Strong supply relationships reduce cost, spark innovation
By Staff -- Purchasing, 1/15/1998
An A.T. Kearney survey of more than 450 global senior executives finds that few companies leverage their supplier relationships. However, companies that do make supplier relationships a priority--about one-fourth of those surveyed--are rewarded with better performance."For many companies, suppliers provide an uncommon opportunity to enhance performance," says Paul Inglis, study director and vice president of the international management consultancy. "Companies that take time to improve supplier relationships can also negotiate better prices and delivery times. Better supplier relationships create opportunities for both sides to innovate, leading to improved performance."
According to A.T. Kearney's 1997 Global Business Study, leading firms attain annual improvements in product innovation and greater savings through sourcing at twice the rate of average competitors.
In terms of cost reduction performance, researchers say executives among the leading 25% of firms most frequently cite cost competitiveness as their top agenda item while those in the weakest quartile nearly always cite customer relationships as their number-one objective. Leaders emphasize value of supplier relationships 78% more often than do laggards and they stress shareholder value 49% more frequently than their poorest performing counterparts.
In terms of new product development time, the top 25% cite revenue growth as their top priority while customer relationships receive top billing most frequently among the poorest innovators. Leaders emphasize supplier relationships and shareholder value 58% more frequently than laggards. And leaders cite cost as a priority 28% more frequently than those in the bottom quartile.
Ironically, the researchers note, those who lag are generally unaware of their poor performance. In fact, many companies describe their sourcing programs as "highly successful," especially in South America and Europe. Still, few claim to have successfully captured performance benefits, the study observes.
Big barriers
In North America, study finds that the main barrier to forming effective supplier partnerships is management's preoccupation with other competing initiatives. Other problems (in order of popularity): comfortable relationships with existing suppliers, lack of cross-business unit cooperation, doubt that opportunities exist, lack of cross-functional cooperation, lack of adequate data to support analysis, inadequate monitoring and control systems, and inadequate experience at managing improvement programs.
Trust also lacking
While CEOs understand that strong supply relationships require trust, the study finds that few companies actually achieve high levels of trust with their suppliers. In fact, the study shows that most companies are reluctant to outsource noncore activities or to involve suppliers in key-process management. Fewer than 20% of North American and European companies involve their suppliers in key-process management. In Asia-Pacific, only 13% of companies involve suppliers, and South America, only 8%.
Beyond trust, many executives simply fail to see the connection between advanced sourcing practices and customer satisfaction. Researchers observe that, "In most companies, the procurement function is not empowered to support the customer. In fact, the procurement mission is not seen as enhancing customer relationships." More typically, the study finds that CEOs (especially in North America) demand cost reduction from the procurement function and do not expect quality improvement, access to new resources, or enhanced sales.
Ultimately, Inglis argues, it is the CEO's responsibility to sponsor and drive programs that develop supplier relationships. "Leading companies develop tailored supply strategies that are directly linked to their corporate strategies. CEOs emphasize shareholder-value creation, revenue growth, and cost competitiveness, and have specific programs in place with their key suppliers to ensure that these objectives are met. They use suppliers to maximize their own products' competitiveness, going beyond the narrow focus of cost reduction. Leaders exceed traditional sourcing practices, adopt new models to fully leverage supplier capabilities, and further their own position in the marketplace."
Interviews were conducted for A.T. Kearney by Opinion Research Corp. Internat'l; 463 of the world's largest companies participated (sales volume of $1 billion or more). Headquartered in Chicago, A.T. Kearney operates in more than 30 countries.
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