Avoid the Pitfalls in Supplier Development

As manufacturing firms outsource more parts and services to focus on their own core competencies, they increasingly expect their suppliers to deliver innovative and quality products on time and at a competitive cost. When a supplier is incapable of meeting these needs, a buyer has three alternatives: (1) bring the outsourced item in-house and produce it internally, (2) change to a more capable supplier, or (3) help improve the existing supplier’s capabilities.

All three strategies can work. The choice often depends on price, volume, or the strategic nature of the procured item. For low-value-added, nonstrategic commodities, the cost of changing to a new supplier is low, and switching may be the best option. At the other extreme, when an underperforming supplier provides an innovative product or process technology (that may be of sustainable long-term advantage to the buyer), the buyer may wish to protect this potential advantage and bring the work in-house by acquiring the supplier. In those cases that lie between these two extremes — and even at times including these extremes — the best option may be “supplier development.”

We define supplier development as any activity that a buyer undertakes to improve a supplier’s performance and/or capabilities to meet the buyer’s short-term or long-term supply needs. Buying firms use a variety of activities to improve supplier performance, including assessing suppliers’ operations, providing incentives to improve performance, instigating competition among suppliers, and working directly with suppliers, either through training or other activities.1

Supplier development requires both firms to commit financial, capital, and personnel resources to the work; to share timely and sensitive information; and to create an effective means of measuring performance. Thus, this strategy is challenging for both parties. Buyer executives and employees must be convinced that investing company resources in a supplier is a worthwhile risk. Supplier executives must be convinced that their best interest lies in accepting direction and assistance from their customer. Even if the two companies mutually agree that supplier development is important, success is not a foregone conclusion.

Although difficult, supplier development can be an important “cornerstone” in the deployment of a truly integrated supply chain. The average manufacturing firm spends over 50 percent of its revenues on purchased inputs.2 With companies continuing to increase the volume of outsourced work across industries,3 this percentage is likely to rise.