Should You Care If Your Suppliers Are Making Money?

By on August 28, 2019
Supplier and manufacturer working together

“We’re here for two reasons. One reason is that we’re committed to helping our suppliers improve their production process; the second is that we want to make sure that they’re making money.”

This is the unconventional response I received when I asked a consultant from a major car manufacturer what their goals were for their visit with my client, a small manufacturer that made headrests for their cars. The first reason they shared – to help improve work processes – made sense to me. The second – to make sure my client was making money – struck me as very unusual.

I have spent much of my career in a mass production world where the relationship between companies and their suppliers is contentious. It is common practice for purchases to be made through hard bargaining, the goal of which is to drive the price paid for supplies down as low as possible.

The typical line of thinking seems to be:

Will our suppliers make money after we drive the price we pay for their products as far down as possible? That’s their problem.

Will our supplier’s production processes allow them to deliver high quality products alongside our production processes? Again, that’s their problem. We don’t care how they do it, just that it happens.

These two statements seem incredibly naïve when viewed through the lens of Lean manufacturing.

When you aren’t worried about whether your suppliers are making money or not, you’re essentially saying you are willing to live with the possibility that a supplier of the parts and raw materials needed to keep your assembly lines running won’t be able to deliver.

When you aren’t concerned about your supplier’s production processes, you’re basically saying you are willing to blindly trust their ability to deliver high quality parts on time.

Both naïve and very destructive modes of thinking are outcomes of believing that production processes begin and end within the walls of a plant. Nothing could be further from the truth. A plant’s production processes are just one segment of a value stream that begins with suppliers and ends with customers.

The benefits of one integrated value stream

So, what is a “value stream?” A value stream is all the steps that suppliers of raw materials and parts must take in order to ensure that quality materials are delivered in the quantity needed to manufacturers of products on time so that quality products can be delivered to customers on time. Suppliers, manufacturers and customers are all components of one integrated value stream.

Integrated value stream

An integrated value stream benefits suppliers, manufacturers and customers.

Anything that fractures the smooth flow of this one value stream will result in low quality products and dissatisfied customers.

Fortunately, with the increasing influence of disciplines like Lean Manufacturing and Operational Excellence, more and more companies realize they have a vested interest in the vitality of the entire value stream, not just their segment of it.

However, mass production thinking still impacts the relationships between too many manufacturers and their suppliers. The accounting system devised by Alfred P. Sloan and others at General Motors from the 20s through the 50s still poisons the thinking of many manufacturers. Sloan, who was CEO, president and chairman of GM from 1923 until 1956, valued inventory the same as cash, leading to GM building up excessive inventory. This excessive inventory created bloated factories filled with many types of waste. Sloan also championed combative relationships with suppliers. He created a “just-in-case” mindset regarding the purchase of parts rather than Lean’s “just-in-time” perspective. Sloan’s behavior showed he believed GM’s value stream started and ended inside the walls of a GM factory.

Nothing could be further from the truth.

“Beat ’em down until you get the lowest possible price” thinking is also prevalent in purchasing departments because their bonuses are often based on getting the lowest possible price for the items they buy from suppliers. They operate in a vacuum all too often, not communicating with the engineers and operations professionals who could give them great advice on the quality of parts needed.

Lowest price and best price are two very different things. Lowest price thinking takes place in a vacuum; best price recognizes the single value stream.

Mass production vs. Lean thinking in supplier relationships

Here are key differences between mass production and Lean thinking as it relates to interaction with suppliers.

Mass production vs Lean

The key differences between mass production and Lean thinking.

Is exchanging financial information with suppliers a difficult step to take? Undeniably. Alarm bells ring when any company considers doing this. We are concerned that if our suppliers know how much money we’re making, they’ll want to charge more for what they sell us. Or, if they know how low our profitability is, they may want us to pay them up front before delivering supplies to us.

Why would any company do this? Because they’ve come to realize there is only one value stream and that their long-term profitability depends upon the health of every component of this value stream. And highly efficient value streams depend upon transparency. This transparency shouldn’t be feared. After all, your suppliers are partners, not combatants.

Should you be concerned about whether your suppliers are making money? You absolutely should. The future of your company depends upon it.

Want to learn more about how your organization can benefit from one integrated value stream? Check out our Lean transformation training and contact us with any questions.

About George Friesen

George Friesen serves as Business Practice Leader - Lean Manufacturing for the Workforce Solutions Group of St. Louis Community College. He has led the College's Lean business practice area since 2000. Prior to joining the College, George worked for Maritz Performance Improvement Company. Over the past 35 years, he has served a wide variety of Fortune 500 companies, specializing during the past eleven years in Lean Manufacturing, focusing especially on the 5S System, Lean leadership and thinking processes, Value Stream Mapping, and Lean team building. George is a graduate of Washington University (AB), Webster University (MA), and United States Air Force Flight Training.

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