Many clients engage with us on how to achieve optimal performance within their supply chain. Historically, leaders have often targeted improvement efforts on areas within their span of control, or on annual supplier price reductions to achieve their targets. Yet, year after year, this approach to cost-cutting initiatives has yielded lackluster results.
Why? Because improvement efforts are often independently formulated within separate business functions and are met with apathetic support from different parts of the organization. And unfortunately, we find time and time again that price reductions do not necessarily generate value across the business.
Overcoming Challenges to Supply Chain Performance
A Supply Chain is a system of interrelated business processes which must work together to deliver products and services to the customer. Many times, performance is sub-optimized due to the formation of internal constraints by departmental silos, and instead of focusing on process re-design and elimination of these constraints, unrelated improvement efforts are initiated to drive better performance.
When a holistic approach to performance management is not employed, we often see conflicts arise within companies due to competing initiatives. This ultimately contributes to internal barriers and compromises both value and cost.
By taking a systems-thinking approach to measuring and redefining value across the organization, companies can develop innovative win-win strategies and realize far greater cost effectiveness, operational efficiencies and agility.
Opposing Expectations Drive Misalignment
The definition of value, however, is not limited to the internal organization. Suppliers are part of the system, but often have their own specific needs and improvement initiatives. The relationship between the customer and supplier can be tenuous as they are often at odds with one another due to differing needs and expectations. In some cases, these competing priorities are diametrically opposed as illustrated in the diagram below.
For example, it’s common for a customer to make demands for annual price reductions. However, in order to achieve those price reductions, a supplier may need consistency, and the promise of growth to maintain profitability. Opposing expectations exist when companies and suppliers fail to have an open dialogue, recognize what generates value for each, and achieve a shared purpose. When this occurs, the customer-supplier relationship becomes misaligned and results in compromise, delivery delays, and instability.
Independent Purpose Inhibits Cost Awareness
When each party is driven by independent purposes, over time, the relationship erodes and trust is damaged. Cost awareness is inhibited due to a lack of transparency. Value is misrepresented as price, and overall performance is sub-optimized.
In addition to compromise, delivery delays and instability, independent purposes also drive the following supply chain ineffectiveness symptoms:
- Unpredictable schedules or delivery
- Squeezed margins
- Capacity constraints
- Long cycle times
- Prolonged decision-making cycle times
On the other hand, systems thinking fosters shared responsibility within internal departments as well as suppliers. To truly leverage supply chain as a competitive advantage, companies must see suppliers as an integral extension of the system and must work together to identify and change the business processes and organizational behaviors across all relationship touch points that have become barriers to trust.
Optimizing Supply Chain
To learn more about the customer-supplier relationship, access our new eBook Optimizing Supply Chain: 4 Pillars to Strategic Sourcing for Performance Excellence.
Uniting on an Understanding of Value and Shared Purpose
At Implementation Engineers, we work on the entire system to redefine value, deliver a shared purpose, build trust and gain a better understanding of the relationship costs. Once these costs are understood, then they can be controlled.
By uniting on a common understanding of value, customers and suppliers will generate improvements more quickly, effectively and collaboratively. This creates the ideal environment for innovation to grow within the partnership, thereby enabling each company to achieve their full potential and improve overall competitiveness.
The objective of our value-based re-engineering approach is to concurrently move your supply chain from a state of mistrust to a state of trust as you migrate from a price-centric to a value-centric procurement model. This is what generates transparency, enables value, and achieves breakthrough cost reduction.
To learn more about systems thinking and our 4-pillar value-based approach to strategic sourcing, click on the link above to access our new eBook.
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