Archive: June, 2015

Marriage of convenience

Supplier relationship management is becoming an increasingly important part of the service offered by procurement. Globalisation continues to produce longer, more complicated and riskier, supply chains. Procurement is seeking new opportunities to drive additional value.

Most procurement functions actively manage their top suppliers based on spend. The more mature functions evaluate risk and manage those suppliers that are both high spend and high risk. One of the biggest challenges to calculating risk in long and complex supply chains is knowing which suppliers are critical. This is getting increasing difficult as more suppliers collaborate.

There is nothing new about businesses collaborating, however, their is increasing pressure to form joint ventures or looser alliances despite the inherent risks. An article last month in the Economist called Managing Partners outlined the pressures which include the increasing cost of developing new technology, greater cross-sector and cross border opportunities and greater expectations from consumers.

Car manufacturers have a long tradition of collaboration in the areas of technology and manufacturing. The cost of some new technologies, however, is so high that even the largest companies cannot bear it alone. Toyota, the world’s largest carmaker, is working with BMW, one of its main competitors, on fuel-cell technology. A similar trend can be seen in telecoms with Apple and Samsung. Apple’s main supplier of microchips for its iPhones is Samsung, its main rival in the smartphone business.

Companies from different sectors are forming seemingly unlike partnerships which is putting pressure on their rivals. Allianz, a German insurer, has teamed up with Google to create an “accelerator” centre in Munich, to foster start-ups that are seeking to use data analysis to improve the insurance market. Mobile-telecoms operators and financial institutions are collaborating to offer mobile payments.

The tide is changing between rich countries and emerging economies. Procurement has led many of the initiatives to outsource to low cost countries. Now, however, it is as likely to be an emerging-market firm seeking a Western partner to help it go global. Dr Reddy’s Laboratories, an Indian pharmaceutical company, and Merck KGaA, a German one, are working together on cheaper versions of cancer therapies that are losing their patent protection.

The fourth pressure comes from consumers. Most department stores and supermarkets have offered concessions to niche providers as part of their proposition to consumers.  As more people move to shopping online, owners of physical shops are having to find new ways to get customers to visit them. H&M, a fashion firm, invites consumers to free space in their wardrobes by bringing their old clothes to its shops and receiving a discount on new ones. To do this it works with I:CO, a logistics firm, which sends some of the used clothing to the second-hand market and the rest to be recycled.

By understanding the pressures that suppliers face, procurement professional will develop better predictive indicators that provide insights into the risks. In the future, we will find that the risks arise not only from our supplier but also from their arch rival or one that doesn’t even compete in their market.