According to a Reuters news report, Ford plans to “identify 850 suppliers eligible for its future business by the end of this year, down from 1,683 suppliers last year.” Tony Brown, Ford’s group vice president of global purchasing, is quoted as saying, “We’ve accelerated our efforts…to rationalize the supply base in order to get to profitable growth for all. There is simply too much capacity in the system. We don’t need that capacity.” Long term, Ford expects to trim its supplier base down further to 750 suppliers. The company estimates that the number of bankrupt or financially distressed suppliers has doubled since last year.
Ford’s strategy to consolidate its supplier base is not uncommon these days. Obviously, considering the state of the automotive industry, it makes sense for Ford to conduct due diligence on its suppliers and prioritize those who are the most financially healthy or strategic. Other companies are looking to save money by leveraging their spend across a smaller set of suppliers or by consolidating their distribution networks. Anheuser-Busch InBev, for example, “is exploring the concept of someday selling as much as 50% of its U.S. beer volume directly to retailers through its own distributors, up from 7% today,” according to an article in the Wall Street Journal, based on a report issued by Melissa Earlam, a UBS AG analyst.
The bottom line: suppliers and distributors, particularly in financially-distressed industries, have a big target on their back.
If I was in charge of trimming down my supplier base, what criteria would I use? These days, financial stability is certainly an important factor. But here are some other attributes I would consider:
- Alignment with my corporate culture. For example, if Lean principles are embedded in my company’s culture, I would prioritize suppliers who also have a Lean culture and share a similar commitment to waste reduction and continuous improvement.
- Alignment with my long-term strategy. If a growing percentage of my revenues and profits will come from emerging markets in the next 5-10 years, then I need suppliers who have the capacity and infrastructure to support me in these geographic regions. Similarly, if my long-term plan is to discontinue certain types of products and launch completely new business segments, then I need to factor in these plans in my supplier selection process.
- IT capabilities. Are my suppliers managing their supply chain planning and execution processes with spreadsheets and fax machines, or are they using sophisticated software applications and automation systems? Is the data and information I receive from suppliers timely, accurate, and complete, or do I spend an inordinate amount of time dealing with data quality issues? Are my suppliers’ IT systems flexible enough to adapt quickly to process changes and new business requirements?
- Employee talent and retention. If you believe that a company is only as good as its people, then I would evaluate a supplier’s employee talent, especially their engineers, scientists, and operations managers, and evaluate how successful they’ve been at retaining talented employees in the past, and how they plan to keep them moving forward.
- Big fish in little pond. Everything else being equal, I’d rather represent 50 percent of a supplier’s business than 2 percent.
- Commodity vs. proprietary. Not all materials, parts, and components are created equal. I would have one strategy for selecting and managing suppliers of commodity parts and materials, and a different one for suppliers that supply me with proprietary, highly-engineered, and/or capacity-constrained parts and materials. And I would make sure that my product development teams and procurement and supplier management teams are collaborating on an ongoing basis, so that we manage our bill of materials as effectively as possible.
I’m sure I could come up with a few more attributes if I had the time. But my point is that there are many factors to consider when evaluating your suppliers. And there’s always the danger of consolidating too much, leaving you with less supply chain flexibility and greater supply risk.
Are you in the process of consolidating your supplier base or distribution network? What criteria are you using in your selection process? Post a comment and let me know!
Dr. Jeff Karrenbauer, president and co-founder of INSIGHT, Inc. (www.insight-outsmart.com) has some comments below on the GM Bankruptcy and the quick, rash decisions these automotive companies are making without evaluating the consequences:
The Transformation of the American Automobile Industry – A Perspective from a Supply Chain Professional
Over the past six months or so we have witnessed a series of truly remarkable events in the American auto industry. After much consternation, evaluation and debate the Administration and Congress have decided that we the people will, indeed, sell Chrysler and rescue General Motors. Fair enough. However, as a supply chain professional for nearly 40 years, I have serious reservations about how this is unfolding. Apart from the obvious issues associated with capital and liquidity, General Motors is facing a classic supply chain strategy problem. Over the next few months they must decide which suppliers to cut loose and which to retain, which worldwide manufacturing facilities to close and how best to utilize the survivors, how they will continue to distribute product (railheads, distribution centers, ports and so on), which brands, models and dealers to retain and which to close, how much inventory to slash. Not the stuff of spreadsheets, to be sure, although they will probably try.
Frankly, I am personally and professionally offended at what I have been reading about the likely go-forward strategy of GM. In particular, I was appalled when I saw decisions already taken to relocate much of the manufacturing to offshore locations, ostensibly because of labor costs. This fundamental management error has all-to-often encouraged by analysts on “The Street” who are woefully ignorant of operations beyond ratios derived from financial statements. It is only now being rectified at many companies, years after they disastrously followed the outsourcing lemmings over the cliff. This is most assuredly not a “made and buy in America” polemic; artificial protectionism went out with the great depression and mass merchandisers stomped on its grave. Rather, it is a plea that the analysis be conducted in a thoroughgoing manner that is consistent with the true bottom line, not one component of it. Simply put, there is significantly more to worldwide supply chain/operations strategy than manufacturing labor costs. Procurement, manufacturing, transportation, warehousing, various types of inventory, duties, taxes, port handling charges, flexibility, responsiveness, risk…all of that and more must be considered, more or less simultaneously. Regardless of the merits, it is impossible for anyone to reach any conclusions in such a short period of time, given that they conduct the analysis properly. I have no use for analysis paralysis. However, I passionately believe that we owe the country, its taxpayers, and the various stakeholders of General Motors no less than the best possible effort accomplished as expeditiously as possible, not some sophomoric rush to judgment that we will come to regret.
Along the same lines, I am equally appalled at the speed with which the dealer closure decisions have been made. Once again, there are proven, rigorous, objective techniques for addressing such matters but it is a virtual certainty that they have not been employed in the spectacle that we have witnessed thus far.
Late news flash: we are now being treated to the specter of various members of Congress strong-arming management regarding various facility closure actions (as in blocking them). Somehow I cannot bring myself to believe that their reasoning parallels that offered above. This might be entertaining were it not so destructive. Memo to the members: this is not the Department of Defense. First you excoriate the industry for inefficiency and then you compound the problem. The very worst thing you can do is meddle with a corporation that you wish to see return to profitability. You can’t have it both ways. Please do the country and the company a favor and back off.
With respect to the bailout itself there are seemingly irreconcilable perspectives. On the one hand, there is surely the temptation to let capitalism work its supposed rational course: the trio of inferior products, woeful management and myopic unions should be punished in the marketplace via bankruptcy and probable liquidation and the underlying resources redeployed to better effect elsewhere. On the other hand, the genesis of the current economic crisis is clearly not with this industry and there are a huge number of largely innocent victims, including suppliers and dealers, whose communities will be severely impacted. Nevertheless, should the government pick winners and losers, even for something we used to call a prime example of a “basic industry?”
Nothing is ever as simple as we might idyllically and naively wish. It is that rational, unfettered capitalism which has presented us with the detritus of markets run amok: the savings and loan crisis followed by successive tech, internet, and financial market meltdowns, none of which should have happened, all of which occurred in the space of about two decades. Where were the promised built-in self-correcting market mechanisms? Sorry George Will, Adam Smith is a hopelessly overmatched opponent for good old greed.
There is an important national security issue in play as well. Suppose, just suppose, that Pakistan melts down and/or North Korea follows bellicose with equally irrational action and/or the Middle East really lights off or…the list is sobering. What if we truly had to mobilize and one of our most fundamental weapons…our industrial might…had essentially vaporized, piece by piece, as it now seems to be doing?
As the President of a software and consulting firm, as well as an adjunct professor at two universities, I teach both clients and MBA students the value of comprehensive supply chain analysis and how it relates to overall corporate strategy. The practicing supply chain professionals have understood the underlying principles for a long time. We should demand no less of our new auto industry caretakers.
Jeffrey J. Karrenbauer
President
Insight, Inc.