The art of competitive collaboration

  • Author: Colin Maund
Posted on 18-01-2012

Everyone is facing the same problems of recession, supplier instability, and greater regulation of business – which is driving more concerns about suppliers. So how do you afford it all? I believe companies are going to have to start looking at business models that are a radical shift from the present ones.

Traditionally, companies have been loath to collaborate with competitors, apart from against common ‘enemies’, like government where they have been prepared to form trade associations to lobby for their interests. Also, they have been prepared to work together in areas like science or on standards to make sure their industries are looked after. But they haven’t been prepared to look at collaboration much beyond that. Companies are now starting to have to look at collaboration with competitors as a way of reducing costs and this is opening up the next stage of the business development model.

We have already seen companies outsource their activities to others in an effort to reduce costs, we have seen them move down the road of greater and greater efficiency methods – lean supply chains etc – but the next stage – where it’s economically sensible and non competitive – is to collaborate with competitors for mutual advantage.

Companies have to be innovative about defining the areas where they truly compete and the areas where collaboration is sensible and possible. The first thing is to undertake a value chain analysis and ask, ‘where do we add value as a company, and where is it absolutely against our interests, long term or short term, to work with others?’ But as a point of caution, it is important to understand these boundaries, as potentially, a company could undermine its own competitive advantage.

In areas where there is no competitive advantage it may be absolutely right to collaborate. By way of example, if you have two car companies both using different factories, producing broadly the same part, if they could agree the specification for that part then they could collectively still continue to use those two factories, but if one of their factories became disrupted by an event like an earthquake, both could draw on the other plant. And of course, if they were able to collaborate on specification the price of those components would drop.

People in the supply chain need to have a different way of thinking when it comes to collaborative opportunities. We have got to start rethinking fundamentals. Most companies, especially large companies, tend to think they are an island at sea – it’s them, their suppliers and their customers.

When we were putting together our schemes, many of the procurement people from the various companies in a sector had never spoken to each other. You would have thought this would have been quite a common occurrence between companies in the same area of activity, in the same geographic region – but not at all. The fact that we provided a forum where they could meet and discuss common problems without entering into anti-competitive behaviour has proved to be a very valuable element of our operation.

There is a natural level of suspicion that needs to be overcome in competitive collaboration. If a competitor phones up and asks you ‘would you like to work together?’ your immediate reaction may well be, what are they up to? To get past that barrier is an important first step.

Research shows sharp rise in Supplier Challenges

  • Author: Gail Wilson
Posted on 08-12-2011

Research by Nottingham University and Achilles indicates a sharp rise in the number of supplier challenges going to court – a significant concern for buying organisations in the Public Sector. The report which looks at supplier challenges brought under the EU procurement regime in the UK over a twenty year period, suggests that in 37 per cent of those cases at least one of the claims was supported by the court – inferring an even larger proportion settled out of court.

Challenges take months to resolve and in many cases cost hundreds of thousands of pounds in compensation or settlement out of court.

The Achilles/Nottingham University report highlights the fact that, historically, the challenge rate in the UK has been very low, averaging approximately two challenges per year in the period between 1993 and 2006. However, following 2006 the number of challenges has increased steadily. Findings from the study also indicate that the reforms to the remedies system introduced in December 2009 have had a dramatic effect, with a significant jump in the number of challenges in 2010 when 18 challenges were reported. This increase appears to be continuing in 2011, with 10 challenges occurring in the first six months of the year – up to the end of the period covered by the study.

It can be no coincidence that the number of challenges has risen dramatically since changes to the remedies directive were introduced in December 2009. The new rules have made it easier for suppliers to challenge as more information must be provided to suppliers losing a procurement competition and they can now halt the award of a contract through an ‘automatic suspension’ mechanism where court action has been commenced. In addition, the current tightening of public purse strings is making a challenge more likely as suppliers compete for a dwindling number of contracts. If procuring entities are to find themselves in an increasingly challenging environment, where suppliers are more likely to take their chances with the courts, then buyers are going to have to ensure that their procedures and contracts are ‘water tight’ and in line with current legislative requirements. Any shortfalls or oversights could prove expensive in time, resources and money. Gail Wilson is EU Service Manager at Achilles.

Practical advice on managing supplier risk

Posted on 10-10-2011

Supply chain risk can come from any source. From the financial failure of a critical supplier to disruptions caused by natural disasters, poor supplier product quality to infrastructure failures. Now is not the time to relax a company’s vigilance over its suppliers. There’s no telling where the next issue can spring from, and adding to the complexity is the difficulty in measuring and monitoring those risks.
Forrester’s Stephanie Moore worries that “a single outage or bankruptcy or fraud or bad acquisition could spell disaster for a client”, she writes in her blog how companies can monitor the viability of privately held IT services suppliers and recommends alternative options are available in case of failure.
Her tips for monitoring the viability of privately held IT services suppliers include:
• Make sure you’re taking the risk for a reason. If the service supplied is that critical, you may want to rethink who your supplier is.
• Have your accountants perform their own financial audits to ensure the veracity of vendor provided financials.
• Check out the ownership structure and debt-holders. Where is the company incorporated? Is it incorporated? Who owns the company and where is the company registered?
• Check out LexisNexis for evidence of legal problems or lawsuits. Corporate counsel can and should assist with this activity and information can be updated in your supplier management system on a regular basis.
• Watch for excessive account management attrition. If your onsite account managers, client partners, or sales folks are turning over too much, this suggests that the company is a risky place even from an employee perspective. And, red flags should be vigorously waving if account management and sales staff are actually being laid off. In this healthy market, stable vendors are adding to their client partner and account management ranks, not firing them.
• Monitor employment websites to find evidence of attrition outside of your account. Interview former employees or current employees who are on the job market.
• Use your social media connections. Facebook, LinkedIn, and many others contain information that is useful for evaluating specific vendor viability.
While there is no silver bullet, Stephanie recommends looking into tools to help executives optimise their monitoring and risk mitigation efforts.

How to see the value in supplier relationships

  • Author: Nick Allen
Posted on 21-09-2011

The trend to outsourcing and the forging of closer collaborative relationships with suppliers is significantly increasing the dependency organisations have on their supply base. In a growing number of instances a company’s success is now highly reliant on the performance of its suppliers and on the efficient workings of those relationships. However, the information on suppliers available to buyers is often, fragmented, erroneous, incomplete, insufficient and frequently duplicated across the enterprise. In the vast majority of instances there is no single source of supplier information.

Findings from Aberdeen Group’s recently published ‘Year of the supplier’ report highlight the wide gap that exists between organisations that are best-in-class for their ability to leverage supplier relationships – by improving supplier visibility, tracking supplier performance and enhancing the ability to avert supplier risks – and those that are lagging. According to the report, which draws on survey results from over 150 organisations globally, best-in-class companies have one per cent of suppliers duplicated across the enterprise as compared to 27 per cent among laggards.

Best-in-class were also found to have 88 per cent of their suppliers demonstrating on time delivery/project completion versus only 48 per cent with laggards. And two per cent of suppliers to best-in-class companies reported catastrophic failure as compared to five per cent for laggards.

Interestingly, the Aberdeen report showed that companies enjoying best-in-class performance were 38 per cent more likely to use tools for supplier risk analysis and mitigation than all other organisations – industry average and laggards combined. Also, 24 per cent of best-in-class companies were more likely to use supplier analytics and visibility tools for modelling and predicting supplier costs than all other organisations.

However, one of the greatest challenges facing buying organisations appears to be the use of disparate systems for tracking supplier information, where a combination of solutions have been used from contract management, procurement solutions and ERP systems. Hardly surprising, but still shocking, is the finding that 77 per cent still use spreadsheets.

If buying organisations are going to properly manage the relationships they have with their suppliers – in order to drive up the performance and success of their companies – then clearer visibility of accurate, accessible and up-to-date data on suppliers is absolutely necessary. A good starting point would be to create a single source of supplier information. But then, as Aberdeen’s report points out, a series of actions need to be followed, starting with standardisation of supplier management practices, improving the overall quality of supplier data, developing and enhancing metrics with supplier risk management tools and establishing a single supplier selection process and workflow.

Clearer visibility of supplier data will enable buyers to see the value in their supplier relationships.

The Seven Rs of Buyer/Supplier Communities

  • Author: Geoff Palmer
Posted on 15-07-2011

A light-hearted look at what matters in buyer/supplier communities:

Every Responsible organisation working in increasingly Regulated environments (and everything seems to be getting more regulated these days) is justly concerned with its Reputation in competitive markets (because reputation is an important differentiator when specifications can otherwise appear so similar).

To secure ongoing competitive advantage, they are dependent on Reliable suppliers with whom they can establish, grow and maintain strong Relationships whilst reducing their cost base.

The traditional approach to understanding and managing supplier Risk is to establish a procurement team whose job is to assess and re-assess suppliers.

The Repetition involved for every Buyer and every Supplier is hugely costly and time-consuming; and for smaller suppliers, especially so, which threatens the breadth of the supplier base and stifles innovation.

Communities of buyers and suppliers sharing information can combine and leverage the experience of multiple Buyers from multiple market sectors into a single environment where all suppliers are assessed equally, thoroughly and appropriately. Such a community provides a benchmark for suppliers against which they can assess their own competitiveness and plan improvements.

The continuing risk of supplier failure

  • Author: Colin Maund
Posted on 01-03-2010

Despite the recent recovery in global trading conditions, a significant risk from supplier failure still exists. Indeed, the experience from past recessions is that the most dangerous times for widespread bankruptcies is in the first stages of recovery. Although credit availability may be a little better than it was a year ago, the financial security of many suppliers remains an open question.

Buyers face the continuing risk of a supplier going under, maintaining the prospect of interruptions or failure in the supply of critical components and services. Even worse, if a supplier goes bust, who owns the part completed or fully completed goods? Retention of title clauses can make for complex situations that may become very messy.

If a supplier is vulnerable it is worth knowing about it in advance. That way an alternative supplier may be sought, or if the supplier is a single source for a vital component or service, action may be considered to help that supplier. Either way, predictive financial tools and up-to-date credit ratings on suppliers is the only way of reducing exposure to this very real risk. Despite the existence of many established and well known products, these have been developed largely for short term use by sellers and are neither accurate nor up to date. For buyers they are particularly inappropriate as buyers need to look during the lifetime of a project, supply contract or even a piece of machinery or IT programme which is often dependent upon continuing support, maintenance as well as the provision of expensive warranties.

However, gaining a clear view of your supplier base, with access to pertinent information that has been qualified, evaluated and monitored, need not be complex and stressful. Working in collaborative communities within industrial sectors, much of the work associated with updating information and monitoring suppliers can be undertaken by an independent, specialist third party for the betterment of the entire community. Furthermore, tools and processes for identifying and ranking supplier risk in the supply chain can be used to understand and manage the risks in a controlled way whilst giving access to more up to date and more specialist information.

Mitigating risk is all about understanding your supply chain. Companies that manage risk successfully will continue to reap the benefits; companies that mismanage it will expose themselves to a far greater chance of failure, or equally as bad, will become far less competitive as recent events in several industry sectors demonstrate.

Are your suppliers exposing you to data security risks?

  • Author: Colin Maund
Posted on 17-02-2010

The trend over recent years to outsource ever more sensitive functions has significantly increased a company’s exposure to risk. Over the same period, reputation and the value of the brand have grown in importance too, a combination that has placed a heavy emphasis on the impact suppliers have on the reputation and performance of the enterprise.

How your supplier behaves, and what processes your supplier has in place, can directly affect your business. In some cases those effects can be completely disproportionate to the value of the contract.

One emerging concern that is likely to grow in importance is data security. This is an area of particular importance to government departments and financial institutions following a number of high profile lapses in security, but increasingly corporate bodies will be required to sharpen their practices too.

Companies may have very strict processes in place for how their staff handle sensitive data – blue chip companies are very well thought of in this regard – but then all too often a supplier or contractor is called in to undertake IT work and the buyer of those services fails to check that the contractor has similarly rigours terms in place in relation to their subcontract employees. This is particularly sensitive where the data has been sent offshore to a low cost processing location or to a specialist computer facility and is therefore outside local court jurisdiction.

The danger is that a breach in security, with sensitive data being taken off-site, lost or misused by a supplier, could have a serious negative impact on a company’s hard earned reputation – and may even leave you, as the buyer, open to litigation. Greater scrutiny of a supplier’s contractual arrangements with its staff and subcontractors is essential in mitigating this risk.

What’s more, monitoring that those standards are maintained and contractual arrangements are current, is important too in ensuring the ongoing compliance of suppliers to the rigorous standards of data security that the buying organisation both requires and expects. In an environment where data is becoming increasingly valuable and tradeable this is likely to be a major area of risk for procurement teams in the future.

How responsible are you?

  • Author: Per Karschowski
Posted on 02-02-2010

Do you know how many sub-contract workers you have working on site? How many contractors are working for tier -two, three or four suppliers? Just what visibility and control do you have of your supply chain and what risks are you exposed to in regards Health & Safety compliance of second or third-tier suppliers who may be visiting your sites on a daily basis? What would be the consequences and liabilities of a fatal accident caused by, say, a tier-three sub-contract worker?

Unfortunately, for far too large a group of buyers the answers to these questions is – ‘I don’t know’. Perhaps, even worse, are the numbers of those under the misapprehension that their principal contractors shoulder the risk commercially or criminally.

According to statistics compiled by the UK’s Health and Safety Executive in 2008/09 there were 53 fatal injuries in the UK construction sector – the rate of major injury in construction is the highest of any main industry group (254.1 per 100,000 employees in 2008/09). Most procurement professionals are adept enough to ensure that principal contractors are compliant with Health and Safety working practices and legislative requirements, but trust principal contractors the responsibility for accidents caused by sub-contractors.

Many buyers are unaware of the changing attitude of those in authority to the responsibilities of the buyer. Those doing the purchasing are now expected to not only check for proof of a supplier’s compliance to Health & Safety requirements, but are expected to monitor their status – and that’s across the entire supply chain, down through all the tiers of sub-contractors. Increasingly, the burden for compliance is being shifted from the provider of goods or services to the procurer, as demonstrated by the new European Directive on chemical safety (the so-called REACH  Directive) which demonstrates the increasing trend to shift responsibility to the ultimate buyer.

The dangers that exist here are many. Accidents are not only shocking and damaging to the reputation of a buying organisation, but are costly and cause delays. However, beyond this, litigation can be a consequence, with directors being exposed to prosecution if correct procedures have not been followed or if negligence is suspected.

With such a heavy burden of risk now lying with the procurer, what can be done to mitigate these very real and potentially, highly damaging risks?

Those procuring services must gain a greater visibility of their supply chain, through all the levels of supplier and sub-contractor relationships, to ensure full control over what happens on their own premises or within their sphere of influence. They must get closer to, and co-operate more closely with, principal contractors on a continuous and ongoing basis to take control of the process, beyond the signing of the contract.

Importantly, a sub-contractor should be treated in the same way as you would a principal contractor. You forward the responsibility for Health & Safety issues on to your sub-contractors, but by using the same methodology as you use towards your principle contractor, so that you can ensure that all the way down the chain you maintain the same standards. This can be achieved through contractually ensuring that principle suppliers select only sub-suppliers that are pre-qualified, independently audited and monitored on a continuous basis.

Very often the purchaser needs to demonstrate not only that they take health and safety issues seriously themselves but have a systematic approach to ensuring that those people who act in their name do so as well. Even if they avoid the dangers of litigation, fines or other sanctions there is the real risk that they will be exposed as a company who put profit before social responsibility and who demonstrate a cavalier regard for public safety. Such claims can be extremely damaging for the long term health of the business.

Ensuring that compliance is complete across all tiers of the supply chain and throughout thirty, forty or even fifty sub-suppliers may appear a daunting task. But it’s essential for the many companies that may be oblivious to the risks, to wake-up to the realisation that the dangers from the non-compliance of a third-or forth-tier supplier on a site under their control could be devastating. Those doing the buying need to tackle this serious issue by using the tools and information available to them, and by working in collaboration with the supplier community, to take control of their full sphere of responsibility.

Per Karschowski is Regional Director for Western, Central and Eastern Europe, Achilles Group