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May 24, 2012
strategic insight | Sourcing
But can they deliver?
Conventional wisdom says buyers look mainly at price when they go to choose suppliers. Yet many place heavy emphasis on delivery capabilities as well.
By James A. Cooke
When it comes to sourcing products, parts, or materials, some companies choose their suppliers strictly on one basis: price. Given the current flat economy, that's probably no surprise. These companies are likely under enormous pressure to hold down supply chain operating expenses, and that starts with procurement.
But for many other buyers, price is not the sole concern. "I would say in most cases, cost is a very important consideration, but it's not the only consideration in picking suppliers," says Kumar Venkataraman, a consultant with the firm A.T. Kearney.
As for what other factors might come into play, that varies all over the map. Sometimes, it's the availability of value-added "extras," Venkataraman says. But often as not, one of the biggest considerations will be the supplier's logistics capabilities-that is, its ability to get the product into the hands of the buyer at the agreed-upon time.
"Where you don't have buffer inventory, delivery is important," says Simon Ellis, a practice director for global supply chain strategies at the firm IDC Manufacturing Insights. "If being late with a delivery causes the downstream process to completely stop, then evaluation of the supplier on this basis [takes on enormous importance]." In those cases, delivery capabilities will rank right up there with price in determining which supplier gets the contract.
The extent to which logistics factors into the supplier selection decision has a lot to do with the buyer's type of business. Among consumer goods manufacturers, where it's common practice for customers to take control of their shipments at the seller's dock, buyers won't be too concerned about delivery capabilities. But in other types of businesses, it's critically important, industry experts say. Here's a look at some of those industries:
- Construction. Alix Partners consultant Foster Finley notes that builders typically require the delivery of accessory items like forms and bar supports at a precise time during the construction process. Because builders often coordinate different crew types on a large construction project, they can't have workers who are paid by the hour standing around idle. "If cement trucks are coming en masse and the crew prepared, you have a real problem if the accessories [like forms] are not there," Finley explains.
For that reason, Finley says, builders often give a lot of consideration to suppliers' delivery capabilities during the selection process. In addition, he says, many builders will incorporate a clause into their supplier contracts that provides for a penalty if a delivery failure idles a work crew.
- Food service. Because restaurant chains need a supply of fresh milk, bread, produce, and meat, they depend on timely deliveries from their suppliers. That's particularly true for American restaurateurs opening up operations overseas. In Asia, for instance, American restaurants must import non-native food staples like milk and bread. In such cases, logistics capabilities can well determine the choice of supplier, according to Finley.
- Biotech. Finley reports that as clinical trials for new drugs migrate from the United States to countries like India, China, and Brazil, more pharmaceutical and biotech concerns are evaluating suppliers on their ability to make deliveries. Because tissue samples and ingredients like chemical reagents often have short shelf lives, it's crucial that point-to-point deliveries take place on the targeted date and time. He notes that pharmaceutical companies also place a high premium on tracking and pickup performance in choosing suppliers.
- Defense. With a few exceptions, the U.S. military uses civilian providers for such items as food, munitions, fuel, and equipment. The ability to deliver those items precisely when required to troops in the field plays a major role in provider selection. Finley notes that "because the military is not in the habit of passing advance information on to a civilian contractor" (as it could compromise mission security), a supplier has to be in position to fill orders swiftly without any advance notice.
- Automotive. Logistics capabilities play a big role in supplier selection for original equipment manufacturers (OEMs) that want parts delivered in sequence to their factories, a practice common in Europe. Simon Bragg, a principal at the U.K.-based consulting firm SCI3, reports that many OEM contracts are structured so that if the buyer is forced to shut down an assembly line because the supplier failed to deliver parts on time, the supplier pays the cost of lost production. The amount is typically negotiated each time the contract gets renewed.
- Online retailers. Many e-commerce merchants—like those specializing in flowers and gift items—rely on contract suppliers to fill customer orders and handle delivery. In the case of flowers, for example, the online retailer will contract with a local florist to pick, pack, and ship the order. So it stands to reason that these merchants would seek out suppliers that can make deliveries as promised, especially since customers tend to wait right up to the deadline to place orders. "The workload becomes difficult to manage since we, as consumers, are comfortable waiting until the last minute," which creates a spike in order volume, explains Finley.
At the moment, delivery capabilities are less a concern for traditional brick-and-mortar retailers than for those engaged in e-commerce. But that could soon change. Many experts believe that traditional retailers will start offering home deliveries as a way to defend their turf from online merchants. If that happens, they too will likely begin factoring suppliers' delivery capabilities into their sourcing decisions. "We see tremendous growth in home delivery for retailing," says Venkataraman. "And when it comes to home delivery, logistics capability can make a difference."