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Minimizing surprises in your company’s supply chain
It's a common scenario in supply chains where manufacturers use just-in-time inventory for their production needs: a client contacts us to explain the facts of their supply dispute and seeks advice on the possible consequences resulting from those facts (i.e., line is going to shut down). Typically, these conversations include some level of eagerness to find a workable solution while preserving the long-term relationship with the supplier.
While we enjoy our role of being a "fixer" of our clients' problems as they place a high value on our analysis and recommendations that ultimately helps them keep operations online and productive, we also enjoy being a "surprise minimizer." When we work with clients upfront to identify potential issues and develop strategies to minimize them, we also minimize sleepless nights for the business owner, limit increased costs and address impacts on the bottom line that come with a supply chain surprise.
The good news is many of those involved in the purchasing side of the supply chain can and do operate proactively when negotiating with a new supplier. They identify which contract terms are most important for the supply relationship as well as the "non-negotiable terms" that are at the forefront of a negotiation with a supplier. Understandably, price is commonly a key non-negotiable term, however, we counsel our clients to consider other important factors such as indemnification, warranty, shipping terms, the length of a contract and termination rights.
In my experience, clients who are proactive in the improvement of their supply chain have a competitive advantage over firms who do not dedicate sufficient resources or time to that effort. That should not come as a shock to the reader on its face but can be challenging to implement, especially when factoring in the goal of avoiding unnecessary expense. Resources are not unlimited. Analysis of the cost to your business and reputation from a key supplier missing delivery for a day, a week or longer may provide an ROI on taking supply chain performance improvement to the next level.
More and more manufacturers realize the work of proactively minimizing surprises should not stop after a new supplier is on board. Supply chain improvement can be achieved in many different ways and evaluating your suppliers at regular intervals can be beneficial as compared to evaluating only new suppliers when they come online. As time goes on, ownership and control of your supplier can change. A supplier may move its operation from one state to another or offshore. A supplier may decide to use a different carrier to save costs. Does your supply agreement provide you with any rights if these things happen? I would suggest that you not wait until a surprise happens in your supply network before you evaluate the strength of your base and your agreements with them.
Periodic evaluation of your suppliers can be a positive process for all involved after some initial resistance. A growing trend in the automotive, defense and aerospace industries is conducting 360 evaluations of suppliers. What this approach shares with the more commonly known 360 review in the employment space is an emphasis on providing a comprehensive view of strengths and weaknesses from every possible angle. These reviews go far beyond simple price evaluations and often include evaluating the supplier on value, compliance, quality, risk, their place in the market, diversity and performance.
This approach makes even more sense in an environment, suggested by the market, where manufacturers are making efforts to reduce the overall number of suppliers they work with. There is a general perception that consolidation will reduce internal cost and yield volume-adjusted discounts. If you have engaged in this same reduction, perhaps your procurement team would benefit from leading your top suppliers in a 360-degree review. You may bring issues to light that could potentially threaten your business and, with this knowledge, can devise strategies to minimize or even eliminate their impact.
While there may not be a 360 model that fits every supplier in terms of which questions should be asked, I am confident that measuring your suppliers against the metrics important to your business will be worth the effort over the long term. Consider asking your attorney and advisers what they see as common problems requiring reactive responses in your industry. Give additional thought about what types of issues might disrupt your supply chain, triggering surprise. You may find you can shape the success of a supply relationship more than you originally thought.
Varnum LLP attorney Scott Hill is a member of the firm's Executive Committee and his practice centers on business succession, transactions, and supplier and customer contracting.