SCM Pain Points: Findings 7- 10
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:
7. Power Shift (7%)
Increasing volume consolidation in retail markets is driving a shift toward creation of a buyers’ market in many manufacturing categories. Large global retailers such as Wal-Mart, Metro, Carrefour, Tesco, and Target have the ability to dictate difficult terms for manufacturers to meet while making a profit. Buyers dictate price and conditions for delivery, creating competitive tensions that require manufacturers to reevaluate the current business processes in their respective supply chains. According to one manufacturer’s representative,
The pinch point is the aggressive nature of what I would consider global competition. Among the CPG companies, the power has shifted from manufacturer to the trade. In general, average selling prices have been coming down for CPG. Retailers like Wal-Mart and Carrefour do not allow manufacturers to increase prices or even keep them stable, and there is pressure for continuous improvement. And there is consolidation among the CPG retailers—they get bigger every year. So there is competition for share of shelf. What this means for people in procurement and logistics operations is that, although we have done a great job of taking cost out (a 39% to 54% increase in margins last year), it is not good enough. We get tremendous pressure from the trade. What this does for the corporation is that we are continually asked for more savings.
Relating pain point to supply chain trust and collaboration
It is onething to develop trust and collaboration in a relationship where the distribution of power seems stable over time. It is another to maintain trust and collaboration when shifts in power occur. Under such conditions, is collaboration possible, or is there always a trade-off between gaining power over suppliers (customers) and reaping the benefits of relational capital? How can supply chain members counteract the negative effects of power imbalances? This is an important question for researchers to consider in investigating buyer-seller relationships.
8. Regulatory Compliance (7%)
Escalation of logistics security, government regulators, and compliance with mandates is a trend that is an inherent parameter in the post-9/11 supply chain environment. For example, the Sarbanes Oxley Act and the recent spate of regulatory requirements for companies in Europe demand that companies effectively document all of their business processes, transactions, and decisions down to the last penny. The potential for legal torts requires careful administration of all packaging and consumer services. Additional regulatory requirements established by agencies such as the U.S. Food and Drug Administration and the U.S. Department of Homeland Security, as well as their counterparts in European countries, create a constantly changing set of hoops that companies must dutifully jump through. As one of our respondents noted,
Regulatory compliance is a big issue, including [compliance with] Sarbanes Oxley, [attention to] environmental health and safety issues, [and reduction of] exposure to liability. We are also being asked by the government to increase the diversity of suppliers, which is problematic for us as we have difficulty in some cases identifying qualified companies. Regulatory and legal controls are problems for us because they are often out of our control and are unknown elements that we must deal with on a daily basis. The cost of meeting these requirements is going up, not down.
Relating pain point to supply chain trust and collaboration
Exposure to liability encourages collaboration but may reduce trust. As the demands of regulatory compliance increase, supply chain members may become more willing to invest in collaboration to avoid being vulnerable for the actions or omissions of upstream or downstream members. Nevertheless, increased liability may be expected to lead to a blame game in which supply chain members try to protect themselves rather than build the relationship. How can companies work with regulatory agents in a collaborative manner to achieve benefits? For example, more multinational companies are working closely with U.S. regulators through the Customs-Trade Partnership Against Terrorism (C-TPAT) and Partners in Protection (PIP) programs. These are joint government business initiatives to build cooperative relationships, with a goal of strengthening the overall supply chain and border security. Benefits provided to logistics partners accrue from reduced inspections and faster shipment clearances at borders.
9. IT Integration (5%)
Technological innovations often differentiate competitors and create lead versus follower market positioning. Integration within organizations and between Tier 1, Tier 2, and Tier 3 suppliers is often inefficient, however, as one respondent explained:
What also keeps us up at night is loss of market share due to information and technology gaps in the supply chain. In our industry, technology leadership is the only ingredient for survival; if you are not the leader, you can’t extract the full value of your product, as you must constantly be innovating. That is also true when it comes to information technology. Am I the best at communicating with my customers? If someone else has a technology advantage, they have innovated better than me. If I come up with an RFID [radio frequency identification] solution and I go to my customers and say I can track their freight—then I will leave the others behind. I can still be the best at my traditional business—but I will lead because I have a technology innovation.
Relating pain point to supply chain trust and collaboration
New information technologies permit collaboration and the exchange of information at a level that would have been difficult to imagine a decade ago. Such technologies, however, may limit the type of information exchanged in a way that also limits the development of the relationship. The executives interviewed in our survey were very focused on staying at the forefront of information exchanges using technologies such as RFID, but there was little mention of the development of social or relational capital. Consider a scenario in which a supplier has shifted from telephoning to electronic data interchange to notify customers of production problems. Telephone contact offers the chance for a rich exchange of information plus an opportunity to look for creative solutions to the production problem, whereas computer-based exchanges lack such richness and search behavior. Rather than automating the most important exchanges of information, should supply chain professionals seeking a competitive advantage in turbulent environments go so far as to maintain more personal forms of contact in their networks, even though such contacts require more resources and are by nature more variable? Also, these questions of IT integration remind us that, in researching supply chain collaboration, we must go beyond simple instruments that collect general assessments of the quality of communication to measure (and quantify) data concerning who communicates what to whom, with what frequency.
10. Intellectual Property (2%)
Manufacturers from countries in which costs are low are flooding markets with lower priced knockoffs, which threatens intellectual property (IP) ownership. A senior manager from an electronics firm told us,
We are seeing a lot of our products coming out as “Made in China” knockoffs for less than half the cost. . . . IP issues are surfacing. The quality is not as good, but it looks just like ours and is being sold into a distributor network. We know it is coming from China. That is a significant threat for our business.
Most of the risks identified by executives we interviewed are located in the upper right quadrant of the graph in Figure 2, indicating very high probability and severity of occurrence. In other words, these risks require immediate executive and corporate attention.
Relating pain point to supply chain trust and collaboration
The quality of intellectual property protection in a given market has far-reaching implications for collaboration, trust, and the development of relational capital. If intellectual property protection is weak, the value of the product is reduced, putting strain on the relationship. Furthermore, as organizations share more information collaboration becomes a risker proposition. Therefore, it is useful to consider the relevant intellectual property and the level of its protection in setting goals for relationship development in the network.