Costs Causing Strain in the Supply Chain

Sept. 23, 2010
Nearly 40% of industrial companies say that focus on cost has hurt relationships with suppliers, according to a new KPMG survey

Two-thirds of leading industrial company executives say cost containment remains the top priority in managing their supply chains, but almost four in ten now acknowledge that driving down costs has damaged relationships with their suppliers, according to the results of a recent global survey conducted by KPMG International.

The KPMG global survey polled nearly 200 senior level executives from the aerospace, metals, engineering and conglomerates sectors across North America (making up 32% of total respondents), Western Europe and Asia-Pacific to understand how their supply chains were changing as a result of prevailing economic uncertainty.

Respondents say that new strategies for managing the supply chain designed to repair relationships and weather any economic condition are gaining hold among leaders in the field.

“The fact that nearly 40% of respondents acknowledge that their focus on cost has hurt relationships with suppliers is an alarming statistic,” says Jeff Dobbs, global head of diversified industrials for KPMG. “Those businesses that continue to follow the traditional ‘low cost or bust’ models in supply chain management are at risk of losing a foothold in the market.”

Having stronger and deeper relationships is critical among leading companies, with 53% of respondents expecting to enter into more long-term contracts but with fewer suppliers. While cost remains a key driver for much of the collaboration, the expected marketplace winners are entering into strategic relationships with suppliers that not only deliver product, but provide innovation as well.

More important than the duration is the depth of the partnerships. Over half of the respondents plan to collaborate more closely with suppliers on product innovation and development, R&D, and cost reduction.

In more detailed interviews with several top performer companies in the survey, several of them say they are forging stronger relationships and engaging in collaborative innovation with suppliers, strategically investing in key suppliers or bringing parts of the supply chain back in-house, and applying a mix of both regional and global supply sources to achieve the best combination of speed, quality and cost.

While 66% say cost is the leading consideration in managing their supply chains, 63% agree that more attention and up-front planning should be paid to non-financial elements of the supply chain such as natural disasters, upheaval and infrastructure bottlenecks.

“It used to be that sourcing decisions rested on routine considerations,” Dobbs adds, “like who could make the best bolt for the best price. This approach worked when there was little variability in the cost inputs. Now, leading supply chain strategies must involve detailed scenario modeling and the most successful companies will be those who build adaptability and flexibility into their supply chains. Viewing the supplier relationship as a strategic partnership helps top performers ensure certainty of supply, improve demand planning and fine-tune the mechanism for getting product to the customer.”

Top performers are also paving the way in cultivating relationships and controlling risk when it comes to R&D and sharing intellectual property (IP). While 26% of survey respondents see IP protection as one of their biggest risk concerns over the next two years, cooperative innovation on IP can be very lucrative with the proper risk management in place.

Survey respondents were split down the middle when asked whether cost and quality considerations have made a shift in sourcing from the emerging markets to developed countries more viable. China remains the most current common sourcing location among 35% of respondents, followed by the U.S. as selected by 30% of the global executives.

Thirty-nine percent say they will continue to invest in China more than any other country over next two years, while 26% will invest more in India over the same period. Cost was cited as the predominant deciding factor. Only 11% plan to outsource from the U.S. more than from any other country during the next two years.

“The global financial crisis dealt a blow that sent shockwaves through the industry, but those same forces are the catalysts that are helping organizations create more dynamic, resilient and responsive supply chains,” Dobbs says. “It’s incumbent upon businesses to embrace new ways to use the supply chain to enhance their business models.”