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8/07/03
Supplier
Development:
A Survey of Risks and Benefits
Compiled
by:
Scott Frahm, SCRC |
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Though
Japanese firms first embraced supplier development
after the end of World War II, it has only begun
to take hold in the United States in the past
three decades. Recognizing the need to compete
with the Japanese business threat on many fronts,
U.S. firms began to tackle this issue with great
vigor. The supplier-customer partnership can be
described as “a long-term relationship between
a buyer and a supplier characterized by teamwork
and mutual confidence with the supplier considered
an extension of the buyer’s organization
(1).”
Supplier development can help a manufacturing
company reduce costs, streamline operations, and
minimize defective products. Devising a supplier
development program can positively impact an organization’s
business. Still, many companies have yet to embrace
this idea because of the associated costs. Businesses
feel they do not have the time or resources to
commit to a supplier development program.
Number of Firms with Supplier Development Programs
Honda of America has a supplier development program
that many envy because the company has an extensive
13-week program in which Honda employees spend
up to four days a week at a supplier’s site
and work on continuous improvement projects (2).
In a poll conducted by Purchasing Magazine, only
53 percent of purchasing executives stated that
their organization engaged in supplier development
activities. Furthermore, very few companies have
initiatives as extensive as Honda of America (3).
The Purchasing Magazine survey also revealed:
| • |
One
in five companies surveyed occasionally contributed
financial support for suppliers. |
| • |
Only
14 percent place their own employees at the
suppliers’ site. |
| • |
Eleven
percent of companies surveyed give suppliers
the opportunity to study at the customer’s
site. |
| • |
Though
53 percent claim they pursue supplier development,
only 11 percent have formal programs (4).
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Risks
and barriers
Sharing proprietary information with suppliers
is a concern of many senior IT executives. In
a survey conducted by NerveWire, an information
technology consultancy, 75 percent of senior IT
managers said lack of trust is the number one
barrier to collaborating with suppliers (5). Organizations
need to establish trust with suppliers and vice
versa before any supplier development program
can be initiated.
Another risk is security concerns with sensitive
information due to the large volume of information
that is sent between customers and suppliers.
Competitors or others that intend to do harm can
hack into the Internet and Electronic Data Interchange
(EDI) shared between companies. Therefore, it
is vital that this information is secure enough
to ensure that only the intended recipient receives
this data (6). Encryption can be used to circumvent
security breaches. However, there is still some
skepticism surrounding the security of these customer-supplier
networks (7).
Getting a supplier development program initiated
in the first place can itself be a challenge.
According to Centers for Advanced Purchasing Studies,
executives cited the following barriers in utilizing
cross-company teams to improve collaboration:
| • |
Other
competing initiatives |
| • |
Lack
of adequate data to support analyses |
| • |
Inadequate experience managing an improvement
program |
| • |
Inadequate monitoring and control systems |
| • |
Need to rotate personnel to other duties (8)
|
Benefits
The rewards for undertaking a supplier development
initiative are well worth the effort. For example,
according to research conducted by Aberdeen Group,
an IT market analysis and positioning services
firm, some of the benefits of a good supplier
development program include:
| • |
Sourcing
cycle time reduced by 25-30 percent |
| • |
Time-to-market
reduced by 20 percent |
| • |
Inventory
costs lowered by 25-50 percent |
| • |
Improved quality, reliability, and manufacturability
of new designs |
| • |
Increased responsiveness to customer needs
and market dynamics |
| • |
Improved collaboration and knowledge sharing
across the extended enterprise (9) |
Armed
with this knowledge, supply chain managers should
be able to calculate the impact of a successful
supplier development program while weighing the
benefits against potential risks.
References:
(1) Monczka, R., Trent, R., & Handfield, R.
(1998). Purchasing and Supply Chain Management.
Cincinnati, OH: South Western College Publishing.
(2) Nelson,
D., Mayo, R., & Moody, P. (1998). Powered
by Honda: Developing Excellence in the Global
Enterprise. New York: John Wiley & Sons.
(3) (June 15, 2000). “Half Work With Suppliers,
Half Don’t.” Purchasing Magazine.
(4) Anonymous. (June, 2000). “Half Work With
Suppliers, Half Don’t.” Purchasing Magazine.
(5) (January, 2003). “Suspicious Minds.”
CIO Magazine.
(6) (1994).
"Security Issues in the EDI Environment.”
International Journal of Operations & Production
Management.
(7) (December, 1999). “From Traditional
EDI to Internet-based EDI: Managerial Implications.”
Journal of Information Technology.
(8) Batson, Robert. ( 2002). “Getting started
in a supplier improvement initiative” Annual
Quality Congress Proceedings.
(9) Jones, Katherine. (August 2002). Source Smart:
The need for Supplier Management. Manufacturing
Systems.
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