Modern management concepts like lean manufacturing and flexible manufacturing have changed the traditional relationships of companies and their suppliers. Gone are the days when competitive tendering and written agreements were the basis of companies’ relationship with their suppliers.

Today, most manufacturers concentrate on managing their brands rather than their capital resources. In fact, the increased trend to outsource has given rise to a new organisational form – virtual organisation – where the main function of the company is to co-ordinate the activities of a network of suppliers. This realisation has made most companies concentrate on vendor development and to leverage their efficient and productive vendors for competitive advantage.

More and more MNCs are using India as a hub for their global manufacturing needs. This has created ample opportunities for SMEs to take advantage of the vendor development programmes of these companies. Most companies coming into India have to depend on local suppliers for their requirements due to government regulations that make indigenisation to a certain level mandatory. MNCs are also increasingly sourcing components from India since the low labour costs here trim their product costs.

Today, most vendor development programmes emphasise long-term relationships that are quite advantageous for suppliers. For instance, the Swatch group has set up a fully-owned subsidiary, Swatch Group (India) Pvt Ltd, to undertake the group’s sourcing activities in India for various items like components, equipments and software.

SMEs have a lot to benefit from the vendor development programmes of big manufacturing companies. For instance, LG Electronics takes its key vendors to Korea to familiarise them with the quality issues and expose them to international standards. It has invested heavily in vendor development so that the local suppliers can reach the quality benchmark of its Korean plants, which have a rejection rate of just 300-500 parts per million.

Vendor development programmes help SMEs to have access to the latest manufacturing technology. With the prevalence of concepts like just-in-time (JIT) production, suppliers will also have to adopt the latest communication technologies to operate computerised systems. The exposure to the latest technologies increases the learning curve of the SMEs. It also enhances their competence to operate in the present dynamic business scenario.

Today, most manufacturers are closely involved with their suppliers in initiating quality systems. For instance, TVS-Suzuki Ltd is in the process of transferring lean manufacturing and total productivity maintenance systems to its suppliers. The initiative would give suppliers the expertise to reengineer and value engineer their company besides improving quality and reducing costs substantially.

A major cost-saver

Vendor development programmes help the suppliers as well as the buying companies to reduce costs drastically. If the suppliers have access to the latest technologies through their buyer companies, their product quality and productivity shoots up. When the parts supplied are perfect, the buying companies save reworking costs. Fiat Auto of India is planning a vendor development programme for its world car Palio to keep the cost under check so that it can be priced competitively.

Most companies prefer to have their suppliers located as close to their plants as possible. For instance, Maruti Udhyog Ltd locates most of its suppliers in and around Gurgaon, so that delivery schedules are met. The close relationship between the vendors and the buying companies keep the suppliers under pressure to improve their operational efficiency and the quality of their output. Besides reducing the production costs, effective vendor development programmes also help reduce transactional costs.

Flexibility, a good result

The increasing trend of companies to cut the number of suppliers should be good news to the established SMEs as this would ensure fresh orders on a continuous basis. The relationship is most often based on mutual trust and not on legally enforceable contracts. The winning supplier can restrict competition by strictly maintaining the quality and delivery schedules of the client. The absence of legal contracts with their suppliers enable companies to be flexible in their manufacturing processes. They can change their product mix more quickly.

Such flexible vendor development programmes help companies to involve themselves in various aspects of their suppliers’ business including product design, quality control, purchase of inputs, manufacturing methods and human resource policies. Such flexible programmes also further the practice of manufacturing to order, as the suppliers are left in a better position to serve their clients according to consumer demands.

Danger of over-dependence

Some manufacturers like Maruti Udyog have developed a network of exclusive suppliers. In some cases, the company has given feed capital to its suppliers to improve their manufacturing facilities. This makes suppliers deliver the components only when required and hence the inventory is maintained at the supplier’s plant. The only danger suppliers face here is that they have to depend on the company’s business for survival. If there is a downturn in the industry, the suppliers are adversely affected.

The outsourcing organisations also have to place their fortunes on their suppliers when they depend on exclusive suppliers for certain components. Organisations that just assemble and coordinate the activities of different suppliers also run the danger of not fully utilising their core competence. This may hurt them in the long run.

Future outlook

Vendor development programmes are of strategic importance as every penny saved by improving the efficiency and productivity of different components lends organisations a competitive edge in the marketplace. Every enterprise –whether a supplier or a company assembling components from different suppliers – has to strive towards efficiency. The successful organisations of tomorrow are those that work closely with their suppliers in delivering superior value to the final consumers. The increasing trend of MNCs investing in vendor development apart from enabling local suppliers to realise better value for products made will help in increasing the foreign exchange earnings of the country.