SCM Pain Points: Findings 4 - 6
Rob Handfield , SCRC
Wolfgang Steininger, Supply Chain Redesign, LLC
It is increasingly clear that companies must collaborate with suppliers and customers to respond to market needs. Such collaboration, while often beneficial, may result in challenges that we refer to as pain points—that is, specific and well-defined aspects of SCM that are hindering smooth flow and ability to innovate in a firm’s supply chain. Findings from the study presented this week in-depth include:
4. Commodity Price Increases (10%)
Severe and unexpected increases in raw material prices (particularly steel, alloys, resins, concrete, natural gas and energy) are negatively affecting financial performance. Customers will not accept price increases to accommodate raw material price increases, resulting in squeezed profit margins. Visibility into the nature of commodity price increases is difficult, as such price increases are often the result of several factors’ influence on different tiers in the value chain and are difficult to predict. For example, who would have predicted that a storm like Hurricane Katrina would hit all of the Gulf Coast refineries in the United States and drive up the price of gas? Such unpredictable events are causing major problems for manufacturers. A representative from the chemical company explained,
Speculative money is driving up the cost of base metals and chemicals in the current economic cycle. This is not a function of misaligned supply and demand. Earlier in the business cycle, producers could not afford to stay in the business. When demand was lower and raw material capacity was reduced, buyers expected capacity to come back when demand increased again. However, it is not coming back, because producers cannot afford to buy the capacity. They are taking advantage of the situation to make a profit in this cycle [use the leverage from the scarce capacity to take short-term profits without thinking about its impact on the supply network long term]. The mergers and acquisitions we have seen have reduced overall capacity in metals and chemicals, and it isn’t coming back. After years of depressed prices, the large commodity suppliers in areas such as plastics, precious metals, minerals, resins, steel, pipe, and other commodities are able to take advantage of these market conditions and raising prices, in some cases by over 200%.
Relating pain point to supply chain trust and collaboration
In identifying commodity price increases as a top pain point, the executives interviewed demonstrate the dichotomy between transaction-based and collaboration-based thinking. On one hand, executives expect suppliers of these materials to refrain from taking advantage of current high levels of competitive power. On the other hand, the same executives make it clear that they are describing commodity products that can come from any supplier, with the supplier chosen based on competitive bidding. What are the roles of collaboration and trust in purchases of commodities? Is it better to remain with a transactions perspective, moving toward relationship-free platforms such as Internet auctions, or can collaboration and trust pay off even in such purchases?
Every organization needs a dedicated resource that is focused on gathering, sifting through, collating, and organizing data for the benefit of end users making decisions in supply management. Few organizations can invest in dedicated personnel to conduct supply market intelligence, despite the need for this type of information. Moreover, as we argued earlier, given that an average organization spends 40% to 60% of its cost of goods sold on external materials and services, it would make sense for this same organization to devote at least as much time to supply market intelligence as to consumer market intelligence, because supply and demand must be balanced in the supply chain equation.
In general, companies in today’s economy find that their primary source of competitive advantage lies in the unique proprietary knowledge they possess. To put it simply, there is great value in sharing—across a whole company—proprietary insights into customers, competitors, products, production techniques, emerging technologies, and the like. In practice, companies find it far more difficult to take advantage of all this knowledge than an individual would, of course. An individual’s knowledge is self-contained, always available. But companies are discovering that it is increasingly difficult to exploit the valuable knowledge in the heads of a few hundred employees, particularly if they are scattered in different locations. In large, diverse companies with complex global supply chains, the task expands to cover thousands of highly educated professionals and managers spread across a variety of specialties, locations, and countries.
5. Global Competition (10%)
Competition from low-cost countries is driving cost pressure. Labor costs are a fraction of Western rates, causing Western manufacturers to face a substantial cost disadvantage in many markets. The growth in manufacturing in China has been a particular challenge. However, the nation’s breathtaking rate of change means that a wide range of sourcing questions must be constantly readdressed by policymakers and by managers whose companies are buying more components or finished goods from China. The questions range from “How clear can supply chain planning visibility be?” to “What environmental compliance can be expected of Chinese factories?” Answers to such questions tend to be based on weak assumptions, received wisdom, and even myths. Much of the received wisdom comes from a time when the bulk of China’s product offerings were unsophisticated, many of its industrial managers lacked crucial skills, its factories were antiquated, and its supply lines were unpredictable. Today, those characteristics are confined to smaller and smaller industrial pockets in the nation’s hinterland. They certainly do not describe supply conditions in the flourishing provinces and cities of China’s east coast. Overall, the nation’s industrial practices, processes, and capabilities are changing faster than many Western managers understand. The changes dictate the types of decisions, the velocity of those decisions, and the agreements made when establishing a sourcing operation in China (Handfield & McCormack, 2005). A electronics firm’s representative stated,
General competitiveness is causing us to experience increased pressure. Key drivers are in taking out cost through continuous consolidation of our supply base combined with continuous improvement. The bar keeps getting higher and higher—we need to be more and more creative in our approaches to global sourcing. The situation is forcing us to take risks with partners in China that we wouldn’t have taken before. We do not have the experience and knowledge to do business in this region.
Relating pain point to supply chain trust and collaboration
The executives interviewed indicated that the cost advantages of low-cost countries were creating pressure on production in developed countries. This pain point demonstrates the tendency of cost to dominate other sources of competitive advantage, such as short lead times or product customization. Consider two supply chains, one in which goods are sourced from a low-cost producer selling in a developed market, and a second in which goods are sourced from a local producer in the developed market. Collaboration and trust are expected to be much more limited in the first chain than in the second due to geographical, cultural, and process constraints. The second chain is positioned to exploit any customer needs for responsiveness. Therefore, responding to such challenges requires a dual approach: simultaneously exploring ways of creating some collaboration with distant suppliers while using collaboration to strengthen the competitive position of the domestic producers.
This is particularly true when working in China. Western managers are urged to understand the sharp rivalries between Chinese provinces, towns, and local districts and to trace the logistics linkages that must be used to reliably source from their selected Chinese suppliers (Handfield & McCormack, 2005). The better they understand the political rivalries, the better these managers can accommodate scenarios such as duplicate investments in ports and airports, and difficulties in obtaining products on time, and the more easily they can cope with the concomitant red tape and trade barriers. Similarly, if managers can pinpoint the bottlenecks in their supply chains, they can begin to plan around them through close collaboration and relationship management.
6. Developing SCM Talent (7%)
Rapidly changing business environments (structures, processes, technologies, business models) require new skills and knowledge in SCM teams. Research has shown that the top skills required by new applicants for management positions in the supply chain world include team building and relationship management. The latter is especially important in a global environment, where different cultures, buyer-supplier relationship modes, and requirements for successful collaboration are critical to becoming globally competitive (Giunipero & Handfield, 2004). However, many of our respondents noted that there is a shortage of new personnel and also that existing personnel often leave for higher-paying positions and attractive career enhancements. Multiple new challenges in succession planning and career development have surfaced in the area of supply chain human resource requirements. One of our interviewees, a mid-level manager at a CPG company, said,
We have 83 manufacturing locations, and 57 of those 83 have purchasing needs, yet it is tough to find purchasing personnel. We don’t have a culture for developing high-quality purchasing people, so the idea of strategic purchasing is completely foreign to our staff. There is not even a single commodity that we leverage to get price discounts across our operating units. That is an outcropping of our culture—but it continues. Our new chief procurement officer is the first person that I know of in senior management who has ever had any purchasing experience, which shows that we have a real lack of leadership for creating a pipeline of supply chain talent.
As this economy takes off, the biggest challenge is developing and retaining talent. What everyone has forgotten is that before 9/11 there were a lot of people moving to better jobs, and we were losing some good people. You have to watch this closely—as the economy takes off, people will be getting more headhunter calls, and companies will be looking at the people that are doing things well for us. We can’t forget that we can lose good people, so we need retention strategies, and we need to hire the right people. We don’t have a high attrition but expect that we will lose people with a lot of knowledge, and when you run lean, you have to manage them carefully. This will heat up again, in the next year. Whatever you want to call it—the talent search and retention—can become a real problem if you are not careful.
Relating pain point to supply chain trust and collaboration
Deploying enabling technologies and building social capital requires a new skill base, so this pain point is not a surprising one. Whether the supply chain is transaction- or collaboration-based has far-reaching consequences for the talent required to run it well. It is interesting to note that this was the only major pain point perceived as being less severe, although this problem must be resolved in order to address most of the others. What are the skill bases required to build a collaborative supply chain? Do supply chain networks remain in a transactional mind-set because employees lack the skills to build collaboration?
A more strategic role will be a requirement for supply management professionals in the future. Research indicates strong trends underlying this movement (Giunipero & Handfield, 2004). These include the need for purchasing managers to build strategic relationships and focus on total cost and strategic cost reduction, yet still be able to collaborate and integrate purchasing processes with those of its suppliers. The managers that we interviewed stated clearly their belief that strong relationships drive costs lower through improved process efficiencies. Strong intercompany linkages fuel innovations that improve both quality and cost.
It also appears that the supply management function will soon be divided into strategic and tactical areas. Tactical buyers will be more concerned with day-to-day activities, whereas strategic supply mangers will focus on building relationships and lowering total costs. The skill sets required of the two groups of supply management personnel are expected to differ considerably, with those involved with strategic initiatives needing a high level of communication and financial skills in addition to technical SCM competences. We can expect to see companies struggling to find a balance between over- and undertraining their SCM personnel in these strategic skill sets, with more companies failing to invest than overinvesting in the training required for achieving operational goals.