Value Creation Tip – Supplier Development

Oftentimes, companies are used to improvement ideas coming with a capex investment (and related justification form/process!) – such as new or improved automation for better efficiency or even a new facility for increased capacity. However, there is often a way to increase EBITDA, inventory turns, and order fill rates simultaneously with little or no capital expenditure. In most companies we assess, under-leveraged supply chains are common, and opportunities for success are often achievable – like the ability to obtain better pricing, to have shorter lead times, to secure a supplier’s active support in rolling out new products, or to leverage a supplier’s resources to address quality issues.

Many entrepreneurially run companies are working hard simply to ship products, and they have not had the bandwidth (or expertise) to evaluate better ways to leverage their sourcing spend. Finding time to conduct a competitive process to test the market is often out of reach for these businesses. More than half the companies we have assessed have not competitively bid their purchased goods and services in the prior 5 years!

Often times, all of these improvements can be achieved with existing suppliers. But in some cases, switching suppliers may be required to obtain things like better pricing, higher performing parts or services, shorter lead times, more flexibility and ultimately a more robust supply chain. But the point is that there can be plenty of latent value still waiting to be tapped, like oil patiently waiting below ground for the current or future owner to tap into it!

Supplier Development

The idea is to work with a core group of suppliers, one by one, to find better ways to leverage the joint supply chain to become more valuable to customers, more enriching to employees, and more profitable to shareholders.  This process often includes one or more of the following:

  • Ways to build the trust necessary to share demand information, forecasts, schedules and existing inventory balances
  • Ways to leverage one member of a supply chain who can compete a task or requirement at a lower (sometimes much lower) cost than the current actor
  • Developing line-ready packaging, pricing schemes that fit in scheduling, and/or freight patterns
  • Including the supplier in planning new product roll-outs, onboarding new customers, or in preparation to handle promotions or special events

One common opportunity is to replace a traditional blanket order / PO process with a shared forecast and schedule. This sharing of information benefits the company by reducing the inventory levels, ensuring that we never shut down a line due to a lack of parts, and reducing administrative duties. In this scenario, the significant benefits to the manufacturer are exceeded by the benefits to the supplier because the supplier can use that information to level load their plant, plan production, and improve their own purchasing, which in turn benefits the entire process. In other words, it is a win-win situation for both the company and their supplier.

However, this approach requires trust. It also requires a fairly complex project plan to develop this capability with your key suppliers. The capex might be minimal, but it will require the strategic intent and efforts of the whole management team.

If you believe that one of your companies is under-leveraging its supply chain or would like more detailed information on relevant initiatives, please contact us here.

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