The Obsession over Supply Chain

Supply Chain Management certainly is not a new idea. Companies have been “managing” their supply chain for years. Consultants have been selling “Supply Chain Management” for years. Supplier Quality Engineers have been “working with suppliers” for years. There has always been a great deal of activity around a company’s supply base. Why? Because in today’s Global Economy the material cost of a product is generally the largest percentage of the product cost and offers the largest area for improvement opportunity.

The question becomes, if You want to conduct an effective sourcing/purchasing/supply base program do I need an entire new set of skills or are some of the internal skills/programs that will work as effectively with the suppliers and the sourcing/purchasing system as they do on internal processes. This is not meant to say that there are not skill sets indigenous to Supply Base Management. There are obviously skills around negotiation, inventory management, contracts, etc. that may or may not be known within the organization.

Without a doubt alignment is as important in the Sourcing/Purchasing organization as it is in the rest of the organization. Generally this involves gaining the best value in purchased materials and services for the organization. The issue becomes what makes up value. Value has a lot of different meanings to a lot of different people. Naturally nobody wants to pay more than they should for material or services therefore value in this context has to include price. A few decades ago price would have been sufficient. In today’s global economy it takes more than just the lowest price to become an active participant in someone’s supply base.

On-time-delivery is also a critical characteristic. Large amounts of unscheduled down time due to late deliveries from suppliers is unacceptable.

Companies with some level of sophistication realize the importance of quality. Although it should be intuitively obvious that a low price, on time delivery doesn’t matter if it is defective. It is the same as no delivery at all. There will be those that wish to discuss the idea that it is unlikely that a delivered product would be 100 percent defective. It is inconsequential. Delivery of any percent defect is the same as not delivering that same percentage.

For those who only desire the most superficial relationship with their suppliers the use of tools such as Lean, Six Sigma and Lean Six Sigma can be used to “work with suppliers” to assure compliance with the quality and delivery requirements. For those organizations that wish to develop an actual mutually beneficial relationship with their suppliers implementing these programs can serve as a good foundation for the creation of a common financial interest.

There is another aspect of a successful program that is frequently not addressed. When am organization engages with a supplier there are systems that support the business transaction. These systems were generally designed without the knowledge of what systems they would have to interface with. The two systems may or may not be compatible. Systems that generate a Purchase order may not accurately comprehend a contract, accounts receivable may not accurately understand the negotiated pricing, etc.

All these foibles can stress an otherwise successful relationship that is perfectly delivering material at the right price, at the right time and with the right quality. These back office processes are another opportunity for improvement.

Make no mistake that it is critical to the success of a program such as previously described that the organization understand the financial implications of these activities. It takes resources to do a program like this. Those resources have an associated cost. The various projects should create an associated benefit. Between the two there should be a positive net benefit to both the supplier and the purchasing organization. This is business. If both parties do not realize a reasonable return on investment (ROI) then one of the two parties will eventually disengage in the relationship.