Putting the squeeze on suppliers

As the economy continues to cool and companies look to decrease operating expenses, a tug-of-war is shaping up between large companies who want even their smallest suppliers to become e-enabled and many midlevel and small suppliers that say they do not see the benefit of adding an additional layer of infrastructure to the supply-chain process.

The battle is being fought one level removed from the ultimate customer and its major suppliers, pitting large suppliers and their production partners against each other. At the root of the push and shove is mounting pressure on suppliers to get connected to key electronic marketplaces and to have the smallest suppliers invest in even the most rudimentary electronic capability.

Awrey Bakeries Inc., for example, a baked goods supplier to restaurants and institutions, is being pressured to join at least two and possibly three major food service industry exchanges. The entry fees and set-up costs are a tough sell for a midmarket manufacturer such as Livonia, Mich.-based Awrey, says Marty Carrier, director of IT. “It’s a myth how efficient the exchanges are right now,” Carrier adds.

Carrier argues that an exchange makes sense for companies at a Fortune 500 level because creating a more efficient order system may eliminate 50 positions. But when a company has fewer than a half-dozen people in that department, you would have to eliminate one position to achieve savings, which is not easily done.

“You might free up some time, but it would be tough to be able to eliminate a whole position,” Carrier says. “It’s a dilemma.”

In an industry even larger than food service – automotive – a recent survey of tier-one automotive suppliers, doing an aggregate US$70 billion in sales shows they are pushing hard all the way down the supply-chain stream.

A survey completed last month by the Center for Electronic Commerce in Dearborn, Mich., found that 77 per cent of all the tier-one suppliers polled said that within two to three years they will select their production parts suppliers on the basis of their ability to do e-business with them. This is a dramatic 62 per cent increase over the current method of selecting suppliers.

Although purchasing agents surveyed expect 5 per cent cost reductions from adding an electronic interface this year, they expect savings to grow to 17 per cent in two to three years. Through focus groups, the survey found that procurement managers believe that the Internet is strategic because it can reduce costs, not because it’s trendy.

“We talked to people in purchasing at tier-one companies who understand e-commerce and we got the impression that it is no longer a matter to be ‘e’ for the sake of being ‘e,’ ” says Bernard Swiecki, senior analyst and co-creator of the survey for the Center.

Smaller suppliers don’t seem as convinced about e-business as their well-heeled counterparts. One supply-side player who requested anonymity wonders, like Carrier at Awrey, what the benefits of e-enablement to his company are.

“If you had one person, and one screen to look at for parts inventory, it is doable. But when you start multiplying by the number of products and the number of customers each with their own electronic solution, I don’t see how it is going to work,” the supplier says.

Down and Dirty

Nevertheless, with the downturn in the economy, especially in high-tech, processes that bring a quick and simple solution to old supply-chain problems appear to be moving ahead.

Todd Gifford, a principal at Dee Electronics Inc. in Cedar Rapids, Iowa, an electronics distributor that works with thousands of large and small suppliers, believes the benefits are too great to ignore. Dee set up a relatively simple extranet Web site for its smallest suppliers that are not using EDI (electronic data interchange), let alone newer e-commerce solutions.

“We tell our suppliers, ‘Don’t call us, don’t fax us.’ I just want the data, and without having to hand-input it,” Gifford says.

The critical supply-chain data, in the case of Dee Electronics and for most suppliers, is accurate confirm ship dates which the entire supply chain depends on – both upstream and downstream.

Having that data sent electronically allows Dee to do more of a mathematical and automated formulation to determine where the problems are and get people involved in solving business problems, rather than working at the level of trying to read a handwritten fax.

One e-business analyst says in many cases, might makes right, especially when it doesn’t cost the big guys anything.

“From the large manufacturers on down, everyone is pushing down the responsibility because they can do that without having to make the investments [in e-business] themselves,” says Thilo Koslowski, senior analyst in Gartner Inc.’s e-Market Intelligence group in San Jose, Calif.

And despite the rising expectations of the major suppliers, the smaller suppliers are not happy. Speaking on the promise of anonymity, which is understandable in an industry that is well-known for its willingness to take reprisals, a small auto industry supplier balked at the need for e-enablement.

Deciding on minimum and maximum amounts is something that is done by all suppliers, but hourly views into the assembly line, for example, is just not something that makes sense, the supplier says.

“You’re not going to take a box of 50 clips and deliver them six times a day to the automotive supplier. There are weight considerations, run considerations, shipping considerations that have to be factored out,” the supplier says.

Suppliers also shake their heads in disbelief at their larger customers’ unwillingness to accept that in many cases EDI, which already has a long track record, handles much of the same “just in time” forecasting capability. To participate in electronic marketplaces, suppliers have to convert their data formats to XML and use the Internet for connectivity.

“EDI gives the supplier a 6-month window, a weekly, daily, and just-in-time schedule. What extra benefit does this provide? We will interface [with e-commerce] if we have to, but we can’t champion the idea,” the supplier says.

Dee Electronics’ Gifford agrees that EDI for high-volume, repetitious transactions works flawlessly. Gifford likes his extranet as well, because it is, as he puts it, a “sweet spot” between traditional EDI and those customers that can’t do EDI yet. But Gifford also believes that a reporting system based on XML would add new dimensions and would capture a great many more transaction sets.

“EDI is somewhat defined. If we want to exchange our catalogue with a customer, EDI would not really handle that well,” Gifford says.

Rebecca Thomson, vice-president of marketing and product management at FreeMarkets Inc., an e-procurement online exchange with a customer base that includes some of the world’s largest companies, including General Motors Corp. and Alcoa Inc., believes that many of the smaller suppliers just don’t see the big strategic picture.

Part of the drive is to create a large market for sourcing goods, and to do that there has to be some level of electronic connectivity, according to Thomson. The cost savings come from reducing errors.

“The tier-ones need to integrate operations into an Internet-based supply chain,” Thomson says. “Savings come from cleaning-up processes. It is hard to quantify in hard dollars, but this is a big issue.”

But Koslowski at Gartner does not believe that exchanges are necessarily the right solution for even the larger companies because a lot of the tools that are offered by the marketplaces are no longer unique. These tools can be used on an individual company basis rather than over an exchange to leverage efficiencies with their own suppliers.

“Why do you want to use the same tools your competitors are using? It’s important to have their own e-application as a competitive advantage,” Koslowski says.

Marshalling Forces

Although Koslowski’s opinion is reinforced by the actions of some of the largest companies such as The Boeing Co., Cisco Systems Inc., and Intel Corp., which use their own electronic solutions for collaborative engineering, there is not a doubt that many companies are using exchanges for procurement.

In industries such as automotive and aerospace where product design plays a key role in the procurement process, sourcing a single part can take as long as a year, FreeMarkets’ Thomson says.

For example, a custom-designed part requires an engineering group to spec it out. The specs are then handed off to the sourcing or purchasing department. The purchasing department is responsible for sending the specs out to suppliers as a RFQ (request for quote). The suppliers in turn, depending on the complexity of the part, need three weeks to four months to get back on the RFQ. Then the purchasing along with engineering departments have to make sure everyone is on the same page.

“We had 20 suppliers actively bidding on 4,000 parts over the space of four hours, and there were 721 bids. The fact that you can iterate that quickly is pretty phenomenal,” Thomson says.

Thomson believes the benefits to smaller suppliers are to be found in finding a wider market for their products. Some may follow the route fictionalized in a recent television commercial that depicted a small producer of bananas outbidding a giant food conglomerate for business. The giant food producer, totally befuddled as he watches the price of produce drop, shouts, “How can someone sell bananas at cost?” while the camera switches to the banana plantation where one farmer sits at a desktop PC taking orders.

Thomson believes that this scenario is where the benefits become a reality for smaller suppliers as well.

“When smaller suppliers understand the competitive nature out there, instead of saying, ‘I can’t be competitive,’ they can say, ‘What do I need to do internally to compete in a global market?’ We have had many suppliers who participated as suppliers and then become our customers,” Thomson says.

The fact is that in many industries, both multibillion-dollar publicly traded companies and little mom-and-pop companies can both participate in e-commerce. And some believe that at the end of the day a cooperative effort will be required.

“You have to find a way to connect them all up and drive applications that the whole industry can afford,” says Tom Baird, vice president of new ventures at San Diego-based Reynolds and Reynolds, a supplier to the auto industry with multibillions of dollars in annual sales.

Awrey’s Carrier is also optimistic. He believes that everyone benefits when the supplier can watch the inventory levels and make deliveries without the customer getting involved. “In a perfect world if our systems are linked, as soon as our schedule changes an order is sent to the supplier.”

In two to three years all actions will generate from one source, the ultimate or end customer, Carrier says. “That is what we are all shooting for.”

Expected Cost-reduction Impact of E-business


Engineering, product design: 4.0 per cent – 18.0 per cent

Procurement: 7.0 per cent – 16.0 per cent

Quality assurance: 3.0 per cent – 19.0 per cent

Average: 4.7 per cent – 17.7 per cent

Note: Survey consists of responses from 46 first-tier suppliers to the auto industry with the highest North American automotive sales. Responses represent total sales for 2000 of US$70.2 billion. Average respondent had sales of US$4.4 billion. Each respondent managed a supply chain consisting of an average of 1,303 suppliers.

Source: Center for Electronic Commerce

Importance of E-business

Do you select any production-parts suppliers on the basis of their ability to do e-business with their suppliers?


15 per cent – 77 per cent

Importance of Doing E-business in the Following Categories


Demand planning and management: 2.4 – 3.4

Engineering design: 2.5 – 3.2

Procurement: 2.9 – 3.5

Average: 2.6 – 3.4

Note: Rated on a point scale of 1 to 4, with 4 being most important.

Inventory Management

It seems like nobody wants to pay the freight, literally. As companies look to reduce inventory costs and carrying charges, which typically add 15 per cent to the cost of goods, they’re trying to find ways to shift the responsibility for holding inventory onto their suppliers.

Certainly companies such as Dell Computer Corp. in high-tech and Wal-Mart Stores Inc. in retail have elevated inventory management to high art. Unable to say no to the customer above, more companies are also pushing down on the supplier below.

Part of the problem stems from who holds the “safety stock,” as it is called. Prior to e-business, most companies maintained a 15 per cent to 20 per cent coverage in whatever their product was just in case their customers needed more product in a hurry or there were an industry shortage.

An automotive supplier who requested anonymity notes the expense in more systems and workers.

“[The customers] want someone else to monitor their inventory levels. And what are you going to do if more and more suppliers insist you use their system? I’ll have to hire another guy to watch the screen,” the supplier says.