Getting the most out of your suppliers

The topic of supply chains has garnered major focus as the UK moves towards its exit from the European Union. The headlines have particularly highlighted the potential shortages of everyday items from the end of October, but supply chains don’t just begin and end with Brexit.

Managing supply chains is a core component of every business’s day-to-day operations. And since the financial crisis, it has become even more important. “We have seen an increasing emphasis on businesses maintaining visibility in the management of their suppliers,” says Steve Trainor, chief operating officer at consulting firm Odesma.

Increased awareness of the risks to business reputation due to problems in the supply chain has led to more in-depth reviews of not only primary suppliers, but those further down the chain, including secondary and tertiary suppliers.

To mitigate the risk, businesses are now asking suppliers to provide a lot more information. “They are interested in suppliers’ policies, procedures and approach to managing ethical and data obligations much more than before,” explains Trainor.

Finance is not likely to be the only function at the party, either, often covering procurement, governance, risk and technology teams as well, depending on the industry.

Risk is the watchword from an organisational viewpoint, as regulatory and legislative frameworks are brought to bear on businesses and pressure groups exert influence on the brand.

The contract is, for many, the beginning and the end of the relationship between the company and the supplier. Good contract management used to be about how often the two parties chatted on the phone to appraise one another of the current situation. That simply won’t cut it any more.

Governance has always been essential, but these days companies must dig deeper to ensure they protect against more than just the day-to-day risks, measured by key performance indicators of units manufactured to specification and delivered on time.

Even if you have a sophisticated management process – such as the quality, cost, delivery, development and management model applied with rigour by companies such as Nissan and Honda – the board won’t be the only function asking hard questions. Stakeholders include regulators, investors and lobby groups for high-profile brands or topics in the public domain. And then there’s the press and the social media effect.

Not everything needs to be investigated forensically. There will always be some services that are more or less commoditised, such as cleaning or payroll. As long as the company meets all normal checks concerning financial probity and employment law requirements, you don’t need a close relationship.

The rest depends on the industry you are dealing with. Those dealing in cut flowers will have different requirements from those who import semiconductors used in military equipment.

Yet environmental, social and governance issues are now high on the agenda of investors, politicians and regulators. Companies increasingly rely on third parties to confirm what they may have learned about a supplier from a questionnaire or even a visit to the plant.

Technology is increasingly being used to monitor not only performance of delivery – units, times, failures etc – but to collate data about all suppliers in order to flag potential risks before they become a problem.

Businesses can tap into a range of technology and intermediary services, as well as non-governmental organisations to support these checks and the on-boarding process of new suppliers.

“If a business has 15,000 suppliers, it’s impossible to manually investigate all of them,” says Trainor. “There are numerous services that allow businesses to understand their suppliers and provide self-certification of suppliers by asking all of the necessary questions.”

The use of technology allows businesses to holistically evaluate the risks and respond to changes of circumstance in a less reactive manner.

“That richness of data gives you a risk picture that allows you to make an assessment as to what will be the likely outcome by working with one third party versus another,” says Kristian Part, a partner in the risk advisory team at Deloitte.

This holistic approach needs to be consistent, says Park, to avoid spending too much time focusing just on those particular elements a business feels it has more control over.

For instance, businesses now pay much closer attention to information security, cyber risk and exposure to modern slavery. But if there was another recession, the primary risks to each business would inevitably change.

“Companies will go back to asking their suppliers to cut their costs by 10% or more,” says Park. “Then they will look at the historical effects to see if suppliers have been compliant over the last five years, focusing on contractual terms.” They can use any anomalies to get clawback money.

“We ask clients to think about these different risks the whole time,” adds Park. “Cost management, cost control and cost recovery, as well as risk management, should be components of any processes managing suppliers.”

Deloitte’s latest Third party governance and risk management survey highlights how a lack of investment has resulted in some risks being totally overlooked. One of the key findings was the lack of oversight organisations have of subcontractor and affiliate risk. As few as 2% of organisations identify and monitor all subcontractors engaged by suppliers. And only 8% undertake this research for their most critical relationships. The rest (90%) have not recognised the need for any oversight for those supplying their suppliers.

Knowing that your supplier has a number of other counterparts it can access does nothing for diversification if they all turn out to be totally interdependent.

In 2018, the European food and drinks industry lost some of its sparkle when it discovered rather too late that two major carbon dioxide suppliers were closing for maintenance at the same time. Having processes that monitor and crosscheck potential risks should identify these incidents earlier and allow alternative sources to be found.

Even with new technology using data monitoring and analytics to help manage processes, logistics and risks, monitoring remains something of an Achilles’ heel in many businesses.

These days we tend to believe you can never have too much information. But even if requests for proposals are to be fed into powerful computer programs, what data do you need and how will it influence the relationship with suppliers?

Richard Nixon, a supply chain expert and associate principal at The Hackett Group, says that the single most useful piece of advice he could give to those managing suppliers is to keep things simple.

“Make it as easy as possible for the supplier to give you their best offer,” says Nixon, “as finance and procurement professionals in supply chains don’t half make it difficult for suppliers at times.”

Even before questionnaires are despatched, begin with a frank exchange so that suppliers can understand what they are getting into. If there is a lot of competition, tell them from the start. If you are looking for a long-term relationship that sees a supplier bringing forward innovative products that will require investment from them, let them know that will be met with commitment from your end.

Once the ground rules are set, you must determine the type of supplier they represent in your chain – routine or strategic, bottleneck or leverage. It’s also important to understand what they think of you.

“There will be times when you’ve got a new product or project and it’s very exciting. You’re in growth and you are the suppliers’ best friend,” says Nixon. Sometimes you will need them, so considering how you manage the relationship and do the right thing for both the short term and long term is crucial.

He adds: “If you see them as strategic and they think they can exploit that position then you have got a dysfunctional relationship. Power and influence in the relationship are important aspects to consider as these will change over time.”

Technology is powerful, but we must not allow ourselves to rely on it alone. “Don’t ever forget the psychology, because how we think about and use our intuition to evaluate these situations is an important part of making the right choices,” says Nixon.

For all the emphasis placed upon technology, there is a huge amount of business that has yet to be touched by it or by automation of any kind. It is coming, but painfully slowly, and this will impede how businesses interact with suppliers, monitor their performance and manage risk.

“There are 30 million companies in the US alone. That’s 30 million different communication points, 30 million different levels of technological understanding and maturity,” explains Roy Anderson, chief procurement officer and digital transformation officer at enterprise solution developer Tradeshift.

And most of it is not digital, but analogue – ie, paper-based. Not that long ago, between 60% and 70% of all invoices were still produced on paper – and this is more than 25 years after businesses began installing electronic record systems.

“There’s still an enormous amount of paper within industry,” says Anderson, who includes both emails and PDFs in this definition, as they still represent analogue processing. It will take some time to transition these processes to digital and then on to the blockchain and artificial intelligence platforms that the risk platforms of tomorrow will exploit. “So there remains a massive effort to be undertaken to move those millions of businesses to a digital environment.”

Some of the difficulties that businesses encounter in getting the most out of their supply chain are largely of their own making. With responsibilities spread across finance, procurement, risk product and perhaps even more divisions, reporting lines are unclear, schedules are not aligned and so the collective team cannot pull together as one.

Even if finance doesn’t control the management of suppliers, there is no one better placed to co-ordinate the business’s strategy, according to Alex Mumford, head of finance consulting at Grant Thornton.

Mumford spends much of his time helping chief finance officers (CFOs), finance directors and their teams understand their role, and demonstrates that through what he calls the CFO or finance scorecard. This covers four main performance areas for finance teams to focus on: business protection, operational delivery, stakeholder management and adding value. The supply chain contains all those elements.

“The role that the CFO plays around business protection is absolutely critical in making sure the financial goals of the business are aligned with supply chain strategy and that it’s being delivered,” says Mumford. “The finance function has stepped out from behind the filing cabinets over the past five years and become more involved and a more proactive partner to the business.”

The aforementioned Deloitte survey found that there is an increased level of co-operation across businesses in order to manage suppliers and the role of finance is, frankly, a no-brainer.

Finance has an enterprise-wide perspective on data, profit and loss, and budgets. It has the expertise to offer the CEO or chief procurement officer the kind of analytical capability and access to data that will allow the business to make better decisions.

“Working with finance offers all other stakeholders a far broader perspective,” says Mumford. “Finance has the wherewithal to join up the dots, to help the business understand the broader implications of decisions made in the supply chain, that perhaps a supply chain director or team might not might be able to on their own.”

The final crucial stage is to ensure that processes are allowed to develop and evolve.

Just as your own business changes over time, so do your suppliers. Mergers and acquisitions not only change names, but cultures as well.

Managing these relationships involves not thinking of them simply as a snapshot in time, but something that needs to be reviewed continually.

Businesses need to be sure both the relationships and processes still work effectively, have developed as expected and remain relevant within the context of the business.

• Getting the most out of your suppliers
  Business & Management Magazine, Issue 278, October 2019

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