Kathleen Fasanella over at Fashion Incubator sent me the following video in response my post this morning on Bashing Suppliers Into Submission.  She's right, it really is a priceless two minutes that demonstrates the idiocies of traditional customer-supplier relationships!  I've already sent it to one of my customers to "set the foundation for next year's contract negotiations." 

by BILL WADDELL

Before I went into consulting I was the VP in charge of the supply chain at a big consumer products company, and I used to have a pretty standard speech I would give to new suppliers and would be suppliers.  I told them that Walmart was the big dog at the end of the supply chain, and they set the rules.  As a result, I was not particularly interested in the suppliers wants, needs or policies. 

Walmart paid us in 60 days, so the suppliers would be paid in 60 days; Walmart accepted returns for just about any reason, so I would return their components when the goods came back from Walmart regardless of the reason; Walmart expected us to ship within a couple of days of the receipt of their order, so our suppliers had to provide the same lead times; and if Walmart gave us a 2% price increase, they would get a 2% price increase.  In exchange for all of us following Walmart's rules, Walmart would sell a tremendous volume of our product, which meant they would move a tremendous volume of their components.  The arrangement between my company and theirs was pretty much non-negotiable because our relationship with Walmart was non-negotiable.  Those were just the rules of this particular supply chain and they could take it or leave it. If they didn't like those rules, there were certainly other supply chains out there operating by different rules and they were welcome to go participate in one of them.

The underlying principle was that each participant in the supply chain had to increase their profits by improving their own performance – eliminating waste from their processes; and the players in the supply chain should not expect to become more profitable by taking advantage of each other.

There was always a great deal of howling and whining from the suppliers – especially the small ones, as well as from the big ones that had no concept of lean.  They wanted to operate within their own four walls in whatever manner optimized their business, and expected the rest of the supply chain to compensate for their limited capabilities.  Whether their inability to meet the terms was due to lack of size and resources, or due to parochial management, I had little sympathy.  You don't get to play in the big leagues unless you have big league capabilities – you don't get Walmart scale unless you have made the investment of effort and money to operate at that scale.

What prompted me to go on this particular tirade is an article about a company called Government Suppliers & Associates, which makes and distributes uniforms and so forth to government agencies.  They are formally protesting to the Government Accountability Office that the TSA is open to bids from Mexican companies, rather than buying strictly American.  At issue is whether NAFTA trumps "Buy American" in the law.  I say to Government Suppliers & Associates: So you have to compete with low labor cost producers? Welcome to the big leagues.  The 99% of American manufacturers that are not government suppliers wish they had someone in Washington whose skirts they could hide behind when challenged by foreign competition.

More significant, GS&A is complaining that the TSA"uniform contract bundled manufacturing, customer service, warehousing and distribution."  In other words, the TSA is looking for a comprehensive supply chain manager – not just a shirt maker.  GS&A's President, Mike Frisbey, is protesting that such a customer requirement is terribly unfair – that  "It's all designed to favor large business over small".  This is a common complaint from small manufacturers who want to make money in government supply chains, but will not or cannot provide the one stop shopping capabilities the government agencies often need.  He is looking to use the authority of the Government Accountability Office to compel his customer to allow him to work within the little business box GS&A has carved out for itself.

GS&A, and any supplier insisting that they should be allowed to define the scope and rules of their participation in whatever supply chain in which they would like to operate are deluding themselves.  That is akin to me demanding the right to play in the US Open Golf tournament, then demanding the right to play from the ladies tees because I am not good enough to drive from the pro tees. 

The customer calls the shots.  Any manufacturer believing that point is negotiable, or thinking they have some inherent right to do business on their own terms is doomed.  The tail is never allowed to wag the dog, and that is Supply Chain 101.

Yes, there must have been a conference I missed, because out of the blue I've been deluged with official letters from customers, large and small, that align nearly perfectly into two categories. 

The first is a desire to change payment terms from Net 30 to Net 60, and generally includes colorful and flowery language about "how we're all in this together" and "our success is your success."  Really?  So my small company providing an ongoing cash loan to a Fortune-50, instead of investing in improving processes, equipment, and knowledge, is a partnership?  What was my response?

"No."

I went on to explain that I wasn't in the banking business (especially these days!) and that there would be order entry delays if PO's had to be changed, and shipping delays if I put their Fortune-50 on credit hold.  I was tempted to ask why they were following the strategies of the Detroit Three and whether they wanted the same results.  I also suggested that any supplier who accepted Net 60 obviously had some extra margin, and perhaps there should be some pricing discussions.

The second category of letters has to do with "business continuity."  Sure, we should all be concerned about that.  But shouldn't we always and not just now?  Medical device companies more than most I suppose since it is more difficult to requalify suppliers.  In one case I am being "required" to provide notification of any changes to process, plant, or equipment… three (3) years in advance.  Yes, in this dynamic economic environment.  Look back twelve months to understand why that's impossible.  These days my crystal ball extends out a few weeks.  It must be the fancy smancy ERP systems those big companies have that are wiser than us mere mortals.  So what was my response?

"No."

After a few days have any of those customers responded to my refusals?  No again.  Which tells me this is just an exercise, probably an edict from on high.  Sure they'll suck in some suppliers that believe success is based on top line instead of long term bottom line.  And those supply chain characters will probably get rewarded for those random successes, reinforcing that this is a good policy.  The fruits of true long term partnership take longer to realize.

Customers can really have some strange ideas, and I guess these just follow that trend.  I remember only a couple years ago when a different Fortune-50 asked me to set up a "redundant backup manufacturing location" a couple thousand miles away from California.  They seriously, and I mean seriously, were concerned that at least my part of California would fall into the ocean some day.  I tried to explain that if that happened, a loss of my components would be the least of the world's worries.  They also didn't care that my sole source raw material supplier was just a few miles down the coast and had an actual view of the beach.

I do have one group of customers that are a bit more enlightened.  They all have their flaws, but they are trying.  For example, one is actually doing Net 10 to create a tighter relationship.  It works.  Another is improving overall communication, which means that formal notifications and such are no longer even necessary.

Sure a customer is a customer, but guess which ones I want to create long-term mutually successful relationships with.