June 1, 2005
By Darren Dolcemascolo
The traditional purchasing model has buyers and suppliers as adversaries or at least competitors. The supplier is trying to bid just low enough to get a contract while the buyer is looking for the lowest price. The buyer continually is applying pressure to the supplier, and the supplier has no way to meet their demands without sacrificing something. Ultimately, at least one of the organizations loses. However, the lean buyer-supplier model is one of cooperation. The buyer and supplier are partners. If the buyer succeeds, the supplier succeeds. What does such a relationship look like?
Entering an outsourcing relationship must create value for both the supplier and buyer. To accomplish this, it is important that the supplier be given the tools and incentives to succeed. First of all, “open book” or transparent costing must be in place. That is, the buyer should be able to know how much it costs the supplier to produce components. The buyer’s goal is no longer to maximize its own profits and minimize the profits of the supplier. Instead, both organizations must work toward increasing total value.
An outsourcing contract need not specify the pricing on each item that the supplier will provide; it should specify the method by which prices will be determined. The buyer and supplier need to gain agreement on pricing. Initial pricing can be based on supplier cost plus a reasonable % profit. Generally speaking, pricing on existing products should be expected to decrease. The buyer must challenge the supplier to decrease pricing through productivity improvements, and some form of gain-sharing should be specified.
The buyer must ensure that the supplier has the tools to accomplish such improvements. A lean organization must help its suppliers get lean by assisting them in activities such as:
Value stream mapping training and implementation.
5S training and implementation.
Kaizen Events focused on Cellular Manufacturing / One Piece Flow, TPM, Quick Changeover, and other basic lean tools.
Setting up kanban systems.
If an organization makes such investments in its suppliers, it will build an environment of trust and will create the necessary conditions for its suppliers to succeed. If an organization’s suppliers are successful, its supply chains will be successful: overall lead time, inventory, and costs will decrease.
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