Global OEMs want (and need) supplier collaboration

The new normal in manufacturing is impacting global OEMs and their supply chains, causing them to reexamine suppliers more closely with an eye toward reducing risk and improving collaborative efforts. While suppliers are gearing up for what they hope is a growing 2011 with demand picking up, 639 executives who responded to a recently released McKinsey Quarterly survey reveal they are divided on their companies’ preparedness to meet those challenges. Fully two-thirds, say McKinsey analysts, expect supply chain risk to increase—not a good sign for either side of the manufacturing equation.

Volatility in customer demand runs rampant, increasing complexity throughout the supply chain. The McKinsey survey showed that 37% of respondents say “increasing volatility of customer demand” was a supply chain challenge over the past three years, and 21% say it will continue to be over the next five years. Consumers have become unpredictable, which makes OEMs unable to forecast parts orders, which then trickles down to processors and tooling manufacturers.

So manufacturers are left wondering what do with this volatility, says Jeff Dobbs, global head of diversified industrials (DIs) at KPMG. “Do you increase your supplier base to make yourself agile in India, Brazil, China, or the U.S.?” Dobbs poses. A KPMG survey came back with information similar to that of both the McKinsey survey and the Institute for Supply Management’s recent survey: Large global manufacturers are planning to reduce their supplier base, some through supplier consolidation.

However, in the wake of that reduction, the KPMG survey found that the conglomerates also plan on becoming true partners and more collaborative with their suppliers. “The answer was pretty clear,” says Dobbs. “We need partners and we need to collaborate. Industrials are clearly lining up on the side that it’s all about collaboration. Not only because it’s the right thing to do, but it reduces your risk as well. We’ve paid attention to supplier metrics such as reliability, quality, and cost, but there’s a whole lot more to the supply chain than just those three. There’s R&D, the whole supply chain management process that collaboration enhances. If you have suppliers that are on your side with mutual interests, mutual gain, and mutual risks, it just works better.”

Executives responding to the McKinsey survey continue to be focused on supply chain costs, but the last recession provided opportunities for them to learn to manage and control future expenses. Reducing operating costs remains the most frequently chosen goal over the next five years—as it was over the past three years, notes the McKinsey analyst.

Increasing volatility of commodity prices is a major concern for the 145 respondents who answered McKinsey’s question about their level of preparedness to meet supply chain challenges over the next five years. Many are not prepared to deal with the ups and downs of commodity pricing among their supply chains. While 28% say they are prepared to deal with pricing volatility, 37% say they are not prepared.

That may be why KPMG’s Dobbs noted that DIs want suppliers that will work with them, particularly on pricing. Forecasting pricing is important to these global conglomerates, and they want suppliers that are not going to push prices up and down, as has happened often with molders and their resin purchases. “Collaboration—creative thinking—is key to the problem, but it seems too simple,” Dobbs adds. “DIs need to do cost averaging to avoid these wild commodity swings. Theoretically, it needs to be simpler—otherwise you have winner and losers every day and can’t predict what business will be like.”

One way to cope with this uncertainty, said the McKinsey report, is to “view supply chain assets as a hedge. By considering investment in production resources that aren’t necessarily lowest-cost today (but soon could be), companies can position themselves for greater flexibility in the future.”

Supply chain management is becoming increasingly critical to manufacturing success. McKinsey’s report revealed a disconnect between upper management and the supply chain: “The vast majority of CEOs do not actively develop supply chain strategy or work hands-on to execute it.” When asked what role, if any, the CEO of the respondents’ company plays in managing the supply chain today, only 10% said the CEO actively develops the supply chain strategy with the operations team and works with them to ensure execution; 12% said the CEO actively develops the supply chain strategy with the operations team and lets them execute it.

The more common scenario is that the CEO “sets the strategic direction for the business, including the supply chain strategy, and lets others execute” (37%), or that there is “No or limited interaction—lets operations drive the required strategy and tactical operation improvements needed to meet the business strategy” (38%).

McKinsey’s conclusion is that “hands-on attention from the CEO is pivotal in managing the cross-functional trade-offs that underpin many supply chain decisions. Yet the role of CEOs at many companies we surveyed is limited or nonexistent. Companies that can bridge the functional divides that thwart collaboration will have an edge in creating competitive supply chains capable of fulfilling business strategy requirements.” —Clare Goldsberry