Posts Tagged Suppliers

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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Who’s watching your suppliers?

In the old days, a company really only needed to worry about the credit worthiness of their customers.  The credit department would monitor the accounts receivable balances and watch the buying history to make sure the customer was able to pay for the product that they purchased.  If a customer needed more product, or there were concerns about the ability for the customer to pay, the credit department would set up some alternative financing (cash up front, letter of credit, etc.) against the customer.  It was normal business, your supplier did the same thing to your organization.

Time have changed, now days with an over optimized supply chain, a hiccup upstream will have an adverse reaction to the flow of goods and services out of your organization and in turn all the way downstream to the consumer.

One of the hiccups can be a supplier of products, raw material or services going bankrupt. 

This is happening more and more in today’s economy.  Once thriving organizations are no longer to keep financially afloat and are reorganizing or closing their doors.  To help mitigate this type of risk, many companies will multi source, with the expectation being that if one supplier has financial problems, there are others who can provide your organization with the products needed to satisfy your customers demands.  Additionally, a periodic review of the supplier’s financials (through a credit reporting organization such as D & B or Best) can help identify potential issues down the road.  Your credit manager can provide a quick analysis, or set standards for you to monitor.  If the company has financial issues, it is time for a frank discussion on the viability of the organization and a team review of the business continuity plan that would be put in place if the supplier was no longer able to provide product.

But what happens when the supplier in question is farther upstream?  If your direct supplier’s  supplier of raw or other material, or a service provider is caught in a financial bind. In many instances your supplier may not provide you with information on who their supplier is.  The visibility of a problem upstream is not as visible to you and may also cause your secondary sources to have stock outages or be unable to provide the things you need.

To minimize this risk, I suggest several alternatives.  First have an understanding of the sources your supplier may be using and monitor the industry/suppliers on a global basis.  Second, help your suppliers by requiring them to provide a copy of their risk management plan.  During the contract process you can outline the types of risks that they should monitor and the communication and contingency plan they have developed in the event one of those uncertain items arrises.  They don’t need to provide names and sources, but they should provide a general overview on how they will protect your supply chain while under their control.

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