Category Archives: Supplier Management

Strategic Supply Management at Japanese Companies

Yesterday in What can we learn from Keiretsu? we outlined methods in which correctly applied Keiretsu teachings could rejuvenate your supply chain, referencing a report released by the CAPS Center for Strategic Supply Research Supply Management Research Group last year titled “Japan’s Keiretsu as a Strategic Relationship with Suppliers”. However, the teachings do not end there. This year, the CAPS Center for Strategic Supply Research Supply Management Research Group released “Strategic Supply Management at Japanese Companies”.

This report, which starts off by chronicling the impact of Nissan CEO Carlos Ghosen, the shift to strategic purchasing and the rise of the concept of supply management (primarily in the US and Europe), the enhancement of business competitiveness through strategic purchasing, and the evolution of the purchasing function in Japanese companies describes the challenging issues in the shift to strategic purchasing, offers a perspective on strategic purchasing from the Japanese perspective, and ends with a case study that demonstrates the beginning of strategic purchasing in proactive companies that are seriously considering moving forward the status quo that is the result of traditional Keiretsu practices focused on strong ties with traditional partners and not necessarily the best partners.

It points out that in recent years, the goal of Japanese manufacturing corporations has been to build an efficient supply chain that decreases lead time, improves quality, and reduces inventories and costs associated with the logistics process. After all, improving the logistics supply process reduces lead time and improves inventories, even if actual transportation costs are not decreased. Furthermore, whereas purchasing has always played an important role in cost reduction, there is also a new, and increased, emphasis on quality control, supply management, and accurate, quick deliveries from suppliers.

Purchasing is also taking on more of a research role, as its close contact with external resources puts it in a strategic position. In some engineering companies, purchasing is responsible for:

  • giving advice on potential new contracts
  • exchanging engineering information with suppliers
  • participating in design review, facilitating supplier decisions, and leading cost reduction and value analysis efforts
  • cost research for marketing requests

It also outlines the major competencies that are required for strategic purchasing:

  • intelligence and the ability to identify what information is needed and how it will help them attain their goals
  • IT literacy and competence
  • supply chain knowledge

and how Japanese companies are embracing these competencies.

So what does all that mean? In addition to holding on to the best practices of the east, Japanese companies are embracing the best practices of the west. Maybe we should latch on to their best practices as well.

What can we learn from Keiretsu? (Strategic Supply Management)

Keiretsu, which can be briefly described as a long continual business relationship, in one way or another has been a significant force in the Japanese economy for over sixty years and despite its long and varied history, criticisms, the Structural Impediments Initiative, and economic downturns, is still a strong foundation for many supply chain relationships in Japan.

“Japan’s Keiretsu as a Strategic Relationship with Suppliers”Therefore, even though some economists would argue that it contradicts the basic principles of the free trade of capital, there must be something to it. Therefore, I think the issue is worth exploring, with the goal of taking away lessons that can be used to improve our supply relationships, especially considering that current markets and supply chains are now filled with volatility and risk. And a great starting point is , a study released by the CAPS Center for Strategic Supply Research Supply Management Research Group last year.

The report indicates that a Keiretsu relationship can be defined as a series of repetitive transactions that occur long term between two or more entities in an asymmetrical relationship where one entity uses its position to govern the relationship. A Keiretsu relationship is based on a close and stable business collaboration between affiliated entities. There are different forms of the relationship, and the term is difficult to narrowly define, but all forms center on a long continual business relationship.

This report, which points out that Keiretsu has a long and varied history starting in world war two, covers the major evolutions over the last six decades and notes that changes in the competitive corporate environment leads to diversity in the Keiretsu system. Sometimes external circumstances force a company to end or restrict some of their Keiretsu subordinates if the relationship did not meet the demands of the increased competition and other times a company could use the circumstances to its advantage to work within the confines of its Keiretsu relationships to increase its competitive edge.

Keiretsu relationships in Japan generally display a number of common features:

  • long-term trade relationships that often prevent third parties from participating freely in the market;
    although this can stifle free-trade relationships that depend on competition, this can also create excellent economic efficiencies and make sense among companies that specialize in a particular product
  • companies often hold significant amounts of each other’s stock to prevent other companies from acquiring shares;
    although this seems to contradict the basic principles of the free trade of capital, this can create stability in the stock market and provides protection against hostile takeovers
  • fixed non-symmetrical trade between companies
  • “dispatching” executives into the Keiretsu
    it is such a common practice, once a parent company’s executive or chief executive retires, to dispatch that person to another company in the Keiretsu that it is a defining characteristic of Japanese Keiretsu
  • supplementation and replacement through business sharing;
    a parent company, with cooperation of the subcompany, establishes guidance systems governing production technology and quality control methodology

Furthermore, Keiretsu is often established to

  • move low-value-add production to subsidiaries
  • ensure continuous high quality production capability to avoid excess production and consumer problems
  • improve risk management, especially with regards to variable or uncertain demand
  • ensure that increased sales mean a corresponding increase for subsidiaries
  • prevent technological information from being disclosed to competitors through close continuous relationships

A close examination of each of the above points is based on an underlying idea that can improve your supply chain. Specifically:

  • strategic long-term trade relationships with key partners with a long-term focus on process improvement can generate excellent efficiencies
  • a minor position in your key partners demonstrates commitment, and it can help provide financial stability in unstable times
  • non-symmetrical trade stabilizes the relationship
  • seasoned executives have a lot to offer, and should consider consulting beyond retirement from full time positions
  • companies with more resources and established processes should transfer those capabilities to their strategic suppliers to improve processes and reduce costs
  • a company should be focused on high-value-add production, and since value-add production is relative, low-value-add production for one company might be high-value-add production for its supplier
  • the best way to maintain quality is to maintain relationships with suppliers who consistently produce quality
  • risk can be shared among partners and reduced
  • strategic relationships can insure that your key suppliers succeed and remain stable
  • forming key relationships with key suppliers that can adapt to changing demand minimizes the spread of trade secrets

Thus, even though over-applied Keiretsu can lead to closed markets, correctly applied Keiretsu teachings can rejuvenate your supply chain.

Supplier Enablement

Last month, the ISM awarded a number of individuals and organizations the R. Gene Richter Award for Leadership and Innovation in Supply Management. The recipients were primarily organizations that had demonstrated massive improvements in their sourcing and procurement functions which came about through concentrated improvement efforts. These improvements were the direct result of the adoption and consistent implementation of best practices across the sourcing and procurement functions in the organization. This week we are discussing the best practices that helped one or more of the recipients transform their organizations and win these coveted awards.

Today we are going to discuss how supplier enablement can significantly enhance your sourcing function, as it did for Rockwell Collins, as described in the article “The Next Step” in the latest issue of Inside Supply Management.

In 2005, Rockwell Collins launched an eRFQ/APO (electronic Request For Quote / Automated Purchase Order) system that extended the initial supplier portal that it released in 2003, SupplyCollins.com. This site is the primary communication tool between Rockwell Collins and its suppliers, providing a single process and methodology of doing business that is understood by all parties involved.

The system also supports Total Cost of Ownership (TCO) analysis, that allows the system to automatically select the winners of the eRFQ and generate APOs when the response deadline occurs. The system automates tactical pieces of procurement and frees up Rockwell Collin’s staff to concentrate on strategic issues and spend more time working with engineering and supply.

The system provided the following benefits to Rockwell Collins:

  • the volume of automated transactions has increased to 70%,
  • nearly 90% of direct materials are purchased through the system,
  • supplier visits have increased eightfold in a 2 year period, from 5,000 in January 2004 to 40,000 in January 2006,
  • over 1,400 suppliers use the system, and
  • the application has generated more than 70,000 eRFQs and more than 50,000 purchase orders.

Supplier Satisfaction

Originally posted on the Synertrade blog in December, 2017.

Supplier satisfaction is critical to your success. By this we don’t mean your satisfaction with the supplier and its performance, we mean the supplier’s satisfaction with you and your performance.

Why is this so critical? Ultimately, your success depends on your supply chain’s success, and the success of your supplier’s. Think of all the major product and service lines you sell. How many of these could be truly successful without top tier support from a key supplier? The answer is, if you haven’t figured it out already, 0. Even if you are a consulting organization offering pure IP services and delivering only talks, workshops, and paper, you are still depending on one more suppliers to do that. Either couriers to deliver the paper or the internet provider to deliver the email. If they fail, you fail. And if you are delivering products, or product-supported services, you are relying on many more suppliers and sometimes relying on them 100%.

So why do your suppliers have to be satisfied when, theoretically, as a big important buyer you could just give your business to someone else? Because, in reality, you often can’t — at least not quickly. Think about it. Even if there are three other suppliers who can supply that more-or-less commodity item – they need to be qualified and contracted, then they need to produce and ship, and then it needs to hit your store rooms or shelves. Depending on the category, that is weeks to months. If it is a custom manufactured product, it could take weeks to months just for a new supplier to setup and configure a new production line.

Basically, for strategic products and services, which, to be honest, include any products or services that cannot be interchanged with products and services from another on-contract supplier as-is, your organization is ultimately dependent on one or more supplier organizations, and their performance is your performance. And that, in a nutshell, is why you need them to be satisfied.

Quality, on-time delivery, and product/service support are entirely up to your supplier, whose personnel are overworked, whose carriers have limited capacity, and whose attention is being simultaneously requested by all of their customers, including your competitors. If you want to be sure that, when time is crunched, it’s your product shipment that is subjected to the expected (and contracted) quality tests, it’s your product shipped out on time, and your support calls that are answered, you need to be a customer of choice. And the only way to be a customer of choice is to be a customer that the organization is satisfied with. It doesn’t matter how much you spend, it doesn’t matter what language is in the contract, and it doesn’t matter how important your customers are. If the supplier doesn’t like you, you’re not a customer of choice.

This is becoming especially critical now that your chance of not being subject to a supply chain disruption in any given 12 month period is 10% or less, now that news stories about not only lack of quality (testing) but faked quality tests are becoming common, and now that complex products are requiring more support from the supply base.

So how do you satisfy a supplier?

While it’s hard to give a hard and fast rule that will work in all cases, starting with the following three recommendations will go a long way to satisfying your supplier and making you a customer of choice.

1. Pay on Time

And, more importantly, pay on time under reasonable payment terms. Even if the locality will let you get away with 60, or even 90, day payment terms, don’t do it. Just don’t. Chances are your supplier has a worse credit rating than you, has less cash in the bank, and if they have to borrow, has to borrow at a higher rate than you. So pay them in 30 days, or less, every single time. You’ll be pleasantly surprised how far this alone will put you above the average customer.

2. Create 360-degree scorecards, listen to feedback, and implement corrective action plans internally as well.

Think about it. Would you like to be constantly assessed, compared against your peers, and forced to undergo corrective action plans without ever having the opportunity to provide feedback? Would you feel it fair if every time something went wrong, you were always assumed to be the root cause and you had to do all the work? You wouldn’t — and your supplier feels the same way. Make them a part of a complete, open, and transparent process where, if you determine that you are partly to blame for a failure, you force your people to undergo a corrective action process and to create a plan to do better. Even if your organization struggles to improve, this will still earn you a deep respect from the supplier who will, in turn, be willing to give a bit more since you do.

3. Create, and undertake supplier development plans regularly.

Chances are your organization is a more mature organization in Procurement, project planning, lean implementation, six sigma analysis, and so on. And, chances are, your CFO is demanding cost reductions even when raw material prices are going through the roof, currency conversion is not in your favour, and oil, and thus fuel prices, are insane. The only way you are going to get those savings is if the supplier becomes leaner and meaner and reduces production costs. Chances are that your supplier needs help to do that. So, if your organization is the one to help them, they will be forever in your debt — or at least in need of your services, again making you a preferred customer as they will be more than satisfied with your performance as a customer.

The reality is that it’s usually not that hard to keep your suppliers satisfied. It just takes fairness, a bit of effort, and the willingness to work together to make both parties better. So go and satisfy your suppliers. Your customers will thank you for it.