As if the lost jobs and plummeting sales caused by the recession weren't bad enough, now comes word that one of the survival strategies for manufacturing companies -- cost containment -- has damaged relationships with suppliers. Fortunately, some new supply chain management strategies designed to repair relationships and weather any economic condition are starting to gain traction.
"Nearly 40% of respondents acknowledge that their focus on cost has hurt relationships with suppliers, [which] is an alarming statistic," says Jeff Dobbs, global head of diversified industrials for consulting firm KPMG International. "Those businesses that continue to follow the traditional low-cost or bust' models in supply chain management are at risk of losing a foothold in the market."
KPMG recently polled nearly 200 senior-level executives from the aerospace, metals, engineering and conglomerates sectors in North America, Western Europe and Asia-Pacific to understand how their supply chains were changing as a result of prevailing economic uncertainty.
| Jeff Dobbs: |
"Nearly 40% of respondents acknowledge that their focus on cost has hurt relationships with suppliers, [which] is an alarming statistic."
More important than the duration is the depth of the partnerships. Over half of the respondents plan to collaborate more closely with suppliers on product innovation and development, R&D and cost reduction.
In more detailed interviews with several top-performer companies in the survey, several of them say they are forging stronger relationships and engaging in collaborative innovation with suppliers, strategically investing in key suppliers or bringing parts of the supply chain back in-house, and applying a mix of both regional and global supply sources to achieve the best combination of speed, quality and cost.
While 66% say cost is the leading consideration in managing their supply chains, 63% agree that more attention and up-front planning should be paid to non-financial elements of the supply chain such as natural disasters, upheaval and infrastructure bottlenecks.
"It used to be that sourcing decisions rested on routine considerations," Dobbs says, "like who could make the best bolt for the best price. This approach worked when there was little variability in the cost inputs. Now, leading supply chain strategies must involve detailed scenario modeling, and the most successful companies will be those who build adaptability and flexibility into their supply chains. Viewing the supplier relationship as a strategic partnership helps top performers ensure certainty of supply, improve demand planning and fine-tune the mechanism for getting product to the customer."
Survey respondents were split down the middle when asked whether cost and quality considerations have made a shift in sourcing from the emerging markets to developed countries more viable. China remains the most common sourcing location among 35% of respondents, followed by the United States as selected by 30% of the global executives.
Thirty-nine percent say they will continue to invest in China more than any other country over next two years, while 26% will invest more in India over the same period. Cost was cited as the predominant deciding factor. Only 11% plan to outsource from the U.S. more than from any other country during the next two years.
"The global financial crisis dealt a blow that sent shockwaves through the industry, but those same forces are the catalysts that are helping organizations create more dynamic, resilient and responsive supply chains," Dobbs says. "It's incumbent upon businesses to embrace new ways to use the supply chain to enhance their business models."