How OEMs can get the most out of a supplier

“An OEM-supplier relationship is like a marriage”, says Marcus Engman, Senior Vice President at Fortaco. We asked him to play marriage counselor and answer tough questions about OEM-supplier relationships.

If we look at the OEM-supplier relationship as a marriage, what are the key factors to keep a couple together? What makes a relationship work?

It’s really important to sit down, talk and to get to know each other, because no relationship can support too many wrong assumptions. In terms of business, both parties have to understand the supply chain. Since you can’t keep marrying and divorcing all the time – or if you do, it gets disastrously expensive – it pays to invest in a strategic partnership and, as importantly, invest in the selection process to ensure a strategic fit.

For a supplier it’s exhausting to fill out RFIs and RFQs that arrive via email. You fill them out, you tell your story, but you never meet your potential client. Generally speaking, things that happen via email are not fruitful. When an OEM begins looking for a new supplier there is always a reason behind it. Maybe their current supply chain has price or quality issues, or capacity constraints, or perhaps they’re going to open a new factory somewhere and need to localize the supply chain . You’ve got to understand their motivation, and an email exchange doesn’t provide the type of dialogue so that a supplier can add value.

But OEMs are so burdened that they’re even bringing in consultants to do RFQs. What’s a more ideal process – better than email – for finding the right match?

It’s true that consultants are often brought in to do prequalifying work. Another common practice is to leave that work to dedicated business intelligence. They don’t always have the authority to do more than the bosses have told them to do. No dialogue comes from it.

It’s not efficient if an OEM is paying a lot of money for someone to shortlist companies without even knowing whether those companies are really interested or if they’re a good match. If an OEM’s short list is full of suppliers that don’t fit their strategy, then the OEM really has no short list. Choosing a good tier-one strategic supplier isn’t as easy as just doing a Google search, though this tool can aid you in preparing a long list. More important is preparing the correct supplier profile.

Of course, you have to take part in RFIs and RFPs. These are the steps before the RFQ. But the level of commitment to the process is different. If an unknown OEM approaches me and asks for a long list of information, and they’ve provided an RFQ. I don’t immediately say “Yippee, let’s do it.” I’ll say “Yes, we’re interested, let’s meet.” It’s a complicated relationship and many things must fit: ambition, timing, resources, industrial processes, just to name a few.

But an OEM can’t meet with everyone, so how should a good short list be built? What’s one important element that must match between supplier and OEM?

One observation I can make is that size matters. A supplier needs to have a certain size of business, the right processes, people, and so forth. Take steel fabrication, for example.

One European OEM’s spend in steel fabrication can be 100 million euros and upwards. Fortaco’s larger competitors in steel fab are around 30-50 million euros in turnover, but you can find suppliers who have turnover of five million euros or less. A supplier has got to have the critical mass, a certain amount of fixed competences or resources – project management, quality, sourcing, inventory management, and other support functions. Fortaco’s turnover in steel fab is 170 million euros, and this means we can afford a higher fixed cost base.

Those serious about being a tier one supplier must have the willingness and ability to invest in the operation. The bigger the company the bigger the investment budget. Investments can be in the range of millions. It doesn’t make sense to form a new relationship for revenue of a half-million euros. There’s got to be a clear target, commitment, and the long-term business case must be clearly understood by both parties.

So can you define your dream OEM?

For us, our dream customers are those with whom we have a strategic relationship that’s not only about manufacturing, but where it’s also about technology and early involvement. Fortaco’s dream customer comes to us with a question and is open to ideas about how to develop new products that are easier to manufacture or products that come with improved functionality. The dream customer is quality driven, values performance in terms of delivery accuracy, and is more focused on value than on cost.

The dream customer gets involved in R&D and we work together in the early stages to secure the best product at the right price and right quality. A dream customer is a customer who can critically examine their own processes and, if something goes wrong, doesn’t take the easy way out and blame the supplier. To make any marriage work it’s got to be a balanced relationship.

You have been known to say that “suppliers actually choose the OEM, not the other way around.” Explain what you mean, because it seems OEMs are often proud of their huge spends and some have reputations for being dictatorial.

In principle, you should choose your customers yourself. Why should you let somebody else decide on your future or your destiny? You have to be in charge of your own business!

Fortaco lately had a rather good experience with one customer we’ve been with in talks with for many years. And I mean literally years—this customer was already auditing our factories several years before we had a concrete business case. We both wanted to work with each other, but we had to wait for the planets to align and for a concrete project to appear so that we could begin cooperation.

We have made mistakes in the past when we were not critical enough of a potential customer. Perhaps we were hungry for new business and we began working together, but later we understood that it was not a good match. We’ve learned that we need to use our resources on relationships that are fruitful in terms of executing our strategy. It means that we must choose our customers as much as our customers choose us.

Bringing you back as a marriage counselor, how about one practical idea for OEM-supplier relationship improvement?

Consider this: a typical supply agreement is about ten pages long. Three of those pages are concerned with how prices are formulated, one page about warranties, one page about liquidated damages if you don’t perform, and another page about quality, and so forth. In all of those ten pages there may be only a few sentences about how we will work together to ensure we meet the delivery performance and quality targets. The part which describes how we’ll work together is basically missing! The communication, sharing of information, production planning, capacity flexibility issues – this is crucial information in order to meet targets, but it maybe rates the attention of only a few sentences.

My point is that lots of energy is expended when it comes to price. But very little energy is put into the question of how we’ll work together. I am not placing blame here, because we as a supplier can also take some responsibility for this. But the supply agreement might be one place where we could start—in the name of better marriages—in order to shift the focus away from cost and back to value.

Please contact Marcus to discuss in more detail about OEM-Supplier relationship