Supply Chain Frontiers issue #11. Read all articles in this issue.
Companies are still learning the hard way that unsound supplier relationships frequently lead to higher costs and crippling supply chain disruptions. "We continue to see companies that neglect to put in place a robust strategy for how they deal with suppliers, and as a result are putting their businesses at risk," said Yossi Sheffi, director of the MIT Center for Transportation & Logistics and author of the best-selling book, The Resilient Enterprise (MIT Press, October 2005).
A case Sheffi describes in his book is that of British car company Land Rover that in 2001 suddenly lost its sole source of chassis for the popular Discovery vehicle when the supplier went bankrupt. Land Rover eventually had to pay down some of the company's debts to restore supplies, suffering severe production delays in the process. The car manufacturer was unaware of the impending disaster because its supplier relationship was dysfunctional.
Fast-forward to today and the same mistakes are being made. For example, this summer British Airways' operations at Heathrow Airport in the UK were halted when ground workers went on strike in support of fired workers at its core catering supplier, Gate Gourmet. The airline was caught off guard and the result was canceled flights, irate customers and negative publicity. "Having a close relationship with Gate Gourmet may have alerted BA to their planned actions and the possibility of a sympathy strike by BA's own militant workers, giving them time to prepare and possibly avert the strike before it started," Sheffi said. Yet Willie Walsh, the company's CEO who joined BA recently, said that the August strikes had "nothing to do with British Airways" and BA could not have seen it coming.
On the other side of the Atlantic automaker General Motors is paying dearly for its flawed relationship with supplier Delphi Corp. The enterprise was spun off from GM in 1999, and with annual sales of $ 28 billion is a major supplier. Since it cut loose from its parent Delphi has been unable to compete effectively with leaner, more efficient rivals, and recently filed for bankruptcy. In addition to the possibility of losing a supplier that makes products ranging from brakes to satellite radios, GM is under pressure to take on some of the company's pension liabilities. The debacle shows that GM is ill prepared for the fallout from the failure of a key supplier.
Contrast this to the approach taken by Toyota Motor Corporation to its suppliers. The highly successful Japanese carmaker holds stock in many of its suppliers, and the suppliers reciprocate by holding Toyota shares. Respective companies are bound together by mutual interest and are committed to the long-term health of their businesses. For instance one parts supplier, Aisin, part of the Japanese company Aisin Seiki Co. Ltd., customarily shares testing sites with Toyota to help the automaker cut costs.
Still, the Toyota approach is not a template for all companies. There are two basic types of supplier relationships Sheffi explains, and each has different demands. Companies can choose to do business with a small group of core suppliers. In this case they need to have a deep knowledge of each vendor and extensive relationships, including monitoring and information sharing, because the unexpected failure of one could be disastrous. Such relationships, however, are expensive to develop and maintain and a company may prefer to keep suppliers at arms-length. In this instance the company's knowledge of its suppliers is relatively shallow and there is greater risk of a surprise failure. Hence, the supplier network needs to be extensive so that the company can find an alternative source quickly should one of its vendors become problematical. "Neither approach is right or wrong, the trick is to commit to one and develop the appropriate strategy," Sheffi said. "But as a general rule companies should regard the supplier base as an extension of their business, and at least know enough about vendors to be forewarned of a major problem."
For more information about Professor Sheffi and The Resilient Enterprise, check out the book's website.