COST is a big factor in the supply chain. And it will remain a big factor. However, it is important to remember that supply chain professionals are slowly moving away from the lowest cost, best option mentality.
The lowest cost approach will only offer savings in the short term, never in the long term. Today’s supply chains are gravitating from a cost focus to a customer focus hence the need for supply chain professionals to have an end-to-end orientation.
The days of piece-price negotiation is long gone. Supplier development strategies do not focus on short-fuse shelf price negotiations. It looks at the bigger picture. The lowest cost approach could be paved with good intentions, but it must be remembered that most often the lowest price also brings the lowest quality.
Trying to extract every penny of savings out of a supplier and demanding year-over-year lowest prices may result in short-term benefits without providing optimal answers to the cost challenges.
A short-term approach of forcing suppliers to reduce their prices often corresponds to a proportional increase in the risk of supplier failure.
It can backslide as daily supplier cost pressures continue to prevail. It is, therefore, advisable for companies to move away from a “price down” procurement strategy to a “cost out” strategy.
Such an approach focuses mainly on removal of waste through joint initiatives aimed at value creation for the whole network. It would appear the current business landscape makes it extremely difficult to absorb the costs of supplier switching as well as the costs of unmet expectations making supplier development initiatives the only favourable option to remedy the situation.
Price reduction is only a tactical short-term solution and supply chain professionals need to understand that there is a limit to how much a supplier can reduce its price and still remain viable. Hammer driven approaches to cost reduction do not and will not work. Pure focus on cost reduction and cost avoidance through squeezing supplier margins will remain a pursuit of illusions.
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The expectations from such cost reduction negotiations have rarely been matched by reality. Supply chain professionals are, therefore, advised not to treat price negotiations with suppliers as an emotion filled battle.
It may be necessary to filter your subjective thinking while at the same time understanding the nuances of your business environment. It is now critical to realise that modern day supply chains are driven by professionals with process expertise as opposed to people with just functional competences and experience.
Real world business operations do not often unfold as planned. It may be important to remember the realities of the business world are fluid and will continue to be fluid. The world today is undergoing changes unseen in a century.
There is a wide array of risks unfolding before our own eyes - both actual and perceived. It is, therefore, important to constantly challenge the status quo and have big questions for the obvious.
Supply chain challenges are obviously numerous but so are the opportunities. Thought leaders in procurement are slowly recognising that dependency on suppliers and or service providers has increased manifold.
However, it must be remembered that the so-called best suppliers of today can easily turn out to be the problem children of tomorrow. It is, therefore, a strategic imperative to recognise that supplier development initiatives find strong expression in the way supply chains are being run.
Supplier development programmes involve working in collaboration with high-potential strategic vendors with a view to improve capabilities in high strategic areas such as cost control, quality control and innovation technologies. Such programmes are just not meant to produce cost reduction results. They are meant to give your business a trusted partner with the capacity to understand every aspect of your business. The process seeks to work with strategic suppliers on a one-to-one basis with a view to improve organisational performance. Supplier development strategies are born out of the belief that fresh eyes are best able to find unique and award-winning solutions.
Suppliers have got the capacity to sense and adapt to the dynamic changes in the business environment with a view to achieve the next level of value. Given the high costs of research and development, suppliers make huge investments in time, money and effort in developing innovativeideas.
Supplier development programmes provide a conducive platform for a learning-by-doing experience. Suppliers have got the capacity to bring the vision of future trends and supplier’s innovation solutions at no cost to the business.
They can facilitate the development of a product or service not currently available in the marketplace. They can assist your organisation in avoiding unworkable design process flows, thereby, shortening the product development cycle for new products.
Supplier development programmes are slowly becoming a textbook example of how supply chain professionals can leverage on the expertise of the vendor community. It appears such programmes are slowly becoming the mostinfluential management processes for achieving and improving organisational performance.
All other associated benefits emanate from this process, the first domino in a chain of positive outcomes. The same way marketing people are expected to nurture customer relationships, the same way procurement professionals should nurture supplier relationships.
Suppliers must be approached with the same care and attention the same way customers are approached. After all, an organisation is only as strong as its supply chain. Supply chain professionals should therefore continue to ideate on how best to leverage on supplier development programmes.
It is generally acknowledged that technological improvements have made it extremely difficult for companies to possess a full array of expert knowledge in all facets of production. Such challenges are coupled with specialisation issues. The increase in specialisation requires companies to source many different component parts from competent and competitive suppliers. There is a widespread recognition that companies compete not so much through what they do but through how they do it through their supply chains.
It, therefore, follows that strategic competitive advantage will remain resident in those companies that leverage on the expertise of their supply chain partners. Organisations should be ready to acknowledge the parallel efforts of vendors in solving supply chain related challenges. Supplier development initiatives have therefore grown in popularity and in number increasing collective value creation and making it possible to create efficiencies that were previously out of reach.
Through such programmes, supply chain partners can easily improve their offering exponentially. Supplier development programmes are associated with many desirable outcomes to include cost reduction, reduced cycle time, promoting improved reliability of designs which largely promotes quality products.
It will, therefore, promote total quality management which will in turn reduce warranty expenses and product returns. Such programmes are also associated with lower investment in capex, skill enhancement and effective utilisation of manpower, ease technology transfer, enhancing product range and reaching out to a larger customer base.
This will obviously tilt the scales to the benefit of many. As so often the case, suppliers are, and they will remain prolific sources of untapped innovation for continuous improvement and cost reduction. Their real-world experiences hold applicable value in the way business organisations are run. But to leverage this value and due to the coalition nature of business relationships, improved communication with suppliers holds the key.
Suppliers are not mind readers. Collaboration efforts will work best where there is open communication and transparency between supply chain partners. It requires going above and beyond current contractual requirements to develop stronger supplier relationships. It involves the acknowledgement of supplier skills and facilitating the alignment of those skills to organisational objectives.
Such collaboration efforts through supplier development entail acknowledging the vendor’s knowledge and matching it with the business’s goals and objectives. Such initiatives will often find ways to unlock significant new sources of value that benefit both. In some cases, small to medium size companies struggle to grow their businesses to match the user requirements of big companies. They can be supported through supplier development programmes with emphasis on education, mentoring, access to wider networks and improved access to capital.
Savvy supply chain professionals must see the need to facilitate small suppliers to collaborate utilising and honing their collective knowledge and expertise in order to compete for large tenders. Supply chain professionals seem to recognise that to move from good to great, from mediocre to excellent, there is need to give small suppliers the opportunity to hone in on their expertise.
They must be given the opportunity to organically capacitate themselves to become more competitive. Supplier development initiatives offer small to medium size companies an ecosystem of opportunities to foster growth and development. In conclusion, just to make sure nothing falls through the cracks, it must be remembered that good business is built on solid supplier development programmes.
The need for supplier development programmes should undoubtedly remain a top-of-mind issue. Supplier development has been embraced as a cornerstone to business success. Other supply chain practitioners may view supplier development initiatives as a nice to have process. It must be regarded as a necessity. It must be regarded as a vitamin not as a painkiller.
As real-world operations do not often unfold as expected, supplier development initiatives often try to follow a different path from the past with the future in mind. Such programmes should lend us the benefit of wisdom and good counsel from supply chain partners.
Commercial experience has demonstrated that companies cannot be more responsive to its customers unless its suppliers are equally more responsive. When correctly applied and followed supplier development programmes can produce sustainable savings in a consistent manner.
The aggregate value potential is worth the effort. Leveraging on the support of supplier development programmes is the need of the hour. The key variable to achieve this holy-grail is to work closely with your supply chain partners.
Problems can easily become opportunities when the right supply chain partners come together without necessarily overlooking the critical nuances of the supply chain landscape. It is not beyond the realms of possibility that supplier development objectives could be achieved with relative ease.
Big things happen when you do little things right. Supplier development programmes could be an X-factor in the quest to achieve supply chain excellence.
- Nyika is a supply chain practitioner based in Harare. — [email protected].
