Steps to Building a Competitive Supply Base
Ensuring a competitive supply base requires four fundamentals," Laseter and Sharma say. "Without them, competitive bidding can do as much harm as good."
These four principles can be summarized as follows:
1. Understand the Sources of Value Creation: Procurement managers need to go far beyond the "specs." Before launching a competitive bid process, supply managers need to focus on two critical activities: (1) define the product or service requirements by truly understanding the performance objectives of the customer (either external, but more likely internal); (2) supply management professionals must understand the sources of value creation based not only upon customer needs but also supplier cost drivers.
Find and Attract the Best Suppliers: Too often, supply management professionals simply reach out to the same set of suppliers they always use. These may or may not really be the best or most competitive sources for a given buyer need. "No amount of bidding will help if the competition exists among noncompetitive suppliers," Laseter and Sharma say.
Align incentives to Create Value: After steps one and two, the challenge becomes aligning incentive to capture the maximum value. Laseter and Sharma recommend gaining sharing arrangements with suppliers for any improvements to cost they can bring to the table.
Collaborate to Achieve Results: "Supply managers who assume their job is done upon contract award will not build the best supply base," Laseter and Sharma say. Instead, the managers must champion joint planning, collaorative product design, etc., with suppliers for the long term.
"Competitive tension certainly prevents complacency among the supply base. But, a single-minded focus on competition — particularly among a marginal supply base — can wreak havoc by forcing suppliers to cut corners at best or put them out of business at worst," Laseter and Shaarma conclude. "To manage the balance, organizations need to move toward a focus on creating a competitive supply base rather than creating a competitive bidding process. The distinction is far from trivial."
Our take: These principles are not really anything new, having been promoted in one form or another by many procurement experts for many years. Still, we liked the points about how the highly collaborative approach too often leads to relationships with only large suppliers, and their contrast between a highly competitive process and a highly competitive supply management strategy.
We wonder, however, if many companies today can really put off what might (repeat might) be savings today for a potentially more competitive supply chain position down the road, and whether supply managegement staffing levels really allow procurement managers enough time to lead development of more highly collaborative relationships with suppliers.
What's your take on Laseter and Sharma's perspective? Is highly competitive bidding really hurting supply chains? Right now, or just in the future? Should - and can - supply managers really lead the supplier collaboration effort? Let us know your thoughts at the Feedback button below.