SMMT Industry Forum: Managing supply chain relationships
Building great business relationships not only improves productivity, the work itself also becomes more enjoyable when we have good relationships with those around us. As naturally sociable creatures, human beings crave positive interactions, meaning that when we have a good relationship with a colleague, they are more like to go along with changes we implement. These positive interactions also make us more innovative and creative in our roles.
A healthy working relationship is one built on trust, mutual respect, mindfulness and communication. When we neglect one or more of these areas, the relationship can suffer. In process crucial areas of business, such as supply chain, good relationships are key to delivering to targets.
Healthy relationships are not about being good mates with one's suppliers at the cost of good professional business practice, though. There are advantages of working with companies we like, such as reductions in costs that are often intangible. It can be hard to show the value of the relationship. But operating outside of corporate rules, regulations and structures, could cause trouble. If the friendly company’s piece price is higher than a company with whom there is a weaker relationship, the decision should not be based on personal preference.
Relationships with suppliers do not collapse overnight. Usually errors are made which fall into one of the following categories: Pre-contract mistakes, contract errors, termination issues and the breakdown of relationships.
Businesses who rely on an efficient supply chain to remain profitable know that the relationships with those within the chain are paramount. It is essential for these businesses to build and maintain high performing relationships with customers and suppliers.
The inability to maintain an effective working relationship can have a huge impact on the entire supply chain, such as:
Issues with stock availability due to poor performance
Issues with obsolescence due to variability supply
Being stuck holding excess levels of stock to buffer the impact from suppliers
Little to no support to manage changing demand patterns
Increasing supplier costs with no negotiation
Difficulties in containing risk
The most common relationship mistakes include the failure to monitor performance and resolve issues as they arise. However, for most businesses the supply chain is constantly evolving, as are the best practice methods of managing it. The previous methods of relationship management from 20 years ago will no longer work in today’s working environments. The ‘old school’ approach needs to adapt and grow in order to suit the rise of the millennial generation as it moves into more senior positions in the workplace.
According to Relate by 2025 75% of the workforce will be millennials (those born between 1981- 1996). This change in generation will have a greater impact on supply chain relationships than their predecessors due a shift in working behaviours.
Previous generations of management such as Baby Boomers (1946 – 1964) and Gen- X (1965 – 1980), tend to be seen as aloof, with a focus on the bottom line and an ability to confront problems head on. That management style doesn’t work for millennials, who have a need for social responsibility, constant communication and team work.
A recent article in Forbes stated that, “millennials will only interact with brands that are open and transparent, stand for more than their bottom line and address environmental and socioeconomic issues in the community.”
The desire to see suppliers as part of the team, rather than a customer and provider relationship, will better suit a changing supply chain culture.
Previously, it has been common practice for suppliers to be dictated to when it came to products and the quantity required, with contracts won based upon price alone. It was also typical for suppliers to be reprimanded, fined or ‘punished’ with less favourable terms or treatment following problems with supply. In turn, customers had prices dictated with little negotiation on other key areas such as service, MOQs and delivery time frames.
One of the biggest and long-term wins from a close and collaborative relationship with a supplier is technology development – with the automotive industry offering today’s supply chain executives a vast history of successes and failures. The traditional model would see some large OEM companies co-develop a new technology with a supplier with no commitment to purchase beyond the design phase, then put its manufacture out to tender. Often, the supplier involved in the design would be undercut and lose the business. Next time, the supplier would take its ideas elsewhere and the OEM’s industry reputation for rewarding innovation would be harmed. Relationships built on decency and trust are needed for the long-term survival of the OEM. If customers and suppliers abuse this trust, the whole supply chain can break.
Nowadays, that type of management, especially in emerging sectors or new, innovative businesses, isn’t conducive to a healthy supply chain. Suppliers are part of the business. Prices, scaled discounts, collaboration through planning, rebates, commitment to buy, returns acceptance for new range releases, VMI, consignment stock agreements – these things are now common for those who actively manage their relationships with suppliers.
However, this can differ for different sectors - those who are lagging with the new approach to supplier management typically reside in the heavy industrial areas such as automotive, industrial machining and aerospace.
Those pushing the boundaries of what was once standard practice tend to be in technology, fashion and fast-moving consumer goods – particularly sectors with a strong consumer reach where their customer base demands high quality, responsible, efficient supply.
The previous limitations of supplier relationship management are being lifted with advancements in technology. Blockchain promises to allow visibility throughout the supply chain, making it easy to view key factors such as: current stock, production, shipping information, quality issues and pricing of raw material data.
Transitioning from a one-sided supplier management approach, to a joined-up partnership means that measuring a full range of services (price, lead time, quality, customer service, environmental sustainability, CSR) is essential if technological advancements are to be adopted. No supplier will sign up to sharing data honestly, if there is the fear of punishment as a result.
In order to best improve and maintain a good relationship with suppliers, supply chain managers need to move away from an outdated business culture of finding someone to blame, and towards a collaborative approach with a ‘how do we resolve and improve this together’ mentality.
Those seeking support can turn to analysists such as SMMT Industry Forum, who help global manufacturers understand, optimise and improve both manufacturing capability and business performance. SMMT Industry Forum was created by the UK government, the Society of Motor Manufacturers and Traders and vehicle manufacturers to improve competitiveness of the UK’s automotive supply chain.
Specifically-developed supply chain training courses, using the foundations of the IATF 16949 standard as well as specific logistics and operations under MMOG/LE, help to support businesses with improved supply chain performance.
Top five tips for maintaining good relationships with suppliers
Communication: Talk to suppliers regularly
Team work: Plan for contingencies and accept accountability
Understanding: Have a working knowledge of a supplier’s business and/ or operating procedures
Stay flexible: Adapt to everyday issues as they arise and resolve them quickly
Feedback: Encourage open discussions around how to work together more efficiently in the future
Case study - Phones 4U
The fall of Phones 4U in 2014 was described as a classic example of a relationship breakdown.
The decision of EE and Vodafone to withdraw supply forced a company, that was at the time making profits of £100mn, into administration.
The supplier’s decision to end their contract is usually an indication that something went wrong when the next generation of contracts was being negotiated – possibly while trying to drive a hard bargain. As a result, Phones 4U ended up as the unfavoured route to market. A domino effect followed with one supplier after the other falling by the wayside.
Rachel Sellers is a Principle Supply Chain Consultant at SMMT Industry Forum.
NTT DATA Services, Remodelling Supply Chains for Resilience
Joey Dean, the man with the coolest name ever and Managing Director in the healthcare consulting practice for NTT DATA and is focused on delivering workplace transformation and enabling the future workforce for healthcare providers. Dean also leads client innovation programs to enhance service delivery and business outcomes for clients.
The pandemic has shifted priorities and created opportunities to do things differently, and companies are now looking to build more resilient supply chains, none needed more urgently than those within the healthcare system. Dean shares with us how he feels they can get there.
A Multi-Vendor Sourcing Approach
“Healthcare systems cannot afford delays in the supply chain when there are lives at stake. Healthcare procurement teams are looking at multi-vendor sourcing strategies, stockpiling more inventory, and ways to use data and AI to have a predictive view into the future and drive greater efficiency.
“The priority should be to shore up procurement channels and re-evaluate inventory management norms, i.e. stockpiling for assurance. Health systems should take the opportunity to renegotiate with their current vendors and broaden the supplier channel. Through those efforts, work with suppliers that have greater geographic diversity and transparency around manufacturing data, process, and continuity plans,” says Dean.
But here ensues the never-ending battle of domestic vs global supply chains. As I see it, domestic sourcing limits the high-risk exposure related to offshore sourcing— Canada’s issue with importing the vaccine is a good example of that. So, of course, I had to ask, for lifesaving products, is building domestic capabilities an option that is being considered?
“Domestic supply chains are sparse or have a high dependence on overseas centres for parts and raw materials. There are measures being discussed from a legislative perspective to drive more domestic sourcing, and there will need to be a concerted effort by Western countries through a mix of investments and financial incentives,” Dean explains.
Wielding Big Tech for Better Outcomes
So, that’s a long way off. In the meantime, leveraging technology is another way to mitigate the risks that lie within global supply chains while decreasing costs and improving quality. Dean expands on the potential of blockchain and AI in the industry.
“Blockchain is particularly interesting in creating more transparency and visibility across all supply chain activities. Organisations can create a decentralised record of all transactions to track assets from production to delivery or use by end-user. This increased supply chain transparency provides more visibility to both buyers and suppliers to resolve disputes and build more trusting relationships. Another benefit is that the validation of data is more efficient to prioritise time on the delivery of goods and services to reduce cost and improve quality.
“Artificial Intelligence and Machine Learning (AI/ML) is another area where there’s incredible value in processing massive amounts of data to aggregate and normalise the data to produce proactive recommendations on actions to improve the speed and cost-efficiency of the supply chain.”
Evolving Procurement Models
From asking more of suppliers to beefing up stocks, Dean believes procurement models should be remodelled to favour resilience, mitigate risk and ensure the needs of the customer are kept in view.
“The bottom line is that healthcare systems are expecting more from their suppliers. While transactional approaches focused solely on price and transactions have been the norm, collaborative relationships, where the buyer and supplier establish mutual objectives and outcomes, drives a trusting and transparent relationship. Healthcare systems are also looking to multi-vendor strategies to mitigate risk, so it is imperative for suppliers to stand out and embrace evolving procurement models.
“Healthcare systems are looking at partners that can establish domestic centres for supplies to mitigate the risks of having ‘all of their eggs’ in overseas locations. Suppliers should look to perform a strategic evaluation review that includes a distribution network analysis and distribution footprint review to understand cost, service, flexibility, and risks. Included in that strategy should be a “voice of the customer” assessment to understand current pain points and needs of customers.”
“Healthcare supply chain leaders are re-evaluating the Just In Time (JIT) model with supplies delivered on a regular basis. The approach does not require an investment in infrastructure but leaves organisations open to risk of disruption. Having domestic centres and warehousing from suppliers gives healthcare systems the ability to have inventory on hand without having to invest in their own infrastructure. Also, in the spirit of transparency, having predictive views into inventory levels can help enable better decision making from both sides.”
But, again, I had to ask, what about the risks and associated costs that come with higher inventory levels, such as expired product if there isn’t fast enough turnover, tying up cash flow, warehousing and inventory management costs?
“In the current supply chain environment, it is advisable for buyers to carry an in-house inventory on a just-in-time basis, while suppliers take a just-in-case approach, preserving capacity for surges, retaining safety stock, and building rapid replenishment channels for restock. But the risk of expired product is very real. This could be curbed with better data intelligence and improved technology that could forecast surges and predictively automate future supply needs. In this way, ordering would be more data-driven and rationalised to align with anticipated surges. Further adoption of data and intelligence and will be crucial for modernised buying in the new normal.
These are tough tasks, so I asked Dean to speak to some of the challenges. Luckily, he’s a patient guy with a lot to say.
On managing stakeholders and ensuring alignment on priorities and objectives, Dean says, “In order for managing stakeholders to stay aligned on priorities, they’ll need more transparency and collaborative win-win business relationships in which both healthcare systems and medical device manufacturers are equally committed to each other’s success. On the healthcare side, they need to understand where parts and products are manufactured to perform more predictive data and analytics for forecasting and planning efforts. And the manufacturers should offer more data transparency which will result in better planning and forecasting to navigate the ebbs and flows and enable better decision-making by healthcare systems.
Due to the sensitive nature of the information being requested, the effort to increase visibility is typically met with a lot of reluctance and push back. Dean essentially puts the onus back on suppliers to get with the times. “Traditionally, the relationships between buyers and suppliers are transactional, based only on the transaction between the two parties: what is the supplier providing, at what cost, and for what length of time. The relationship begins and ends there. The tide is shifting, and buyers expect more from their suppliers, especially given what the pandemic exposed around the fragility of the supply chain. The suppliers that get ahead of this will not only reap the benefits of improved relationships, but they will be able to take action on insights derived from greater visibility to manage risks more effectively.”
He offers a final tip. “A first step in enabling a supply chain data exchange is to make sure partners and buyers are aware of the conditions throughout the supply chain based on real-time data to enable predictive views into delays and disruptions. With well understand data sets, both parties can respond more effectively and work together when disruptions occur.”
As for where supply chain is heading, Dean says, “Moving forward, we’ll continue to see a shift toward Robotic Process Automation (RPA), Artificial Intelligence (AI), and advanced analytics to optimise the supply chain. The pandemic, as it has done in many other industries, will accelerate the move to digital, with the benefits of improving efficiency, visibility, and error rate. AI can consume enormous amounts of data to drive real-time pattern detection and mitigate risk from global disruptive events.”