Chain Reactions
In this exclusive Q&A, supply chain expert Russ Weybright outlines new ways for manufacturers to bring more value to their customers.
BY DAN HEILMAN
Russ Weybright is president of RW Solutions Inc. (RWSI), a TwinCities-based consulting firm that specializes in operational and supply chain turn arounds. Prior to founding RWSI, he spent his career delivering dramatic operational improvements at companies suchas Johnson & Johnson, GE, and Eaton Corp., among others.
Weybright has a particular passion for bridging the gaps between large and small companies. And that passion is driven by his commitment to optimize the efficiency of domestic supply chains andminimize the need for offshore sourcing.
How would you define "supply chain" for the purpose of what we want to talk about here?
Ten years ago, the supply chain was narrowly considered a subset of manufacturing. It would include the purchasing department and maybe warehousing, distribution, and planning.Today, a company's manufacturing functions are considered to be one link in the supply chain, which starts back at your suppliers' suppliers and moves all the way through to your customers' customers. This expanded definition is important because it provides opportunities for suppliers to bringmore value to different parts of the chain.
What prompted that evolution?
Companies have realized that whatever they do outside their core competencies can be a drain. In a competitive marketplace, those inefficiencies begin to pinch margins.
Are all industries singing from that same sheet of music,or are some industries and sectors lagging behind?
Different industries are in different places. Automotive went through an early transition when it was shaken by the eminence of Toyota and Honda. It was an eye-opener when they realized they didn't have mastery of every step in their supply chain.
We've also seen tremendous increase in expectations of service. Companies doing business with large retailers such as Wal- Mart, Lowe's, or Home Depot must commit to fill rates that were unheard of 10 years ago. Failure to achieve them results in penalties and, ultimately, loss of business.
Industries traditionally shielded from profit and loss have been slower to adopt this broader view of the supply chain and a corresponding commitment to lean operations. You'll see this emerging in health care today. Lean thinking has become more and more prevalent at the provider level. Everyone will benefit from this trend, as uncontained medical cost increases force all businesses providing medical benefits to be less competitive. Health care providers understand this and are beginning to respond, but they are 10 years behind the rest of industry.
Are there opportunities for suppliers who understand these changes?
Companies value suppliers of any size that fix their problems, that anticipate and meet their needs. This is accompanied by a willingness to move responsibilities and transactions out into the supply chain. In many cases, the retaileror the OEM may use its leverage to tell suppliers: "This is the way it will be if you want a strong relationship." RFID is an example. It has a lot of folks scratching their heads about howdeeply to get involved in it. Do I do it just to satisfy my customers or does it have implications that can help in my factory as well?
Another area where OEMs are under pressure is time to market for new products. In medical devices, suppliers can participate much more deeply in the design process. Expertise in product design can significantly raise a supplier's importance to the OEM.
There isn't an industry that hasn't asked significantly more from its supply chain in the last 10 years. That trend won't slow down. The key question for a supplier is whether to resist the trend or embrace it and find ways tomake itself more valuable to customers.
Is there a risk they could lose their position if they fail to step up?
Certainly! Customers comewith a need. If you pass on that opportunity, your relative valuewill diminish. The best example would be the move toward tier-one suppliers in the automotive industry. Major automobile components -interiors, electronics, brake systems, etc. - are no longer designed by engineers at General Motors or Ford. Instead a tier-one supplier takes responsibility for designing the systemand identifying and qualifying suppliers, along with the manufacture and delivery of the completed system. Frequently, tier-two suppliers also participate in the design of the system. It moves from the first-tier automotive supplier to the second and sometimes down to the third. This concept is being employed inmore and more industries. OEMs are looking for ways to bring more products tomarket. Meeting customer needs is one of the best ways to assure future success and business.
Where does someone like you fit in?
I help suppliers understand how large companies evaluate their supply base, help them understand and correct where they fall short of meeting customer expectations, and help identify and implement ways to increase their value to their customers. Not all commodities are equal in the eyes of the customer. Most large companies use a combination of dollars spent and the complexity of the commodity to determine how the commodity will be managed. Different combinations of complexity and financial exposure require different management strategies. The best way to think about that complexity measurement is to view it as the customer's total cost of switching. And when I say "total cost of switching," it is not just requalification. Also to be considered are the design capabilities, proprietary technologies, and service that the supplier provides. All of these affect the costs of switching to another supplier. The chart titled "How Do Large Companies Evaluate Their Supply Chain?" (see below) breaks a supply base down into four quadrants based on cost and complexity.
Can you walk us through the chart?
Group A items are commodities. The reason they are commodities is that the cost of switching is low. These kinds of items mean a relatively simple change.The strategy for Group A items is heavily focused on price. You'll see very little loyalty from your big customers, and there is a constant threat of foreign competition. So if you are in Group A, you've set yourself up as a price target with constant renegotiation and demands for nonprice concessions. To make money, you'll have to be a low cost producer - and have to maintain that edge over a lot of years. If that's not how you want to live, you can look for other portions in that value stream to step into and increase your value, and move yourself out to the right on the grid.
The strategy for Group B items is demanding partnerships. There are high costs associated with this because of dollars spent and there is also a high supply risk. Consequently, these relationships are not typically run solely by the purchasing department. These are true partnerships; they need to be cross-functional at all levels. Senior leaders should know one another. Engineering should have a direct relationship, certainly the finance group, certainly the quality group. Long-term agreements are available with items like this. You'll see mutual design, and possibly risk and reward sharing. That would involve the supplier funding its own design efforts in exchange for a piece of the action down the road. Willingness to participate in such agreements can move your company further to the right on the grid. If you can move your company into this quadrant, your future business will be there and that's great. But you have tied yourself to meeting your customers' future expectations almost in lock step, so you need to choose your partner well.
The strategy for Group C items is to secure supply. The customer probably doesn't have a lot of buying power or market clout - and yet it is extremely dependent on the supplier for these items. Price is much less important; assuring availability of the item is what is crucial. One strategy employed here is to use distribution instead of a direct purchase to take advantage of the distributor’s leverage with a supplier to make sure there is ongoing supply. If a customer chooses to be in a direct arrangement, it will likely seek a long-term agreement. For items in this quadrant, a supplier should not feel compelled to agree to aggressive price concessions. Assuring and maintaining a flow of quality items that meets a customer’s schedule requirements should be enough. And remember: Before you commit future capacity to a long-term customer agreement, make sure you choose well.
Group D is what I call “stuff” because I don’t want to give it too much value. I would tell you that the total cost to your business - cost of acquisition and cost of possession - tend to be more significant to you than the price you pay for the item. A great example is shop supplies such as cutting tools in amanufacturing operation. They might not be high on the list compared to raw materials or capital equipment, but if you don’t have them, you don’t employ the others. If you experience poor quality and you scra pproduct, that cost will far out weigh the cost of the insert. The most common strategy for these items is to bundle the entire acquisition process for an entire commodity and subcontract it.
How does a company move from one box to another?
The first step is to understand which group you are in. Small businesses should have a frank discussion with their big customers and make sure they are aligned. They may be providing a tremendous amount of value that decisionmakers at the customer may not see. If they are a Group B company and are seen as a Group A company, they should get that resolved immediately.
Are companies typically aware of where their relationships lie?
The supplierwill have visibility of everything it does for each customer and how comprehensive the relationship is.The buyer will not have that same wide perspective.
The second obstacle to be overcome in assuring that your total contribution to a customer is recognized is the fact that different functions usually have different measurements. The purchasing area has responsibility for cost. When a new purchasing director arriveswith a big challenge to reduce costs, all suppliers may get treated as a commodity. When this happens, the supplier must communicate and vigorously defend its total value. If you don't make sure the whole contribution of your company is clear to all parties at your customer, you may end up giving away margin that you don't have to.
How does a company do that?
Direct discussion. It is very much a supplier’s right to sit down with a key sourcing individual at the customer and ask, “Where do you see us?” If you’re seen as a commodity supplier, the customer will give you commodity treatment — price concessions. If you are adding other value, the cost of you adding it will make it difficult to meet their price concessions. And then one of the biggest shames is that your work goes to another company that doesn’t intend to provide the same value package that you do.You’ll lose the business, the customer will lose the service and, ultimately, the new supplier will have to add costs, with tremendous price pressure, or give the business back because it won’t be able to perform the same level of service. Getting straight with your customer on the total value package that you offer — and how they see that value and where they position you — is an important step.
How savvy are most suppliers to that need?
Most small suppliers working with big companies are reluctant to push that agenda. First and foremost, it has to be a bit of a mystery as to how their big customer operates, who actually make decisions, etc. Second, big companies get involved with strategies for a three - to four-year period and then change direction. In such an environment, there is a reluctance be a rabblerouser. But remember: You’ve earned the right to have that kind of discussion. If you are always meeting that customer’s needs, you have the right to know the state of the relationship from your customer’s perspective - and to educate them on the value you provide.
How can a company make itself more valuable to a customer?
Constantly exceed performance expectations.You drive cost out of your customers’ business by not passing through your errors.You also want tofix their problems. Overplan for known customer problems. If you are aware of seasonality in their business and they don’t seem to be good at accounting for that, make an investment in inventory to help. Being able to supply product when even they don’t know they need it is a positive and increases your value to the customer.
Last, but not least, look at the steps in the value chain, and bewilling to increase your footprint. Examples would be product design, vendor-managed inventory, or however you would choose to do that. Increasing your footprint will help drive your value to them - and drive you further to the right side of the grid.
How can you best assure future business?
First, move as deeply into product development as you can. I have never seen a major company’s R&D group that wasn’t looking to increase its design capability and delivermore products to the marketplace. When you can step in and increase that capacity, you increase your value—and endear yourself to a group that will have majority say on who the [future] suppliers will be.
Second, get to know the senior leadership as well as you can. The procurement people can be great people, but at the end of the day, you need to know the executive responsible for profit and loss.
Third, as we have mentioned before, take over steps in the value stream that cause your customer pain. This could mean vendor-managed inventory, taking part in planning, or providing simplified billing, to name a few.
Fourth, and most important: perform, perform, and perform! It is incredibly difficult for a large company to let go of a high-performing supplier. The amount of time and money you put into improving the reliability of your business could almost be viewed as a sales expense. Because improving your company’s performance is more effective at securing new business than a sales call.
How should you use supply chain excellence to get new business?
The best way to get in the door is to guarantee your company’s performance. Be willing to guarantee fill rate or short lead times. You might not want to do it, but on the other hand, it is a relatively small cost. And it helps you differentiate yourself.
Second, I think most suppliers get in by fixing a problem that seems unfixable, so don’t be afraid of accepting a short- or no-lead time challenge. You’re probably getting an opportunity to clean up a competitor’s messes. If you can do that, it is easy to see the procurement department penciling you into that supplier’s spot on the lineup.
How do you bird-dog when a competitor is having a problem?
You have to have a presence at the customer and you have to be aggressive. I would overtly ask for the chance to fix a problem they can’t solve. Conversely, you must be obsessive about not making the same error twice and not passing through errors to your customer. Again: perform, perform, perform!
This is kind of an obvious question, but is it one of the things that plagues suppliers?
It is probably the top cause of lost confidence. Compliance to cost-down requests and on-time shipping cannot overcome poor quality. And that could be quality at any step of the process. It could be a deficiency in product, it could be shipping to the wrong warehouse. Once you have that loss of confidence and you drop to the bottom of the line, it is a dogfight to climb back up. And to find your way back in, you’ll have to buy your way back in. It takes your business and makes it a lot less profitable.