Updated: Feb 9, 2022
A recent article published by McKinsey & Capital caught my attention: "Overcoming Barriers to Multitier Supplier Collaboration." The article discusses benefits of companies and their suppliers collaborating to get to a fully integrated supply chain. In this case, collaboration means sharing data, such as forecasts, delivery schedules, logistics visibility, etc. There are many challenges that are preventing or slowing down this type of cooperation, including lack of technological capabilities, inconsistency in operating processes, and a reluctance to share certain types of data.
Article refers to a survey that McKinsey performed of more than 100 organizations. The potential annual cost savings of the supply chain integration driven by collaboration are pretty impressive: overall savings of up to $77 billion, inventory cost reductions up to $9.5 billion, and a decrease of emergency deliveries saving up to $4.7 billion.
I was reading this article the night before my 20-year anniversary with ASCI and it hit me - in my professional career I have seen so many examples of cooperation and a lack thereof between the customers and suppliers, not just the products, but also services.
In many cases, when the client pushed a supplier or a group of suppliers to significantly reduce their pricing, the end result would often be a decline in the service level. This would eventually lead to the decrease in the initial cost savings and most likely cause an increase in long-term operational costs. I also witnessed clients and suppliers working closely together in the continuous improvement efforts that produced results that are still memorable many years later.
It is a fairly common practice to ask the material and service providers to reduce their pricing when you are trying to reduce your operational costs, especially during economic downturns. Here is what happens when you stick with this strategy and do not let your supplier base to eventually recoup their losses, or if you continue to push for price reductions without looking for alternative ways to reduce operational costs.
In order to stay in business and remain profitable, some suppliers will increase pricing or billing rate on the non-contract items to compensate for the loss.
Lower priced material may no longer be in supplier's local stock and have a longer lead time. Or you may start receiving a lower quality substitute. Both could cause down-time, reduced production, and potential for safety incidents.
Lower priced labor will often lead to reduced service level, poor morale, and increased turn-over. Again, all leading to down-time, reduced production, and potential for safety incidents.
There are other impacts, but the three above were the most visible and costly. I do agree that there are times when asking your suppliers and service providers for reductions is necessary. However, it should not be the only option. In fact, our company has implemented reductions in the past that were less drastic, but led to the same cost savings to our clients. One example was reducing the number of billable hours for the team and retaining them as full-time employees with benefits. The total reduction in hours added up to laying off two or more team members, which was less impactful on team morale. In many cases these reductions are temporary and the hours go back to normal once there is more funding available.
I have been through several pricing reduction activities, as a bystander and as the contractor who had to take a pay cut. I have also witnessed how collaboration for both material and service suppliers can deliver cost reductions without overall negative impact for both parties. One of the greatest examples is ASCI SmartTools module called SmartTracker. SmartTracker is a purchase order (PO) tracking tool that allows the client, buyers, expeditors and suppliers to enter status information after the order was placed until it is fully received at the destination.
One of our Alaska clients utilized SmartTracker for almost a decade, and I often hear from those who used it how much they miss it! The tool allowed for multiple users in different areas of supply chain to enter latest information about the order, including required by date, estimated delivery date, actual ship date, carrier and tracking number, and any relevant notes.
While there is a cost associated with implementing a system such as SmartTracker, many reputable software solutions would pay for itself within the first couple years (or even less, depending on the transactional volume). Imagine having access to live data and how many emails and phone calls it eliminates! Here is what happened while SmartTracker was in use:
More material arrived in time for the project or a maintenance activity, which led to reduced downtime time.
Without SmartTracker or a similar software, our client would have to use MS Excel or MS Access option. If you calculate the number of hours required for data entry into either and consider system limitations such as multi-user access, overwritten data, lack of historical update information, etc - again, the system pays for itself and leads to overall cost reductions in the long run.
The system keeps track of lost, damaged and discrepant items, which helped to resolve them quickly and retain information for freight claims, escalations, etc.
Personnel increases and reductions during economic up and downturns were based on the transactional volume data extracted from SmartTracker. This made it less controversial and drastic, and helped to ensure we did not cut too deep or hire too many people.
SmartTracker is just one example of collaboration, which does not have to include technology. Collaboration can involve the exchange of information such as client's and supplier's pain points, and looking for commonalities or service exchange options (for example - you help us with upfront capital and, in exchange, we will reduce pricing).
To get to the place where clients and suppliers can collaborate may take a while, but I hope that COVID and global politics demonstrated that staying in your bubble is not always the best strategy to remain operational or to increase profits. I have been in contact with several local small manufacturers discussing their supply chain issues, which in Alaska is normally revolves around transportation costs. Collaboration between local suppliers could be just as productive.
Organizations such as Association for Manufacturing Excellence is one way to increase collaboration by sharing ideas and information between small manufacturers in Alaska (or any other state). If you are a company that is looking into cutting costs or increasing your operations through collaborative approach with your distributors, customers, or even your competitors - send me an email to set up a free consultation appointment. I would also welcome any ideas or experience you can share that may help others through a digital media post.
ABOUT THE AUTHOR
Rosita Johnson is ASCI's Business Development Manager. Rosita has been with the company for over 20 years in different areas of supply chain management: procurement, contracting, inventory management, and ERP system implementation. Contact her at email@example.com to set up a free consultation appointment or to share any ideas or experience that could help other businesses.