Supply chain professionals face this dilemma all too often: How can they lower supply and materials costs while keeping supplier and customer relationships intact?
Obviously, in the current economic environment this juggling act takes on even greater importance, and, based on the handful of articles and reports released these last couple of weeks, the results of the best ways of doing that appear mixed, at best.
For instance, a recent KPMG International survey titled "Global Manufacturing Outlook – Relationships, Risk and Reach," polled nearly 200 senior-level executives from the aerospace, metals, engineering, and conglomerates sectors across North America, Western Europe, Asia/Pacific, and Africa to understand how supply chains have shifted as economic uncertainty continues. The firm found:
- 66 percent of respondents indicated that cost still ranks as the leading consideration of their supply chain models.
- But 63 percent of respondents also agreed that more attention should be paid to non-financial elements of the supply chain.
- And 38 percent said an acute focus on cost has harmed relationships with suppliers.
To address these concerns, leading companies are designing more strategic approaches to handle economic-associated risks, which KPMG suggests could emerge as best-practices. The approaches, however, don’t strike me as particularly novel. According to KPMG’s survey, companies are: forging stronger relationships and engaging in collaborative innovation with suppliers; strategically investing in key suppliers or bringing parts of the supply chain in-house; and applying a mix of both regional and global supply sources to achieve the best combination of speed, quality, and cost.
In and of themselves, they sound like strategies companies have been -- or should have been -- adopting long before the financial crisis. Then, I read another report penned by experts from Wharton School of the University of Pennsylvania and The Boston Consulting Group, which also pointed to another rather commonly talked about solution: supply chain flexibility.
The authors suggest that present economic pressures will compel companies to more adeptly address what they call a “two-speed world.” Within this model, one world revolves around the slow rate of growth and high per capita income in developed regions such as Europe and North America, they note. The second world centers on far faster growth in emerging economies with low per capita income, namely places like China, India, and Brazil. For companies to adequately play in these two distinct markets, the report authors say, the key challenge to overcome is creating “flexible and adaptable supply chains that can serve both types of markets while optimizing sales and margins.”
Again, managing costs comes up in the context of creating flexibility. In mature, low-growth economies, strategic pricing is key to profitability. "If you want to make more money without selling more, then you have to maintain or increase price levels," says Pierre Mercier, Boston Consulting Group partner and leader of the firm's supply chain group.
On the flip side, in low-wage, developing countries, since the average consumer cannot afford expensive products, cost and value rank as more important. "In emerging economies, you need a very low-cost, streamlined supply chain," Mercier adds.
This seems to imply to me that cost and supplier-relationship integrity may not necessarily align strategically. And, perhaps, as Tony Golsby-Smith writes in the Harvard Business Review, in the quest to keep costs on budget, the strategic part seems to falter. Golsby-Smith aptly asks the question: “How can strategy free itself from the budget-planning monster?”
I’m thinking about this in a slightly different way. If supply chain costs are, in fact, a top consideration in any supply chain project or operation, and companies are truly engaging in strategies aimed at forging deeper relationships with suppliers, where do those two points come into balance? Do they ever come into balance, or are they always ebbing and flowing depending on external situations?
During this prolonged downturn, how are you holding this all together? Which side more frequently wins out -- the near-term material price tag or the long-term relationship? And how do you keep both in check? Let’s take the discussion beyond the obvious solutions that keep coming up in conversation and get to some of the nitty-gritty “How do you do this stuff for real?” kinds of practices. I am looking forward to your replies.