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After suspending operations last Thursday, car-parts manufacturer Autodom was put into administration over the weekend.
The company, which supplies the Victorian and South Australian operations of several major car-makers, made a last-ditch attempt earlier this year to get its customers to put some money into keeping the parts-maker afloat. Ford and General Motors refused to back the company, according to reports at the time.
To cut down on storage and wastage, carmakers use ‘just-in-time’ procurement, where parts can be put into cars immediately after being delivered from the supplier. This means, with Autodom out of action Holden and Ford could run out of parts by the middle of this week.
It’d be an ineffective procurement officer who didn’t try to get the best deal for the company’s money when buying from smaller suppliers. But Andrew Downard, the managing director of consultancy AD Supply Chain, says that by focusing on the short-term, quarter-by-quarter imperatives to get the best possible deal out of suppliers, many leading companies are jeopardising their long-term success.
Before turning to consultancy, Downard worked for more than two decades in auto-industry procurement with companies including General Motors and Nissan Australia.
“If you look at the research, the results are that … collaborating and having a good relationship with suppliers is the better solution,” he says, citing both theoretical and practical studies.
For example, a 2007 study comparing American to Japanese automotive manufacturers found American companies spent six times as much to purchase a product, adding up to, on average, $1500 more per car for the parts they buy. In Japan, car companies have largely collaborative relationships with their parts suppliers, while in America car companies tend to play suppliers off against each other to get the lowest prices.
Arrogance and margin envy lead to “used up” suppliers
When it comes to large companies buying from smaller ones, there can be a level of arrogance in senior management that means suppliers are squeezed too far, Downard says.
“There can be the feeling in very senior ranks that they’re the biggest player. A sense of entitlement comes with that. One can assume that the government will step in and prop you up, and that suppliers will do everything they’re told.”
This can lead to short-sightedness, where instead of just using suppliers, suppliers are “used up”.
“Margin envy” also plays its part.
“There can be a perception that suppliers are making more profits than the customers, and companies often try, especially if they’re larger and more dominant, to extract that.”
These factors can mean senior ranks get it wrong when it comes to procurement. Companies that squeeze their suppliers too far can suffer disruption in their own manufacturing cycle if a key supplier collapses.
Downard gives the example of Ajax Fasteners, which collapsed in 2006. “They were the main supplier for fasteners to all the car companies. Those companies pushed and pushed for cost decreases, and Ajax fell over. But the car companies weren’t buying a commodity. They were buying specifically-designed fasteners. So they were forced to prop up Ajax for several months as they tried to find other sources overseas.
“If you do rough, back-of-the-envelope calculations about how much they paid to prop up Ajax, compared to the savings they got over several years from pushing for cost decreases, it wasn’t a very good investment.”
Leaving money on the table
When negotiating a contract with a supplier, it’s often worth “leaving money on the table”, Downard says.
“It’s an investment in the relationship, and you’ll get payback for that.”
But the supplier-squeeze problem is rarely something that happens just in the negotiating room. In most cases, those on the front lines of procurement want to have good relationships with their suppliers, Downer says.
“The people negotiating the deals, they might have every intent of coming up with a win-win situation,” Downard says. “But they find that as soon as the corporate lawyers get involved and come up with standard contracts and boiler-plate clauses, it’s easy to lose that original intent. It’s all very well and good negotiating win-win. But one has to contract it, too.”
The problem is that long-term, beneficial relationships with suppliers are rarely accounted for. Companies usually measure the outputs of their relationships with suppliers, rather than the relationships themselves, which can lead to bottom-line assessments dominating over more long-term considerations of business co-dependence.
Some companies and consultancies have pioneered more inclusive ways of measuring supply-chain value. For example, ‘vested outsourcing’ is a model of outsourcing where both the customer and the supplier are formally vested in each other’s success on predefined business goals. Another way of measuring such relationships is the supply chain collaboration index, which looks at how closely businesses work together on a range of issues including quality control.
While far from the norm, many big companies follow relationship-oriented models and have success to show for it. For example, Proctor & Gamble, Microsoft and McDonald’s follow the vested outsourcing model.
With a bit of thinking, it’s possible to avoid using up suppliers to fund a business model, Downard says.
“If people recognise that those short-term actions are detrimental to the long-term, they wouldn’t do it,” he says. “But quarter-by-quarter, short-term thinking, it’s pretty corrosive to the benefits of building relationships.”