What Do You Really Know About Your New Supply Chain Ally?

By Rob Haynes, Principal, Tompkins Associates

As companies continue to move toward extended supply chains and evolve into new ways of doing business, collaboration among supply chain partners is more important than ever before. As supply chain networks compete, a highly effective supply chain will outpace the competition through more efficient operations and increased market share. So, what could be of greater importance than choosing the right supply chain partner? It is critical to supply chain success to know who your partners really are and how they operate.

The Need to Know

Although conducting a financial review before signing a major commitment with a supplier or customer provides an important measurement of an organization's performance, its operational status-how its DC is performing, whether customers are receiving shipments accurately and on time, who its partners are-is just as critical to getting a complete picture as are its finances. Achieving synergy and increased market share require an investigation of all elements, not just finances.

An assessment that looks at an organization's business operations and processes will give you the whole picture across the company's supply chain, from logistics to distribution to manufacturing. Understanding how information and materials flow from suppliers to distributors to consumers is key in determining whether or not a company is efficient or effective-and whether you want that company as part of your supply chain.

Take this scenario for example. Company A has tentatively selected Supplier X as a tier-one supplier. Supplier X's financials are impeccable. Its records show a strong, solvent company with a long history of increased shareholder value, but this assessment does not reveal the operational liabilities of Supplier X:

• Company A's best-of-breed systems cannot communicate with Supplier X's legacy equipment when it comes to purchasing requirements and specifications.
• Supplier X's operations are based on poorly defined processes and methodologies.
• Supplier X's inventory is not cycle-counted and is disorganized.

A further look into Supplier X's operations is even more revealing. A customer that asks for P/N 345 receives whatever Supplier X's order-pickers find in the bin for P/N 345, even if it's the wrong part. Customer service calls go unanswered. A look at Supplier X's inventory shows that its accuracy rate is well below industry standard. A trip to the company's facility shows that the facility is already over capacity. Everything points to the fact that the excellent finances have resulted in the firm's strong growth, but with little reinvestment. As a result, poor operational performance is in the forecast.

A comprehensive due diligence assessment focused on operations is essential for painting a complete picture of an organization's performance. This assessment evaluates a company's core processes, including customer service, transportation operations, logistics network, and inventory planning-together providing a clearer picture of the significant value-drivers. Imagine the surprises you could receive if you ignored a company's operational issues:

• Customer satisfaction suffers because of an ineffective distribution network.
• Long manufacturing lead-times create large inventories.
• Lack of equipment reliability limits machine capacity.
• Computer systems are a hodgepodge of new and legacy systems and data, and they lack adequate documentation.
• Manufacturing processes cannot maintain quality performance standards.
• Volume of shipments during peak seasons exceeds warehouse capacity.
• Cultures of the two organizations are incompatible.

What to Investigate

An operations-based due diligence assessment starts with a big-picture view of an organization and can be carried out on several levels. At the highest level, a company needs to determine if a prospective supply chain partner is really a good fit. Does it really have the product development process it claims it has? Does it really have a good supply chain network? Who are its supply chain partners and how are they performing?

It is also important to consider the level of supply chain visibility in place and whether there are metrics established to regularly measure supply chain effectiveness and optimize collaboration. Cultural and organizational issues such as leadership style, communication methods, and organizational structure are also critical points to evaluate.

Do Your Homework

The time has passed when financial reviews sufficed to determine the feasibility of a supply chain partnership or alliance-they tell only part of the story. Operational due diligence is necessary to round out the picture and identify other savings or potential pitfalls that books and records cannot reveal.