Tradeshift’s Q1 Index of Global Trade Health suggests trade activity continues on a path to recovery; however, the strained relationships between buyers and sellers requires more thoughtful repair to weather future storms.
We talked to WNS’s Manish Vora about the disconnect between buyers and sellers and how covid might trigger a reset in the relationship.
Q&A with Manish Vora, Executive Vice President at WNS.
Is there an imbalance in the relationship between buyers and suppliers?
Buyers hold the money and therefore have the upper hand in most situations; that is not new. In the Pre-Covid-19 era, demand was more than supply in many sectors which helped balance power. Even in lower-demand sectors, long-term agreements allowed the seller to gain a level of commitment for ongoing business and the buyer to maintain a reliable source of supply; which provided both sides with security and stability.
However, circumstances have changed since the Covid-19 pandemic abruptly disrupted supply chains globally. Reduced spending and a shrinking pool of customers for suppliers ultimately strained buyer-supplier relationships and illuminated power imbalances.
What are some of the ways this imbalance has come into play during the pandemic?
This imbalance has resulted in ‘Price squeeze’ in which buyers constantly seek to lower the price paid to the manufacturers. It has also led to a ‘Lead time squeeze’ in which buyers demand supplier factories to produce goods in increasingly shorter periods of time. But beyond the twin squeezes, there have been cases of buyers penalizing suppliers for delays. During the beginning of the COVID-19 crisis, there was a sudden shortage of raw materials when parts of China went into lockdown. A study revealed that more than 50% of buyers penalized the suppliers for delays in their shipments. For the remaining, almost all of them were unable to have their buyers readjust pricing to accommodate the higher raw material prices.
Many buyers evoked the force majeure clause in their contracts to justify the breaking of their binding obligation to pay for orders in production. And for those that kept their orders, late supplier payments have increased. This delay leaves the supplier in an uncertain supply chain position with delayed finances and broken payment agreements.
What does “good” look like in terms of the relationship between buyers and suppliers?
An excellent supplier-buyer relationship requires active and engaged working collaboration. It also calls for a change in mindset, encouraging both buyers and suppliers to commit to the long-term pursuit of value from their collaborative relationships. Here are a few steps organizations can take to put supplier-buyer relationship management on the right track:
- Buyers should start by identifying those suppliers that offer unique joint opportunities to create and retain significant value.
- Buyers should align strategically with these partners to define joint objectives and develop a compelling business case for both parties.
- They should adopt a methodical and structured approach to define the scope, pace and targets for joint projects, including a clear methodology on how to measure value creation
- Create a robust risk, compliance and governance model focused on supplier risk, BCP/DR, performance, implementation tracking, and hardwiring supplier collaboration into core operational processes
- Foster a culture founded in proactive communication, transparency, consistency, and knowledge sharing, to strengthen long-term partnerships.
- Invest in building world-class organizational capabilities to ensure sustainability over time
In the spirit of fairness, buyers can also adopt a more egalitarian payment structure to ensure suppliers are adequately covered for their expenses throughout key stages of order execution.
What role does technology play in supporting relationship success?
Automating the supply chain offers a number of benefits for businesses – namely, reducing manual effort while increasing productivity, efficiency, and accuracy - all of which provides a better experience on both sides and frees up resources to develop strategic partnerships. Some of the ways automation is applied includes: payments and invoicing, order fulfillment and inventory management, customer service, marketplace selling, and real-time measurement of revenue and other KPI’s.
Investment in the right tools and resources can also significantly cut down on operational costs in the long run. A study by ISG using RPA (Robotic Process Automation) to automate supply chain processes resulted in a 43% reduction in resources for order-to-cash processes including billing, credit, collections, and pricing.
Automation could accelerate the productivity of the global economy by between 0.8% and 1.4% of global GDP annually. In other words, supply chain automation is both cost-effective and leads to higher profitability.
Which companies are doing a great job of using automation to support their supplier relationships?
There are a few large buyer organizations that come to mind that have figured out the key to their success in strong, collaborative relationships with their suppliers and setting the standard for how true partnership can come to life.
Unilever is a great example of a buyer leveraging technology across the supply chain to drive business transformation at speed. At the beginning of 2000, Unilever began a five-year growth strategy, which included a significant restructuring of their supply chain management. They focused on organization, global procurement processes, supply chain executives, supplier involvement, and technology. As a result, they achieved $14.24 billion in savings in 2003 from its initiatives, and Unilever became a leader in the consumer packaged industry for technology adoption. The company has built capabilities to become more responsive to the changing needs of consumers and cultivated strong partnerships rooted in shared sustainable growth ambitions for continued success.
L’Oréal leads with communication for collaborative innovation with its suppliers. Through open dialogs concerning company goals and long-term commitment, L’Oréal has been able to establish an effective co-development process. The company’s annual “Cherry Pack” exhibition, for example, offers suppliers a preview of the consumer trends that the company will be working on, and asks them to develop packaging solutions in harmony with these trends. During the exhibition, L’Oréal creates a trust-based forum for suppliers to present the ideas and products in development—including ideas that have yet to be patented. This level of access to practical short- and long-term ideas and projects ultimately accelerates packaging innovation.
P&G has taken a step further in creating cross-functional teams solely focused on joint innovation with suppliers. By creating a practice of “open innovation,” P&G aimed to coordinate its efforts and leverage the skills and interests of people throughout the company to assess the competitive landscape, identify types of innovation that can help develop disruptive ideas, and identify appropriate external partners. For innovation to work, P&G has stressed the need to integrate cross-functional teams that, in turn, integrate business strategy with operations—which requires a broad network of interactions.
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