This year, as in the past five years, our supply chain index contributed to the overall ranking of firms in the top 250 best managed companies, as ranked by the Drucker Institute. The top companies in 2011 included the following:
- Johnson and Johnson
- Cisco Systems
- Procter and Gamble
In an earlier blog, I explained how the SCRC supply chain index was formed, and how it provides meaningful insights into the Innovation and Sustainability categories of the WSJ index, by assessing the level of innovation and sustainability within an organization’s supply chain.
However, it is also noteworthy here that many of the companies in the top 10 do not manufacture anything, but outsource their manufacturing to “contract manufacturers” such as Flex, TSMC, FoxConn, ThermoFisher, and others. Only a few, including P&G, Intel, and Johnson and Johnson, actually own manufacturing sites that produce products. The remainder largely rely on third parties to do so.
Not that there is anything wrong with that. However, during our current state of supply chain shortages, there are definitely some benefits to owning your own supply chains! In an earlier article this year in the WSJ, the Drucker Index prepared a list of companies best able to “weather the storm” of supply chain disruptions. Of the companies ranked highest in overall effectiveness within the 24 industry groups that we track, just eight scored a 4 or 5 in both of these supply-chain management practices: Ford Motor Co. F -4.76% , Exxon Mobil Corp. XOM -2.19% , Procter & Gamble Co. PG 1.42% , Alphabet Inc., GOOG -1.33% Amazon.com Inc., AMZN -1.54% Microsoft Corp. MSFT -0.92% , Apple Inc. AAPL -2.07% and AT&T Inc. T -1.75%.
These companies were all characterized by two critical characteristics, in my opinion, that made them better able to handle supply chain disruptions. First, they had invested heavily in a capability known as 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.
A second critical capability for managing shortages is known as Supplier Relationship Management. This is NOT a ‘touchy feely’ type of requirement. 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.
SRM begins with “mapping out” the supply chain – and understanding the weak links and how to address them. As more companies outsource, however, it has become abundantly clear that many do not know who is IN their supply chains. This dramatically increases 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!”
The WSJ index is a good indicator for well run companies. But one of the most important of these is the ability to map out your supply chain, assess the risks, and manage your relationships with critical suppliers. Those who do this well will be able to capitalize on these investments, as we go into 2022 with a likely set of more disruptions on the horizon.