Even in the age of digitization, technology is not a silver bullet; modern supply chains remain highly dependent on human relationships in order to stay moving.
As globalization unfolds at a breakneck speed and consumer expectations evolve accordingly, value chains are becoming exponentially more complex, with higher levels of outsourcing than ever before. These days, the average product will pass through many different hands under various vendors around the globe before reaching its final destination. Today, sixty to seventy percent of a firm’s cost is typically controlled by the extended supply chain.
But with communications confined to the form of emails and spreadsheets, the consequences of shaky supplier relations are often not made evident until after disaster strikes, when businesses scramble in vain to coordinate hundreds of disparate moving parts across their supply chains. Disruption is inevitable, but its impact can be mitigated—and even leveraged—if a supply chain comprises a network of close relationships on which it can depend. Consequently, cultivating strategic partnerships is a critical component in reaching supply chain excellence.
1. Partnerships, not Transactions
The first step requires actually seeing suppliers as long-term partners, as opposed to antagonizing them and turning every interaction into a quid pro quo. Stiff-arming and penny-pinching fail to be effective tactics in an economy in which value creation for the customer, not cost reduction, is the benchmark of future success. In the end, the cheapest option could turn out to be the costliest when mistakes have to be corrected or extra fees must be paid to ensure products reach consumers on time.
With this shift in mentality, what were once regarded as transactions become collaborative interactions that allow for the setting of realistic, productive expectations. Decisions surrounding what to outsource and to whom it should be outsourced must be aligned with overarching business strategy—not just simple cost considerations.
2. Time for a Reality Check
Dependency on third parties is a common reality in the contemporary product landscape. Today, most large companies have direct control over only a fraction of their entire value chain, which means that a growing portion of work is being outsourced. This includes activities across the spectrum, ranging from the sourcing of raw materials to the delivery of finished goods. As a result, the risks associated with outsourcing (e.g., customers lost due to poor quality, data breaches arising out of flimsy security practices, or disruptions resulting from weak contingency plans) have been compounded.
Conventional wisdom says that outsourcing allows businesses to drive growth and focus time on core business functions, at the cost of sacrificing control and risking quality. The heightened risk tends to bring out a knee-jerk defensiveness among executives, but a smarter response would be to make this dependency known to partners. By disclosing the significance of the relationship, suppliers are more likely to reciprocate with a renewed investment in the partnership and a willingness to re-prioritize when the chips are down. Moreover, building a relationship with boots on the ground can give rise to a higher degree of control than would have otherwise been possible.
3. Transparency with the Good, the Bad & the Ugly
Though perhaps an obvious, even clichéd, piece of relationship management advice, transparency continues to elude even the most seasoned of operations leaders. Ideally, transparency starts from the beginning, when choosing who to partner with. Businesses should look for partners who share the same priority of creating value for customers, and are also willing to share in the burdens and benefits equitably.
Transparency involves opening up communication channels to allow for the two-way flow of information so that important decisions can be made with an accurate understanding of the context behind them. The regular flow of information can also help lead to the development of new ideas that improve overall supply chain performance. Again, this goes back to the notion of trust—a willingness to share both short- and long-term forecasts, key business data, and bad news without the fear of backlash. Once all stakeholders are operating on the same plane of reality, decision-making becomes less of a bottleneck and more of an automatic reaction.
4. Change Management
The businesses that will succeed into the future are not those that dictate change, but rather, those that help company culture evolve, bringing processes up to speed and allowing for the organic uptake of new configurations. Outsourcing often necessitates streamlining communications in the face of disconnectedness, and instilling second-nature habits of transparency and over-communication not just within the internal operation, but with partner teams as well. Change management is closely intertwined with behavioral patterns, the shaping of which becomes more difficult for incumbent companies that tend to face greater resistance when overhauling long-held practices.
Having strategic, reliable partnerships in place makes it easier to implement change efficiently by avoiding gaps in communication, aligning expectations across the board, and minimizing exposure to the bullwhip effect. It also enables a better understanding of how changes made at the upper level trickle down to affect downstream processes that would have otherwise gone unnoticed, providing further incentive to have a robust policy in place.
In light of the increasing complexity resulting from globalization and outsourcing, it might be more apt to characterize modern supply chains as supply networks, comprised of multiple tiers of vendors that serve various different businesses. Yet many companies are unable to produce a list of their first-tier suppliers, let alone their second- and third-tier ones.
But the benefits to be reaped from cultivating strategic partnerships are to the advantage of all parties involved. Implementing these changes will enable companies to transition away from putting out fires and towards proactively managing problems and patching vulnerabilities, while also opening up new opportunities in the form of faster time to market, enhanced competitiveness, and financial gains.
At the end of the day, it is about creating value for customers. By pivoting away from adversarial supplier relationships and towards strategic partnerships, businesses can unlock value, enhancing product availability and creating a consistent experience that buyers can depend on. And the partners who share this belief are the ones who will help you get there.
By Kalvin Fadakar - March 13, 2014
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