When buyers know they have the leverage in a relationship with a supplier, the move is almost always to exploit that leverage for better pricing. And why not? When spending a lot of money on a widely available product, the buyer has freedom to source parts from wherever they choose, so exercising that opportunity to get better prices is relatively easy and has an immediate impact to the organization’s bottom line.
Even better, this hand can be played as many times as needed with relatively low risk, except in scenarios where a supplier is leveraged out of business by being forced to take on higher volumes with a single customer at an unrealistically competitive cost. With so many commodity suppliers competing for increased business, there seems to be endless leverage for piece price reductions in the supply chain.
But when a strategy seems easy, it’s guaranteed that competitors are doing the exact same thing. Differentiating within the market requires a different, more challenging, but ultimately rewarding approach.
Strategic Supplier Development: Not Just for Strategic Parts
Traditionally, entering into long-term agreements and taking a partnership approach with suppliers is utilized on only those parts which account for a great deal of spend but are produced by a small number of unique suppliers and manufacturers. This is intuitive, as these scenarios leave the buyer with little choice other than to develop a strategic partnership in order to remain competitive. But what are the benefits to taking the same approach with a supplier over which the buyer holds a great deal of leverage?
Working with a leverage supplier to expand their capabilities to better support the business can pay dividends in the supply chain. For example, a stamped component a buyer procures is relatively simple and can be made at many different suppliers by simply moving a tool, but the weldment it belongs to is complex and expensive. In this circumstance, the buyer has plenty of leverage over the component, but not the skilled trade required to produce the weldment, which makes for a perfect opportunity to move toward a strategic relationship with the stamping supplier and propose adding the welding capability to reduce costs.
Insulation from Market Volatility
In times of economic uncertainty, prices for commodity parts are difficult to predict, resulting in buffers being added to costs to alleviate some of the risk of doing business during times of volatility. In addition, when there are supply shortages, the commodity supplier can flip the leverage back onto the buyer by raising prices significantly in the short term. In a strategic relationship with leverage suppliers, the risk is minimized due to long-term contracts and cost transparency; a buyer and seller can effectively work through volatile markets together to minimize any damage.
Inventory Costs, Quality
If piece price is the only factor, there’s high potential for inventory risk with the commodity supplier. That risk presents both at the buyer location in the form of excess inventory as a result of leveraging higher volume purchases to lower unit costs, as well as at the supplier location in the form of poor on-time delivery performance as a result of stockouts.
The excess inventory leads to costly inventory carrying costs that can be avoided by engaging with the supplier to optimize the inventory in the entire supply chain from raw material to finished good. This also reduces the required space to hold inventory at the supplier, and can allow them to add capabilities that support the buyer and their business.
Additionally, working with suppliers on quality systems, though time consuming in the short run, results in reduced long-term costs to the buyer in the form of avoiding quality issues that require rework or returns or, in the worst case, cause recalls.
Ultimately, striving for strategic relationships with commodity suppliers where traditionally they are exploited for better piece prices will result in reduced risk and better long-term health for the supply chain. With better cooperation throughout the entire supply chain, organizations can insulate themselves from market risks, costs of high inventory, and high costs of supply shortages that often plague other organizations with a large amount of commodity spend.