Preferred Supplier; Presumed Growth

In March, 2002, Toronto Plastics Ltd. received a “Preferred Supplier Award” from tier one automotive company Windo-Motion. According to a press release, TPL got the award for “consistently meeting the increasingly strict quality, delivery and cost objectives required by Windo-Motion to maintain their competitive edge.”

TPL is now called Plextron and they still act as a preferred supplier to Windo-Motion, as well as a handful of other automotive firms.

“There’s a lot of value to developing the kind of relationship with your customer where you are a preferred supplier,” states Dave McQueen, president of Plextron (Toronto).

A slightly nebulous term, “preferred supplier” is usually applied to suppliers who establish close, long-term relationships with one particular customer. Typically, each party in a preferred supplier relationship shows a degree of favoritism to the other, often to the detriment of competing firms.

McQueen can’t understand why anyone wouldn’t want to be a preferred supplier.

“When you have an intimate knowledge of [a customer’s] business, and fit your business practices very tightly with theirs, it benefits you,” he states.

Not everyone is convinced that being a preferred supplier, or working with a preferred supplier, is the way to go, however. Critics say the preferred supplier system leads to excessive customer interference, especially on pricing issues. Supporters say the negatives inherent in the system are more than made up for by positive aspects of the preferred supplier arrangement.

Chris Singleton, a plastics industry veteran turned consultant and project manager, says “stability” is the single biggest advantage of being a preferred supplier.

“When you can look down the calendar for six weeks and you can see what you are going to be molding for the next six weeks on all your presses, as a business manager, you’re pretty happy,” states Singleton, who heads a Cambridge, ON firm called Singleton Associates. “If you can only see three weeks down the road, you’re in a lay-off situation.”

“When you’re a custom molder, you need stability, you crave stability, you pray for stability. It’s very hard, however, because everybody is snapping at your heels,” he continues.

Hunjan Moulded Products, a global firm with its headquarters in Markham, ON, acts as a preferred supplier to several tier one automotive companies.

Baljit Sierra, president and COO of Hunjan, says the preferred supplier system offers benefits to all involved.

“The customers know our business, our capabilities and our business model,” says Sierra.

In return for this insider’s view, customers give Hunjan first-in-line treatment when doling out new business.

“When our customers look at new business … in the majority of cases, we’re going to have a very good chance of [winning new work] because of our preferred supplier status,” states Sierra.

The Hunjan organization is familiar with the other side of the supplier equation as well. The company receives shipments of components, resins and other materials from various firms, some of whom Hunjan has designated as preferred suppliers.

“We have preferred suppliers for secondary equipment,” says Sierra. “We have a good indication of their capabilities and pricing … this enables us to respond much more quickly to our customers.”

Being a preferred supplier can have its drawbacks, however.

Singleton says preferred suppliers run the risk of becoming complacent, less hungry for new business.

Paul Rouen, president and co-founder of Rouen Tool and Mould and Rouen Plastics Ltd., both of Ajax, ON, cites another danger.

“If you’re a preferred supplier, you could have too much business in one place, which might leave you vulnerable,” says Rouen. “If your supplier goes down for any reason [you could too].”

While many customers tend to interfere in their supplier’s business, Rouen says meddling is far worse in a preferred supplier situation.

“You’re always afraid you’re going to lose that preferred supplier position, so that’s why [the customers] exert more pressure” especially concerning pricing issues, he states.

McQueen concedes this is true.

“In some cases, companies or certain individual purchasing departments or purchasing agents, will use [the preferred supplier] system to set unrealistic targets,” he says.

McQueen also admits that the preferred supplier system can “make it very difficult for new companies” to grab certain contracts. When customers only deal with preferred suppliers, companies that are “out of the loop” suffer as a result.

Instead of fighting this system, smaller firms might think about becoming preferred suppliers themselves.

McQueen explains how the process works: “If you are able to meet [the customer’s] expectations, on all the different issues — not just price, but service delivery, quality, business systems — you become part of a preferred group of people who are given the first opportunity [for new work].”

“It’s good to align yourself with key customers,” adds Sierra. “When your customer grows, you have the opportunity to grow as well. If you’re not on the preferred supplier list, you face an uphill battle.”

Nate Hendley is a freelance writer with extensive experience in business and marketing topics.

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WHAT DOES IT TAKE?

In larger purchasing organizations, there are often specific metrics that determine preferred supplier status. For example, here are some details on Boeing’s Preferred Supplier Certification (PSC) process, which is often considered a best-in-industry practice. Boeing manages about 11,000 suppliers worldwide.

Boeing suppliers can achieve gold, silver or bronze rating under the Preferred Supplier Certification process. According to the Boeing web site, the requirements for gold status are:

100% on-time delivery for 12 months;

100% acceptance (no quality defects) for 12 months;

affordability rating of 4.0 or higher (this involves cost trends, cost reduction efforts and lean practices);

customer satisfaction rating of 4.4 or higher (includes scheduling, quality, technical, finance);

top scores on Boeing’s quality system evaluation matrix;

a rating of at least 4.0 on Boeing’s business process assessment as determined by an on-site audit.

The stated benefits Boeing confers to preferred suppliers include increased opportunities for Boeing business, preference in the bidding process, reduced potential for inspections, support for lean initiatives, and access to Boeing resources and training.

The preferred supplier document from another aerospace company, Hamilton Sundstrand, is more reflective of the mindset and commitment that “preferred supplier” status involves, rather than the metrics.

Here are some excerpts from “Characteristics of a Hamilton Sundstrand Preferred Supplier”:

short cycle times;

cost competitive culture (includes flexible cash terms, year-over-year regressive pricing);

understands and utilizes Hamilton Sundstrand web-based paperless systems;

proactively seeks solutions to problems without Hamilton Sundstrand intervention;

commitment to Hamilton Sundstrand requirements 24/7.

— Cindy Macdonald