Fending Off the Budget-Planning Monster

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 {complink 7219|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.

8 comments on “Fending Off the Budget-Planning Monster

  1. Jay_Bond
    February 3, 2011

    Personally I don't think there is a simple answer to solve this issue. This is something that has been plaguing companies for a long time. It is very hard to justify keeping inventory in preparation for sales when it is money that is tied up and not moving unless the sales are there. On the other side it is very hard to not keep the inventory in place to meet demands of customers and have a quick turnaround. In a perfect world planning out your budget and future sales wouldn't be a gamble. Unfortunately, this isn't a perfect world and everybody has to justify the path they choose. This is a valid issue that should have played a factor long before the latest financial crisis.

  2. Barbara Jorgensen
    February 3, 2011

    I'm with you, Jenn, these results aren't exactly mind-blowing. I'm wondering if perhaps the supply chain has reached a plateau–there were so many big changes post-2001 that we're awaiting the next revolution. That's not to say there is not a lot of innovation going on, but when was cost and flexibility NOT an issue in the industry?!?

  3. mfbertozzi
    February 4, 2011

    I am in line with previous posts; Jenn is reporting a very fascinating scenario. Till now industries tried to save cost especially on production leaving off supply chain as process in reality included in.

    @ Jenn/Barbara: not to say following is THE solution, anyway some steps ahead in improving supply, reducing costs and holding/increasing consumers' satisfaction have been done introducing mobile telecommunications in the process.

    Thx again for very interesting article!

  4. Jennifer Baljko
    February 4, 2011

    @Jay_Bond: You raise equally valuable points about everyone trying to balance the “to-hold-or-not-to-hold” inventory equation. And, you're right in saying that we're still in this phase of “everybody has to justify the path they choose.” But, shouldn't we be out of the justifying phase by now, with all this collective experience we have? Shouldn't something more definitive than circumstancial justification bubbled up to the surface yet?

    @barbara – I think if can move out the “justifying” phase Jay alludes to, we'll finally get to this next revolution, or evolution, at the very least.

    @mfbertozzi – Agreed. mobile telecommunications has already tipped many supply chain innovations. The problem is how to avoid being roadkill on the information superhighway when 5,000 things are zipping around all of us at 100 mph.

    Maybe Ken Bradely post's The Art of Pricing raises a valid point also relevant here in regards to pricing vs keeping suppliers game to play:”Let's consider three things a company can do to create leverage with a supplier: 1) Agree to favorable payment days; 2) Link new design win awards to price considerations on production materials; and 3) Sell your company’s success path to the supplier.”



  5. mfbertozzi
    February 4, 2011

    That's right Jennifer, you gave light to one of the crucial issues in terms of how to manage infos flood coming from all over. Some experiments related to virtual presence to treat “bits flow” in addition to ourserlf have been done. Of course it takes a few years as stable feature to introduce within the supply chain process.

    Thx again.

  6. Ken Bradley
    February 4, 2011

    Jennifer, I like this article a lot. I really resonate with your comments on the lack of novelty in most supply chain approaches.  Like you, I seem to hear the same old pap regurgitated with very little innovation.

    I think there is hope in the area of supply chain design where supply chains are designed to a specification of expected outcomes and each step in the chain is understood in terms of its value contribution to the end goal. Supply base design, a subset of supply chain design, examines supplier choices in the context of the end objective.

    The supply chain needs to create differentiating value for a company and “forging stronger relationships and engaging in collaborative innovation with suppliers” only makes sense with a limited few suppliers that can help with differentiation. Most of the rest are commodity suppliers whose main contribution to value creation is through price.

  7. eemom
    February 5, 2011

    I also agree with previous posts.  While companies have always worked on reducing their costs, the economic downturn has made this step more imperative.  I do agree that strategic relationships will be crucial to ensure lower costs and enable competitive pricing.  Strategic relationships to me though, mean more than just providing lower pricing.  Supply chain manufacturers will have to work with ODMs to add value and figure out how they can reduce their pricing without themselves taking a hit on profit.  Just shopping price will not work long term especially when ODMs start to demand more and more out of their supply chain.  Loyalty, differentiation and added value will all play a role in how ODMs and supply chain manufacturers team up and align to address this issue.

  8. Jennifer Baljko
    February 8, 2011

    Ken – Nice reconnecting with you. It's been a long time. I think you're onto to something with supply chain design and supply base design. It does feel like the existing sc models many companies use have exhausted their usefulness. Revamping it, though, is probably too scary for most people, and for better or worse, what's in place is the evil they know. But, I agree. Some incremental steps better aligning supplier choices with better-defined expected outcomes makes sense.

    eemom – Right: “Loyalty, differentiation and added value will all play a role in how ODMs and supply chain manufacturers team up.”

    But what feeds this loop? Competitive pricing, high quality, and supplier reliability may eventually open the door for discussions about value-added services and differentiation options if a supplier os considered a potentially long-long strategic partner. What if you're not in the running to be a longer-term partner, you're the commodity guy filling a short-term hole, where does loyalty play there? It probably doesn't, really, and price becomes thething by which most in this category are judged.

    It's the same loop over and over again, no?

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