Suppliers in the high-tech industry are continuously evolving their offerings and easily become innovation partners rather than simple suppliers.
No company is an island. Instead, we’re part of a value network or business ecosystem where we co-exist with customers, partners, suppliers, competitors and so on. The ecosystem is continuously evolving and changing and occasionally, there are large disruptions.
Many feel that suppliers are the ecosystem’s most stable and trustworthy members. They have a vested interest in building trust relationships with their customers, ie us, as it offers a moat against the continuous price pressure and risk of replacement. However, that doesn’t mean that we can trust them to never go against our business interests if it would be better for their business.
The typical pattern between companies and their suppliers follows the three-layer product model discussed in earlier posts. Whenever functionality that’s differentiating for us is commoditizing, it becomes relevant to explore whether a supplier could take over this functionality and own its maintenance and evolution.
The complaint many have is that suppliers will immediately seek to sell the same functionality to our competitors. It’s a natural tendency for suppliers to amortize their R&D investments over as many customers as possible. Of course, we could force them to only offer the functionality to us, but then they become simply an external R&D unit and there’s no or at least limited benefit from a cost perspective.
Obviously, the notion of a supplier where we buy widgets and pay for these without much consideration for anything besides the price is simplistic in the high-tech industry. The offerings there tend to have a high degree of complexity and the components and subsystems that come from suppliers need to be integrated into the overall system. This integration can be quite deep and require a similarly deep relationship with the supplier, turning it from transactional to continuous.
When working with suppliers, there are at least three main areas to consider: DevOps, being held hostage and competition from suppliers. First, with the adoption of digitalization, many companies adopt DevOps. The software in the offering is released frequently, both by internal developers and suppliers. This means that the relationship with not only the customer but also the supplier becomes a continuous one, making it much more difficult to keep the supplier at arm’s length and maintain a cost-centric approach. Typically, the switching cost when changing suppliers goes up significantly and traditional contracts need to be replaced with agile contracts where the company and the supplier can easily make changes without significant overhead.
Second, especially as the integration with suppliers, partners and customers becomes much deeper due to DevOps, the company can easily become a hostage of its business ecosystem. Even if it’s obvious that significant change is required, the suppliers, partners and others in the value network loudly communicate that anyone who upsets the applecart will be ostracized and kicked out of the network. As companies need time to transition from the old to the new business model, few can afford to sacrifice their current revenue streams for a future-oriented value stream that often is much smaller and quite uncertain initially. Hence, companies risk getting stuck in an increasingly outdated ecosystem structure until external players disrupt the ecosystem as a whole.
Finally, suppliers are always looking to work their way upmarket, which means taking over functionality that initially was provided by our company. If we’re not careful and incorporate sufficient new and differentiating functionality, the layer of functionality we’re providing on top of what’s coming from suppliers gets exceedingly thin. When this happens, the suppliers can decide to displace us altogether and work with our customers directly. For example, companies exploring autonomous driving offerings were quite easily able to get all the major parts of a car sourced from traditional tier-1 suppliers without an OEM in the middle.
Suppliers have no interest in protecting our business interests but rather are responsible for their own revenue. They’ll work with us as long as their interests align with ours. And, to be honest, I’ve seen many situations where suppliers were treated rather roughly by their customers and I can’t really blame them for not offering the loyalty they’re asked for. If we’re not developing and defending our niche, others will ensure we have no place in the ecosystem.
It’s easy to talk about a supplier that simply delivers parts to us when we need them at a price we agreed upon. In practice, suppliers in the high-tech industry are also continuously evolving their offerings and easily become innovation partners rather than simple suppliers. There are three main areas to focus on, including the impact of DevOps on the relationship with suppliers, avoiding being held hostage by the ecosystem and avoiding being displaced by our suppliers in the ecosystem. These areas apply to everyone as, to quote William Edwards Deming, everyone is a customer for somebody or a supplier to somebody.