The world of the supply chain is undergoing radical change. A whole new approach to the business of managing relationships with suppliers is evident from global brand names to national food retailers. The traditional obsession with costs and price reduction is giving way to a far more constructive approach that shares power with and spreads benefits to smaller suppliers.
“Strategic procurement used to mean driving down costs,” says John Francis, a senior UK manager with consultants Accenture. This approach is now seen as wholly outdated by the majority of businesses Mr Francis works with. In a recent survey of 225 organisations worldwide, Accenture found those that had mastered procurement by collaborating with suppliers spent half as much on managing their supply chain as businesses that didn’t operate a collaborative model, yet saved 30 per cent more.
What this epidemic of collaboration boils down to is that large businesses are establishing partnerships with smaller suppliers and encouraging them to improve quality. US Jeans giant Levi Strauss, for example, has recently embarked on an ambitious programme to provide secure finance for many of its key vendors.
These suppliers, typically garment makers in Bangladesh, are audited by Levi Strauss on characteristics such as workplace safety. Working with the World Bank’s private sector arm, the International Finance Corporation (IFC), Levi Strauss then provides loans for factory improvements such as sprinkler systems.
The IFC steps in to offer ongoing loans to these companies at interest rates and terms that reflect the credit status of Levi Strauss, rather than the more onerous terms that would apply to small outfits in the local market. Olaf Schmidt, who runs the IFC’s global retail unit, points out that “the poorer the country, the bigger the need for supplier finance”.
The IFC is paying these suppliers as soon as they deliver goods to Levis Strauss which in turn reimburses the IFC within two months. So the suppliers get reliable cash flow while the jeans maker’s audits encourage best practice in terms of working conditions. The whole arrangement hums away within online software from GT Nexus that allows all parties to log on and see where shipments and payments stand within the supply chain.
While Levi Strauss sources its denim from around the world, many of food retailer Sainsbury’s own-brand products come from UK farmers. But the dairy farmers that supply the milk have to contend with market prices which often bear no relation to the cost of producing it. Faced with the prospect of suppliers going to the wall, Sainsbury’s decided to change its entire relationship with them.
For the past eight years it has run a scheme intended to create and protect a long-term source of quality dairy products. The supermarket chain pays vets to teach farmers how to spot and deal with common health problems among cattle. Individual farmers might not want to take on this cost. But by promoting higher standards and sending its own retained vets to visit dairy herds, Sainsbury’s sees each of the 55,000 cows in these herds produce 140 litres of milk more than the national average.
INVESTING IN THE FUTURE
Rather than pay an unpredictable market rate, Sainsbury’s has introduced a payments scheme based on cost of production plus profit. This has freed its farmers from the worry of dealing with volatile costs for animal feed, fuel and fertiliser. Judith Batchelar, director of Sainsbury’s brand, says long-term sustainability is what it’s all about. “We’ve spent £60 million over eight years on vets and other assistance to dairy farmers. It is a long-term investment. No one knows at what point we will see payback, but if you want a sustainable supply chain you have to work like this.”
What this epidemic of collaboration boils down to is that large businesses are establishing partnerships with smaller suppliers and encouraging them to improve quality
Accounting for Sustainability, a body set up by the Prince of Wales in 2004 to support resilient business models, was the catalyst for this project. Sainsbury’s own chief financial officer is an active member of this initiative. Getting backing from the top means innovative supply chain moves are far more likely to thrive and Accounting for Sustainability typifies a new wave of groups like the IFC that encourage strategic supply chain thinking.
National Hickman is a building supplier that grew out of a long-established Wolverhampton timber merchant. Long-standing relationships are the key to the business. It takes wood and related parts from its suppliers and cuts them into shapes that allow its clients, including Barratt and Persimmon, to assemble key house components quickly.
In order to keep its own supply chain on track, National Hickman establishes guaranteed orders from the big housebuilders. It then offers higher volumes of custom to its timber suppliers who can keep their costs low due to a secure order book. “We can all create a decent margin without the prices going up too much – it’s a virtuous circle,” says National Hickman group deputy managing director David Formaston.
He recently spent £1.6 million on robots that pre-cut house parts before they are shipped out to the housebuilders. This meant Mr Formaston’s clients could use less skilled labour on their construction sites. The company had worked out that a shortage of skills was holding back housebuilders and went about solving its customers’ problems, thus cementing its own supplier-client relationship.