15.3 Supplier Integration: An Overview

You may be wondering, "Why is teaming-up with suppliers—i.e., supplier integration—so important?" One reason is that customers, like you, are more demanding than ever. Ask yourself, "When you buy a product, don't you want the best quality, the newest features, and the lowest costs possible?" You also want the product to be available when you want it—where you want it! Companies that can provide you what you want faster, better, and cheaper than anyone else win your business. Because customers are demanding and competition is tough, companies need to team up with their best suppliers. Suppliers bring the ideas, resources, and skills to the team needed to win tough competitive battles. No company can do it alone. Aristotle, the Greek philosopher, shared this idea when he said: "The whole is greater than the sum of its parts."

Reasons for Supplier Integration

Now, let's look at three reasons that show why you need to work well with suppliers: high levels of interdependence, the need for speed, and the costs of poor .

High Levels of Interdependence

Ask yourself, "What percent of a car is designed and manufactured by the (e.g. Ford, Nissan, or Mercedes)?" You may be surprised to learn that OEMs actually manufacture a relatively small percent of the cars they sell. Up to three quarters of a car's consists of supplier-manufactured parts! At Honda, it's 85%. Figure 15.1 identifies a fraction of the suppliers for Mercedes E-class. If Mercedes doesn't work well with suppliers, its cars won't run. The reality is that suppliers play a key role in designing and manufacturing key components for most of the finished products that you buy. You really can't run a business without a great supply team. Indeed, consider these key facts: Since 1970, the external spend for all companies listed in the has increased by an average of almost 40% to approximately 80%.1

Figure 15-1: Supplier Map for the Mercedes E-Class1

The Need for Speed

Ask yourself, "How often did your grandparents need to buy a new phone?" Most likely, they updated phones twice: When technology changed from rotary to pushbutton and then again when cordless phones became available. Now, ask, how often do you upgrade your phone? Answer: Every two to four years! Why? Answer: Because you don't want to own old, out-of-date technology. Consider this reality. The iPhone wasn't the first smart phone; however, it changed consumer expectations. To do this, Apple needed to do more than invent the iPhone. Apple needed to constantly re-invent the iPhone (see Table 15.1). That is, part of Apple's reality is that to stay ahead of tough rivals like Samsung, it needs suppliers' help to constantly push towards "faster, better and cheaper."

Table 15-1
Launch Dates for Apple's iPhone and iPad
iPhone Models Launch Date iPad Models Launch Date
Original iPhone June, 2007
iPhone 3G July, 2008
iPhone 3GS June, 2009
iPhone 4 June, 2010 Original iPad April, 2010
iPhone 4s October, 2011 iPad 2 March, 2011
iPhone 5 September, 2012
  • iPad 3
  • iPad mini
  • March, 2012
  • November, 2012
iPhone 5S & 5C September, 2013 iPad Air November, 2013
iPhone 6 & 6 Plus September, 2014 iPad Air 2 & mini 3 October, 2104

The Costs of Poor Synchronization

You may be wondering, "What happens when something goes wrong?" Boeing found out! When Boeing developed its vaunted Dreamliner (aka, the 787)—a plane designed to change air travel the way the iPhone changed communications—it outsourced major modules of the plane to suppliers located around the world (see Figure 15.2). The goal: Cut up-front development costs—estimated at $10 billion—in half. Unfortunately, Boeing's and its suppliers' efforts weren't synchronized. When the first parts were delivered for final assembly, they didn't fit together. Ultimately, design and delivery problems delayed the 787's launch by over three years and drove up initial development and manufacturing costs to over $30 billion.

Figure 15-2: Supplier Map for the Boeing 787 (the Dreamliner)1

A Brief History of Supplier Integration

Given the benefits of working together—and the costs of poor synchronization—you might expect integrating with key suppliers is common practice. If so, you'd be wrong. Just a few years ago, purchasing professionals viewed buyer/supplier integration as something to avoid, not embrace. Most purchasing organizations focused on short-term costs. This meant pitting suppliers against each other to keep costs down (remember the J. Ignacio Lopez story). Besides, few companies knew how to make teamwork pay off. Conflict was common and compromise necessary. The bottom line: Teamwork is tough, requiring both trust and work!

In the 1980s, companies worldwide received a wakeup call. Japanese manufacturers like Cannon, Kawasaki, and Toyota invaded the U.S. market, capturing market share and putting rivals out of business (e.g., the U.S. consumer electronics industry). Analysts took note and asked, "What are they doing differently?" When they did the analysis, the pundits discovered that Japanese rivals relied on longer-term, more tightly integrated buyer/supplier relationships promoted by just-in-time sourcing and the Japanese structure. 6 The better quality and lower prices delivered by Japanese manufactures captivated the American consumer. Customer expectations have steadily increased ever since. U.S. companies realized they needed to adopt the mantra, "faster, better, cheaper." To do a fact check, ask your grandparents how often they had to take their GMs and Fords to the shop for repair. No company could survive today with American-style, 1980s-level productivity and quality.

Unable to compete and losing market share, how did U.S. manufacturers respond? You guessed it—they adopted manufacturing and slowly but surely, they turned to suppliers for help. By 2015, even General Motors had announced that it would adopt longer-term contracts and build closer supplier relationships to gain greater access to supplier innovation.7 Table 15.2 lists key benefits companies have achieved by integrating more closely with suppliers.

Table 15-2
Benefits of Supplier Integration1
Reduced design and development time Reduced procurement item cost
Improved procurement item quality Improved procurement item reliability
Reduced design and development cost Improved access to product technology
Improved product features Improved customer service
Reduced technological risk Reduced financial risk
Improved environmental compliance Improved governmental compliance

Now, a warning: Despite the benefits and after 30 years of talking about buyer/supplier integration, companies still struggle to integrate operations with suppliers. Let's find out why.

Barriers to Effective Supplier Integration

If buyer/supplier integration were easy, everyone would do it. But, supplier integration isn't easy. It is also not a one-size-fits-all solution! Every supplier brings unique capabilities—and challenges—to a collaborative initiative. Thus, although the basics—like the need for high levels of trust—are consistent, you need to tailor each initiative to specific goals and the participants' capabilities. As you design and execute a supplier integration strategy, keep the following barriers to success in mind (see Figure 15.3).

Figure 15-3: Barriers to Closer Integration

Fight for Control

Do you like to control your own destiny? Buyers are no different—they like to keep work in-house. Giving up control of sensitive information and value-added activities is hard. Why, you ask? Buyers, like most people, are uncomfortable with change. Asking suppliers to take responsibility for part of your job makes you vulnerable. If they perform poorly, you won't look good. If they perform too well, someone might want to give them more of your work. To help people let go and be willing to try new things, you need to be a great coach.

Supplier Commitment

You've heard the phrase, "It takes two to tango!" It holds true in buyer/supplier integration. Even if you are excited about having a supplier take on new roles, the supplier might balk, not seeing the near-term benefit. For instance, the supplier might view the new role as distracting from its core business. Or, the supplier might be worried about expending too many scarce resources to work more closely with you. To help suppliers get excited about integration, you need to be able to articulate "what's in it for them." Simply put, you've got to be a motivator.

Chemistry

Agreeing to shift roles and integrate operations is just the beginning. Once you sign on the bottom line, you actually have to perform—you must learn to work effectively together so you can execute with precision. Misaligned goals, poorly communicated expectations, cultural differences, and even strong personalities can undermine collaboration. Part of your job as a coach and motivator is to cultivate great working chemistry.

Confidentiality

As you integrate operations, you give supply partners unprecedented access to your organization (e.g., information, technologies, and customers). Simply put, you become vulnerable. So do your supply partners. Either side could leak proprietary information or steal trade secrets. Any breach of confidentiality destroys trust—and with it the opportunity to collaboratively gain a competitive edge.

To sum it up, the barriers to integration are real, but they are surmountable if you, like a coxswain, can get everyone to row in unison.

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