[EXCERPTED WITH PERMISSION OF THE PUBLISHER, WILEY, FROM STRONG SUPPLY CHAINS FOR RESILIENT ORGANIZATIONS BY [AUTHOR/S]. COPYRIGHT © 2024 BY A.T. KEARNEY. ALL RIGHTS RESERVED. THIS BOOK IS AVAILABLE WHEREVER BOOKS AND EBOOKS ARE SOLD.]
To improve resilience, you can start by changing your view of suppliers. They are a source of value. Rather than seeing your supply chain as something you construct out of meaningless individual chain links, envision your suppliers as partners. They need to be strong, because without them, you can’t build a strong supply chain.
Sure, you may be thinking, you’re talking about supplier relationship management (SRM). Yes and no. You do need relationships with your suppliers. And those relationships will be stronger when you manage them. But some people seem to think that SRM is all about bashing vendors over the head until they reduce the price another 4%. That’s not a relationship. Those people are practicing supplier abuse management. As in any relationship, SRM involves communication on the executive level to understand the problems of the other party.
For example, Rational, a company that makes equipment for professional kitchens, won the 2022 Overall category for Kearney’s Factory of the Year program by working in very close collaboration with suppliers. Rational’s SRM focuses on technologies, quality criteria, and building long-term trust so that suppliers are willing to make mutually beneficial investments. Rational’s supplier fitness programs are about managing growth together. For example, if Rational needs suppliers to commit to higher volumes, it sends experts to help implement and optimize, to ensure that development is sustainable for all parties.
Do your suppliers help you with design? Are they involved in open collaboration, with teams at your company, or teams at your other suppliers? Have you given them the visibility they need to make smart and profitable decisions? When you ask these types of questions, you know you’re in a relationship. It’s managing these issues—collaboration, transparency, satisfaction—that’s the heart of your SRM.1 Why? Because your suppliers are a source of value, and you need to maximize that value, not minimize the cost.
We’re not saying, “Don’t pay attention to costs.” Just, “Don’t pay attention only to costs.” For example, when a global food business decided to reduce packaging costs, it shared detailed cost and complexity models with its packaging suppliers. That sparked collaborative ideation that not only further reduced costs but also improved packaging sustainability.
Indeed, for key suppliers, they should be more than sources of value. They should be partners. You are on a journey to resilience, and you want one or more suppliers to join you on this journey. This requires a new mindset. Rather than being transactional, your relationship with this supplier is one of trust. You trust them, they trust you. The top leadership of your firm invests the time and money required to build up that trust. Trust is always a two-way street:
• You may help suppliers in their time of need, trusting that they will help you come your own crises.
• They may ask to see your sales and operations planning (S&OP) details, trusting that you will fix anything that’s wrong. After all, if you have S&OP issues, your suppliers often pay the price—but lack the power to fix them.
• You may ask to see your supplier’s books, knowing that they will trust you not to negotiate on cost. Instead, you want to see where they are struggling and how a joint effort might allay that struggle. For example, if they’re struggling with their own suppliers, you may be able to help with negotiations or reengineering.
You certainly can’t do this with all suppliers. Your engineers are going to travel to their site, your chief procurement officer (CPO) is going to meet with their CEO, and even your CEO will ideally meet their CEO. Obviously, this is only for major suppliers of huge quantities on multimillion dollar contracts. The benefit of bringing in the CPO or CEO, rather than a category manager, is that you may be able to get a longer-term contract. Yet even as you build this trust with major suppliers, you can let that new attitude spill over to other relationships. You can seek to establish a cooperative culture toward suppliers in general—note that it’s the job of the C-suite to cultivate this culture.
Resilience is about strengthening the links in your chain. Building trust with key suppliers provides the strength. Thus empowering suppliers builds resilience. When they’re resilient, the next crisis won’t break them. It won’t tempt them to move to other customers. And thus it won’t break you.
End-to-end thinking builds resilience
Supplier partnerships are not just about shared spreadsheets and engineering specs. They’re also about story. Your suppliers should be able to see an end-to-end picture: how their inputs bring value to the final product. For example, if you make automobiles and your steel producer understands your technical specs, that’s good. But if the producer also understands that your customer is looking for a cool design, that’s a partnership. That’s a producer who will potentially contribute to your next cool design.
Likewise, if you make iPhones, your supplier should understand more than the value of Apple. (“Ooh, Apple is a powerful company, I’d better do exactly as they say.”) Instead your supplier should understand the customer’s value: the value of having glass that I can touch, but that doesn’t break if I drop it. That’s a supplier who builds your priorities into its decisions. (“Ooh, my engineers just stumbled across a way to make that glass thinner. Let me tell Apple!”)
But how is the supplier going to gain that knowledge? From your procurement team. These people used to do what we call “desktop procurement”—research into markets, costs, prices, and so on. Instead, they need to get to know suppliers and their products. Specifically, your procurement teams need knowledge of how suppliers create value for us} and knowledge of how we create value for customers. The more they know about each, the more they can collaborate, develop, reengineer, and otherwise transform the supply chain. Indeed, when you have great answers to both questions, you become a disruptor—someone who can overcome industry thinking in a radical way.2
In other words, your category buyers need to be real managers of the category. If they just focus on “How can I get savings?” they do not have the big picture. They need to know everything about the market: What are the technologies? What is unique? What is distinctive about each supplier? … This is why they matter. And this is why the right goals and incentives must be in place. For example, when a manufacturer of industrial assets had an opportunity to switch cable suppliers, the category manager did more than look at the 25% savings opportunity. She called engineering to learn how the cables were used, what drove materials costs, and what drove total cost of ownership. She learned that cheaper cables might break on average within four years rather than five—but the product had a five-year warranty. The company would be more resilient by rejecting the switch and discussing collaborative cost reductions with the incumbent supplier. But would she have made that choice if her incentives measured only procurement savings?
Yet supplier management is not merely a job for procurement. Your entire firm must think end-to-end about resilient supply chains. For example, if procurement is going to find alternative materials, it needs support from R&D. And if it’s going to qualify those materials, it needs testing support from manufacturing.
Furthermore, a resilient supply chain may require devolved and decentralized decision-making to manage the inevitable disruptions. If a tree falls across a remote shipping lane and no Wall Street Journal reporter is there to hear it, does it have an impact? Most decidedly yes—and the news will reach your local representatives long before it reaches those involved in top-down decision-making.
Indeed, modern supply networks have become so complex that no single player within them has the power to control the whole value chain from material extraction through to consumption. You can no longer use the traditional siloed approach to managing them. Everyone needs to collaborate more. All participants—from sub-tier suppliers to tech platforms, producers, and distributors—need to deploy predictive data analytics to achieve maximum visibility. You want visibility into changing demand and supply constraints as they emerge, as well as visibility into hidden risks that could be lurking both upstream and downstream.3 This is why we talk about supplier ecosystems and empowering those ecosystems. The phrase “supply chain” is still handy because so many know what it means. But in a sense both parts of it are outdated: (1) you’re no longer looking at supplies that arrive at your factory; instead, you’re looking at a value chain that goes all the way to the end consumer. (2) It shouldn’t be a chain, with all the weakest-link implications of that word; instead, you should lean into the interdependencies and manage it as an ecosystem.
Notes:
1. For a full treatment of SRM, see Mike Hales, Michael F. Strohmer, et al., Supplier Relationship Management: How to Maximize Vendor Value and Opportunity (New York: Apress, 2014) or the summary “Supplier Excellence” at https://www.kearney.com/article/-/insights/supplier-excellence-procurement-capability-article
2. For more on disruptive procurement, see Michael F. Strohmer, “Disruptive Procurement: Reinventing and Transforming the Procurement Function,” 2020: https://www.kearney.com/procurement/article/-/insights/disruptive-procurement-reinventing-and-transforming-the-procurement-function
3. For more on complex supply networks, see Per Kristian Hong, Nigel Pekenc, and Xavier Mesnard, “How Can We Achieve Resilient, Net-Zero Global Value Chains? A Summary of Discussions from the World Economic Forum Annual Meeting,” 2022: https://www.kearney.com/global-strategic-partnerships/world-economic-forum/article/-/insights/how-can-we-achieve-resilient-net-zero-global-value-chains
