Unfair practices within a supply chain disrupt normal functioning of any business. 

Here is guide for suppliers, distributors, manufacturers and retailers on fair doing business and relationship-building.

In 1990s General Motors started to actively promote its PICOS, a “Programme for Improvement and Cost Optimization of Suppliers”. The declared goal of the programme was to help suppliers reduce their production costs. In fact, the only company that lowered their expenditures was General Motors. They simply started putting a ‘big-player’ pressure on its partners and pursued their agenda. Twenty years passed, but the effects of the programme are still being felt. 

In a survey led in 2014 by Planning Perspectives Inc. the US suppliers called General Motors the worst automaker to deal with. This year was painful for the company, it faced numerous reputation scandals caused by car breakdowns, faulty ignition switches and linked deaths. A same story happened in Uzbekistan. Being a monopoly, GM Uzbekistan concluded a price fixing deal with car parts producers. They agreed to reduce the car components prices by 20%. It is clear that the producers started cutting corners on cheaper manpower and technical service. 

This example illustrates the aftereffects of monopoly, miscommunication and the attempts to put pressure on the suppliers. And such cases are very common in the CIS countries, a way more common than in the rest of the world. The reason is, we have not yet succeeded in building a long-standing culture of business-to-business relations, we simply did not have enough time for that. 

The strongest takes it all

In a basic supply chain consisting of raw materials supplier, manufacturer, retailers and distributors, the latter often have the most disadvantageous position. Distributors are stuck between devil and the blue sea, between retailers and manufacturers. They have to find a win-win solution for both of them, no matter who conquers the fluctuating market power. 

In a traditional model, distributor’s profit depends not only on its business effectiveness but also on the the conditions of its partnership with the manufacturers and retailers. However as a matter of actual practice, distributor focuses 99% of its efforts on the relationship-building. The distributor has to fight to protect its business and interests and survive. This fight kills growth and business development.

Consequently, all members of supply chain face problems starting from delayed or incomplete supplies (distributors are focused on their relationship issues, they do not have demand data, which affects planning) to profits loss and business failure. 

He who pays the piper calls the tune.. and suffers damages.  Keep in mind the General Motors case.

Relationship with distributors can be very painful. Here is another example. We will keep the names confidential for obvious reasons. A large Belgium retail network very often ignored the payment deadlines and failed to pay its suppliers in due size.  In 2013, suffering from a post-crisis lack of assets, the retailer asked for credit supplies. Fair enough, the suppliers refused this request. Lesson learnt: in 2010 retailer has 110 stores, now it has 67.

Another story. A network of construction hyper-markets is widely known beyond Hungary for its non-negotiable and harsh payment terms. Suppliers can receive their money only after the goods are sold. Suppliers are not able to track and control their inventory sales.  Moreover, the retailer can benefit from a payment delay. In fact, this network can pay at any time and ignore any agreements. 

Once we were addressed by a company supplying door hardware to this retailer. The supplier wanted to install a smart inventory management system to track and control his inventory sales. If the retailer allowed, the supplier would not only be able to control and forecast demand, but also to get his money in due terms. Very soon after the system was installed, the retailer changed the responsible people and put inventory system work on a full stop. Evidently, the retailer is not prepared for transparent doing business and a fair play. 

Let’s have a fair play 

Have you ever wondered what the term “supply chain” stands for? Its meaning is highly symbolic. All members of the supply chain are united, they form a whole. The moment of product purchase by the end consumer is a culmination, the ultimate goal of all supply chain members.  In an ideal world, each member of the supply chain works to make this happen. 

There are two models of supply chain interaction. Vertical integration means merging different levels of a supply chain, and horizontal model deals with the moves related to same-level chain members. Let’s explore these 2 models: 

Vertical integration brings more benefits to both retailer and supplier. Being able to control supplier’s inventory levels, a retailer reduces its lost sales level. At the same time, being able to control sales and demand data, a supplier can adjust his operations.  A thorough analysis of lost sales across sales locations, we have noticed that 80% of lost sales are caused by supply planning errors. And just imagine, 1% of lost sales equals to 10% of net profit.

If a supplier has accurate sales data, he is able to plan the next inventory shipping in due time and in due quantity. Faster shipping brings faster sales. Both retailer and supplier enjoy a win-win effect.

The cooperation between Wall Mart and P&G is a an example of vertical supply chain partnership. P&G unprecedentedly gave Wall Mart access to its inventory data and a possibility to manage their products. Wall Mart agreed and as a result, both parties benefited. As a result of this collaboration Wall Mart enjoyed a guaranteed inventory turnover and reduced time needed for inventory planning, while P&G was getting accurate inventory demand data and stable fast sales. These relations built on trust resulted in a more effective planning for P&G, which brought Wall Mart a higher turnover rate.

Horizontal integration has three basic functions:

  1. Lowering of a purchase price. Due to the larger volume of orders both international and foreign suppliers can reduce inventory purchase prices. For example, eight retail groceries present in Ukraine formed an alliance and all together, they managed to lower purchase prices, becoming competitive and matching a market-leader level.   

2)   Experience exchange. Sometimes even indirect competitors cooperate with each other to get new market knowledge. For example, an electronics retailer can share his experience on sales promotion with groceries, and vice versa.

3) Less investment into innovation. In case there is a need to conduct a global market research or develop a new solution, market participants can unite their efforts. This solution can work for a company which can not innovate itself, and is ready to develop the product with its competitors. 

Bringing together 10 regional networks, “Drogerie Union” is an example of horizontal integration in CIS. Dmitriy Kalachev, “Vprok” retail chain director, shares his experience of being a part of this alliance:

First of all, its participants can import goods for their brands directly. Before joining the alliance, their volume of orders was insufficient, by measures of China. Now they have enough volume of orders and their local products can successfully compete with global “power brands” and bring higher profits. 

Dmitriy mentions experience sharing as the next key benefit of joining the alliance. Knowledge is power. If you can compare your business and performance metrics to industry and understand your competitors, you can easily identify opportunities for growth and improvement, find your niche. 

How to form an alliance?

Each member of any supply chain can start building either horizontal or vertical relationship.  

Successful vertical integration means the retailer is the first to trustfully opens its data. Long-term vertical cooperation is possible only when members of supply chain openly share data between each other.

Sharing sensitive data and making an integration model work requires smart technical and administrative support. Technological solutions are needed to securely transfer confidential information preventing data monopoly.

To make an integration work smoothly and efficiently, all partners shall perfectly understand their roles, responsibilities and benefits. That is why building an organizational structure of this integration can be a challenging task.

Before entering any partnership and choosing potential partners, its initiator must define its own resources and benefits. The initiator takes the lead in negotiations, pitches about partnership and its benefits, presents goals and objectives of the integration to its potential participants.

This is not easy. Clear facts and figures, tangible benefits of partnership, clear and visible development perspectives can persuade potential partners to enter the alliance. Meaning partnership is possible. Gather like-minded people, team up, take the lead and go for it! 

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