Controlling the Controllable with Suppliers (Part II): An Understanding of Vital Requirements

When looking at ways to optimize supplier relationships and reduce costs across the supplier base, it is important for companies to regulate certain variables that they are able to control. In my previous posting I highlighted the three customer-controllable factors that have the strongest correlation to cost in the context of supplier relationships. These three factors are: 1) effective forecasting, 2) having an understanding of vital requirements and accompanying regulation of superfluous demands and 3) monitoring compliance. Here I will speak to my experience and findings with how not having a clear understanding of your vital goods and/or service requirements in the context of supplier relationships can lead to suppliers taking advantage of customers and customers not utilizing suppliers effectively.

In general, suppliers will cater to the needs of their customers and this resonates as the common mantra of companies with a good and/or service to offer. This ideology can sometimes act to the detriment of customers who do not have a solid grasp of what they need and what they could go without or in a different context: what they can perform in-house versus what they can outsource. In other words when a company contracts with a supplier they need to have an understanding of what the core requirements they have and what other goods or services may fall in the “nice to have” category. If the lines are unclear as to what the fundamental needs of your company are, this oftentimes leads to ambiguity in the contracting process and therefore increase the chances of acquiring good or services that are not needed or excluding supplier requirements and responsibilities that are fundamental to the operation.

In my experience I have seen various examples of overutilization, underutilization, and outright misuse of supplier services. In one case of overutilization a supplier was maintaining a price point approximately 20% above the industry average. As it turned out the customer was utilizing VMI services which required a full-time dedicated supplier resource to stock and monitor inventory bins (Kan-Ban style VMI) at the customer site. After analyzing inventory levels it was apparent that the volumes of components provided by the supplier did not require a full-time supplier resource to monitor the bins. In this case the supplier claimed to offer the service “free of charge” when in reality the service was costing the customer a 20% premium. In this example not only did a customer not need the levels of service being provided, but the supplier embedded the cost of the VMI service in the unit cost of the products – a common practice that customers need to be weary of.

In order to avoid this scenario some example questions that should be asked up front during the scoping process and eventual contracting process with suppliers should include: Is it cheaper for me to perform this service in-house, or outsource to a specialist? Is this good or service an integral part to the operation? What are the core needs that must be fulfilled? How does this contribute to our bottom line? Is this good or service directly or indirectly related to core business offering? Essentially, questions should be asked and factors should be weighed to strike the optimal balance between quality of service and cost. With this knowledge and understanding it is then easier to create a lean yet impactful supplier relationship thereby eliminating unnecessary services and deriving greater value from your supplier base.