January 14, 2013 As if corporations didn’t have enough money sitting idle in their accounts today – now we learn that they’ve been borrowing aggressively, spurred on by record-low interest rates. We know that businesses have been hoarding cash ever since the Great Recession. A Federal Reserve Flow of Funds report from last year showed U.S. non-financial companies sitting on $1.7tr in liquid assets, in domestic accounts alone. When you factor in international holdings, that number balloons to $5.13tr.
On top of that, the Fed reported that those same corporations had $8.4tr in outstanding debt at the end of the third quarter of 2012 – a $136bn increase from the previous quarter, and more than half a trillion dollars higher than a year earlier.
What are businesses planning to do with all that money? They’re not hiring in droves, notwithstanding the gradually improving unemployment rate. Some are hunkering down, waiting for signs of lasting economic recovery, or a final resolution of the fiscal cliff debacle. Others are plotting mergers or acquisitions. Far-seeing companies are sinking money into new-product development.
Here’s another idea: How about spending some of that cash on supplier development?
Under the old way of thinking, the only kind of spending that a company would contemplate on the supplier side would be for the product or service being offered. Everything else was a cost that degraded procurement’s ability to deliver on its primary mission: save the company money, year after year.
The recent spate of natural disasters and other types of supply chain disruptions, coupled with fiercer competition and the challenge of emerging markets, has caused business executives to take a new attitude toward strategic sourcing. They might even consider throwing a little money at a struggling supplier, or working with a trusted vendor to enhance its capabilities.
Discovering who those vendors are is a key step toward enlightenment. First, though, companies need to examine their product strategies as far as 10 years into the future, says Mickey North Rizza, vice president of strategic services with BravoSolution. After that, they must determine precisely what differentiates them from the competition. Is it price? Quality? Uniqueness of product? Or, just possibly, the excellence of one’s supplier base?
A given supplier might be a superior performer in quality, responsiveness, or, yes, cost. Often it needs a little help from its buyer to reach that state. Brand owners and original equipment manufacturers should be thinking about what they can do to create optimum conditions at the supplier’s site. Such efforts might involve development and enforcement of quality specs, maintenance of fair labor conditions or aid toward reaching sustainability goals.
All three areas are crucial to the maintenance of brand reputation. Just look at the recent mess at Foxconn’s manufacturing facilities in China, to see how poor oversight can damage a brand owner’s image. Or the tainted products that can actually cause harm to consumers.
“Often suppliers don’t have enough money to bring it out to the next level,” says Rizza. A smart buyer can come to the aid of a valued partner in exchange for more volume and preferred treatment.
Up to now, she acknowledges, manufacturers have focused on price as the main if not sole criterion for selecting suppliers. But in a world of increasing product commoditization, that’s no longer a tenable approach. Product quality and trust in one’s vendors must also be factored into the mix.
When it comes to emerging markets, tradition-bound companies need to get creative. Take the case of Brazil, host to the 2016 Summer Olympics. Rizza sees a big opportunity for business to capitalize on a surge in spending and customer demand in that country. There’s also the chance for new supplier partnerships. But manufacturers need to be careful about whom they choose for their supplier base – perhaps to the extent of merging with a Brazilian entity, or calling on a local partner for its expertise. Price alone won’t cut it.
Companies are finally beginning realize to that a workable risk-management strategy has to include procurement. You can’t know the exact nature of the next disaster, but you can minimize its impact through strong relations with suppliers. Frequently that effort involves drawing on multiple sources for key components or finished goods, even if it costs more up front.
“For too long,” Rizza says, “procurement has been done in a box.” The function has to integrate with the company at large, with all departments working to satisfy “top-line strategies.” Key performance indicators need to be put in place in order to ensure that the common goal – whether it’s penetration of new markets or the introduction of new products – is being met.
A company might even go so far as to buy a supplier outright, either to lock up a limited source of product or ensure the quality of a component. The Boeing Co., whose troubles with the 787 Dreamliner just won’t go away, did just that when it spent $1bn to buy out the South Carolina plant of Vought Industries, a maker of parts for the aircraft’s fuselage.
Such a move strikes no one as the most cost-effective strategy for managing suppliers, especially in the era of outsourcing. It does show that companies are starting to view procurement and strategic sourcing as more than a game of numbers. Whether they’ll dip into their bursting coffers to ensure a solid supplier base is another matter. But it beats bonusing the CEO.
Next: What’s it take to be a 21st-Century chief procurement officer?
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Keywords: supply chain, supply chain management, inventory management, inventory control, supply chain planning, sourcing solutions, supply chain risk management
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