eWorld Masterclass Presentation
September 28th, 2010
London, UK
One of the greatest challenges faced by both the private and public sectors in terms of driving best value decision-making, is supply base erosion. Almost irreparably damaged through ill-advised initiatives such as supply base rationalisation and low cost country sourcing (to name but two), many supplier development, engagement and utilisation programs are little more than exercises in futility. This session aims to dramatically increase your chances of success, by explaining the new dynamics of the global economy and how you can drive sustainable value through your supplier relationships.
Speaker: Jon Hansen, Procurement Insights
3. Supplier Development in aGlobal Market The concept of "governance" is central to the global value chain approach . . . some firms in the chain set and/or enforce the parameters under which others in the chain operate . . . A chain without governance would just be a string of market relations.
4. Supplier Development in aGlobal Market Case Reference: Tesco control of the production of mangetout (snow peas or snap peas) in Zimbabwe
6. Supplier Development in aGlobal Market Market access: developed countries dismantle trade barriers, developing country producers do not automatically gain market access, because the chains which producers feed into are often governed by a limited number of buyers . . . And access to and coordination with lead firms and their objectives. Note: Lead firms according to Gereffi “undertake the functional integration and coordination of international dispersed activities.”
7. Supplier Development in aGlobal Market Fast track to acquisition of production capabilities: producers that gain access to the chains’ lead firms tend to find themselves on a steep learning curve . . . are very demanding with regard to reducing cost, raising quality and increasing speed (and are therefore unpopular with the local workforce) . . . best practices* and provide hands-on advice (and pressure!) on how to improve layout, production flows and raise skills. * Similar The Wal-Mart position that their demands on their suppliers make them (being the suppliers more efficient).
8. Supplier Development in aGlobal Market Case Reference (The Bad?): Wal-Mart and Vlasic Pickles
9. Supplier Development in aGlobal Market Case Specifics: Finally, Wal-Mart let Vlasic up for air. “The Wal-Mart guy’s response was classic,” Young recalls. “He said, ‘Well, we’ve done to pickles what we did to orange juice. We’ve killed it. We can back off.’ “Vlasic got to take it down to just over half a gallon of pickles, for $2.79. Not long after that, in January 2001, Vlasic filed for bankruptcy.”
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11. This trend is most pronounced in the apparel-and-accessories category, where average gross margin drops from 48.7% for companies generating less than 10% of sales through Wal-Mart to 28.7% for those selling 20% or more. Food and beverage also shows a big disparity, where the same breakdown shows average gross margins dropping from 39% to 22%.
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14. Supplier Development in aGlobal Market Distribution of gains:understanding the governance of a chain helps to understand the distribution of gains along the chain . . . in which high barrier to entry functions (R&D, branding, marketing) and high returns belong to developed countries . . . low barrier to entry (production activities) and low returns for developing countries . . . question re the spreading of the gains from globalisation.
15. Supplier Development in aGlobal Market Think of the Clark and Fourastie three sector (now four sector hypothesis) re the development of a wealthy nation’s economy . . .
20. Supplier Development in aGlobal Market With India, the indigenous software engineering talent has made that country the off shoring destination of American high-tech firms, each of which have committed to investing $1 billion into its economy . . . the result of this boom is that India has seen double-digit wage growth for much of the 2000s.
21. Supplier Development in aGlobal Market Leverage points for policy initiatives: many global value chains are not just strings of market-based relationships they can both undermine government policy but also offer new leverage points for government initiatives . . . Lead firms in developed countries can influence supply base in developing countries . . . re raising labour and environmental standards.
22. Supplier Development in aGlobal Market Funnel for technical assistance: based on find ways of providing effective technical assistance to developing country producers . . . lead firms of chains become the entry point for reaching out to a multitude of distant small and medium sized suppliers . . . however, buyers may require ‘mentoring’ in order to fulfil this funnel and transmission function.
24. Supplier Development in aGlobal Market An increasing number of developing country producers will engage in contract manufacturing for a decreasing number of global buyers.
25. Supplier Development in aGlobal Market Brands play an increasingly important role in enterprise strategy, particularly in consumer products such as garments and footwear . . . brands stand for high quality or well-defined images, they need to define and enforce product and process parameters . . . In short brand maintenance and chain governance is unquestionably linked to one another.
26. Supplier Development in aGlobal Market Risk of supplier failure will continue to be a key driver of chain governance . . .
27. Supplier Development in aGlobal Market Interesting side note . . . a 2008 Aberdeen study found that 99% of supply management executives reported disruptions in their organization’s supply chain in the previous 12 month period . . . which negatively impacted key areas including customer relations, earnings, time to market cycles, sales, and overall brand perceptions . . .
28. Supplier Development in aGlobal Market . . . despite the frequency of the disruptions and far reaching negative consequences, the survey reported that 84% of executives believe that their company is not prepared to respond to a disruption in their organization’s supply chain.
29. Supplier Development in aGlobal Market Profit squeeze leads buyers to scout continuously for new producers who offer lower labour costs . . . raising the risk of supplier failure and the need for chain governance . . . while the squeeze relative to traditional products such as garments and shoes have likely “bottomed out” . . . newer products such as computer monitors or all year-round available fruits and vegetables are vulnerable.
30. Supplier Development in aGlobal Market While Business-to-Business (B2B) electronic commerce is being promoted world-wide as a means of enabling developing country producers to sell in advanced country markets and transform the relationship between producer and buyer . . . all forms of e-procurement are likely to require mechanisms to contain buyer risk, such a certification . . . meaning that monitoring and accreditation agencies will be of increasing importance (Mansell 2001).
31. Supplier Development in aGlobal Market A predicted shift to parameter setting and enforcement by agents outside the chain . . . the more conformance/compliance with parameters can be codified, generalised and credibly applied, there will be a decreased need for governance management from within the chain.
32. Supplier Development in aGlobal Market The Questions: In your opinion, why did Mattel fail to enforce the proper parameters in relation to the paint incident?
33. Supplier Development in aGlobal Market The Questions: To what degree should the gap between domestic market requirements and export market requirements influence your organization’s decision to use suppliers from within a specific foreign cluster?
34. Supplier Development in aGlobal Market The Questions: If you choose to invest in developing a few selected suppliers in an effort to quickly close the capability gap, at what risk are you of running into the problems referenced earlier pertaining to diminished profit or reduced competitiveness?
35. Supplier Development in aGlobal Market The Questions: Being apprised of the fallout associated with Tesco’s control of the production of mangetout, at what point does the nature of your “influence” over suppliers cross the line?
36. Supplier Development in aGlobal Market The Questions: Based on these as well as other elements of establishing a globalized supply chain, and if possible, does it make more sense to deal with domestic or close proximity foreign suppliers (re like Canada and the United States)?