Supplier Development: A Survey of Risks and Benefits

Though Japanese firms first embraced supplier development after the end of World War II, it has only begun to take hold in the United States in the past three decades. Recognizing the need to compete with the Japanese business threat on many fronts, U.S. firms began to tackle this issue with great vigor. The supplier-customer partnership can be described as “a long-term relationship between a buyer and a supplier characterized by teamwork and mutual confidence with the supplier considered an extension of the buyer’s organization (1).”

Supplier development can help a manufacturing company reduce costs, streamline operations, and minimize defective products. Devising a supplier development program can positively impact an organization’s business. Still, many companies have yet to embrace this idea because of the associated costs. Businesses feel they do not have the time or resources to commit to a supplier development program.

Number of Firms with Supplier Development Programs

Honda of America has a supplier development program that many envy because the company has an extensive 13-week program in which Honda employees spend up to four days a week at a supplier’s site and work on continuous improvement projects (2). In a poll conducted by Purchasing Magazine, only 53 percent of purchasing executives stated that their organization engaged in supplier development activities. Furthermore, very few companies have initiatives as extensive as Honda of America (3).

• The Purchasing Magazine survey also revealed:
• One in five companies surveyed occasionally contributed financial support for suppliers.
• Only 14 percent place their own employees at the suppliers’ site.
• Eleven percent of companies surveyed give suppliers the opportunity to study at the customer’s site.

• Though 53 percent claim they pursue supplier development, only 11 percent have formal programs (4).

Risks and barriers

Sharing proprietary information with suppliers is a concern of many senior IT executives. In a survey conducted by NerveWire, an information technology consultancy, 75 percent of senior IT managers said lack of trust is the number one barrier to collaborating with suppliers (5). Organizations need to establish trust with suppliers and vice versa before any supplier development program can be initiated.

Another risk is security concerns with sensitive information due to the large volume of information that is sent between customers and suppliers. Competitors or others that intend to do harm can hack into the Internet and Electronic Data Interchange (EDI) shared between companies. Therefore, it is vital that this information is secure enough to ensure that only the intended recipient receives this data (6). Encryption can be used to circumvent security breaches. However, there is still some skepticism surrounding the security of these customer-supplier networks (7).

Getting a supplier development program initiated in the first place can itself be a challenge. According to Centers for Advanced Purchasing Studies, executives cited the following barriers in utilizing cross-company teams to improve collaboration:

• Other competing initiatives
• Lack of adequate data to support analyses
• Inadequate experience managing an improvement program
• Inadequate monitoring and control systems

• Need to rotate personnel to other duties (8)

Benefits

The rewards for undertaking a supplier development initiative are well worth the effort. For example, according to research conducted by Aberdeen Group, an IT market analysis and positioning services firm, some of the benefits of a good supplier development program include:

• Sourcing cycle time reduced by 25-30 percent
• Time-to-market reduced by 20 percent
• Inventory costs lowered by 25-50 percent
• Improved quality, reliability, and manufacturability of new designs
• Increased responsiveness to customer needs and market dynamics

• Improved collaboration and knowledge sharing across the extended enterprise (9)

Armed with this knowledge, supply chain managers should be able to calculate the impact of a successful supplier development program while weighing the benefits against potential risks.

References:

(1) Monczka, R., Trent, R., & Handfield, R. (1998). Purchasing and Supply Chain Management. Cincinnati, OH: South Western College Publishing.

(2) Nelson, D., Mayo, R., & Moody, P. (1998). Powered by Honda: Developing Excellence in the Global Enterprise. New York: John Wiley & Sons.

(3) (June 15, 2000). “Half Work With Suppliers, Half Don’t.” Purchasing Magazine.

(4) Anonymous. (June, 2000). “Half Work With Suppliers, Half Don’t.” Purchasing Magazine.

(5) (January, 2003). “Suspicious Minds.” CIO Magazine.

(6) (1994). “Security Issues in the EDI Environment.” International Journal of Operations & Production Management.

(7) (December, 1999). “From Traditional EDI to Internet-based EDI: Managerial Implications.” Journal of Information Technology.

(8) Batson, Robert. ( 2002). “Getting started in a supplier improvement initiative” Annual Quality Congress Proceedings.

(9) Jones, Katherine. (August 2002). Source Smart: The need for Supplier Management. Manufacturing Systems.