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Taking care of your suppliers can really benefit your business! June 10, 2011

Posted by solutionsbconsultants in 1.
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Oftentimes those of us in the business process improvement world place extreme emphasis on cost-reduction – and one of those activities is the pressure we are asked to place on suppliers to lower prices. That works well in the short run but can have disastrous effects in the long-term. There is a better way. The upside is that it will save your company money in the long term – the downside is that it takes an investment of time and trust.

Let me illustrate with a story.
One of the first items that we sourced in China was box packaging. Previously, our client was purchasing packaging in the states from two sources – a manufacturer in the US and a broker who was importing boxes from (you guessed it) China. We were determined to figure out a better way. In China, box packaging is mostly done by hand – the only machinery was the printing press for the outside paper and a rotating glue cylinder that the employees would manually coat the box pieces as they assembled them. We quoted out nine manufacturers and chose three suppliers which we labeled A, B and C. The A supplier received about 50% of the business, the B supplier 35% and the C supplier 15%. We did this to mitigate risk and to discover and leverage any process efficiencies.

Rather than hammering on the suppliers to lower prices, we went inside the plants and learned the cost of the raw materials, labor and the process. This research effort resulted in changes made to the manufacturing processes in order to eliminate bottlenecks, needless steps and standardize product output. Quality output improved by more than 12% which made our customers happy and created more profit for our suppliers.

Using a scorecard system for our suppliers, we ranked them on several metrics including initial quality check, on-time shipping, completed orders, value-add, total cost of ownership, and ease of doing business (including making process changes). The percentage of business awarded was adjusted quarterly and served as a catalyst for continuous improvement.

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