Supply chains: achieving and sustaining profitability

Globalisation, low cost sourcing, transport costs, a focus on improving core competencies while outsourcing, and demand for supplier flexibility make it difficult to achieve and sustain an efficient supply chain that balances cost with high service standards. As such, the way that a customer interfaces with its suppliers is critical in driving a company’s overall supply chain efficiency and effectiveness and, in turn, overall profitability.

When visiting factory shop floors and talking with teams about improvement prospects we [Newton] are frequently told that the biggest ‘issue’ is supplier performance, whether on delivery or quality – or both. In our experience the organisation’s typical first response will be to manage suppliers harder or eliminate them. Additionally, where there is a perception of risk – few companies have a real understanding of the size of risk in their supply chains – the most common solution is to multi-source.

Neither of these approaches are necessarily the best routes to go down. What we rarely see, but which can be extremely beneficial, is an effort to increase the level of partnership with key suppliers.

Stewart Kelly, managing partner at supply chain design and optimisation specialist, Oliver Wight, says not enough companies are leveraging opportunity in their supply chains to address waste.

End-to-end supply chain visibility is a necessity to create an agile supply chain and meet ever-changing demand. Creating it, however, is no mean feat. The right people, processes and tools have to be in place, and forming strategic partnerships throughout the extended supply chain is imperative.

Companies need to start thinking less about ‘me’ and more about ‘us’. Value should start with the consumer, and any ‘heavy hitters’ in the supply chain. Efficiency then has to be driven through the supply chain step-by-step, first with tier one, then tier two suppliers and customers.

For some businesses the supply chain can involve hundreds, even thousands of suppliers, posing a potential barrier to collaboration. A strategic approach, beginning with suppliers that have the greatest impact on your business, as well as any particularly poor performers, is needed.

The benefits of building strategic relationships with customers and suppliers alike are clear: companies with optimised supply chains improve their ‘perfect order’ rating by 17% while reducing operating costs by up to 50%.

For any lean thinker, facilitating the flow of value within their organisation is an ongoing labour. It is less commonly appreciated that the overall value chain reaches far beyond the boundaries of one organisation and that supply chain value directly impacts the value creation any one company has within their control.

The automotive industry, with perhaps the oldest foundations in lean thinking, also has one of the strongest track records in taking the time to address wastefulness and lack of alignment within the extended value chain. Lean leaders in automotive often go as far as setting up collaborative cross functional teams from both suppliers and customers to drive out cost and improve delivery performance.

In other industries you tend to see far smaller pockets of excellence. And increasingly, industry initiatives are coming into play to improve supplier and customer relationships, accelerate competitiveness and raise supply chain performance, such as the SC21 initiative within the aerospace and defence industry. However, the successful programmes to-date are typically in non-critical areas – such as a joint supplier/end-user initiatives to reduce the total cost of ownership of tooling at a dockyard. There is a lot more scope to be taken advantage of but many companies fear collaborative opportunities for improvement.

Pete Austin, director at continuous improvement consultancy, Suiko, gives his perspective on the application of multienterprise lean thinking.

The best example of collaborative working I have seen is in the automotive industry, in particular in Honda. Honda run a competition called NHC (New Honda Circle) where teams (both internal to Honda UK and suppliers) are formed, opportunities identified and then realised. The teams present back to a UK panel about how a problem has been permanently resolved, the process used and the savings achieved. The winners of the UK competition will then enter the European competition and the European champions go forward to the world competition.

What does this achieve? It supports employee development, motivation and pride as it is done in personal time, and of course there are 1000s of tangible improvements for the value stream. In addition for the supplier it reinforces focus on customer values (the first principle of lean) in a very real way.

Times are changing for us consultants as more and more clients sign up to results-based contracts. This style of contract reduces client exposure while ensuring an ‘in it together’ approach in which both parties are absolutely focussed on realising the benefits. The disadvantage of this is that unless great care is taken, the fine balance of results versus sustainability will be thrown into question.

Both suppliers and customers are often afraid they will give away information that they shouldn’t, or they become tied up in relationships that may go bad. There is a perceived loss of control inherent in collaboration and, as a result, the initial position from both sides is often defensive, rather than open.

In addition, there is a common fear of complex commercial and contractual arrangements. These reach from basic agreements over who is going to pay for the improvement work through to more complex gain-andpain share agreements. In our experience, the first step to easing these barriers is recognition from the customer that they are partially at fault for any existing inefficiency and need to make themselves easier to supply to.

For many manufacturers, managing supplier performance is becoming increasingly important as they try to balance supply risk with working capital pressures. By working collaboratively with each individual supplier and continuously managing their performance they will ensure that a focus remains on developing quality and efficiency, while helping their key suppliers gain better visibility of their requirements.

Driving toward full visibility will unlock a culture of openness and two way communication. In cases of close collaboration we see both the customer and the supplier identifying problems and opportunities while also mitigating areas of risk. For success however, there needs to be clear direction from the top of both organisations.

A coherent plan agreed by both sides of the partnership will enable the cost impact of behaviours in each organisation to be understood.

The development and implementation of precise communication flows needs to happen. Once common ground is reached and barriers have been removed, the result is the unification of the supplier and customer. They should perform as if they were one business working towards a common goal.