Cutting costs by better managing supplier relationships is a familiar theme in procurement these days. Phrases such as “earlier supplier involvement,” “tiered supplier relationships” and enhanced “supplier development” are familiar refrains.
But if you come from a tradition of tough, power-play negotiations, how do you overcome that history and move to a more even-handed, transparent and collaborative relationship with your suppliers?
One of our clients, a leading manufacturer of electronics gear, has found a way to do it by adding a different spin to their supplier management program.
And it’s resulted in big returns in accelerated timeframes.
The Challenge
The impetus for our client’s creative approach to supplier management rings as familiar as today’s newspaper: fierce competition, especially from the Japanese, and price erosion of 15 to 20% annually, coupled with a simultaneous product-features explosion fueled by the industry’s demanding consumers.
Consequently, to confront this fierce cost-down pressure and supplement their existing supplier management activities, our client hired us to design a series of innovative, joint customer/supplier workshops.
The Approach: Establishing An “Even Playing Field”
These sessions bring to bear, on one key product component at a time, the relevant customer and supplier representatives necessary to explore any and all avenues to significantly reduce the integral cost of that particular component. No aspect of the component in question is off limits. In addition to standard bill-of-materials issues, all aspects of component design through development and production are fair game. Even sessions on cardboard and Styrofoam product packaging have yielded significant results!
Probably the most unique feature of these joint customer/supplier team sessions – our client calls them “Town Meetings”* – is that we, not they, conduct the sessions, serving as neutral, “third-party” moderators. We establish right up-front that this is not a negotiation session; it’s an opportunity to collaborate. And the norms we set reflect that.
First, only “key suppliers” get invited to participate in “Town Meetings,” and we make it clear at the outset that nothing a supplier says or does in any session can in any way negatively affect the business they already have. Instead, the incentive is to get even more business by helping our client reduce the market price of their products even further.
Secondly, cost-reduction gains are shared, and we make it very clear that it’s just as acceptable for a supplier rep to finger something the customer is doing that adds unnecessarily to integral cost as vice-versa.
The result of these “rules of the road”? Suppliers get listened to, not just heard. And our client attests to a lasting overall improvement and a greater degree of “transparency” in their relationship with key suppliers in the aftermath of these sessions.
Taking Cost Out Quicker
Another unique feature of these so-called “Town Meetings” is the “report-out” segment that concludes each one. At a “report-out” the joint customer/supplier work team presents its detailed cost-reduction recommendations and action plans to a pre-defined group of joint customer/supplier executive management representatives.
By the rules established for a “Town Meeting,” these executive decision-makers must render decisions – “go or no-go” – on team recommendations on the spot. (Approval rates for team recommendations are consistently well above 90%.) This change-acceleration feature short-cuts the bureaucratic delay that often surrounds decision-making, ensures clarity on what’s been approved, and enables customer/supplier teams to begin implementing cost-reduction actions immediately. As a result, cost-reduction gains can be achieved sooner.
The Results
In one geography alone, our client conducted well over twenty of these sessions over approximately a two-year period, and the results speak for themselves:
• A session focused on TV connectors identified possibilities for saving 10% of what was being spent yearly on that component, approximately $3.2 million US dollars (USD). Two years later, not only has the $3.2 million been achieved, but subsequent purchasing/supplier negotiations, based on agreements made at the “Town Meeting,” are resulting in a recurring savings of $1 million USD per year.
• Another session, targeting TV speaker boxes, sought to reduce the amount currently being spent yearly on that component by 10% — $2.4M. The joint /supplier team identified initiatives which, they estimated, could save a total of $3.8M. Actual results since the “Town Meeting” which have been directly attributed to it are $2.5M, with roughly half a million per year expected for another year or so.
• The company’s audio manufacturing business group in Singapore began with just a few “Town Meetings.” A year later, three sessions on product packaging, printed circuit boards and tape deck mechanisms together yielded over $1 million USD in savings, with more expected when implementation is complete.
On the strength of these results, the company’s audio group called the “Town Meeting” process a “strategic element” of their supplier development process.
Our experience also shows that this kind of collaborative vs. competitive approach with suppliers produces equally important qualitative results as well. Customer/supplier teams frequently attest to smoother, more open and effective communications between their organizations after they’ve worked together in a “Town Meeting.” We’ve even seen customers and suppliers resolve to harmonize previously incompatible systems and channels of communication and data sharing – e-mail and CAD/CAM systems, for instance – all steps that result in greater efficiencies and cost-savings across multiple future projects.
As we see it, the underlying reason for this kind of success is an approach to supplier management or supplier development that creates a win/win vs. an adversarial dynamic. The even-handed process and the neutral, third-party facilitator help to reduce apprehensions on both sides. And once everyone’s guard is down, it’s amazing what can be shared and learned about improving the way both sides of the customer/supplier relationship conduct their business.
*Our client’s “Town Meetings” are based on the GE Work-Out process which we adapted to suit their specific, supplier development needs over a period of approximately five years.