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Managing Supply Networks

January 10, 2008

‘Sourcing Innovation’ has produced a good summary of recent research on future trends in sourcing and supply chain management. The latest article focuses on the challenge of overseeing multiple supply networks – a topic that should interest both buy and sell side professionals.

Drawing from a recent report published jointly by ISM, AT Kearney and CAPS, the article starts with the observation:

In tomorrow’s world, the ability to respond to change will just be the price of admission. Competitive advantage will require agility, while supply chain excellence will be defined by the ability to:

  • Anticipate changes in customer requirements, product offerings, supply conditions, regulations, and competitor actions
  • Adapt to the changes by deftly reconfiguring existing supply chains or creatively assembling new ones
  • Accelerate implementation of change to capture the new opportunities ahead of the competition

These comments are perhaps a longer and more detailed way of expressing IACCM’s recent comments that “in the future, we must become ‘Managers of Uncertainty'”.

The real point, of course, is that change is happening ever-faster and our systems and capabilities must mirror this new reality. And one area where that has dramatic impact is in the contract relationship. Since so much is unpredictable, we can increasingly forget about things like volume commitments or rigid supply forecasts. Clearly , we have to get comfortable with the fact that customers cannot accurately forecast requirements in any sense – they won’t know what they are. Trading relationships will have to be based on an understanding of mutual interest in each other’s success and a commitment to work together in dealing with an uncertain – and fast-changing – world.

But on the other side, if suppliers can no longer expect such firm commitments from their customers, what is reasonable in terms of what customers can expect from them? Clearly (and as recent IACCM case study articles have shown), traditional buyer behavior of shifting risk to the supplier while taking none themselves is not the type of ‘flexible partnership’ that this new world demands. You cannot expect a supplier to invest in ‘anticipating changes’ and ‘deftly reconfiguring’, nor providing the latest innovations, if the core of your relationship is constant – and unilateral – focus on cost reduction and an atmosphere of blame for any shortcoming. If you cannot accurately define your requirements, how can they possibly make firm commitments – except commitments of fidelity, of integrity and honesty.

This ‘new world’ points to the critical need for more collaborative relationship structures and that in turn suggests a focus on outcomes, rather than inputs. While those involved in structuring and negotiating the relationship remain fixated on short-term objectives, that tend to assume dishonesty, it is unlikely that we will see emergence of the capabilities indicated by this article.

Since the bidding, negotiation and contracting phase precedes the relationship, or shapes its governance framework, we will only build these more integrated and collaborative structures by re-thinking our approach and policies in the set-up phase. In addition, if we are truly establishing networks, we must start to look at the interplay between contracted relationships and create models that encourage transparency and cooperation.

Today, such discussions are far too often taking place between groups and individuals who are outside the contracting process; functions such as Legal, Procurement and Contract Management are seen as obstacles to getting the right relationships in place. The words of one executive always ring in my ears at moments like this: “We believe that we can collaborate in spite of the contract.”

While true, is this not an indictment of our work and is it not a threat to our future relevance?

It is time for both buy-side and sell-side to consider the impacts of reports such as Succeeding in a Dynamic World: Supply Management in the Decade Ahead and to work on developing the practices, procedures and policies needed to ensure competitiveness in this emerging business environment.

(See the Sourcing Innovation commentary at http://blog.sourcinginnovation.com/)

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