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Invisible reallocation of supply chain vendors based on perceived threat to buyers


A satisfied customer is not the same thing as a loyal customer. Walker Information, a 65-year-old firm that tracks customer loyalty, has tried to draw the distinction and today is releasing the results of a survey that determines which IT companies engender the most loyalty. The results... show a correlation between customer loyalty and financial performance [where] brands that scored high in customer loyalty had higher operating-profit margins, aggregated over three years, compared with negative profit margins for what the company calls the "loyalty laggards." Walker evaluated more than 50 brands in five categories: software, services, networking, servers and workstations, and storage systems.

Walker arrives at its rankings through detailed interviews that charted buyers' feelings on everything from product quality to customer service and post-sales support. Of all the IT buyers interviewed for the report, only 44 percent said they feel loyal to a majority of their suppliers, 30 percent feel "trapped" by at least some of their vendors, and almost 25 percent are actively looking to swap their IT providers for somebody different.

I wonder how this low loyalty to IT vendors, to the point of buyers feeling "trapped" by their current relationship with certain suppliers, transfers beyond the IT sector into the wider corporate supply chain.

It has been my experience that while many industrial firms have made a strategic IT commitment to the likes of Microsoft or Cisco in volume purchases that significantly lower the per seat product cost, they exhibit a very different -- lower and more transient -- loyalty to the suppliers in their product supply chains.

Based upon our work in the automotive sector, we can say that OEMs (Original Equipment Manufacturers) -- or vehicle manufacturers -- in this relentlessly cost sensitive sector have less than rigid loyalty to suppliers and certainly feel "hostage" to certain suppliers, especially those suppliers who dominate the market in a specific part/subsystem or even a high percentage of overall industry production to all OEMs. OEMs are reacting by reallocating their part production awards to other than the industry leader, irrespective of that supplier's ability to provide a technically and financially acceptable component.

This does not mean that OEMs will award business to firms with substandard performance, quality, and robustness, but rather that they will select among a group of suppliers capable of providing a peer level of performance in order to reduce the dominance of particular suppliers in critical market subsystems. I hasten to add that "critical" may be based upon internal OEM criteria not available to the supplier who would otherwise presume that they have the business based upon being the incumbent supplier offering a competitive cost and functional bid for a subsequent model year.

Companies were then grouped into three categories: loyalty leaders, loyalty limbo and loyalty laggards.

Were I an automotive supplier, I would launch an immediate, sustained competitive tracking of all my competitors' current and forecast business with all OEMs, my competitors' percentage of business with each OEM, and of the buyers' opinions at each OEM of my firm in order to see which supplier was most likely to be given new business -- either at my expense if I am leader, or to gain a larger share if I am a new entrant or minority provider.

Also, I would be sensitive to my quarterly/annual profit announcements which, on one hand, are necessary to attract equity funding, but, on the other hand, draw the quiet rage of OEM personnel who feel that certain suppliers are making more money pro rata than they are. There is always a latent, "I am larger, I am the buyer, and due more deference" attitude on the part of the OEMs, but it is never more virulent than at the times of high profit announcements by suppliers or a supplier's refusal to lower prices. This reaction is especially apparent when the OEMs are under severe market pressure.

a company is setting a low bar for itself if it is measured only by customer satisfaction. "If you ask people if they're satisfied [with their provider], most would say, 'Yeah, sure, I'm satisfied.' But if you ask them would they buy again, increase their purchases [from that provider] or recommend them, that's a different story."

Any automotive supplier that is unaware that his major OEM customers are watching his firm's ability to prejudice or restrain an OEM's flexibility and profitability, or is not showing due deference to the OEM, or in some way placating the OEM with accelerated R&D, service, et al, is naive and can suffer in future bidding.

If this tenuous level of loyalty extends beyond the automotive industry into other equally cost sensitive markets able to make vendor selections from among a group of similarly able suppliers, it could be a contributor to OEM-supplier strife, outsourcing (to low cost but not low risk locations), or other supply chain dysfunctions.

Who do you love?
September 20, 2004: 1:34 PM EDT
By Paul R. La Monica

IBM Tops IT Loyalty Survey
Lisa DiCarlo, 09.20.04, 12:01 AM ET

Loyalty study zeroes in on tech stalwarts
By Matt Hines
September 19, 2004, 12:01 AM PT

Gordon Housworth

InfoT Public  Risk Containment and Pricing Public  Strategic Risk Public  
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