'E': effectiveness of operations
The second reason for intervention with specific suppliers and therefore source of supply chain value is that of ensuring the 'smooth and effective running' of the business and applies where operations necessitate ongoing communication with, or the involvement of, certain suppliers. In such cases a close working relationship regarding these operational matters becomes essential.
There are certain situations where suppliers need to be much more involved than others. For example, a construction project where subcontractors fulfil large parts of the project requires robust project management to manage and coordinate these suppliers. Contractors will need to interact on a daily basis and work together with other staff on site to accomplish the task. An outsourced call centre needs to function 'as if they were part of the business' with supplier's staff having access to company systems and the ability to directly interact with, influence and determine the activities of other parts of the company's operations. Relationships in support of effectiveness of operations tend to be more prevalent with service providers but can also be required in some cases for suppliers of product. For example, a software company providing a customized system is unlikely to deliver exactly what is needed without regular interaction and review throughout the design process. The developmental process necessitates a relationship. In all these situations successful outcomes are entirely dependent upon a deliberate and well-structured close working relationship for operational matters. Key identifying characteristics for such relationships here include:
• Achievement of the required outcome is only possible with good interaction between parties.
• Suppliers are typically providing some sort of capability or capacity that the organization doesn't have or chooses not to have; they may well be specialists in their area.
• Suppliers might work as if part of, or an extension of the business as opposed to a supply scenario where goods are handed over, or a simple service executed.
• Suppliers tend to gain know-how about the work that, over time, can give them a unique advantage making it difficult to switch suppliers creating a situation of dependency.
Relationships with suppliers for the purposes of ensuring effectiveness of operations are not without risk. If a supplier is critical to achieving business outcomes or if the dependency upon a supplier becomes too great then the risk of failure or exploitation needs to be considered. These risks are heightened if the supplier is less interested in the relationship. Therefore the relationship dynamics and degree of mutual interest and dependency must be understood. Where effectiveness of operations is identified as a need for certain suppliers, it follows that they will require certain provision as part of ongoing supplier management, typically including:
• qualification, eg security, health and safety, capability etc;
• setting clear requirements, deliverables or outcomes;
• defined ways of working, interacting and lines of communication;
• provision to retain essential knowledge; and
• contract provision for exit.
The third reason for intervention with suppliers and source of value in the VIPER hierarchy is that of performance and performance improvement. Supplier performance and driving improvements with suppliers are both entire subjects all of their own and indeed four full chapters are given to these topics later.
Supplier performance could encompass many areas: quality, timeliness, correctness, price, performance, risk management and so on; so there are many areas that could be considered - more on these later. It is easy to chase performance improvements with suppliers but it is not always worthwhile. For example, I would really like it if the software package I use to create presentations didn't always seem to crash at the point when I haven't saved my work for some time. I could even pursue the large global company that created it but my actions here are unlikely to provoke a response. If the guy who cleans my windows keeps failing to do a good job then I can simply find another window cleaner, writing off what I have already paid. In both these cases putting energy into pursuing performance improvements with the current supplier is simply not worthwhile. But if my bank keeps applying incorrect charges to my account I will want to seek both performance improvements and reimbursement or even compensation for my losses as the effort to switch banks is unpalatable.
The value in performance improvement therefore comes by developing supplier relationships or interventions for the specific supply situations where it is both possible to pursue improvement and where the effort required will deliver worthwhile results. This may not be limited to first tier suppliers (those suppliers with whom we have a direct contractual relationship) but could even be appropriate with second or third tier suppliers or indeed suppliers way back in the supply chain many contractual steps removed. Here it becomes more difficult (but not impossible) to pursue improvements as we don't own the direct contractual relationship.
Supplier performance improvements can potentially add value when:
• performance is not what was agreed or expected;
• we can secure greater value if performance can be improved above that agreed or expected; and
• there are unacceptable supply chain risks that must be addressed. For each of these, effort to drive improvement is worthwhile if and when:
• we stand to gain or lose significantly;
• our intervention is likely to yield a result;
• we have few alternatives so we need to make it work (eg because we have progressed too far with the supplier, because we cannot easily switch to another supplier or because the market is difficult); or
• the supplier is unable to improve without help.
Performance improvements can be either directive (telling the supplier to improve) or collaborative (working with the supplier to deliver improvements) and both approaches have their place depending upon the type of relationship we want in place.
Performance improvement is not easy. The reality is securing improvements can be much harder than often realized. For example, a specialist manufacturing company making precision components might be struggling to achieve good accuracy resulting in high wastage and therefore increased costs for every good unit supplied. If the company could reduce waste it would. Driving performance improvements here may not simply be a case of telling the supplier to get on with it but rather might need some support, perhaps investing in having one of our technical experts to help them or even consider if we can help them fund new equipment to become more accurate. Either way improvements may require our help to realize them.
VIPER helps the organization define the broad areas where performance improvements might be required, for example the need for general supply base improvement might be identified in response to corporate objectives to reduce defects or customer companies regarding service failures. VIPER also helps us identify performance improvements for specific suppliers where we know there is an issue, for example: 'bring working conditions at factories in India in line with our Corporate Responsibility policy'.