Posts Tagged Lean Manufacturing

Seven risks of partnering for supplier resources

In the October 11th issue of Business Week, there was a short article talking about Walmart’s drive to partner with their suppliers to increase bargaining power with raw material resources (“Walmart Wants More Buying Clout” ).  Walmart is looking to partner with their suppliers (like Pepsico) to purchase raw materials (like sugar and potatoes) jointly in order to reduce the product cost because of the combined volume purchased from the two entities together.

This is not a new or novel concept.  Buying Groups have been around for years in order to help reduce costs and increase profits and have been very successful.  There are also down sides to the world of buying groups that, if not properly managed can land you in a world of trouble with the government from anti trust laws. 

While it’s important to understand the implications of anti trust laws and address them if the situation warrants, I would like to talk about other supply chain risks associated with this type of an agreement.

One.  How would this partnership affect your current suppliers?  Would it put an undue burden on them that could affect quality, delivery, your relationship with them? Or will you continue to use your current supplier?   A smart supply chain manager is looking at the suppliers and monitoring the volume not only of the direct supplier, but also the supplier’s sources to assure a continuous supply of material needed in order to keep the factory running. 

Two.  In building the partnership will this require single sourcing of all supplies?  That’s where the benefit of volume comes in.  Building a large enough “buy” that helps your supplier project volume and realize cost saving for them that are necessary to pass any additional breaks down the line.  Are you ready to take on the risk of single sourcing?  (and if you are single sourcing right now do you realize the risks?)

Three  Is this a partnership that makes sense?  Will it last the test of time and you have no fear that your customer will not: a)  get into financial difficulty and not be able to complete their portion of the buy.  b)   drop the product line and leave you responsible for the entire buy c) decide to partner with someone else and leave the buying group and you responsible for the entire buy d) not pay for their portion of the material received and leave you responsible for the costs of their goods e) be involved in a operational issue or recall that you could be associated with. 

Fourth  Will this partnership provide to much information to your customer that could be trade or company secrets to your product that could affect the brand?  In today’s information rich environment a good analyst with marginal computing power can extrapolate random bits of information and tie them together to get the “secret formula”.  If you partner for one item, your organization is probably safe, if you extend it across the board, there is a chance the secret could get out.

Five  How will this affect the pricing and profit of your product?  If your product is unique and can maintain a higher demand that allows you to price accordingly, that should not be a problem, However if you have been commoditized and in order to maintain market share, your pricing is forced down to meet competition threats, will you be able to maintain that price should the partnership dissolve and higher supply pricing is once again in place?  Remember to look at your partner’s marketing and business strategy, especially if you are in competition with a store brand or private label product.

Six Do you feel comfortable in losing control of the supplier negotiations?  Adding a another player to the mix changes the negotiation process.  Each party brings it’s own agenda and expectations to the dance, from the size, shape of the table to the locations of the negotiations, to the most important factor of the agreement, some of which may be different than yours.

Seven  How does this change your relationship with the customer?  Does this give your customer more leverage over your organization from a buying standpoint or does it build greater ties to your customer that makes it more difficult for your competitors to gain inroads into their organization?

When assessing risk for the supply chain area of an organization, Operational and Financial risk should be the primary factors, with Reputation a close third.  Delving into a partnership such as this or a buying group is a strategic business decision, filled with risks including the traditional SCRM focust and adding many more.  Any partnership with a customer other than the traditional relationship should be carefully reviewed with the pro’s and con’s weighed before moving forward.

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The Downside of Lean

Can you every be to lean? 

The answer is a resounding Maybe.   It depends on your business model and the tolerance for risk.  Here’s an example.

In a Bloomsberg Businessweek Article  “Low Inventory Angers John Deer Customers“  Shruti Singh reports on the challenges John Deere has faced because of a change in management philosophy.  According to Singh, John Deere opted to shift focus from building inventory to allow for quicker delivery to a build to order model that provides the customer with the product ordered, and reduces inventory and the associated carrying costs.  While this has lead to reduced inventory an working capital tied up in inventory, and increased profits, the flip side is that the low inventory levels do not allow them to capitalize on the strengthening farm economy.   One Deere dealership is quoted as saying they are probably losing at least a half dozen sales per month because of Deere’s inability to delivery.   Let’s face it a farmer who needs to get his crops in in September is not going to wait until the following December for new equipment and will look to other suppliers.

Not only is this a short term loss for Deere, many died in the wool John Deere Green Farmers are now open to other brands such as Caterpillar, Case and New H0lland.  The inventory mis-step also opened the door for loss of market share and an impact on brand reputation.

In my opinion, when the recession began, the Deere organization needed to look at options to make sure the company survived and thrived and minimized short term losses.   They did this by significantly reducing inventory (to an industry low 12.3% of preceding 12 months sales) and focusing on more build to order products.  This move significantly improved the company’s profit picture over their competitors with the lowest decline in profits (52% compared to Caterpillar’s 75%)  and was applauded by some analysts.

This inventory reduction would not have affected them if the ability to ramp up production to meet demand was available, but as it apparently is not.  Additionally, because they were unable to properly forecast the strengthening of the farm economy in time to react, they are left with lengthy delays in production while their competitors are able to provide delivery of product to meet the customer’s needs. 

Overall I think the long term effects on this decision will probably be painful, an an opportunity for their competitors to take market share and convert the John Deere Greenies to a competitors color.

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