In a recent Wall Street Journal article it was reported that buyers are balking at working with Chrysler on the new models. The suppliers are not sure that the vehicles will be received well enough in the marketplace to achieve the volumes that will substantiate the supplier's investment in plant and equipment to provide the parts for the new models.
Just as buyers are more sophisticated in understanding the operations and financials of their key suppliers, suppliers are also more actively involved in understanding and evaluating their risks as suppliers.
This is all happening in an era of increasing supplier’s influence and sophistication. In the current environment there is a global under capacity. This is producing a seller’s market environment—the seller has limited available capacity. Thus sellers are less inclined to offer deep discounts, change production schedules, and participate in the time-consuming and costly bidding processes.
This global seller's marketplace is largely the result of the growth of the BRIC nations (Brazil, Russia, India, and China). Twenty-five years ago, collectively, these nations accounted for less than five percent of global industrial production and consumption. Today China, the third largest economy, alone accounts for over seventeen percent. The rapid growth and industrialization of these nations has created an environment where the same limited resources and industrial capacities are sought after by more buyers.
What does that mean for Supply and Procurement? First, we can anticipate more price increases as suppliers respond to increased demand for their limited capacities. Second, we will have constraints in availability of sources of supply. Lastly, the assumptions that suppliers will be responsive to cost concessions, changes to their production schedules, and delivery options are no longer justified.
Now is the time to recognize the value of Supplier Relationship Management (SRM). What is SRM? SRM is an effective technique to collaborate with suppliers that incorporates these five key elements:
- Seamless Communications – Comprehensive information is shared between buyers and sellers.
- Collaborative Efforts – Suppliers participate early in decision making—Early Supplier Involvement (ESI).
- Mutual Benefits – Objectives are to eliminate waste and increase productivity.
- Suppliers are viewed as part of the enterprise not in conflict with its objectives.
- Supplier Segmentation allows a differentiated approach to supplier management and expectations.
This requires identifying key critical suppliers and forming a mutually beneficial long-term relationship with those suppliers. This means substantially reducing the number of suppliers with whom we do business, both in order to concentrate volume leverage and, more effectively, integrate the collaborative requirements that will be needed in a 21st century buyer-seller relationship.
The risk is that we picked the right suppliers. The second risk is that we are more inter-dependent on those suppliers. For many, there are few alternatives to accepting these risks.
This is the time to reassess our relationship with suppliers; establishing relationships that are not based solely on price reductions but rather on inter-dependency and mutual advantage that achieve significant value for both.
Anything else puts us at significant risk of some day being told, “…Dear Buyer: You’re fired! Best Wishes, Your Former Supplier.”