In today's difficult economy it is very important for companies to realize that success lies not in being better than your competition, but instead in your supply chain being better than your competitor's supply chain.
So it is critical to all the Buy-Make-Move-Store and Sell links in your supply chain that effective Supply Chain Partnerships be created.
There are three phases of Supply Chain Partnerships for the five stages - Buy-Make-Move-Store and Sell - of the supply chain.
For Buy and Make, the Supply Chain Partnerships are called SRM - Supplier Relationship Management.
For the Move and Store stages of the supply chain, Supply Chain Partnerships are called Service Provider Relationship Management.
For the last stage on supply chain management, Sell, Supply Chain Partnerships are called Customer Relationship Management - CRM.
All three stages: SRM, Service Provider Relationship Management and CRM, are critical to achieve supply chain competitive advantage. However, of these three Relationship Management phases, many Western companies are struggling the most with the first, Supplier Relationship Management.
In fact, I have heard it said that Western companies and Asian companies spell SRM differently. In the West, SRM is spelled capital S, little r and capital M (SrM). For the West, it is all about Supplier Management. To the contrary, in Asia, SRM is spelled little s, capital R and little m (sRm). It is all about relationships.
To help me explore the Asian view of relationships, I have asked Steve Ganster, the CEO of Technomic Asia, a subsidiary of Tompkins International, to join me. Steve has been doing business in Asia since the mid-1980s, and I am very pleased to introduce Steve Ganster, my partner, to the podcast audience. Steve, welcome.
Steve:
Thanks Jim, it is a real pleasure to join you on this important topic. As you know, many serious challenges have emerged over the last year or so and they are collectively compelling Western companies to rethink their existing supply chain strategies as well as supplier relationships. We think there are ways to turn these challenges into competitive advantages, and SRM is a key tool to make that happen.
Jim:
Steve, what recent changes in the China landscape have resulted in organizations having greater awareness and sensitivity to Supply Chain Partnerships, and in particular to Supplier Relationship Management?
Steve:
A number of major changes have taken both suppliers and buyers by surprise over the last couple of years. When added together, the cost for many China-based suppliers has gone up over 30%. While they have absorbed some of these costs, price increases have been unavoidable and many smaller, less capitalized firms have even gone under.
Let me briefly review some of the key changes that have taken place. First as we all know, China's currency has steadily appreciated over the last couple of years, rising almost 20% against the dollar. At the same time, the Chinese government has rolled back most of the VAT (value-added tax) rebate allowed on Chinese exports. For many firms, their rebates have gone from 13% down to 5%, and even zero in some cases. It should be noted that the government just recently gave back up to 4 points of this rebate. This has been done for a basket of consumer products that have been under severe duress due to cost increases as well as a softening market in the West. Nonetheless, the loss in rebate has wiped out the margin and then some for many small Chinese suppliers.
Another factor has been an introduction of a new labor law this year in China. The effect of the law is far reaching and has caused employee costs to go up especially for those firms that have not been paying full benefits to employees. Beyond these rather unique factors, the increase in raw materials and oil has raised the costs for everybody.
As you can imagine, the confluence of factors is making many companies in the West rethink their existing supply chain, as well as their portfolio of their suppliers in China. Relationships have been strained under this severe pressure, which is forcing some suppliers to cut costs or even to abandon their business. Buyers for their part are pressing their suppliers for more and more and are also walking away from what have been very successful relationships.
Jim:
What are the implications of not doing a good job on sourcing and building the correct relationships?
Steve:
Jim, during this tough environment, I think we are seeing even greater negative fall-out due to the lack of attention to supplier relationship building. Even the best relationships are under strain today, but those with a weak foundation are suffering more keenly and even falling apart in some cases. These relationships are degenerating into finger pointing, corner cutting, and even intellectual property violation.
At the same time, the benefits of solid relationships are becoming more evident today, as buyers and suppliers are working in concert to respond to the challenges I just described. Companies with stronger relationships are better able to address issues such as cost increases and changes in demand forecast. Through closer communication and a better understanding of the stress points on each side, more effective planning can then take place. Creative approaches to product design, raw material sourcing, and logistics can be uncovered by working as a team.
Jim:
Steve, I have heard some folks talking about rethinking their China sourcing decisions. What have you seen actually happening here?
Steve:
I think companies are looking at all options, such as shipping sourcing closer to home, like Mexico or even back to the U.S. Others are looking at different markets within Asia. Vietnam is getting a lot of attention as an alternative location today given its lower labor costs and tax-friendly environment.
Nevertheless, despite the changes in landscape, we are not seeing companies abandoning China. China's well developed infrastructure and industry supply chains, its manufacturing scale, and even its potential market for Western companies continue to make it a compelling place to be. In fact, after looking more closely at Vietnam, we are seeing companies staying put in China or looking for more favorable locations within China, such as in Western regions where labor and other costs are more competitive to the east coast provinces. While some sourcing will certainly shift out of China as companies move a few eggs out of the China basket, we don't see any wholesale migration out of the country.
Jim:
Ok, so this whole SRM relationship topic is a key topic in today's global supply chain. Tell me more about SRM.
Steve:
As you pointed out, Jim, SRM in China is all about the relationship. I strongly believe that we need a real shift in the way we do Chinese supplier relationships. Effective relationship building involves regular communication with the supplier and spending significant amounts of face-time with supplier management to better understand each other and to build trust.
Often the most meaningful discussions are held after 5 p.m. over a number of glasses of Maotai. The investment in travel and time to build close relationships will have a great ROI and will help avoid the time and cost of fixing mistakes due to miscommunication. Many managers in the West just don't get this, and push it aside as an intangible competence that is not as important as good processes and of course technology.
A key initiative we recommend is to develop effective "Voice of Supplier" programs with the same intensity as we develop "Voice of Customer." "Voice of Supplier" is a key tool to help improve relationships by uncovering gaps in understanding. It is common for us to see huge misunderstandings between buyers and suppliers who have worked together for years. "Voice of Supplier" proactively excavates these misunderstandings, which exist on both sides of the ocean, by the way. When these gaps are closed, tangible benefits in cost reduction, quality improvement, and speed to market will result.
Jim:
I find this cultural context very interesting. Give our listeners more information about this.
Steve:
Yes, Jim, this is a fascinating area that also needs more attention. As you can imagine, cultural issues are at the heart of relationship building. Fundamental problems with many supplier relationships stem from key cultural variations between East and West, resulting in many gaps in communication.
We in the U.S. are low-context communicators -- what we say, we mean, and what we mean, we say. In China, as in many parts of the world, communication is more contextual, with many shades of grey. Many of our listeners have no doubt experienced the "Yes doesn't mean yes" phenomenon. A reluctant 'yes' from the Chinese often means 'I don't think so,' or 'No way can I do what you ask.'
Even understanding the hierarchical aspects of relationships in Chinese society gives us clues to seemingly strange behavior. In China, the boss is always right and is not to be challenged. So why are we surprised when a supplier does not openly tell us when they cannot do something we ask, or meet a deadline, or let us know that there is a better way to accomplish our objective? Western management will do well to better understand these cultural differences. This also involves helping our Chinese counterparts to better understand us. After all, it's a two-way street. And as we have been saying, the key to achieving good results here is also through quality relationship building. Frequent time together helps bridge this cultural divide. When times get tough, it is the quality of the relationship that empowers our ability to successfully address unexpected challenges.
Jim:
Steve, what are the attributes of effective SRM?
Steve:
Let me summarize a few of these. The company with good SRM will have a formal Asian supplier development plan. They'll prioritize suppliers and build relationships with those that are most important, and they'll frequently visit with those same suppliers. They'll keep these suppliers in tune with corporate objectives, even allowing them to contribute to the planning process.
They'll have a usable scorecard to help monitor results, with metrics that are measurable and lead to action. This scorecard will be shared with the key suppliers.
They'll have an aggressive focus on transparency, understanding the whole supply chain from the supplier's supplier to the customer's customer. In this regard, they'll not settle for anything less than full disclosure from all key suppliers. They'll view sourcing in key supplier relationships strategically, always observing strategy before structure, and not putting programs in place simply to have them.
They'll use their supply chain and strong supplier relationships as an offensive weapon to enhance revenue and profit. They'll have the right resources on the ground and will involve senior management in building supplier relationships. And lastly, they'll have a key objective to change behavior, not just processes. In our experience, Jim, companies having these attributes will typically have a very effective relationship management program, not to mention a high-performing supply chain.
Jim:
Well, thank you very much Steve. I am certain pursuing stronger Supply Chain Partnerships, and in particular Supply Relationship Management with Asian suppliers, will result in supply chain competitive advantage.
This concludes Podcast #6 in this globalization series. In two weeks, I look forward to us beginning to step our way through the five stages of Buy-Make-Move-Store and Sell. In two weeks, we'll look at the overall picture of Buy-Make-Move-Store and Sell, and two weeks after that Steve will be back with us to dig into the Buy component. Glad you were with Steve and me today. We look forward to speaking to you again real soon.
