Jan 13 2011

The Myth of Supplier Management

Published by at 12:21 pm under Uncategorized

Large companies, like the Big Three, have finally found out they are not the 800 pound gorilla in the room.  Because of JIT, they have found themselves hostage to their weakest supplier.  One little $20.00/1000 widget that doesn’t get shipped because Crash and Bang Molding is in financial trouble and a company the size of General Motors could miss several million dollars in shipments.  So, we hear the silliness of Supplier Management.

First, let’s get something clear: The word ‘manage’ means to exert a controlling influence.  However, the Customer seems to think Supplier Management means they can control their supplier base to do whatever they want.  In reality you have more luck trying to train a dozen cats to dance the polka.

Small businesses (suppliers) started up because they thought they could do it better than being lost in the bowels of big business.  They are more efficient because the money they spend doesn’t have the “mother may I?” mentality of proposals, PowerPoint presentations, and committees.  Things get done with a minimum of fuss and a focus on the product, not office politics.

The very nature of our tax system requires that from an accounting standpoint a small business ‘looks’ as if it is barely surviving.  Small closely held corporations aren’t required to have the accounting or reporting practices that must report to Wall Street and its stock holders.  Without experience in forensic accounting, looking at a small company’s financial reports is, at the very least, confusing.

When it comes to Supplier Management Practices many of the ‘games’ the customer plays on small businesses need only be personalized to see how foolish they are.  Here are some examples:

1. Financial Reporting – ‘send us your Profit and Loss statement with each shipment so we know you’re healthy’.  What if you’re employer asked you for your financial records before you got each paycheck twice a month?  Your response would be (1) you simply wouldn’t do it, or (2) you’d make something up because it was too much work.

2. Delayed Payments / Cost reductions – ‘It’s a privilege to do business with us.  We pay our invoices in N-60 (N-90 etc.)’.  Would you work for someone who held back your paycheck for more than two months?  Nope.  You’d quit and find another job. How long would you work for a company who hired you at a salary and two months later said they are cutting your pay by 15% and wanted more work from you?

3. Quality – ‘Send us proof of CpK (for free)’.  Would you work for a company who to keep it’s health insurance premiums low;  monitored what you ate, required you to go to a gym, not smoke or drink, and would fire you if you got a speeding ticket? And here you thought they hired you for what you could do on the job.  Dope.

4. Vender Visitation/performance reviews – Many companies do vendor audits looking at your plant and manufacturing practices.  Would you work for a company that came to your house to observe how you raised your children, what church you went to, asked you to describe your love life – all as a condition of employment?  Could you work for a company that filled your personnel file with a written report of every little mistake you made but didn’t allow you to refute the accuracy of the report?

If you think any of these above practices would engender loyalty in the Customer/Supplier relationship you are sadly mistaken.  But, when a customer does business with a supplier, it is valid to ask if the supplier is reliable and will continue to be so in the future.

Here’s the solution:

1. Financial Reporting – ask the supplier for permission for the customer to get (pay for) a monthly report from the supplier’s merchant banker.  This report will only state that whatever loans the bank has made to the supplier are being paid back on time and his credit is good.  Not the dollar amount or for what purpose.  If a company is financially healthy, its banker is more than happy to tell you.  Keep in mind credit reports or Dunn and Bradstreet ratings don’t give a good picture.  All of the Big Three have horrible credit ratings because they pay their suppliers late.

2. Delayed Payments/cost reductions – As far as the supplier is concerned you’re just another customer; no more, no less.  If he can’t make an acceptable profit from you, at some point in time he’ll tell you to take your business elsewhere. There is no ‘privilege’ in doing business with anyone.  You placed the job with this particular supplier because he was the low bidder.  If there was someone cheaper why didn’t you place the job elsewhere? Don’t agree to N-30 then pay Net 90.

3. Quality – Your only interest is a supply chain full of usable parts.  All the complexities of CpK, 6-Sigma etc usually end up in someone’s filing cabinet and nobody actually looks at it.  Proof – I’ve written computer programs that simply made up charts for a Supplier to send to his Customer at $100/chart.  All the parts worked, nobody cared.

4. Vendor Visits and Performance reviews – before you hop on a plane to visit your supplier ask yourself:  “If I see his plant and talk to managers; am I competent enough to understand the process and make an informed judgment?”  Smart suppliers won’t even let you on the production floor (“for insurance reasons”, “it’s proprietary”, “we’re not going to show you how we make your competition’s products”).  What they have to sell is expertise not a pretty plant.  How they make your product is none of your business.

More than 60% of negative comments on performance reviews are not due to the supplier.  Usually the customer hasn’t revised his specifications so that an acceptable part measures out to agree to the design.  Many Customer returns are really an exercise is having excess inventory because of bad forecasting.  What do you think would happen if the supplier gave annual performance reviews to all its customers stating the worst customer would be dropped?  While not a common practice, it’s beginning to happen.

You chose your supplier base because they have a history (verifiable) of on-time acceptable product shipments.  That’s all.  Everything else is wasted effort.

Supplier Management is a silly as saying you manage your spouse.  Those who think they can, usually end up divorced.  Doing business is like a marriage: each party has clear expectations of the other.  Trouble only arises when there isn’t agreement.  Yes, there will be the occasional ‘bump in the road’.  But if the relationship is based on trust and honesty it is fairly easy to work through the problem at hand.  Be honest with each other; make sure you both profit from the relationship, and be polite whether things go right or wrong.  Do this and you’ll have a long enduring relationship.

It’s simple.

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You can read this, agree with it and then bow and scrape as your supplier bullies you.  Keep in mind they aren’t paying you for financial reporting, the time wasted on vendor visits or the arguments of not complying to CpK but still shipping usable parts.

OR you can read this and take a stand.  If you don’t want problems learn to say “no” politely and firmly. The philosophy of Supplier Management is really a game of cat and mouse.  You’re the Mouse.  The cat stops playing when either it had killed the mouse, or the mouse fights back.  Think about it.

It’s your money.

One response so far

One Response to “The Myth of Supplier Management”

  1. Dan Pauluson 04 Apr 2017 at 4:05 am

    Thanks For Your Blog.

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