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Supply Chain: Don't Forget About Relationships

Thought Leader
It is Friday and the clock can’t move fast enough, when right at 4:53pm your phone rings. Long story short, it is an emergency. A part broke and if it doesn’t get replaced by 10pm the next shift will not be able to complete the order for your organization’s top customer on time. You go through your contact list as fast as you can, searching for your supplier’s number like Cinderella running before midnight. If it was your old supplier, you know there would be no problem. The part would be there in an hour max because you had a relationship, but maybe not now. In the latest frenzy to reduce expenses, a new contract was negotiated with a new supplier and God only knows the agreed upon terms. Sound familiar? I truly hope not for the sake of your sanity, but it is a common occurrence. It is typical for organizations to target price when challenged with cost reduction initiatives. In today’s economy, organizations need to pursue economies of scale to achieve competitive advantage, but supply chain organizations need to be judicious and think long and hard about their strategies before squeezing price as the only alternative. Along with sales, demand, supply, forecasting, and inventory, as inputs to the supply chain life cycle, supplier performance and the value of the relationship should also be key inputs, especially for critical suppliers. On our engagements with supply chain organizations, our team often hears: “We have squeezed every penny we can from all our suppliers.” As proud as they are of this, I must admit, this typically raises a red flag for me and two things come to mind: 1. I hope there is a robust supplier management program, to sustain those savings. 2. I hope there was a comprehensive re-negotiation strategy for suppliers providing critical products/services. Believe me, we all want the best price possible, and maybe that is the sole purpose of your negotiation when buying commoditized items like pencils or reams of paper. However, when your supplier provides products or services that can stop your production, or can result on putting you out of business, price is only one of many elements to consider. When there were none of these in place at our client’s site, our plan of attack included the following: * Determine the categories: We evaluate the items you purchased, if possible for a few years, and categorize those purchases based on your organization’s mission, strategic agenda and customers you serve. Who do you serve, and why you do what you do should drive your customer demand when there is alignment. * Assess the spend: For your most critical categories, we look at the spend and demand over the past 5 years. We also look at the suppliers for those categories and pay special attention to instances where there were more than one supplier providing your critical item. * Segment: Based on our findings, we evaluate your supply base on spend, value and risk, and segment your supply base based on criticality. * Manage per segment: Once segmentation is completed we take a robust look at the existing contracts with your critical suppliers to identify key areas that should be part of each supplier’s management program, based on the relationship and agreed upon terms. I must admit that our implementation is very thorough, but the robustness of the solution will depend on what your organization can consistently sustain based on these variables: * The skills and the capacity of your team – People * The current dynamics that allow your teams to transform your organization’s resources into value to your customers - Process * The systems currently in place to enable program’s success – Technology Whether a robust or lighter version is in place, the supplier management program always seeks to deepen the relationship with your suppliers based on transparency, mutual collaboration and beyond the contract negotiated terms. Like any relationship, it does take time to build, but by approaching it in a structured and consistent way, you will be able to interact with them as business partners, to identify common goals and become their Customer of choice. Because at the end of the day, success in business is all about the relationships. By Neysha Arcelay, Precixa,