Profitable Supplier Collaboration: A Resource-Focused Approach

Dec. 16, 2011
How focusing on improving resource metrics can help kick-start results.

Is supplier collaboration poised to become the next big thing in manufacturing performance improvement? It could be -- if more companies were confident that they could make it work. A resource-focused approach, which targets resource consumption and waste production as the levers for value creation, can help improve the odds of getting the results you want.

Making the Leap from Theory to Practice

Reducing costs to release cash to the business is an ongoing pursuit for most organizations. And if you're like many manufacturing executives, you're at least considering collaborating with your suppliers to do it. For good reason. Supplier collaboration can be a logical next step for companies that feel that they're reaching the limits of their lean/Six Sigma and strategic sourcing programs' cost-cutting power. The costs are certainly there: According to one estimate, supply-chain costs can consume more than 50% of manufacturing companies' revenue. The leverage of a company's buying power can make it easier to "sell" the idea of collaboration to suppliers than to its own customers. And unlike customers, which typically command the lion's share of a company's attention, suppliers can represent a relatively untapped well of opportunity for collaboration.

If supplier collaboration is such a great idea, though, why isn't everyone already doing it? When it comes to systematic, strategic supplier collaboration programs rather than the occasional one-off or ad hoc joint projects characteristic of many companies, the obvious answer is: It isn't necessarily easy. For starters, to focus its investment (and keep program scope manageable), a company should be able to effectively and systematically identify which few high-potential suppliers to approach out of a pool of possibly hundreds or thousands. Once identified, those suppliers may need a more compelling value proposition than simple cost reduction to take the perceived risks that collaboration may entail. The parties may diverge in their views on any number of issues -- what projects to consider, which improvement metrics to pursue, what targets to set, what data to share. Small wonder that the potential gains, however appealing on paper, may not seem worth the effort.

That's where a resource-focused approach can help. A focus on reducing resource use and waste can not only point the way to fruitful opportunities for collaboration, but actually help leaders find effective answers to questions like the above -- thus helping them lay the groundwork for effective supplier collaboration in the first place. The potential payoff: lower costs, bigger margins and a decision framework that can help guide a company's supplier collaboration efforts on an ongoing basis.

So What Exactly is a Resource-Focused Approach?

Stripped down to its essentials, a resource-focused approach aims to create value by finding ways to use less resources and produce less waste to achieve the same or better results. More formally, it strives to reduce the business' impact on five resource metrics -- energy, carbon, water, materials, and waste -- in order to cut costs and pursue other value-creating opportunities. The reasoning behind the approach is simple. Metrics relating to the resource categories just mentioned can be an excellent proxy for operational efficiency, which means that improvements in these metrics (i.e., reductions in resource use and waste) often correlate with greater efficiency and lower costs. Even if the correlation may not hold in each conceivable case, it happens often enough to make a resource focus a productive way to identify potential cost-saving opportunities.

Although a resource-focused approach can be applied within a company's own four walls to good effect, the greater potential benefit comes from applying it to the supply chain. Why? Because for many companies, the supply chain may account for the bulk of the business' total resource impact. (The Carbon Disclosure Project, for instance, estimates that more than 50% of a corporation's total carbon emissions come from its supply chain.) The argument for taking a resource focus to the supply chain is exactly parallel to the reason for going there for cost reductions: In both cases, look where the opportunities are likely to be.

If you're thinking that this sounds a lot like "greening the supply chain," you're half right. Resource metrics relating to energy, carbon, water, materials and waste are similar to, or may even be the same as, the metrics organizations look at when examining environmental sustainability. But make no mistake, many companies view resource efficiency in the same way as they look at any other game-changing business opportunity that forces them to think differently about their operations. Most astute organizations realize if their supply chain uses too much energy, or if it uses too much water or materials, or if it produces too much carbon or waste, then they are spending too much money. And that extra expense is being passed onto their product cost.

Driving Effective Collaboration Through a Resource Focus

A resource focus can be more than simply a useful lens for identifying performance improvement opportunities. It also has several distinctive characteristics that can help companies overcome a number of common obstacles to effective supplier collaboration. This, in turn, can not only reduce the risk and effort of starting a supplier collaboration program, but also help companies address challenges that may arise during the collaborative process itself. The reasons for this include the following:

A resource-focused approach comes with a built-in methodology for identifying and prioritizing appropriate suppliers to work with. How can a manufacturer with hundreds or thousands of suppliers boil down the pool to a short list of candidates for collaboration? An effective winnowing-down process should be both based on empirical data and yield clear results. A resource-focused approach, which bases supplier selection on lifecycle analysis (LCA), fits the bill (click here to see sidebar, "Selecting collaborators and projects the resource-focused way"). The LCA methodology is both well-established and widely used, and the simplicity of its output can help lend clarity to the selection process. As a bonus, a company may often be able to use publicly available data to perform an initial LCA, reducing the need to ask a supplier for specific data unless it makes it past the first cut.

A resource-focused approach can create value along multiple fronts, strengthening the value proposition for both you and your collaborators. Cost reduction isn't the only, or even always the primary, potential benefit of reducing resource use and waste. The prospect of gains above and beyond cost reduction can allow companies to offer suppliers a more compelling value proposition than a simple cost-cutting play -- which may be necessary to help reorient what may have historically been an adversarial relationship to a more collaborative one.

Perhaps most obviously, their tie-in with environmental sustainability makes resource-focused changes a natural fit for a company's branding and public relations efforts. For instance, Starbucks Coffee Co. launched its effort to make its paper cups recyclable specifically to address customer concerns about the cups' impact on the environment. As part of the program, Starbucks collaborated with International Paper, a major supplier of Starbucks cups, and Mississippi River Pulp, a recycled pulp producer, on a project that demonstrated the feasibility of "cup-to-cup" recycling despite the cups' inner plastic lining. U.K.-based retailer Marks & Spencer, in helping to fund the construction or retrofitting of four "eco-factories" owned by its clothing suppliers, has been able to prominently feature the "carbon-neutral" nature of the clothing produced by these factories in its advertising.

Resource-based improvements can also help a company manage risks related to resource scarcity. An inconsistent supply of key resources can drive greater cost volatility; in the worst case, it can threaten a business' ability to function. Reducing a company's dependency on resources also reduces the associated risks.

The global food company Nestl, for example, works with farmers in developing countries to encourage sustainable farming practices -- which can reduce a farm's carbon footprint and water consumption -- with the aim, in part, of reducing the risk of experiencing cocoa and coffee shortages driven by decreasing soil fertility and other environmental impacts.

Siemens, the global high-tech manufacturer, has launched an "Energy Efficiency For Suppliers" program in which Siemens brings its specialists and tools to suppliers' facilities to assess their energy efficiency and recommend improvements. The resulting reduction in suppliers' energy consumption can not only save the suppliers money, but also help shield them -- and therefore Siemens -- from the impact of energy price fluctuations that might affect the price and/or availability of crucial components.

Then there's the innovation angle. It's widely held that resource scarcity and other sustainability-related drivers can spark value-driving innovation. Put that driver together with the growing adoption of collaborative innovation practices among manufacturers and their suppliers, and the results may yield both top- and bottom-line improvements. One research study that examined "green product innovation" at a Korean semiconductor manufacturer concluded that "involving key suppliers in green new product development for environmentally demanding customers and markets can bring both environmental and commercial success."

Two examples of innovations generated through manufacturer-supplier collaborations include the Coca-Cola Co.'s work with Brazilian manufacturer Braskem to develop a "100% plant-based" bottle for Coca-Cola's Odwalla line of products, and the collaboration between cosmetics giant Garnier (L'Oral Group) and glass/plastic manufacturer Gerresheimer to develop a new technique for improving the clarity and quality of recycled glass.

A resource-focused approach can help identify previously overlooked opportunities, further enhancing the potential value of collaboration. Resource use and waste are ubiquitous throughout the supply chain, meaning that opportunities for reduction may be similarly ubiquitous. Looking for those opportunities from a product lifecycle perspective forces a company to consider a product's potential resource impact even at times, such as during transport, use or disposal, that the product is outside the company's direct control. For companies not accustomed to such a viewpoint, this approach can represent an entirely new way of thinking that can point to improvements in areas where no one had previously thought to look.

A resource-focused approach can be less intrusive than other approaches in its information-sharing requirements. Why use resource metrics as a proxy for operational efficiency instead of the actual operational metrics themselves? One reason is that many suppliers may balk at sharing efficiency and cost information outright with a customer, viewing attempts to collect such data as a potential threat to their own margin. On the other hand, because resource metrics are typically a step removed from a supplier's actual performance metrics, a request to share data on resource metrics may meet with more success.

Resource metrics may be easier to collect than other types of data. If a company doesn't want to collect the information itself, various third parties, including the Carbon Disclosure Project, can be hired to gather and analyze resource data from suppliers. Many suppliers, for their part, may already keep track of their resource data for other reasons (for instance, to prepare Carbon Disclosure Project reports), which can make it less burdensome for them to provide that information than if they had to generate the data from scratch.

Resource-focused projects can be relatively easy to execute and deliver fast returns. Projects that reduce energy, carbon, water, materials and waste can represent some of the easiest ways to remove significant cost from the supply chain. They may also typically have rapid payback periods and can be among the lowest-risk projects a company can undertake.

Toward Profitable Resource-Focused Supplier Collaboration

It should go without saying that the basic tenets of effective supplier collaboration apply to a resource-focused approach: align both parties' interests with each other and their respective business strategies; lay the ground rules of engagement early; and set up appropriate systems and processes for capturing and analyzing data. In addition, companies can take several steps specifically geared toward making a resource focus "work":

  • Manage the program with a multifunctional team. At a minimum, the collaboration program team should include people with both sustainability knowledge and supply-chain operational knowledge -- the former to perform the resource data analyses and interpret the findings, and the latter to work out how to get the job done. Additionally, a company's marketing, branding and public relations professionals may play an important role in activities such as selecting products for LCA analysis ("Which products are we trying to brand as sustainable?") and publicizing the results of collaboration.
  • Play up the range of potential benefits when approaching suppliers. The potential risk, innovation and branding benefits are as real as the potential cost-saving benefits, so why not make good use of them in your pitch to suppliers? The combination of financial and non-financial value may just be enough to bring an otherwise reluctant supplier to the table.
  • Be extra careful about how you brand the program internally. Everyone loves an initiative that improves profitability. Attitudes toward sustainability, however -- or anything that smacks of sustainability -- vary among companies and among the leaders of any particular company. Depending on your company's culture, you may want to position the supplier collaboration program as a money-making initiative first and foremost and only incidentally as a sustainability initiative. Above all, combat the perception that supplier collaboration is a "feel-good" exercise and nothing else.

If supplier collaboration is the next big thing in manufacturing performance improvement, a resource-focused approach could be one way companies can bring it within closer reach. Whether you're starting a new supplier collaboration program or working to improve an existing one, a resource focus can open up a whole new realm of value to your company and its collaborators.

Sanjay Agarwal is a principal with Deloitte Consulting LLP and leads Deloitte's sustainable supply chain service offering. Kyle Tanger is a director with Deloitte Consulting LLP.

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