You get what you pay for: Is cost containment your main SCM goal?

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Is cost containment your main supply chain management goal? If so, do you think you’ve paid a price for taking that approach? Given today’s business climate, I believe those are two valid questions. What’s more, if you think your company--or supply chain--has suffered as a result of focusing primarily on cost containment, you aren’t alone. An article that recently ran in Aerospace Manufacturing and Design (AMD) reports on the findings of a recent KPMG International survey of nearly 200 senior executives from the aerospace, metals, engineering and conglomerates sectors. Nearly two-thirds of the executives surveyed reported that cost containment remains the top priority in managing their supply chains. What’s interesting here is that almost forty percent of the executives also acknowledge that driving down costs has damaged relationships with their suppliers. In fact, according to the survey results, new strategies for managing the supply chain that are designed to repair relationships with suppliers and weather changing economic conditions are gaining favor among industry leaders. I have to say I agree with Jeff Dobbs, Global Head of Diversified Industrials for KPMG, when he says that’s an alarming statistic, and those businesses that continue to follow the traditional low-cost-or-bust model in supply chain management are at risk of losing a foothold in the market.  The encouraging news, however, is that according to the survey results, having stronger and deeper relationships with suppliers is now seen as a vital capability by leading companies. More than 50 percent of the respondents expect to enter into more long-term contracts but with fewer suppliers.  Phew! It isn’t just duration of the relationships that’s changing; depth of the partnerships is also changing. Over half of the survey respondents say their companies plan to collaborate more closely with suppliers on product innovation and development, R&D and cost reduction. Furthermore, the article reports that in more detailed interviews with executives from several top-performer companies participating in the survey, several said they will be working even more closely with suppliers. Some of them said they are strategically investing in key suppliers or bringing parts of the supply chain back in-house, and are applying a mix of both regional and global supply sources to achieve the best combination of speed, quality and cost. As Dobbs said,

“It used to be that sourcing decisions rested on routine considerations, like who could make the best bolt for the best price. This approach worked when there was little variability in the cost inputs. Now, leading supply chain strategies must involve detailed scenario modeling and the most successful companies will be those who build adaptability and flexibility into their supply chains.”

That’s sound advice. To me—and apparently half of the participants in KPMG’s survey--the days of being able to “beat up” on suppliers to get better pricing are over. If a company is truly going to build an agile supply chain that allows it to quickly seize opportunities, then it makes sense that suppliers must be seen as strategic partners. It’s time for sharing business strategies, mutually investigating risks and threats, jointly looking at opportunities, developing and linking plans and targets … and treating key supplier as an extension of the business. By sharing more information and working more collaboratively with key suppliers, you can make faster, better decisions. With a more complete view of the facts, you can resolve issues faster. And with more mature business relationships, you can achieve better long-term results. To be sure, cost containment will continue to be a key goal, but so will overall supply chain performance. Viewing the supplier relationship as a strategic partnership and working more closely with those trusted partners will enable companies to ensure supply, improve demand planning capabilities, manufacture more innovative products and, ultimately, improve the ability to get those products to the customer. Aren’t those the goals in the first place?

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