Before the coronavirus caused unexpected disruptions earlier last year, many companies either ignored or didn’t realize the vulnerabilities within their supply chains. Addressing these potential problems was an issue for another day. After all, things had run smoothly for this long, so why wouldn’t that continue?
That mindset quickly changed, of course, as manufacturers found themselves without key materials, distributors and retailers couldn’t get core products and everyone struggled to deliver orders to customers on time. That sparked a realization that affected companies needed to prioritize efforts to build more resilient supply chains, whether by finding additional suppliers in a wider range of locations or expanding relationships with existing suppliers.
As organizations assess their supply chains with newfound skepticism and begin to look for, onboard or start using new partners, they face a new kind of challenge: How can they effectively manage a network that, by way of becoming more resilient, also grew larger and more complex? These new suppliers can introduce additional risk and challenges, so it’s critical that businesses first select the best partners and then keep a close eye on their performance. Then there’s the execution component — how can a manufacturer coordinate the delivery of a key component from three different suppliers and maintain strong relationships with all of them?
Companies are smart to build supply chain resilience and diversity — which often looks like onboarding additional suppliers, or working more with existing ones that aren’t your go-to — now so they’re ready for anything. But there are certain guiding principles organizations should keep in mind and red flags to watch for as they bring on and work with these suppliers. We spoke to supply chain experts and business leaders who have dealt with these issues firsthand to compile some best practices.
One way to mitigate many of the complications is by choosing the right suppliers. That doesn’t just mean finding organizations that can meet your needs around timing, quantity, price and quality, though that’s obviously important. Companies should view their most crucial suppliers as long-term strategic business partners rather than a temporary fix to a pressing problem.
“What I’m observing as part of the COVID reaction is businesses are re-evaluating those really important items, those things that will make or break me from a supply shock standpoint,” said Peter Bolstorff, executive vice president of corporate development at the Association for Supply Chain Management(opens in new tab) (ASCM). “They’re focusing on how do I develop better strategic relationships with a more diverse set of [suppliers].”
Here are a few key characteristics to look for in a supplier:
Seek partners that follow processes that make sense to you and reflect your own operations. Ensure they’re following current best practices — not what were best practices 10 years ago — across planning, sourcing/manufacturing and delivery, Bolstorff said. This is a promising sign that they will be a reliable supplier not only this year, but in five years.
Companies entrust suppliers to provide the key materials and products that will enable them to offer a positive customer experience. They share a lot of information with these partners, and any oversights could damage their own operations and reputation. The operations team must understand a supplier’s physical and cyber security policies and how it protects its facility, products and data, according to Andrew O’Connell, president of investigations and private client protection at security firm Guidepost Solutions(opens in new tab). The amount of time and effort spent evaluating security concerns will depend on whether you’re in a highly regulated industry.
Additionally, businesses shipping sensitive products where theft and tampering is a major concern should consider tamper-resistant tape and labels(opens in new tab). If this applies to you, make sure your new partners can take care of this.
Technology plays an integral role in the daily operations of today’s complex global supply chains. Understand what systems a supplier uses and what technology it plans to add in the near future to determine whether you’re both committed to adopting new devices and solutions to optimize the supply chain. Practically speaking, consider whether the supplier’s software can integrate with your supply chain management platform and the work required to link those systems.
“Sometimes businesses can overlook the fact that suppliers have their own IT infrastructure which may not work perfectly with your systems,” said Sukhi Jutla, co-founder and COO of B2B jewelry marketplace MarketOrders(opens in new tab).
Businesses should institute a due diligence program to determine whether a supplier candidate meets these standards. A due diligence program should outline key steps that assess the supplier’s financial stability, compliance and security protocols. Again, this could be an intensive process if you’re part of a highly regulated industry or work for a large multinational and/or publicly traded business.
As part of the due diligence process, the business should review any public records it can find about the candidate, as well as any news articles. Checking references is another essential step in developing a clearer picture of what it’s like to be a certain supplier’s customer.
“Ask the supplier for at least three other businesses they work with and independently get a reference from them,” Jutla said. “Find out, how do they deal with things when things go wrong — do they prioritize customer care, do they supply goods on time and to the right quality spec?”
Even though decision-makers may be under pressure to show executives the progress they’ve made in strengthening their supply chains, they cannot use that as an excuse to expedite their due diligence program.
“Under the current COVID circumstances, organizations may be tempted to skimp on the due diligence, vetting and pre-planning for supplier onboarding,” O’Connell, a former assistant U.S. attorney for the Southern District of New York, said. “This is not the time to relax on your protocols.”
Once you decide to move forward with a partner, it’s time to start working on a contract. This agreement should outline clear service-level agreements (SLAs) for each party. It should also detail payment terms and termination rules, including what happens to outstanding orders if the supplier goes out of business.
Contractual language will likely be under the microscope moving forward, as many suppliers — and their customers — tried to figure out if the coronavirus and subsequent shutdowns triggered force majeure clauses that would allow them out of a contract due to an event beyond their control. While the ability to claim a force majeure event depended on the exact language of the contract, most suppliers or customers would need to prove a direct link between the pandemic and their inability to provide or pay for a product or service.
What Force Majeure Means for Your Company Now: These clauses may come into play for your business, suppliers and partners. A digital law expert gives an overview of force majeure in the current climate.
Businesses can work from sample contracts(opens in new tab) or use a contract creation tool(opens in new tab) as a guide. However, they should always have a contract lawyer or in-house counsel review any contracts before signing them to provide clarity and ensure the terms are fair.
After that’s done — and it could be a lengthy ordeal — it’s time for onboarding. Matt Villarreal, co-founder of Infinite Composites Technologies(opens in new tab), has found it helps to have a clear, detailed onboarding process. Infinite Composites, which makes pressure vessels for the aviation and aerospace industries, sends out a supplier handbook that vendors must read and sign before becoming an approved supplier.
“This practice enables our team to quickly get prospective vendors up to speed with our vendor requirements and provides documentation [so] that vendors understand what’s expected of them, and shifts some of the onboarding responsibility to the vendor,” Villarreal said.
O’Connell, of security firm Guidepost, thinks businesses should consider establishing a recertification process that suppliers must complete annually to ensure they’re still meeting the service-level agreements (SLA) outlined in the contract.
Businesses can avoid the extensive work that goes into finding, vetting and onboarding suppliers and eliminate some of the risks that come with newcomers by taking advantage of the capabilities of their existing partners. Suppliers with multiple locations or capable of producing an item or material you usually get from a different supplier can also boost supply chain resilience.
East Coast Wings + Grill(opens in new tab), a restaurant chain with 36 locations, leaned on existing relationships to overcome supply chain disruptions it experienced last year. For example, when shipments of branded take-out containers didn’t show up, its packaging distributor quickly sent out blank containers as replacements. When the franchise’s chicken supplier ran out of six-ounce breasts, it instead gave the company seven-ounce breasts for the same price.
East Coast Wings COO Tom Scalese thinks bringing in more food manufacturers or distributors could create more opportunities for problems, particularly in the current environment. Although the franchise had to find a new vendor for its breaded appetizers when its existing supplier got out of that business, it has otherwise relied on existing vendors.
“There is definitely a balancing act with new suppliers coming in, those new relationships, vs. hey, let me go back to my current partners and make sure we exhaust every avenue we can exhaust with them,” Scalese said. “That’s what I do first. I want to keep it with that partner because they know me, they understand me, they know the quality I want.”
When selecting new or replacement food items, the restaurant chain usually conducts focus groups and measures intent to reorder, then tests them in a few different markets. Since that’s currently unfeasible, he relies on the East Coast Wings staff for testing and feedback.
Getting a new item from an existing partner or receiving products from a different facility closer to your home base could also be far faster than onboarding a new strategic supplier, and a contract adjustment should be less work than creating a new agreement. Additionally, you shouldn’t have to worry about the process and technology roadblocks mentioned earlier — unless it’s you who is introducing new technology requirements.
“I can tell you that as you start moving volume from one supplier to the next, it affects contracts, it affects freight rates. You’ve got to be very cognizant of that,” Scalese said. “That’s why again I think less is best and really I focused in on my top purveyors that gave me the critical items for East Coast.”
“I can tell you that as you start moving volume from one supplier to the next, it affects contracts, it affects freight rates. You’ve got to be very cognizant of that.”
Scalese noted that this approach only works if your vendors view you as a key customer. That requires a certain amount of volume and money spent with that supplier, but consistently paying on time and taking the time to develop meaningful relationships could also improve your standing.
Just about everyone we spoke to called out the critical role of communication in managing suppliers effectively. Companies should realize the value of putting in the time and effort to establish a two-way line of communication with suppliers. They can do this by reaching out frequently and making a point to emphasize the supplier’s importance to your organization.
“Building strong personal relationships with vendors is critical to managing complex supply chains,” Villarreal said. “[Our] personal relationship with vendors enables greater flexibility with pricing, timelines and sales terms, and has saved our team multiple times when we were in a crunch.”
Similarly, Scalese credits strong relationships with helping him stay ahead of issues and, when they do surface, find quick solutions.
“As sure as I’m sitting here saying that [a certain supplier] has fulfilled everything, next month I can have a scenario,” he said. “But I know I’ll get the truth, I’ll get a phone call way in advance so I can make appropriate decisions for what impacts my brand and how to mitigate those implications.”
Villarreal suggests companies call vendors at the “first indication of a schedule slip” as emails are much easier to miss. Jutla pointed out companies could use project management tools to facilitate frequent communication.
If there’s no way to avoid a problem with a supplier from affecting your customer, let them know as soon as possible and keep them updated. Indeed, constant communication is a valuable tool for upstream partners as well, whether those are other businesses or consumers. If a distributor begins receiving items from a manufacturer in slightly different packaging, for instance, it needs to make sure the retailers it sells to are aware of this before their next order arrives.
How to Future-Proof Your Supplier Network: Along with strong relationships, resilience requires planning, real-time data and the ability to make fast decisions based on that data. Here’s how to achieve that.
From mid-March through June, East Coast Wings sent out what it called a “business guide” to franchisees every week, and today it goes out every three weeks. It kept store owners informed with demand forecasts, information on any upcoming changes (like the new containers), food substitutions and marketing updates.
This communication can make a big difference. East Coast Wings recently conducted a survey of franchise owners focused on their experience managing restaurants through the pandemic, and many respondents gave the corporate team high marks for their guidance and support.
“People honestly that beat us up a little bit came to us and said, ‘You know, I never really appreciated what you do day in and day out until this hit. I was light-years in front of the competition in my market, [including] bigger brands,’” Scalese said.
Assigning an employee or team to manage suppliers is often a smart move because it can promote consistent communication and give you a dedicated resource to manage the unexpected. Think of this person as an account manager, only for suppliers rather than customers. This staffer could lead efforts to find and vet new partners, as well.
Note that this does not mean simply adding supplier management to the job description of your existing supply chain/operations employees. To realize the true value of this position, the primary focus of this role needs to be building close relationships with suppliers and figuring out solutions to delays, shortages and other problems that pop up. Managers can conduct surveys of suppliers and track communication frequency to ensure their investment in more resources here is paying off.
This is part of a broader investment companies need to make in supply chain staffing as they recognize this function as not only a critical component of their success but a potential competitive differentiator. Adding more moving pieces to the value chain requires a corresponding investment in human resources. A midsized organization cannot saddle one or two employees with all supply chain responsibilities as their operations become more complex.
Bolstorff suggests companies identify strategic, planning and execution touchpoints for all suppliers. Make sure you have all of these bases covered as you divvy up responsibilities between existing and new staff members.
East Coast Wings shifted one of its field reps who previously focused on helping unperforming locations into a more supply chain-focused role. He’s now the first point of contact any time there’s an out-of-stock, whether it’s napkins or a particular menu item, and can get in touch with the supplier to figure out the cause and suggest a solution. He alerts Scalese to any notable trends or concerns involving suppliers that require the COO’s attention. This reassigned staffer also stays in regular communication with franchise owners about any changes to the products they use.
Ideally, companies and their suppliers see one another as valuable business partners and realize that the success of one depends on the other. But you can’t rely on goodwill alone to carry productive relationships with your suppliers, especially as you add new ones to the mix. That’s why it’s essential to track their performance individually.
Monitoring supplier performance could be as simple as tracking basic metrics like on-time delivery rate, delivery in full rate and defect rate. Businesses could develop vendor scorecards and determine thresholds vendors can’t fall below. They could also maintain records that track the details of any incidents with the supplier. For instance, did it offer advance notice about a late shipment?
Companies further along in their supply chain optimization journey might opt for scorecards that use a more comprehensive rating system like the supply chain operations reference (SCOR) model(opens in new tab). SCOR, created by the Supply Chain Council (now part of ASCM), looks at six key processes — plan, source, make, deliver, return and enable — and analyzes supplier performance in areas like reliability, responsiveness, agility, cost and asset management efficiency. The business can establish benchmarks for each category.
While adopting a more advanced framework like SCOR will take significant time and effort, it can provide a full picture of whether your suppliers are furthering or holding back your supply chain improvement efforts.
“If both companies are intentional about having the right supply chain skills and competencies in the right roles, and they use a common language like SCOR, it makes things infinitely easier,” ASCM EVP Bolstorff said. “We use the same SCOR metrics, we have the same SCOR processes, we use the same competency models. Now even though we’re not the same company, it’s like we’re the same company.”
|Reliability||Perfect Oder Filfillment||Parity||85.5||78.5||87.8||97.0||-|
|Responsiveness||Total Order Fulfillment Cycle Time, Stocked Products (Days)||Advantage||44.5||17.0||10.5||4.0||34.0|
|Agility||Supply Chain Flexibility (Days)||Superior||70.0||30.0||16.8||3.5||3.5|
|Supply Chain Adaptability (%)||25.0||25.0||37.5||50.0||25.0|
|Cost||Total Supply Chain Management Cost (% of Product Revenue)||Advantage||3.7||5.7||4.2||2.7||-|
|Asset Mgmt. Efficiency||Inventory Days of Supply||Parity||26.2||63.3||43.4||43.4||-|
Image credit: ASCM. The data contained in the table is owned and supported by PwC.
Regardless of the exact method used, it’s critical that businesses identify a common way to rate the performance of each of their suppliers. This ensures everyone is graded on the same scale and held to the same standards. If suppliers know they’re constantly being monitored and graded, that could also encourage them to avoid slip-ups and be a better partner all around.
Measuring performance can also help distinguish between an isolated mistake and a troubling trend.
“I think everybody messes up. I think there’s this perpetual messing up without doing anything about it, I think that’s the issue,” Bolstorff said. “And/or not continually looking at ‘how do I improve my own operations,’ because in this world the number of suppliers is rapidly increasing and they’re highly capable. So how do you stay competitive is a question that everybody needs to ask.”
Technology can greatly reduce the burden of managing an increasingly complex supply chain and an expanding network of suppliers. Software can be an extremely valuable resource to supply chain leaders by helping them pull the right levers at the right time so they don’t run into out-of-stock nor overstock situations with products or materials. Technology can make it feasible to keep optimal inventory levels in your facility while using a number of suppliers.
For example, a business can use the data in its ERP system to create a forecast of demand for the next quarter or six months. Based on that forecast, an employee can use supply chain management (SCM) software to send out purchase orders to a list of approved suppliers, track the status of outstanding orders and ensure delivery times align with the production schedule. Software makes it much easier to ensure all the pieces of this puzzle are in the correct place and to spot a delay on a critical order from a supplier, for instance, and start working on potential solutions.
Furthermore, an SCM solution can collect extensive data on the performance of vendors. Supply chain managers can then view detailed metrics and pull various reports on how a supplier has performed over a certain period of time.
Additionally, companies could set up a supplier portal, functionality that may be included with their SCM software, to reduce the work that goes into managing these partners. Supplier portals allow suppliers to self-serve. They can submit onboarding information, post invoices and other documents and send messages.
Businesses use only 30% of the technological functionality they already own, according to Bolstorff, because they haven’t updated their practices or taken advantage of new automation opportunities as they’ve upgraded their systems. So in some cases, leveraging software to improve supplier management may not require a bigger financial investment. Organizations should think about what capabilities would contribute the most to building supply chain resilience and start there.
The ultimate goal of all this technology is data transparency, from Bolstorff’s point of view. The more various stakeholders from across the supply chain can see the same information, the better. This transparency helps all stakeholders understand the independent demand from the end customer and the numerous factors that could influence it, then plan accordingly. It would mean less educated guesses and more data-driven decisions.
“It would be nice for everybody to have their eye on the same goal, so the wider you can make that transparency and the clearer you can make the end volume, the independent demand … the easier everything becomes,” he said.
Though it may not be attainable for some companies yet, blockchain is one promising technology for enabling this transparency. If suppliers, the businesses they support and their customers are all in the same blockchain network, everyone is looking at the same set of information. For example, they could all view a detailed history of the movement of certain materials or goods.
“One of the biggest causes of delays in supply chains is not having access to the right information at the right time,” said Jutla, who is also a blockchain expert. “If all parties use the same ledger, then they can track exactly what is going on and see the activities of other participants in the ecosystem.”
Businesses committed to building supply chain diversity and resilience will surely reap the benefits of these efforts in the future, and likely sooner rather than later. Although finding new suppliers or looking for better partners to replace ones you hastily added during the pandemic may create some headaches now, the end result could be a competitive advantage for the company that takes action now and can capture market share as others struggle.
Organizations may not need to be so strategic in selecting and managing relationships with all suppliers, like those that provide something that’s more of a commodity or isn’t essential to your business’s success. But for those mission-critical suppliers, it’s worth putting in the time and effort because they impact your customer experience. As the past year revealed, sometimes all it takes is one broken link in the supply chain to impede your ability to meet customer demand and tarnish your reputation.