The single greatest risk from supply chains is getting caught off guard.
In 2007, Mattel Inc., owner of such popular toy lines as Barbie, American Girl, and Fisher Price, was forced to recall millions of the toys it had outsourced to a producer in China. Despite requiring its supplier companies to undergo outside audits to make sure they operated properly and ethically, Mattel’s main supplier of its Hot Wheels cars had subcontracted its painting to another company. However, instead of using paint supplied by the Tier 1 contractor, the subcontractor used paint that contained potentially toxic lead, leading Mattel to a costly and reputation-harming recall.
Over the past 20 years, many other companies have been damaged by glitches in their supply-chain relationships. The immediate causes varied, including flawed software, product defects, ineffective transportation, poor material handling, bad inventory tracking, conflicts between contractors, and misleading representations by suppliers. What all of them shared was the buyer’s lack of visibility into what was happening with its supply chain, and a corresponding lack of preparedness to deal with the issues once they became apparent.
Fallout from the inability to clearly see issues affecting suppliers as they emerge is being multiplied by the speed with which market forces operate today. Disruptive products and solutions entering a market place extreme pressure on the supply chain to provide a rapid response. Consumer products that have become the objects of fads face similar challenges, where demand is fickle. In both cases, having the ability to respond to rapid marketplace changes is essential. Being blindsided by a supplier’s troubles or limitations can be devastating; maintaining visibility is a powerful business survival tactic.
That’s because, in addition to unexpected changes in supply and demand, supply chains also face near-permanent changes in markets. Those structural shifts usually come from economic progress, political and social change, demographic trends, and technological advances. All of those developments need to be monitored and somehow accommodated. Unless companies adapt their supply chains, they won’t stay competitive for very long.
But the fact is that manufacturing supply chains are notoriously complex. The very public supply snags that have grown out of the COVID-19 pandemic have helped to drive that point home. Yet procurement teams often lack consistent visibility beyond their Tier 1 vendors. Although procurement professionals sometimes capture information regarding Tier 2 suppliers, and once in a great while about their Tier 3 suppliers, the longer the supply chain, the lower its visibility. And the less visibility the buyer has, the less prepared it is to respond to change.
For example, a Dun & Bradstreet study of Fortune 1000 companies found that 162 of them had one or more Tier 1 suppliers in the Wuhan region of China — ground zero for the coronavirus. Considering what we know now about the pandemic, this number seems manageable — maybe even low. But when they looked a little deeper, they found that fully 938 of those companies had Tier 2 suppliers there. Now that’s really bad.
An analysis in Harvard Business Review concluded that top-performing supply chains — the ones that provide companies with sustainable competitive advantages — share three very important characteristics. First, great supply chains are agile; they react promptly to sudden changes in demand or supply. Second, they adapt over time as market structures and strategies evolve. And third, they align the interests of all the firms in the supply network so that everyone maximizes their interests. In each case, having visibility into the supply chain and marketplace context are fundamental to developing timely and appropriate responses.
Of course, seeing clearly into the inner workings of suppliers and markets is easier said than done. When it comes to suppliers, there is often a long history of adversarial relationships. The practice of beating up suppliers over pricing is a legacy of the last century which many companies continue to follow to this day. However, one of the casualties of those conflicts has been collaboration; suppliers are much less likely to cooperate with a company they perceive as a bully, and hostile behavior encourages price gouging and other forms of retaliation.
Research from McKinsey provides compelling evidence that companies that have invested in supplier collaboration tend to outperform their peers, resulting in an average 4.9% EBIT growth when compared to those without. It seems clear that for many, an untapped opportunity exists to generate significant value.
Beyond that, information about suppliers — which is at the foundation of every procurement activity — is frequently scattered across multiple collections of data and stored in separate silos, including spreadsheets, Access databases, e-mail, paper documents, and even Post-It Notes. Much of it is further dispersed along department lines, including finance, legal, logistics and purchasing. That makes it almost impossible to do a good job of strategic sourcing.
Instead, relationships that are more collaborative, more partnerships than rivalries, is the direction that many successful companies have taken. What distinguishes advanced procurement organizations is their commitment to digitizing their purchasing activities. These range from onboarding and collecting information about prospective suppliers all the way through to final payment. The shorthand for it is source-to-pay (S2P) —unified platforms available from multiple vendors — that typically include identification of potential suppliers, sourcing and negotiation, contracting, ordering, and invoicing and payment for goods, materials and services. However, some also include spend analysis, increased supply-chain visibility, greater compliance, improved supplier and stakeholder collaboration, and better supply-chain capacity forecasting. With S2P capabilities, procurement can grow to become a pillar of the company’s supply-chain resilience and risk-management strategy, and even a competitive advantage.
At a time when doubt and uncertainty seem to be a significant part of the new norm, and every company is impacted by crisis, it’s the procurement team that can help to build an agile and resilient supply chain to weather almost any storm. Leading procurement teams can manage multiple levels of the supply chain and maximize the value of data and information to make better decisions to mitigate risk and performance issues. Many procurement organizations have also implemented best practices like supplier development programs, category management and other collaborative activities. To streamline and enable these activities, procurement organizations will likely have turned to technology, including source-to-pay solutions, to maximize value generated through their supply-chain activities.
Doug Keeley is senior product marketing manager at Ivalua, a provider of cloud-based spend-management software.
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