Supply Chain professionals should continually evaluate and push to understand the multiple layers of their supply chains. Not only is it a matter of due diligence and very relevant for day to day operations, it can produce tangible benefits in the forms of risk mitigation, technical engagement, and building a socially responsible supply chain.
Through the start of a new calendar year when organizations reflect and refresh goals and metrics – strategy moves to the forefront. Within supply chain teams, it is a time for brainstorming ideas, charting direction and evaluating supply chain objectives. This time often results in discussion around deepening the understanding of the complex and multiple layers of supplier partners supporting the organization’s goals. Supply chain teams operating with a systems-thinking approach will often strive to connect with and understand the supply web extending out of their facility, engaging further, pulling additional information and proactively reaching out to establish connections and make introductions to their supplier’s suppliers. These initial engagements will lead to discovery of a supply chain that reached much further than previously known, both in layers of suppliers, and geographical distance. It also allows the Supply Chain team to view supply issues through a different lens with much more context, and to ask more informed questions of tier 1 suppliers when working to solve a problem. Understanding the Multiple Layers of Your Supply Chain As COVID-19 circulated the globe and supply chains started feeling the effects with extended closures of Asian businesses, and then European companies before spreading across North America, understanding multiple layers of the supply chain has become paramount. Business continuity is hinging on the ability of the supply chain to continue to support ongoing operations, and now has company-wide visibility up to the C-level. Supply chain teams that understand the tiers of suppliers and maintain relationships with critical lower tier suppliers will have an advantage in terms of faster communications, and the ability to develop mitigation plans and responses ahead of those who do not. This is starkly visible during the current pandemic but often fades to the background during normal operations – and is equally applicable during regional weather events, or instances of political or labour unrest. It must be noted that the development of these relationships does not happen quickly or easily. Often tier 1 suppliers are reluctant to divulge their own supply base, and especially to provide contacts or access to these key resources. Supply chain professionals must build an environment of trust and be clear on intentions or requirements for mapping the supply chain. Initial discussions or visits can be held between all three parties to ease any tensions. A further benefit when engaging critical sub-tier suppliers is the potential input and impact to designs, and the ability to release new designs faster. For instance, when dealing with electronic contract manufacturers, if a direct relationship exists with the printed circuit board supplier, design choices, reviews and feedback can be done much faster than working through the contract manufacturer as the conduit for communications. This could save days in a design cycle, and weeks over a new product development. It also fosters trust between all parties’ engineering teams, and can lead to the discoveries or introduction of new materials or processes. A similar approach is also true in the design of plastic or metal components, working directly with potential third-party suppliers such as tooling manufacturers or coating providers. Creating a Socially Responsible Supply Chain By understanding multiple layers of the supply chain, teams can build and employ a socially responsible approach when selecting and working with supply partners. The approach to review supplier networks for socially responsible reasons is a relatively recent development which has gained momentum after the passage of the Dodd-Frank Act in 2010, and its implementation in 2012, which requires reporting on conflict minerals by publicly listed companies in the US. More recently, reporting on the carbon footprint of supply chains with the goal of becoming carbon neutral has become the focus of highly developed companies and their supply chains. Volkswagen has committed to becoming carbon neutral by 2050 in compliance with the Paris Climate accord, and other large companies are following suit. All in all, getting to know your supplier’s supplier is a critical element of strategic supply chain management. It is fundamental to the entire system, a keystone to risk management, and critical to business continuity strategies for successful companies. Engaging directly with engineering teams brings speed and new technology to new designs and brings new products to market faster. And socially responsible companies need to know who is supplying their products all the way through the chain, to build a sustainable supply chain and drive continuous improvements. Once the ink dries on the contractual signatures, it can feel like a weight has been lifted. Negotiations are over for another round, and both sides have an agreement they are satisfied with – so what now? In long-term partnership agreements, often spanning several years and hundreds of millions of dollars of business between partners, the management of the agreement and the relationship becomes critical. Successful agreements set clear expectations and behaviours for both parties - allowing all involved to focus on improving the overall system that produces and delivers materials, components, or services from supplier to customer. This approach results in better quality, lower prices, and a higher level of engagement between all involved.
Negotiation of supply agreements is a key function for any Sourcing Professional, and requires strategic planning, an extensive knowledge of a firm’s supply partners, and internal cross-functional alignment. Every stakeholder wants to be heard, and wants their say in contract content, planning - and needs to be kept updated through the negotiation process. As the lead negotiator, the Sourcing Professional must be detailed, meticulous, and determined, as well as an excellent communicator to see the supply agreement through to closure and execution. Taking a System Thinking Approach to Contract Management Considering the supply contract from a system thinking perspective, one needs to take a view of how each supplier fits into the overall value chain, and consider the significance that each partnership brings. Involving all stakeholders early in the contract structure and negotiation processes, keeping discussions focused on business and terms at hand, and searching for ‘win-win’ scenarios will ensure that agreements close positively for both parties. In turn, the execution portion of the contract will begin with both firms focused on joint success, collaboration, and continuous improvement in order to achieve the mutual goals set out for the contract term ahead. There are times however, where the path to ‘win-win’ is not always clear. There are situations where a smaller firm relies on a much larger firm for key components to their product. What do we do when a supplier does not need our business? Instances like this require a Sourcing Professional to take on a sales role – selling the organization, the product and the future to a larger supply partner. Additional efforts in the form of constant contact on the phone and in person – and transparency in plans and requirements - lead to credibility between the larger supplier and smaller customer. Putting in these efforts and taking a sales and promotional role can lead to a collaborative reciprocal relationship even with organizational size imbalance. Key Components for Building and Maintaining a Long-Term Supplier Partnership A few things to remember during contract structure and negotiation that will go a long way in maintaining and building a partnership with a supplier after it has been signed:
Ultimately, while negotiation of a mutually beneficial supply agreement is a critical part of the Sourcing Professional’s job – along with securing supply and pricing, governing behaviours, and setting expectations, it is the relationship with the supplier that is the foundation of successful growth between partners. A positive, transparent, reciprocal and cross-functional relationship will lend itself to profitable long-term partnerships. At BKW we're very proud to have our Value Stream Mapping projects guided by Brian Watson. Brian is a supply chain system thinking expert, and he has spent his entire career helping firms across various sectors improve their performance. Brian spent 21 years in manufacturing, enjoying much success improving the performance of the firms he managed. For 18 years, Brian was a Professor of Supply Chain & Operations Management at Conestoga College. Since 2017, Brian has been the Director of the Magna Centre for Supply Chain Excellence at Conestoga.
Through his role with Conestoga College, Brian has been able to share his knowledge and increase awareness of the importance of system thinking in improving firm competitiveness in this dynamically complex global economy. Recently, he authored a whitepaper focused on Canada’s productivity and how system thinking enables businesses to strive for sustainable competitiveness. The following is an excerpt from the whitepaper, Addressing Canada’s Productivity Challenge: Sustainable Competitiveness Through Integrative Supply Chain System Thinking (May 2018). Canada’s economy lags behind many other nations in terms of productivity. It is projected that Canada’s productivity growth rate will be slower than many of its peers over the next thirty years. Addressing Canada’s productivity is a dynamically complex challenge, impacted by international, national and organizational factors. While governments hammer out trade agreements, tax and business policy regimes, there is much that individual organizations can and must do to address productivity improvement. The predominant argument put forward to address productivity improvement is that of investment in technology. While investment in technology is necessary, it is not sufficient in addressing Canada’s productivity challenge. Many SME’s do not have the resources or skills to invest in technology, while other firms invest in technology without truly understanding its impact, often resulting in unintended negative consequences. Organizations must first place their efforts and resources on improving system effectiveness in delivering ever increasing customer value. Only then should investment in technology occur. Effectiveness first, then selective investment in technology where appropriate, in a never-ending process of innovation, knowledge creation, continuous improvement and value creation. Doing so generates much needed financial and human capital and improves operational and financial performance, allowing the organization to leap ahead of the competition and establish sustainable competitiveness in the process. To achieve this, a transformation in thinking and behaviour is required. This paper will identify two key areas requiring the immediate attention of executives and senior management across all organizations. The first is the development of mission critical integrative supply chain system thinking competencies in their organizations. Integrative supply chain system thinking marries training in effective supply chain management with system thinking, then applies these in addressing the productivity challenge. In the process key competencies are developed, necessary for improving an organization’s effectiveness in delivering ever increasing customer value and improved productivity in today’s (and tomorrow’s) dynamically complex global economy. Of note, in 2016 the World Economic Forum (WEF) identified the top ten skills required by organizations needed to thrive in the fourth industrial revolution.* Those top ten skills include;
Integrative supply chain system thinking competencies, when developed as outlined in this paper, and in concert with effective leadership, embodies all of these skills. The second key area requiring immediate attention is that of organizational culture. An organization’s culture must be one that encourages collaboration, risk taking, is focused on customer value creation, adopts continuous improvement as foundational to its strategic approach, and regards all employees and key supply chain partners as critical to the creation of innovative new knowledge. Developing such a culture requires organizational leadership that values and adopts such principles and approaches in the day to day managing of the firm. Unfortunately, such leadership is at odds with traditional cost-focused management culture found in many organizations today yet is absolutely essential to achieving sustainable competitiveness in today’s (and tomorrow’s) dynamically complex global economy. World leading productivity, and with that true sustainable competitiveness in the global economy, comes through the effective application and leveraging of all of an organization’s resources, not just technology. This is true for organizations in all sectors of the economy. It takes skilled supply chain specialists trained in system thinking to effectively leverage all resources including technology; integrating, coordinating, and optimizing them to achieve world leading productivity and system performance. It also takes a leadership culture that fosters an environment in which knowledge creation, innovation, and continuous improvement toward true sustainable competitiveness can flourish. This paper reviews the work of a number of key thought leaders in defining integrative supply chain system thinking. Additionally, a case involving a manufacturing firm is outlined throughout the paper in an effort to better understand the importance of integrative supply chain system thinking to improving organizational effectiveness. Improving productivity in Canada is an urgent matter that must be addressed by governments, business, and education systems alike. Unless taken seriously and accompanied by specific action, Canada’s productivity, and with it our competitiveness and standard of living will continue to fall behind. This paper is a call to action to all organizational leaders to address the productivity challenge. It is also a review of what needs to be in place for improved productivity and sustainable competitiveness to be achieved. If you are an organizational leader charged with the responsibility to improve your organization’s/supply chain’s performance then I encourage you to continue reading. If you would like to read the full whitepaper, please click here. *The Future of Jobs, Employment, Skills and Workforce Strategy for the Fourth Industrial Revolution Report, World Economic Forum, January 2016, as summarized in, Alex Gray, The 10 skills you need to thrive in the Fourth Industrial Revolution, January 19, 2016, https://www.weforum.org/agenda/2016/01/the-10-skills-you-need-to-thrive-in-the-fourth-industrial-revolution World Economic Forum, Retrieved February 26, 2018. |