Companies are constantly looking for ways to create more value within their current supply base. Often times, Procurement professionals turn to proven sourcing and category management strategies to create this value. While this is no doubt a sound approach, there are additional strategies, such as increasing supplier collaboration, which can lead to increased value.
Supplier Collaboration – A Means to Reduce Total Cost of Ownership
Today’s competitive and complex economic environment demands that all companies focus on achieving the lowest total cost of ownership for all categories of spend. This focus must include all costs, from the time a spend requirement is first identified to the moment the actual purchased item is used. Increased supply chain integration, through collaborating with the right suppliers, is one of the best options a company has to ensure they lower their costs as much as possible.
However, there are many challenges to increased supplier integration, especially today when supply chains have become increasingly complex. In response to these challenges, many companies have had to invest much time, energy and resources. Take for example the well documented challenge that large manufacturers face with a similar challenge - logistical integration. Here we see many actors (suppliers, third party logistics - 3PL - providers and contract manufacturers, etc.) collaborating through coordinated transactional efficiency, the exchange of managerial information and the use of integration-enabling technology. Driving increased supplier collaboration requires the same types of efforts.
Despite these challenges, the benefits of greater integration are significant and have been widely recognized by supply chain management professionals. They include lower inventory levels (often times through the reduction of the bullwhip effect), reduced errors throughout the purchasing process, and improved supplier performance overall, just to name a few.
A Holistic Approach is Key
There are many potential reasons why the full benefits of supplier integration are not realized by a company, but perhaps the most common reason is that many integration efforts do not recognize the significant supply chain or organizational challenges in store. Case studies among large global manufacturers have shown that companies often focus on the IT challenges stemming from a supplier integration initiative, while failing to place enough focus on the equally important supply chain and organizational challenges. For instance “absence of a single dominant industry data standard” and the “inadequate IT capabilities of supply chain partners” are repeatedly cited as some of the most important IT problems that companies face during supplier integration initiatives. The irony is, however, that these IT-related problems are often the result of underlying supply chain and organizational challenges of the actors involved.
The significance of supply chain challenges to supplier integration is particularly clear. To achieve successful supplier integration, full commitment of all partners involved is essential. For companies leading the integration initiative, achieving both a dominant position of influence as well as a position of trust are key success factors. A lack of influence can be mitigated by joining an industry association or any number of other specific initiatives such as the GCI. However, building trust is much more difficult. Establishing a distribution of costs, benefits and risks that is acceptable for all actors involved is needed, which usually takes much more time.
For these reasons, an integration initiative that focuses solely on logistics or IT is likely to fall short. In order to succeed, initiatives must include other parts of the organization, such as Procurement, that can help to solve the supply chain and organizational challenges facing an integration initiative. But Procurement organizations should not blame IT or logistics professionals for not being included. Procurement professionals need to be more proactive and do more with their supply market strategies. Too often, they are aware of supplier portfolio models, such as the Kraljic-matrix, but they fail to develop category specific strategies that take into account supplier integration. Procurement professionals should be developing supplier integration strategies, with senior management’s support, in collaboration with logistics, IT, business representatives, etc.
In the end, we see that overcoming the challenge of an integration initiative requires the efforts of many in the organization. Nonetheless, the benefits of such initiatives are significant and we believe well worth the effort in time, energy and resources.