The Future of Purchasing and Supply: Supply Chain Partner Selection and Contribution

Initiative #4: Supply Chain Partner Selection and Contribution
Take the Initiative: Continuing coverage of the trends shaping the profession

By Roberta J. Duffy, writer for Purchasing Today®.
November, 1999 Purchasing Today®, page 41.

Just enough is not enough as purchasing and supply organizations choose suppliers for their ability to learn, analyze, and contribute to more encompassing supply chain goals and objectives.

Just as you wouldn't hire a new employee for your organization based on what you believe to be his or her six-month ability. Just as you wouldn't expect your star employee to operate only at the "acceptable" level. Just as you would expect your recruits to bring to the job fresh ideas from their past experiences. Just as you would anticipate all these strategic qualities to accompany a new business associate, so goes the way with suppliers. Supply chain management, the formalized method of managing all those links - suppliers, customers, and others - that ultimately affect the purchasing and supply organization, is coming into focus as the means to leverage several organizations' expertise and operations. The methodologies and processes surrounding supply chain partner selection and contribution are evolving to become more significant and more integrated, and are resulting in more value-added opportunities for the entire supply chain. Yet, as leading organizations are raising the standards in this arena, there are opportunities for even further growth and innovative relationships five and ten years down the road.

The Prime Selection

The first step in optimizing supply chain partner involvement is determining that you've got the appropriate partners. Many of the traditional rules still apply, including issues of quality, past performance, financial stability, and process competencies, but many experts insist that the leading purchasing and supply organizations dig into these areas deeper than before. For example, rather than just analyzing financial statements from an organization's annual report, the trend is for purchasing and supply professionals to assess a supplier's market share, trends within their industry, their long-term strategic plans, and their investments in research. Purchasing and supply managers need to become so knowledgeable in supplier operations that they know as much about the person across the table as they do about themselves.

To properly evaluate a supplier's potential capabilities, purchasing and supply organizations must become aware of and consider attributes they might not have considered in the past. "The suppliers we want to add to our supply base should have more technology or system capability than we could ever imagine using in the immediate future," says Jeff A. Tomko, purchasing senior manager for Honda of America Manufacturing in Marysville, Ohio. "That indicates the level of potential." Another good sign: adaptation to accelerated development. Just about the only certain thing for the future is the need to be flexible. Where does the supplier's role in development begin and end? In past projects, how did the supplier contribute? A little more elusive to quantify, but still important, is management. Tomko says that evaluating an organization's management style and compatibility comes after several supplier visits during which you can get more of a handle on those subjective traits.

Criteria to Consider

The exact criteria to be used in selecting supply chain members will obviously vary for each organization and industry. In fact, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" says that "supplier metrics will become more individualized as companies specialize the metrics for individual supplier performance." However, the focus will be on potential. Whatever criteria you're currently using should be projected into the future. If "response time" is a critical metric for your organization, potential suppliers should be asked not only what response time they're able to achieve now, but how they expect those times to improve in the future.

Selection criteria will also cross functional lines. In the future, supplier contribution will not be limited to "purchasing" activities. For example, if your organization is anticipating major systems investment, a potential supplier might be evaluated on its potential to share knowledge about its systems experience. This would go beyond the supplier's eventual interaction with the systems to include its overall experience as a fellow business partner. Even if processes currently aren't in place to include suppliers in such discussions, selection should be made based on potential activity.

It's important to note that these evaluation and selection activities are not restricted to new suppliers targeted for their potential. An existing supplier may have the capability to elevate practices or form a more integrated relationship. "Most enlightened organizations recognize that development of a high-level management team cannot be accomplished solely through recruitment, but includes training and employee development as well," says Jim Wehrman, assistant vice president, purchasing, at Honda of America Manufacturing. "By the same token, a top-level supply chain management effort must focus heavily on development of current suppliers, and must devote significant resources to strengthening current suppliers and improving their capabilities."

While selecting appropriate suppliers with which to develop strategic relationships is an important step, it's only the beginning. The largest task of developing a world-class supply base is in developing those chain members, says Wehrman. The findings of "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" support this theory. While "Supply Chain Partner Selection and Contribution" is one of the initiatives cited, other areas specifically address even more developmental issues - relationship management, global supplier development, strategic supplier alliances, and source development. This series "Take the Initiative," will examine those areas in coming months.

Share and Share Alike

How many supply chain partners does it take to make a difference? Haven't heard that one? A better question might be, how can many supply chain partners make a difference? "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" predicts buying and selling organizations will participate in more joint planning and development activities. More and more, organizations are looking for ways to increase supplier involvement and most are finding that some of the basic steps include:

  • Sharing information
  • Developing trust
  • Creating a mindset of increased involvement
  • Strategically selecting the right partners

Phelps Dodge, located in Phoenix, Arizona, is one example of an organization that has made some significant strides in these areas, according to Michael F. Upton, vice president of supply strategy for the mining company. "We wanted to provide an environment where we would spend time with suppliers and begin to change the nature of our relationship with them." What emerged was a supplier council, comprised of 11 suppliers as well as Phelps Dodge representatives, which holds meetings on a quarterly basis. "Historically, we've had a reputation of not being very user friendly with our supply base," says Upton. "Now, with the council in place, we've got a vehicle to help change the way we communicate and open the door for increased involvement and supply chain opportunities."

One technique Phelps used to improve communication takes advantage of the latest technology. At one of the supplier council meetings, a third-party service provides laptops to all present - in this case it was about 40 members from Phelps and the supplier council members. Participants submit questions or comments about each other via the computers while remaining anonymous. The questions and comments can then be addressed by the group. Out of this exercise, opportunities emerged: together they determined that some training was in order on strategic alliances. With this objective in mind, the supplier council and Phelps Dodge hired Lisa M. Ellram, Ph.D., C.P.M., CPA, associate professor of supply chain management at Arizona State University. The supplier council worked out the details and attended the two-day class together. Ellram explains why this group, and other groups, are moving toward more joint activities and how this will optimize supply chain contribution.

"What really impressed me about the Phelps Dodge seminar was that even in formulating the ideas to include in the supplier alliance training, the purchasing and supplier organizations worked together," says Ellram. It wasn't one side saying, "Here's the relationship we'd like to have; please be involved in the training with us." It was the two parties - together - determining the need and content of the program.

Ellram says that when supply chain members participate in such an activity it allows them to develop a deep understanding of what the other is looking for, and sometimes there are surprises. "Purchasing organizations are usually surprised to hear that a supplier is not just interested in more money," she says. "Sometimes it's more about being assured of long-term orders. Or perhaps they just want more visibility of what is planned at the purchasing organization; that can be worth a great deal to them." And it works both ways. Oftentimes, suppliers realize that their selling point is not just a competitive price, but might be their financial strength or reliability. The point is that creating an atmosphere where these objectives are shared is the first step in actually achieving them.

The Sum of All Parts

The goal of all these efforts is not just to be able to say that you've done all the proper communicating or know that you've got the "best" supplier on board. The goal is to ultimately realize value-added benefits that would not have been possible without this particular relationship. You want to be able to show that the combined efforts of the supply chain have produced some results.

Imagine you are a manufacturer that uses several natural compounds in your product. Surely you would expect your supplier to have some knowledge of various chemicals, including availability. But can you imagine members of your and the supplier's organization forming teams to research the environmental effects on natural resources and how that will affect the harvest of these compounds 20 or 30 years down the road? Or, how about this one: one of your critical supply partners (a smaller firm) is facing legal challenges and members of your legal department are sent to provide counsel. The extreme of supply chain contribution stretches far beyond the purchasing-supplier relationship. Although it's extreme, it's coming.

If these scenarios seem hardly more than a "gleam in your purchasing eye," keep in mind that strategic benefits from supply chain contribution can, today, manifest themselves in different forms. It might be a seemingly routine, ongoing process that gets improved, but the point is that the improvement comes from within the supply chain.

Jeff Hillary, project manager in supply chain efforts for Arizona Public Service (APS), a utility company in the Southwest, explains how an open, collaborative environment paid off for both the supplier and customer. The situation involved APS' purchase of a product from the supplier, which then had to be shipped on a combination of flatbed and closed trucks. In analyzing freight costs, the two parties realized they were unnecessarily high. "This product wasn't that heavy," says Hillary. "It was the mass that was cumbersome, taking up space, and raising costs." The solution was to design a mechanism that allowed the product to be double-stacked, thus reducing the space required. And here's the kicker: it was jointly designed by APS and the supplier's technicians, and freight costs were ultimately reduced by almost 50 percent. "Because of the environment we created with this supply partner, a flow of ideas was generated which created this solution," says Hillary.

The Evolution of a Relationship

How exactly do you raise the level of expectations among suppliers about their contribution? What does the future hold in terms of integrated involvement? Let's look at an example at Honda of America Manufacturing to see the evolution from a traditional supplier role to one that is selected, developed, and measured against total supply chain contribution. For most of us, the instrument panel of an automobile means dials, buttons, and knobs. But for Honda, it's an opportunity for total system development, increasing suppliers' level of contribution, and supply chain competitiveness.

In the past, the instrument panel of the car was produced by Honda and the accompanying components, like various ducts, the odometer panel, or the glove compartment box, were outsourced to several suppliers based on their capabilities to produce that isolated part. Eventually, the manufacture of the instrument panel was charged to a single supplier and from there, that supplier's role began to increase. Rather than Honda taking responsibility for design details of how everything will ultimately work together, the panel supplier performs that function. "They're not physically assembling the part," says Honda's Tomko, "but the components ultimately work together because we've arranged for the two suppliers to work together."

Next in this evolution is even more responsibility for the panel supplier. Instead of just working with the component supplier, they will assume responsibility for sourcing of those component parts. After that, the panel supplier will perform some subassembly of the panel and its components prior to the materials shipping to Honda.

Tomko admits this is just one possible scenario. Part of optimizing the supply chain contribution is being able to recognize which links in the chain have the required capabilities. In his case, one of the component suppliers might have the technology to take on an additional component, or Honda might find a component supplier who is suited to manufacture the whole instrument panel. "We leave those options open," says Tomko, "because in sharing our ideas, it generates possibilities among the supply base."

One of the predictions from "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" says that formal competency centers will be established to measure the results of such activities like those at Honda. These centers would be established at dominant organizations and consist of highly trained personnel who study their supply chains and search for opportunities to achieve competitive advantage through their choice of supply chain partners, determination of core competencies, and influence of design, manufacturing, operations, and sourcing. Tomko can envision this happening as Honda processes cross product lines or geographic areas. He says they might introduce this model for a smaller volume line of cars, and then, based on that success, expand this concept on a larger vehicle volume worldwide. A formalized team, or competency center, could facilitate that process.

In Your Wildest Dreams

Experts agree that once strong connections are established, to the point where buying organizations and suppliers are contributing jointly to projects and activities that benefit the whole chain in measurable ways, the next step is to involve second- and third-tier suppliers. This could involve working directly with a supplier's supplier, but also training a supplier, as though the supplier were an extension of your organization, to apply the same principles up the chain.

For APS' Hillary, the future includes not only addressing these issues with second- and third-tier suppliers, but going to even more comprehensive lengths with first-tier suppliers. Currently, the emphasis has been placed on product delivery or logistics, but it's possible that the future will include independent processes. "We might ask whether they're using the right experts or the most efficient installation process for their equipment," says Hillary.

Another avenue to explore is acquainting two different first-tier suppliers so they have a better understanding of how a product or service plays a role at APS. Hillary can envision the suppliers as a group traveling to supplier sites together. "We would go from forming several two-way trust relationships to having three- or four-way relationships."

While increased total supply chain involvement is the ultimate goal, Phelps Dodge's Upton cautions that different organizations - and particularly different industries - will be in various stages and levels of performance in this area. "I feel we've made great strides with our supplier council and in building trusting relationships, but in some areas, we're not as far down the road as others," he says. "We've been mining in remote locations for hundreds of years and have traditionally done everything ourselves. Therefore, our culture hasn't always been conducive to sharing the data all the time. We're just beginning to understand the value of doing that."

What will the future hold? For some organizations, like Phelps Dodge, it might mean joint business ventures with suppliers - perhaps creating a new mine in a joint ownership scenario with supplier(s), and sharing the profits. For another organization, it might mean developing suppliers to create a consortium that would cater to several buying organizations to leverage buying power. To others, joint training and skills development - as though suppliers and purchasers were one organization - will be in order. All of these possibilities lead to benefits for extended supply chain members and a competitive advantage for the chain. This incentive will drive the actions necessary.

C.P.M./A.P.P. Alert Module 4

Initiative #4: Supply Chain Partner Selection and Contribution

"Box page 42"

The 1998 study, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," by NAPM, the Center for Advanced Purchasing Studies, A.T. Kearney, Arizona State University, and Michigan State University, details 18 initiatives that will shape the purchasing and supply management function in coming years. This month, Purchasing Today® provides commentary on one aspect of the study: Initiative #4, Supply Chain Partner Selection and Contribution. The study gives the following predictions:

  • Determination of first-, second-, and possibly third-tier suppliers will become more critical to supply chain dominant organizations in the future.
  • Lean supply chains will be a strategy to help develop competitive advantage.
  • Resources will be increasingly shared between highly interdependent firms that rely on each other as customer/supplier in the supply chain to maximize value-added contributions and reduce duplication of resources.
  • Increasingly integrated supply chains will provide the basis for competing and generating cash flow and return-on-investment.
  • Strategic purchasing competency centers will be established at dominant organizations with highly trained personnel who study their supply chains and search for opportunities to achieve competitive advantage through their choice of partners.
  • Purchasers and suppliers will increasingly participate in joint planning and development activities.

Do You Have It in You?

"Box page 44"

Supply chain partner selection and contribution is cited in "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" as a trend facing purchasing and supply professionals. Is your organization already focused on and prioritizing such activities? Is the environment ripe for these efforts to take place? You can't expect to make progress in this area without having some framework that breeds success. Here are a few questions you can ask to determine whether the climate is right for effective supply chain partner selection and contribution.

  • Are lines of communication open within your organization to gather and evaluate information about current and potential suppliers?
  • Has purchasing and supply management earned the respect of others in the organization - through kept commitments and high performance - to facilitate this process, which requires total organization input?
  • Have you addressed change management with your department and organization? Do individuals recognize that roles within the supply chain can change as members work toward common goals?
  • If you're going to ask suppliers to share proprietary information, such as financial data, is your organization prepared to open its books as well?
  • Do you have the support of senior management? Will they be willing to meet with the senior management staff of the supplier organization?
  • Are you properly trained on the analytical thinking skills required for evaluation of costs, performance, and process capabilities?
  • Are you prepared to learn the nuances of your supply chain's different business objectives so that you have a thorough understanding of trading partners' goals?
  • Have you refined and executed your own processes to the extent that you will be able to effectively measure them when other supply chain partners join in the effort?