Sustainability is key

If any suppliers needed more evidence of the importance of sustainability in the sourcing decisions of huge consumer goods companies, they certainly got it in spades over the last several weeks.

General Mills’ executive vice president of supply chain operations John Church announced a new corporate climate policy to track and reduce GHG emissions as part of its commitment to environmental stewardship and sustainable agriculture. In his blog post, he said this new policy requires key ingredient suppliers to demonstrate environment, social and economic improvements in their supply chains.

Shortly afterwards, Coca-Cola increased its investments in Africa to support, among other activities, key sustainability initiatives and programs there. The company also signed a letter of intent to launch Source Africa, an initiative to secure more consistent, sustainable local ingredient sourcing for its products, in partnership with the New Alliance for Food Security and Nutrition and Grow Africa.

On the heels of Coca-Cola, Tata Global Beverages announced their plans for 100% sustainable sourcing by 2020. A major focus of its sustainable sourcing strategy is sustainable agricultural practices, including reducing the use of Plant Protection Products in the tea industry.

Suppliers, take note.

The cost of being a bad customer

If John Henke’s calculations are accurate, General Motors could boost its operating income by $400 million per year just by improving its relationships with its suppliers. For Ford the number is $327 million, and Chrysler, $308 million.

We are not alone in claiming that suppliers don’t give their best stuff to their worst customers, but Henke, who is a Ph.D. and president and CEO of Planning Perspectives, Inc. has finally projected a dollar cost for bad relationships. He’s been studying supplier relationships and cost concessions within the automotive industry for many years, and he developed an index to measure it.

For the first time ever, however, Henke used proprietary data his firm has collected, public records, and media reports to calculate the costs when suppliers do such things as shift their innovations, A-Team support, or added value service to other customers. Foreign automakers have been able to take advantage of those shifts and have saved significantly over time as a result, according to Henke.

You might quibble with Henke’s formula, but the conclusion is pretty solid for any manufacturer in any sector. Beating up suppliers on price is a short-term tactic, not a long-term strategy for profitability. Are the Big Three listening? Here’s an Automotive News video report with Ford’s chief purchaser sounding like he’s read the study and is trying to catch up, while Toyota’s purchasing chief is taking steps to shore up his declining supplier scores.

 

White House endorses quicker supplier payments

One of the maxims of this blog is, “Suppliers don’t offer their best ideas to their worst customers,” and one of the quickest routes to the category of “worst customer” is stretching out payments to 60, 90 or  120 days — as has been fashionable in the automotive and other industries. We generally applaud the idea of thinking like a CFO when you are a supply manager, but too often the finance-department led idea of pushing the cost of money onto suppliers by delaying payments results in tighter margins for the supply base that stifle reinvestment in equipment or research and development.

Apparently President Obama has come around to our thinking on the topic because he recently endorsed an organization of companies that have pledged to pay suppliers quickly, or help them find lower cost working capital.

In the White House announcement, the Administration claims its QuickPay program of paying small government contractors quickly has saved them $1 billion since 2011. The private business version of the program, called SupplierPay is an opportunity not just to save money, but to create better relationships that foster innovation.

 

How do you manage risk?

A recently released Accenture study, “Don’t Play it Safe When it Comes to Supply Chain Risk Management,” shows the wide range of approaches companies take when it comes to managing their supply chain risk.

Unfortunately, only slightly more than one quarter of the companies surveyed are taking the most important tack, developing a “playbook” or plan that various parts of the organization can implement immediately when a crisis strikes.

It’s well and good to identify alternative suppliers that can step in when needed.  And it’s critical to monitor all of your suppliers (not just Tier 1) on an ongoing basis for troubling trends and potential risks.  Building in excess capacity in the event of high volatility is important, too.

But if you don’t have that plan or playbook everyone can follow, you risk having everyone react “one off” and potentially exacerbate the crisis.

On Wednesday, July 16, ISM will host its Risk Management Summit in New York City.  It’s an opportunity to learn how to identify and oversee critical risks, and learn the key measurements you need to effectively communicate and implement a risk strategy.  For more information, visit ISM Conferences for 2014.

 

Thoughts on the Chinese economy

The Chinese version of the ISM PMI® has ticked up from negative to positive territory, according to reports such as this one on Bloomberg.com.

A preliminary June Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 50.8, up from 49.4 in May. An index above 50 signifies expectations of growth, and Chinese leaders are giving themselves credit for stimulating the economy without resorting to drastic measures.

A survey of analysts by Reuters came to a similar conclusion about the growth of the Chinese economy. More reporting of a stronger Chinese economy comes from the South China Morning Post.

We do a significant amount of work in China and the business environment there is unique, but it has matured since the days when U.S. automakers, for instance, were almost demanding that suppliers source from there. Large Chinese companies are not just focused on exports, but meeting growing domestic demand. They are adapting more sophisticated sourcing strategies of their own, and even investing in manufacturing plants in the United States, as described in this article in The Detroit News.

The strength of China’s economy and the rapid change in sophisticated sourcing is evident in  increasing  demand for development programs, certification programs and alignment with key universities in China.

The maturation of Chinese companies does tend to reduce their cost-competitiveness, but it also introduces elements of stability that mitigate some risks from sourcing at a great distance. Economic indicators that show slow, steady growth are also good signs of stability.

 

Move over Big Three

A seismic shift may be coming in the automotive industry.

“Not even two years after the delivery of the first Model S, Tesla Motors has transformed from fledgling start-up to arguably the most important car company in the world.  We are not joking,” said Morgan Stanley analyst Adam Jonas in a quote to the LA Times.

According to the article, suppliers who once dismissed this manufacturer are now considering building dedicated lines and facilities solely for Tesla’s business.

At least four southwestern states are vying mightily to become the home of Tesla’s $5 billion gigafactory which will employ more than 6,000 people to produce enough battery packs by 2020 to supply 500,000 vehicles.

But suppliers and states aren’t the only ones to sit up and take notice. One of the largest automakers in the world, General Motors, established an internal “Team Tesla” to analyze that company’s culture and success. Managing and collaborating with suppliers is one key to success.

Dare we say the current may be shifting toward electric cars?

Learn to keep your skills current

People, keep on learning is the crux of this research study “Keep Learning Once You Hit the C-Suite” in the Harvard Business Review blog.

While it’s aimed at those in the C-Suite or those who aspire to it, the results are valuable to everyone who cares about his or her career.  Who among us wouldn’t benefit from being more flexible, adaptable and curious?  A better team player?  Or from updating our communications skills and learning to interact through social media?  The study talks about the value of mentors, and not just those who’ve achieved long, successful careers.  How about a “reverse mentor,” someone younger who can help change old habits and outdated ways of thinking?

The study cites the importance of looking for opportunities to get out of comfort zones.  And, to ask for feedback from your team, peers and bosses on how to be better at work.  Always keep developing your skills, a self assessment like ADR’s DNA is a good start.  I have the view that learning never stops and I can always learn more.

Whether you’re headed to the top, or happy in the niche you’re in, it’s all good advice.