Driving benefits from supply chain relationships
The success of a business is often inextricably linked to efficiencies in the supply chain. Whether embracing new technologies or simply reviewing supply contracts, productivity can be influenced significantly by improving the process by which inputs become outputs.
While critical to the success of any business, at times the supply chain can seem like a part of the organisation bedevilled by an entrenched mismatch of motivations: the purchaser wants the best possible quality for the lowest possible cost, and the producer is fed up with being squeezed to endlessly deliver more for less.
The key to increasing productivity through the supply chain therefore lies not in driving a harder bargain out of suppliers, but rather in investing in long-term relationships, so that suppliers become motivated partners and not dispirited providers.
Many businesses are now focused on restructuring their supplier relationships and increasing their supplier collaboration, and new technologies are presenting opportunities for even greater efficiencies. One of the lynchpins of productivity in the supply chain comes from efficient communication between the various links in the process, and here the latest innovations around blockchain technology have the potential to revolutionise the way supply chains can operate.
This supply chain represents all the links involved in taking a product from raw materials to end user, and, in today's sophisticated environment, those links can span huge numbers of parties spread over countless locations. If something goes wrong, it can be hard to work out what happened, and if a customer wants to know about a product's constituent parts, it can be impossible to trace them all. When companies are asked to be accountable for the use of forced labour (for example) in their supply chains, it can be extremely difficult to police them.
That is where blockchain comes in. A blockchain is an open, distributed ledger which allows for transparency and security in a database. In the supply chain, it can be used to register the transfer of goods on the ledger as a series of transactions, identifying the parties involved, the price paid, the state of the product at the time, plus the date and location of the deal. No one party owns the data, so it cannot be manipulated, but instead it can allow everyone involved to trace products back to the origin of their raw materials.
Adrian Jones, a corporate partner in the firm's London office, says: "Blockchain is expected to provide a new way of verifying all the steps in a supply chain, acting as an open ledger which allows us to follow goods right back to their source."
Whether tracking the 15 suppliers who may have been involved in producing a designer leather handbag, or tracing responsibly-caught yellowfin tuna from catch to consumer, the demand from customers for more transparency around the provenance of the things they buy is clearly growing. For a business-owner, the ability also to smooth the process by which the various links in a supply chain work together can drive significant cost- savings.
Jones says: "We see many examples of clients being innovative and taking a more partnering approach to their supply chains. Some businesses are getting their suppliers involved in product research and development, others are sharing the benefits of efficiency savings or increased sales, investing directly in their suppliers or undertaking joint ventures with key suppliers."
The most effective way to manage a supply chain is to efficiently manage the internal and external interfaces within it, and lack of communication can significantly hinder that. If the supply chain is not operating smoothly, businesses are forced to build inventory to buffer themselves against peaks in demand or supplier failures, and inventory costs money. If, instead, suppliers can be involved in the planning process to meet requirements, then that buffer is no longer required.
This type of approach, dubbed vendor- managed inventory, sees buyers sharing more information with suppliers, so that those suppliers take more responsibility for maintaining an agreed level of stock, usually at the buyer's end location, which may be in store.
Less forward-thinking, but no less critical to the smooth running of a supply chain, are the contract negotiations which take place between vendor and buyer. Many businesses operate without written terms in place with suppliers – preferring to keep arrangements high-level rather than prescriptive – but this can create problems when disputes arise around things like the calculation of staged or retrospective discounts, or where liability falls when a particular issue arises.
Corporate partner Riccardo Abbate says: "Certainty of legal terms is really what you should strive for, so that you don't get a battle of forms, where each party is trying to contract under its own terms. Don't end up with a contract which is based on nothing more than oral and email conversations, but instead make sure terms are agreed upfront."
One of the key areas of debate for all parties is payment terms, and as of April 2017 new measures have come into force in the UK requiring large companies to publish details on the time taken to pay their suppliers. The rules are designed to shine a light on bad practice, with the Department of Business, Energy & Industrial Strategy saying SMEs were owed more than £26 billion in overdue payments in January this year.
Large businesses are now required to report publicly twice a year on their payment practices and performance, including the average time taken to pay supplier invoices. Failure to do so is a criminal offence.
Supplier incentivisation is another hot area when it comes to driving efficiencies, and has been credited as a key mechanism behind the success of the Olympic Delivery Authority ahead of the London 2012 Games. Likewise, we see cost sharing in the supply chain as another lever being used by innovative organisations.
Whatever the methodology employed, supply chain collaboration has increased dramatically over the past few years.
Working more closely with suppliers, and building more meaningful relationships, is perhaps the best way to cut down the time spent moving products from start to finish, and to thereby increase productivity.