Return to the handbook index.

SUBJECT: Supplier Requirements

ALPHANUMERIC IDENTIFIER: GA

BRIEF DESCRIPTION: A major component of supply chain management involves selecting suppliers who are aligned with the customer’s overall corporate strategy. Translating the business/market strategy into specific vendor requirements is an important part of strategic sourcing.

KEYWORDS: Supplier Requirements Purchasing Strategy Sourcing Vendor

OVERVIEW:

Many companies dive into supplier selection without a strategic plan. Historically, the focus has been price, price, and price. Today, companies are realizing the importance of cultivating the right supplier partnerships to reduce total cost while obtaining the best possible product and service quality. Supplier requirements for each component can only be determined after examining the component’s relationship to the overall business strategy. Two important relationships are the purchased part’s influence on company results and its influence on purchasing risks. Before describing specific requirements based on corporate strategy, all suppliers should meet a few minimum requirements. These include:

1. Financial stability – Customers should be confident that their supplier is strong financially.
2. Strong references – Customers should check supplier references to ensure that minimum standards of cost and quality are met.
3. Capacity – Customers should understand the production capabilities of suppliers.
4. People – Customers should expect strong working relationships with their suppliers.

Once a list of potential suppliers are determined using the minimum requirements listed above, a specific sourcing strategy should be developed for each component. One way to determine the specific sourcing strategy is to ascertain the component’s influence on corporate competitiveness and purchasing risk. This relationship can be judged by asking the following questions:

Corporate Competitiveness

1. How does the component influence the overall cost of the finished product?
2. How does the component influence the overall product/service quality?
3. How does the component influence the finished product delivery times?
4. How does the component influence the finished product differentiation?

Purchasing Risk

1. Does the supplier have bargaining power over us?
2. Are substitute components available?
3. How intense is the rivalry within the component industry?
4. What are the barriers to entry within the component industry?

After answering questions like the ones above, sourcing strategies start to emerge. For example, if the component has a strong influence on a finished good’s success and the purchasing risk is high, then strategic partnerships make sense. However, a component with a weak influence on the finished good and low purchasing risk might be purchased with open market transactions. These opposite strategies result in some very different vendor requirements:

Partnership Strategy

1. Long-term contracts
2. Continuous quality and cost improvements
3. Supplier reductions
4. Informal agreements
5. Low transaction costs (i.e. EDI, intra-nets, etc.)
6. Technical assistance

Open Market Strategy

1. Competing vendors
2. Price concessions
3. Standardization
4. One-stop shopping

It is important to remember that sourcing strategies can fall between these two extreme examples. Additionally, components undergo changes in importance and purchasing risk over time. Sourcing strategies must adapt to these changes in order to remain current. With competition intensifying in many industries, manufacturers are turning towards supply chain management as a way to surpass their competitors.

REFERENCES:

• Selecting a Supplier Strategy, Wayne L. Douchkoff, Executive Vice President Professionals for Technology Associates, Inc.

ACKNOWLEDGEMENT: This is a March 29, 1999 revision by Gene Goodson of an assignment for OM742 contributed by XXX Kamdar.