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Buyer Misery Equals Supplier Opportunity

August 6, 2008

The media is full of stories about the failings and weaknesses of global supply chains. It seems we have suddenly discovered that China is far away (and not in fact a remote US state); that ’emerging’ markets do not share Western value systems; that business rules and practices are driven by culture and cannot simply be overridden or suppressed; and that historic economic muscle does not automatically translate to limitless power and control.

So now the body of experience is growing. The war stories are proliferating. And as costs rise, supply constraints kick in, quality failures become visible and threatening, we find an environment in which fundamental questions are being asked over supply strategies. Perhaps local sourcing makes sense. Maybe those old suppliers were not so bad after all.

Given these valid questions and concerns, it surprises me that Western suppliers are not taking greater advantage of the situation. For some time, I have been urging my friends in sales contracting to think about the opportunities that their customers’ global supply concerns represent for their company. After all, risk reduction has value. So if my company can offer more reliable supply, can commit to ethical and environmental standards, can guarantee compliance with customer codes and policies, can adopt and use the technologies required by the customer – does that not make me a more attractive supplier? Does it not win me the business?

The argument goes further than this, because there are of course substantial cost justifications in selecting reliable suppliers who operate with guarantees of integrity and have established world-class practices and technologies in running their business. These savings arise not only from tangible benefits such as compliance with delivery dates, but also by avoiding the hidden – and growing – costs of oversight and compliance monitoring.

So why is there not more evidence of major Western corporations countering price and negotiation pressures with clear benefit statements relating to their risk-free operations?

Much of the answer, ironically, is that we are now all caught in the same trap. As recent surveys show (see, for example, the latest Ernst & Young study), virtually all major companies depend on outsourced providers for key aspects of their performance. So no one can offer guarantees because they do not know whether they can honor them.

The situation has been made worse by the trend towards greater risk transfer. As understanding of exposures has increased, the reaction from buyers has not been to build closer supply relationships, but has in fact been to impose ever more rigorous terms and conditions related to failure. Indemnities, causes and consequences of liability, parent guarantees, liquidated damages – these are all areas where negotiations have become tougher and more adversarial. And the result is that it is simply too risky for suppliers to take on customer risk; they have become3 defensive and protective. Far from looking to expand their commitments, they look to limit them.

I still believe – perhaps naively – that this means there are big opportunities for suppliers who capitalize on the issues of reliability and integrity, who actively seek to differentiate through taking on extra responsibiliies. At IACCM we have started to explore the types of terms and conditions that might represent a charter of ethical and trading practice value.  By leading with such terms, companies might start to shift the negotiation agenda – escaping the sterile battle over risk allocation and moving the agenda to partnered risk management.

In a world where every business struggles for differentiation and value-add, surely this will be a logical and compelling area for future market advantage?

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