3.4 PER MILLION
Voice of the Supplier
Form true partnerships and don’t overcomplicate matters
by Mike Carnell
In the 1998 Jerry Bruckheimer film "Armageddon," the character Rockhound (played by Steve Buscemi) turns to Harry Stamper (played by Bruce Willis) as the two men are about to be launched into outer space:
"You know, we’re sitting on 4 million pounds of fuel, one nuclear weapon and a thing that has 270,000 moving parts built by the lowest bidder. Makes you feel good, doesn’t it?"
It is good humor, but if you think about the comment, it isn’t really about suppliers or bidders. It is about how an organization has chosen to acquire materials to build its products. If we use a tool that has become more common for showing the process—a suppliers, inputs, process, outputs and customers (SIPOC) diagram—it appears even less complicated.
In Figure 1, a single box (supplier) represents what is normally considered three distinctly different disciplines: sourcing, purchasing and supply chain management. Quite frequently, you’ll see supply chain management as the name of all three functions, or the organization understands supply chain management as the new nomenclature for all three.
The part I find most intriguing about the SIPOC diagram is the focus we put on the process, which we should because we have direct control over it. It is critical to remember, however, that the front-end supplier can have a huge effect on the outputs—regardless of how much work you put into the process.
Material cost is frequently much higher than any other part of total product cost. In my first position as a production manager, I was required to report on labor variance each month. Labor was 5% of total product cost. When I questioned why anyone would care about this number, I was told those types of questions were "career limiting."
In today’s environment, we have been inundated with all of these voices in our heads that we need to heed: voice of the customer (VOC), voice of the process, voice of the business (VOB) and voice of the employee. But what about the supplier? Do our suppliers have a voice?
We have listened to people use the cliché "Garbage in, garbage out," which has become so common, people just use its acronym: GIGO.
It is most critical in the SIPOC here because we know that if incoming material is defective, it will most likely result in defective product. So where is the voice of the supplier?
If the supplied material is late, the finished product will either be late or we will go through an expediting process to stay on time. One results in poor customer relations (VOC) and the other is expensive (VOB). So where is the voice of the supplier?
The truth of the matter is that in most organizations, there is no voice of the supplier. In general, we throw everything over the supply chain management wall and tell them to deal with it. It has become even more common to outsource the entire supply chain management activity.
If we are truly dealing with supply chain management, it is an organization that deals with the movement of material from the suppliers all the way through to customers. Outsourcing our customers’ satisfaction doesn’t seem like a very high percentage play.
There must be something extremely difficult about this entire supply chain management concept that makes it so complex that we need to outsource it to experts to manage it for us.
Actually, it isn’t so complex that it cannot be accomplished, and it isn’t so simple that just anyone can take care of it. There is also the common-sense approach that answers a very simple question—one we have heard relentlessly from our experts on change: "What’s in it for me?"
Superficially, that should be easy to answer. Sourcing shows up at your door and you jump through some hoops until you are issued a request for quote. This is almost always about price. Not total price, just the quoted price, so you have to start reducing the margin. The games begin.
You want a contract? You can have one, but the price drops an additional 5% per year over the next three years. Where in this process have we ever looked at this and asked, "What’s in this for the supplier?"
We think being tough negotiators—armed with abusive supplier quality engineers—will strike fear into the hearts of suppliers near and far. It doesn’t. Good suppliers are working with people who are in that antiquated relationship where they work together as partners. Their customers understand that they must make a fair profit to stay in business, and they can discuss that with them without the fear that disclosing too much will cost them their entire margin. Basically, good suppliers are looking for good customers (and vice-versa).
The novelty of net 30
When the partnering concept began, I was with Motorola, the company credited with developing Six Sigma. An order came from the CEO stating, "You will pay all of your suppliers in 30 days. Period. End of story."
The accountants snickered because the CEO obviously did not understand cash flow. You put off paying those suppliers and run on their money for a while, making more by hanging on to your own cash.
Of course, that was a logical reaction from a group of people who had never actually owned a business and never actually had their own money in the game. This was a decision made by a person whose father had started the company, and he had been running it quite successfully. You may have to give him the benefit of the doubt.
The net effect? Word got around that we honored a real and consistent net-30 days, and the best suppliers were lined up at the door. Sourcing became much easier.
Because the net-30 days was real, suppliers didn’t have to pack their price to cover their cost of capital while some purchasing clerk played with their money in the name of improved cash flow.
On-time delivery made sense because meeting the schedule meant suppliers knew exactly when the money would arrive, which made their businesses easier to run.
Business, in general, isn’t complicated unless you make it complicated. We have made a lot of noise about all of the voices. In the end, we seem to have forgotten the first voice. In a successful relationship, it can be as important to be a good customer as it is to have good suppliers.
Mike Carnell is president and CEO of CS International in New Braunfels, TX. He earned a bachelor’s degree in business administration from Arizona State University in Tempe. Carnell is a member of ASQ.