World views of Dr. L. Allan Austin

Cost and/or Collaboration – Can we have both?
March 10, 2013

By Herb Shields | 10/07/2010 | 7:45 AM

The Material Handling Industry Association published an interesting article recently using survey data from KPMG’s Global Manufacturing Outlook report.

“Despite the fact that new approaches are gaining hold,” MHIA stated that “A clear majority of leading industrial companies still see cost as their main priority when managing supply chains, despite emerging evidence that excessive focus on cost has damaged relationships.”

KPMG’s survey revealed that “cost still reigns among 66 percent of respondents as the leading consideration of their supply chain models. But 63 percent of respondents agreed that more attention should be paid to non-financial elements of the supply chain and 38 percent said that an acute focus on cost has harmed relationships with suppliers.”

As many readers of DC Velocity’s blogs know, I teach Purchasing at the Illinois Institute of Technology here in Chicago.  Each semester, my students debate these very same issues.  Can a company continuously ask for lowest cost and maintain a collaborative relationship with its key suppliers?  I think that the best answer is yes with a caveat.

First, you need to focus on total cost, not just piece price.  Total cost includes piece (or unit) price along with transportation, quality, inventory, and tooling to name a few other elements.  And cost reductions may occur anywhere in the supply chain process perhaps starting with your suppliers’ suppliers. Cost reductions that are achieved by competitive bidding only may be temporary at best.  If that is your only strategy, ultimately you may force suppliers out of your business and into collaboration with your competitors.

Damaged relationships affect the buyer as well as the supplier.  Several senior executives whose companies are in the consumer products supply chain have told me that their organizations evaluate customers on the basis of their willingness to collaborate.  One executive said that his company cannot afford to develop capacity for a customer and then have the customer ask for pricing proposals from his competitors.  Customers who expect the supplier to continuously reduce cost, but do not participate in finding collaborative approaches are becoming second tier in terms of R&D, new product development, etc.

KPMG’s report states that “Having stronger and deeper relationships is critical among leading companies with 53 percent of respondents expecting to enter into more long-term contracts but with fewer suppliers. Cost remains the key driver for much of the collaboration.”

“More important than the duration is the depth of the partnerships. Over half of the respondents plan to collaborate more closely with suppliers on product innovation and development, research and development (R&D), and cost reduction. Such collaboration appears to be a preferred approach among the top performers.”  From my perspective, depth is synonymous with trust.  The more trust that is developed in a buyer/supplier relationship, the more potential exists for cost savings and other important supply chain improvements.  Regarding duration, it is difficult to build trust quickly, and, people need to work together for a period of time to learn the best ways to collaborate.  Strategic relationships are measured in years, not months.

I am interested in your thoughts on this subject.  Has your company been able to balance lowest total cost and collaboration?  What has worked for you?

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