Operations Payoff

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For Strong Supplier Partnerships, Define Outcomes, Not Methodology

When companies are developing requirements for their suppliers, they often define in great detail how the supplier will deliver the materials and products and how they will offer support. Companies often stipulate that suppliers carry a certain level of inventory to provide a high service level. For instance, many companies require the supplier to hold 30 days of stock on hand.

You Pay for What You Require

At first glance this might seem to make sense, but the reality is that when you specify how  suppliers are to do their job, they will charge you for what you require them to do. Those costs will either be built in to the part price or added as a service charge or surcharge. When I was VP Operations for a manufacturer, one of our sister companies used consigned inventory and required 30 days stocking levels at the supplier. The supplier charged them a five percent surcharge for doing so.

Tell Suppliers What You Want, Not How to Provide It

In a true supplier partnership the customer defines outcomes, not methodology. For instance, if you want just in time delivery, say so. If you want to use Kanban, say so. If you want 99.8% perfect order execution, say so. Specify the outcome, not the method. This allows the supplier to use whatever means they need to meet your requirements. The process is theirs, not yours. They won’t add a surcharge, the service will be better and the total cost of materials will be lower.

©2013 – Rick Pay – All Rights Reserved

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