Modern day businesses have no excuse for standing still. Bigger, better, stronger, faster – life refuses to stand still in the quest for advancement. In the words of Winston Churchill, “To improve is to change; to be perfect is to change often.”
This analogy rings true in the world of procurement with the conventional approach to procurement revolving around sourcing. In the past this was seen as enough to deliver results, particularly when initially reducing or creating a cost base. However, over the past decade the construct of a business has fundamentally changed. Today, labour costs are just 12.5% of a company’s revenues with supplier costs consuming up to 70%!
Given that up to 2/3 of business revenues are now being spent with external third-parties, suppliers now constitute one of the biggest areas of business investment.An area that businesses neither own, nor control.
As this cost externalization has occurred, the typical supply chain has quickly gone from a few suppliers to thousands of suppliers – however, the conventional approach to managing this nexus of supplier relationships has not developed at an equal rate. Unless businesses challenge this status quo and make the most of the new tools and opportunities available to them then they will lose out to more nimble competitors.
Poorly managed supply chain ecosystems can conceal a number of accidents just waiting-to-happen. Who runs the risk of something going wrong in your supplier base – like the wrong professional advice, deliveries arriving late, illegal workers, or negligence? Quite simply – you do.
Who suffers if governance fails? You do. If your suppliers perform poorly? You again.
Nothing demonstrates this more clearly than horse meat scandals, uncapped oil-wells, garment factory disasters or European car manufacturers witnessing their solid reputation and healthy finances having a hole blown in them by the risks buried in the chain of command or hidden in the supply chain. When businesses have gaping holes in their procurement of services and supplies, it’s because there is a tendency to rely on those suppliers who shout the loudest, rather than making intelligent judgements based on insight into the most valuable suppliers – the drivers of value creation in your own business.
Who knows where the untapped opportunities may be in the market?Who makes large investments in research and innovation? Who really knows what is taking place in terms of provenance, transparency and risk?Who has the greatest potential to provide the support that has a real impact on corporate objectives?
Answer: Suppliers do. They hold the cards for both sides of the equation.
Yet again, the conventional approach to managing suppliers too often fails to engage on any level other than price. It fails to question the buying itself or think about the context around it, and fails to effectively connect suppliers to corporate objectives.
A new approach to challenge the norm
It’s about time the procurement practice adopted a new approach to the supply chain – taking a view not just from the supplier side, but also from the customer side so that real visibility into the supply chain can be achieved. Clear visibility of a supply chain, or supplier ecosystem, allows for flexibility on both sides so that timelines and budgets can be closely monitored to achieve real end results.
Businesses need to have a clear sense of how the supplier eco-system feeds into the wider business. A company like Apple is hugely dependent on a whole ecosystem of suppliers but the way that they are managed has resulted in a compelling proposition to the end user.
Despite all this, only four in 10 companies that track triple bottom line (TBL) outcomes – financial, social and environmental effects – extend these metrics to their supplier relationships. There has never been a more important or appropriate time to challenge the norm.
I’d like to share with you a short story to better explain the need to change conventions around managing supplier relationships and the implications of doing a good / bad job of it: