Companies should never confuse a supply relationship with friendship. In fact, part of the role of any good provider is to challenge its clients in a productive way. Many times, companies outsource in order to transfer the majority of risk to suppliers.
In June, Design News hosted a webcast on product lifecycle management presented by team members at Sparton, a firm that handles the both design and manufacturing efforts for low/medium-volume, high-complexity components. Their presentation, “Why Product Lifecycle Management Is an Emerging Trend,” included all of the cost, timing, and supply chain implications of PLM.
During the webcast, Sparton presenters spoke about the importance of building relationships with key suppliers. That emphasis makes sense because, in Sparton’s role as an outsourcing provider to manufacturing companies, the company sees advantages realized with those that they are able to partner with versus those that hold them at arm’s length or push back on project recommendations.
Good suppliers will bring their interests into alignment with those of their clients and make sure that the risks they are being asked to bear do not come back to bite their clients in the end. They understand that there are costs associated with each risk and, in order to service their customers efficiently, suppliers need to help them root out the causes of those risks.
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There were several examples of healthy pushback shared on the webcast, including times when an outsourcer might return to a client and say, “Yes, you can make that decision, but you need to understand the inherent risks/costs/complications.”
As outsourcing becomes more prevalent (even when we don’t call it outsourcing), expectations have to shift. Part of why companies hire skilled third-party service providers is because they can do the job better. And that doesn’t always mean performing tasks the way they have been in the past.
So when will good outsourcers raise red flags on the risks they see clients embedding into their supply chains?
Single sourcing was the example given most often -- and for good reason. No matter how perfect of a match there is between a component or a material and a design, if it can only be purchased from one supplier, it will make supply managers wary. Supply chains may be disrupted, and companies can be purchased or go out of business, suddenly cutting off access to an integral part of a design. The costs of such a turn of events include lack of product availability, increases in cost, and complete redesigns.
Margin tradeoffs involve another tricky set of decisions to be made. Market testing is usually done in advance to see what kind of price the market will bear for a product, but over time, business development teams may feel the need to discount the product in order to maintain market share. Cost effectiveness is not a fixed point. Depending upon the expected life of the product, the margin that can be realized may change significantly. If the product launches with too low of a margin, the risk increases for the manufacturer, because in order to continue to generate sales, they may have to sacrifice revenue.
Demand over the lifecycle of the product is another moving target that a good outsourcing provider will work hard to hit. This is relevant for overall sales as well as component stocking. Some of the inventory will be for new original sales, and some will be for ongoing support. Although a company may be ready to move on and start selling a newer design of a product, the users that had purchased the old design and still have it in use expect ongoing support. Not having access to the stock to support those users is bad for brand reputation as well as future sales.
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When an outsourcer is involved at the design stage of a project, it is in everyone’s best interests to have an open dialogue. It is far less disruptive to examine a design and make prudent decisions before the product goes into production and starts to build market share than it is to forge ahead only to find that the margins and sources of supply are not sustainable.
Make the most of conversations for the internal as well as external improvements they may offer. Will the estimated order volume being used in strategic sourcing match the likely usage volume resulting from demand? Can you alter your packaging or select a less expensive or more reliable delivery option? Just what levels of safety stock need to be retained -- both for components and for finished stock?
No supplier wants to tell a customer no. But sometimes that is exactly what they are being paid to do. The important thing to remember in that moment is that they are not just protecting their own bottom line, they are guarding their clients’ too.
Click here to listen to the full audio of the webcast, “Why Product Lifecycle Management Is an Emerging Trend."
Kelly Barner is the co-owner of Buyers Meeting Point, an online resource for procurement and purchasing professionals. She has been an industry award-winning supply management practitioner and consultant, and is now an independent thought leader and author on procurement, sourcing, and purchasing. She is co-author of Supply Market Intelligence for Procurement Professionals: Research, Process, and Resources. Kelly earned her MBA from Babson College.