Suppliers are from Venus, OEMs are from Mars
A new MTI report funded by the Blandin Foundation suggests that both supply-chain players need couples counseling.
BY KEVIN FEATHERLY
The scenario has played itself out hundreds if not thousands of times. Bob’s Widgets has just programmed its six-tool computerized numerical control milling machine and is starting a production run of a batch of complex, slot-cut engine components for Acme Corp. Acme is Bob’s biggest original equipment manufacturer (OEM) client, but lately, the marriage hasn’t been so good. They just haven’t been talking, except, of course, when Acme has decided to issue another of its apparently indiscriminate demands.
There was a time when Bob’s and Acme were a match made in heaven. Wasn’t it just ten years ago that Acme went out of its way, at its own cost, to train some of Bob’s key operators on lean manufacturing? Good times. But, let’s face it, that was then. Everything has changed. The two companies hardly communicate, except when Acme wants something. And even those have hardly been satisfying conversations — they all seem geared toward Bob’s making some new sacrifice.
In times past, Acme often valued Bob’s for its input, its creative design, its top-flight machining — in short, for its brains. But lately, it feels like Acme is only interested in Bob’s pricing. And even then, Acme never seems satisfied, constantly hectoring Bob’s to get slimmer and slimmer — with respect to the profits Bob’s can expect for each order. What’s worse, Bob’s has very good reason to suspect that it’s being jilted by Acme, which gives every indication that it is shopping around for some new, leaner, classier supplier. But what can the widget maker do? It’s dependent on Acme. If it were to break off the relationship, what would happen to the kids — which is to say, all of Bob’s employees?
In a new report commissioned by the Blandin Foundation, Minnesota Technology, Inc. (MTI) examines the often challenging marriage between Minnesota’s suppliers and their OEMs. The study was launched with the idea of helping suppliers get better at their business and thus more valuable to OEMs. But its conclusions came out somewhat different. Though the report, titled “The Minnesota Value Chain Management Program: Phase Two,” doesn’t come right out and say it, the reader can only come away with one obvious conclusion: Suppliers and OEMs need couples counseling.
This would suggest that the moral of the report, in the words of popular TV self-improvement guru Dr. Phil, may be as simple as this: “If you want a good friend, be a good friend.” But John Connelly, director of product management at MTI, takes away a different message.
“The biggest thing that came out of the report in my mind is the idea that the connection between the OEM and the supplier is far more complex than most people give conscious recognition to,” Connelly says. “It really varies based on a lot of factors as to how successful that relationship is. There is great potential for improving the relationships in general.”
Vicki Prock, a business services specialist at MTI and co-author of the study, says people have historically looked at value-chain or supply-chain management issues from the OEM perspective, which is one reason the initial idea of the study was to identify ways to improve supplier performance — so OEMs would want to do business with more of them.
“OEMs certainly do have a perspective,” Prock says. “But suppliers have an equally interesting — and in some cases very compelling — perspective, to which I think it would behoove OEMs to pay a little more attention.”
A Change of Focus
There is a point to all this beyond just making the gears run smoother between OEMs and suppliers. Improving the supply chain is a critical component of the Minnesota manufacturing economy, and anything that improves it will necessarily improve the state’s economic opportunities.
With an eye toward accomplishing that goal, MTI, with funding and backing from Blandin, undertook a series of interviews with OEMs and top-performing suppliers. They also reviewed industry literature and researched supply-chain development programs around the country.
The Blandin/MTI project is a sequel to a report conducted by MTI and the Minnesota Department of Employment and Economic Development (DEED) that was based on interviews with 14 major Minnesota OEMs. That research was published in 2006 as “Minnesota’s OEMs: Can the State Supply Chain Be Stronger?” The report ends by calling for “possible initiatives to improve customer-supplier relationships and overall supplier development” and helped provide the basis for the current report. (See the sidebar on page 12 for a summary of the 2006 study.)
The current report’s primary contribution, according to Connelly, is that it moves the focus away from pushing suppliers endlessly to improve themselves to satisfy manufacturers and toward getting each side to take a look at how it is handling its side of the relationship.
It may sound a bit ludicrous to position interactions between OEMs and suppliers as a question of maintaining a happy marriage, but Connelly acknowledges that there is something to the analogy. “OEMs and suppliers don’t generally see each other’s business,” Connelly says. “There is an assumption that theway I see things is the way you see them, but you just don’t agree with me. I think that in that way, the comparison to couples makes sense.”
It Depends
Prock says that when the project began, she thought she knew in advance much of what she would find. Several interview subjects came from a group that the report identifies as “top performing suppliers” (they aren’t identified by name). Among the questions they were asked was one that Prock thought would be the very simplest to answer: “Does your OEM ask you to produce to certain specifications?”
“That should be a simple yes or no answer,” she says. “The actual answer was, ‘It depends.’”
That’s what started the project rolling in an unexpected direction, Prock says. When she talked to OEM executives, the issues of cost, quality and on-time delivery, “the holy triumvirate,” dominated expectations. But according to Prock, the suppliers’ answers tended to equivocate. “It depends on what the OEM’s pressures are,” some said. Others indicated that “it depends on how well they know us.” Still others would say, “It depends on whether or not they think we would be able to give them different design specs.” Plainly, the two sides of the supply-chain equation were not seeing things in the same light.
“That’s part of what started to tumble out of this,” Prock says. “You go into this thinking it’s going to be all about cost, quality and on-time. In fact, that’s kind of how we started out looking at this project.”
Not surprisingly, one major finding of the research is that high-performing suppliers were best able to meet the expectations of their OEMs. The problem is that expectations vary dramatically from manufacturer to manufacturer. And suppliers were inconsistent on how best to meet the demands of their OEMs. Quality, for example, is considered the most important factor for medical device manufacturers. But low cost is the top priority of the electronics industry. Even within a single OEM, the report states, expectations can vary considerably between corporate divisions.
This revelation was a curveball for the researchers. Part of their mandate was to perform a general-needs assessment. But since there are no generally accepted terms for supplier performance, there can be no universally defined performance gap. The only set of expectations OEMs and suppliers could generally agree upon concerned ways to improve the relations between the two.
Both sides generally agreed that they wanted to improve supplier performance, wanted to increase their relationship capability, wanted to elevate the level of their relationship and wanted to improve the joint performance of the partners. Both sides also saw developing relationship skills as away to gain new trading partners. Farther down the list of general needs were items such as increasing the relationship capability of the trading partner (in other words, fixing what’s broken on the other company’s side of the fence) and improving OEM performance.
“They both want to get to the same place,” Prock says. “The good news is that everybody wants to have suppliers that are of more value. The trick is how do you get there?”
The answer here, too, is, “It depends.” It depends on what kind of relationship the supplier has with its OEM, how that relationship is maintained, and what kind of communication goes on between a supplier and its OEM. “It’s not reasonable for a supplier to expect that their OEM is going to sit down and give them a big hug,” Prock says. “They have to really be able to understand what it is that they offer to that OEM.”
Still, OEMs have a part to play in saving the relationship as well. One thing Prock would like to see manufacturers end is the practice of rotating procurement staff every six to 12 months. The practice is actually aimed at keeping relationships from developing, so that, for example, a procurement officer who has become friends with a supplier’s CEO won’t look the other way if production begins slipping.
“To me, this is totally counter productive to this concept of ‘You’ll do better if you have a better relationship,’” Prock says. “In order to retain that distant objectivity, large OEMs will often change their procurement folks so that if I am the supplier, just when I start to get to know somebody, I’ll have a new procurement person to deal with. And then I have to start all over again.”
The Transaction Trap
One of the main reasons that OEMs and suppliers find themselves in troubled marriages is because of what the report calls “the transaction trap.”
“Most people accept that business is done at the transactional level,” says Connelly. “The idea there is that it’s essentially about price, quality and delivery. If you can compete on those things, then we can conduct the transaction.” In other words, the OEM places the order; the supplier makes and delivers the part. End of story.
That would seem rudimentary, and it is, but on a practical level for suppliers, the transaction platform quickly becomes a transaction trap. “What that means is that as a supplier, I am always fighting price,” Prock says. “I’m always being asked to cut a penny here, cut a nickel there. It becomes not a very satisfying or fulfilling position for a company.” If the supplier’s owner is thinking strategically, she says, the supplier looks for away out of that rut. “A lot of it depends on the supplier’s interests, capacity and expertise, and whether or not they want to think strategically about their business,” she says.
According to Prock, that’s not too far off base. “We had some suppliers that would say, ‘I know that I am a little ahead of my OEM in this particular design area, and every once in a while we’ll sort of lift up our head and say, “Do you guys care yet?” And if they say they care, we go and have more conversations. But if they say they don’t care, then we go, “OK, fine,” and we tuck it back away again and then we wait to see whether or not they get ready.’”
That’s an example of a supplier preparing itself to take the next step, which according to the report means entering into collaborative relationships with OEMs. “Suppliers can escape this [transaction] trap by finding ways of adding value, gaining capacity, protecting it and then devoting it to increasing relationship capability,” the report states. For example, Connelly says, instead of simply placing one order, the supplier and OEM could discuss a commitment for a series of orders that stretch over months or years. The OEM might agree it will commit to working with a supplier if that supplier agrees to add capacity, or certain new machines, or if it acquires new skills in welding to a particular standard. At that point, Connelly says, “we are getting into a collaborative relationship, where we’re starting to share our business opportunities.”
There is one additional stage on the relationship scale identified in the report — the strategic level. According to Connelly, “That really gets to wherewe are interdependent on each other, where we rely on each other.”
One example of a strategic relationship is the old “Wintel” alliance between Microsoft Corp. and the chip maker Intel. It’s not a perfect example, because both are essentially suppliers — incredibly powerful suppliers — to the computer industry. But by working exclusively with each other beginning in the early 1980s — supplying chips and operating system software in tandem — the two companies strategically advanced each other’s causes. (That alliance has since become nonexclusive, but it indisputably made both companies’ fortunes.)
It’s not easy to point to a Minnesota OEM-supplier relationship that has reached that advanced state, Prock says. But it’s still a good model to keep in mind, as an example of how healthy the OEM-supplier marriage could become, she says.
The practical reality, of course, is that the OEM holds most of the cards. A supplier cannot force an OEM to move from a purely transactional business arrangement to a collaborative one. If a supplier thinks it has reached a collaborative state with an OEM, but the OEM sees the relationship as strictly transactional, frustration will be the result. And for the most part, OEMs — and suppliers — still think in mostly transactional terms, Connelly says.
“Getting back to the analogy about couples, you don’t get past transactions, you don’t get to the collaborative level and you certainly don’t get to the strategic level unless people balance out those power issues,” Connelly says.
The study — which in a strange way reads a bit like a highly elaborate mediator’s report — concludes that what is needed is an initiative aimed at bringing the two sides together to learn about ways to strengthen their relationships. It proposes an “Elevate Supplier Value” initiative, the confines of which are at this point amorphous. The initiative could include educational training by schools and universities around the state. It could involve some Minnesota analog to programs such as the “Accelerate! Supplier Results” initiative that has been developed by the Wisconsin Manufacturing Extension Partnership, in which non competitive OEMs team up to assess selected suppliers and help them define needed improvements. It could also include a modified version of CEO Peer Councils that have been run by MTI for several years. DEED might have something to offer. Possibilities abound, Prock says.
“The good news is it could be anything,” says Prock. “The bad news is it could be anything. Overall, suggesting the ‘Elevate Supplier Value’ project was our way of articulating that there are a lot of ways that you could go at this. The value in all of it is that you will elevate the value of that supplier.”
Heavy Lifting
Prock and her co-author, Roger Hurd were surprised by the conclusions to which the study drew them. Prock admits she was a little nervous when she realized that what she was going to suggest was not a simple list of ways that suppliers can make themselves better, but that the tea leaves instead pointed toward the complexities of relationship improvement.
“For me, the moral was that we went out thinking that the answers were simple, and the big surprise was that it really is more complicated, and if you keep trying to force it to be simple, then you will lose the boat,” she says.
But the more she and Hurd talked it through, Prock says, the more they realized that the conclusions made sense. “To me, Roger is very empirical,” she says. “Part of what he did was to try to build some science around this so it wasn’t all about that chick writing all this relationship stuff.”
The report has been in circulation for only a few months, and MTI has just begun spreading the word about it. Still, Connelly says some feedback is filtering back to him, and that it has been largely positive.
“Most people that looked at it said, ‘Wow, this report helps me to understand how this relationship can be so involved, maybe even so frustrating.’ We think that one of the tools that can come out of this will be in the way that we assess each other as partners.” In other words, how does an OEM look at a supplier? Where does the OEM want to be versus where does the supplier want to be? Are we both collaborative, are we both transactional? Are we in different places in our expectations? “Having assessed those positions will lead you into the scenarios about what’s next,” Connelly says.
It might also help steer some troubled OEM-supplier relationships away from the shoals, Prock suggests, simply by starting a dialogue. Here, she says, the couples counseling analogy is spot on. Whether it’s couples or companies, when the communication breaks down, things go wrong. In either case, when parties get frustrated with each other, they don’t communicate more, they communicate less. And they focus on the nonessentials.