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Wednesday, September 15, 2004

Building The Advantaged Supply Network - Via S&B

There's nary a manufacturer on earth that isn't on a crusade to control costs in their supply chain. Typically, buyers solicit bids from suppliers for every new part or materials program, and then aggressively negotiate to drive down the prices. But companies tell us the "piece-part" prices they're paying still aren't as low as they'd like, nor are they satisfied with the level of other costs throughout their supply chains. There is a better way: A few companies, often leaders in their industries, are building what Booz Allen Hamilton calls an advantaged supply network. In this model, buyers collaborate with their suppliers to attack waste in the supply chain, to coordinate business strategies, and to jointly manage resources for competitive advantage.Efficiency and innovation in manufacturing are gained through such cooperative buyer–supplier strategies as collaborative product and process planning, integrated engineering and design, and other forms of cooperation that lower total costs, decrease time to market, and improve the quality of the entire supply base’s output.Toyota created an advantaged supply network that has given it a significant edge in per-vehicle cost of production over U.S. rivals, half of which comes from reduced material, labor, and warranty costs. Because of its approach, Toyota has detailed knowledge of the costs of its suppliers’ technology and manufacturing processes, and a significantly more flexible global manufacturing system. Just as important, Toyota’s excellent record of new product launches and high product quality have given it the ability to charge higher prices for its cars, an advantage that will take a long time for its competitors in the mass-market automotive sectors to match. Interestingly, Toyota does not always get the lowest piece part price. BAH has outlined eight critical benchmarks and nine critical management principles that would help in building an advantaged supply network.
As competition intensifies, manufacturing companies that stick with the confrontational and transactional pricing model will find it harder and harder to squeeze out costs. Rather than worrying today about giving up a little margin to a supplier in the pricing of a specific part, it is far more cost-effective to develop deeper knowledge of suppliers’ strengths and weaknesses — and help them to improve their business.The current bidding model has its merits, but it will not, in the long run, be as beneficial as the advantaged supply network model for managing price and driving innovation.

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