What Supplier Development Process Makes Sense For Your Company?

If you purchase large amounts of products from supplier companies, you can have an influence on those companies. If you can get them to improve their performance using a supplier development process, for example, improve their quality or cut their costs, you will benefit greatly.

The process of getting suppliers to improve is usually called supplier development. And most large companies have set up their own supplier development process, at least for their key relationships.

The question is, what will make sense to your company?

As we will see, the supplier development process needs to be tailored to the situations of both parties. There is no ‘one size fits all’ here.

1. What is the current situation, and what do you need as a priority?

If you have been collecting a dashboard of KPIs about each of your key suppliers, you can probably point to 1 or 2 areas of performance they need to improve on.

Even if you don’t have any data, you can certainly pick a priority for improvement among these common candidates:

Quality, including closing the loop on past issues in order to prevent a recurrence
On-time delivery
Cost
Ability and speed to develop custom products
General service

2. Are you in a position of strength?

If you are General Motors and you are dealing with rather interchangeable sources of parts, you are in a position of strength. If manufacturer A rejects your demands and doesn’t want to sign your contract, you go to manufacturer B. Once they have accepted a project, they can’t just drop it halfway through a model’s lifetime, or the penalties may well put them out of business.

However, not every buyer is in this position.

We see companies that are working with 1 main supplier. They desperately need that manufacturer to improve in a certain respect. But they totally depend on them, and so they can’t rock the boat. And both parties are aware of that fact.

This becomes even trickier when the buyer side needs more capacity. They absolutely cannot risk losing a source of products, so they cannot push any key supplier too strongly.

The more dependent you are on a manufacturer, the more you will need to work on a positive and cooperative relationship. You won’t be able to twist their arm into doing anything.

And, the smaller you are in the factory’s eyes, the lower your power to push them to do anything. If you buy 60% of their output, they will certainly listen. If that proportion is 2%, they will probably not.

As Clive Greenwood suggests in this video, a true partnership is quite different from an arm-length relationship:

3. How far and how fast do you need the supplier to go?

You need an understanding of what you need to change. Let’s take 3 examples.

If they have one bottleneck process and they need to buy 3 extra inexpensive machines as well as hire 3 machinists, that may be a 3-month project.
If they lack a planning system and that’s what leads them to consistently miss important deadlines, that might be a 9-month project (hiring a production & material control person, and starting to use the related modules in their ERP).
If you want them to go to ‘zero defect’, that will require them to change their whole mindset. It will have to become ‘the way they do business’. There will be no end in sight. And it will probably require a very strong push from their main customers.

4. Decide on an approach to motivate the supplier

In other words, what carrots and what sticks will you use? Here are some common approaches:

Provide expert assistance

Providing expert assistance can be well received. Or, in a factory that does not want anybody to see up close how they work, it may be seen as an offense. Tread carefully. And remember, involving the supplier collaboratively in deciding on a good option is much more likely to succeed than dictating what they must do. Watch this short video on Toyota’s supplier development programs:

Meet formally on a regular basis

A formal meeting every (for example) quarter, where they have to explain their areas of poor performance and how they are tackling it, may help a lot. Maybe all they need is some pressure, and they will find out what they need to do.

Compare them with other suppliers

Comparisons with other anonymized suppliers, to emulate their competitive spirit and/or get them to take your threats seriously, can help a lot, too.

Utilize painful and expensive situations to escalate issues

Escalating certain issues into expensive and painful situations (e.g. 100% source inspection, frequent audits… at the supplier’s cost) might be what they need. Make their mistakes painful, and they will strive to avoid them. It will, of course, add friction to the relationship, so don’t overdo it if you want a long-term partner.

Hit them with financial penalties

Financial penalties for poor performance is a similar idea. Make their mistakes painful. Charge them at the level of the fully-loaded cost their poor performance is costing your company, so they understand the severity of the effects of their issues.

5. Implement the approach you have chosen, and iterate as needed

First, you need to announce it to the supplier in question.

The axis of improvement may be related to a key theme you are driving across your business, and they might already have heard of it. Or it is very particular to their operations. In any case, you need to explain why it is becoming critical and unavoidable.

If you have a track record of making such requests and not following through, expect a ‘wait and see’ attitude. You will need to send people to the factory to drive your agenda, so they see this is not just the flavor of the month.

6. How to expect cost reduction without going into a very conflictual relationship

Many companies’ purchasers are evaluated on the savings they generate through price reductions, so they push suppliers hard for those lower prices.

This comes at the expense of building a cooperative and positive relationship. Everybody at the factory will be careful not to communicate anything that can be used by a purchaser to push for a price reduction.

Now, the right way to do it is to have transparent and clearly communicated expectations when a new product is developed. You will need a lower price over time, based on a certain schedule. The people in the factory can plan for that and keep working on ways to generate those savings. This video demonstrates this point clearly:

7. Keep providing feedback

Your understanding of good/bad performance may be different from that of your supplier. Giving them regular feedback is extremely important, to make sure they understand what you can’t tolerate and how much their problems are costing you.

Developing a supplier is a marathon, not a sprint. It usually requires a combination of continued pressure, consistency of messaging, and regular feedback directly to the operational teams.

Some buyers get frustrated by very small steps and switch to another source. But that other source will also have its own issues, and they are not known yet. A ‘middle ground’ is often to double-source a part/product, compare the two sources, and give more business to the best manufacturer. It can be part of your supplier development approach (as I outlined in section 4 of this article).

In certain cases, you can really build a close partnership, and the benefits will usually justify single sourcing. These can be truly great and very productive relationships. They are, unfortunately, not very common.

Have your say…

What’s the supplier development process in your business? What were the key areas you found they needed to improve on? How do you motivate your suppliers to take the action you need them to? Let me know by commenting, please.

Don't miss a post