Buyers and Sellers Lean on Each Other

While leaning on someone can have a negative connotation, today’s economy requires adoption of a lean strategy that brings shared rewards.

The past few years have been tough on suppliers. Rising commodity prices, tight credit and various disasters impacting supply chains have all contributed to the pain. Many buyers have been in a position of strength, leveraging the downturn to negotiate lower prices and other terms to their advantage.

However, current trends and predictions of many leading purchasing managers and other executives suggest that the balance of power is turning. More significantly, the very nature of buyer-supplier relationships seems poised to change. Several trends are involved, including the following:

Firms are waking up to supply risk. The scale and impact of recent global events on supply chains have highlighted the importance of both understanding and actually mitigating supply risk, and how ineffective we are today in doing so. As companies shift their focus, exclusive or preferential supplier agreements will grow in importance, giving suppliers increasing leverage.

Knowledge is flowing throughout the supply chain. As companies look to extract more value out of their supply base, an obvious approach is to tap the expertise within it to help innovate or expand into a new market. Some companies are starting to do so, and this trend will increase. Our supply bases have a wealth of knowledge within them that can be of great value. For example, if you are looking to enter a new market, it’s very likely a supplier has already gone through that experience and can offer great lessons.

The marketplace is becoming more complex. As emerging economies produce successful, fast-growing and culturally different companies to compete on the global playing field, the process of selecting suppliers will become riskier, more complicated and more fluid.

We’re seeing greater pricing transparency. eSourcing and procurement’s intrepid scrutiny into still-cloaked categories are bringing increasing price transparency. Global trading networks and online communities will take this up a notch, further decreasing the importance of price negotiations.

Online communities are proliferating. Digital trading networks and communities are enabling more effective discovery of and collaboration with suppliers. Ongoing technological innovations will make collaboration faster, more secure and easier. As a result, it will accelerate the change in relationships.

Nearshoring

The trend toward nearshoring will further encourage supply chain change and in some cases may be a result of innovators already working to build closer supplier relationships and focusing on value rather than cost.

Costs may be a factor in Western European firms shifting to Eastern Europe. Labor costs in Eastern Europe remain 50 to 60 percent lower on average according to Eurostat. However, if cost was the primary factor, Asian countries such as Vietnam, China or India would present greater savings.

Transportation costs, while lower in nearshoring situations, don’t compensate for the difference in labor costs. And given that they have actually been trending flat to lower over the past few years, there would now be less pressure to choose nearshoring vs. offshoring from a cost perspective.

Nearshoring often involves working with suppliers in countries with better intellectual property rights than offshoring countries (such as Eastern Europe or Mexico vs. China or Vietnam). One concern with greater buyer-supplier collaboration is the threat to a company’s intellectual property. The increasing nearshoring trend will reduce this barrier.

Nearshoring is more conducive to collaboration with suppliers, which often share more similar cultures/language/values, unlike most offshore locations. While networks and increasing automation will make it easier to find and collaborate with distant suppliers, collaboration is more effective when the parties share such factors and are in similar time zones. Nearshoring also helps reduce risk of supply chain disruptions, as political risk is often lower and delivery times are shorter.

The Impact of Lean

Many of the changes predicted are due to the rise of supplier networks and the increase in automation and other mechanisms that will enable greater and more efficient collaboration between buyers and suppliers. These advances will help take lean up yet another notch, while simultaneously increasing collaboration across new categories of spend.

For example, suppliers in a lean value chain will be able to leverage social media mechanisms such as networks and online communities to quickly ask questions and share specifications or prototypes with buyers and others in the value chain. Much of this takes place today, but networks will make it much easier to share such information, as well as quickly configure groups and add new parties, much like individuals do today in their personal lives.

The key concerns with the changing nature of buyer-supplier relationships, particularly the loss of leverage with suppliers and greater risk from higher dependency on suppliers, all apply to lean and have to be managed. Lessons learned can and should be applied to minimize the pain of this transition. For example, the immediate and high impact on Toyota of the recent tsunami and corresponding mitigation strategies will be a valuable lesson.

Desire for Healthy Suppliers

Greater cost transparency is an outcome of lean, but rather than leading to an elimination of margins, it has led to a new culture where buyers are conscious of and interested in the financial viability of their suppliers. They push them to constantly improve productivity to offset cost increases, but ultimately absorb price increases when necessary to ensure their supply chain remains viable. And in the process they gain greater visibility into their own margins as they better understand how commodity prices and other cost changes are impacting their suppliers.

Lean requires strong buyer-supplier relationships, and they will become far more common in the future. Here’s how they’ll work:

• A partner-oriented relationship with suppliers will involve greater collaboration along all stages of the product cycle. Suppliers need to be engaged early on to ensure their production meets customer goals and to assist in making suggestions to improve the end product.

• Constant, efficient communication will ensure product delivery. There is little to no room for delay in delivery due to the lack of inventory and order-based production. Hence, suppliers must be informed rapidly of demand.

• Suppliers will be as empowered as those actually producing to suggest and make improvements. They will also share risk, since a stoppage of production in one point of the value chain can cause stoppages throughout due to lack of inventory and tight integration.

How buyers and sellers leverage these changes will determine just how effective and efficient the supply chain of the future will be.


Alex Saric is marketing director, Europe, Middle East and Africa, at Ariba Inc., providers of business commerce technology.

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