Category Archives: Supplier Management

Dilemma or Not, Buyers Still Must Take Ethics into Account

In a recent post over on Spend Matters UK, Andrew Cox asked whether “aggressive buyers are stupid or guilty of segmentation errors”. In this post, the author chimed into the debate over supplier bullying, initiated by Peter Smith over the continued extension of unreasonable payment terms by 2 Sisters and Sainsbury’s, continuing the unsavoury Tesco tradition. According to Mr. Cox, food companies should not be condemned as ‘unethical’ just for extending payment terms as ethical standards are a contested concept.

While I agree that what is unethical for some is just fine for others, as per the example provided in the post, one would think that there are some positions that just about everyone with a conscious could agree upon, just like the vast majority of people in modern society believe that murder is wrong. In the debate, Peter Smith is condemning the act of a supplier unnecessarily extending payment times to the point where a company could risk bankruptcy. I would hope that this would be a situation that most people could agree is simply not ethical.

But this is not the only time when ethics should be taken into account. Ethics should also be taken into account when choosing a supplier. When choosing a supplier, fair labour standards should be considered. Now, while what is fair is always a subject of debate, it should not be a subject of debate that a fair supplier

  • follows all health, safety, and minimum wage standards of the country or countries they operate in
  • if there are no such standards, the supplier does not unnecessarily expose its workers to risk, does not maintain conditions that threaten its workers’ health, and/or does not pay its workers less than a living wage in the country that is being sourced from (as defined by the World Economic Forum, etc.)
  • does not unnecessarily harm the environment

And while it might be difficult if there are no standards to determine that conditions are sufficiently healthy or safe, that the wages paid are suitable, or that the supply is not unnecessarily harming the environment, there are points when it becomes obvious. Just like delaying supplier payments 180 days or more is ridiculous, so is choosing a supplier that houses its workers in buildings that should be condemned (which are doomed to collapse like Rana Plaza), that allows workers into a mine without adequate safety gear, that uses wide-spread clear-cutting that will clearly harm the local environment, or that pays its workers so little that they can’t afford to keep a roof over their head and eat. If we can’t agree that if the majority of the population, and in particular, the majority of the population that defines our customer base, would consider the supplier and its practices unethical that we should too, then do we even deserve to call ourselves professionals? Every professional organization worth it’s salt has a code of conduct, and most of these have an ethics clause that say we will adhere to the ethics of the industry we work in and the society we live in. If the majority of society condemns an action or a state of affairs, and, in the country we operate or sell in has laws that condemn an action or a state of affairs, how can we claim there is any debate whatsoever from an ethical perspective in regards to a supplier that takes that action or maintains that state of affairs?

Geopolitical Damnation #31: China and the New Silk Road

China is arguably, and simultaneously, the world’s oldest culture and the world’s newest mega-economy and super-power. Not only does China have the 2nd largest GDP in the world, but it is one of only 4 countries that are net international creditors (the other three being Norway, Luxumbourg, and Switzerland). In comparison, the US, with the largest GDP (of slightly less than 18 Trillion), has an external debt that is roughly 18 Trillion. (In other words, it’s debt now exceeds its annual GDP!)

It’s also the world’s most populous country with 1.35 Billion people and the second largest country by land area. It has the world’s third longest river, 14,500 kilometers (or 9,000 miles) of coast lines, approximately 130 ports open to foreign ships, over 11,000 kilometers (or 6,800 miles) of rail, and over 180 commercial airports. It’s rail network and ships transport a significant percentage of the world’s global trade and traffic is still increasing annually.

China is no longer the emerging economy of the 80s and 90s that you outsourced to and imported from — now it is the emergent economy that is outsourcing to Brazil (to serve the North American Market, consider Foxconn) and Africa (to serve the European market). And, for most multi-nationals, it’s their newest, and most promising (and potentially most profitable) market. China already has over 220 billionaires, and this number increases annually. (The US has 442.)

And as a result, China is turning the traditional sourcing world topsy-turvy — especially now that the New Silk Road (China’s Grand Strategy has been operational for eight weeks. (Source: UNZ) As described in the UNZ article, and on SI last fall (in What Impact Will The New Silk Road Have on Global Trade?, for e.g.), this 13,000 km railroad that crosses China from East to West and then Kazakhstan, Russia, Belarus, Poland, Germany, France, and finally Spain enables trade across most of Eurasia. And when the high-speed rail is complete, transport from China to Europe will take even less time than it does now. And China, which is home to 7 of the world’s top 10 container ports and which serves up air cargo that represents more than one-third of global trade value (even though only 1% by weight), will control even more of global trade then it does now! While also being your biggest customer.

You can’t deal with China in the old way anymore. Gone are the days when they were the low cost provider that needed your business. Gone are the days when you could fall back on Mexico. And gone are the days when you never needed to worry about the China market. Now they are a lower cost provider, due to their increases in efficiency (just like Japan increased in efficiency after WWII), but they don’t need your business. They have money and they have the world to sell you. Because Mexico was almost abandoned for China, there are few factories left that can produce modern electronics and none that can produce the volume to equal a Foxconn. And with most markets stagnant, China is one of your few opportunities for growth. Moreover, the supplier you are negotiating with to produce your cell phones for Engineering might be the same supplier your sales team is negotiating with to buy IT’s new mobile factory management software suite.

In other words, when China is across the table, they are not a vendor or supplier that can be beaten down with old-school hard-ball negotiation (even if they historically put melamine in the milk, lead in the paint, and who knows what in the pet food) — they are a partner, and equal, and must be approached as such. Even if you never sell to them, you might sell to one of their partners, and they talk just like we do. This doesn’t mean that you shouldn’t be determined in your negotiations — as you should always fight for the best deal — but be fair, realistic, and base your demands on fact and should-cost models, not empty threats or baseless demands for unreasonable cost reductions.

China is about to become your upstream as well as your downstream supply chain. You have to abandon your old view of the world, accept this reality, and start preparing for it. It doesn’t have to be the damnation that causes your undoing. It can be your salvation. Your choice.

Procurement Trend #07. Supplier Pre-Payment

Four anti-trends remain. We can count them on one-hand’s worth of fingers, but like LOLCat, we feel more compelled to provide examples of how far beyond retro the futurists really are when they provide us examples of trends that anyone who bothered to poke their head over their cubicle wall thirty years ago (or outside the yurt three thousand years ago) would have noticed. However, we’ll leave their bitter humiliation for LOLCat, who is obviously received very little enjoyment from this series, but still found the time to point out how LOLCats have been sustainable at least since the first corrugated cardboard box was created and instead focus on dispelling the myths the futurists continue to propagate.

So why do these Rip van Winkles keep pushing upon us trends from yesteryear? Besides the fact that some of them obviously spent the best part of last decade napping, probably because they look around, see the laggard organizations still caught in the muck, and assume they can still sell last decade’s leftover snake oil in today’s marketplace. Why do they think Supplier Prepayment is today’s cure?

  • suppliers in emerging and even recently emerged countries may not have easy access to short-term financing
    which may mean that payday loans or family* loans may be required and as a result
  • interest rates vary and suppliers’ interest rates may be much higher than yours
    and costing the supplier, and thus you, 3% or 4% a month, not per annum
  • early payment can be the difference between blood red and black
    because with 36% APR loans, they double every 24 months a borrower doesn’t make a payment

So what does this mean?

Know the True Cost of DPO

How much is 30 day, 60 day, 90 day and 180 day DPO, from the time the supplier starts producing your order, really costing the supplier and, hence, since that costs needs to be built into their price, costing you?

Know the True Return on DPO extension

If the only reason to extend DPO is to get 2% annual interest in a short-term cash deposit, and this extension of DPO costs your supplier 24% annual interest, are you really making money off of this? If, however, you have the 1 in 100,000 situation where paying on time requires a loan from your bank at 12% and your supplier is on-shore, being government funded, and getting development capital at 6%, then in this case it actually makes sense to extend DPO until you are in a better position as it only increase the supply chain cost 6% instead of 12%. But this is probably a 1 in 100,000 situation.

Know what alternative investments net

Decreasing DPO might decrease supply chain cost, but if that investment requires smaller LTL (Less Than Truckload) orders and faster inventory turnover, this could cost more in the long run as FTL (Full TruckLoad) is cheaper and stock-outs cost revenue. Throw all the numbers, good and bad, into an optimization model and figure out what the best choice really is. Sometimes it will be early payment, or even pre-payment, of the supply base, and sometimes it won’t.

* Not their family, the family, capiche?

Procurement Trend #16. Stronger Supplier Relationships

Thirteen anti-trends from those crazy eighties (or earlier) still remain, and as much as we’d like to provide some entertainment that hasn’t been rebooted and re-rebooted to LOLCat who is bored with our continuing anti-trend coverage, we must continue to play Sam Sheepdog and make sure that no Ralph E. Wolfe in sheep’s clothing goes undetected or unrewarded for his effort.

So why do so many historians keep pegging stronger supplier relationships as a future trend? Besides the fact that they are likely still struggling to pronounce col-lab-o-ra-tion (which is a undoubtably a new word for them), it is probably because even the Businessman knows that:

  • delivery dates can make or break a product release and a company

    as a late launch can allow your competition to launch first and secure a substantial amount of marketshare that your company may never get back

  • knowledge work needs to be done with knowledge

    and you can’t fake it by throwing more warm bodies at it

  • supplier failures can often be prevented, but only with foresight

    once a supplier’s doors have been closed, it’s too late to reconsider that 180 day net-terms policy

So what does this mean?

Delivery Dates

Product Lifecycle Management (PLM) is key. In order to make sure everything stays on schedule, Supply Management has to monitor, or manage as the case may be, the design, the supplier selection, prototype production, full production, transportation, and the delivery schedule. Any delay anywhere in the process that goes uncaught and uncorrected in a timely fashion will result in a missed delivery date.

Knowledge Work

As per our many previous posts, including our posts on inter-departmental collaboration, more stakeholder collaboration, and talent, we’re in a knowledge economy and supply management is knowledge work. Implement a good Knowledge Lifecycle Management solution, get training, collect knowledge from your employees, partners, suppliers, and customers and put it to use.

Supplier Failure

Suppliers typically fail for financial reasons, and this is often something that can be foreseen. You can follow the financial risk ratings, or you can just pay close attention to what is happening. There are always cues when a supplier is in trouble. Multiple contacts disappear overnight. Late deliveries. Poor quality. And so on. Often it’s just a cash-flow problem that is easily fixed by simply paying the supplier a little earlier (which, for many companies, translates into simply paying the supplier on time) so it can cover its operating costs. When you consider that the supplier has to buy the raw materials, produce the goods, ship the goods, wait for you to get them, and then wait for the clock to start ticking on the invoice when you can often sell the goods as soon as you get them, it’s completely understandable that they can be struggling to make payroll when they have to float operations for six months or more when you, if you are selling a hot electronics item or piece of apparel, can get paid in six days or less.

Procurement Trend #22. Process Convergence into Supply Management

Nineteen anti-trends from the hinterlands still remain. As much as we’d like this series to be nearing its end so that LOLCat can come out of hiding, this delirium has to stop. We have to shine the light on all these half-truths and lies and put an end to them once and for all. We will continue until each one is laid bare in the hopes that the outback futurists crawl back into the sand caves from once they sprang and leave us alone to push forward.

So why do so many historians keep pegging process convergence into supply management as a future trend? Besides their inability to remove the blinders, there are a few reasons, but among the top three are:

  • Supply Management used to be office supplies and pushing manufacturing POs
    and the most sophisticated process was getting quotes from three office supplies vendor and selecting the lowest but
  • Now its product, services, marketing and legal
    each with their own needs, own processes, own languages, and own regulations and
  • Processes and talent haven’t kept up
    as change management and training wasn’t a priority as not much was needed when all you were doing was buying office supplies or cutting POs for a contact signed by another department

But, as we all know, it’s not that way anymore! So what does this mean for you?

Supply Management is the New Heart of the Organization
and needs to be structured and positioned as such.

All of the functions of the company are, to different degrees, becoming dependent on Supply Management. Supply Management must now be a leader in collaboration, supplier relationship management, and transition management, among other modern processes and technologies, that will be discussed in an upcoming series.

Back-Office and Front-Office are Converging

Its not just AP (Accounts Payable) merging with AR (Accounts Receivables) or Sales merging with Marketing, its the CRM (Customer Relationship Management) and SRM (Supplier Relationship Management) processes merging and Sales, Finance, and Supply Management getting an end-to-end view.

Transition Management to a new operational paradigm is required

And processes like ADKAR, as we discussed in our recent post #25 on More Stakeholder Collaboration, are going to be required. More on this in an upcoming series as well.