Industry TalkRegular Industry Development Updates, Opinions and Talking Points relating to Manufacturing, the Supply Chain and Logistics.
What 2018 taught us – how a holistic approach to supplier management can prevent organisations from repeating the same mistakes
If you had to sum up 2018 in one word, a good option would be eventful. The collapse of Carillion, supply shortages and Brexit uncertainty have dominated the headlines and impacted the way organisations operate. If the last 12 months have shown us anything, it’s that the consequences of inadequate supplier management can be disastrous. As part of any new year’s resolutions, organisations must ensure they reflect on 2018 and think about the major learnings they can apply to their supplier management practices in 2019.
- Cut-price procurement costs Carillion dear
The downfall of Carillion demonstrated what happens when supplier management goes wrong, with overdependence and ineffective monitoring of a key strategic supplier. Poor government procurement resulted in payment delays, risky contracts being awarded, and unprofitable outcomes, but a cost focus also put pressure on margins. Carillion was under constant pressure to drive the price down, to help public sector organisations deliver infrastructure projects and public services.
The failing highlighted the dangers of a cost-dominated approach to procurement, but also the risks for organisations that excessively concentrate work with very few, strategic suppliers. It’s time to move away from this cost-focussed approach, especially in an era when organisations are more reliant upon their suppliers than ever before to help deliver goods and services.
Focusing on cost introduces financial pressure and increases risk. Organisations must be much more holistic when it comes to procurement and should put in place a structured supplier performance process that regularly assesses and monitors supplier performance and health.
- Supply shortages ruffle feathers
In February 2018, KFC closed more than half of its 900 UK outlets after the failed handover of their logistics contract from Bidvest to DHL caused problems with their delivery network. Subsequently, KFC ran out of chicken and suffered a loss of up to £1 million per day. Fast forward five months and we saw another major supply chain issue. This time, CO2 was in short supply after a number of UK and European production facilities closed for maintenance, putting pressure on beer and fizzy drink supplies during a busy summer for England at the World Cup.
Supply shortages can be highly damaging to both revenues and reputation but are largely preventable, with both these events caused by a lack of planning. The CO2 production facilities had been taken offline for planned maintenance, suggesting nobody was prepared for the likely ramifications. KFC eventually switched back to Bidvest, but the problems could have been avoided if they had evaluated whether DHL could deliver from day one, with delays at the Rugby distribution facility the major bottleneck.
These types of shortages can be mitigated against in the future if organisations have a 360-degree view of suppliers and the risk factors likely to affect them. This entails internal feedback on suppliers, 3rd party information and closer collaboration with suppliers themselves. Such a holistic approach enables complete visibility of supply chains, which will help with contingency planning and risk management.
- Brexit gave way to uncertainty
With three months left to go before Brexit, the exact effect on the supply chain is still virtually unknown, making preparations for the eventual outcome challenging. Throughout the year the likelihood of securing a deal has varied wildly. Despite securing a deal with the European Union and the prime minister surviving votes of no confidence, we’re still no clearer on what will happen come the 29th March due to major divisions in parliament.
The uncertainty has increased the likelihood of a no-deal Brexit, something the government has been urging organisations throughout 2018 to prepare for. A no-deal Brexit outcome will result in new regulations, new tariffs and new processes, with limited time to adjust to them. This means organisations must ensure they have assessed their supply chains to establish how this affects operations and develop contingency plans. Organisations need to know where bottlenecks will appear, what new tariffs will be applied, the implications on margins and new customs checks. These questions need to be answered today because the landscape will quite literally change overnight.
Become smarter to see the whole
These issues might have been making the headlines in 2018, but with them come lessons for organisations on how to avoid falling into similar traps in the new year.
Supply shortages may still happen, suppliers may face financial peril, and if the news is anything to go by, we won’t be escaping Brexit anytime soon. The recurring theme is the need for a holistic overview of suppliers and the supply chain and the agility to adjust to a rapidly changing environment. This need makes it clear that the role of procurement will continue its rise in importance in 2019. The historical focus on procurement as a cost cutting and compliance tool will continue to fade.
With the addition of smart procurement technology, this role can become even larger, giving much needed 360-degree visibility into suppliers. Organisations then have the ability to regularly assess supplier performance and health, monitor for risk factors and develop robust contingency plans. As is normally the case with challenges and failure, the problems experienced in 2018 bear important lessons for the future. Organizations that heed those lessons will find 2019 much easier to navigate and may even turn tomorrow’s challenges to their competitive advantage.