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A de-facto supplier relationship

By Bijan D
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Bijan is a senior consultant and co-founder of Symphony Consulting, a management consulting firm located in Sunnyvale, California that specializes in sourcing, procurement and supply chain management. This article originally appeared in the Symphony quarterly newsletter.

It happens in subtle ways. An engineer orders a few samples from the supplier who just visited. Tight schedules force the buyer to order material from the first supplier he can find. A designer decides to call up a supplier she used at her last company.

While each of these may be a small first step, it often ends with the supplier’s part designed into your product or the supplier's product procured for internal use. A simple shortcut to find a supplier quickly often ends with a long-term problem for the company in the form of a mismatch with a key business partner. In turn, this leads to missed schedules, poor quality, obsolete parts, and higher costs.

These are scenarios that Symphony Consulting encounters in many client engagements. In most cases, we are called in to clean up a situation that has been created by rushing into a relationship. Unfortunately, by that time, most of the damage is done and the focus is on taking remedial measures. The irony is that not only are you potentially stuck with the wrong supplier, but now the goals that you were so adamantly trying to meet (e.g. high quality, quick time-to-market, lower cost) are at risk.

So how do you go about balancing due diligence with meeting short-term objectives?

Here are three simple approaches:

1. Spend time upfront vetting suppliers

Document your supplier selection process and obtain cross-functional buy-in. This is particularly important if you feel there is limited awareness in your company for the importance of due diligence in sourcing or if procurement gets involved too late in the game.

Generating an RFP (request for proposal), conducting site audits, negotiating contractual terms, and finalizing statements of work are not trivial tasks and need to be pursued with rigor. Incidentally, following a thorough process sometimes resolves mismatches because suppliers themselves may decline to bid on certain projects.

2. Determine long-term fit

Look wide and deep at your supplier’s capabilities and map them against your selection criteria.

How well does each capability match your stated goals? Do you prefer existing suppliers or technologies? If so, do the stakeholders know about them? Answering these questions requires that you spend the time upfront getting alignment internally. It also requires that you take time to understand the supplier’s value proposition and how it fits with your long-term plans.

Before you begin discussing price and availability, you should ask fundamental, basic questions to determine fit. Look at the supplier’s size, financial stability, business plans, and interest in your business. Later in the process, use site audits to validate the claims and commitments that suppliers have made in their proposals.

In a recent sourcing project, we eliminated two early front-runners because upon closer examination, we realized that their poor financial health would inhibit growth with our client's business.

3. Seal the deal before you award business

This means that you negotiate and finalize key contractual terms before you select the supplier. Do not let a low price entice you into rushing into a situation without understanding the overall risks of doing business. When you invest in tooling, order products, or initiate services, you lose the leverage that you need. You're putting the cart before the horse.

In fact, use schedule pressures to drive closure on contract terms that can tilt the playing field in your favor. Term sheets that are either binding or non-binding can be a reasonable temporary substitute in high-trust relationships to level-set management on both sides until the main agreement is finalized.

Keep in mind that strategic suppliers that provide you with complex products or services are difficult, and very expensive, to replace. That is why it is worth spending the extra time and applying the right level of scrutiny before going too far.

Strategic sourcing and supplier due diligence are among Symphony’s practices areas. If you feel we can be of help, please contact us at