Meet the supply chain crisis with closer than ever relationships

For years the power of procurement professionals has grown, driving costs in the supply chain down and making supply chains leaner. Some have used just a single supplier to gain economies of scale and drive prices down further. But we can now see that there was a price to pay in terms of resilience – the cheapest suppliers were not the ones best able to operate through difficult trading conditions. 

Companies now need to step back and make a conscious choice about supply chain strategy – do they want to continue to risk their stability for lower costs? I don’t think they should. 

We have experienced Brexit, covid lockdowns and the war in Ukraine and it is certain that more shocks are on the way, and we won’t have any idea what they will be until they hit us. Our preparation can’t be specific so it has to be general, and it has to be focused on building up resilience. But in supply chains there is a price you pay to get the resilience that helps you withstand the shocks. 

The aftershocks from the covid lockdowns and volatile commodity prices caused by it and the Ukraine war have sent supply issues soaring towards the top of corporate agendas. Chief executives told McKinsey in June that it is the third biggest issue they face, behind geopolitical instability and inflation. 

To deal with these uncontrollable external shocks companies are looking harder at their sourcing strategy and thinking about how they can build resilience into their supply chain, and what an acceptable price is to pay for that – it will be higher than the cheapest price out there.

This is partly about taking a strategy-led approach to supply chain management in the first place, about a recognition that this is an area of your business that was once purely operational but now has to be strategic. And it is partly a response to other pressures – the pressure to know more about labour practices and environmental impact in your supply chain. 

Companies are appointing supply chain directors to work alongside chief procurement officers to make sure that there is a strategy and that it really does guide the company’s behaviour. The information flow between supply chain, procurement and customers is improving as organisations learn to take a more holistic approach. 

But the one thing that companies can do to improve supply chain resilience is to foster better relationships with a smaller number of suppliers. Stick with suppliers over the long term; develop pricing that works for both parties and not just the buyer, and collaborate where possible. 

This helps with accountability and transparency, as supplier and customer get to know each other over years and can vouch for materials and methods. And it helps navigate uncertain shocks because you have developed a culture of collaboration to build on in the hardest times. 

We saw this in action in the early days of the covid crisis. Companies did not grab their contracts and rush to courts to litigate over missed supplies or ratchet up charges via penalty clauses, they got together to work pragmatically to deliver what they could, understanding that the world had changed. 

Those with longer, closer, stronger relationships fared better, and those whose supply chains were transactional, short termist and focused only on the lowest achievable price found themselves at the back of the queue when supplies were low. 

Some experts have said that the crisis showed us that the best supply chain is the shortest one, because companies found themselves with stranded components on the other side of the world, buried under impenetrable layers of sub-contracting. 

It is true that pursuit of the lowest price has introduced needless complexity, not to mention too much distance between some of the companies producing materials and their ultimate customer, the length of the supply chain isn’t the most important issue to consider. What matters most is who is in the chain at all. 

Rather than shorter being better, it's about having the right suppliers in the chain. You can have a really short supply chain, but if one of the suppliers in it is not resilient and then the supply chain is still broken. The most important thing is having the right suppliers in it rather than a particular number to aim for.

Partly this is about balance – of size, of power, of culture. Finding companies that share some values and approaches is helpful. So is finding a match that avoids great power imbalances. A relatively small supplier may be taken advantage of by a customer that represents 80% of its business. Similarly a smaller buyer might be de-prioritised by a huge supplier. 

Choosing your suppliers also involves due diligence – who are their suppliers and how resilient are they? Where are they based? How is their financial health? This is most commonly done when a company is being bought, but the same questions and similar rigour in the contracting process can help build your own organisation’s resilience. 

An economic relationship that benefits both parties more or less equally is inherently more resilient than one that has a lopsided power relationship. 

Companies have increased the number of suppliers partly to drive down cost through competition, but also in the only partly-true belief that this avoids a lot of risk. Yes it mitigates company-specific risk, such as bankruptcy because of employee fraud. But it does little or nothing to mitigate systemic risk, as we learned during covid and the current period of high inflation and spiralling energy costs. Having nine factories that can’t afford the fuel to make your component rather than two is no benefit at all. 

So shrinking the number of suppliers to make it easier to have meaningful long term relationships makes sense, but companies should still avoid becoming completely reliant on one supplier. Making sure you retain control of intellectual property, tooling, designs and other methods of control of the process will help preserve your rights to take your business to the best supplier available. 

This deeper supplier relationship will also make it easier to meet growing demands for transparency and accountability when it comes to labour exploitation and climate impact. 

Complying with modern slavery laws and demonstrating action on climate impact to customers and investors are two of the main driving forces for companies to learn more about their supply chains. This activity is complementary to solving the resilience problem.

There is no easy answer to how to improve your supply chain, nor one way of measuring what improvement looks like. Some companies have taken to storing much more stock than before having been unable to supply customers during covid lockdowns. But that ties up capital and costs money in terms of storage and transport, and anyway only solves one specific set of problems. 

Solutions will only come when companies take a holistic view of supply chains and take a strategic approach that aims to increase suppliers’, and therefore, the company’s resilience, accountability and transparency.