Don't Forget Tier 2 Suppliers When Deploying SRM!
Several companies I’ve interviewed recently have been sharing how to structure or “tier” their supply base, based on impact on tier 2 suppliers or commodities. As companies continue to outsource, one major segment is the management of leased equipment, which entails management of the aftermarket parts for major equipment. One company I spoke with works with suppliers that are much larger than they are and who are furnishing component replacement parts. The team spends a lot of time properly understanding the scale of the relationship that exist up and down the supply chain, and building a deep understanding of the product component parts market that drives quick response time for part delivery. The company competes directly with the manufacturers of the equipment, but often have a more responsive and flexible response to customer requirements, which becomes a factor in a time-critical environment.
Another organization manages tier 2 raw materials for their automotive parts supply base on a global basis, with a global purchase team that looks at major categories such as steel, material, paint, adhesives, lubrication, and fuel. Each of these global teams have commodity strategies at a central location, as well as a developer who works directly with major tier 1 suppliers on cost strategies. The team is able to conduct global lowest total cost analysis to manage raw material supply to suppliers all over the globe, and conducts a complex analysis considering price analysis, logistics hubs, and supply routes that create the optimized mix by location. Most of the contracts with tier 1 suppliers are local sources near assembly facilities, to promote the “buy where you sell, sell where you buy” culture that exists. To further promote collaboration with tier 2 steel suppliers, the supply organization has established multi-year agreements with steel producers to enable hedging on raw materials such as coke and iron ore, and combines this with bank hedging agreements that also benefit steel suppliers. A three month rolling price adjustment is established to enable long-term risk management on steel, a core component of tier 1 and tier 2 supply.
There is also an increasing recognition that supply base reduction poses a risk of pushing the contracting and relationship piece back onto tier 1 suppliers that are less capable of supply management than the buying organization. An executive at a major oil and gas company noted that:
“As we have reduced the number of tier 1 suppliers, we are forcing our suppliers to do more subcontracting, and we are seeing issues as we have forced them to become general contractors. They end up subcontracting the same people that we used to work with directly! But they are not good at managing them. So this raises a number of questions? Who is the best supply manager for managing second tier suppliers? Should we be directing them to work with tier 2 suppliers? Do we have any business forcing relationships that didn’t exist before? We are recognizing that supplier management is not a skillset that one develops overnight, it is a skill that needs to be built over time, and by reducing our supply base we are creating something that the supplier is not ready to do!”
As such supply base reduction strategies should always examine the impact on tier 2 suppliers as well. Tier 2 suppliers are an important component of the supply chain, and as I’ve discussed in this blog, can dramatically impact availability, cost, quality, and technology innovation.
