Over the last two decades, globalization became more intense, and with it, competition among companies and their supply networks. The constant fight for new sources of raw materials at a more competitive cost, the development of suppliers in low-cost countries, and the ability to manage logistic chains have become part of the routine of strategic sourcing.
In today's economic environment, companies are continuously pressured to reduce costs to combat slower growth; to offset increases in material prices, energy, and transportation; and to counterbalance various other pressures, such as inflation. Despite these issues and the economic instability worldwide, companies must continue to differentiate themselves and find growth opportunities to compete in the global marketplace. For example, in order to boost revenues and fuel growth, many companies are now under as much pressure to reduce product life cycles and speed-to-market as they are to find savings and reduce operational costs.
After steering through the challenges of the COVID-19 pandemic, procurement continues to face new disruptions driven by geopolitics. For example, many procurement teams are continuing to deal with issues related to the ongoing Russia-Ukraine war that began in early 2022. More recently, the Israel-Palestine conflict and disruptions in the Red Sea and Suez Canal have forced global freight providers to reroute shipping containers around Africa, which has intensified costs and increased lead times.
The ever-expanding volatilities of global supply have caused many companies to revisit their procurement strategies and put more focus into multisourcing, nearshoring, and regionalizing their supply chains to improve resilience against such disruptions. In a recent Gartner survey, 63% of respondents said they were investing in multisourcing to “achieve greater resilience and/or agility.” Similarly, according to McKinsey’s “2023 Supply Chain Pulse Survey,” “almost two-thirds (64%) of respondents say that they are currently regionalizing their supply chains, up from 44% last year [in 2022].”
Multisourcing is a great strategy for responding to risks and threats by having alternative sources of supply or backup supply. Essentially, it is about diluting the risk over multiple suppliers. Sourcing diversification across distinct geographies and/or nearshoring can also mitigate the risk from sudden changes in import tariffs due to trade wars.
While this trend is pointed at enhancing the resilience of global trade in the face of disruptions, it is a colossal undertaking for procurement teams to reorganize complex global supply chains. Procurement now needs cope with new challenges, such as finding and qualifying new providers, cutting supply lead times, and reducing logistics complexities.
Most groups of companies or large multinational organizations which operate several establishments adopt some compromise between purchasing globally and buying locally, aiming to balance the advantages of centralization with the flexibility of decentralization. This transformation will require a strong focus on supplier relationship management to develop these reimagined supply bases and ensure that new suppliers meet the company’s standards when it comes to service levels, cost improvement initiatives, environmental key performance indicators (KPIs), and quality control.
For a real-world example, let’s consider Toyota. Famous for its “just in time” (JIT) production system, Toyota relies on long-term, strong relationships with its suppliers. By developing local suppliers and investing in their capabilities and capacities for years, Toyota has built trust and loyalty among its suppliers while achieving substantial stability in its supply chain. Local suppliers are more responsive and can deliver products faster than those located farther away. This approach has increased efficiency in production processes, enabling lower shipping and warehouse storage expenses. Thanks to this deeply integrated system with suppliers, Toyota has shown resilience against supply volatilities and maintained its leadership position in the global automotive marketplace. By incorporating local suppliers into its plans and managing inventory just in time, Toyota has gained a financial inventory benefit and cost advantage over its competitors. Furthermore, partnering with local producers is good for the environment, because it reduces global shipping and the company’s carbon footprint. “Glocalization” combines the global sourcing with the proximity of local availability of critical supplies. Think global, act local!
A more collaborative approach
This is why in more recent years much more attention has been paid to the development of “mutual” supplier-buyer relationships, where the benefits of doing business together arise from sharing and exchanging ideas. Effective and regular communication is the cornerstone of a strong supplier-buyer relationship; it aids in understanding each other's capabilities and expectations, and it fosters a sense of partnership. This is in complete contrast to short-sighted and adversarial relationships, where the focus is only on performing a financial transaction.
In the collaborative approach, the buyer organization seeks to develop a long-term relationship with the supplier. Establishing strong, enduring, and mutually beneficial relationships with a strategic supplier is a critical step in improving performance and ensuring consistent quality across the supply network. This is particularly important when adopting a glocalization strategy to build reliable supply chains that in turn benefit the customer experience.
The strategic view is that the buyer organization and the supplier should share a common interest, and both should seek ways of adding value in the supply chain that build a satisfactory outcome together. Both parties must invest in trusting and supporting the relationship with the intention of identifying and implementing improvements and innovations. Embedded in this approach is the commitment that any benefits that are achieved will be shared, a process not possible with a simple transaction. The organizations concerned will seek to come together and jointly set targets for overlapping interests.
This shift requires the role of sourcing to move away from a transactional one focused on materials and services management and toward a more strategic role, aligned to long-term business requirements. To be successful, supplier relationship management must play a pivotal role.
