5 Tips for Switching Strategic Suppliers

Switching suppliers can be daunting, especially when strong relationships are involved. Yet, prioritizing the best fit for your business is essential. Follow these steps to transition seamlessly and maintain professionalism throughout the process.

READ THIS WARNING FIRST: Have you done everything you can to avoid switching suppliers? Improving a poorly performing supplier is almost always the best strategy. It signals to your entire supply chain that you are committed to long-term partnerships.

 

Here are some tips if you have no other choice than to change suppliers:

1. Assess the New Supplier Thoroughly

Before making any move, ensure the new supplier meets your needs. Value is not just about price. Consider lead times, OTD, quality control measures, financial stability, and overall reliability. A lower price might come with hidden costs such as delayed shipments or subpar products. If the supplier is a distributor issues like terms, customer support, and escalation paths are important. 

If the supplier is a manufacturer, especially of custom parts like PCBs, cables, sheet metal, or PCBAs, evaluation of capabilities and quality control moves to the front.

Best Practice: Conduct a First Article Inspection (FAI)

When purchasing from custom manufacturers, implementing a First Article Inspection (FAI) process is critical in evaluating their capabilities and performance. First Article Inspection is a formal process that involves a detailed and documented verification and validation of a supplier’s production process. It includes thoroughly inspecting the first article produced, which serves as a benchmark for all subsequent production units. The Quality department usually controls FAI, here is an overview for you.

Steps in the FAI Process

1. Planning and Preparation
   • Documentation Review: Ensure all necessary drawings, specifications, and quality requirements are available and understood.
   • FAI Plan: Communicate a comprehensive FAI plan detailing the inspection criteria, methods, and documentation requirements.
2. Production of the First Article
   • Controlled Environment: The first article should be produced under controlled conditions exactly like the actual production processes.
   • Recording Data: The supplier is expected to document all settings, materials, and processes used during the production of the first article.
3. Inspection and Testing
   • Dimensional Verification: Measure all critical dimensions to ensure they meet specifications.
   • Material and Process Verification: Confirm that all materials and processes conform to the specified requirements.
   • Functional Testing: If possible, conduct functional tests to ensure the product performs as expected.
4. Documentation and Reporting
   • FAI Report: Upon receipt, your quality team will compile a detailed FAI report that verifies all inspection results and measurements and notes any discrepancies found.
   • Approval Process: The FAI report is typically reviewed with relevant stakeholders, including quality assurance and engineering teams, for approval.
5. Feedback and Corrections
   • Corrective Actions: The supplier is usually allowed to address any discrepancies or issues identified during the FAI. They can then implement corrective actions and repeat the FAI if necessary.
   • Final Approval: Once all issues are resolved, your company will issue final approval to proceed with full-scale production.

An FAI process is mandatory under AS9102 and is usually a key component of ISO9001 and ISO13485. It is also part of the Federal Acquisition Regulation (FAR) under FAR 52.209-3. By adopting the First Article Inspection process, you can significantly minimize risks and ensure a smoother transition to your new supplier. This approach not only verifies the supplier's capabilities but also aligns your quality assurance processes with industry best practices.

2. Communicate Carefully with Your Current Supplier

Be very careful if the items being transitioned are the sole source, critical, or have a long lead time. If your existing supplier learns they are going to be terminated before you are prepared, they may try to leverage you, so discretion is very important until you are ready. Supplier selection is often an involved process that can take months. During this period your challenge will be to conduct business as usual while developing other options. This can feel uncomfortable. Try to remember it is always within your discretion to make a change, there is nothing wrong with it. And there is also nothing wrong with developing options. 

It is very possible the efforts to find a new supplier will fail and you will ultimately continue with the current supplier, so maintaining the status quo is entirely professional. When the time comes to inform them, the news should not come out of the blue, the issues leading up to the change should have been aired already, so that by the time you communicate a definitive decision there is no surprise. 

There should be a sense you are being firm, but fair. When the time comes, inform your current supplier about the change without disclosing specific details of the new supplier, if possible. Have a management-approved contingency plan ready in case the supplier reacts badly. 

3. Plan the Transition

A smooth transition requires meticulous planning. Notify all relevant departments within your organization and create a timeline for the switch. Don’t forget to have a contingency plan in case things don't go as expected.

Transition Steps

• Inform internal stakeholders about the change.
• Set a timeline for transitioning orders.
• Maintain a buffer stock to avoid disruptions.
• Plan for overlap where both suppliers are used during the transition period.

4. Manage Liability Carefully

Switching suppliers can involve various liabilities, both contractual and non-contractual. To ensure a smooth transition and avoid unexpected complications, it’s crucial to carefully assess and manage these liabilities.

Assess Contractual Liabilities

Review Existing Contracts

• Termination Clauses: Examine the termination clauses in your contract with the current supplier. Understand the notice periods required and any penalties or fees associated with early termination. 
• Outstanding Orders: Identify any outstanding purchase orders or commitments that need to be fulfilled or settled. Determine whether you need to negotiate their completion or cancellation.
• Inventory and Tooling: If the supplier holds inventory, tooling, or equipment specific to your products, understand the terms related to these assets. This may include buyout options or transfer agreements.

Negotiate Terms

• Inventory Buyout: If the current supplier holds significant inventory (raw materials, WIP, or finished goods) specifically for your business, negotiate terms for purchasing this inventory. This ensures you do not face shortages or disruptions during the transition. This is also a source of leverage to ensure the supplier executes their responsibilities professionally.
• Tooling and Equipment: If specialized tooling or equipment is used, negotiate its transfer to the new supplier or purchase it if feasible. This avoids delays in production at the new supplier’s facility.

Address Off-Book Liabilities

Supplier Relationships

• Long-Term Commitments: Consider any verbal agreements or long-term commitments that might not be documented formally. Address these openly to avoid any misunderstandings or disputes. If appropriate, consider any repercussions that involve 3rd parties such as suppliers to your supplier.
• Partnership Investments: Evaluate any joint investments or shared resources with the current supplier, such as co-developed technologies or collaborative projects. Plan how to handle these investments during the transition.

Quality and Compliance

• Regulatory Requirements: Ensure that both the current and new suppliers comply with all relevant industry regulations and standards. This is especially critical in industries with stringent compliance requirements, such as aerospace, automotive, or medical devices.
• Quality Assurance: Validate that the new supplier can meet your quality standards. Implement a First Article Inspection (FAI) process to verify their capability to produce parts to your specifications.

Mitigate Transition Risks

Contingency Planning

• Buffer Stock: Maintain a buffer stock to cover potential delays or disruptions during the transition. This ensures continuity of supply while the new supplier ramps up production.
• Parallel Production: Consider running parallel production lines with both the current and new suppliers during the transition period. This approach can help mitigate risks associated with the new supplier’s ramp-up phase.

Legal and Financial Considerations

• Legal Review: Conduct a thorough legal review of all contracts and agreements. Involve your legal team to ensure compliance with all contractual obligations and to protect your company’s interests.
• Financial Implications: Assess the financial impact of the transition, including potential cost savings, transition costs, and any penalties or fees. Ensure that senior management is aware of and approves of the financial implications.

Inventory Management Tip

If required to buy out inventory, negotiate favorable terms. If not obligated, purchasing inventory can serve as leverage, particularly if the new supplier accepts it. Use this leverage to ensure the fulfillment of current orders and a seamless transition.

5. Maintain Professionalism and Respect

It's crucial to handle the situation professionally to preserve relationships as best as possible. You might need your old supplier in the future, and burning bridges is never a good business strategy. Every situation is different but do everything possible to maintain a relationship and hold out hope for the future. 

Here are some key strategies:

Clear and Respectful Communication

Transparency

• Honest Conversations: Once they have been informed of the change be empathetic and have honest and transparent conversations about your decision to switch. Clearly explain the objective reasons for the change without divulging sensitive information about the new supplier.
• Feedback: Provide constructive feedback on areas where the current supplier’s performance did not meet your expectations. This can help them improve and potentially regain your business in the future.

Polite Notifications

• Formal Notification: Notify the current supplier formally through a well-drafted letter or email. Ensure that the communication is professional, clear, and polite.
• Timeline: Provide a clear timeline for the transition, including key dates for the cessation of orders and the start of new supplier engagements.

Professional Conduct

Dignity and Respect

• Acknowledgment: Acknowledge the contributions and efforts of the current supplier over the duration of your partnership. Express gratitude for their service and support.
• Professionalism: Handle all interactions with the current supplier with professionalism and courtesy. Avoid any language or behavior that could be perceived as disrespectful or dismissive. 

Non-Disclosure

• Confidentiality: Maintain confidentiality regarding the specifics of your new supplier’s offerings and any strategic decisions related to the transition. This respects both parties' business interests. 

Long-Term Relationship Management

Future Opportunities

• Open Door Policy: Keep the door open for future collaboration. Let the current supplier know that while you are transitioning now, you value the relationship and may consider working with them again in the future.
• Opportunities for Improvement: Suggest ways the current supplier could improve their offerings to better meet your needs in the future.

Smooth Handover

• Transition Support: Offer to support the current supplier during the transition period to ensure that outstanding orders are fulfilled without disruption. This might include sharing necessary information and coordinating timelines.
• Continued Engagement: If applicable, consider maintaining a smaller volume of business with the current supplier during the initial phase of the transition to ease the impact.

6. Document Everything

Hope for the best, prepare for the worst. Keep detailed records of all communications, agreements, and evaluations. Documentation ensures that you have a clear trail in case of any disputes or issues down the line. In the case of switching EMS suppliers, this can become very complicated and they are likely more experienced at it than you. 

If you are disengaging from a Tier 1 or Tier 2 EMS company, they will do everything they can think of to keep you, and once they become convinced you are leaving you will be dead to them. But you will be very much alive to their lawyers!

Documentation to keep

• Email communications
• Meeting notes
• Contract amendments
• Performance evaluations of the new supplier

Conclusion

Switching strategic suppliers is a significant decision that requires thoughtful preparation. While it's best to avoid such changes when possible, a structured approach can minimize disruptions. Evaluate the new supplier thoroughly, ensure clear communication with your current one, and craft a detailed transition plan. This diligence safeguards operations and nurtures professional relationships. Though challenging, managing these transitions is an essential part of procurement, ensuring the best outcomes for your company while maintaining industry standards.