Want to shorten your supply chain? Rather than cutting large numbers of suppliers as some are doing, take the long, collaborative and strategic route.
Whoever coined the phrase “strength in numbers” probably did not have recession-era supply chains in mind. As manufacturers regroup for economic recovery, many are drastically thinning their supplier ranks in an effort to cut costs, risks, and complexity.
Japanese consumer electronics giant Sony Corp. served up a stunning example in May, when it announced that it would cut more than half of its 2,500 suppliers out of the picture. Also, in the spring, German industrial conglomerate Siemens said it would eliminate 20% from its supplier base, which stands at more than 100,000 companies and a staggering 370,000 locations, to help it improve on a supply process that purchases about €42 billion worth of goods a year.
But is sheer numbers reduction the answer to achieving better operational efficiency, cutting costs, minimizing inventory, mitigating risk, and all the other attributes of the hypothetical frictionless supply chain?
The answer from manufacturing gurus is a resounding no. “I would wish them well,” Deloitte Consulting’s Doug Standley wryly says of any manufacturer that wantonly takes the knife to its supplier list. “I would say that’s a tactical move, not a strategic one.” In fact, says Standley, a principal in Deloitte’s Technology Innovation Strategy practice, shrinking is not necessarily the right prescription at all. “Shrink the supply chain? Maybe, but not just on a reactive level. Rather than merely shrinking the number of suppliers, people should think about better collective intelligence.”
Collective intelligence — there’s an apt phrase for the modern information age. It evinces two aspects that progressive supply chains must have: connectivity and collaboration.
Collaboration, in the broadest sense, means that manufacturers and their suppliers must work together in a way that values strategic gains over mere pricing considerations, Standley says. And from a pure connectivity standpoint, Deloitte estimates that the global economy has 35 billion of what Standley calls “high-value connectable assets” — goods and information in one place that would benefit another location or group within a supply chain. “Don’t just think of your supply chain as a transaction, but as a collective intelligence network,” he says.
Those who do this well will succeed. Every year, market research firm AMR Research ranks the world’s top 25 supply chain operations. And every year, those 25 companies’ stock prices outperform the companies in both the Dow Jones Industrial Average and S&P 500 indices, regardless of general economic trends. In the down economy from the end of May 2008 through May 2009, the AMR Top 25 companies’ stocks declined 29.1%, besting DJIA companies, which fell 33.8% and S&P 500 companies, which tumbled 38.5%. In the prior year’s more buoyant economy, AMR’s Top 25 rose 17.9%, compared with increases of 6.4% and 3.5% for DJIA and S&P 500 companies, respectively. AMR’s supply chain leaders this year are Apple, Dell, Procter & Gamble, Cisco, IBM, and Nokia, and the research firm expects them to lead the Top 25 to another outperforming year.
A chief feature that distinguishes the AMR Top 25: “They are further along in becoming demand-driven,” says AMR Vice President Debra Hofman. In other words, they are better than others at making things that the market wants, which marks a shift from the traditional supply-driven approach in which manufacturers build to a plan that’s not necessarily in line with the market. The demand-driven approach cuts down on inventory, unnecessary shipments, and inefficient ordering of parts.
“It sounds like a simple shift, but it’s a very profound shift,” Hofman says.
The Road to Collective Intelligence
