The New Breed: Value Added Suppliers – “VAS”

Quotes give way to collaboration for small OEM’s

By: Jim Mayer

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Many smaller manufacturing businesses today don’t have access to supply from low-cost countries like China. This puts them at a distinct disadvantage to their larger competitors that maintain the staffing necessary and volume to buy direct from foreign contract manufacturers and component makers. However, the strategic use of Value added Suppliers (VAS) levels the playing field that small original equipment manufacturers (OEMs) need to stay competitive in today’s marketplace.
The VAS plays a role that larger businesses manage in-house, and smaller businesses would if they had the breadth and depth of product offerings. But many have lower volumes with higher mixes of products that seldom allow for direct procurement. The VAS differs from traditional suppliers because they become more of a strategic partner that can streamline and optimize complex supply chains by shouldering the burden and certain risks.

The true “value add” is to give smaller procurers (not necessarily smaller businesses) access to lower cost suppliers without the headaches. The value-add comes from being able to do business in the same time zone, in the same language, handling lower volumes and higher mixes of products or components; holding inventory to allow a variety of just-in-time stocking that supports lean production processes while delivering these advantages at substantial savings to purely domestic sourcing.

But how does a value-added supplier do all of this and itself stay in the game? It’s very simple. The VAS consolidates common processes like testing, local vendor management, sourcing, engineering support, supply chain services, audit and inspection; to name several, and then spread the cost to multiple small accounts. The economics of one OEM doing this alone prove financial unfeasible in many cases.

This is the equivalent of an individual taking a beverage can to an aluminum recycling center. The cost of driving that one can to the location does not warrant the return value. However, if a value-added service collects aluminum cans from hundreds of locations, sorts, crushes and consolidates them using an efficient process and then presents those to a recycler, the return can be exponential.

Small international OEM’s can imagine….What if there were English-speaking suppliers, domiciled in the U.S. but manufacturing in low-cost countries that really understood (our) domestic product development, engineering dynamics, design, forecasting or demand planning, production processes, intellectual property protection, and were paid only when they delivered and invoiced? Collaborative suppliers that, in spite of low-volume, even high-mix sourcing [for example, electro-mechanical or electronic parts and assemblies] could reduce costs, shorten and narrow complicated international supply chains; all but eliminating specific inventory financing until the purchases were pulled into work-in-process or job shop processes.

This would be the VAS that offer the benefits of outsourcing, local collaboration, and pipeline visibility to, for instance, a China-based supply chain. They would be vendors partnering with their customer’s functional departments to virtually eliminate stock-outs to assure safety stocks while gaining favorable pricing for on-demand purchasing using stocking agreements in lieu of master purchase orders.

Could this facilitate small and middle market original equipment manufacturers (OEMs) to outsource globally while transacting the dynamics locally?  No financial exchange issues, no letters of credit, no cash on documents transactions; simply integrating sourcing and supply chain management through vendor partners.

The answer is yes. 

The VAS is not just a quote

Evolving today is a new breed of niche vendor the VAS that often compresses 12 or more time-zones (by buffer stocking), countless sourcing complexities and thousands of details into a local relationship; based upon mutually-defined goals like eliminating 12-20% of an OEM’s direct procurement cost on 30% of products that represent the lowest volume.

To be blunt let us just say the brokers, traditional suppliers, manufacturers’ representatives, and foreign companies with U.S. sales presences, have gotten smarter by necessity, not entirely choice and often as a result of customer demands.

On really difficult sourcing it’s out of touch suppliers that are not prepared to add value but merely quote a price.  And for customers, it’s short-changing the procurement process not to consider integrated solutions that a VAS offers. But it takes collaborative approach to OEM internal processes and procedures (as opposed to internal silos hindering progress) that can garner management buy-in for the inevitable result: lower costs, fewer mistakes and better cash flow.

Managing Asia

All too many U.S. OEM’s have discovered the greatest Asia-direct procurement program….with the most favorable costs but often difficult logistics….can get scrambled like an omelet with failed lead-times, unexpected spikes in demand, supply chain breakdown or unproven suppliers that drop the ball that destroy margins and production scheduling.

Notwithstanding, many certifications (like ISO, UL and industry specific guides) must be audited, and are bought, traded, exchanged between suppliers with little regard to actual compliance. This can lead to embargoes and seizures at the worst for OEM’s that are otherwise compliant and diligent in their businesses.

The “trust me” risks taken working direct with Asian suppliers often lowers an unenlightened OEM’s guard, exposing it to defective product, involuntary component substitution (sometimes counterfeits), previous-mentioned certification fraud, and even human rights abuses with little recourse; especially if cash-in-advance invoices have already settled and no obligations are outstanding to an offending supplier.

Another frequent problem: Asian production delays (including expected ones like Chinese New Year that is normally well-calibrated by experienced Value Added Suppliers) that can lead to unexpected, costly, domestic spot-market purchases to cover gaps that increase overall spend and decrease gross margins, often frustrating management forecasts and budgets.

VAS Performance

But the good news is that a VAS proactively forecasts (in collaboration with their customers), schedules production and shipments months ahead; tests at origin points, audits suppliers, knows intra and inter-country logistics, and stocks buffer inventory that can often be provided just-in-time. The VAS normally has backup vendors, affording the OEM a barrier to miscalculations, supply chain disruptions, foreign supplier failures, inconsistent quality, and enumerable other problems that can spell stock-outs or production delays. The best VAS is fully transparent  and can arrange for customer tours of its Asian production facilities right down to assisting with transportation, transfer, hotels and the securing of visas.

By example

Let’s suppose the annual requirements are for units of production number less than 2,500 pieces, of four different parts at prices that may aggregate to less than $200,000 of total spend.  For direct Asian sourcing it becomes an issue of low-volume, and higher-mixes chasing value pricing on modest annual procurement.  This is hardly the business that gains attention from Asian manufacturers. If it did, how much real and intangible cost would there be to dealing with the language barriers, production scheduling, compliance, testing,local cartage issues, export documentary requirements, insurance, certifications, import clearance, inspection, customs and buffer/safety stock requirements…..all for spend of $200,000 per year?  It might take several people on the payroll to accomplish what one supplier could offer merely integrating these processes into its net pricing.

So as commonplace today, the lower volume, smaller OEM forgoes low-cost country sourcing. But the alternative of an intermediary with economies of scale, deep sourcing experience, vendor leverage and capital to offer turnkey solutions and be a viable option for U.S. OEM’s.  While there are brokers, manufacturer reps, the notion of the virtual manufacturer; the VAS becomes a new, but lesser-known option for smaller firms. Too often OEM’s may have spent tens even hundreds of thousands in consulting fees to essentially obtain introductions, recommendations, supply chain mapping and develop production plans or forecasts. But in the final analysis, consultants don’t buy or sell themselves; they have “no skin in the game,” and the OEM is basically on their own, or paying for advice and financing they can get for free through the VAS’s.

What Should You Expect?

The VAS is expected to consolidate the costs of procuring and managing the international supply chain into an integrated pricing structure. One price includes markup and a wide range of services, and only the costs of transportation may stand separate.  The value-added supplier allows lower volume customers to obtain low-cost country pricing and eliminate the learning curve of going direct in countries like China.  Here are some of the questions to ask your vendors to separate yesterday’s suppliers from today’s VAS.

  • Will the VAS collaborate with you on sourcing, demand and production planning, or other aspects of product management even before you commit to a low-volume order?
  • Does the VAS offer design or engineering capabilities if you are launching, re-designing, or tweaking products?
  • Has your VAS been in business procuring from the target country at least five years?
  • Can the VAS work with your estimated annual usage forecasts?
  • Will the VAS work with master purchase orders or contract periodic purchases and not just purchase orders?
  • Can the VAS save you at 12%-30% over domestic production?
  • Can the VAS source and supply low-volume, high-mix products?
  • Does the VAS have dedicated human resources to handle program management and vendor audits both domestically and internationally?
  • Will the VAS invest its resources to work in advance with your multiple functionary departments like: procurement, logistics, engineering, design and product management; even before the first order?
  • Can the VAS provide you references?
  • Does the VAS have economies of scale – by example, the ability to consolidate either air or waterborne shipments?
  • Does the VAS have sufficient leverage with its foreign vendors to: 1.) protect intellectual property, 2.) be truthful about production scheduling and timely delivery, 3.) gain the best price, 4.) stand behind product when there are failures, 5.) know that proper certifications exist, 6.) get samples cheaply, 7.) assure rigorous quality control and testing, 8.) assure a fully-functioning supply chain both inbound and outbound, 9.) know its supplier’s financial condition and, 10.) deal with owner or senior management at the vendor?
  • Can the VAS warehouse your product in the country of origin, in its own facility, in your facility or utilize a third-party logistics provider?
  • Can the VAS provide you just-in-time stocking utilizing a wide range of plans including: consignment, in-plant stores, kanban, local or source warehousing?
  • Will the VAS be able to handle buffer inventory/safety stock, reverse engineering and re-work?
  • Can the VAS gradually provide these services on more custom products you source, not just one industry?

Closing arguments

The Value-added Supplier is not an invention of American business but an evolution of it beyond the quote. As domestic and international supply chains provide greater challenges for original equipment manufacturers (OEM’s), and especially when there are lower volumes of components or parts, a new breed of supplier that collaborates, sources, manages forecasts; provides demand-based stocking, handles complex logistics, provides quality control and protect intellectual property for one price, the old school practices are changing. OEM’s may be well-served by having fewer suppliers carrying more of the load; able to collaborate and not just quote.

About the author

Jim Mayer has spent more than 30 years of advising, managing and directing smaller businesses as a consultant and operational manager. He is a director of M-Wave International, LLC – a Value-added Supplier of assemblies and custom products located in Itasca, Illinois. He can be contacted at: jmayer@mwav.com.

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