Prof. Richard Wilding, Chair of Supply Chain Risk Management at Cranfield, analyses Sony’s supplier cuts
Dr Richard Wilding, Professor and Chair of Supply Chain Risk Management, Cranfield School of Management, writes on the decision by Sony to cut its number of suppliers by half, from 2,500 to around 1,200…
Supply chain rationalisation
First of all, I’d like to point out that a move like this is often not as bad as it seems. Supplier rationalisation, as it is called, has many cost benefits and can support innovation in the industry. What’s more, the suppliers selected to stay on often do not have the required capacity, so end up using the other suppliers who are not selected anyway.
A supply chain rationalisation initiative results in reducing complexity. What that generally means is that Sony will save costs through its procurement processes in a number of ways. One is that it will be able to reduce the size of its internal procurement function, including invoicing, paperwork, controls and the associated man hours. Another is that Sony will be ordering from the remaining suppliers in higher volumes and should therefore be able to negotiate lower prices.
There will be certain suppliers with whom Sony must retain a strong relationship, to maintain the quality and value drivers that it wants to achieve. The more suppliers you have, the harder they become to effectively manage, so rationalising your supply base means you can focus your resources more readily.
What is interesting is that when a company goes through a supplier rationalisation process, one of the measures it usually takes is to appoint a lead supplier in each of the categories of component it needs. The company then deals only with that lead supplier, who must then supply the goods by whatever means it sees fit. If it does not have the capability to supply all the requested parts, it will need to source the missing items from other suppliers.
So, many of the suppliers who have initially found themselves cut from Sony’s supplier network will still actually be providing it with goods or services, albeit indirectly. The lead supplier takes over some of the management burdens of the supply network; Sony still gets the goods but cuts out a lot of the time, cash and admin of dealing with such a huge number of firms.
The situation is also likely to bring about many mergers and acquisitions between the suppliers for the same reasons.
What this all means is that Sony cutting 1,300 suppliers from its network is not likely to lead to anywhere near that number of companies going out of business, or even suffering major ill-effects.
Another issue is that the supply chain Sony has at the moment will have been built up over a number of years and might as a result be sitting pretty cosy, without terms or contracts being regularly reviewed due to the sheer size of the operation. Shaking up the supply chain will ensure it is all sharpened up.
Conversely, there is a real danger that relationships which have been built up over many years can break down at times like this. Say, for example, that all the suppliers are grouped together at a conference and told that 1,300 of them will no longer be working with Sony – that won’t inspire the best of atmospheres. When a company makes an announcement like this without outlining which suppliers are to stay on the books, there is a real danger that it will lose goodwill from everyone.
The political situation has to be managed very carefully.
Deciding who to work with
One thing that has been mentioned in the discussions about Sony is the commoditisation of electrical components. This is when specialist items become produced on a larger and wider scale and are then open to price auctions as they can be acquired from a higher number of sources. But some things cannot be negotiated on cost alone. You need to ensure your suppliers have the capability to stay ahead of the game through market leading research and development, especially in a market like Sony’s, where the goal posts are changing all the time and innovation is key.
I suspect that in many cases, companies were originally on Sony’s supplier network because they offered something niche and were therefore a key supplier. But the way that world markets have developed means there will be more competition and those capabilities that one company offered will simply now be a qualifying factor to be considered for a contract, offering limited competitive advantage.
If Sony decides to choose largely the lowest cost suppliers, they could come from anywhere in the world and probably will not be in Japan. If innovation is the overriding factor, there’s a good chance Sony will decide to support a localised support network and choose companies from its home country. At the same time, there will be capabilities it cannot source in any one country, including Japan; China, for instance, has emerged as one of the leading regions for innovation in electronic component manufacturing and its capabilities will be difficult to ignore.
There will not be one policy that fits all of Sony’s lines and it will have to decide which items can be considered as commodities and which need to be considered as key niche items – the very best of which need to be brought in. It will be about weighing up the most effective way of sourcing these, taking into account quality, availability, cost and labour, and deciding on that basis where each product should be made and which suppliers should be used.
To mitigate the risk of being dropped, suppliers need to understand their capabilities and whether their product or service is becoming commoditised. If it is, the supply chain and the way that company serves becomes critical. It must create an offer based on shorter lead times, cost, innovation or something else that will benefit the company it is supplying in a way in which no other potential supplier can. It needs to address all aspects of its operations and make sure that what it is good at doing is still something that is desirable in the market. Because what it was good at doing five years ago may no longer be enough, or even in the right arena.
I believe there’s a good chance that, in the long run, product quality will get better through this measure. If you’re sourcing components from a reduced number of sources, the consistency of the components and the logistics in acquiring them will be made smoother and it will then be easier to identify how and where quality can improve. However, during the transition process you may get emotional reactions from suppliers which could result in quality dropping off. The suppliers, feeling spurned, may focus more of their efforts on other organisations.
Overall, cash is king and service is sacred. In a troubled global consumer market like the one we’re currently in the midst of, global companies need to concentrate on speeding up cash-to-cash cycles, controlling inventories, taking time out of processes and generally reducing complexity so that the business can be managed more effectively.
All organisations will be looking to see where they can simplify things and be more efficient in any area they can and Sony has hit on this idea of supplier rationalisation.
I think the initiative is a canny one that we will see copied in many of the world’s biggest corporations before this downturn is over.
By Professor Richard Wilding
Professor Wilding works with European and international companies on logistics and supply chain projects in all sectors. Cranfield’s Supply Chain Research Centre is one of Europe’s largest centres dedicated to research into logistics and supply chain management..
Comment on Professor Wilding’s thoughts in the box below or email your own ideas to [email protected].