21 Apr 2020

Simply doubling down on cost reduction won’t be a sustainable solution

The last few weeks has seen countries, businesses and most importantly people facing unprecedented challenges. For us, what is becoming evident is the ability of people and businesses to respond to these challenges and adapt rapidly to what for some time might well be the new normal.

At the time of writing this in a surreal state of lockdown in the UK and conducting interactions with colleagues and clients via video conference rather than face to face it makes me realise how adaptable and creative we can be when pushed. However, this is nothing compared to what some organisations have achieved in reshaping supply chains and business models to both maintain vital supplies and protect their businesses.

None of us can accurately predict the outcome of the current crisis, but it’s clear the cost in economic terms will continue to rise the longer businesses are unable to function normally. Even in the midst of this turmoil we need to think how we will respond longer term and consider how we will rebuild and emerge stronger from this experience.

In a series of blogs we’ll take key supply chain themes and ask the difficult questions like how well prepared were you for a once a hundred year event? How visible were your supply chain risks beyond tier 1? Did your supplier relationships stand up to the test? Did it feel like you were a customer of choice?  Did you have access to the information you needed? Were your people sufficiently well trained? etc. This will culminate in our annual global SRM report scheduled to be published in October where we’ll explore these and many other topical questions.

We fully understand that many businesses will have experienced an unprecedented reduction in revenues and a big projected hole in the balance sheet. In these circumstances history tells us that the first reaction might be to go after suppliers for cost reductions, or to put it more bluntly price cuts. What is unique about this situation is that the phrase commonly being used in a positive context to bolster morale, which is “we’re all in this together” applies to both customers and suppliers and extends right down the supply chain.

Despite its apparent expediency, simply doubling down on cost reduction won’t be a sustainable solution. While some tough tactical decisions will have to be made many suppliers will be in perilous financial straits and short term gains could result in just kicking more supply chain risk down the road.

Done well, segmentation will have revealed those suppliers that are most vital to your organisation and in some cases the lifeblood, so endangering their prospects of recovery by over aggressive price challenges could prove very counter-productive. Likewise, beyond this group will be another tranche of suppliers that while not as critical could still cause significant disruption in particular if large numbers are unable to reinstate business as usual. This could result in an impact on some supply market dynamics. We suggest a measured approach including the revisiting of segmentation models to assess market and risk profile changes.

Collaboration has already been a hallmark of this crisis so far resulting in UK Government, NHS clinicians and management, military personnel and private contractors working together to build a 4000 bed hospital in central London in just 9 days. This is what effective collaboration can achieve.

If the global economy is to haul itself back and be in a position to move forward and face the other challenges that haven’t gone away such as the climate change emergency then procurement and supply needs to play its part. And that means reinventing supplier relationships to be more collaborative at all levels and not just strategic. Every supply chain interaction can benefit from being more collaborative, whether its risk management, supply chain efficiency, cost and design optimisation, transactional efficiency or innovation.

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Our global research extending over almost 12 years has shown the benefits that companies can achieve by more collaborative management of supplier relationships via an SRM approach. However it has also highlighted an elaborate network of barriers unconsciously constructed that have held it back. These have ranged from the insistence on pre-determined ROI for even a modest investment in SRM, other business priorities overriding it, organisational change, lack of time and resources, no IT systems etc.

By the time we reach the business and economic recovery phase of this crisis, business leaders will have had supply chain performance on their daily dashboard for several months. The objective should be to keep it there, not because it’s in crisis but because it’s delivering strategic advantage.

Combined with a thoughtful and coherent plan to recover, this could be a tipping point for the way in which supplier relationships are managed going forward.

For further information on how we can help your organisation reinvent its supplier relationships for a new era, please contact us here or at enquiries@stateofflux.co.uk

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