Provider Damnation 66: Tier 1 Suppliers

Suppliers. Some days you can’t deal with them but you cannot survive without them. You’re in business to serve customers, who want the products your organization sells, but which your organization can only provide if your tier 1 suppliers manufacture those products you need, to the customer’s specifications. And that’s the kicker.

No suppliers, no products.

You absolutely need suppliers, even if you are a pure services agency because you still need products (be it laptops, janitorial suppliers, or even paper for reports) to deliver services. There is no such thing as a fully integrated self-sustaining business that is self-contained all the way back to the mining or harvesting of the raw materials, the production of the energy required to process them, the pumping of the water required, and so on. So you need suppliers. Lots of them. Sometimes thousands of them. And trying to manage that many suppliers, even with a best of breed SRM system, is a nightmare on a daily basis, because, if things go wrong

Once you have a contract, barring catastrophic supplier failure, you’re locked in.

A contract locks you in until an exit clause is hit, which, in an average contract in an average organization, typically is only invokeable when a supplier fails to deliver a significant portion of the contracted goods after a significant amount of time has passed (and your organization has been stocked out for weeks and lost millions of dollars), the quality gets abysmal and the warranty return rate hits the double digits, they violate a federal safety or import regulation, or they commit a crime — assuming you have a well drafted contract.

This means that, if they’re always a few weeks late, running up costs with unnecessary expedited shipments, tacking on fuel surcharges, or slacking on quality and continually shipping orders with DOA rates just within limits, there’s nothing you can do about it. You can employ the best SRM techniques up your sleeve, but if they refuse to respond, until the contract is fulfilled and you can kick them to the curb, they’re your problem because your customers are yours to satisfy, not your supplier. Moreover, if you can’t break the contract, you can’t even shift demand to another supplier temporarily until a force majeure event occurs when they are allowed to claim inability to fulfill you orders until the event is over but

When force majeure hits, you may not be able to respond fast enough.

If it’s a custom product, it’s impossible to just go back to the runner-up in the sourcing event, award them a short-term contract (with the promise of an extension in the future when you kick your current supplier to the curb), and expect them to start production the next day. Even if, after being turned away, they say yes, and even if they say yes quickly, and even if they have capacity opening up, it takes time to retool a production line and get the engineers up to speed on a new product design. It’s going to be weeks, at the minimum, before you see the first unit.

But if you don’t find a temporary supplier, your solvency is in danger.

Cash-flow is the life-blood of the business, and without a product, it’s no sale, and no sale, no store. A company that does not sell does not survive long.

A poor supplier that locked you in to a three-year contract before you found out that they were a poor supplier (that just marginally met the minimums necessary to prevent you from cancelling the contract without a huge penalty that the organization is not likely able to afford) is a damnation of the worst kind. Fortunately there aren’t many suppliers like this because even one is way too many.