Executive Briefings

Rethinking Supplier Relationship Management

Analyst Insight: The increasingly hyper-competitive supply chain landscape requires a reassessment of "old" supplier relationships and a paradigm shift. Executives are scrutinizing old business practices, especially those related to supplier management. Manufacturers are reassessing outsourcing engagements and bringing many of them back in-house (termed "backsourcing" or "reshoring") given that many of the original reasons for outsourcing have changed. Increased supplier segmentation will force a reassessment of supplier governance, with leading companies having segmented supplier management strategies. - Nada R. Sanders, Professor of Supply Chain Management and Iacocca Chair, Lehigh University

The majority of companies are rethinking their supplier relationships given a change in the global competitive landscape. Many are considering bringing back in-house many processes previously outsourced and conducting an extensive analysis of their supply base. The majority of manufacturing firms say that supplier segmentation, risk management and ongoing reassessment of outsourcing are required parts of managing a competitive supply chain.

"¢ Supplier Segmentation. Segmenting the supply base and structuring and applying governance agreements based on a supplier's role and importance in the supply chain helps businesses better anticipate disruptions and respond more effectively to those that do occur. Leading companies are developing risk management practices that segment suppliers into different categories according to risk and the way the company does business (e.g., product complexity, length of lead time, high and low gross margin, high and low levels of innovation). Strategic suppliers, the smallest percentage of the total, are disproportionally vital - the "vital few." As such, governance structures with these companies require the alignment at the highest level, such as strategic alignment and vision. Less critical supplier segments will continue to be transactional in nature. However, companies will need to be careful in identifying the less critical segments as they may not be as obvious. Also, companies will need to reassess and reconfigure their supply base on a regular basis.

"¢ Reassessment of Outsourcing Strategies. Many outsourcing engagements were developed before the "new normal", where low labor costs were abundant in developing nations and transportation costs were less critical. With changing cost structures - labor, fuel, and transportation costs - more companies are rethinking their outsourcing strategies and a large number of manufacturing firms are considering bringing certain activities back in-house. Many leading companies are considering the advantages of in-house production, especially when issues of protecting proprietary designs and intellectual property are important, as well as quality assurance, and control of processes.

"¢ Supplier Risk Model. Old supplier risk models relied upon modeling historical financial performance and trends as a predictive indicator of future supplier financial performance. New metrics such as measuring cost of goods to incorporate supply chain risk will increasingly be used. Rethinking cost to reflect risk (such as creating "risk adjusted price") will be increasingly common. Risk metrics should include both financial and operational risks that contribute to the overall supplier risk rating, which would then be used to augment or modify quoted price. Supplier risk can then be compared to the organization's risk tolerance and an associated risk variance can be developed into a performance metric used by the buyer.

The Outlook

The general trend in outsourcing will continue. However, companies will bring certain processes back in-house, especially those that involve large intellectual property and proprietary designs. Leading companies will place great emphasis on understanding and segmenting their supplier base, giving preference to strategic suppliers. In 2013, expect to see analytics and big data better link macro-economic data (regional economic data, political data, regulatory requirements) with supplier data (financial information, operational data, performance execution) to provide a more comprehensive supplier risk map.


Keywords: supply chain, supply chain management, supply chain risk management, supply chain planning, supplier performance, supplier base, supplier risk map

The majority of companies are rethinking their supplier relationships given a change in the global competitive landscape. Many are considering bringing back in-house many processes previously outsourced and conducting an extensive analysis of their supply base. The majority of manufacturing firms say that supplier segmentation, risk management and ongoing reassessment of outsourcing are required parts of managing a competitive supply chain.

"¢ Supplier Segmentation. Segmenting the supply base and structuring and applying governance agreements based on a supplier's role and importance in the supply chain helps businesses better anticipate disruptions and respond more effectively to those that do occur. Leading companies are developing risk management practices that segment suppliers into different categories according to risk and the way the company does business (e.g., product complexity, length of lead time, high and low gross margin, high and low levels of innovation). Strategic suppliers, the smallest percentage of the total, are disproportionally vital - the "vital few." As such, governance structures with these companies require the alignment at the highest level, such as strategic alignment and vision. Less critical supplier segments will continue to be transactional in nature. However, companies will need to be careful in identifying the less critical segments as they may not be as obvious. Also, companies will need to reassess and reconfigure their supply base on a regular basis.

"¢ Reassessment of Outsourcing Strategies. Many outsourcing engagements were developed before the "new normal", where low labor costs were abundant in developing nations and transportation costs were less critical. With changing cost structures - labor, fuel, and transportation costs - more companies are rethinking their outsourcing strategies and a large number of manufacturing firms are considering bringing certain activities back in-house. Many leading companies are considering the advantages of in-house production, especially when issues of protecting proprietary designs and intellectual property are important, as well as quality assurance, and control of processes.

"¢ Supplier Risk Model. Old supplier risk models relied upon modeling historical financial performance and trends as a predictive indicator of future supplier financial performance. New metrics such as measuring cost of goods to incorporate supply chain risk will increasingly be used. Rethinking cost to reflect risk (such as creating "risk adjusted price") will be increasingly common. Risk metrics should include both financial and operational risks that contribute to the overall supplier risk rating, which would then be used to augment or modify quoted price. Supplier risk can then be compared to the organization's risk tolerance and an associated risk variance can be developed into a performance metric used by the buyer.

The Outlook

The general trend in outsourcing will continue. However, companies will bring certain processes back in-house, especially those that involve large intellectual property and proprietary designs. Leading companies will place great emphasis on understanding and segmenting their supplier base, giving preference to strategic suppliers. In 2013, expect to see analytics and big data better link macro-economic data (regional economic data, political data, regulatory requirements) with supplier data (financial information, operational data, performance execution) to provide a more comprehensive supplier risk map.


Keywords: supply chain, supply chain management, supply chain risk management, supply chain planning, supplier performance, supplier base, supplier risk map