Still Beating Up Suppliers?

How do you know when the leaders of a company understand Lean management? It is when they begin to treat their suppliers as valuable resources instead of entities to bargain with for lower prices. Executives start to see the key stakeholders – employees, suppliers, customers, investor, and communities – operate as an interdependent system, rather than independent parts.

I recently visited a large company that has been applying Lean tools and methods for more than fifteen years. Yet the head of operations proclaimed “We beat the crap out of our suppliers [to get lower prices],” as if that tradition is one that should be carried on. Obviously, the “Respect for People” principle has not yet registered with them. Nor have they thought to ask “Why?”

As my Japanese sensei would have said, “Any idiot can beat up suppliers. Your challenge is bigger: to help lower prices by working together, with mutual trust and for mutual benefit.” Instead of beating up suppliers (zero-sum), sensei taught us to engage suppliers in joint problem-solving (non-zero-sum). And not just between sales and purchasing people, but between people in engineering, finance, operations, purchasing, and logistics in both organizations, to reduce costs, improve quality, and reduce lead-times.

When a company beats on its suppliers, it truly is nothing more than a corporate bully. The methods vary, from threatening to cancel orders to reverse auctions, but the desired outcome is always the same.  Remarkably, this “worst practice” continues in organizations as if it were a “best practice.” The early 20th century pioneers of the purchasing profession, almost all of which were practitioners (not academics), wrote about the damage price beating did to both buyer and seller. Here are some words of wisdom from these long-forgotten pioneers:

“The most important object in making any purchase is to obtain the right article, that is to say, that article which is best suited to meet the buyer’s requirements… yet ninety-nine purchasing agents out of ninety-nine work on the theory that price is the most important consideration.” Purchasing by C.S. Rindsfoos, 1915, p. 1

 “If you treat them [suppliers] fairly, they will treat you fairly… he [the buyer] must establish relationships of good will [sic] and mutual confidence with manufacturers, merchants, and brokers…” – Purchasing Principles and Practices by John Dinsmore, 1922, pp. 111 and 118

“…the purchasing executive is dependent upon his innate common sense for the successful accomplishment of his duties…. Refuse to be a party to price beating… Avoid any method that even verges on sharp practice… No longer is buying a leisurely process of obtaining goods at a low price, but a scientific system of securing quality, service, delivery and a fair price.” – The Science of Purchasing by Helen Hysell, 1923, pp. 10, 32, and 39

“Strange as it may seem, the actual prices paid for material, equipment, and supplies, frequently are of relatively minor importance. It is necessary to explain a statement so revolutionary, for, generally, price is about the only thing considered to be worthy of attention, and a difference of but a fraction of a cent per unit between two bids will shift the order or contract from one vendor to another, without proper evaluation of quality or utility with price.” – Principles of Scientific Purchasing, by Norman Harriman, 1928, pp. 16-17

“It has long been considered an essentially sound sales policy to develop goodwill on the part of customers toward the seller… Goodwill between a company and its suppliers needs to be just as assiduously cultivated… Failure to maintain these relations is often more serious than is sometimes believed.” – Industrial Purchasing by Howard Lewis, 1940, p. 251

One can translate Lean to mean “everything must change.” That means everything must change regarding purchasing practices and the use of use of price-based metrics, and, closely connected to it, the driver of those practices: finance. And let’s not forget that changes also need to be made in engineering, operations, logistics, etc. Change everything from zero-sum to non-zero-sum. Only then do you start to understand Lean management.

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