Two ways to lower supply chain costs—which is right for you?

If you’re looking to cut manufacturing costs, should you cut a deal with your current supply chain partner or find a cheaper supply chain partner? This article discusses the pros and cons of each option and offers suggestions to help you in your decision-making process.

Your manufacturing milestone: Your first-to-market product is being undersold by fast-followers and you need to find a way to cut costs. And now you have a decision to make.

Should you work with your current supply chain to lower costs or should you find a cheaper supply chain partner?

Factors in your decision:

• Cost of conversion—In addition to implementation costs, consider the potential cost of production gaps, scrap and rework errors and overtime labor costs.
• Risk of change—Can you handle the risk of making a big change to your supply chain?
• Effectiveness of your new product introduction process—Does it make sense to work with your current supplier to improve this process for future releases?
• Supplier availability and resources—Does your current supplier have the bandwidth or desire to help you with a cost-reduction effort?
• Lean, Six Sigma, 5S, TQM—Have you already implemented one of these cost-cutting business strategies, or is there potential to save money by improving your internal processes?

Weigh the options before making a decision

Option A.

Reduce costs with your current supplier

Option B.

Find a lower cost supplier.

Option A: Reduce costs with your current supplier

When this can work for you:

• You will be introducing new product lines with similar assembly requirements in the future, and can flush out production-related issues for them now
• You can potentially cut costs in other places by implementing lean initiatives throughout your business and supply chain
• Your supplier has bandwidth to reduce costs and is willing to work with you
• A large change is too risky for you at this time
• You are mid-production and can’t afford any setbacks or delays

Potential Benefits	Risks
Minimal risk	Your supplier may be unwilling or unable to cut costs
No surprises.	There is less opportunity to innovate
Leverage an established partnership	You may be missing out on a chance to revitalize your business
Opportunities to optimize for future release and a baseline for improvement
Available resources to focus on quality and governance issues

Adaptation is safer than starting from scratch

Evolution is safer than revolution, so in many cases, working with your current supplier is the least risky and most efficient way to reduce costs. Although it may be tempting to start fresh with a new supplier—especially if there has been tension over decreasing profit margins, pursuing a whole new strategy can be hard to pull off smoothly.

Leverage your current partnership to cut costs

If you have had a good relationship with your supplier you can leverage it—and any other learning experiences you’ve had with them—to refine your production methods without disrupting business. It might be easier than you think to reduce costs with your current supply chain because they are invested in your success. Since they depend on the money from your orders, they have some natural incentive to help keep things running smoothly.

Establish a baseline for improvement with your current supplier

Working with your current supplier also gives you the opportunity to pursue cost-reduction sharing. If you’ve been with your current supplier for a while and know their costs, you can quickly establish a realistic baseline for improvement.

Avoid production stoppage by staying with your current supplier

Moving production to a new supplier can be a headache. There will be various quality and governance issues you need to sort out, and it may take longer than you think to end things delicately with your current supply chain—especially if you will be running multiple supply lines over multiple products. You may also be surprised by the level of management intervention and resources required to get everything set up. If your current supplier is willing to work with you, cutting the ties may not be worth the hassle.

Will you like your new supplier’s new ideas?

Lastly, a new supplier means new ideas and surprises along the way—for better or worse. Will the new supplier’s ideas mesh with yours? Will you be able to resolve problems quickly enough to keep the line moving? In the long run, the only way to avoid the headache of sourcing, managing and problem-solving with a new supplier is to stick with your current supplier. And if you demonstrate your loyalty to your current supplier now, it may help you if you need to negotiate additional price cuts down the road.

Option B: Pursue a new outsourcing strategy

When this can work for you:

• You are well established and have a highly mature product
• You are at a stable place in your company and product life cycle
• Your current supplier is unable to unwilling to cut costs any further
• Your team is up for a challenge and can put additional resources into change management
• You understand how your product is designed and manufactured well enough to explain it to a new set of vendors
• There is little opportunity to cut process costs internally by adopting Lean, Six Sigma, 5S, TQM or other strategies
• You have access to a competitive supplier landscape where sourcing is not prohibitive

Potential Benefits	Risks
Kick bad habits to the curb	Increased risk of production stoppage
See real change	Decreased stability
Demonstrate to other suppliers that you’re serious about cutting costs	New and unexpected problems to manage
Find a supplier in a more ideal location, with better technology	Additional resources needed to source, manage and problem-solving with a new supplier
Increase your ability to innovate	Potentially burned bridges with your old supplier
	Your supplier may be unable to help you cut costs

Although it is tempting to tough it out with your current suppliers to maintain stability, there are some situations in which finding a new supplier is the best bet. For example, if your margins have been steadily decreasing and your supply chain has already made all the cuts they can, there isn’t much you can do to improve your current situation without a major change.

Your supplier may not be motivated to help you

Additionally, if your suppliers work with larger clientele, and you are a “small fish,” it might be more difficult to get what you want out of a continued relationship—especially if your supply chain doesn’t seem to care about your business. Investing more time and money into a partner relationship only makes sense if your partner is willing to put in their fair share. If you don’t have the size, clout or relationship to get your supplier’s attention, you may not be able to implement the changes you want.

Prove you’re serious about cutting costs

Even if you are decently satisfied with your current supplier, you may want to consider looking into other options. After all, introducing a new supplier may be a great way to get the message to your old suppliers that you are serious about cutting costs—and may even convince them to put more effort into streamlining your production.

Take your business to the next level

By moving to a new supplier, not only is there potential for monetary benefits, but you can improve your business in a variety of ways. If you take the time to shop around and find a more tech savvy supplier, you can utilize their new technology and equipment to speed production, and get a more competitive edge. Additionally, if you find suppliers in areas where the cost of labor is much cheaper, you might be able to save money without making too many dramatic changes to your process.

Create competition in your supply chain and get the best deal

You can create greater competition in your supply chain and stronger options for sourcing by increasing your supplier network. If suppliers are competing for your business they may be more willing to expose hidden margins that your current supplier may not be telling you about.

Drop dead weight and take advantage of an opportunity to innovate

Lastly, starting fresh with a supplier can breathe new life into your business. When you are starting something new, you are forced to look at your status quo operation and refine it as you deploy with the new partner. In some cases, the new supplier may be better equipped to help you expose better or more refined processes, which is a huge benefit of getting a new set of eyes onto your product and production methods. With all the possible benefits, working with a new supplier can be a risk, but it’s a rewarding risk to take.

To recap

You may want to work with your current supplier to cut costs if:

• You will be introducing new product lines with similar assembly requirements in the future, and can flush out production-related issues for them now
• You can potentially cut costs in other places by implementing lean initiatives throughout your business and supply chain
• Your supplier has bandwidth to reduce costs and is willing to work with you
• A large change is too risky for you at this time
• You are mid-production and can’t afford any setbacks or delays

You may want to find a lower-cost supplier if:

• You are well established and have a highly mature product
• You are at a stable place in your company and product life cycle
• Your current supplier is unable to unwilling to cut costs any further
• Your team is up for a challenge and can put additional resources into change management
• You understand how your product is designed and manufactured well enough to explain it to a new set of vendors
• There is little opportunity to cut process costs internally by adopting Lean, Six Sigma, 5S, TQM or other strategies
• You have access to a competitive supplier landscape where sourcing is not prohibitive

Tips for making it work

If you’re going to stay with your current supplier, you’ll want to make sure you’re working closely to integrate industry best practices like Lean and TQM into your strategy.  To ensure you don’t become supplier-dependant, always be ready to reassess and make changes proactively. As you move forward with your current supplier, remember that it’s one thing to make a smart plan, it’s another thing to execute it well. This is where you will need to be vigilant—don’t expect your supplier to implement change independently of you. Throughout all your changes, remember to focus on your product—don’t get so caught up in adding a lot of new technology and processes that you forget to simplify. If the product doesn’t get made faster, better or cheaper it’s not worth doing. If you decide to leave your current supplier, don’t rush the decision. You should evaluate many suppliers in many geographies—don’t assume that outsourcing overseas is automatically the best solution. It’s also important to keep in mind that as products mature and become obsolete, other products will emerge—you need to balance your supply chain to fill both needs. Execution is critical. You need to understand that once you break the news to your current supplier, they will have less of a motivation to help you, which can make the transition painful. As with any other breakup, you may notice your calls go unanswered, your voicemails aren’t returned and your product deliveries are treated less urgently.  Understand your supplier’s motivations, and find ways to compensate them, sometimes with money. No matter what you decide, don’t be fooled into thinking there’s a magic bullet, you should always be evaluating new options for all of your products.