I interviewed two experts on True Supplier Partnerships (listen here) — Rick Pay (The R Pay Company, LLC), an expert on manufacturing process improvement, Lean, and related disciplines, and Kate Vitasek, lead researcher and author of a new book on the concept of Vested Outsourcing.
Rick discussed the challenges of truly partnering with suppliers, as opposed to beating them up and trying to drive their prices down. One of Rick’s clients is a supplier who has been pushed for annual cost cuts of 3-5%, with 125-day payments, and with no forecasting information shared. This supplier is considering firing the customer — and who can blame them? That’s classic zero-sum thinking at its worst.
Rick sees a lot of lost opportunity in cases like this, because a well executed partnership can enrich both parties. To do so, you have to actually trust your suppliers and customers, and share a lot of information.
Rick likes to step back from the detailed contract and start such a positive relationship with a Memo of Understanding that lays out:
- the key contacts for both firms
- the payment terms
- quality expectations and measures
- delivery expectations and measures
- lead times
- cost reduction efforts
- participation by both parties in design activities
- communications including regular meetings
As my prior guest Henry Evans put it in his excellent book “Winning with Accountability,” all true accountability is front-loaded, by setting the expectations up front. Rick’s MOU does that.
A well executed partnership provides some significant advantages:
- World class pricing
- Shorter lead-times
- Enhanced quality
- Greater profitability
- Increased inventory turns
Rick has an article that describes this in even more detail — get it here.
My second guest was Kate Vitasek, lead researcher and author of a new book on the concept of Vested Outsourcing.
Kate has been studying the challenges involved in outsourcing — specifically the ways the interests of the customer and the service provider are not always aligned, and the problems that arise when that occurs.
What excites me about Kate’s work is that she derived her lessons by studying the most effective and successful outsourcing firms, including Microsoft. And she partnered with the US Air Force, learning what problems were occurring with their large amount of outsourcing.
The result was a catalog of the ten ailments most common to outsourcing relationships, and five rules that help create true win-win or “vested” outsourcing relationships.
The rules are:
- Laying the Foundation – What’s in it for We?
- Rule #1 Focus On the What, Not The How
- Rule #2 Focus on Outcomes
- Rule #3 Agree on Clearly Defined and Measurable Outcomes
- Rule #4 Optimize Pricing Model Incentives
- Rule #5 Governance Structure Should Provide Insight, not Merely Oversight
GE and the Navy have a contract at the Jacksonville Navy Depot to maintain the 404 Engine. This contract is based on incentives regarding reliability and availability. There is a repair turnaround time goal. And while GE has some skin in the game, all the hands-on work is being done by Navy personnel.
So GE relies on teaching the Navy to use Lean Six Sigma and has invested in information technology, all to move these metrics in the right direction. It’s a true partnership with a remarkable absence of finger-pointing.
There are several other case studies and examples. Listen to the whole interview here.