According to researcher Anupam Agrawal, a professor of business administration for the University of Illinois, there are several benefits in establishing relationships with suppliers beyond the first tier. However, most companies are neglecting to reach out to such companies. Agrawal recommends companies establishing such relationships by initiating a “sourcing hub” through which manufacturers and their lower tier suppliers can share knowledge and information about their needs and practices. This would allow companies to get direct information from the original sources where their raw materials come from.
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Agrawal points to the study conducted within the automotive manufacturing sector. When depending on the intermediary source, the automaker was purchasing 29 different types of aluminum to go into their vehicles. After establishing a relationship with the original source of their aluminum, they learned that there were other products available that were actually better suited to their needs. The automaker reduced their purchases to 17 types of aluminum, making the entire process simpler and cheaper.
Agrawal says that these relationships reduce costs by allowing the manufacturer to get better prices, to negotiate bulk prices and to find better raw materials for their designs and processes. Additionally, loans for the products are cheaper, because giant companies can get better interest rates. Creating a sourcing hub also improves the grade of raw materials acquired and simplifies the overall process.
In addition to the automotive industry, this practice could benefit any other industry in need of large quantities of raw materials. Examples cited by Agrawal include the aerospace industry, appliance manufacturers, apparel makers, and those who produce footwear. Companies that provide raw materials to first tier suppliers have a better knowledge of their product lines, and can therefore steer the client into making better purchase decisions to improve their products as well as streamline their processes. [/show_to]
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