When the purchasing department wants to buy items from a supplier, it must compete with the orders of the supplier’s other customers. If the supplier already has a heavy backlog of other customer orders, it may be impossible to obtain materials in a timely manner. This is a particular problem when there are few suppliers of a given item, or if the company needs materials on an immediate basis. When this problem arises, a company will be faced with either paying a premium to have its order jumped ahead of other orders placed with the supplier, searching for and placing an order with some other supplier with whom the company is unfamiliar, or delaying its production until such time as a supplier delivery can be obtained.
The solution is to purchase supplier capacity. By guaranteeing a supplier payment for all production from a given machine or work center, a company no longer has to worry about obtaining key materials, while at the same time it can block other suppliers from obtaining that supplier capacity. The company no longer has to compete with orders placed by other customers of the supplier – it simply places orders directly into the work center that it essentially owns. Suppliers are usually more than happy to accept this arrangement, since they no longer have to worry about maximizing the capacity of their equipment. A company can also build into its contract for this service a clause to sell some of the capacity back to the supplier, who may occasionally need it for rush orders to its other customers, and which the company may not need, depending on variations in its demand.
An added benefit of this approach is that the quality of items produced by the supplier will rise, because it is using the same machines to produce the same items every time – there is no tolerance variation caused by the use of different machines throughout the supplier’s facility. Along the same lines, company engineers can more easily assist the supplier with the improvement of its operations by concentrating their attention on the machines reserved for company use.
This best practice should only be attempted for the most crucial materials, and even then only the ones for which a reasonably steady demand can be predicted. Otherwise, a company may spend a great deal to reserve capacity that it rarely uses. Thus, it is least effective for low volume, standard items.