Creating agile and responsive supply chains that deliver value to the end customer with the least amount of waste requires close working relationships with key suppliers – but which ones? By Nick Allen
When it comes to managing supplier relationships a good starting point is to know who your suppliers are. This may sound obvious – a little strange even – but according to research conducted earlier this year by IFF Research on behalf of supplier information management company Achilles, one third (34 per cent) of businesses said they did not know who their suppliers were at tier two and below.
Further revelations from the report show that 50 per cent of companies have not mapped out their supply chains and of those that have not, two thirds plan not to do so in the future. This is, perhaps, a surprising finding following the damaging impact of two high-profile supply chain failures last year that emanated from deep within the food and fashion chains – the horse meat scandal and the Rana Plaza disaster in Bangladesh.
Considering the significant costs associated with supply chain failure, found in the Achilles report to amount to an average of £165,000 in total per business per annum, it begs the question – why are so many companies slow or disinterested in mapping their supply chains?
The likely answer is that it’s difficult. And companies don’t have the resources. The Achilles survey reveals that 44 per cent of businesses do not have the staff for the task.
According to Adrian Chamberlain, CEO of Achilles: “The problem for most companies trying to map their supply chain is that, other than the very largest multi-nationals, businesses have diluted leverage when they get below their tier one suppliers. So you have to collaborate. If three or four large buyers start asking their suppliers to map out their supply chain they have little choice but to comply – and that works right down the chain.
“In our experience, efforts to improve information about the supply chain work best when whole industries – such as oil and gas – work collaboratively to agree and implement standardised requirements of all suppliers in terms of business critical areas, such as health and safety to reduce the burden of administration. They can then manage the information on a global, centralised database – implementing the same high standards not only in the UK but in every country in which they operate,” he says.
Global industries such as automotive, aerospace, pharmaceuticals and to some extent oil & gas have been leading exponents of supplier relationship management (SRM) programmes. The automotive sector has been involved in a version of SRM for over thirty years under the guise of supplier development, using lean and six sigma process improvement techniques to identify and remove waste at whatever tier of the supply chain it exists, to drive value to the OEM and ultimately the consumer.
David Atkinson, managing director of Four Pillars, a consultancy specialising in SRM, explains the structured approach that is taken by these industries on their journey in pursuit of value.
“There are three phases,” he says. “In the first phase, you need to have tools, processes and templates. Because you have to do significant relationship analysis to understand to what extent you can leverage additional value.
“You also need top management support, because it’s a cross functional endeavour.” He points out that, particularly in the indirect space, it is not procurement and supply chain people who will be leading the relationships post contract, it will be the business.
“You need a work plan to decide which suppliers you are going to focus on in the first year and the second year, because its very tempting to present the new initiative to far more suppliers than you have the capacity to manage.”
Then there is segmentation. Atkinson says: “You have to decide which suppliers are the most business critical and present the best opportunity to drive incremental value from the relationship.”
Phase two is about getting the relationship strategy documented, agreed and signed-off by senior executives, “important because it’s the plan for what we would like to do with that critical supplier over the next five years,” he says.
And phase three is engagement. This is when you take the supplier relationship management activity to the suppliers.
“There are three levels of value that you need to focus on,” says Atkinson. “One is about protecting value and that is essentially doing contract management and supplier performance management with the aim of getting what you contracted for. Very often there is value leakage and this will diminish the impact of anything else you may do with the supplier.”
He says: “Step two is value development, where you do supplier development – driving incremental improvement through improving processes, working practices, interface activities etc.”
“And the third step is ‘strategic value’. This is where you look at strategic alliances and innovation capture – all focused on improving your organisation’s revenue stream for down stream customers,” he says.
However, Atkinson has a sober warning. He says: “Research published about three years ago suggests that 80 per cent of strategic alliances fail inside of the first two years.”
So the risk of failure is high.
“When you get into the supplier strategic value space, where relationship specific investments need to be made by both parties, then there has to be some degree of win for both parties,” he says.
But how do you go about determining which suppliers you need to form these close relationships with – would it be on the basis of who you are spending the most with, or perhaps, who you perceive as being the greatest risk? Or would it be where you see there is the greatest potential advantage in, say, producing a better quality product or delivering a faster product to market?
Anne Marie Kilkenny, partner at Oliver Wight, says: “This is where it comes down to strategy. If you are in a product leadership position and innovation is really critical, then you are going to be selecting suppliers that are technically excellent and that are also very responsive. Whereas if you are price driven you are going to be looking at suppliers that can take cost out of your supply chain.
“In terms of selection there is a very simple matrix that has been around for a long time. You have spend on one axis and then, depending on the business, either technology or risk on the other. So if you have a high spend and a low risk, then your approach is going to be different to if you have a high spend and a high risk,” she says.
“And indeed, the trickiest segment is where the spend is relatively low but the risk is high. So if you are in a sole source position – an involuntary one – but you don’t have a lot of leverage with the supplier, then that’s where you should be focusing a lot of attention. Often people forget this. They will just do the cut based on spend, they don’t think about the risk aspect and then they find themselves caught out.”
Kilkenny explains the dangers of buyers failing to forge relationships with suppliers where risk is high. There have been instances where “the supplier just announces we are pulling out of production of this product and it has caused significant issues for the customer.”
Kilkenny points out the importance of having people with the appropriate skills-set. “If you have these critically important relationships then you need to think about the skills-set of the person that is looking after the supplier or group of suppliers, and recognising there are different skill-sets required depending on what the relationship is and how it is going to be managed.
“It could be that a technical skill-set is very important, or it could be, if you are sourcing from Asia, that language and cultural flexibility is important and I think people don’t always think through what combination of process and skill-set is needed,” she says.
In developing relationships with suppliers, understanding the costs, and in particular, “cost to serve” is critical. According to Laura Morroll, head of commercial – consumer sector at UTL, cost to serve is an important tool for identifying where waste exists in the supply chain and presents opportunities for purchasing, logistics and suppliers to work together to take out cost. In retail that means healthier margins.
“We estimate that typical costs for logistics related activities in a retail supply chain, such as order processing, inventory holding, picking, outbound freight and store fulfilment, total on average 24 per cent of cost of goods sold. In poorly managed supply chains those costs can be as high as 46 per cent of cost of goods sold,” she says. “However, when ‘best practice’ principles are applied those costs can come down to just 13 per cent.”
Morroll points out that understanding the costs to serve for each product along its route to the customer helps with decisions on how to best serve the consumer and provides a basis for benchmarking performance and implementing operational improvement. But she emphasises that there can be challenges.
“The problem for many retailers is that cost to serve is a cross supply chain method of looking at process-based costs and touches on activities within different spheres of the business, as well as those within partner and supplier organisations,” she says. “Taking a cohesive approach to driving out cost therefore requires close collaboration across the value chain and must involve management within sales, merchandising, and operations – along with external partners such as logistics service providers, carriers and suppliers.”
She points out that a collaborative approach with Homebase and its suppliers has seen a 30 per cent reduction in shrinkage and damage to pots and tiles from Turkey and the Far East.
Originally appeared in Supply Chain Standard, June 2014