Supply Chain 24/7
This piece originally published in SupplyChain 24/7.
When financial performance tumbled well below the expectations of shareholders at a major US-based manufacturer of industrial parts, the new head of supply chain saw ways to make the supply chain part of the solution.
The firm was struggling to manage costs and still meet commitments on multiyear contracts with customers. It did business with thousands of suppliers, even though only a handful accounted for the vast majority of spending. Annual net productivity increases hovered close to zero. And decision making to award new work to suppliers was fragmented among individual product lines, undercutting the firm’s scale advantages.
With the backing of the leadership team, the new head of supply chain took action quickly, focusing on some of the highest sources of value. The company pared back the base of suppliers chosen by each product line to create a much smaller number of strategic relationships. That action reduced transaction costs, including overhead generated by the internal complexity of managing a long tail of smaller suppliers.
The leadership team aggregated spending from product lines, and the higher volumes of purchasing led to immediate savings in direct costs. The team also integrated functions that formerly worked in silos - procurement, quality, logistics and so on - to work closely together and to provide a single contact for each of the product lines served.
As a result of these steps, the company tripled the annual net productivity rate of the supply base over the course of two years - from near zero to about 3% above inflation - and reduced indirect procurement costs by 12%. The commercial programs benefit from single-point accountability and now view the supply chain function as a true business partner. Investors, meanwhile, have rewarded the company with a steady rise in its stock price.
Greg Gerstenhaber is a Bain & Company partner in Dallas, where he leads the firm’s Americas Supply Chain Management group. Peter Guarraia is a partner based in Chicago and the leader of Bain’s Global Supply Chain Management group. Pierre-Henri Boutot and Miltiadis Athanassiou are partners based in Hong Kong and Zurich, respectively. Boutot leads Bain’s Asia-Pacific Supply Chain Management group, and Athanassiou leads the group in Europe, the Middle East and Africa.