Steve Bagshaw (SB): How do you balance flexibility with cost and quality considerations and can you measure whether you are striking that balance?
Guy Allen (GA): Those are two separate questions. The first depends on your marketplace and what it demands. The nearer you are to the consumer retail market, the more flexible you will need to be. I think it was the Nintendo Wii a couple of years ago that you could not buy for love nor money. It was the most innovative videogaming product for years yet you couldn’t buy one, and this went on for months and months. The supply chain director really should have been asking themselves some questions – they were clearly stopping the company capitalising on that opportunity.
In that instance, they could have done with a lot more flexibility in the supply chain and probably any costs they incurred because of it would have been recouped. Other markets, such as the construction industry, can probably can afford to be a bit less flexible.
Michael Walsh (MW): We don’t use the term “flexibility” as a key objective in our business, but if you don’t try to figure out what flexibility you need, and therefore what to do to get that flexibility, you will run into problems. In our business, volume flexibility is clearly important. For example, with products like the Wii, which is highly competitive and volatile, our customers will rapidly switch from one retailer to another. But there are other things that we do, such as promotions, which drive huge volatility into our volumes and therefore into our supply base. Then there are other factors that are out of our hands, such as seasonality. If the sun comes out a few weeks early, the volumes on a hosepipe will rocket by several thousand per cent, or if it gets cold it will be the same for heaters.
Beyond knowing that it will be cold at some point in the year and it will be warm at some point in the summer, it is hard to be accurate. So we need to build in flexibility to drive the volume responsiveness, and the trade-offs need to be thought through carefully.
SB: And would you be prepared to be more fluid on quality or on price in order to get that flexibility?
MW: Not on quality, in that we have clear thresholds of standards. There clearly are differences in quality in the products we sell, but then it is for the customer to choose.
In terms of total procurement costs, there are parts of our supply base where – and let’s take Wii again as an example – we had limited flexibility. That is the product and the customers want it. Of course there is a commercial negotiation, but we don’t always have a choice around alternatives.
There are other parts of the supply base where we do have flexibility, both on “which suppliers?” but also “which locations?”. In those cases, we are much further down the road of thinking through what kind of flexibility we want in our overall supply base structure – which countries, how close to home, how far away from home, what are the trade-offs on lead time, availability and cost that come from those, because they are all very different.
Colin Davis (CD): I am coming from an entirely different end of the spectrum, working on five-year plans in construction compared with those of you in retail dealing with the here and now, so it is an interesting dilemma.
Our primary goal is going all the way back to the sourcing decision and making sure that we have got everything absolutely aligned to business drivers with the initial contracts and also in the relationship going forward. In the past, certainly we have had various contractual arrangements that have been completely out of kilter with what the business is trying to deliver.
For us, if you manage to achieve that early stage alignment and are absolutely explicit as to what you want – and that’s not necessarily in terms of the traditional contractual goals, but more the behavioural and competency-based goals of organisations working together – then you naturally work in a more flexible way to achieve the outcomes. That is what we are about, so it is not necessarily a compromise between cost, quality and time or anything else.
SB: What happens when the priorities of the
business change?
CD: You clearly need to build flexible supply chains, to coin a phrase, that enable you to flex your requirements. Over the past six months, we have changed our cost challenge from about 13 per cent down to about 23-24 per cent and our supply chain and ourselves have both taken significant cost out to flex appropriately but still maintain that momentum.
Martin Högel (MH): We seem to be mainly talking about supply chain agility, that is, how do you react to sudden changes on the demand or on the supply side. There is another aspect to supply chain flexibility, which is longer term: how do you adapt to wider changes in the market structures, such as shifting vertical industry structures, stricter environmental legislation, technological changes or movements in international labour costs? How do you incorporate that into your corporate strategy, your manufacturing footprint, your supply chain approach and so on?
Ideally, a company’s supply chain approach should be comprehensive enough to absorb a change in business priorities. This obviously necessitates an understanding and management of the effects of changed business priorities across the entire enterprise.
In reality, however, we still see a lot of silo thinking inside companies. That can have a counterproductive effect as departments tend to optimise the costs in their area while, as a company, you might be better off optimising the supply chain across various divisions or departments.
When you consider companies that have incorporated supply chain flexibility into their corporate strategy, and fashion retail is a prime example – take Zara or Mango, for instance – they actually incur additional costs in some elements of their supply chain. If you look at their manufacturing facilities or if you look at their warehouses, they are rarely fully used because they know that if they want to respond quickly to the market – and that is part of their corporate strategy – they need additional flexibility in their supply chain.
Those companies really optimise across the entire chain – not only “let’s optimise the warehouse or optimise asset utilisation”, they look at the cost:benefit ratio in the whole supply chain and optimise that.
SB: Can non-retailers get this flexibility to be part of the corporate strategy?
Andrew Vaughan (AV): My background is in retail as I was with Marks and Spencer for 15 years. My current business is different; it’s still about getting value but I don’t necessarily need something there the same day like a food retailer does. For me, it comes down to the link with the market, and Guy made a very good point that if you start with the market from a strategic perspective and work back down, then to my mind it is just about effective communication.
If you have got the communication right, from board level down through the organisation with good brand planning and strong links with the supply base in terms of contracts and systems, then this can give you the flexibility. Effective communication is the key for me. Whether that is the IT link with your supply base, accurate demand planning or how your customers are responding to your products, effective communication is fundamental.
SB: To what extent might you be out of the loop if the stakeholders are talking to the suppliers directly? Is there a danger that procurement ends up being marginalised?
AV: That is a massive danger, yes. But you want your stakeholders to engage because you want to drive innovation. You want your stakeholders to be talking to your supply base but you need to attempt to manage this process. What we try to do is operate cross-functionally so we go together as a team and discuss innovation; we discuss delivery and we discuss quality and costs. If you go to the suppliers in this way you can cover most of the bases, but it is not an exact science.
GA: You can’t stop your stakeholders talking to the suppliers, and neither would you want to. You do need to give them a structure in which to have those conversations. Earlier in my career, I tried to stop engineers talking to suppliers: that affected the design quality of the product because suppliers couldn’t say, for example: “Well, if you make that angle there, I can’t mould it very well. If you could change the angle I could mould it and it will be a better quality mould or cheaper.” Be very careful about thinking we can constrain stakeholders from speaking to suppliers.
SB: Elaine, how do you manage that, and what kind of extra flexibility would you like to have that you don’t currently have?
Elaine Hughes (EH): When we have needed to call on suppliers very quickly, fortunately they respond well because it is a specialised market, so they know what the issues are for the Fire and Rescue Service. They know that if you get an incident like the fire at the Buncefield oil depot [in 2005], then they have all got to be on call and ready to respond. Really, it is a case of the suppliers knowing the market very well.
Looking at wider issues in terms of where can we get the supplies from, the fire and rescue service is trying hard to have “interoperability”. What it means is that they can call on each other, and they do that regularly anyway, but also increasingly trying to share and have equipment that will work together when fire services jointly attend incidents.
SB: Now we are emerging from the recession, how does that affect supply chain flexibility?
AV: This was a serious consideration during the recession, because everybody was obviously deeply in the mire with numbers going through the floor and everyone wanted to offload inventory. There is no doubt that inventory reduction and the pressure on working capital is driven by the board, and everybody you speak to, including your suppliers, your customers and your competitors, all want to do the same thing.
One of the keys to flexibility is effective supply chain design. We segment our supply base to focus on key components that we source as generic parts from a variety of suppliers, and customised parts that are specific to our requirements. Dual sourcing where necessary for us gives security, leverage and flexibility. Effective demand management is key.
SB: Once you have that in-built flexibility, does it cater for all circumstances or do you, again, need this kind of instantaneous flexibility on occasion?
AV: There is a dynamism in the whole supply chain piece and therefore you have got to keep reviewing it constantly, ideally every six monthly or annually.
MW: For us it is which specific parts of our supply base could be more exposed when things do pick up? For example, our furniture supply base, big-ticket items, has declined dramatically and we hope that at some point that bounces back. We also know that some of our suppliers have a greater dependence on us, so that is where you might see a bigger market effect, and a bigger impact of that on our supply base.
In these areas, we do monitor capacity in our supply base. We understand our share of that capacity, we understand what is spare and we understand what could be turned on should the market become more positive.
And, if we are comfortable with the state of the market, then we can look at other issues. If not, then we require dialogue with suppliers to understand their readiness and what can be put in place to support the potential upturn.
CD: We have got an inherent risk in our business and in the construction business, so the supply chain has shown flexibility in the downturn by taking out resources. The trouble is that as the recession continued, those resources and skilled labour tended to move into different areas or increase their skills or retrain.
Inevitably, as we move out of recession, the big risk for many businesses in the construction industry is that the availability of some skilled resources in particular key areas is going to be scarce. So what we have tended to do is try to make sure we have maintained a reasonably broad supply chain during the recession and maybe compromised some of the commercial advantage we could have taken in those situations so that we can then call on people as we go forward.
SB: And when you say “skilled resources”, you are talking about the people as much as the business services?
CD: Yes, absolutely.
SB: So you have spent more to keep them going in order that at the end of the recession they will still be there?
CD: Yes. There are some key resources such as design engineers who could have gone into other industries and we would have lost them forever. We have taken the strategic decision to protect the ongoing construction programme by keeping one or two key relationships going.
SB: It sounds like there may have been a difficult conversation.
CD: Oh, absolutely. We have paid a premium during the recession for some of these. In other areas where there wasn’t such risk and we believed there was surplus of resource and there was never a problem, we took a different approach.
SB: And what do you think, in broad terms, the payoff will be from having retained those resources?
CD: What we have tended to do is make sure that we have got some contractual coverage for the longer term in that downturn period, so that will commercially reap advantage for us. In addition, we have created appropriate long-term relationships with these organisations that will hopefully show some flexibility going forward.
So, yes, we have had to make some choices whereby we have paid a premium, but for fairly small programmes of work for the last 12 months. Once we ratchet up to the full scale, we are anticipating that we will be well prepared.
SB: Michael, Colin mentioned supporting suppliers and retail has a reputation for being at the other end of the co-operation spectrum. Is that something that you
would consider?
MW: Yes, we do consider this, and have been doing it for some time where it makes sense. It has clearly been an area we have had to understand much more in the past few years. On the one hand, there are parts of our business that are still commodity-type products from a commodity supply base and a price-based approach is absolutely fine. On the other hand, there are parts of the business where that price-based approach might have been fine a few years ago but we clearly cannot take that approach now. We have scale, we have certain volumes and in some cases that alternative supply base simply doesn’t exist.
So we clearly need to nurture the supply base where they are struggling. But nurturing comes with responsibilities on both sides. Responsibilities come under the banner of openness and cost transparency and trust; all those things that are easy to say but quite hard to put into practice.
So where we have built that understanding, then you can put in place things to change or adjust, such as payment terms if there is a cash flow problem, or make certain commitments around stockholding if you need to get ready for a peak period. But you can’t do that, or it is very difficult to do that, unless you have got that foundation of trust to start with. Otherwise it becomes a cat-and-mouse game and no-one will win.
MH: What you mentioned requires that you have a really good understanding of the structure of your supply base: which are strategic suppliers, which are, let’s call them preferred suppliers, and which are commodity suppliers or vendors. One thing we have been seeing in the markets over recent years is that the companies that managed that game really well are the ones that have a strong focus on understanding what their strategic categories and their strategic suppliers are, and then put specific resources behind it to manage those.
SB: What is the difference between directs and indirects when it comes to this issue?
Austen Bushrod
(AB): Certainly with regards to our people, we haven’t seen much change over the past two years or so. Our recession came early. It was at the stage of the smoking ban [in the UK in July 2007], so we were six months earlier than most businesses. I believe we issued statements in the latter half of 2007 saying we have seen the effects of the smoking ban, we have seen the effects of the gaming legislation change, but there is something else that we just can’t put our finger on.
It was then that we really started suffering. We cut our cloth at that point. By the time things really started going in early 2008, we were in better shape. Fortunately we have managed to push forward our attendances and our offering.
SB: If you were first into the recession, were you first out of it as well? Have you seen a great improvement over the last four or six months?
AB: Yes. Obviously I have to be careful what I say because we are just about to publish results, but in the latter part of 2007 we were in a position where everything was going into freefall and everyone stood with their backs to the wall. We changed a few members of senior management and pushed it forward. The main thing we implemented was a customer obsession. When we talk about flexibility and supply chain, as long as you go back to the customer and start from that point and see what flexibility they need, then you can work out what requires flexibility and what doesn’t in the long term.
SB: Is that point about customers being the leaders of flexibility something that others have seen?
EH: We have to work closely with our customers to discourage them from over-specifying or wanting more and more things. We have talked about what it will be like for businesses coming out of recession, but in the public sector spending is going to be tighter than ever for the foreseeable future. That may help to persuade customers that they should standardise more and not want different bells and whistles on the equipment or vehicles they are buying.
SB: How much of a problem is that? Let’s take, not the fire engine, but perhaps the breathing equipment. How many different specifications can fire brigades ask for?
EH: We are fortunate in that we have a standard specification, but it is then a case of adding additional items where they might have their own bespoke requirements. So the kit is there and is the same, but different brigades might want different things on it. Fire vehicles would be a good example, actually, because in the past few years capital expenditure has been available so vehicle manufacturers have full order books from the fire service for the next couple of years. From then on money is going to get tighter so we want to try and get standardisation around a vehicle that will reduce cost in the longer term.
SB: It is a priority for any business, isn’t it, to know exactly what their customers want and to build everything around it? It sounds as if many supply chains were not doing that. Should this become a high priority for the corporate strategy?
AB: We probably don’t want to wait for the customer to get to that point. Over the past 12-18 months, we have started putting in loyalty schemes – only into Grosvenor Casinos – and started to understand what customers are spending their money on in our casinos. We knew they were there, we just didn’t know specifically what people were doing. Using that as a starting point, we have started putting in some strategy in terms of targeted marketing, which allows us potentially to tie in with various suppliers in terms of targeted promotions.
We do these, for example, with Cadbury on bingo. It is fairly obvious that a marketplace dominated by females with an average age of 45 is going to like chocolate so you combine the two. But we are really in the infancy stage of understanding our customer base well enough to start to tie in the various supply chains and to prioritise what supply chains are most important to us over which aren’t. In casinos, we suspected the slot machines were important but now we know who is playing the slots, now we know which slots are played more often than the others, and we can tie that in with other suppliers.
SB: That is an interesting set-up, but how would it work in a business-to-business environment as opposed to business-to-consumer environment?
GA: My answer to that is that our contracts are very, very rarely less than three years long, and can be 10 years long. If you don’t totally satisfy your customer, they will cancel the contract, but if your customer only thinks you are average you could lose out on extending that contract and taking on new areas.
The customers that we satisfy are the users of the PC, they are not the owners of the budget. It is a different dynamic for us, in that the end user isn’t actually the customer that pays the bill.
SB: So you differentiate a client who pays the bill from the end user or the customer?
GA: Yes. We will do satisfaction surveys with the 120,000 people in an organisation, but fundamentally what matters is the satisfaction survey that an independent company does one-on-one with the CIO or the CFO. They are incredibly important to us.
AV: It is important to consider where your business is positioned within the supply chain itself. We are positioned as a central supplier/manufacturer that doesn’t necessarily sell to the end user. To a certain degree, you can control your downward supply chain, but the upward supply chain for us focuses on the provision of spares and service. The supply chain doesn’t necessarily end when you get the product delivered to the installer. For us, maintaining it and supporting it are key and need just as much flexibility.
MH: It is almost like you were seeing this both from the demand side and the supply side. Both ultimately cater to supply chain flexibility. When you look at the supply side, really advanced procurement supply chain organisations understand today the ripple effects that a natural disaster, or an epidemic, has on their overall supply chain, and take immediate preventative action even though only a sub-tier supplier to their main supply base is directly affected.
SB: Do you have a sense of what kind of value in percentage terms, or monetary value, that can be gained if you achieved this?
MH: Let’s go back to Zara or Mango. Zara sells 85 per cent of its store stocks on initial price, that is, it doesn’t have to discount it. The average in the clothing retail industry is 60-70 per cent. Zara’s on-target price:sales ratio is clearly an effect of a well-crafted and executed supply chain strategy. You can then look at the effects this has financially. Zara enjoys profit margins several percentage points higher than some of the other apparel manufacturers/retailers. That would be one way of looking at it.
AV: That is about management, isn’t it? Flexibility of where you are sourcing from. We know from fashion retail that, to a certain degree, companies make their sourcing decisions based on speed to market and cost. They will potentially have both local close to market supply and more complex supply routes to offshore low-cost sources. They will look at ways of managing flexibility depending on whether it’s a core garment or a fashion garment.
AB: I think buyers are getting closer to sales and marketing teams, and the internal teams can be critical of buyers’ understanding of what they are going to be required to buy. But you can take it one stage further and get the supply base involved in that too. We regularly take suppliers to sites to show them and say: “Have you seen what happens here, how someone sits down in one of our bingo halls and plays bingo, what they are looking at, what they are looking for?”
SB: Are you involving suppliers much more closely at every stage?
AB: At every stage. Sometimes it’s not just about going in there and saying “Would you like to come and have a look at the casino?” but inviting them to a night out there so they can talk to customers. As a buying team, we get involved in customer research, whether that be personally talking to customers or online research. We are totally immersed in that so that my buying team completely understands what the customer needs, but it’s a challenge to get to that level. The next challenge is to bring the supply base into that fold as well, so they feel comfortable to stand at a bar in a casino and say to someone: “Let me get that drink for you, and let me ask you a few things: what do you think of the bar, how do you think we should set it out?” The more you bring suppliers on board, the more they come up with all kinds of ideas.
GA: I think that’s brilliant. It goes back to that transparency of information flow. At one bank I worked for, the issue was around single deliveries into the branch, but we had all these reasons from the sales organisation for not doing something about it.
I said to the buyer: “Go and spend a day in a branch.” Because they’re graduates, they’re posh and the last thing in the world they want to do is to take a look! They went and were totally inspired because they saw how often branch staff were interrupted by receiving deliveries. They could see immediately that if you could make a case for deliveries coming in once at 1pm or whenever it would have a big impact on the branch. They immediately had information to go back to the sales group with and say: “Look, I know you don’t want us to do this thing around delivery, but actually, we have spoken to a couple of branches, and they think it would be fantastic.” With supplies, it is even more so, but it is just about getting your buyers into where your frontline is.
AB: For example, showing the drinks supplier a bar, and asking them which one of their bottles hasn’t moved for three weeks, and they suddenly realise “Oh! Okay!’ Or “Do you see those sandwiches sitting over there – do you see why we need an extra day’s shelf life?” It’s just to get them to understand the challenges that we have in the club so they start to think of solutions. As soon as they buy into solutions, you can get some level of flexibility for free because they understand and feel part of it.
Once a year, we have a big supplier poker night and a big event with entertainment where the whole supplier base gets together. They have a great night, drink too much, eat too much, but they feel part of it.
AV: It is a commonsense approach, though. I like that phrase “flexibility for free” it’s a great way to put it. A lot of it is just commonsense. It won’t cost us any more to do that.
AB: It is about getting them involved. There is that camaraderie, which is very positive. And if later on a supplier comes to us with a different solution then wants to use us as a case study when talking to potential customers of their own, I am quite happy to write it and go along to meetings to explain what we have done with the supplier.
EH: We tend to run trials with customers and the suppliers. That is invaluable in identifying things such as faulty zips. That might sound like a minor issue, but it has major implications in a real-life emergency where the zip was sticking or fasteners weren’t working and that type of thing.
SB: Is that with the end users and the suppliers?
EH: Yes, they bring in their products and we will undertake trials to see whether things work in that simulated environment. They are absolutely invaluable.
GA: It always shocks me when you’re in a new car or a hire car, and within 10 minutes you can pick up the five things that are really annoying about them. In the old days, and I guess it is true of CDs too, there would be a little slot in the console that just wasn’t quite big enough to store tapes in. And you’d think, how long would it take you to work that out? If it had been made half a centimetre wider – which wouldn’t change any design bits of the car – you could have had six tape boxes in there and other things like that. You just think, it takes nothing!
AB: As individuals ourselves, we can provide customer feedback. Procurement can be seen as more than just someone who is there to save some money. I think when purchasing people get more involved in other areas of the business they can get a lot of respect.
This debate took place in London in February, in association with BrainNet. For more CPO Agenda Executive Debates, visit www.cpoagenda.com/debates
