BUYER MANAGED SUPPLIERS SYSTEM

I just came back from a two weeks working visit to a small company in Ci xi, Ningbo, China. Me and my colleague practically struggled more then 12 hours per day during the course of the visit to ensure a new product are manufactured to the specification and scope of our organization.

During the course of the working visit, we observed many first hand working behavior of the locals and No, i am not going to discuss the new product status and the local managements view here. What I am going to talk about is supplier selection!

As many buyers will attest to it that cost of material will be utmost importance to the final product cost of the final product to be sold by the company in the market. Unfortunately in most part of the world, the cost of the product is bench-marked against the quality of the product. Thus, the higher level of effort put by the producer onto the production quality and overall standard, the higher the cost of the final parts.

The cost areas can be in the area of:-

a) Material used and cost of the raw materials itself
b) Cost of production, example production cycle time versus the wages paid
c) Fixed assets overhead cost of depreciation
d) Quality department overhead
e) Overall factory general expenses and management overhead cost

We all have heard of VMI system where the vendor will managed the inventory system for their customers. I will like to introduce BMS system where the procurement division will managed the suppliers.

 The company we decided to engage for this new product development can be considered a very small family unit operation and none of the system you will expect them to have is non existent. So many will asked why the hell we choose them to develop a completely new and strange product for the global market?

Well, the reason is simple, COST.

However in this scenario, the easy part is they will have a much lower overhead compare to established company with the international system and overheads cost distributed. The hard part is how to managed an organization which is efficient in cost but the risk aspect on quality is high.

Many will argue that this is no brainier at all as when qualifying a supplier, we need to review the overall aspect on cost, quality, consistency in system management, delivery on time record and other social and environmental aspects. Why this now?

There are a number of reasons we did this:-

a) the overhead cost is lower and thus product cost
b) we able to tune them to our need as they are a small set up and the business proposed to them will be grabbed with two hands by the owner
c) managed the process flow system and asked for implementation
d) control the cost of production by setting up process output monitoring
e) ensure they meet all local legislation on environment and social responsibility
f) when come to price negotiation, we as buyer will have upper hand as we knew their costing in details
g) material specification and suppliers are selected on their behalf based on quality and cost

By managing in this manner, buying power in term of delivery, pricing and quality performances will be controlled and view from the buying office.

There are many small family units companies around the world, especially in Asia are awaiting to be explored in such manner and if your organization have the volume and purchased value, looking into a "junior" partner to help your company growth will be an excellent strategy.

However, when managing such strategy there a long term disadvantages such as:-

a) the supplier expanded their business due to higher turn over and they will able to secure other accounts to support their business, thus, need to be wary and close monitoring.
b) over reliance of single source buying if the product is successful and create a demand pattern out of expectation.
c) risk management aspect

To counter these disadvantages, a 2nd choice supply base will be needed to be secured and even if this will be slightly more costly, this benefit will bring long term stability to the supply base. Your 2nd choice partner will be a organization with larger set up and system in place and cost can be higher then your developed "junior partner".

Developing a second choice will avoid your organization been taken "ransom" and also ensure that comparison are available.

However to take note, developing in such manner, an important aspect will be the production facilities evaluation will be an important factor as well.

In BMS system, the role of the procurement and quality function will be key to success and undertaking these system in your company also require much ground work to be done. Your company is practically running the supplier operation including reviewing cost of raw material and components, checking and confirming production plan scheduling, quality measurement report which the supplier will handle and emailed to your quality department for confirmation and reviewing.

The closest you can compare this will be to outsourcing system but in outsourcing, the bulk of material will be provided by the principal company but in here, the supplier are genuinely producing the parts and the buying organization closely monitored it.