Reality has settled in for companies with growth ambitions. The days of getting the occasional lift from outside forces such as market appreciation or a timely acquisition are fading, and companies are casting wider nets in their search for new growth routes.
Some are even going the overseas route and migrating operations to low-cost countries such as China or Mexico to streamline costs. But this does not have to be the solution, especially with new or increased tariffs on the horizon. Many companies, particularly across the consumer products space, are creating their own tailwinds internally by transforming core operations and processes in ways that increase productivity, lower costs, and drive profitability. One area of opportunity lies in supplier management, specifically the level of engagement and focus firms are giving to this network of key relationships.
Every supplier is an investment in your success
Just as investment managers actively manage their holdings, it behooves manufacturers to be highly engaged in managing their supplier portfolios. Continuous monitoring provides better visibility and allows for more nimbleness to make real-time adjustments that can mitigate risk, ensure alignment with partners, and strengthen competitive positions. Firms have shored up their supplier oversight in recent years with all the tumult – but the process highlighted here needs to be an entrenched business routine, and not just a one-and-done annual review subject. A passive approach to managing suppliers only invites trouble due to the rapid pace of change.
Framework for active management
The first step in mining this opportunity is performing a current-state analysis to better understand strengths and weaknesses. Two-way communication is a baseline requirement for building stronger, long-term relationships with suppliers. Are you interacting with them regularly to share feedback and ideas for improvement? How often do you analyze their performance and what are your KPIs? Are you properly diversified? Do you have multiple backup plans in place?
The list of areas to self-examine will be unique to each company but there are certain behaviors and best practices that should form the backbone of an effective supplier management strategy. Here are five key components:
- Analysis and selection
The evaluation process you use to vet suppliers should be rigorous and aligned with your values, standards, and long-term objectives. Performing diligence on financials, technology utilization, and track records is important and should not be overlooked. One strategy that can work for both parties is to arrange a trial through which a vendor works on specific projects to gauge reliability before making a commitment. - Risk assessment and management
The companies that do this best can minimize their risk exposure by closely monitoring issues that may affect suppliers, including geopolitical turmoil, economic swings, and bottlenecks in their own supply chains. Diversification is a fundamental tenet of good supplier management and helps avoid being overly reliant on a single source. Last, having backup plans in place and alternative options for materials is also an important aspect of risk management. - Auditing and benchmarking
Periodic reviews to discuss performance, challenges, and opportunities for improvement from both sides are invaluable. Establishing KPIs to track performance metrics such as on-time delivery, quality rates, and responsiveness helps instill accountability and a stronger sense of teamwork. Some companies develop custom supplier scorecards as a mechanism for assessing and benchmarking performance. Regular audits are also required to ensure suppliers are following regulatory requirements, ethical practices, and sustainability standards. - Technology utilization
The growth landscape is challenging, but the abundance of technologies that can help facilitate better supplier management can help fill the void if harnessed and used correctly. From supplier relationship management (SRM) tools to automation to AI, knowing where and how to use technology continues to be a competitive differentiator, and can deliver significant value. - Relationship building
Building long-term, collaborative partnerships with your best suppliers is the goal, and this mindset needs to be always churning. Strategies that can build stronger ties include establishing communication channels for frequent updates and feedback, and involving suppliers in strategic planning, product development, and process improvement planning.
The Fruits of Labor
A more hands-on approach to managing suppliers also gives companies better vision, allowing them to anticipate and address major disruptions like financial instability, natural disasters, or geopolitical events before they can cause real damage. But it does much more than that – here are four key benefits companies can realize by managing their supplier portfolios more strategically.
- Minimized risk exposure
When companies assess their top risks, supplier networks are typically near the top of the list due to the sheer number of variables in play, be it unforeseen quality problems, compliance violations, or cybersecurity issues. Constant monitoring also provides a close-up view into the supplier’s regulatory, environmental, and labor practices and standards. - Cost savings and optimization
Strong supplier relationships can often lead to better pricing, volume discounts, and more favorable contractual terms. Also, identifying any inefficiencies and opportunities to cut costs – such as consolidating suppliers or using more local sources – can help reduce procurement and logistical expenses. - Improved quality and performance
Managing suppliers more efficiently leads to improved quality and performance throughout the entire chain. Stronger relationships, for example, can help ensure consistently high-quality raw materials or components, which cuts back on defects and improves customer satisfaction. - Meeting sustainability goals
Manufacturers still face pressure to do their diligence and to partner with suppliers that are environmentally and socially responsible. Another benefit of managing suppliers more intentionally is that it allows companies to enforce sustainability standards, monitor compliance, and align with ESG objectives.
Case Studies
Every company stands to benefit from better supplier management, and we have dedicated ample space to sharing the whys and how’s. But we also know that real-world examples best truly drive the point home. Here are the brief stories of three consumer products companies, one of which we worked with closely, that made strategic changes to their supplier management approaches and realized strong gains as a result.
- Mattel: By closing its less-productive factories, outsourcing elements of production, and streamlining operations at specific sites, the toymaker produced and released “Barbie” movie merchandise on a faster track. In the process, Mattel improved its gross margins despite experiencing a fall-off in total sales.
- Reckitt Benckiser Group: The U.K.-based health company invested in a new plant in North Carolina that has significantly enhanced its U.S. manufacturing footprint. By shifting production from Mexico and the U.K. to the new plant, Reckitt reduced the time needed to get products to market by several weeks, providing greater flexibility and responsiveness to changes in demand.
- Sealy: The global mattress manufacturer was strongly considering moving operations to China for better cost control. TBM worked closely with Sealy to apply lean management techniques to its supplier process. After making strategic adjustments, the company was able to avoid migrating to lower cost Asian regions and exceeded its original goals, achieving lead times of 48 to 72 hours compared to 8 to 10 weeks for top competitors. Sealy also reduced inventory by 62% and working capital by $1.5 million.
Kickstarting the process
Taking the reins on your supplier management process is a powerful strategy that can deliver multiple benefits – including better risk management, cost optimization, quality, resilience, and enhanced performance and innovation. The biggest challenge for most is taking the first step, which can be just auditing a single supplier or focusing on one best practice to integrate. Once you start, we are confident that you will like what you see.
