Strategic partners can be very important to your business. By ignoring this opportunity to gain significant resources may limit your growth and learning. I was not naturally a partnering kind of entrepreneur and wanted control, to call all of the shots have 100% equity.
However, when it came time to satisfy customers, I was willing to seek out external resources to give them what they wanted, when they wanted it.
Understanding what is most important for your customer
In my business, lead times for the mechanical components that our customers bought from us were critical for their final assembly process step. They had MRP computer systems that relied on our lead times to schedule their orders with us. We built parts for them based on their purchase orders and could not afford to keep finished goods inventory which would tie up scarce working capital.
Our customers would provide us very little in the way of accurate forecasts for their demand. Of course, this became a huge scheduling problem because we received orders that did not take into account our capacity to produce. Late deliveries of our $20 part would cost a $5,000 circuit board to be late…totally unacceptable to them.
Being a supplier to OEM’s, we found they very seldom had good estimates of their own customers purchases from them. They had the same aversion to holding inventory for their own customers. Contracts were difficult or impossible to secure and their “blanket” purchase orders had no real “take or pay” component to them. They did not want to hold inventory any more than we did.
Changing the paradigm with external resources
We solved this with an “infinite capacity” production model. For every operation in the factory, we developed strategic partners who had similar capabilities. We would source 25% to 50% of our base capacity with these partners. We set the pricing for these “buy vs. make” items, paid them in 7 days taking a 2% discount, gave them fixtures, inspection guages and forbade them from going directly to our customers.
We never put anything in writing, after all, they were mostly local vendors who we knew well. Most were small shops, entrepreneurs within 30 miles of our business. We put nothing in writing, just a good understanding of how we were going to do business.
The benefit was significant cash savings by reducing investment in equipment and process capacity. We did beef up our incoming inspection process and pushed down the outside vendor ordering, purchasing and scheduling to the department level so each manager could “flex” their own schedules and be fully responsible for their own strategic partners.
Transparency with customers
Customers were aware of the system and reviewed our quality systems carefully for how vendors were trained, provided updated process documentation and inspection criteria. Since our outside service providers replicated what our own internal processes were, there was some extra effort needed to insure they ran in parallel.
We were very seldom out of capacity to serve ebbs and flows in incoming orders! During downturns in demand, we just sent less to the outside resources. The “first time”, critical quality or fast turn jobs we tended to keep in-house, outsourcing higher volume repetitive jobs. Materials and components were “kitted” and arranged for daily pickup and delivery. The MRP system communicated to our partners with automatic daily emails of open orders and 1-2 week out forecasts.
This was not done for cost reduction purposes and customers never pressed us for this. In fact, it may have cost us a bit more, but we never had to say “no” to our customers on their delivery requests, even their emergencies, and were rewarded with more business. It was a huge competitive advantage.
We tried to be sure that our partners never had more than 25% of their business with us to avoid undue concentration to insure that their own business had the flexibility to respond and to handle the inevitable dips in demand.
Partnering with component suppliers
We tried a different kind of partnering with our component vendors. Since they called on the same customer base to get their parts specified into the “Bill of Material,” there was a lot of crossover, and one primary supplier in a category was selected to “take with us” on sales calls and share prospecting leads. The sales staff was trained and provided basic technical support. It resulted in generating additional business, and customers appreciated the joint effort and endorsement of these partners.
Unlike the “service” and “assembly” vendors, a few of these component suppliers developed an intimate understanding of our products and in a few instances decided to “compete” with us by developing their own products. Careful selection and more formal agreements were developed to prevent this. It was a good lesson to learn about “trust”. The fabrication and assembly suppliers were much less capable of “integrating forward” with customers who demanded a robust quality system and were hesitant to add new vendors to their own supply chain.
Flexible staffing with employees
Another variation on being able to offer “unlimited capacity” was to utilize temporary employees on a daily basis based on work load. Initially, this seemed like a very expensive option and the providers of “temporary” help, where not always reliable. Developing some best practices minimized the variations.
A number of vendors provide this service and each sources differently. Selecting only two vendors to work with stabilized the situation and allowed temporary workers to be pulled from different geographic locations without overlap. From time to time, an additional provider was brought in to “test” their services and benchmark the existing suppliers. Negotiation on rates, insurance coverage, transportation, placement, overtime and weekend work could all be worked out in advance.
It was clear to the providers that our expectation was to hire some of these temporary workers as full time employees and we always able to negotiate a waiver to the “placement fees” as a condition of doing business. Temporary employees knew that there was a track record of hiring from the temporary worker pool, and since the base pay for internal employees was greater than minimum wage, it would be at a higher rate for them. By the time a hiring happened, there had been a full opportunity to evaluate skills, attitude and dependability.
All were included in company-wide communications and not treated as “second class citizens”. Inevitably, when orders declined significantly, this tier of resources were cut back first. Newly hired, permanent employees with recent hiring dates knew that the temporary employees would be laid off first, a measure of protection for them in tough times.
Some of the temporary workers never accepted repeated requests to hire them. Each had their own reasons for declining, but it was clear that they wanted to have the “flexibility” to say no and not be held to a fixed weekly and annual schedule. This system worked equally well for more technical skills like quality and programming and even in a few cases for managerial positions on the 2nd and 3rd shift supervisors.
When the largest customer “demanded” that we support their Asian operations, they recommended a vendor in Singapore that they were using for us to partner with. Since the partner was already “approved” in their system, this partner was very aware of the customer’s quality requirements, shipping logistics and their local buyers.
As with our other “outside-vendors” we provided the components in “kits” and they did final assembly according to our previously approved process documentation. To further reduce lead-times involved in shipping, we set up common components in a caged and audited inventory location at their site. As with other vendors, we established the pricing targets which they met or exceeded.
Everything went smoothly for 4 years until the customer changed the rules to “we must have a presence in China,, Singapore is not good enough”! Upon careful reflection and our experience with component supplier partners, we decided to form a company in China, a WOFE (Wholly Owned Foreign Entity), no partners and not a joint venture, which proved to be a great decision supported by all our Asian customers.
Always being flexible, customer focused and willing to adapt to conditions gave an edge over competition and maintained trust and loyalty over the years. Without our willingness to work with strategic partners, customers would have viewed us as a “regional” vendor unable to “flex” with their needs.
Feel free to share some of your own best practices or experiences in dealing with these issues in the blog comments. I encourage comments and dialog, allowing all to learn from both my views and the views of others – a virtuous learning cycle. Jump right in!