Monday, 28 October 2013

Supply chain management

A recent post on this blog looked at how lessons analysis can help organisations identify some of the high-impact issues affecting their performance.  Last week we examined ‘contracts and incentive mechanisms’ and discussed how some companies suffer unintended consequences from their contractual arrangements with suppliers.

We now turn to the related issue of supply chain management.
What is the problem? 

Problems relating to supply chain management appear at opposite ends of the same spectrum: at one end are those companies with complete freedom to choose any supplier for any service or product; at the other end are those companies that have chosen to restrict their choices to a handful of suppliers.
At both ends of this spectrum, companies have encountered problems, forcing them to consider a different approach.  Despite the positions being exact opposites, the issue is the same; namely, that a blanket, one-size-fits-all approach does not work for every kind of operation, project or commercial undertaking.

How does it manifest itself?
The ‘free’ companies have to deal with many different points of contact, order/billing/payment processes and currencies, whilst the ‘restricted’ companies have limited choice and their chosen supplier may become a single point of failure if they are unable to meet their client’s requirements.

Other issues include perceived intransigence on the part of a ‘preferred’ supplier and an insistence that the terms contained in the ‘Master Service Agreement’ are applied at all times, regardless of relevance to changed circumstances.
Examples from the news include:

·       The British Army fitted its bases in Afghanistan with air conditioning (ac) under a contract derived from one in the UK. Under the contract’s terms, broken ac units had to be repaired or replaced within 30 days – a reasonable clause in the UK’s moderate climate, less appropriate for the 50 degrees heat of the Helmand desert.

·    Another military example: the UK Ministry of Defence (MOD) was revealed to have paid £22 for light bulbs that could be bought for just £0.65 each; screws that sold for £2.61 were purchased by the MOD for £103.
What is its impact?

The ‘free’ companies incur greater costs through having to manage a large number of interfaces and, whilst their flexibility means they are able to switch supply to exploit market conditions, they are unlikely to enjoy the discounts that the ‘restricted’ companies are likely to have negotiated in return for restricting themselves to a limited supply.
Conversely, the benefit of the ‘restricted’ companies reduced interfaces may not be sufficient to off-set the risk inherent in a limited supply (i.e. a supplier unable to fulfil its client’s requirements on time or, in the worst case, going out of business and ‘leaving them in the lurch’).

What recommendations are made to address it?
Companies that have identified these problems often implement the same solution, regardless of the bracket into which they fall; namely, they conduct a review of their supply strategy to identify where more choice is needed and where the benefits of fewer suppliers are warranted.  This may vary according to the maturity of the market for each product or service. 

Another course of action has been for client companies to seek to develop close and collaborative relationships with suppliers, in order to maximise their understanding of the client’s requirements and minimise excessive restrictions.

For more information on how lessons capture sessions and analysis can help identify the big issues faced by companies today, please visit the Knoco website.

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