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 / Fall 2004 / Issue 36(originally published by Booz & Company)


Building the Advantaged Supply Network

3. Choose carefully, then guide suppliers. Not every supplier has the right attitude or aptitude to be a best-in-class company. Over time, a supplier can become one, but only if it has the underlying desire and market position. If a supplier is selected and accepts the invitation to be a part of the network, the buyer and the supplier need to work in tandem to improve operating costs. That is what creates value that exceeds what a one-off pricing relationship can accomplish.

4. Create the right supplier structure. There is no “correct” number of suppliers in an advantaged supply network. But a buyer needs to know what the sufficient number of the right type of suppliers should be to achieve the desired performance in cost, quality, and productivity for the whole network. Having too many suppliers will undermine efforts to create the scale necessary to make substantial improvements in a supplier’s economics or influence its management behavior. Having too few suppliers is equally problematic. We recommend selecting at least two overlapping suppliers per category to ensure internal competition, making sure that each supplier has distinct roles as well. Having suppliers able to stand in for one another adds financial stability and reduces the risk of supplier shutdowns.

5. Develop a new purchasing paradigm. Shifting from a “negotiating” paradigm to a “creating best practices” paradigm requires the buyer to gather knowledge of costs (not just price) from suppliers worldwide. Even pricing models are not enough, since they do not reflect the true costs of operations. A buyer in an advantaged supply network has the ability to give a supplier a price objective for a program knowing that it is world-class — and feeling confident that the supplier will get a good return on capital. Purchasing organizations accustomed to beating up suppliers over price, and interacting only with their suppliers’ junior staff, must change their behavior dramatically when they have to collaborate on setting strategy with a supplier’s senior managers.

6. Determine the pace of the transition. Transitions occur when a buyer replaces one or more existing suppliers or brings on new suppliers. The transition from one supplier to another can be made quickly if the new supplier (or suppliers) can cost-effectively retool and has capacity available, or if there is a second tier of reliable suppliers to cover for the one that is leaving.

But moving too fast in a supplier transition can be risky. Financial and time costs, such as getting approvals for new suppliers or the retooling of machinery, can be substantial. Sometimes it makes sense to keep a program with the current supplier, especially if it is about to expire, or if the production volume is low and the transition costs are expected to be high. A new supplier may require a longer transition period to install appropriate equipment for a focused factory, and to develop the skills to meet the customer’s needs. In some cases, one supplier may merge with another during a supply base restructuring so it is easier to build focused plants.

7. Be open to sharing information and knowledge. Over time, suppliers will share sensitive strategic data and create processes to transmit this data on a timely basis. This is where trust is essential. When problems occur (and they will), they must be handled quickly at the appropriate executive level.

When suppliers and customers share information about their R&D expenditures, it encourages the supplier to invest in a customer’s future needs. This is especially critical in the process technology arena, where suppliers have knowledge about new processes, but really need more information (and sometimes assurances from the customer) to make an investment in a new technology. Even sensitive information, such as volume forecasts, is easier to share with suppliers in a network. For the supplier, such forecasts may enable reduced capital investments and improved capacity utilization. As important as trust is, of course, neither party should ever be lax about protecting its own economic interests.

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  1. Ranjay Gulati, Sarah Huffman, and Gary Neilson, “The Barista Principle — Starbucks and the Rise of Relational Capital, s+b, Third Quarter 2002; Click here.
  2. Peter Heckmann, Dermot Shorten, and Harriet Engel, “Capturing the Value of Supply Chain Management,” s+b enews, 06/26/03; Click here.
  3. Tim Laseter, Kamalini Ramdas, and Dorian Swerdlow, “The Supply Side of Design and Development,” s+b, Summer 2003; Click here.
  4. Tim Laseter and Keith Oliver, “When Will Supply Chain Management Grow Up?” s+b, Fall 2003; Click here.
  5. Keith Oliver, Anne Chung, and Nick Samanich, “Beyond Utopia: The Realist’s Guide to Internet-Enabled Supply Chain Management,” s+b, Second Quarter 2001; Click here.
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