Or what about several months’ worth of sales in increased turnover and revenue via reduced lead time and faster time to market for new products?
It almost sounds too good to be true, but these are in fact some of the potentials identified by the companies participating in the project “Tighten the chain” (Stram Kæden) by the Confederation of Danish Industry (DI), and which they are now in the process of implementing. “Tighten the chain” is about supplier development, which focuses on how companies can benefit from closer cooperation with their suppliers to achieve increased supplier performance to the mutual benefit of both the company and supplier.
Initiatives on supplier development could for example be about actively defining the quality level and quality assurance in the supply chain, thus reducing waste. Or about increasing the material flow in the supply chain by defining the right lead time. There is also great value to be gained by involving the suppliers early in the product development in a structured process. The premise in “Tighten the chain” is that work must take place across the supply chain, and that there are no discussion of prices in the process, which would otherwise typically be the focal point in a customer-supplier relationship. All participants have accepted this premise. The ambition level has been high and the idea generation great, and their work is now being rewarded with savings and value creation.
Valcon is participating and supporting DI’s project “Tighten the chain” by facilitating optimisation processes between businesses and their selected suppliers. The project is financed by the Danish Industry Foundation and has confirmed what we already knew from other client projects and from an earlier Valcon survey on supplier development: Many Danish businesses still do not have sufficient focus on the opportunities to be had by working with focus and structure on supplier development. Unit costs rather than value creation remain in focus in the customer-supplier relationship. Many years of hard price negotiations have put their mark on the interest and ability to think beyond unit costs and your own business – both with the customer and the supplier. This is despite the fact that up to 60-80 percent of product costs can be found with the suppliers.
“A strong management focus on moving closer together in the supply chain can really pay off. It contributes to increasing growth in productivity, which is essential for Denmark to be able to continue being a wealthy society with a strong competitiveness. Figures from Statistics Denmark show that productivity decreased last year in the private business sector by 0.5 percent. And if you look at the last 20 years, Denmark's growth in productivity is at the very bottom of the list compared with the other OECD countries. If we are not able to turn this development around, we run the risk that growth fizzles out, which is why “Tighten the chain” is focused on a central area for the Danish business sector.”Henriette Søltoft Industry director, DI, responsible for DI’s company-targeted productivity initiatives, including “Tighten the chain”.
So dear supplier, can you afford to wait for your customers to realise the value of supplier development and invite you to participate in a dialogue and closer cooperation? Or should perhaps act first and try to differentiate yourself in the often hard separation process among suppliers. Couldn’t you, the supplier, just as well invite your customers to participate in a dialogue and try to understand your customer’s vision, targets and strategy? Understand what the strategy means to the supply chain, and how you can contribute to supporting this strategy and create value?
In one supplier meeting in connection with “Tighten the chain”, the customer explained to the supplier why they were the ones to win the order on components for a new product. It was not because they were cheaper, but because they had a development time of eight weeks in this specific situation, which enabled them to contribute to timely launch of the new product. The supplier’s normal development time was 12 weeks, but there were cases where they could do it faster. It is difficult to work with varying lead times when trying to hit a launch window, but if the supplier had sought at an earlier stage to understand his customer’s commercial agenda, they maybe would have won more orders and not just one order “by accident”. The supplier could also have caught the ball and asked himself what it would take to always be able to guarantee eight weeks’ lead time, if that is what creates value to the customer and ultimately increased turnover and revenue in his own business.
It would be natural to use the dialogue to try to understand why your company was the one chosen as supplier. Was it primarily because of technology and innovation skills? Was it primarily because of price? How highly are quality and short lead time prioritised in product development and deliveries? Through a dialogue on targets, strategy and your role in the supplier network, it will become clear what requirements are placed on you as the supplier. You can cooperate with your customer on defining performance targets and prerequisites for both parties for reaching those targets. You will thus be able to move the dialogue focus away from just price to value creation. You will consequently be able to shed light on the value you create for your customer.
So dear supplier, what are you waiting for? You can make yourself far more attractive to your customers by participate in defining how you, as the supplier, can contribute with the largest possible value to your customers.
Valcon survey from 2012 among 850 Danish production companies: 69 percent of the respondents stated that they do not cooperate with their suppliers on joint targets and key figures for the supply chain. 84 percent of respondents answered that they to a high or some degree focus on ensuring low unit costs from their suppliers.
Originally published in Børsen Ledelse.