Good Suppliers or Good Customers:
Which is More Important?

by Dave Garwood

Everyone knows any successful enterprise needs good customers. But what happens if they don't have good suppliers? It is only a matter of time until the enterprise has trouble quickly delivering a defect-free product on time at a competitive price. And the good customers will disappear. The answer to the question is an enterprise needs both good customers and good suppliers.

But are suppliers and customers treated with equal importance, attention and respect? In most cases, the answer is no. Is the new e-commerce practice of managing the supply base supportive of keeping a good stable of suppliers? Let's start the discussion by developing a profile of the ideal supplier.

Ideal Supplier
A "quality" supplier means they meet all of the customers expectations. As a customer, what do you expect of suppliers? What is the profile of a good supplier? The ideal profile includes these seven key characteristics:

1. On-time delivery. Late supplier shipments are costly in many ways. The customer's customers will likely get late deliveries also. Costly informal systems pop up to minimize late delivery damage, including buffer inventories. Perpetual late deliveries will likely lead to lost business.

2. Frequent deliveries without price penalty. The ability of a supplier to frequently deliver, i.e. deliver a day's usage every day (or close to it ) without any price penalty can be a huge capital and cost advantage. For example, if a quality problem is discovered, only a small quantity needs to be reworked, replaced or returned. And another delivery is already in the pipeline. Smaller quantities take up less space!

3. Reasonable price. Purchased material often accounts for as much as 60% or more of the cost of goods. Minimizing this cost can add a lot to the bottom line.

4. Minimal paperwork to do business. Ever think about all the documents involved in doing business with suppliers? Purchase orders, requisitions, requests for quotations, quotations, invoices, bills of lading, etc. Looks like a real threat to our national forests! The ability of a supplier to do business without all this paperwork can be a tremendous cost savings.

5. Quick response. Forecasts are never accurate and customers seldom know exactly what they need and when. The ability to quickly respond to unanticipated needs can be a huge advantage. Supplier lead times often make up 80% or more of the lead time for a company to respond. Short supplier lead times are a big advantage. Less buffer inventory is needed, for example. In many cases, this ability to respond quickly to get incremental business may be more valuable than a 3-5% purchase price reduction.

6. Inspection not required. The last activity by the supplier is often also the first activity by the supplier -- inspect the material. Reliable quality can eliminate this costly, time-consuming step.

7. Technical ideas. This may be the most significant characteristic on the list. If we are using a bearing, packaging material, seals or whatever, in our product, why not depend on the experts in those businesses to design and define what is needed to most effectively get the job done? Many companies could reduce the engineering staff and get lower costs, more effective purchase material if they would only utilize and listen to their suppliers engineers. Early involvement in the product design is necessary to take advantage of this free resource. This means the supplier must be selected before the specs are written.

In short, suppliers are a significant part of an effective supply chain. Over the past decade, industry has recognized the need to replace adversarial relationships with supplier partnerships. The selection of suppliers on price alone and single measurements such as PPV (Purchase Price Variance) have been replaced with a more holistic focus and measurements such as total purchase costs (see Hot Info archives). The results have been impressive!

How does this all fit with today's e-commerce approach of competitive bidding over the internet? Not very well! Notice that auctions to award business focuses solely on price -- just one of the seven criteria for an ideal supplier. Have we become so enamored with internet technology that we are abandoning Best of Class supplier practices? Perhaps. But this approach is rapidly gaining momentum, driven by industry giants such as GM, Ford, Boeing, and others --right or wrong!