The supply chain is all-important when it comes to executing a business’s strategy – whether it’s in-house or outsourced, it needs to be the perfect partnership
Deciding what the core business is, what activities to maintain in-house and what to outsource to specialists and suppliers – these are decisions at the heart of corporate strategies for many groups. And the current economic climate does not make them easier.
Supply chain management has always been difficult. The difference today is that the prospect of a prolonged economic downturn has sharpened the collective corporate mind on costs and operations that are deemed core. Flexibility, scalability and optimisation of the supply chain have never been more important, as inventory levels fluctuate due to sluggish consumer demand. In addition, there is more attention paid to the fine print of a contract to ensure that expectations are being met on both sides.
But while the economy is a factor, the bread and butter of daily corporate life such as mergers, acquisitions, divestitures and management shake-outs continue to be driving forces behind outsourcing decisions. And there are tried-and-tested building blocks to a successful venture.
“The first is looking at a company’s requirements, which I compare to buying a house. Instead of location, location, location, it is all about requirements, requirements, requirements,” says Martin Knott, head of trade, global treasury solutions EMEA, Bank of America Merrill Lynch.
“Companies need a strong foundation to build on, although you need to be fleet of foot and flexible. Scope needs to be built in to adapt to any change. Of equal importance is that senior management buy into the project and that outsourcing is aligned with the company’s overall strategy. There also needs to be a strong corporate governance structure and the ability to continually monitor the process.”
This is especially true right now. Shamus Rae, partner and European head of outsourcing at KPMG, says: “During these economic pressure points, we are increasingly seeing companies reviewing all their outsourcing deals from a risk point of view. They want to ensure that their partners are robust, resilient and will not run out of cash or be taken over by a private equity firm.
A shared view on the overall direction is increasingly essential. “Our clients are looking at more than an ability to deliver against a contract and are focusing on the post-contract relationship to ensure the two organisations can align themselves behind a common strategy,” Rae says.
“That means looking at the culture of the supplier organisation relative to the clients, the governance put in place to ensure innovation continues and is focused on the strategy, and the measurement and objectives of management in the supplier are appropriate to what the client is trying to achieve.
This leads to novel ways of working together. “We had a European client who was setting up a key outsourcing deal,” Rae says. “Every three months the supplier would need to present a selection of investment projects for innovation to a Dragons’ Den-type of ‘deal committee’.
Flexibility, scalability and optimisation of the supply chain have never been more important, as inventory levels fluctuate due to sluggish consumer demand
“If the projects were accepted, funds would be provided, but if the supplier consistently failed to come up with innovation then it would allow a termination event to be triggered. This ensured that the supplier had both the carrot and the stick to deliver innovation back in to our client.”
Picking strategic suppliers carefully, says Mike Darby of Deloitte’s consulting practice, ensures alignment of the objectives, goals and cultures of both businesses at the outset. He says: “A later change of business strategy not in parallel with that of the suppliers will require a review of whether the relationship will continue.”
He cites the automotive industry, where ten-year contracts or longer are the norm. “If Toyota is successful, so are its suppliers and vice versa.”
According to Craig Sears-Black, managing director of supply chain systems provider Manhattan Associates, most businesses – whether manufacturers, assemblers, retailers, wholesalers, distributors or in logistics – typically have many suppliers that they rely on to help them be successful.
He says: “Often, though, they work with only a small number of suppliers that they consider strategic. A strategic supplier might be, for example, a software business with such innovative technology and expert people that it becomes part of the extended enterprise.”
Strategic moves can create new supply chain demands. The Co-operative called on existing and new providers after its £1.5 billion acquisition of rival Somerfield in 2008, which doubled the supermarket chain’s share of the UK sector. It was important that the flow of sales as well as shipment and payment information between firms was uninterrupted.
Co-op used GXS’ Trading Grid near-real-time data exchange for documents such as purchase orders, invoices and advanced ship notices with suppliers across the globe. And for the rationalisation of the distribution centres, it turned to Manhattan Associates.
“There were 34 distribution centres and each had its own supply chain infrastructure, operating approach and IT systems platform,” says Sears-Black.
“The challenge was to consolidate the distribution network, develop one operating model that could manage the new infrastructure with its associated contractors and third parties.”
Strategic supply chain relationships have their down sides as well as their upsides, and tighter attention to quality control is vital. Toyota’s experience in 2009 and 2010 when around 10m cars had to be recalled revealed that most failures were tied to subcontracted components.
If that argued for the need for better collaboration and communication between internal manufacturing and design department as well as with the outsourced suppliers, and a broader view over the whole production cycle, then Toyota’s 2011 experience – along with other carmakers – showed a different risk, when the Japanese earthquake and tsunami interrupted supplies – and prompted a lot more strategic reviewing of outsourcing arrangements.
The price of efficiency?
When it comes down to your supply chain, is it flexibility, control or cost that is the driving force?
Whether to outsource or keep a function in-house is rarely an easy decision.
Core competencies, internal resources, cost structures, benefits and risks are often discussed, but the bottom line for many is to look at the advantages, the risks and which party will improve the function most in the future.
Craig Sears-Black, managing director of supply chain systems provider Manhattan Associates, says: “Before deciding to outsource, companies need to ask, ‘what competencies do I have and what do I hope to achieve by outsourcing this particular function?’ They also need to focus on the advantages and the downside. For example, a company may gain a cost advantage and flexibility but lose some control.”
Neville Howard, a partner at Deloitte, believes that often cost is the main driver behind outsourcing deals. “There are many arguments behind outsourcing parts of the supply chain and there is a lot of talk about agility, flexibility and focusing on core businesses.
“Companies will also see it as a way to expand their reach and introduce new products. However, at the end of the day it all boils down to cost.”
Lynn Strongin Dodds is a freelance business and financial journalist. She is editor of Best Execution Magazine and is a regular contributor to several publications including FTSE Global Markets, Financial News, Investment and Pensions Europe and Global Pensions.