Supplier Development - Make or Buy?

The aim of any business today should be to have an effective Supply Chain, one which is competitive in domestic and international markets. It is key if the company is to achieve ever increasing business performance objectives.

The first step to integrate supplier development into a company's supply chain strategy must be an analysis of the company's approach to component sourcing. The question of whether to "make or buy" must be addressed if the company is to exploit exactly what the business does best, and what it does not do well.

The "make or buy" analysis is strategically important. It determines what level of investment the business will have to make in future years. Outsourcing has implications. Not only does it increase the manufacturing capacity for the core product, it changes the management skills needed for purchasing, logistics and quality assessment. It can also provide a platform for reducing the overall cost base of the business.

Why make when you can buy?

The only real way to answer this key question is to analyse the core business competencies. A complete audit of the existing business areas needs to be undertaken. These will probably include Production Planning, Supplier Sourcing and Manufacturing/Production as well as service capability and continuous improvement programmes.

The core business, traditionally performed in-house, can be divided into a few areas. These are usually: activities traditionally performed in-house; activities that are crucial to business performance; those that create, or will create, a potential business advantage over your competitors; and activities that will drive the future growth and innovation of your company.

The audit results can be used to help determine the make or buy strategy for your company and the type of relationship needed between the company and its suppliers.

Buy not Make

If the audit finds outsourcing is the preferred option, it is worth considering the following criteria when selecting your suppliers:

• Buy from suppliers who can supply the product complete, rather than needing additional work.
• Obtain materials and components from a small number of carefully selected, quality assured suppliers. Concentrating on a small number of key suppliers helps to maximise each individual supplier's role in the finished product.
• Make sure each supplier is able to provide long term supply assurances that will protect a product or service throughout its life cycle.

Part of supplier selection must be that they are willing to take part in a form of business alliance, sharing a part of the product introduction risk, introducing innovation that ensures competitiveness in total acquisition costs and the ability to match production and delivery to changing customer requirements

Each of the above helps to bring together a supplier development programme which works for both parties.

When should the process start?

In most cases the process starts when a new product or service is introduced. At this time produce a strategic sourcing checklist which would typically include an approach agreed by the main business areas, towards taking a make or buy decision.

Discussion with potential suppliers should start as soon as possible. By doing so it gives the potential suppliers' opportunity to contribute their expertise and knowledge into the introduction of the new product or service. It also gives the buyer a chance to evaluate suitability in a 'real life' business situation, to influence and develop them to meet requirements in full, and most importantly, to avoid any mis-communication at this early stage which may lead to later ambiguities.

How to identify which suppliers are best for business

One of the most effective ways is to conduct a product portfolio matrix which enables you to effectively evaluate:

• High spend - low risk products/services
• High spend - high risk products/services
• Low spend - low risk products/services
• Low spend - high risk products/services

For example, a business may have a high stationery spend. However, as there are many suppliers of these products, the buyer can review the market without risk to the business (high spend - low risk). Conversely, the same business may have a low expenditure on a product/service which is vital to it's core business, for example an electric motor to support the manufacturing process (low spend - high risk).

The product portfolio matrix approach helps identify the type and number of suppliers required in different areas, the nature of the buyer/ supplier relationship and the supplier development required to fulfill the buyer's needs.

How do I find my suppliers?

Most businesses will already know of suitable existing suppliers. However, new suppliers are good for businesses. They drive competition and competence. Look around; new suppliers can be found in trade directories and associations, exhibitions, trade press, competitors and advertising.

Summary

The above process can be described as best practice in identifying core business competence linked to a supplier development programme. Of course, the results may depend on the influence Purchasing has on the business or may be used as a platform of influence in your company's growth strategy.

About Purcon

David Birch is Director of Purcon Training. Coming from a background at the highest level at Jaguar Cars and Nissan Europe, David is in demand for his extensive purchasing knowledge and strategic influence.

For more than 30 years, Purcon has led the way in permanent recruitment and interim management for Procurement and Supply Chain, with offices in the UK, Belgium, Poland and operations across Europe.

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