by Joe Sandor and Gary Ragatz
Global economic conditions have left many CPOs thinking about how they might manage through a downturn. Economic downturns are often accompanied by large build-ups in inventories and businesses cutting back on production and material orders. This phenomenon ripples through the supply chain and may have an amplified impact on suppliers.
A business downturn creates serious challenges for a CPO. The good news is that in every challenge there is an opportunity to turn it into an advantage. Tough times may be a good point to break the cycle of price negotiations that teeter between buyer and seller markets. Leading-edge firms are waking up to the fact that superior performance requires preferential treatment from both customers and suppliers.
Downturns are unavoidable and often unpredictable. When they happen, smart businesses are prepared to take defensive measures that will limit the short-term damage. But the smartest businesses will also find ways to turn the challenge of a downturn into a long-term advantage by building stronger supplier relationships.
The following measures should help businesses to cut costs and build a foundation for lasting competitive advantage:
1. Examine supplier finances
A general economic downturn may put some of your suppliers at risk of financial problems. A review of the financial condition of all key suppliers is in order, along with closer monitoring of the financial status of these suppliers through the downturn.
2. Review volume commitments
A downturn in your business will reduce your requirements for parts and materials. Review your volume commitments to suppliers under longer-term agreements – especially take-or-pay type agreements – and be proactive in discussing changing requirements with suppliers.
3. Keep an eye on inventory
Business downturns are often accompanied by significant build-up (and subsequent write-offs) of inventories. This is a time to review materials-planning policies and increase vigilance of inventory levels.
4. Simplify specifications
Launch what Theresa Metty, former Motorola CPO and ISM chair, calls “a war on complexity”. Engage your suppliers in a network-wide search for lower-cost alternatives to your current design. Look to eliminate unnecessary SKUs: do you really need so many different widgets and so many unique components? Can you postpone your final product configuration? Can suppliers provide modular component assemblies instead of parts? Share the benefits of the savings from simplification.
5. Cut process waste
Use your own and your suppliers’ excess capacity to experiment. Find and exploit opportunities not only to reduce SKUs but also to reduce process waste. Like the war on complexity, focus shifts to eliminating rather than moving costs. Get top-to-top discussions with critical suppliers going to share risks and rewards, along with initiating joint business plans to manage in the downturn as well as to prepare for the next growth phase.
6. Reduce exposure
Build the foundation for preferential treatment. Working with suppliers to mitigate risks and insulate against negative financial results of reduced overall demand helps everyone. Valuable lessons are learned when joint efforts are applied to align objectives, enhance cost-modelling and improve information-sharing.
7. Collaborate with suppliers
Sharpen the saw together with your suppliers. Build a “slush fund” for joint training and development in such areas as lean processes, statistical data analysis, common systems and aligned metrics. Work together on cost targets, warranty claim reduction and continuous improvement activities. Find areas of redundancy that can be eliminated. Co-locate personnel to leverage knowledge and develop closer rapport. Celebrate successes.
8. Retain key personnel
Convince your and your key suppliers’ senior managers to “stay the course”. Demonstrate the value from closer linkage between key supply stakeholders.
Joe Sandor (sandor@msu.edu) is a former CPO of Sara Lee and the Hoagland-Metzler professor of practice in supply management at the Eli Broad School of Business, Michigan State University, in the US, where Gary Ragatz is associate professor of supply chain management
