Five good reasons to get close to our suppliers
Setting the direction for SRAA
Organizations need contribution, clarity, confidence, closeness and collaboration from their suppliers and so therefore we need the right relationships with the right suppliers in order to achieve this and unlock benefits. Where do we start and how can this translate into a series of specific actions with individual suppliers? Reaching the point where there is full confidence in our supply base and supply chains means we need to understand them fully and get close to the bits that matter. It is easy to say 'let's collaborate more with suppliers' or 'we need innovation from the supply base', but why and for what purpose? Unless we can be clear about this then these are just directionless aims. Worse still if our suppliers were to suddenly start bombarding us with new and innovative ideas because they have been asked to then the effort is wasted unless we are ready and equipped to do something with them.
Here is where our journey towards SRM begins and the starting place is to determine the direction for our SRM initiative, which starts with what the organization needs. We must identify the specific reasons why we need or want a relationship with certain suppliers, ie the problem we are trying to solve or the corporate goal we are trying to reach and therefore what additional value we are attempting to secure. Only then we can begin to determine what the required relationship and intervention should look like and with whom.
SRM requires a selective approach. We cannot have a relationship with every supplier; for many suppliers we simply need them to provide what we want, on time, in full, to agreed budget or price. For others some form of intervention may be necessary to keep things on track and yet, for perhaps a small number of other suppliers, it is possible to secure much greater value; value that can, in some cases, make a dramatic and game changing contribution to our business. Our supplier base therefore harbours huge potential; ranging from the potential to prevent damage to our business through to the potential to add great value to our bottom line and help us grow. All we need to do is decide what we need and then go and get it and here we use the VIPER model: five headings that define what is possible from the supply base and therefore five good reasons to get close to suppliers, five good reasons for intervention or to build supplier relationships and five headings that allow us to define our requirements for the relationship.
VIPER: defining the value we need from suppliers
VIPER is a model used to determine the value the organization needs and wants to realize from the supply base (Figure 2.1). VIPER stands for Value, Innovation, Performance improvements, Effectiveness (of business and operations) and Risk. VIPER defines our different requirements and the reasons for instigating some sort of relationship or intervention with a supplier. It also summarizes the different levels of value possible. VIPER is a hierarchy that ranges from intervention that is essential, to additional value that could be realized should both parties put the energy into realizing it. VIPER also begins to provide the framework to connect the goals of the organization to specific supplier interventions. VIPER therefore operates at two levels within an SRM approach:
FIGURE 2.1 The VIPER model
• Macro or organization-wide level - to define the high-level requirements of the organization and specific types of value the organization needs, eg 'to secure a new technological capability' or 'to find key partners to outsource current business activities'.
• Individual supplier level - to define the specific relationship requirements and the nature of intervention needed with individual suppliers. At this level VIPER is used in response to supplier segmentation (covered in Chapter 4).
Once we are clear why we might need or want a certain type of intervention with a specific supplier, ie what value we wish to secure, then we can set about how we achieve this and what type and nature of relationship is needed.
It is notable that price or cost are not called out as individual themes within VIPER. This is because there can be a conflict between the sole pursuit of reduced price and cost and that of developing a close relationship with a supplier. In a sourcing scenario where there is little risk, we have plenty of alternatives, where we can easily switch suppliers and we hold leverage then, there is unlikely to be much need for a relationship with the supplier or indeed any sort of special intervention beyond the transaction. Instead we simply need to use our leverage in the marketplace to secure the best value for the lowest price. Yet there are other supply situations where only collaboration will deliver benefit, perhaps even including that of reduced price and cost, perhaps because reaching the goal is only possible if parties work together. Price and cost alone are therefore not normally reasons to pursue a supplier relationship unless some sort of relationship is necessary in order to achieve price and cost goals. Nevertheless price and cost can be consequential and beneficial outcomes across the entire VIPER framework.
The value required is typically not considered, instead organizations go straight to implementing a relationship that seems about right. Where a firm needs innovation it seeks a technology partner. Ask a site foreman of a construction company why he is managing subcontractors in a particular way and he is unlikely to describe a definition of value needed using the VIPER model, instead he just knows what he needs and does it. There is a natural correlation between the nature of relationship organizations establish with suppliers (as covered in Chapter 1) and the nature of value that is important in each case (Figure 2.2). This correlation reflects what organizations tend to do, rather than what necessarily should happen. The point here is determining the nature of relationship according to the value required is a crucial step, and one that is often missed. The VIPER framework therefore forms an integral backbone to SRM and one that we will come back to throughout this book. However, first I will expand on each component of VIPER starting with risk.
FIGURE 2.2 Correlation of VIPER to types of supplier relationship
'R': managing supply base risk
The most critical reason for supply base intervention is the effective management of supplier and supply chain risk. Taking steps to prevent crisis or catastrophe, or at least be prepared for it, is arguably the greatest source of value an organization can secure from the supply base. 'Risk' therefore forms the foundation of the VIPER hierarchy.
There are certain areas of spend where a failure in the supply chain can present significant risk to an organization. The severity of this risk can vary significantly. Goods that turn up wrong or a service that underperforms can be an inconvenience; however, if a production line is stopped because one component is not available the cost of lost time can be immense. Worse, if it is the end customer who discovers a problem caused by a supplier, then it can damage sales, goodwill and perhaps even damage a brand.
If a business does not understand and make plans around supply chain risk there may be a time bomb ticking away ready to cause havoc at any moment. Yet many organizations simply fail to consider this risk and assume that supply chains never fail. They do. When things go wrong within a business action can be taken to remedy the situation. When they go wrong outside the business the ability to influence outcomes or recover the situation may, at best, be limited and companies can find themselves impotent in the face of a crisis.
Land Rover's catastrophic supply failure
In 2001 Land Rover, then owned by Ford, encountered a major supply problem for chassis. The specialist process of chassis manufacture had been outsourced to UPF Thompson; the sole source manufacturer. On 4 December 2001 Land Rover's management team were shocked to hear that UPFThompson had been placed into receivership meaning that, with no alternative supply, Land Rover production would soon stop. KPMG was appointed as the receiver for UPF Thompson and initially kept production running to allow chassis deliveries to continue but signalled plans to cease deliveries. As a result Land Rover sought a court injunction to prevent this but had to inject £1 million into UPFThomson to shore up supplies short term. In orderfor Land Roverto properly recover the situation and secure the future supply of chassis they had to agree to KPMG's demands, which involved Land Rover taking on the debts of UPFThompson so the business could continue as a going concern. The extent of these debts was never revealed butvarious analyses suggested this figure could be as high as £75 million.
By considering the likelihood and potential impact of risks around supply failures, delays, quality problems or price hikes it is possible to develop responses that either prevent or prepare for these risks being realized. However, there are other potential risks out there in the supply base where the consequences can go far beyond that of a short-term crisis but can prove catastrophic or even terminal for an organization. Typically these are the risks that take away a company's competitive edge or differentiator, or that cause irreparable brand damage. It is a common misconception that big global companies are prepared for such occurrences but often they are not. The Marsh Report (2008) suggests that supply chain disruptions and brand reputation risks are growing in frequency and impact, with 71 per cent of respondents from across industry reporting an increase in financial impact damaging bottom lines, customer retention and brand equity, yet not a single respondent said their company was highly effective at supply chain risk.
One possible reason behind this is that it is very difficult to anticipate every possible risk. The risks that seem to do the most damage are the ones that appear out of left field; when two often unrelated sets of circumstances collide or when a new event suddenly forces us to question what was to be good practice. For example, during the Fukushima nuclear power plant disaster in 2011, systems deemed 'fail safe', failed. Equipment designed to shut reactors down in the event of an earthquake worked, but this set of circumstances, combined with complete loss of power in the region, and flooding of emergency generator rooms as a result of the tsunami meant there was no power to critical cooling pumps and meltdown followed, leaving the world to learn new lessons for future generations.
Similarly, in the supply base, it is the unexpected that can cause the most damage; the horsemeat scandal described earlier being a case in point. Findus was one of many brands who were caught up in this but one that seemed to attract much attention. Up until that point Findus had been a household name for more than 50 years with sales exceeding £1 billion. As the company carefully managed its way out of the situation the executive team grappled with the question of exactly how much the brand damage had been sustained and whether or not it was recoverable. Brand damage and reputational risk can cause huge loss of market share overnight. Millions and billions can be wiped off the value of a business as share prices plummet. This can mark the end for many organizations, yet some companies recover and share prices bounce back, sometimes higher than before where investors view the company's ability to manage itself out of trouble positively. Managing supply chain risk is therefore not just about prevention but is also about the ability to prepare for, and effectively manage through, catastrophe.
Effective management of supply chain risk requires a thorough and regularly revised understanding of the potential risk areas in the supply base, the likelihood of these risks being realized and the severity of impact. It also requires targeted intervention with some suppliers, and upstream in some supply chains, to either prevent, minimize risk or accept, and be prepared for, certain risks being realized. This means we need to identify those suppliers that present risk to us so we can do something, and the process of supply base segmentation in Chapter 4 tackles this. However, before that, as part of the macro level VIPER determination, the organization must first decide on the degree of risk it needs under control. Many organizations never even consider supplier or supply chain risk until things go wrong. VIPER prompts us to think about this and macro requirements such as 'must have contingency plans for all single sourced scenarios' help focus effort where needed whilst supplier-specific requirements such as 'ensure no trade with the Ivory Coast for any goods sourced' can set clear boundaries for a specific relationship.