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Managing Interconnections Is Key To Value

December 14, 2010

The pressure on procurement and supply chain groups seems certain to grow as more and more reports identify the embedded inefficiencies of today’s performance. But suppliers will also need to adjust to the changes this implies – many of which impact contracts and contract manaagement practices.

The most recent report to highlight supply chain failings comes from Sir Roy McNulty, who was investigating the UK rail industry. He found poor coordination across the range of companies and stakeholders involved in delivering services. He called for ‘much closer working and alignment of incentives’ across the industry and the adoption of ‘good supply chain practices’, which he estimates will save at least £1bn (US$1.6bn) a year, as well as delivering service improvements.

Among the specific failings, the report highlights:

  • poor demand management
  • failure to challenge requirements, plans or costs at an early enough stage
  • inadequate focus on ‘value for money’
  • absence of trust and collaboration with suppliers

Although the situation on which Sir Roy reports may be more extreme than many, the symptoms are found in many places. To be fair, a key reason for this is the obsession of many CFOs with purchase price savings and their refusal to allow ‘value for money’ judgments. Yet Procurement increasingly has evidence – through reports like this – that uni-focused, adversarial behavior does not deliver the best finaincial results. Procurement leadership must step forward to push this issue and illustrate that today’s more complex, outcome-based supply networks demand a new approach.

Suppliers must assist in this change. They should ensure that sales teams are far better equipped with the economic data to enable a shift in the way that relationships are established and managed. They will also have to learn ways to collaborate across a supply network, where necessary with competitors. As Sir Roy concludes, there are those who “appear to have been more successful at developing mechanisms to encourage partnership with suppliers while retaining the advantages of competition.” Those companies will be the ones to flourish in our networked world.

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