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Supply Chain Goobledygook

Time Value of Supplier Retention

Supplier discovery and its integration is an important centrestone of any supply chain. Most successful companies look towards developing long term relationships with their suppliers where they work collaboratively towards enhancing returns for both the parties. Infact some of the most successful supplier relationships extend well over decades. The relationship builds over time (Quite obviously so) and gets strengthened over time. The value that a supplier creates for the retailer grows over time with greater integration. This integration not only means integration of systems but also that of employees on both sides including trust building.

The diagram above shows below has been divided into three types of period- (a) Supplier discovery period which refers to the time spent by a company in discovering a supplier. (b) Period of immediate integration of supplier into retailers system (c) Steady state period where the value for retailer is created slowly and steadily. As shown retailer supplier discovery is a negative cost. And in the period just after the supplier discovery, company spends its time and resources in integrating the supplier with its own systems. There is also a risk in the initial period, where a supplier might be discontinued to any issues relating to quality or service levels. All of which is cost again and therefore during the immediate integration period, supplier creates a negative value for the retailer. However as the integration proceeds the risk reduces and supplier and retailer understand each other better and hence start creating positive value for the retailer.

Over a long time there tends to be development of trust and deeper understanding between supplier and retailer and therefore the ability for the relationship between supplier-retailer further increases. Some of these value creation could come from joint projects that supplier-retailer may undertake. Hence the value keeps increasing over a long term although slowly (a time period indicated as steady state region in the diagram).

However a change of supplier with whom the stable relationship has been established (steady state region) represents a loss of value for the retailer as explained in the diagram below.

The shaded portion as shown in the figure above reflects the value destroyed due to change of supplier who is in steady state phase.

Therefore now comes the most important question.Why would a retailer discontinue a supplier who is in the steady state phase of relationship?

There can be many reasons, some like a sudden event at the suppliers’ premises that may bring disrepute or impact sales of retailer. Examples could be a hazardous contamination in food items ( Instance of discovery of presence of cadmium in glasses being distributed among kids by McDonalds) or reports of inhuman labour conditions at a supplier’s factory or discovery of a fraud etc. Sometimes a new global/local development can also necessitate the action. For example a new regulation that changes the cost equation of your supplier. Therefore for companies whose business model involves large number of suppliers must keep an eye on the emerging trends that may lead to a change in global/local market environment of your suppliers. To safeguard against such risks, it is advisable for retailers to build capacity of their most important suppliers to successfully mitigate such risks. A good example of this would be the proactive involvement of Wal-Mart to improve energy efficiency of its most suppliers in China, in order to safeguard its supply chain against rising energy prices.

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About yash saxena

In this nothing lies everything

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