Balancing Supplier Management Strategies and Cost Reduction – Supplier Development and Investment

There are many strategies companies can deploy to get more from their existing supply base in terms of supplier management. They can invest directly in suppliers, they can send in development teams to engage in joint cost take-out initiatives focused on unit cost, and they can look to develop suppliers in "softer" areas such as labor practices, general CSR adherence/code-of-conduct, etc. Professor Cuihong Li, PhD of the University of Connecticut's school of business, was recently quoted in Venture Outsource with a number of tactics that companies likely Apple have deployed for supplier development. Today we hear about supplier violations (e.g., labor practices) more often than not from a supplier management perspective. But basic supplier development and investment is alive and well in the high tech manufacturing supply chain, among others.

For example, consider how "Apple invested billions of dollars in the production of its LCD panel suppliers: LG, Sharp, and Toshiba." In cases like this, an OEM "may investment in machines/equipment/tools for a supplier" and/or "facilities for a supplier or investment in a supplier's human resources (e.g., supplier worker training)." Here at Spend Matters, we've also seen companies "invest" with their suppliers in such areas as materials demand aggregation, including the sharing in of discounts achieving through spend aggregation across suppliers (e.g., in primary or semi-finished metals). We've also seen companies focus on lean supplier development looking at production, inventory and related processes.

But what are some of the best means of contracting for such arrangements in the first place? Li suggests that there are numerous ways for contract negotiations, terms and ultimate structure to achieve desired outcomes. In certain cases, "they can be realized by commitment to pricing by the OEM (vs. contingent pricing) where the OEM commits to a price (read: sets a target price) before the supplier cost reduction efforts is realized." And in other cases, the OEM may opt to "negotiate the price contingent on the supplier cost reduction being achieved beforehand." Further, an OEM may "want to first observe the outcome of supplier cost reductions (perhaps based on per-determined metrics) and then invest in the supplier."

Contracting and business models for supplier investment abound. But it's clear that companies that have shed much or all of their own manufacturing presence are becoming more adroit at working with both tier one and multi-tier suppliers on investment and joint cost take-out programs.

Jason Busch

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