Comment: What the Carillion crisis teaches us about effective supplier management
The collapse of Carillion at the beginning of 2018 sent shock waves through its supply chain and the wider construction industry. Not only have jobs been lost, but suppliers to Carillion are now at risk of closing shop as well, with contracts like the construction of HS2 likely to change hands.
One detail that has been repeated in the press is that, despite the risks highlighted by repeated profit warnings, the UK public sector still awarded big money contracts to Carillion. This includes a £12m school building contract, awarded three days after Carillion’s third profit warning.
The collapse of Carillion is a sad end for a UK construction giant – but it raises a serious lesson for organisations that have close working relationships with key partners; the importance of effective supplier management.
Give structure to evaluation beyond cost reduction
Effective supplier management is about the holistic evaluation of suppliers. This process should seek to evaluate and manage suppliers on a number of factors and shouldn’t focus solely on cost reduction. Of course, cost reduction is important, but it should not be the only way in which organisations evaluate strategic suppliers.
Solely focusing on cost reduction when managing suppliers is a risky gamble. The pressure to reduce expenditure can bring the risk of weakening strategic suppliers financially, by eroding margins in contracts. For example, if a supplier is operating on a tight margin on an infrastructure job because they undercut rivals on cost, suppliers could quickly find the savings disappearing once they find critical faults that need correcting.
Similarly, suppliers bidding the lowest price may be those with insufficient experience to properly scope effort, resulting in cost overruns and delays. A cost–focused approach is also detrimental to relationships with suppliers and the quality of work and goods organisations receive. If price is the only thing ever discussed, it’s not possible to talk about how to innovate and collaborate on contracts.
Organisations both in the public and private sector should put in place a structured supplier performance process, to analyse strategic suppliers on more than just a cost basis. This process empowers the purchaser to become a partner manager, rather than a price negotiator – with the goal being to help strategic suppliers improve operational performance, control risk and reduce costs sustainably, instead of being pressured into reductions. Responsible, innovative suppliers should be encouraged and rewarded.
Data-driven supplier performance
Technology is key to delivering this in-depth evaluation of strategic supplier performance. But to get smart, organisations need to draw on data within and external to the business to create a barometer of strategic supplier performance.
To start with, organisations should source information on the supplier’s operational performance, looking at issues like compliance with the terms of the contract, service quality, deadline management and supply shortages. Organisations should also collect information and feedback on supplier risk from in-house and external data providers, covering issues like financial health and sustainable development. Such a process would have flagged the risks involved with Carillion.
There is also more intangible data that needs to be collected from internal stakeholders that is relevant to evaluation. This includes feedback on the status of the supplier relationship, team competence, responsiveness in a crisis and the capacity to innovate. Important instances that influence these criteria should be noted and taken up with suppliers to make improvements.
Excellent supplier practises should also be recorded, to see if these can be extended to other areas of the working relationship. Simple, flexible survey capabilities make this process scalable as well as auditable, and help integrate such factors into a 360-degree view of supplier performance and risk.
Suppliers should be asked to provide a breakdown of their selling price according to margins and various components, like raw materials, workforce costs and R&D. This makes it easier to focus on areas in which improvements and adjustments could be made. This collaboration can create more sustainable cost savings, rather than pressuring strategic supplier to cut the price.
Smarter evaluation leads to smarter conversations
A smarter approach to evaluation allows organisations to crunch data to analyse strategic suppliers and assess performance over time. It gives organisations a benchmark to measure against other strategic suppliers, analyse the impact of identified supplier risk and identify areas for improvement. This gives a baseline to analyse discrepancies between targets and performances. Seemingly minor details in technology options, such as whether there is a truly unified supplier record across all processes and modules, make a big difference with regards to the ability to have a holistic view of suppliers. Don’t overlook such details when evaluating technology.
Bringing together this data gives organisations a deeper understanding of their key suppliers and the market they operate in. Organisations can now collaborate with strategic suppliers to create productivity gains and become more competitive and innovative, which can help cut costs.
Taking a holistic approach to supplier management beyond cost reduction decreases the chances that organisations will be hit by a Carillion-sized crisis. It also takes relationships to a more collaborative level, which improves the chances of sustainable cost reductions driven by smarter conversations.
EU and US agree end to Airbus-Boeing supply chain tariffs
The EU and US have agreed to resolve a 17-year dispute over aircraft subsidies, suspending tariffs on billions of dollars' worth of goods that have plagued procurement leaders on both sides of the Atlantic.
Under an agreement reached by European Commission Executive Vice-President Valdis Dombrovskis and US Trade Representative Katherine Tai on Tuesday, the tariffs will be halted for a period of at least five years.
It will bring an end to punitive and disruptive levies on supply chains that have little to do with the argument, which became embroiled in the trade battle. Businesses on both sides of the dispute have been hit with more than $3.3bn in duties since they were first imposed by the US in October 2019, according the EC.
The US imposed charges on goods upto $7.5bn in response to a World Trade Organisation ruling that judged the EU’s support of Airbus, its biggest aircraft manufacturer, unlawful. A year later in November 2020, the EU hit back. The WTO found the US had violated trade rules in its favourable treatment of Boeing, and was hit with EU duties worth $4bn.
In all the tariffs affected $11.5bn worth of goods, including French cheese, Scotch whisky, aircraft and machinery in Europe, and sugarcane products, handbags and tobacco in America. Procurement leaders on both sides of the fence were forced to wrestle with tariffs of 15% on aircraft and components, and 25% on non-aircraft related products.
Boeing-Airbus dispute by the numbers
- The dispute began in 2004
- Tariffs suspended for 5 years
- $11.5bn worth of goods affected by tariffs
- $3.3bn in duties paid by businesses to date
- 15% levy on aircraft and 25% on non-aircraft goods suspended
Both sides welcome end to tariffs
European Commission President Ursula von der Leyen branded the truce a “major step” in ending what is the longest running dispute in WTO history. It began in 2004.
“I am happy to see that after intensive work between the European Commission and the US administration, our transatlantic partnership is on its way to reaching cruising speed. This shows the new spirit of cooperation between the EU and the US and that we can solve the other issues to our mutual benefit,” she added.
Both aircraft manufacturers have welcomed the news. Airbus said in a statement that it will hopefully bring to an end the “lose-lose tariffs” that are affecting industries already facing “many challenges”. Boeing added that it will “fully support the U.S. Government’s efforts to ensure that the principles in this understanding are respected”.
The US aerospace firm added: "The understanding reached today commits the EU to addressing launch aid, and leaves in place the necessary rules to ensure that the EU and United States live up to that commitment, without requiring further WTO action."
This week’s decision expands upon a short-term tariff truce announced in March this year. The EC says it will work closely with the US to try and further resolve the dispute, establishing a Working Group on Large Civil Aircraft led by each side’s trade minister.
Airbus last month signalled to suppliers that post-pandemic recovery was on the horizon, telling them to scale up to meet a return to pre-COVID manufacturing levels. “The aviation sector is beginning to recover from the COVID-19 crisis,” said Airbus chief executive Guillaume Faury, adding that suppliers should prepare for a period of intensive production “when market conditions call for it.”