How to build a transparent relationship with your suppliers
Businesses of all types have been affected by supply chain disruptions linked to the pandemic, but many of the operational challenges they have faced over the past 18 months have been magnified by the pandemic, not by it. . These issues reflect a fundamental and long-standing gap in the way companies’ relationships with their suppliers of products and components are structured. Even in the absence of black swan events, manufacturers will continue to be at risk until they establish new ways of working with suppliers that ensure full transparency regarding sources, availability and cycles. of their critical products and components.
Most companies understand how supply chain transparency can affect their ability to manufacture and deliver products. Very few, however, have a disciplined process that requires suppliers to make important product and supply chain information available to them. Instead, they passively wait for critical information to be delivered or attempt to pull together and manage that information on their own, lacking the depth or detail that only vendors can provide. As a result, companies often react to negative events rather than planning for them. They place too much emphasis on the cost of essential products or components and pay too little attention to the risks inherent in their supply chain.
My firm’s experience suggests that companies rarely share risk concerns with their suppliers, may not even know where their suppliers should look for risk, and are often more concerned with penalties for missed delivery times than for the root causes. Requests for quotes from suppliers are price and time driven and do not require information on regional trade and other compliance issues, product obsolescence, durability or related concerns such as as the manufacturer’s commitment to ethical supply chain practices.
In today’s manufacturing environment – where there are no clear standards for what is and what is not an acceptable supply chain risk – relationships must be developed that formally define and align the interests of the buyer and the supplier. An investment of time and resources is required to establish this type of high-level, non-transactional support from vendors. These relationships should also be based on trust, so that suppliers are comfortable sharing potentially negative information with customers.
For a meaningful change to occur in supply chain risk management, the underlying dynamics of the company-supplier relationship must shift towards a proactive ‘push’ of critical information from suppliers to manufacturers and move away from the reactive “extraction” of information from suppliers by manufacturers. Businesses should expect all suppliers to have their skin in the game and ask them to identify them and keep them informed of potential risks.
Trying to revamp any unwritten and accepted industry practice or establish a new protocol is always a challenge. From the outset, your business should believe that the end benefits of partnering with suppliers based on full transparency will far outweigh the challenges of managing the change process. You have to be prepared to do whatever it takes to be successful and communicate that strong sense of purpose. Here are some lessons we learned about how to build such momentum.
Set a constructive tone
Your suppliers need to understand that managing supply chain risk is a priority. Your business relies on them for critical information and you are committed to establishing a formal system based on transparency and accountability. The common goal is to create a clear path for the supplier to communicate supply chain risks that your business can resolve before an issue arises. It is not about blaming after a negative event has occurred.
To ensure risk management remains a priority and to monitor changing conditions, some companies we work with maintain regular calls with their strategic suppliers, and call notes are widely shared with key stakeholders. internal. These calls also prompt suppliers to make decisions based on identified risks and help avoid out-of-stock situations and other unforeseen issues.
Start at the design phase
Consult with your suppliers during the product design and specification stages so that supply chain resilience can be established from the start. A response to a detailed checklist of risk factors and associated responsibilities should be required from suppliers with each quote they submit (see appendix “A Checklist of Supply Chain Risk Factors”) . This gives your business the ability to assume, share, reject, or modify those risks. Risk factors can include the country of origin of the individual components of the part or system in question, product end-of-life dates, and how long your supplier has partnered with the manufacturer of specific components in the part. or the system.
Identifying risk requirements in requests for quotation (RFQs) or framework service agreements also allows your procurement team to consider risk factors when evaluating proposals. If your product engineers and other upstream decision makers are made aware of supply chain risk issues in advance, they can avoid high-risk specifications when designing the offering.
Anticipate the refusal of suppliers
Providing detail on supply chain risks takes effort as well as a deeper understanding of customer requirements beyond product specifications, time frames and prices. Some suppliers may decline not only because of the additional administrative burden, but also because of concerns about potential legal liabilities for failure to inform customers of the risks. These barriers can be mitigated during negotiations by demonstrating a willingness to build deeper, longer-term relationships with suppliers in exchange for true risk management partnerships.
Apply leverage if necessary
Most vendors will understand the implications of refusing to cooperate with a customer’s demand for transparency. Strong tactics can be counterproductive, but if necessary, you should be prepared to award contracts based on a supplier’s cooperation in providing the necessary information. Additionally, when examining a supplier’s performance, its ability to consistently deliver accurate supply chain risk data should be weighed as heavily as on-time delivery and cost control.
Make sure the information is applied
Supplier information, including risk factors for specific components, end-of-life notifications, and details of potential supply chain disruptions, should reach your company’s product and engineering teams by timely. For example, your product development team may eliminate certain components simply because they are more expensive without knowing or considering their considerably lower supply chain risk.
A large medical device company with a transparent risk management process discovered that a low-cost power adapter used in one of its most profitable devices was made by a single company in China and could not be replaced by no other available adapter. Rather than accept these performance and brand reputation risks, the company redesigned the device to accommodate a wider range of power adapters.
In addition, your suppliers should have access to internal staff who can provide them with detailed advice on specifications and can authorize the approval of supplier recommendations that address potential risks.
Establish a risk assessment and mitigation system
Given the important issues – financial, operational and reputational – your business cannot rely solely on supplier transparency to minimize risk. Even with well-structured agreements with cooperative suppliers, the potential for information gaps and unforeseen supply chain events will persist. For example, people in your organization may not have communicated properly the critical nature of a component to a vendor. And unforeseen disruptions, such as those that occurred when a a giant freighter got stuck last March in the Suez Canal – is never predictable. For this reason, companies must establish a rigorous, data-driven internal process to assess supply chain risks and a risk mitigation protocol that is approved and closely monitored by senior management.
What type of business are you?
The significant supply chain disruptions that have occurred over the past 18 months are likely to affect manufacturers in two ways. Some companies will see them as a red flag to review and strengthen their current risk management practices. Others will conclude that the likelihood of a similar event occurring in the foreseeable future is so low that they cannot afford to take any further action to manage the risk. The latter is a huge mistake.
Rolling the dice is not a risk management strategy. As the global supply chain becomes more interconnected and complex, the impact of climate change spreads, and geopolitical tensions and trade restrictions increase, the likelihood of disruption is set to increase. Businesses need to plan accordingly. These plans should include an overhaul of how you select and work with suppliers to ensure greater transparency, risk sharing and supply chain sustainability.