, but cannot themselves create the values of relationship-based collaboration.
Global sourcing, outsourcing, and supply chains, are all logical supply solutions, optimized through the processes of strategic sourcing. Each must be part of a larger plan for supplier integration that is one of the established deliverables of strategic sourcing in the form of a global supply plan, achieving the integration of these supply strategies into the best value creation strategy and execution processes.
Powering Supply Chain Excellence
Future American industry leaders will be those who create the correct core competency model (for them) and embrace strategic sourcing itself as a core competency. Not all companies have the same potential supplier values creation opportunities, depending on the nature of their products. But where the potential for supplier value contribution is across a wide range and depth of values, supplier integration on a strategic level will create market-winning competitive advantages.
There has been confusion on what powers supply chain, but clarity is emerging through the experiences of world class companies. Strategic sourcing is the business process recognized more over time as optimizing supply chain performance.
The emphasis of IT empowering supply chain excellence is being replaced with the realization that supplier performance is driven through collaboration based on strategic relationships. IT remains a vitally important element of achieving supply chain optimization but it represents a tool set rather than the basis for customer/supplier collaboration value creation. It is customer/supplier collaboration that results in optimized supply chain design, implementation, performance and improvement.
Fundamental to supply chain excellence is that every link in the chain provides exactly the value assigned to it, and does so on time, with the precision of a fine watch, and with absolute predictability. This level of supplier value contribution can only be achieved when the supply base is rationalized, and the company’s strategic sourcing team is collaborating in depth with suppliers to define mutual support goals, continually measuring results over time, taking corrective action when needed, and applying their collective experience and intelligence to continual improvement initiatives. While IT tools can and should assist in this value creation process, it is the human-to-human collaboration that creates best practice levels of supply chain excellence.
Total Cost of Supply: The Bigger Picture
Total cost of supply1 (TCS) optimization refers to taking into account all the costs that a supply strategy and execution will incur, and also includes costs to the supplier as well as the customer. One of the core processes of strategic sourcing is to identify all costs related to supply and develop supply strategies and execution processes that result in optimized TCS; customer and supplier.
In a nonategic sourcing environment, frequently the only cost that is considered in making purchase awards is the price that will end up on a purchase order. During the development of strategic sourcing over the past 20 years it has been realized that there are many costs related to a purchase award beyond the price paid on the purchase order. And that those other costs are frequently greater than what ends up on the purchase order.
When customers and suppliers seek to identify and quantify total cost, the realizations often result in radically altered supply as well as supply chain designs and executions. The scope of effort provided by the company may itself change drastically, all the way to outsourcing for some or all manufacturing, and possibly services such as design , engineering, fulfillment and field service, as well as others.
Strategic Sourcing; a Selective Initiative Where Benefits Exceed Investments
Sourcing strategically requires investment; in people and travel in particular. The people investment relates to hiring what some companies refer to as Supply Base Business Mangers. Their skills and knowledge are such that they know how to build strategic, mutually successful supplier relationships based on the principals of strategic sourcing. The travel comes in when they routinely and continually keep on top of what is developing in the supply community with the essential global perspective always in the forefront of their learning.
The benefits of strategic sourcing are influenced by several factors that should be taken into account when considering making the essential investment:
- How much of the technology in design and manufacturing of our product is contributed by this supplier? The greater the contribution the more likely sourcing strategically would be appropriate to optimize those values. Particularly if the supplier holds key related patents.
- For whatever reason if we have only one source, strategic sourcing makes sense to collaborate with the supplier to mutually build protections against supply interruptions. Mitigation of risk is essential particularly if supply interruption would result in a substantial loss of revenue and customer confidence.
- What % of the cost of our product sourcing does this supplier represent? The greater the cost the more sourcing strategically may present total cost of supply optimization opportunities. This is particularly true as the % of custom design increases to the point that the items provided may be 100% custom; this is where collaboration with the supplier frequently will reveal cost reduction possibilities that both will work to have realized.
Making the investment of sourcing strategically has greater payoffs as variables of supply, technology and cost are greater. As the variables increase so do opportunities for influencing them into representing optimized Total Cost of Supply. If they are not influenced through collaboration with key suppliers, then they will seek their own level which will be far from presenting optimized supplier leveraging.
Summary: An Opportunity for Winning in the Marketplace
Strategic sourcing collaboration establishes the environment in which suppliers willingly engage in customer/supplier supply and supply chain TCS analysis and the planning, as well as the execution, of cost-optimized supply solutions. TCS optimization, all the way to and including the supply chain level, is capable of creating significant competitive financial advantages to both customer and supplier.
Achieving quality results from relationships with suppliers has always been a challenge. That challenge became many times more complex when global sourcing, outsourcing, and supply chains came into being. Each of these changes in sourcing strategy and execution made communications more difficult, blurred lines of value creation and handoffs, while introducing multiple cultural and business process variations.>
Taken together, these impacts have increased the challenge of achieving quality across a supply chain, and through its depth, to a level nearing impossibility. Strategic sourcing focuses the energies of customer and suppliers on continual improvement in the values each represents to the other across a wide spectrum of quality enhancement initiatives. This ability to achieve and maintain focus through strategic sourcing has enabled customers and suppliers to not only handle the increased challenges, but also to turn those challenges into competitive advantages as they excel in their mastery of them!
Continual improvement is what sourcing strategically is all about. This cultural level dedication to excellence starts with supplier integration into the new product introduction (NPI) process where as much as 80% of the total cost of a new product is established. Supplier involvement in NPI applies supplier expertise to that of the company in optimizing product design, manufacturing and supply chain design and performance. Suppliers are a source of a wealth of best practice knowledge, and strategic sourcing leverages that knowledge in the creation of market-winning products and the supply chains that deliver them.
Strategic sourcing is an emerging business process that will become common to the American business environment and adopted worldwide. Manufacturers will have no choice other than to adopt strategic sourcing as their competition realizes that suppliers hold the key to survival in the new world of supply complexities, and leverages that knowledge in the creation of lean, fast-responding supply chains that optimize total cost while merging best of class suppliers into their companies as an extension of themselves.
By Thomas W. Bower
1 For more, see “Larger Cost Savings Come from Total Cost Sourcing” — Return to article text above
To view other articles from this issue of the brief, click here.