Partner Management & Strategic Procurement (Part 1 of 3)

QUESTION => Manufacturers – Are you achieving 500% + on Overall Equipment Efficiency (OEE)?  Are you achieving the planned ROI?

Over the next three weeks, we will discuss the management domains within the Procurement Strategy and Partner Management business management principle.

They are:

1. Procurement Management
2. Risk Management
3. Acquisition
4. Business Market
5. Integration
6. Partnership

This week, we will focus on PROCUREMENT & RISK MANAGEMENT and their influence on many aspects of your manufacturing environment affecting business goals and growth.

Manufacturers may use the term ‘Procurement’ and ‘Purchasing’ interchangeably.  Perhaps it’s a grey area for some and may not know the difference.  Let’s start by discussing the difference as it relates to this article.  LYNXBMG defines ‘Procurement’ as process of strategic sourcing for the purchase of goods and services from suppliers.  ‘Purchasing’ is the act of acquiring goods and services involving the day-to-day transactions between sellers and buyers.

Let’s turn our attention to the criticality of Purchasing strategies and its affect on the business of manufacturing organizations.  Typically, manufacturers purchase close to 80% of their product from the supply-chain and internally manufacture/fabricate the remaining 20% for the critical mission components and assemblies being sold to the prime customers.

The procurement strategy therefore has a significant level of importance and affect on the performance and results of a manufacturing contractor.  The supply-chain management strategy and processes are important if not critical to maintain the company’s business objectives and goals.

Most companies spend considerable time and effort to align themselves with the right tier suppliers involving long-term agreements to help secure business over the medium- and long-term.  This has proven to be a solid method for building critical supply and demand business relationships fostering continuous collaboration, development, and successful growth by both parties.  In some cases, the supplier becomes a partner (either informal or formal) with the tier 1 provider servicing the original equipment manufacturers (OEMs).

So, finding the right supplier that can be trusted for quality and delivery at reasonable cost is key.  It has been experienced that many purchasing team members strive for the least cost possible for the highest quality meeting the specified quality requirements of product.  In doing so, sometimes the thread of purpose is lost driving for reduced costs at almost any consequence and resulting in damaging an organizations reputation and eligibility for further growth.  This has proven to be a short-term strategy that will fail in meeting your organization’s business objectives and goals.  As the saying goes, “you get what you pay for” typically proves to be true and your company begins to experience supply-chain quality and delivery issues.  Furthermore, your company then begins to have an impact in meeting your customer expectations because of it.  Risk quickly becomes an Issue with costly mitigation and damages.  It is a downward spiral that is not a good strategy at all.

Buying leverage is a challenge that needs careful strategic and tactical planning.  Perhaps depending on the product and service you provide, a partnership or merger or joint-venture might be an appropriate arrangement to assure the goals and objectives of the company.  This can be of strategic importance for high-volume and continuous flow manufacturing.  Furthermore, control on cost and margins may be easier to manage and forecast with such an arrangement.

There may be downsides to such arrangements as they tend to demand incremental management attention.  With a merger or J-V that operates autonomously to some degree has a demand of running two companies.  Whilst that is a burden and has business exposure, the benefits outweigh the negatives.  In fact, it may be the appropriate solution if supply-chain requirements are unique to your competitive manufacturing sector.

With such strategies, it may be the most viable solution if a desired contract or business sector needing a combination of services and capability that your organization alone cannot provide.

With any business, managing risk has many facets.  Stakeholders have a great influence on your organization’s success and/or failure.  Performing a working stakeholder analysis by senior management is of great use and guidance to navigate business barriers.  Influencers from competitors, government sponsors, suppliers, regulators, workforce culture, internal leadership, and many others are to be considered and, managed.

Formalized risk management intrinsically gets a modest approach as it is viewed as an extra management task to be resourced and managed.  In fact, everyone inherently does risk management throughout the day without realizing it.  The disadvantage with that is the mitigation is often tribal in awareness and skill to avoid a risk becoming an issue.  The risk problem often gets permanently or temporarily solved without anyone knowing about it.  The organization as a whole is not working together to understand the root causes and impact to other functions within the organization.

The balance is to find the “right horse for the right course” that fits your company culture and tolerance for such management techniques.  Either way, it must be done.  The alternative is to keep your head and the sand and hope for the best.

Next weeks article will be focused on ‘ACQUISTION & BUSINESS MARKETS’.

We encourage you to reach out to us on this topic.  We are practitioners with a true passion to help manufacturers like you meet your objectives.  It costs nothing to enquire, and we wager that you will be glad that you did.

Take a few minutes to watch the fire-side chat video below with Ms. Kelsey Taylor – Assistant Professor of Supply-Chain Management with the University of Manitoba.  We discuss the importance of strong supply-chain relationships and the criticality of partner/supplier integration.