Successful outsourcing requires good relationships (not just good contracts) with suppliers

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As a result of outsourcing and off-shoring, there are now more tiers in the supply chain, which greatly reduces the visibility of brand owners and makes them increasingly reliant on remote suppliers.  With high volatility in the marketplace, it has become critical for organizations to be able to respond quickly to any sort of unplanned event or supply chain disruption—and that requires use of a supply chain risk management strategy that delivers important capabilities.

Organizations need a robust set of tools that enable them to assess risks, visualize and evaluate mitigation and response scenarios, monitor situations and quickly alert appropriate personnel to unexpected events, determine appropriate actions and their consequences, and ultimately respond (quickly and profitably). There is, however, a second required element for successful outsourcing. It’s the human aspect, which sometimes proves to be more challenging than implementing software. In fact, various research indicates that chief among the barriers to globalization are: lack of supply chain flexibility, lack of internal competencies to manage external partners and a reliance on partners who are unable to meet flexibility requirements.

A recent SupplyChainBrain article reports on a new paper that goes even further, asserting that for outsourcing to truly be effective, an organization must not rely solely on contracts with suppliers. Instead, companies must also work to foster an informal supplier-buyer relationship. Chwen Sheu, Paul Edgerley Chair in Business Management, professor and interim head of the department of marketing at Kansas State’s College of Business Administration, studied how nearly 1,000 companies worldwide manage outsourcing, and co-authored a paper—“What makes outsourcing effective- a transaction cost analysis”—along with John Wacker from Arizona State University and C.L. Yang from Chung Hau University, Taiwan.

Data was collected and analyzed from 970 manufacturing firms in 17 countries, and the researchers found that most of those organizations depend on both legal contracts and an informal supplier-buyer relationship. Sheu says both methods are effective, but informal relationships with suppliers deserve more attention from management since in outsourcing, it’s impossible to cover every risk and outcome contractually. When an unexpected event occurs, and the contract doesn’t specify how to respond, it’s imperative to be able to sit down and resolve the issue with suppliers, Sheu says.

This is really a trust and information sharing issue, which allows both parties to deal with unforeseen risks and uncertainties more effectively. In a truly trusted relationship both parties recognize that all decisions need to be mutually beneficial in order to achieve success. The people are the difference between a satisfactory relationship and an exceptional one, where both parties will over achieve to ensure their partner’s success. It’s important to note that not all of a company’s suppliers need to be involved in this level of collaborative discussion. Instead, it’s really only necessary to closely communicate with a few, trusted suppliers.

For instance, your company may purchase a number of commodity components from several suppliers. It isn’t necessary—or appropriate—to closely collaborate with all of them. On the other hand, you should collaborate closely with those few key suppliers that represent the majority of your spend on components, supply components used in products that represent a major portion of your company’s revenue, and supply long lead-time components—especially when there is a potential for excess and/or obsolete inventory. Successful outsourcing requires developing better relationships with long-term, key suppliers.

When that’s done, the brand manager and supplier can share business strategies, mutually evaluate risks and threats, and jointly investigate opportunities. In the end, that allows both companies to realize significant benefits.

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