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Supplier Integration: Changing the Rules of Engagement
Manufacturers who leverage their suppliers’ capabilities will enhance their own operations.
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BKD, LLP
Few medical device manufacturers have the resources to be vertically integrated enough to provide the multiplicity of highly technical parts and components that their finished products require. Therefore, as medical products become more sophisticated, manufacturers of finished products now are more reliant than ever on suppliers for the high-quality parts, components and technologies that are used to make the finished product.
More of the products introduced today involve suppliers who provide these types of high-tech components. A manufacturer often designs and engineers the product; produces the major function, feature and application at the core of the product; and perhaps performs the final assembly. Suppliers provide the remaining materials, components, technology and anything else (eg, packaging, plating, instruction manuals) required to complete the finished product.
Much of the cost to produce a product comes from the myriad suppliers of these items rather than from the manufacturer of the finished item. Therefore, good suppliers are not optional for medical device manufacturers; they are a necessity—an asset that must be managed as such.
What is a good supplier? In general, it is a manufacturing partner who provides reliable and consistent performance to the customer’s order specifications with high-quality, defect-free products and services. A top-notch supplier delivers on time, adheres to order instructions and matches its invoices for products orders to the customer’s purchase orders.
Are suppliers trusted resources and considered an extension of the manufacturer’s supply chain, or are they simply vendors that provide materials and parts for the cheapest price? Are vendors leveraged against each other to keep the piece-part cost as low as possible, or are they suppliers that work with the manufacturer to provide items at the least total landed cost for both players? Are the purchases single transactions delivered to the manufacturer’s dock—counted, inspected, quality-checked and put away for future use—or are certified quality materials and parts delivered in a continuous flow to their point of use in the manufacturer’s facility, with minimal inventory required?
The Importance of Supplier Integration
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The supplier base is rich with opportunities to assist the manufacturer in meeting challenges to reduce costs, improve service, shorten lead times or deter competitor threats. Good suppliers want their customers to be successful because good customers can help them grow profitably.
Supplier integration goes beyond supplier certification, partnering and strategic business alliances—it leverages the supplier’s capabilities by integrating its supply chain, business processes and organization with those of the manufacturer. When the supplier integrates into the manufacturer’s operation and works so closely with it to serve the manufacturer’s customers, the supplier may appear to be a division of the manufacturer. The classic purchasing agent’s role diminishes and the role of a supply manager evolves to orchestrate the integration of the supplier with the manufacturer. Multiple points of interaction between the manufacturer and the integrated supplier emerge as the two organizations align to serve the manufacturer’s customer at the least total landed cost. The integrated supplier is a trusted and reliable resource.
The primary components of supplier integration include:
• Business-to-business integration between the manufacturer and the supplier to work in harmony to serve the end customer
• Process-to-process integration between the manufacturer and the supplier, through which the supplier’s supply chain works in unison with the manufacturer’s supply chain as though it were an extension of it
• Information-to-information integration between the two players, by which information is shared across the two supply chains
Critical to the success of supplier integration are major relationship operating characteristics and attributes that both the supplier and the manufacturer must respond or commit to, such as the pressures to perform and meet the obligations of the integration requirements.
To work in harmony and provide a continuous flow of product with minimal inventory requirements, the supply chains of both the manufacturer and the supplier must extend into each other. To reduce the total cost structure, improve services and eliminate inefficiencies, both enterprises should mutually develop and implement integration improvements.
Joint business planning also will improve performance and achieve systemic performance gains, but it’s essential to openly share information about performance issues to achieve targeted improvements with agreed-upon performance measurements. The manufacturer and supplier that work in harmony to implement these operating characteristics and attributes achieve performance improvements neither could reach independently. The automotive, consumer products and aerospace industries have achieved major business benefits implementing these operating characteristics, and the pharmaceutical industry is designing and implementing similar attributes.
Don’t Fall Into Common Traps
Too many manufacturers reduce their supplier base, increase volume to their remaining suppliers and extract price concessions in the spirit of “partnering,” “strategic business alliances” and “preferred provider arrangements.” When the disguise of the new relationship’s goodness is stripped away and the honeymoon is over with the manufacturer, the lucky suppliers with added volume then are in for the big squeeze to lower their pricing.
Long-term relationships mean very little in this type of scenario, and Web-based auctions may be the manufacturer’s next tactic. If auctions are such a good business practice, why do manufacturers only want to use Web-based auctions to purchase products from suppliers but abhor the use of auctions to sell their own products? When the integration of key suppliers is in place, an auction for the products integrated suppliers provide violates the very principle of supplier integration.
Further pressure by the manufacturer on the supplier in the spirit of “partnering” includes the manufacturer’s demands for special services, increased responsiveness, holding inventory without payment until it is used and other tactics. All are margin migration tactics in anticipation of incremental cost improvements and benefits for the manufacturer. The manufacturer has done nothing to improve the business-to-business integration with the supplier.
On the other hand, suppliers that integrate with manufacturers to provide special services offer product on a continuous replenishment basis with minimal inventory—this creates order-of-magnitude economic gains and benefits for both parties. When the manufacturer participates in the integration process, the supplier can achieve lower prices for the manufacturer, and both parties benefit.
It’s important to point out that not all suppliers will be integrated suppliers. The greater the volume purchased from an integrated supplier, the greater the business benefits. Supplier integration requires the alignment of the supplier with the product-process flow through the manufacturer’s supply chain. An integrated supplier will align its product-process flow with that of the manufacturer. As mentioned earlier, the supply chain processes, business processes and information all are integrated to provide products at the least total landed cost.
How to Integrate
Supplier integration requires manufacturers to manage key suppliers as assets. Following are five fundamental rules that should not be violated:
1. Suppliers are trusted resources, essential for the design, engineering, manufacture, reliability and performance of the manufacturer’s product and service to the customer.
2. Suppliers are managed by supply managers who work with key suppliers to become integrated, meet agreed-upon performance criteria and provide products at the least total landed cost.
3. The manufacturer can’t have a bad day with a customer because of the supplier. Every problem is an opportunity to improve the product, process, cost and performance.
4. The supplier’s profitability is essential for it to remain a key supplier for the manufacturer.
5. The manufacturer and the supplier can agree to disagree, but a resolution that benefits both is not optional—it’s mandatory.
Supplier integration is an untapped area of significant opportunity for the manufacturer and the supplier, but the rules of engagement must change to achieve the benefits.
Manufacturers that recognize the opportunity and put their stakes down for supplier integration also will define the rules of engagement to which their competitors will be required to adhere, creating a competitive advantage designed specifically for the manufacturer and the integrated supplier.
