To protect your Supply Chain… Purchase your suppliers or create supply partnerships?

For many organizations, purchasing even their most critical suppliers and other supply chain links is not a viable option, and not every supplier is interested in being purchased.

For companies that rely on suppliers for critical raw materials, components, or services, there is tremendous dependence on those suppliers to meet the requirements and expectations of the company’s customers and other stakeholders.

One viable strategy that can be used for eliminating this reliance is a supplier buyout, the company buys its supplier. While this may be viewed as extreme, today we are seeing this approach used across a spectrum of businesses and industries.

Lower costs and greater margins

In the case of some companies and some of their most critical and/or risky suppliers, it may be in the company’s best interest. Potential benefits can include lower costs and greater margins, increased quality control, improved logistics and transport, and timely and accurate information flow. Combined, these benefits create a competitive advantage. Acquiring a supplier also results in diversification as the company branches out into new products or services.

A significant added value is the resulting improvement in business continuity management and resilience.A significant added value is the resulting improvement in business continuity management and resilience. Vertical integration eliminates some risks and provides greater control of managing those that remain. The purchasing company now controls the business continuity management system of the former supplier and can set continuity requirements for tier suppliers. The risk of being second, third, or fourth in line when there is a shortage of a critical raw material or component is eliminated. This approach is an even greater benefit when there is no alternate supplier.

Some interesting and informative examples of this strategic supply chain management approach are described in “Luxury Brands Buy Supply Chains to Ensure Meeting Demand” by Mark Ellwood (New York Times, November 15, 2018) and reprinted in The Resilience Post, November 19, 2018.

Two sides of the coin

Yet, as with almost everything in business – as in life – there are two sides of the coin to be considered. Does the company want to take on the risks that will come with an acquisition? Is the company prepared for diversification? Will the result be a less agile organization? A deep dive into the costs vs. the benefits of any acquisition is a must. Acquiring a company requires a significant investment, and financial benefits are not often realized in the short term.

Avoid the old view of a them against us approach. How about working together instead?The reality is that for many companies purchasing even their most critical suppliers and other supply chain links is not a viable option, and not every supplier is interested in being purchased. In those instances, there are many other effective ways to protect a company’s supply chain, and the most effective of these is partnering with suppliers and developing collaborative, mutually beneficial relationships. In these partnerships, supply chain continuity challenges cannot only be resolved by cooperative planning and response, they can often be prevented with collaborative mitigation. Avoid the old view of a them against us approach.  How about working together instead?

Avoid the old view of a them against us approach. How about working together instead?

A win-win for all concerned

Take a more strategic, not a reactive, approach to supplier management. Provide your suppliers with knowledge about your company, its products and services, how it functions, its business continuity management system, your expectations of them, ethical and sustainability standards, and future plans. At the same time, seek to learn the same information about your suppliers. Build a mutual understanding of upstream, internal, and downstream risks that threaten the supply chain. While this approach does require an investment of resources, the return is long-lasting, trusting relationships that, over time, will lead to a more effective supply chain, a win-win for all concerned.

In most cases, while the customer is at risk from its supply chain, the suppliers are equally at risk from their customers.If purchasing suppliers is not in your company’s future, strive to establish and create improved working partnerships with suppliers and all other links in your supply chain to better understand each other’s risk management challenges and capabilities and to collaborate on business continuity strategies and plans. Customer-supplier relationships are interdependent. In most cases, while the customer is at risk from its supply chain, the suppliers are equally at risk from their customers. In ideal supply chain relationships, both customers and suppliers seek to build a connection and communication channels that allow the open exchange of information. This includes collaborative efforts to lower costs, improve quality, mitigate supply chain risks, and provide mutual assistance at the time of an actual disruption or disaster.

In ideal supply chain relationships, both customers and suppliers seek to build a connection and communication channels that allow the open exchange of information.

Strategic approach to Supply Chain Continuity

Begin by ensuring that suppliers know and understand your business continuity goals and requirements. Take a collaborative strategic approach to supply chain continuity. Host or attend a supply chain continuity training where suppliers’ continuity and supply representatives join their counterparts from your organization to learn, brainstorm, and begin the process to build mutually beneficial supply chain continuity strategies to better manage risks that pose a threat to the supply chain. Don’t overlook other supply chain links such as logistics, transport providers, outsourcing companies, and contractors.

Don’t overlook other supply chain links such as logistics, outsourcing companies, and contractors.Participate in one another’s business continuity exercises. Strive to mutually design resilient supply chain strategies. Everyone wants to operate profitably in today’s supply chain environment, and every link in the chain has a vested interest in improved business continuity capabilities that reduce unnecessary and potentially lengthy business interruptions. When there is a stronger, more resilient supply chain, everyone benefits.

Although any move to a partnering approach to building relationships and working with suppliers and other supply partners, compared with the more traditional dictatorial and adversarial tactics, may well require a significant shift in mindset for some, it will benefit the customers and the suppliers and their stakeholders - and create more resilient organizations.
  1. […] To protect your Supply Chain… Purchase your suppliers or create supply partnerships? – T…For many organizations, purchasing even their most critical suppliers and other supply chain links is not a viable option, and not every supplier is interested in being purchased. […]

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