Will We Stand United With Suppliers?
I somehow missed this op/ed in the Wall Street Journal from earlier in the month authored by Bob Handfield. Dr. Handfield, for those who know him, is one of the foremost academic authorities on a range of Supply / Spend Management topics, from supply risk to managing complex, global supplier relationships. The gist of the op/ed is that Dr. Handfield believes that the paradigm must change regarding how we treat suppliers in the current downturn. Dr. Handfield suggests that, "During recessions, it's typical for companies to stand by as their suppliers fail -- or even to impose new payment terms that drive their suppliers into bankruptcy. Such actions are understandable. But I believe the traditional stance is the wrong one. Instead, buyers and critical suppliers should be taking rapid, significant actions to bring their businesses closer together -- both to weather the crisis and to build profitable relationships going forward with the partners that matter most."
I'd describe Dr. Handfield's prescription for change as one of active engagement, starting with pre-emptive discussions with suppliers to learn about their situation following through to decisive action -- including actions that companies might not have taken in the past. Debbie Wilson thinks Dr. Handfield's argument is, in practice, "deeply flawed" and wrote her opinion about the piece on her Gartner blog. Without getting too far into it (in this post), I think Debbie's argument suggests she's out of touch with the conversations going on in the upper echelons of procurement and finance these days regarding the uniqueness of this current recession (e.g., credit availability) and how otherwise healthy suppliers can enter a dangerous slide faster than ever before. But I'll leave that for you to decide. For me, Dr. Handfield's argument is not only thought provoking -- it's one we should all take to heart and share with our broader organizations.
- Jason Busch
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I have run into more than a few buyers recently with surprisingly little grasp of how cash flows in the entire supply chain - i.e. not just their own cash flow - and how they can leverage greater downstream credit worthiness into upstream benefits. E.g. speed up their supplier payments in return for discounts or other benefits - as opposed to stupidly pushing for longer payment terms in industries where suppliers have the highest cost of capital! Let's avoid sawing off the limb we sit on! From this angle I know Handfield is on the mark.
If it takes current market conditions to push companies toward gaining a greater understanding of the entire supply chain - so be it - sooner or later companies need to extend the boundaries of best value sourcing outside their own companies.
On balance, I side with Handfield - but with less froth at the edge of my mouth. :-)
Strong practitioners already know the hymn he's preaching and I thinking Debbie is grasping a bit of straws if all she's doing is trying to say that Dr. Handfield thinks that we need to deeply communicate with all our suppliers and bankroll all the troubled ones. I don't think he is and think that he'd actually agree with her points. Supplier risk management is a capability that needs to work in conjunction with other capabilities such enterprise risk management, strategic sourcing (which includes strategic category management - not the other way around), supplier collaboration, working capital management, supply market intelligence, and other capabilities.
The really great companies make these things synergistic to each other and find ways (e.g., combining external market intelligence, total cost modeling, scenario planning, and fine-grained segmentation) to reduce traditional trade-offs and traditional thinking. Most companies are bounce around these in an ad hoc way and don't really bring them together deliberately. For those who can, they're going to beat their peers plain and simple.
Whatever we will stand united with suppliers,and Manage the expectations of your partner. Only promise what you can deliver. Only ask for what is reasonable. Take a longer view of achieving objectives and ensure both sides benefit from the contract.
Timely communication is essential. If you are open and honest with your partners you will be able to share and reduce the impact of risks. Get input from suppliers as well as your customers.
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Handfield is not suggesting becoming your suppliers' banker. I think he is suggesting that there are many alternative win-win approaches.
For one thing, we are now seeing inventories at levels we have never seen before. Check out yesterday's WSJ article on capacity and inability to forecast in electronics, noting how links have shut down capacity, which may take a long time to increase once the wheels start turning (http://online.wsj.com/article/SB124260855682928885...). What people are beginning to realize is that there may not be any gas in the tank when it comes time to step on the gas. Once the stimulus money starts hitting the street, growth WILL occur in one form or another, inventories will be replenished, and things will start to chug slowly forward again.
The smart executives are locking in contracts with suppliers for the longer term, which is allowing these same suppliers to access capital given that there is some business on the horizon. There are many ways of supporting suppliers who are strapped not because of poor business practices, but simple lack of capital. I have heard this in focus groups in Houston, in Raleigh, in Charlotte at ISM, and in the UK last week. People with foresight are moving quickly to lock in key suppliers while prices are still low.
And oh, by the way, I have a strong feeling that inflation will come creeping back. Expect oil to get back up to $80/bbl by the end of the year, combine that with recovery in copper, steel, nickel, and put a big dollop of US dollar currency movements based on the printing presses moving in Washington, and what do you get?
Hmmm....smells like inflation to me! One more reason to lock in those contracts now!
Looking forward to your insights!
Cheers
Rob
So when we discuss whether Procurement should help suppliers stay in business, we are also talking about ourselves and our own jobs. Maybe we could do with a bit less arrogance and a recognition that we are all co-dependents. Of course we should all seek to drive deals that benefit our company - but we must understand that healthy markets depend on healthy trading relationships, based on principles of fairness and trust.