Supplier Sophistication: Way to a shared prosperity

One-Supplier model is working in the highest level of Supplier Sophistication; think of high end automotive industry, airplanes, high precision engineering, aerospace, defense and this list is long. The binding recourse is to enlarge the pie for each other.

Novelis is one single supplier to Jaguar Land Rover for its automotive parts from bumper, inner doors, outer doors, hood, etc and this has been for the last one decade; each have derived value from the other and have a shared prosperity. From initiation of the new product idea to the final rolling out of the production runs, the two work as one single entity. If one is adding capacity the other is integral to this process with zero time delay. Wherever the product launches are too many, as in electronics industry, the suppliers have to be an integral part of the journey as all plastic mold makers and chip makers become eventually .

Supplier Sophistication is like a Joint Venture without the financial commitment, but the unwritten norms work better than the written sometimes. Here the collaboration gets transformed into integration with the business in terms of processes, systems, which finally fructifies into results.

Increasing the Pie-Size of value for each other can only happen when the supplier-customer partnerships are deeply entrenched in the common puzzle solving paradigm.

Supplier Sophistication is at one extreme end of the Procurement Maturity status where the Supplier becomes your long term business partner, which is also related to the product or service differentiation you are dealing with; the other extreme end of the maturity is when the Supplier instead becomes your tactical opponent when you are dealing with less differentiated product or service and has the minimum relationship in transacting a particular tender or contract. There is value in both but the former has zero transaction costs while the latter has huge. Scaling up of service or product differentiation in the latter becomes that much more difficult.

Most Procurement organizations are stuck between these two extremes. But the understanding of the clear benefits and challenges must be clear.

At the beginning of the Procurement journey when it starts to operate as a separate function, it is straddled with the odds of having many suppliers who have been attached to one or more service areas on one hand and a plethora of options to choose from. Taking an approach of auctions or direct negotiations with a view to getting to the best offer is the best strategy. But it surely involves transaction costs and the best way this could be mitigated is to rationalize the vendor base so that only a few have running contracts that are periodically reviewed for adequacy. This first phase is known as Tactical buying and is the lowest end of the Maturity cycle.

Tactical buying is all about cutting costs and in this phase the relationship is one of guarded rationality as one vies for the other's Pie, so the total Pie-Size of Value shrinks for the combined entity.

The first level of sophistication is achieved after bundling of requirements lead to a higher order requirement which can be sequenced, scheduled and a plan drawn out for a tenured buying over a longer period of time that gives value. This is the initiation of category management and strategic sourcing, when there is a view of a buying horizon and the window of opportunity with Suppliers over a longer time instance. This step is better known as Supplier Management.

The second level of sophistication is when you are dealing with strategic suppliers who are yet to become sophisticated enough in their management processes, systems, innovation and long term sustainability. The approach needs structured development of suppliers in improving capability across a range of dimensions from quality and long term costs. This is known as Supplier Development.

The last and the most matured level is when Suppliers are matured and sophisticated enough and you can do business with only one or two of them for every category. This is the Supplier Collaboration phase where you derive value on Total Cost of Ownership basis.

The journey from tactical Supplier Management to Supplier Sophistication, it is one tedious effort to constantly churn and shed the worst ones so that the best live to be integrated. This is a two way process where both are drawing from each other trust and respect.

Tactical relationships could also be lasting for a longer tenure, which after some time moves into a nuanced relationship based on gains or losses in each transaction. From there to mutual trust and respect, there is a huge difference.

Tactical relationships do not enlarge the pie for each other in terms of value or gains as the interests run at cross-purpose; Supplier sophistication just does that by bringing both sides to the understanding of what could raise the total Pie-Size for the combined entity. The transaction costs then completely disappear.