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New World, New Rules, New Role For Commercial & Procurement?

October 5, 2010

It’s a confusing time for buyers and suppliers, as they seek to navigate the complexities created by our increasingly global market. Each day there are fresh examples of the challenges we face in selecting the right partners. In their different ways, each new story illustrates the need for new sources of information, new levels of communication and more sophisticated methods of analyzing cost and risk.

A few weeks ago, I highlighted two aspects of international trade. The first was Leadership, Values & the Role of International Contracting, in which I highlighted a book by Harvard professor Paul Lawrence which argues for greater regulation of world trade. Professor Lawrence makes the case that much of today’s outsourcing actually results in a reduction in global wealth and therefore operates contrary to human interests. As if to recognize this point, Supply Chain Review then published an article suggesting that US corporations have learnt the error of their ways and supply relationships are being brought back on-shore  – see  Overseas Sourcing: The End of an Era?

However, a report in last week’s Financial Times suggests otherwise. A study by KPMG suggests a continuing trend to low cost sources of supply, with 66% of global manufacturers citing cost reduction as their number one supply chain priority. But this study also suggests a growing maturity of judgment, with increasing concerns about doing business with China and heightened interest in India as a manufacturing base. As IACCM recently illustrated, many low cost markets are not truly low cost when all factors are taken into account. There are many hidden risks and expenses when companies engage with overseas suppliers in non-traditional markets.

A stark illustration of this was contained in the same edition of the Financial Times. In ‘A Future on Track’, the article describes how ‘having transferred high speed rail technology to (Chinese) state-backed groups in exchange for access to a vast market, multinationals find they have created their own low-cost competitors’. Even worse, these multinationals have also discovered that their access has limited value, because their market share has stalled. Small wonder, with stories like these, that companies are forced to re-think some of their sourcing and market entry strategies.

All of this data suggests to me that there is potentially an open door for suppliers and customers to reach a new accord, if only they will engage in new and proactive conversation with each other. Just last week, I reported on the frustration felt by buyers at a meeting I ran in Dallas. They highlighted the reluctance of many suppliers to discuss issues related to cost reduction and service improvement; they felt forced to use competition as a weapon, largely through regular RFPs, in order to drive improvements. This sentiment was echoed just today at an IACCM member meeting near London. And I hear it often from contracts and commercial professionals who feel excluded from customer discussions by the account / sales team, who are reluctant to discuss value and just want a quick fix on price.

We talk a lot about collaboration, but the real issue here is communication and ensuring the right people are engaged. Perhaps a core problem is the traditional sales model, the reluctance by many sales teams to adopt inclusive behavior, their reluctance to engage with procurement and supply chain. I understand the pressures on sales people, especially at a time of economic turmoil. But it may well be that the secret to unlocking value and building more harmonious relationships depends on addressing their role and motivation systems.

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