Behind the Numbers of the SCRC Supply Management Index

The SCRC’s Supply Management Maturity Index was highlighted in a recent Wall Street Journal article, that identified the companies best prepared to weather the storm ahead in terms of supply chain disruptions.  In this blog, I’ll explain a bit more about the rating criteria we used to assess firms.  The assessments involved using a machine based learning algorithm developed by Yung-Yun Huang, PhD, who completed her dissertation in Operations Research at NC State two years ago.  Yung-Yun’s algorithm scanned tens of thousands of targeted news and company reports to develop the ratings in each category.  Let me describe the two categories highlighted in the journal article.

Supply Market Intelligence Enables Improved Ability to Control Inflation

One of the primary areas related to the ability to better manage inflation and supply disruptions involves Supply Market Intelligence.  Supply Market Intelligence (SMI) is the mechanism by which organizations make as complete analysis as possible of a current or targeted supply base, including adoption of supplier-specific and market risks (Handfield, 2006).  To enable improved cost, quality, delivery, and service, as well as improved sustainable outcomes, organizations must have a solid basis for managing spending, a methodology to create the right types of segmentation approaches that drive the right relationships, an on-going and sustainable approach to updating market intelligence, and a strong day-to-day supplier management resource base.

SMI involves external market research identifying information on key suppliers, available capacity, technology trends, price and cost data and trends, technical requirements, environmental and regulatory issues, and any other data that is available. In effect the team must educate themselves through a detailed analysis of the marketplace and identify how best to meet the forecasted demand (generated by the spend analysis and interviews with stakeholders) given the market conditions that will occur in the next year.  Companies who have a dedicated team focused on collecting information on the supply market can anticipate shortages, and work to create better category strategies to control costs.

The data can be collected in a number of ways. For example, the team might elect to meet with a supplier that is an expert on the marketplace, or an external consultant who specializes in studying certain markets (e.g., chemicals, resins, IT providers). These interviews are often the best source of information and are not published. Secondary data sources are published available databases, reports, websites, and so on. Examples might be a “state of the industry” report purchased from a consulting company or a publicly available database such as the Census of U.S. Manufacturers or the U.S. Department of Labor Statistics. The problem with secondary data such as these is that they are often outdated and may not provide the specific information the team is looking for.

. However the data are collected, the team must also process and integrate the data to ensure that they are relevant and can be effectively communicated to stakeholders. The whole point of conducting market research is to understand the prevailing market conditions and the ability of current or potential new suppliers to deliver the product or service effectively. In that respect, supply market intelligence becomes one of the most important and critical stepping stones for an effective category strategy. As one manager noted, “Supply market intelligence may be the only competitive advantage of the future!”

Supply market intelligence can also lead to better relationships with suppliers, which is a critical element to manage supply chain disruptions (see below).

Handfield, R.B. 2006. Supply Market Intelligence: A Managerial Handbook for Building Sourcing Strategies, New York, NY, Auerbach Publications.

SMI involves making as complete analysis as possible of a current or targeted supply base. Areas might include potential suppliers, competitor’s demand requirements, market share, possible intelligence requirements, supply capability and flexibility, long-term supply and demand trends, etc.  Other processes used to develop scorecards for evaluating suppliers for application with sourcing strategies and supplier relationship management.

Key Characteristics to Identify

• Processes are in place to gather supply market intelligence from across the organization, suppliers & external sources on a regular basis
• Insights into category dynamics are used to help businesses achieve critical strategies & results
• Category strategies are well communicated & drive local purchasing behavior & local supplier relationships
• Category managers have processes for mapping & engaging internal resources & stakeholders across functions
• Scorecards used to evaluate suppliers and reviewed on a quarterly basis to identify opportunities for improvements.

Companies best prepared to manage inflation ahead.

Supplier Relationship Management Enables the Ability to Weather Disruptions

As firms outsource a greater proportion of products and services to China, India, and other low-cost countries, the hidden perils of these approaches are often not considered, especially within the context of enterprise risk management (ERM). Global outsourcing affords many benefits in the form of lower prices and expanded market access, but only recently have senior executives begun to recognize the increased risk attributed to the higher probability of product and service flow disruptions in global sourcing networks. A major disruption in the offshore supply chain can shut down a company and have dire consequences for profitability. This was felt most drastically in the last few years, when such events as 9/11, the war in Iraq, the West Coast port workers’ strike, and increased regulatory and customs delays brought supply chain operations to a standstill. Events that can also impact customer service include fire and theft, poor communication of customer requirements, part shortages, and quality problems.

The impact of supply chain disruptions, although difficult to quantify, can be costly. A study investigated stock market reactions when firms publicly announced that they were experiencing supply chain glitches or disruptions causing production or shipping delays.⁷ Results of the study of 519 supply chain problem announcements showed that stock market reactions decreased shareholder value by 10.28 percent. A follow-up study assessed the effect 827 publicly announced disruptions had on long-run stock price (one year before the disruption and two years after) and found a mean abnormal return of nearly 40 percent, along with significant increases in equity risk.⁸ Their results also showed that the majority of supply chain disruptions involved parts shortages, lack of response to customer-requested changes, production problems, ramp-up problems, and quality problems.

Many recent events illustrate this phenomenon. For example, Boeing experienced supplier delivery failure of two critical parts with an estimated loss to the company of $2.6 billion. In 2002, fewer than 100 workers in the longshoremen’s union strike disrupted West Coast port operations. As a result, it took six months for some containers to be delivered and schedules to return to normal. Hurricane Katrina resulted in billions of dollars of lost revenue to major retailers such as British Petroleum (BP), Shell, ConocoPhillips, and Lyondell, as well as causing gasoline shortages in many parts of the United States, resulting in lost economic activity. Most recently, a failure in supplier communication and process compliance on the Horizon caused the worst environmental disaster in the Gulf, and BP’s procurement staff have spent enormous amounts of time and money to address these shortcomings.  Given these and other events, it is not surprising that supply chain disruptions have caught the attention of executives.

In a survey of Global 1000 companies, supply chain disruptions were perceived to be the single biggest threat to their companies’ revenue streams. Although senior executives now recognize that supply chain disruptions can be devastating to an enterprise’s bottom line, strategies to mitigate supply chain disruptions are typically not well developed or even initiated. A troubling statistic is that only between 5 and 25 percent of Fortune 500 companies are estimated to be prepared to handle a major supply chain crisis or disruption.

One factor that is increasing the risk exposure to supply chain disruption is the increasing propensity of companies to outsource processes to global suppliers. The complexity associated with multiple hand-offs in global supply chains increases the probability of disruptions. As the number of hand-offs required to ship products through multiple carriers, multiple ports, and multiple government checkpoints increases, so does the probability of poor communication, human error, and missed shipments. One executive we interviewed from a major electronics company noted: “We have successfully outsourced production of our products to China. Unfortunately, we now recognize that we do not have the processes in place to manage risk associated with this supply chain effectively!”⁹ In this environment, questions arise such as, What steps can an organization take to design its supply chains to ensure uninterrupted material availability? Is it possible to respond in an agile manner to customer requirements in a global sourcing environment? These are issues that supply chain managers must think through in the future, to build effective contingency plans before these disruptions occur, so that there is a plan when they do occur.  And this is best developed in conjunction with suppliers through collaborative relationships.

Firms with high scores in SRM have established the right set of relational structures with suppliers that remain in an optimized supply base.  They are better able to have strong communciations, that give them early warning on supply chain disruptions, and can better collaborate with suppliers to seek mitigation strategies.  Prior research depicts supplier relationship management as a multi-attribute strategy seeking to drive supplier performance measurement, buyer-supplier collaboration, and supplier continuous development.  We define supplier relationship management as a process that begins with supplier evaluation, leading to long-term relationships with suppliers based on mutual trust and respect, as well as operational engagement to reduce the risks of supply disruption. Contractual requirements around environmental performance and labor/human rights are an important outcome of SRM, as the requirements for establishing whether suppliers continue to remain in the supply base are often contingent on whether they meet contractual obligations established at the outset of the relationship.  In cases when contractual non-compliance becomes an issue, buyers may also seek to remedy these problems through supplier development and performance improvement initiatives.

2. Rating Criteria for Supplier Relationship Management

Processes to structure and manage the interface between the firm’s suppliers to enable effective communication, information visibility, joint issue resolution, demand planning, and collaborative process improvements. This includes elements such as alliances, joint issue resolution, information sharing, contract management, e-procurement architectures, and supplier integration into new product/service/process/project development.

Supplier Relationship Management – The Key to Managing Supply Chain Risk and Disruptions