In industry I've witnessed a dramatic shift in how business leaders view supply chain management and growing importance placed on the supplier management function. The role of managing the supply base has become so much more than simply sourcing a part and placing orders. In a highly outsourced and globalized world, managing suppliers often means managing a significant portion of a company's overall business. To better elaborate the point I refer to the changing role of supplier management as a shift from buyer to business manager.
Most product companies typically own one or two links in long supply chain from raw materials to finished goods to satisfying end customers demand. A large portion of the cost and value added to the product occurs at suppliers, especially when product companies have outsourced so much of their manufacturing. In the consumer electronics industry, for example, it is not uncommon for a product company to never physically touch their own product.
Even at the outsourced manufacturer, 80% or more of the cost of the product is procured material, not value added by that manufacturer. Since a company may directly comprise only a small part of the entire chain, the ability to manage the value chain across company boundaries is critical. Responsibility that used to be the domain of a company's internal operations, manufacturing, or even engineering, or marketing, is now squarely on the shoulders of the supply chain management function.
With much of the inventory in the hands of suppliers, supply base management plays an important role in managing a company's working capital. Managers need to properly plan inventory not just at their own company, but at the supplier. Negotiation of inventory liability and well-managed payment terms drive financial risk and working capital requirements of the company, critically affecting the firms ROIC.
In 2001, I worked for the contract manufacturer Flextronics, supporting the Cisco account. The bursting tech bubble created hundreds of millions of dollars of liability for Cisco that had never shown on their balance sheet because it was on the balance sheets of Flextronics and other suppliers. This experience was an important and expensive lesson in the financial risks that have to be managed in the supply chain.
It is not only product cost and inventory that supply base managers must control. In addition to the physical supply chain, there is also a product development value chain, where multiple companies provide technology and expertise that feed into the final product design. Just as a single firm rarely controls the entire delivery chain, a single firm rarely controls all the critical technology in a product.
Product design is collaborative, with companies working to integrate technology roadmaps for various components. In some companies, elements of product design are completely outsourced. With important aspects of quality and functionality in the hands of suppliers, the ability to manage technology and development programs across company boundaries is required; and supply base managers are integral members of the engineering and product marketing teams.
Moving from buyer to business manager occurs when the goods being supplied are no longer simple commodities. With commodities, a buyer can easily switch between multiple sources in order to manage availability and price. Business managers are needed when the suppliers have offerings that are difficult to interchange, either because the product or service is unique, or because the working relationship is complex. In these cases, sourcing decisions are strategic and not just cost-based. The relationship has to survive and deliver past the initial negotiation and order. It is critical to actively manage the performance of these suppliers on an ongoing basis to achieve quality, delivery and cost performance; the buyer can't just threaten to buy elsewhere.
Assuring Continuity of Supply
Assuring continuity of supply is also not as simple as buying from multiple sources. Business managers require deep relationships with their suppliers to understand and monitor potential supply risks that could be within the suppliers operations. Buyers tend to have price-based adversarial relationships with suppliers. Business managers have value- and performance-based relationships where the manager understands the goals and motivations of the supplier, and vice versa.
When the mentality of supplier management shifts from buyer to business manager, it leads to different decisions about the organization. With the exception of a few pure commodities, where scale and buyer size matter, many large companies have shifted supplier management from a centralized function to a function that is aligned with and reports into the product line business units. There is often a matrixed governance structure across business units to align supplier strategies and leverage scale. Within the business unit there is often a matrixed structure across supply chain, engineering, quality and sales operations to manage the key suppliers.
Just as the responsibilities of supplier management have grown, so must the skill sets of people in the roles. Senior supply chain managers must now have the talent, education, experience and temperament that would be expected of a general manager.
The Supply Chain Council has a program called the Supply Chain Talent Academic Initiative. They have identified integration and orchestration as core skill sets of senior supply chain professionals. In other words, supply chain leaders are not just subject matter experts in disciplines like procurement or logistics; Supply chain leaders have to be able to pull together people and skills from many disciplines to orchestrate and implement complete networks of supply, demand and product development.
Where buyers once worked on the tactical activities of negotiating price and placing orders, the professionals managing the supply base are now business managers that have responsibilities that touch almost every strategic aspect of the business. As companies become more focused on their niche in the value chain, the role of supplier management and the skill of managing across company boundaries will be needed more and more.
Jeff Wallingford is vice president, Supply Chain Strategy for Riverwood Solutions.