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Fearing supplier bankruptcy? Take the steady steps for procurement collaboration with your competition

In my previous blog I had touched on the “Why” aspect of a supplier platform strategy to avert the impact of supplier bankruptcy. In the market similar trends are taking place where manufacturers are coming together to develop a common procurement platform for sourcing from a common supplier pool. Such a step should be fraught with a lot of caution, as it is not an omnibus solution. Instead of just hurrying up the myriad steps to reach the goal and announce the collaboration success as media hype, a step-by-step approach with attaining stability after each step is necessary. That is why you will see a lot of “yes-no-yes-no…..” iterations in the media about a lot of superficial collaborations being floated. Probably that is the reason you would hardly see much in the media about such platform strategies already in place among many Japanese manufacturers, as they feel that media announcements will only follow once a critical mass is attained.

Here I explain “How” manufacturers are trying to solve the complex puzzle of the platform strategy.

Step-1: The first step is for the manufacturers to decide which program is appropriate for them to introduce the platform strategy. Most manufacturers would be apprehensive of this platform strategy, fearing brand value erosion, to be associated to another brand. Another major hurdle would be the impact of such strategy on the supplier relationship. It is a no-brainer to assume that the best way to introduce this strategy is with the program with the lowest supplier impact. But a closer look would prove you otherwise.

The Diagram below depicts the various programs for an automotive industry. To explain a few terms for the non-automotive audience:

§  Minor modification is the launch of a model variant with changes such as head-lamp, interior, accessory features, wheels etc.

§  Product extension is the launch of a model variant with changes such as notchback extension, station-wagon extension, engine change etc.

It can be observed that whereas new platform launch has the lowest impact value for supplier relationship, but the platform stability period (here it is the gestation period for the platform time-to-market) is so huge that this benefit is neutralized. Arranging the various programs in descending order of priority for procurement collaboration platform strategy is:

Programs

  1. Minor Modifications
  2. Product Extensions
  3. New supplier selection
  4. New product launch
  5. Regular mass production
  6. New platform launch

Step-2: After selecting the proper program where-in to kick-start the platform, the next step is to select appropriate suppliers for this platform. The manufacturer or OEM has to identify the processes involved in the program. Based on the breadth of processes involved the suppliers are selected accordingly. The suppliers are broadly classified into 4 classes based on their maturity level. These are mentioned below.

  •  Contract manufacturer
  • Own-tool vendor
  • Standard product vendor
  • Original design vendor

The level of involvement of the supplier in the various processes of the program is explained in detail in Paper#86, 12th International Symposium of Logistics, July-2007. The suppliers are arranged in their priority for procurement collaboration within each program in the following descending order:

Supplier groups
  1. Own-tool vendor
  2. Standard part vendor
  3. Contract manufacturer
  4. Own design vendor

Common mistakes: The most common mistakes which should be avoided:

  • Do not treat all programs alike
  • Stability period is generally taken as average period between product launches
  • All factors of Supplier relationship impact are not taken into consideration for arriving at the weighted score
  • No incentives to suppliers enlisted for a platform

Once the manufacturer has selected the programs and the corresponding suppliers, the manufacturer has to go ahead next steps of Governance, Evaluation and communication set-up for making the platform a success. I will explain these details in my next blog.

With GM announcing bankruptcy following Chrysler bankruptcy announcement earlier, most automotive manufacturers would be intensifying their supplier risk measures. In such a scenario, a step-by-step approach to develop close ties in procurement would go a long way to ward off possible dangers of supply failure. I would invite your views on the program and supplier selection strategies for this unique procurement platform strategies emerging in the market.

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