MANAGING IN AN UNCERTAIN ECONOMY: BEST PRACTICE: SUPPLIER STRATIFICATION
In the November post on Managing in an Uncertain Economy. Texas A&M’s Dr. Barry Lawrence and his team discuss Best Practices in Customer Stratification.
Managing in an Uncertain Economy Blog:
Distributors choose a customer type, the “core customer” as described in earlier blogs, and then arrayed resources to meet that customer’s needs. In the process, the distributor “invents” itself and determines what investments will be necessary to be successful (inventory, warehouse, equipment, human resources, etc.). One of the earliest and most important decisions is supplier selection.
Suppliers are selected based on their ability to serve the core customer. In the beginning, this is a very positive relationship with the distributor seeking to delight the customer, and the supplier seeking to find new ways to penetrate this new market. Over time, however, the relationship matures and sometimes goes awry. Suppliers may want distributors to broaden their offerings or buy in volumes inconsistent with what the core customer needs, often leading to excess and obsolete inventories. In other cases, supplier performance may decline or not keep up with the market, leading to customer service failures or a need for more inventory investment.
Many best practices have been developed in Supplier Relationship Management, but they are often misdirected in practice. One distributor maintained what the staff called a supplier report card (a well-known best practice). When asked how they used the report card, they said they took it into their pricing negotiation meetings each year with the supplier. This is not a report card; it’s a baseball bat.
The issue surrounds the basic definition of the distributor’s role in the supply chain. Some believe the distributor is the supplier’s customer, while others say the distributor is the supplier’s partner. The distinction is important. A customer is one to be served; a partner collaborates for the betterment of all. A customer seeks to optimize his or her own costs and operations without regard to the supplier’s needs. A partner, on the other hand, acts as the channel to market for his or her key suppliers and facilitates the success of both.
Returning to our original premise, the distributor selects suppliers based upon their ability to support the needs of core customers. The most significant (strategic) suppliers should carry products and skills that set them and the distributor apart. These suppliers must be partners. The ones that fill the small holes in the product offering and are only differentiated by price and by not product features or quality are vendors. To them, the distributor is a customer.