Best Practice: Supplier Stratification
By Dr. Barry Lawrence, Texas A&M University
Senthil Gunasekaran, Texas A&M University
Pradip Krishnadevarajan, Texas A&M University
and Dr. Malini Natarajarathinam, Texas A&M University
Distributors choose a customer type, the “core customer” as described in earlier blogs, and then arrayed resources to meet that customer’s needs. In the process, the distributor “invents” itself and determines what investments will be necessary to be successful (inventory, warehouse, equipment, human resources, etc.). One of the earliest and most important decisions is supplier selection.
Suppliers are selected based on their ability to serve the core customer. In the beginning, this is a very positive relationship with the distributor seeking to delight the customer, and the supplier seeking to find new ways to penetrate this new market. Over time, however, the relationship matures and sometimes goes awry. Suppliers may want distributors to broaden their offerings or buy in volumes inconsistent with what the core customer needs, often leading to excess and obsolete inventories. In other cases, supplier performance may decline or not keep up with the market, leading to customer service failures or a need for more inventory investment.
Many best practices have been developed in Supplier Relationship Management, but they are often misdirected in practice. One distributor maintained what the staff called a supplier report card (a well-known best practice). When asked how they used the report card, they said they took it into their pricing negotiation meetings each year with the supplier. This is not a report card; it’s a baseball bat.
The issue surrounds the basic definition of the distributor’s role in the supply chain. Some believe the distributor is the supplier’s customer, while others say the distributor is the supplier’s partner. The distinction is important. A customer is one to be served; a partner collaborates for the betterment of all. A customer seeks to optimize his or her own costs and operations without regard to the supplier’s needs. A partner, on the other hand, acts as the channel to market for his or her key suppliers and facilitates the success of both.
Returning to our original premise, the distributor selects suppliers based upon their ability to support the needs of core customers. The most significant (strategic) suppliers should carry products and skills that set them and the distributor apart. These suppliers must be partners. The ones that fill the small holes in the product offering and are only differentiated by price and by not product features or quality are vendors. To them, the distributor is a customer.
The new NAW Institute for Distribution Excellence book, Optimizing Distributor Profitability: Best Practices to a Stronger Bottom Line (available at http://www.naw.org/optimizdistprof), details best practices, their implementation, and return-on-investment (ROI). These practices are valid in any economy, but the significance of one best practice versus another may change under different market conditions. Each month in this blog, we continue to introduce a best practice and how it can improve earnings and/or ROI under current economic conditions. Using this blog, we encourage you, our readers, to ask questions, debate results, and offer your own experiences with these best practices, so that together we may further the knowledge of our community and the understanding of the science of distribution.The book breaks business processes into seven groups (SOURCE, STOCK, STORE, SELL, SHIP, SUPPLY CHAIN PLANNING, and SUPPORT SERVICES) based on various distributor asset categories. This month, we focus on the SOURCE group (see exhibit 1). The SOURCE group has five processes, and we’ll discuss “supplier stratification.”
Best Practice: Supplier Stratification
The process of stratifying suppliers based on profitability, distributor services, performance, and loyalty is called supplier stratification. Other factors such as risk, relationship, and growth potential can be used as well. The analysis is spread across all suppliers or it can be limited to the suppliers that account for 80% of annual spend. The objective of supplier stratification is to understand the criticality of the supply base and to allocate key resources accordingly. The stratification helps develop relationships and improve profitability in the long term. Supplier stratification helps the sourcing team see the impact of buying activity on the firm’s profitability.
Supplier stratification techniques are gaining popularity, but they are often not applied correctly. The practice levels for supplier stratification are as follows:
COMMON practice: (1) No formal supplier stratification, (2) Based on purchase price variance and landed cost
GOOD practice: Based on a single factor (1) Volume of Spend $ (Cost of Goods Sold), (2) Pareto Framework (80-20 rule)
BEST practice: Based on multiple factors (1) Profitability, distributor services, supplier performance, loyalty (exclusivity vs. general), risk/exposure, (2) Combination method. A combination method developed by Texas A&M is shown in exhibit 2.
The stratification framework summarizes key supplier relationship factors in a supplier stratification model based on four factors:
- profitability
- performance
- loyalty
- distributor services.
Based on these factors, suppliers can be grouped within four categories:
- Strategic partners: These suppliers represent strong brand, exclusivity, solid delivery capability, and, together with the distributor, high market control. Profitability is high with this group because sales and margins are high and the cost of doing business is low. Strategic suppliers help distributors sell with their strong brand recognition, at good margins through the exclusive channel, at lower cost-to-serve due to better deliveries, and with greater control of the market by leveraging the alliance.
- Vendor controlled: These suppliers represent high service intensiveness and low market control, in addition to strong brand and exclusivity. The cost of doing business with this group is high for required services (repair, consulting, programming, and so on), but the suppliers are efficient and don’t drive up logistics and inventory expenses. These suppliers offer exclusivity, but demand high loyalty and good performance to protect their brands. Distributors should seek to develop a more balanced relationship that allows them to determine what services the customer needs and not be dictated to by the supplier.
- Distributor controlled: These suppliers represent those situations in which the supplier’s brand is weak, but the distributor’s presence in the market is unchallenged. The distributor is able to dictate service levels and manage prices. Although this is an attractive area, it usually is not sustainable for long because the competition will soon arrive. The distributor should help the supplier improve its performance and increase its loyalty or find another supplier that will.
- Out of control: These suppliers are opportunistic, but they are unwilling to shoulder any of the burdens in establishing and maintaining a market. Distributors should quickly discontinue these relationships.
Distributors want to do business with strategic suppliers. They want loyal/high-performing, vendor-controlled suppliers that can become more effective and loyal in a distributor-controlled environment, and then use the rest of their resources to penetrate new markets. Distributors might have to do business in the rest of the vendor-controlled area due to customer requirements to carry a brand. They also may have to do business in the distributor-controlled area to capture profitability, as well as in the higher end of the “out of control” area just to hit necessary sales numbers. From the start, however, distributors definitely should get out of the worst “out of control” business so that they can keep from losing resources for very poor ROI.
Even though supplier stratification processes influence many business factors, such as brand, exclusivity, and market control, most firms concentrate on two process metrics that affect financial measures:
- Growth potential. This determines the supplier’s ability to scale up shipments when the distributor grows its market share and geographic footprint, affecting revenue growth.
- Lead time and variability. These contribute to inventory levels, depending on a customer’s service-level requirements. Lead times and their variability are countered by the financial element inventory, reflected directly in the financial statements.
Revenue can measure both revenue growth and total asset turnover (asset efficiency). Inventory can be related to GMROII (profitability), working capital (cash flow), and inventory turnover (asset efficiency). These four financial drivers—asset efficiency, cash flow, profitability, and growth—contribute to shareholder value.
Best Practice in Action: Do Suppliers Respond to Performance Measurement?
In order to perform the supplier stratification as per the Texas A&M combination method, you would need to use four different factors as shown in exhibit 2. One distributor that decided to implement the stratification framework for suppliers began with “supplier performance” (one of the four factors in exhibit 2) to perform an evaluation of its top supplier. The top supplier accounted for about 15% of the distributor’s inventory. During initial negotiations with the supplier, contracts were drawn up based on agreed-to lead time variability. If the lead time is 30 days and the supplier often delivers the product between 25 and 35 days, then the variability is 5 days (the deviation from the lead time of 30 days). However, over the years as the supplier expanded its customer base, the lead time variability became 15 days instead of the initial 5 days (as per the contract). When the distributor discussed this with the supplier, the supplier said the variability would get better over time as the supplier increased capacity. However, this did not happen.
The distributor then wanted to understand the impact of increased lead time variability on its inventory levels and customer service. Due to this variability from the supplier going over the agreed-to 5 days, the distributor had to increase inventory levels by more than 20% so that it could still meet the same customer service levels. This increased its inventory investment, reduced warehouse space for new products, increased interest expenses, and so forth. The distributor was taking a heavy toll on its bottom line. Its financial statements became a key concern for top management and shareholders.
The distributor then began to develop a tracking report for supplier performance. The distributor presented the tracking report to the supplier on a quarterly basis. Keep in mind that this was just a report card, and not a baseball bat. The distributor also made the supplier aware of the additional amount of inventory the distributor needed to carry so that it could still meet customer service levels. The supplier then understood the impact of increased lead time variability on the distributor’s bottom line. In the real world, there are various uncertainties that suppliers just have to plan for. Unfortunately, the supplier could not reduce its lead time variability. However, the supplier compensated the distributor by providing price discounts and increasing the payment terms from 45 days to 65 days. As a result, the distributor was compensated for the increase in supplier’s lead time variability. This did not happen overnight, but the point is that the distributor got the message across to the supplier in a way that was beneficial to both parties.
The process of connecting lead time variability to shareholder value is accomplished using exhibit 3.
- Could distributors offer this performance tracking as a service to suppliers?
- Would suppliers value this offering?
- Could distributors get compensated for this service?
Moreover, if suppliers respond to your measurement system in a positive fashion, the end result is more than compensation; it is a partnership and sustainability.
About this Blog
“Managing in an Uncertain Economy” is a blog created by the Council for Research on Distributor Best Practices (CRDBP). The mission of the CRDBP, created by the NAW Institute for Distribution Excellence and the Supply Chain Systems Laboratory at Texas A&M University, is to create competitive advantage for wholesaler-distributors through development of research, tools, and education. CRDBP encourages readers of this blog to send in Comments and email this blog to other interested parties.
Would suppliers be willing to pay for the performance results of their own service if feedback were offered from distributors?
ReplyDeleteThe answer to this question can depend on many things including:
• Where is the power in the relationship
• What resources are available to the supplier as incentives
• Are conditions already favorable for shared information?
A supplier would be willing to pay for this information from a distributor if it provided value to their operation. A profitable relationship is normally the most desired outcome of any business partnership including between supplier and distributor. If the supplier believes that there is room for improvement that will not only impact that single valuable relationship, but could also help it grow market share and revenue with like-distributors the information on their own performance could be quite valuable.
First, the supplier who would most likely be requesting this information from the distributor would have to understand where the decision-making power lies in the relationship. A strong supplier with low risk but a desire for performance information may make an easy-handed request to a distributor that is actually more like “volun-telling” them to provide the information rather than requesting additional feedback for an incentive. If the business is important to the distributor they will politely oblige and work within their existing capacities to accommodate the request. Any incentives or price discounts would likely provide a manager the incentive to come out with a “win-win” situation to his supervisors when briefing why the distributor’s staff is accommodating additional workload.
If the distributor has the power in the relationship they will be able to make up their own mind. If the distributor is comfortable in their position, proposed incentives may not warrant participation in a supplier’s quest for performance information. It really could depend on the relationship vice the exchange of money.
We have discussed incentives, but those are probably the greatest attractor to getting a distributor to participate. Depending on the relationship, the level of management involvement required for the data and the capacities impacted at the distributor’s location can be negotiated. Depending on volume, price breaks, and other possible savings or gains the long-term partnership could make a price break great enough to staff enough people to study the data. This hypothetical “break-even” point could make the data project pay for itself not only in incentives but long-term could also lead to increased profitability and better margins.
Finally, the supplier has to ask themselves if they should pursue performance-based, subjective knowledge when a lot of information is already available via EDI feeds, RFID information, ERP systems, etc… The answer is most likely yes that the information is worth pursuing, because partnerships are one of the valuable intangibles that reside with decision-makers.
To address the quantitative performance-based information, the supplier should ask themselves if their on-time performance can be measured by Qualcomms. Also, can the RFID tags tell me how quickly product is turning over in my warehouse? Is the ERP system supporting the efficiency information that I need? What information from the distributor do I want to provide that I cannot provide to myself?
From there a scorecard could be created to support their specific goals and how they want to achieve those goals. Some of the evaluation criteria should include:
-Capabilities: Production Capabilities, Service Capabilities, Service Quality & Reputation
-Cost: Cost Structure, Pricing, Initial Investments
-Risk: Financial Strength & Stability, Agreements
-Parntership Potential: Fit of proposed process infrastructure, Compability. (1)
References:
1. Laseter, Timothy M. Balanced Sourcing: Cooperation and Competition in Supplier Relationships. San Francisco: Jossey-Bass, 1998.
“Partnerability” is often talked about between customer and distributor, but rarely between distributor and supplier. It is in the best interest of both the distributor and the supplier to become strategic partners. The ultimate goal for both supplier and distributor is to serve the customer. In my opinion, distributors are not the customer. The distributor works with the supplier to serve the real customer, the end user. By forming this strategic partnership, distributors can achieve this goal.
ReplyDelete“One of the fundamental principals of balanced sourcing is that a customer and a supplier working together to find savings opportunities will do better than each working independently.”(1) This applies to the relationship between supplier and distributor as well. Working together as partners not only help cost saving measures, but it also helps other initiatives as well, such as technological advancements and logistical innovations. Suppliers and distributors will have better results in these initiatives working together versus trying to achieve them separately.
Supplier stratification allows the opportunity to evaluate and manage relationships the same as customer stratification. Siemens implemented a supplier stratification program where they rank suppliers based on four criteria: purchasing marketing, quality, logistics (delivery) and technology. Siemens works with their suppliers to improve their performance and quality.(2)
In my company, we have partnered with certain vendors to gain exclusivity arrangements, help in marketing and selling products, as well as other joint initiatives. As a company, we have benefited greatly from these partnerships. In one example, the supplier has dedicated resources in order to help us gain market share in a new product for our company. They have assisted out sales force through training and sales activities, increased payment terms and have granted us an exclusive for there products in our territory. These efforts have allowed us to gain market share during the economic downturn.
The supplier has benefited from the partnership as well. Our business with them has increased in other product lines in addition to the increases we have seen across the board. Also, because of the close relationship, we have shared market information that the supplier would otherwise not have received. This information has helped with forecasting and additional product development.
At the end of the day, it has been our customer who has benefited. We have been able to increase product lines from previous levels and decrease our lead times. We have also been able to postpone and avoid price increases that have been implemented by competitors in our market.
The article focuses on supplier report cards, which can be a beneficial tool to help strengthen the distributor, supplier relationship. As the article points out, this should not be used as a “baseball bat” to strong arm negotiations. It is best used to facilitate discussions on how to better serve the distributors needs and those of their core customers.
We currently use supplier scorecards with our vendors. These results are routinely received favorably by our suppliers and are seen as a helpful tool rather than a threat. While suppliers are impressed with the performance tracking and see it as an opportunity for improvement, our industry does not have any examples distributors being compensated for providing this service. I believe suppliers see the value in these metrics and agree that it will ultimately strengthen the partnership, but I do not envision it being a service we charge for in the future.
1) Laseter, Timothy M. Balanced Sourcing: Cooperation and Competition in Supplier Relationships. 1st ed. San Francisco, CA: Jossey-Bass, 1998. Print.
2) Jim Carbone. "It takes a lot of hard work to reach top plus quality. " Purchasing 15 Nov. 2001
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ReplyDeleteForming strategic partnerships within the supplier-distributor relationship is imperative for sustainable success for both firms. In my industry, which is very much commoditized, one might conclude the value of supplier stratification would not have much prevalence. However, this is far from what we try to accomplish when creating and cultivating relationships with our distributors. As a supplier and manufacture in my division we focus not just on selling the distributor our products, but also bringing value added benefits as a supplier, thus creating a sustaining mutually beneficial relationship. We offer specials, competitive retails reports (what other distributors are selling like products for), advertisement allowances, technical support, and a wide array of products that our competition is not capable of providing. In a recent Strategy & Business survey of diverse group of large corporations, respondents ranked building and sustaining supplier relationships as the most critical of the six Balanced Sourcing capabilities1. Businesses must operate to some extent in a Vendor/Distributor controlled environments; nonetheless, both parties should effort to realize if this relationship can be groomed into a strategic partnership both parties would stand to accomplish a greater level of stability and profitability.
ReplyDeleteThe article spoke about the supplier report card. In our industry we have a large retail distributor that performs this type of task and there is a fee ascertained with the information. During the implementation of this, much of our industry expressed displeasure with these fees and wanted to know why they would even need this type of system. Yet, now that it has been in place for several month it has become an invaluable tool to track our performance with this distributor. Many of our competitors that I have spoken with have not performed well on these reports additionally. This could then help our company capture additional market share in new markets based on our performance. This would be accomplished for the most part because of our performance and working together with this distributor in perfect harmony in the different facets. Synergy in business is the benefit derived from combining two or more elements (or businesses) so that the performance of the combination is higher than that of the sum of the individual elements (or businesses)2.
1 Laseter, Timothy M. Balanced Sourcing: Cooperation and Competition in Supplier Relationships. 1st ed. San Francisco, CA: Jossey-Bass, 1998. Print.
2 Koteinikov, Vadim, “Synergy Achieving Extraordinary Personal and Business Results” Web. visited 4 Nov 2009
Professionals have grown accustomed to making scorecards and evaluating suppliers with Key Performance Indicators; with that written, we can count on the scorecard being a reliable piece of the future business toolbox.
ReplyDeleteSuppliers won’t be willing to pay for a “tool” that they can get from someone else for free; incentivizing distributors to provide performance information appears to be counterproductive because it is already a common business practice to conduct reviews with companies to openly review their performance.
My company conducts reviews on a regular business with our core customers; they are known as Quarterly Business Reviews or QBRs. During these reviews, often initiated by us, we review our performance, both the customer’s & our goals, the performance of other providers that we monitor for them and a multitude of other areas. Normally, this comes at our expense as we are seeking feedback to gain market share and to maintain or grow our existing business.
As of 1997, over 12 years ago, while studying company’s strategies and planning Kurtzman learned that more than 60 percent of companies were already using some kind of scorecard. Plainly, the performance based feedback that suppliers may desire already exists via KPIs, QBRs and interactive business relationships that seek long-term relationships. (1)
References:
1. Economicexpert.com. 4 OCT 2009.
Grouping suppliers based on performance, loyalty and profitability or "Supplier Stratification" is an excellent way for companies to increase the overall performance and profitability of their supply chain. Solid long-term supplier relationships "are the foundation for achieving added value and innovation throughout the supply chain." (1) This is accomplished by developing strategic alliances with suppliers with a focus to accomplish the goals of the supplier, distributor, and customer.
ReplyDelete"Developing supplier networks that focus on quality and are based on strategic alliances requires a new approach to material acquisition." (2) Supplier Stratification accomplishes this goal by helping build strategic alliances with suppliers. Creating a business alliance will build a relationship that allows mutual dependence which comes from understanding that cooperation will help each company succeed. Replacing suppliers can have a high cost; thus, the benefits of the alliance are seen in the overall cost savings of the long-term relationship. In addition, a strong strategic alliance will allow all parties to find ways to work together to improve the overall performance of the supply chain. The cost savings and strong relationship can be used as a competitive advantage in the market to help gain more market share which will benefit all parties.
In addition, Supplier Stratification is a method to help understand and improve profitability. "By assessing the relative and risks of making or buying, companies can leverage their skills and resources for increased profitability." (3)
References:
(1) Laseter, Timothy M., "Balanced Sourcing: Cooperation and Competition in Supplier Relationships." 1st ed. San Francisco, CA: Jossey-Bass, 1998.
(2) Koufteros, X. A. and M. A. Vonderembse. "The impact of organizational structure on the level of JIT attainment: towards theory development." International Journal of Production Research October 1998: Vol. 36 Issue 10, p2863-2878.
(3) Quinn, James Brian and Frederick G. Hillmer. "Strategic Outsourcing." The McKinsey Quarterly (1995): No. 1, Pg. 43-55.
I wanted to address the questions posed in the article separately and in a little more detail than my previous post.
ReplyDeleteCould distributors offer this performance tracking as a service to suppliers?
Would suppliers value this offering?
Could distributors get compensated for this service?
I do believe that performance tracking is a service that suppliers would find beneficial. Many suppliers utilize internal performance indicators to track service levels, lead times, etc. These tacking measures are available as part of most ERP systems in some form. Suppliers who are currently utilizing these tools should be open to tracking measures provided by the distributor as well.
“Orders pulled wrong” is an example of information that a distributor can provide that would be beneficial to that supplier. It can alert the supplier to operational and performance issues. Also, suppliers may be required to maintain different service levels depending on the customer. A distributor who is able to provide a scorecard in these situations would provide a valuable service to the supplier.
Regarding the ability to get compensation for this service, I do not believe it would be well received for distributors to charge a supplier to provide the performance tracking information. While the information is valuable and helps all parties involved, I believe suppliers would rather use internal measures already being collected than paying a distributor for an additional scorecard.
Also, in a strategic partnership, this kind of information needs to flow freely between the distributor and supplier. According to the article, a strategic supplier helps “distributors sell with their strong brand recognition, at good margins through the exclusive channel, at lower cost-to-serve due to better deliveries, and with greater control of the market by leveraging the alliance.” Charging for performance tracking may hinder this relationship.
It just so happens that while flying home from trip yesterday I read a great article on Supply Chain risk by a company named E2Open out of Foster City, CA.
ReplyDeleteAfter reading this article I learned that in one way I stand corrected that a demand may exist for the supplier to provide incentives to receive information from the distributor. While in another manner this article confirmed what was posted in a previous blog- if a company is not already conducting reviews and looking into KPIs they are wrong.
First, I’ll write about the newfound demand. A supplier’s need for the data in order to maintain or grow their business may be so dire that they are willing to offer price reductions or other incentives a distributor may not be able to receive them. This could be perceived by the distributor as an act of desperation; that can have negative consequences in the long-term relationship.
On the other hand, E2Open identified the following areas of risk for Supply Chains: lack of visibility to outsourced operations, additional tiers of partners, fragmented business processes, long supply chains, delayed response to sudden changes and finally a lack of shared performance metrics. (1)
E2Open states of “Lack of Shared Performance Metrics”: “It is critical to have aligned performance metrics and incentives to support customer delivery performance, satisfaction, and cost targets. Even if a shared process is agreed to, conflicting motivation and drivers make it difficult to have alignment on performance metrics and overall objectives.” (1)
E2Open is stating that if you are not on the same page with your supplier (substitute this for customer in the previous paragraph) then you are not properly aligned for success and your business is at risk of failure; normally I would think that is incentive enough to ensure all businesses are sharing performance metrics.
A few things help us easily align ourselves for daily performance reviews as well as regular reviews. The easiest are technology-driven information providers such as email, RFID, GPS, bar coding. As stated earlier, all of these tools with the information they provide let us know how quickly things are occurring in the Supply Chain and whether or not it meets our clients’ expectations.
Finally, E2Open makes a point in the statement above and in their article that long supply chains create decreased visibility requiring reviews of expectations with suppliers & customers. Regular reviews are required for long-term relationships and the opportunity for increasing margins. We understand that best way for two different groups to reach a common objective is through quality communication. The organizations will already have to communicate well and regularly to accomplish the goal of increased client satisfaction and increased profitability. With that written and understood, the communication channels for performance and feedback will be open. The distributor will not be able to charge for information that will most likely already be shared openly.
References:
1. E2Open. "Going Global is Risky Business: Gain Better Control to Maintain Profitability". 2009.
We have given our suppliers a Service Level Report that basically takes the total number of line items placed with the vendor and divides that number into the total number of backordered or delayed line items from the vendor. Giving this form of a scorecard to our suppliers has proven to help tremendously because it is empirical and cannot be easily argued.
ReplyDeleteThe need for a working relationship (or partnership in best case situations) was defined in a recent article in Industrial Distribution Magazine when Boone Mortenson wrote, “Specific supplier-distributor relationships can be vastly different and may affect whole categories. Evaluations based on realistic performance expectations, with clarity of purpose, will define relationships. As distributors command more stature and a greater portion of a supplier's business, the relationship often takes on a whole different meaning.” (1)
To cite a specific example, I have recently been reviewing empirical data, service level reports, and reviewing email interactions between my buyer and their inside customer service representative. After 10 meetings in 10 months (1 at the end of each month, 2 in person and the rest via conference call) the supplier’s Service Level decreased. Now this is not the outcome I was looking for when trying to work together to resolve issues. However, the communication between our two companies has improved dramatically, our packages show up in great shape (as opposed to before), but they are still fighting raw material supply issues which causes their service level to remain at sub par levels. Without reviewing this with them, it would be difficult to gauge the effect of their raw material shortage. Another quote from the same article referenced earlier states, “An open exchange can be a friction reducer in the tense struggle between muscle distributors and power brands. Likewise, performance evaluations provide a platform to discuss the sensitivity of distributors carrying competing lines. At a minimum, any opportunity for regular dialog is a chance to foster a positive environment.” (1) This hits the nail on the head in regards to my current situation with this supplier.
Unfortunately, we don’t do more of this proactively as we should especially in today’s economy when we have less employees doing the same amount or more work. Another article I found noted, “The practice [of developing supplier performance review methods] helps ensure the strength and safety of the supply chain and leads to better supplier development and collaboration. Monitoring also identifies potential risks in supplier performance and compliance and makes it easier to identify problems before they occur. (2) Had I been doing this process monthly or even quarterly with this supplier mentioned above, I could have potentially realized the situation far more in advance and had more time to react to it. As for this blog posting, I find this extremely beneficial and eye opening being in charge of purchasing. This is something we are definitely going to start doing on a broader scale with our suppliers.
1. Mortensen, Boone. "Distribution strategy: is now the time to evaluate supplier relationships?" Industrial Distribution. 23 Jun 2009. Reed Business Information, Web. 6 Nov 2009. Blog Post will not allow direct links.
2. Favre, Donavon, and John McCreery. "Coming to Grips with supplier Risk." Supply Chain Management Review. 01 Sep 2008. Reed Business Information, Web. 7 Nov 2009. Blog Post will not allow direct links.
Luciano Foresti:
ReplyDeleteThe classification of suppliers in different categories shown in the post presents a very intelligent way of defining the type of relationship a distributor is developing with his suppliers.
But as said in our textbook Balanced Sourcing (1) to build a solid relationship distributors and suppliers both have to translate the trust into action thru a path where mutual dependence, goal congruence and knowledge of competency are clearly understood and practiced. Balancing collaboration and cooperation is necessary for each party to succeed. Setting aggressive goals drive both sides to achieve maximum benefit from the relationship. Sharing profits but also the risks in a balanced way will create momentum for converging market approach. And, finally getting to know competencies of both parties thru a mutual learning process of individual capabilities, cost structure, risk factors, and relationship potential will present all aspects to understand how competent can be such relationship.
But, then when applying this methodology in a chemical distribution sector we face huge difficulties to classify suppliers into four categories mentioned in the post. Unless, we reconsider “exclusivity” with a softer definition none of major supplier will fall into the first two preferred categories (strategic suppliers and vendor controlled).
In the book, Optimizing Distributor Profitability – Best Practices to a Stronger Bottom Line (2), page 54, is mentioned that perhaps one of the most important factor in the supplier selection is the supplier’s degree of exclusivity.
As the big names in the chemical industry adopts more than one single distributor per geography or market segment. The reasons for such decision goes back in time, but mainly they do not want to stay in the hands of one distributor as they think it creates too much dependency and a kind of accommodation, and the lack of professionalism in most mid-sized and family owned distributors also collaborated with this poor vision. As we have seen distributors building more capabilities to run their businesses, using more techniques to evaluate their jobs and transforming the distribution activity in a much more efficient and effective business, we may see in the coming future more possibilities for exclusive agreements between chemical producers and certain distributors.
Another interesting point that should be taken into consideration when stratifying the suppliers into different categories specially in emerging markets as Brazil which in some way is related to loyalty is turning over business between supplier and distributor.
It is quite common to see small customers growing faster and knocking the door of a direct supplier bypassing the distributor. If there is no clear hurdles and rules to avoid the transfer of distributor’s customers to suppliers we can see this movement hurting deeply the relationship between distributors and suppliers. On the other side, we may see those small and medium supplier’s customers being transferred to a distributors as the supplier’s customer portfolio sometimes became too large and typically distributor can serve them better.
(1) Balanced Sourcing – Cooperation and Competition in Supplier Relationships, T. M. Laseter.
(2) Optimizing Distributor Profitability – Best Practices to a Stronger Bottom Line, F.B. Lawrence, S. Gunasekaran, P. Krishnadevarajan.
Mauricio Ramirez:
ReplyDeleteOne of the fundamental principles of Balance sourcing is that a customer and a supplier working together to find savings opportunities will do better than each working independently (1)
Based on this principle, one can think that nowadays “Partnerability” between suppliers and distributors is a basic concept that should be very well understood by both members into the supply chain. Nevertheless in the practice cooperation between suppliers and distributors is not always easy to achieve as they both can think of the risk of leaking proprietary information and many other counterproductive things
As the article mentions, “Strategic Partners” is at the top of the most desired arrangements between suppliers and distributors. But to achieve effectiveness in this first arrangement, both supplier and distributor should understand that this is a 50:50 bet. Non of them should think that he or she has to get the biggest portion of the profits or should be the one carrying the lower portion of the risks based on his or her strong market position, brand name, size, reputation, quality, etc. Achieving goal congruence requires risk as well as profit to be balanced in the relationship (1)
As a distributor, when partnering with a big and worldwide known manufacturer, as Tony Yarrell says, the tendency is to think of questions as “where is the power in the relationship?”, and even tough the supplier’s CEO and top management are quite clear about the basics and the strategy to follow for developing a healthy relationship, not all marketing managers and/or branch managers are always perfectly aligned. If not truly convinced, some of them can think that power and information should be retained in the short term because they are only in a temporary situation, and things can change in the near future
This situation is quite common in the chemical industry. Even for worldwide leading distribution companies as Brenntag, a perfect balance is difficult to achieve. For instance, when dealing with key suppliers in the day to day operations, let’s say negotiating purchase orders, the approach to a new client, and even turn over businesses, is not rare to find mid positions everywhere gaming and struggling for getting the most of the relationship
So, the introduction and the usage of tools as a supplier score card is not only effective, as the article mentions (2), but is also quite necessary for showing each party his or her performance, his or her contribution to the relationship, and of course, for measuring the outcomes in the short term. Again, top management should address its population the right message and should show them the score card results in order to get them perfectly aligned with the strategy. If possible, top management should instill planning meetings with both parties involved, as tactical planning meetings provide the means for resolving the conflicts, thereby avoiding gaming and whipsawing (1)
(1) Laseter, Timothy M. “Balanced Sourcing: Cooperation and Competition in Supplier Relationships” 1998, pages 89, 93, and 123
(2) Optimizing Distributor Profitability – Best Practices to a Stronger Bottom Line, F.B. Lawrence, S. Gunasekaran, P. Krishnadevarajan
One of the fundamental principles of Balance sourcing is that a customer and a supplier working together to find savings opportunities will do better than each working independently (1)
ReplyDeleteBased on this principle, one can think that nowadays “Partnerability” between suppliers and distributors is a basic concept that should be very well understood by both members into the supply chain. Nevertheless in the practice cooperation between suppliers and distributors is not always easy to achieve as they both can think of the risk of leaking proprietary information and many other counterproductive things
As the article mentions, “Strategic Partners” is at the top of the most desired arrangements between suppliers and distributors. But to achieve effectiveness in this first arrangement, both supplier and distributor should understand that this is a 50:50 bet. Non of them should think that he or she has to get the biggest portion of the profits or should be the one carrying the lower portion of the risks based on his or her strong market position, brand name, size, reputation, quality, etc. Achieving goal congruence requires risk as well as profit to be balanced in the relationship (1)
As a distributor, when partnering with a big and worldwide known manufacturer, as Tony Yarrell says, the tendency is to think of questions as “where is the power in the relationship?”, and even tough the supplier’s CEO and top management are quite clear about the basics and the strategy to follow for developing a healthy relationship, not all marketing managers and/or branch managers are always perfectly aligned. If not truly convinced, some of them can think that power and information should be retained in the short term because they are only in a temporary situation, and things can change in the near future
This situation is quite common in the chemical industry. Even for worldwide leading distribution companies as Brenntag, a perfect balance is difficult to achieve. For instance, when dealing with key suppliers in the day to day operations, let’s say negotiating purchase orders, the approach to a new client, and even turn over businesses, is not rare to find mid positions everywhere gaming and struggling for getting the most of the relationship
So, the introduction and the usage of tools as a supplier score card is not only effective, as the article mentions (2), but is also quite necessary for showing each party his or her performance, his or her contribution to the relationship, and of course, for measuring the outcomes in the short term. Again, top management should address its population the right message and should show them the score card results in order to get them perfectly aligned with the strategy. If possible, top management should instill planning meetings with both parties involved, as tactical planning meetings provide the means for resolving the conflicts, thereby avoiding gaming and whipsawing (1)
(1) Laseter, Timothy M. “Balanced Sourcing: Cooperation and Competition in Supplier Relationships” 1998, pages 89, 93, and 123
(2) Optimizing Distributor Profitability – Best Practices to a Stronger Bottom Line, F.B. Lawrence, S. Gunasekaran, P. Krishnadevarajan
The article approaches this issue form the point of the distributor. There are best practices listed above that also benefit the manufacturer. The idea of performance metrics can work both ways. When developing a “strategic partnership,” a manufacturer must ensure that the distributor is performing at a high enough level to maintain the brand and increase profitability. An article in Industry Week from this August recommends the use nontraditional metrics to measure the distributor. This protects the manufacturer and strengthens the partnership through increased information flow. “Manufacturers can determine how effectively their supply specialist functions as an operations and reliability strategic partner by employing nontraditional performance measurements.” (1)
ReplyDeleteAccording to Exhibit 2 a strategic partnership between distributor and supplier creates high profitability. The partnership not only increases the flow of information, but should increase cash flow as well. “One important aspect of SCM involves increasing the efficiency of funds flowing throughout the chain: The quicker goods move through the supply chain, the faster members will be paid, which increases cash flow.” (2)
(1) DAVID BLANCHARD. "Use Nontraditional Metrics to Measure Your Distributor. " Industry Week 1 Aug. 2009
(2) Hutchison, P., M. Farris, and G. Fleischman. "Supply Chain Cash-to-Cash: A STRATEGY FOR THE 21ST CENTURY. " Strategic Finance 91.1 (2009): 41-48
Establishing and maintaining distributor-supplier relationships is imperative for the long-term success of both distributors and suppliers. “The benefits of long-term cooperative relationships generally fall into two categories: relationship-specific investment and communication.” (1) Utilizing a supplier stratification model evaluates suppliers on profitability, performance, loyalty, distributor services, risk, relationship and growth potential. The model will provide statistical data to document how beneficial establishing a good distributor-supplier relationship can be for both parties. Additionally, the supplier stratification model will reveal if a supplier is not adding value to the relationship. Using the model, shortcomings in any of the performance categories will be easy to decipher and can be addressed with the supplier in a timely manner. As stated in the article, suppliers have been receptive toward this type of scorecard system and have partnered even closer with the distributor after seeing the level of commitment the distributor is putting forth. Through the use of open communication and this stratification model, distributors and suppliers can collectively work toward a successful and profitable long-term relationship.
ReplyDeleteAddressing the questions at the end of the article: Could distributors offer this performance tracking as a service to suppliers? Would suppliers value this offering? Could distributors get compensated for this service? I feel distributors should offer a performance-tracking system as a service to suppliers, but as a courtesy; not a method to increase revenue. Distributors and suppliers alike have entered into partnerships to maximize profits. Offering this stratification model report at a premium will not foster the collaborative environment necessary to continue strengthening these relationships for years to come. Also, depending on the commodity and the demand for the product in the market, the size of the supplier may limit access to this information; the supplier may not be aware of some of its performance pitfalls. Through this exchange, any misgivings can be corrected. “Good collaboration can improve time-to-market performance, reduce inventories and shrink order fulfillment cycle times. Plus, as demand, supply and regulatory conditions continue to shift, companies need solid, collaborative supplier relationships to help them successfully navigate market volatility.” (2) These key relationship indicators will strengthen the distributor-supplier relationship and will demonstrate how communication and cooperation can foster a profitable long-term relationship.
Bibliography:
1. Laseter, Timothy M. Balanced Sourcing: Cooperation and Competition in Supplier Relationships. San Francisco: Jossey-Bass, 1998.
2. Albinson, Tim. The Top 3 Reasons You Need to Improve Supplier Collaboration. Collaboration Benefits Include Reduced Cycle Times, Better Contract Management, Improved Data Administration, Streamlined Processes. Retrieved on November 8, 2009.
http://www.scdigest.com/assets/Experts/Guest_09-10-28.php?cid=2898
Performance tracking is a valuable service that distributors can provide to suppliers in order to enhance the distributor-supplier relationship. Setting up metrics that are understandable and achievable and properly managing and maintaining these metrics can lead to cost savings and increased customer satisfaction that will benefit all parties involved. Along with rating a supplier's performance, distributors must also look for areas where they can assist suppliers in order to achieve higher performance measurements (1). Rather than using performance metrics as a negotiating tool, these metrics can be used to strengthen the relationship in order to provide the best service available to the customer. Communication between the supplier and distributor is key to this relationship. Regular meetings to understand missed metrics or issues that may affect the suppliers ability to meet metrics will allow the distributor and supplier to work together in order to resolve these issues or take measures in order to minimize risks.
ReplyDeleteThis service can prove to add value to suppliers. Performance metrics and regular meetings with distributors will allow suppliers to improve performance and provide a valued service to their customers. Superb supplier performance is one of the gateways to business success. Performance metrics will allow suppliers to evaluate, ensure management focus on, supplier's contribution to business objectives (2). This service can enhance and solidify the distributor-supplier relationship as it shows that the distributor is committed to helping the supplier to become successful. This relationship and focus on process improvement will help both suppliers and distributors to be successful and achieve more together than they could possibly achieve independently (2).
The performance tracking services provided by the distributor is mutually beneficial for both the supplier and the distributor. With this being true, I don't feel it would be appropriate for distributors to be compensated for this service. Careful analysis of performance metrics will allow distributors to ensure customer satisfaction and improve process efficiencies. Working together to improve services and work proactively to curtail issues before they occur will prove to provide value to suppliers, distributors and especially, the customer.
1. Hannon, David (2006). Help Suppliers Help You. Retrieved November 8, 2009 from: http://www.purchasing.com/article/211487-Help_your_suppliers_help_you.php
2. Hughes, Jonathan (2005). Supplier Metrics that Matter. Retrieved November 8, 2009 from: http://www.cpoagenda.com/previous-articles/autumn-2005-issue/features/supplier-metrics-that-matter/
A successful supplier-distributor relationship will benefit all links in the supply chain, with the end-user (the customer) realizing the most value. This relationship is not bought, but it is built. I don’t believe it adds value to a supplier-distributor relationship for a distributor to charge a supplier for performance reporting when this information should be shared as part of the supplier feedback.
ReplyDeleteSupplier performance metrics should be used by the distributor to improve the performance of the supplier and as a result improve the quality of the supply chain. “The strategy behind supplier quality or supplier development is not one of addressing tactical quality problems, but rather of building a "best in class" level of quality expectations, measures, and performance.” (1) These performance metrics would track delivery performance, quantity performance, and quality, along with supplier improvement plans.
The metrics would be shared upstream and used between the two companies to advance their relationship from simply a supplier-distributor relationship to that of a partnership. It must be remembered that the supplier and distributor will do better at discovering savings opportunities than if they were working separately. (2)
(1) Jeffrey P. Wincel, A Practitioner’s View of Strategic Procurement, Supply Chain Management Review, 1998.
(2) Timothy M. Laseter, Balanced Sourcing Cooperation and Competition in Supplier Relationships, 1998.
We found the use of inventory stratification to be a very effective tool to both increase service levels on our A and B accounts and reduce invetory levels at forward locations. Additionally visibility of diminishing demand on C and D items was highlighted allowing earlier decisions on appropriate management to occur.
ReplyDeleteProduction plants were located in the Northwest while 60% of the customer base was east of the Mississippi River. Employing this strategy throughout our network created a replenishment mix change since we were in essence reducing safety stock at forward locations by using more frequent, but smaller, order quantities to restock those locations. Ultimately, inventory was reduced by 10% throughout the system, while service levels, already high, increased slightly, and troubled inventory was dealt with earlier than it had been previously.