Business accelerator model helps you rethink your path to profitability

Key to streamlining supplier relationships is to change your approach to value-added information

06/03/2014


We have all been on the receiving end of a sales pitch that put emphasis on the concept of “value” to us, the customer. In fact, all but the absolute lowest priced supplier needs to use value as part of their approach. Although we know that value is important, few can succinctly define it and fewer still can quantify it.

A unique model demonstrates an innovative approach that can deliver value to contribute to the success of any organization through a more disciplined approach to defining and determining business value so that business executives can make intelligent business decisions.

The Trelleborg Solution is a strategic perspective on people, processes, and products using a total value assessment to more accurately quantify and achieve long-term business benefits. In manufacturing, OEMs, device developers, and machine builders—along with the system integrators, end users, and all stakeholders involved—need suppliers that are forward thinking and help them reach their goals.

Increasing productivity, reducing costs, delivering new innovations, improving quality, and responding faster to customer needs are all key objectives of a business accelerator model. Its aim is achieving real results that translate into tangible business benefits.

Price vs. cost

One of the most challenging decisions a business accelerator model can impact for a manufacturer that needs to make a major investment in a supplier is choosing between up-front price versus long-term cost. Cost-conscious manufacturers tend to focus heavily on the lowest possible up-front purchase price without significant concern for long-term value.

Unfortunately, this traditional business model neglects to consider benefits like increasing productivity, better efficiency in their manufacturing processes, reducing overall number of SKUs, reducing number of vendors, increasing throughput via Lean manufacturing, and technical reliability.

For example, consider a midmarket OEM exploring the idea of converting its mechanical system to a hydraulic control system to keep up with industry competition. If a supplier begins discussing the technical features of its upgraded system, the OEM might be intrigued but will ultimately balk at the cost of the hydraulic control system, which for the purposes of our example is generally two to four times greater than the mechanical system cost.

However, if the supplier can explain the value-added benefits the OEM will realize by using the new hydraulic system over the mechanical one—benefits such as improving throughput and machine reliability, reducing the number of extraneous components, and opening the door to new customer markets—it validates the rationale in selecting a total value of ownership (TVO) strategy over the lowest price.

Choosing to purchase the lowest-priced material in the short term may mean you are underestimating the long-term costs associated. There are related costs that may not be reflected with managing more SKUs and inventory of parts.

For instance, this is apparent when having to use multiple vendors and manage the logistics and supply of many part variations. The model we have described allows for the use of multiple variations, but with just one product and one SKU, which streamlines engineering and manufacturing processes. Several analysts contend that the bulk of the total cost of ownership of most capital equipment purchases increases substantially if selected solely for price versus looking at the long-term impact of increased costs arising from having selected a supplier’s material based on the lowest price.

After several studies from ARC Advisory Group, it was determined that nine times out of 10, the better choice for an OEM is to evaluate the longer term value. It comes in many different forms from better service life, which means less downtime, reduced maintenance costs, better reputation with end users, etc., and especially when evaluating this decision’s impact throughout the entire supply chain.

Rethinking profitability

The business accelerator model supports all of the constituents involved, from the selection of materials to the design process to manufacturing. Purchasing and supply management that have traditionally focused on price are starting to take heed of a bigger value proposition and a holistic view of their materials purchasing and supplier selection criteria.

The model we are depicting fills the gap that traditional suppliers have yet to offer: rethinking profitability and how to achieve it. It has been developed to bring an over-arching deeper understanding of the value a supplier can bring to impact the entire supply chain, and has proved to have “revenue-enhancing” effects on its customers’ business.

The approach captures total cost considerations as well as performance advantages gained by the manufacturer in being able to create further value for its customers and receive additional revenues that otherwise could not be realized. Going beyond the first apparent approach in being price conscious, the model embraces a manufacturer’s need to reduce the overall business costs and bring finished products to market. It was developed from the concept of the value of a true partnership, which touches on the TVO theoretically and ends in a conceptual framework to benefit OEMs.

This framework has manifested itself in several positive ways such as direct manufacturer support, eliminating the need for a middleman. The value of the supplier and manufacturer relationship is a critical component. It even extends beyond that because it factors in the condition of the facilities in terms of whether state-of-the-art equipment and test facilities are available to produce the materials required in the design.

In fact, product design decisions are integral to the end result’s ultimate success or failure. This is becoming all the more relevant given manufacturers’ increased emphasis on value-based market offerings, from both the supplier and the customer point of view.

OEM and supplier knowledge sharing

The concept of value of an offering is often perceived as being as important as the value of a relationship. According to the ARC Advisory Group, a relationship has value for the business executive because first, exchanges between the supplier and manufacturer become predictable and reassuring since both supplier and manufacturer have learned how they each organize their business operations, and second, the interactions and knowledge sharing exchanged often lead to an adaptation in the relationship resulting in new product or service solutions. This is why the model is interwoven at the base level design of its materials for an OEM, machine builder, or device maker’s benefit. It ensures a successful result that was fundamentally designed from its core.

Sharing knowledge makes for more efficient supply chains (with lower costs and quicker speeds) and more effective organizations (with higher quality outputs and enhanced customer service). ARC Advisory Group studied how knowledge sharing can enhance the performance of partnerships and build stronger supply chains in the global marketplace. The group sought to understand not only which companies benefit from cross-border knowledge sharing but also the conditions that lead to knowledge sharing in global supply chains. Many people see knowledge sharing as the result of customer or supplier needs, when in fact it is more likely to be influenced by market structures or organizational similarities and dissimilarities between manufacturers and suppliers.

Creating a collaborative environment can create more agility, adaptability, and alignment, which is really only possible when partners promote knowledge flow between the highest areas of impact within the supply chain. In other words, the flow of knowledge is what enables a supply chain to come together in a way that creates a true value chain for all the stakeholders.

Knowledge flow creates value by making the supply chain more transparent and by giving involved parties a 360-degree view of customer needs and value propositions. Increased demand visibility can provide such benefits as a better understanding of market trends, and better product design, planning, and development.

Increasing throughput with Lean

All Lean improvements ultimately result in increased throughput of goods. The greatest culprit in reducing throughput is waste, which can translate to machine downtime, lost time waiting for materials, out-of-stock supplies, operator errors, and poorly designed processes.

The model delivers Lean improvements that ultimately result in increased throughput for an OEM or component manufacturer. It supports a leaner environment because of its unique design, which decreases the need for product variations in inventory, simplifies logistics (less SKUs to manage), and delivers on quality, flexibility, and—just as important—modularity. The solution provides improvements that have a direct cumulative effect on overall throughput.

Bottom-line results

Long-term value has little to do with the lowest price, and everything to do with the way the purchase allows the customer to modify business practices and processes for overall efficiency. As previously described, the model has been architected to reduce overall cost to bring finished products to market and reach the objective outcomes:

  • Meet or exceed current seal performance
  • Incorporate “base level” design
  • Product coverage for all application conditions
  • Reduce overall number of SKUs
  • Reduce number of vendors
  • Increase throughput via Lean manufacturing
  • Supply chain advantages and savings
  • “Shoulder to Shoulder” design and testing.

A supplier’s track record is earned in part based on additional services and solutions that lower a manufacturer’s costs and deliver bottom-line results. Furthermore, as a supplier, it is important to identify real needs only when they exist and address them with appropriate solutions. This requires a true understanding of customers’ needs. Then, it is critical to identify issues that fall within the realm of the supplier’s competence so that desirable results are achieved.

It is also key that suppliers streamline business operations, and collaborate with customers to identify areas throughout the organization where they can offer better materials or execute a value-add service that will improve performance and efficiency. Examples of such strategies could be advanced delivery services, inventory management, and stocking programs. This allows customers to focus on their core competency.

Suppliers who go beyond to help their customers succeed will help win new business. Ultimately, solutions and services should help customers improve their product development cycle and reduce their cost to design, develop, and deliver, while bringing greater value to the end product, attracting prospects, and increasing the sales of the component manufacturer. For example, helping customers with a product standardization program, which is one of the model’s aims, can help customers become more flexible and responsive to their market dynamics and improve their manufacturing efficiency.

These efforts will reduce their costs while helping to expand their customer base and ultimately position the component manufacturer as a leader in their market. 

Joe Woods is fluid power segment manager for Trelleborg Sealing Solutions.

Key Points:

  • Manufacturer often face a choice between a lower up-front price versus long-term cost. Evaluating the true value of any purchase is crucial to success.
  • This model embraces a manufacturer’s need to reduce the overall business costs and bring finished products to market.
  • Long-term value has little to do with the lowest price, and everything to do with the way the purchase allows the customer to modify business practices and processes for overall efficiency.
  • Suppliers should help streamline business operations, and collaborate on ways to offer better performance and efficiency.

 



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