00:00:07 Introduction and Muddassir Ahmed’s background.
00:01:39 The blurred lines between suppliers, clients, and competitors.
00:03:36 Impact of corona-virus on supply chain and reliance on suppliers.
00:05:20 Strategies to minimize impact and maximize options.
00:07:40 Benefits of vertical integration in supply chain management.
00:09:49 Line between competitors and suppliers becoming blurred.
00:12:24 Challenges with international supply chains and lead time variations.
00:14:29 Improving supplier consistency with reactive and strategic approaches.
00:15:36 Sharing forecasts and information with suppliers.
00:17:00 Discussing the importance of understanding your role in supplier consumption.
00:18:25 Why having a good relationship with suppliers is crucial for business success.
00:19:10 Improving relationships with suppliers through IT and data sharing.
00:20:30 The value of informal discussions and forecasting accuracy in supplier relationships.
Summary
In an interview, Kieran Chandler, Joannes Vermorel, and Muddassir Ahmed discuss maximizing value from supplier relationships and navigating complex international supply chains. They explore the blurring lines between suppliers, clients, and competitors, the impact of marketplaces like Alibaba, and the effects of the coronavirus crisis on global supply chains. Strategies for minimizing supply chain reliance include maximizing options, agile IT systems, and vertical integration when possible. The interviewees emphasize the importance of strong supplier relationships, clear communication, and high-quality data flow to address lead time variations and ensure success in the interconnected world of business.
Extended Summary
In this interview, Kieran Chandler, the host, speaks with Joannes Vermorel, the founder of Lokad, and Muddassir Ahmed, MEA Regional Planning and Operations Manager for Bridgestone and author of the blog “The SCM Dojo.” The discussion centers around how companies can extract maximum value from supplier relationships and maintain trust in their networks.
Muddassir Ahmed begins by giving an overview of his background, which includes an engineering degree from Pakistan, a master’s degree in production from Sweden, and a part-time Ph.D. from the UK. He mentions his research on supplier development frameworks and how he moved to Dubai two years ago to be closer to his family.
Joannes Vermorel observes that over the last two decades, the lines between suppliers, clients, and competitors have grown increasingly blurry. He attributes this to the rise of e-commerce, which enables companies to sell their products directly to consumers. Vermorel explains that suppliers can potentially become competitors or allies, depending on their knowledge and relationship with a company. He notes that while the potential for cooperation has been growing, many companies have instead opted for marketplaces like Alibaba, where they have limited knowledge of their suppliers.
The discussion then turns to the challenges companies face due to over-reliance on their suppliers, as exemplified by the ongoing coronavirus crisis. Ahmed cites the significant economic impact of the virus on the USA, China, and Italy, as well as its effect on global supply chains. He argues that stockpiling is not a good strategy, as it leads to a “bullwhip effect” and capacity constraints.
The interview explores the evolving relationships between supply chain practitioners and suppliers, the increasing complexity of these relationships, and the challenges that arise from over-reliance on suppliers. The participants discuss the potential for cooperation and competition among suppliers, clients, and competitors, as well as the effects of marketplaces like Alibaba on supplier knowledge. They also touch on the impact of the coronavirus crisis on global supply chains and argue against stockpiling as a response strategy.
The interview discussion begins with the impact of supply chain constraints on various industries. For example, the electronics industry has been affected by the fact that 60-70% of semiconductors come from China, and now the supply chain is almost on hold. The tire industry has also experienced issues with parts coming from China, and manufacturing in Italy has been impacted as well.
When asked about strategies businesses can take to minimize the impact of supply chain reliance, the idea of maximizing options is presented. Rather than attempting to predict when and where problems will occur, companies should prepare for the inevitability of risks. The discussion also covers various forms these risks can take, such as diseases, geopolitical games, and systemic problems like the grounding of the 737 Max aircraft. Stockpiling is mentioned as one way to mitigate certain types of problems, but it’s not a solution for all types of supply chain risks.
To deal with these risks, companies should aim for more agile IT systems. However, this is not typically a strong forte of large organizations. Muddassir Ahmed brings up the concept of vertical integration, explaining that Apple, for example, has chosen to keep design and technology in-house while outsourcing manufacturing to a strategic partner like Foxconn. This approach has allowed Apple to focus on its core competencies and leave manufacturing to a partner with expertise in consumer electronics.
In some industries, however, vertical integration may not be possible. For instance, the tire industry requires a flow line manufacturing process, and the high cost of entry makes it difficult to find strategic suppliers. As a result, vertical integration may be more suitable for some industries than others.
The discussion then shifts to the blurring line between competitors and suppliers. This phenomenon forces companies to rethink their added value and identify areas of specialization. The 21st century has revealed many diseconomies of scale, and companies need to recognize the benefits of specialization over attempting to be good at everything. This is exemplified by Amazon, which has redefined the competencies needed to be a successful retailer.
The interviewees explain that companies that find ways to add significant value, even if their products appear similar to those of competitors, will benefit most from the blurred line between suppliers and competitors. For example, Amazon Prime’s same-day delivery service offers a vastly different experience for customers than going to a mall to purchase the same product.
In the interview, host Kieran Chandler discussed the challenges of international supply chains, supplier lead time variations, and techniques for improving supplier consistency with Joannes Vermorel, the founder of Lokad, and Muddassir Ahmed, MEA Regional Planning and Operations Manager for Bridgestone and author of the blog “The SCM Dojo”.
Muddassir Ahmed highlighted the four key issues caused by supplier lead time variation: increased inventory carrying costs, production delays or stoppages, reduced ability to supply to customers (leading to lost sales and revenue), and a decline in market share. To address these issues, Ahmed suggested both reactive and strategic approaches, such as measuring on-time delivery and total lead time, and working closely with suppliers to understand and address the causes of inconsistent lead times.
In discussing the sharing of forecasts between companies and suppliers, Joannes Vermorel noted that this technique often works poorly due to the inherent imperfections in forecasts. Instead, he suggested simpler techniques that require a higher level of trust, such as suppliers sharing their stock levels with clients, which can provide insights into the consumption patterns and the relationship between the client and the supplier. In some cases, suppliers may have alternative options or substitutes that can address short-term problems, emphasizing the need for closer relationships between the parties involved.
Ahmed emphasized the importance of having a good relationship with suppliers, which he believes translates to good customer service in terms of cost, on-time deliveries, quality, and consistent lead times. This, in turn, leads to happy customers, repeat business, and increased profitability for all parties involved.
Vermorel suggested that companies can extract maximum value from their relationships with suppliers by improving their IT infrastructure and ensuring high-quality data flow. This can help minimize unplanned work and misunderstandings related to order quantities and delivery times. Vermorel also agreed with Ahmed on the importance of fostering close relationships with suppliers, investing time and effort in getting to know them, and prioritizing intelligent discussions to identify areas of improvement.
The interview highlighted the complexities of international supply chains and the importance of maintaining strong relationships with suppliers. Both Vermorel and Ahmed emphasized the need for clear communication, trust, and collaboration between companies and suppliers to address the challenges of lead time variations and ensure the success of all parties involved.
Full Transcript
Kieran Chandler: This week on Lokad TV, we’re joined by Muddassir Ahmed who’s going to discuss with us what companies can do to extract the maximum value from these relationships and how they can maintain and build trust across their networks. So Muddassir, thanks very much for joining us today. Perhaps just to start off, you could tell us a little bit more about your background, your role at Bridgestone, and also your blog, The SCM Dojo.
Muddassir Ahmed: Thanks for having me. My name is Dr. Muddassir Ahmed. I’m originally from Pakistan. I did my engineering back there and then went to Sweden to do my masters in production. Then, I had the opportunity to go and do a full-time Ph.D. from Lancaster University in the UK. I was fortunate enough to find a job in a company called Cummins. I worked at various roles and moved my full-time Ph.D. to part-time, which was funded by them. This is where I did my research on supplier development framework, which is my core subject. Two years ago, I had an opportunity to move to Dubai to be closer to my family, and I now work as the Head of Planning and Operations.
Kieran Chandler: Great. Today, Joannes, our topic is going to be exploring a little bit more about the relationships between supply chain practitioners and suppliers. As a starter, what have you observed here?
Joannes Vermorel: It’s interesting. Over the last two decades, I think that the lines have grown more and more blurry about who is a supplier, who is a client, and who is a competitor. It’s maybe not for super heavy process industries like Bridgestone, but for many other verticals, like fashion or consumer electronics, and there are plenty of other industries where with the advent of e-commerce, as soon as you produce something, you can sell it yourself, which suddenly begs the question of whenever you have a supplier that is where you’re buying something and you’re just doing some kind of little assembly on top and reselling, your supplier can become a competitor. But it can also become an ally because they are much more familiar with what you’re actually doing. It’s interesting because I see that the potential for competition is basically the same as it is for cooperation. It’s a new world where it’s more complex, and where, on the contrary, many companies have gone pretty much in terms of relationships the opposite way, which is to basically kind of treat their suppliers as commodities, where you just have contact with marketplaces like Alibaba where you can source pretty much everything with very little knowledge about your supplier. So, it’s very interesting while the potential for cooperation has been growing steadily, I believe I have seen that many companies are taking the exact opposite stance and going for things with marketplaces where, on the contrary, they have little visibility and know very little about their own suppliers.
Kieran Chandler: Muddassir, we’re kind of seeing at the moment in the marketplace, due to these issues with coronavirus, that there are a lot of businesses and companies that are incredibly reliant on their suppliers. So, what kind of issues can occur in a supply chain due to this sort of over-reliance?
Muddassir Ahmed: As you can see, what’s happening in the news has a big impact on the US economy, worth eleven trillion dollars, and China’s GDP is down. The global impact on the supply chain is growing. Italy is on lockdown, and the finance industry is
Kieran Chandler: It’s a really serious point of concern what’s actually happening in supply chain. People are going towards stockpiling, and I don’t think it’s a good strategy because they are now inducing a fake demand, creating a bullwhip effect. That means they are basically capacity constrained when they should not be capacity constrained. So that’s, I think, a serious impact, and I think we should try to resolve it. It also definitely has created some sort of constraints, especially in the electronic industry, as you can see, it has been massively impacted because, you know, sixty to seventy percent of the semiconductors come from China and now their supply chain is almost on hold, it’s impacting that. Similarly, what’s happening with, for example, our tire industry: the molds and certain parts come from China which are not coming, it’s impacting their supply as well. You know, all the manufacturing in Italy has also been impacted as well because of this, so it’s a serious issue, and I do hope it gets better.
Joannes Vermorel: I kind of mentioned it there, the idea of stockpiling. What are some of the strategies that businesses can take to minimize the impact of being reliant on supplies? The overall idea is that you want to maximize your options. Whenever you have risks, usually it’s a bit of a dead end to say you’re going to predict when and where the problem will happen because usually it’s things that are rare, but ultimately it will happen somewhere at some point. For example, it can take the form of a disease that creates problems in a region of the world or pretty much soon, probably many regions of the world, unfortunately. It can also take the form of geopolitical games, for example, with the Trump administration raising tax levels for imports for the USA. It can take many forms or sometimes the 737 Max variant which is grounded, a whole series of aircraft having the same problem, so it creates systemic problems.
As a firm, stockpiling is just one way to mitigate a certain class of problems. For example, stockpiling will not protect you from problems where you have a recall. Let’s say, if you have a gigantic stockpile of something and then you have a recall because the materials are not good, because your supplier had a quality problem, a safety hazard that was diagnosed, then your stockpile is worth nothing. So stockpiling only prevents certain classes of problems; it doesn’t prevent all sorts of issues you can have with your suppliers in the supply chain. If you want multiple options, it’s interesting that suddenly, unless you want to do it the old way, which is expensive, the alternative is you need to have better, richer, more agile IT systems, which is usually not the strong forte of most organizations.
Kieran Chandler: Muddassir, another kind of strategy that we’re seeing a lot of businesses do these days, companies like Apple, is to vertically integrate. So what are the real benefits of doing something like that?
Muddassir Ahmed: I’d like to explain my definition of vertical integration, which I read in the books: when you’re manufacturing and you go and either buy a supplier or basically bring your core competencies in-house and don’t rely on a supplier. By that definition, I don’t think Apple is really vertically integrated because Apple has kept its design, technology, and intellectual property in-house, and most of the manufacturing has moved to the main supplier, Foxconn, which we all know they heavily rely on. There is a long-term partnership in place with them. Foxconn is the fourth largest manufacturer of consumer electronics by revenue, and they supply to Xbox
Kieran Chandler: Nokia, so not just Apple, there’s a they are really good in manufacturing mobile, you know, all the consumer electronic goods. Having said that, I think Apple did the right thing, relying on one person and giving a finding a partner whose expertise lies in the making of consumer electronics. But what they’ve done very well is created a strategic partnership, so giving the core competency what they have and the supplier have, I think, is a very good alliance. But in some industries, it’s not possible. For example, the toy industry, where you cannot really find a strategic supplier in a sense that most of the manufacturing process is very back and forth. You buy the raw material and basically, you should get the toy, and it’s very much works in a flow line. Each toy industry or plant costs about 300 million dollars, so the market and the barrier to entry is pretty high, so you wouldn’t see that. So that’s another impact to that. Okay, and this kind of goes back to what you were saying, Joannes, about the line between competitors and suppliers is very much something that’s becoming blurred, and is this something that benefits all parties then?
Joannes Vermorel: It certainly forces the parties to really rethink where their added value is. I mean, it’s very interesting because if I take the 20th-century supply chains, it was all about economies of scale. You produce bigger quantities, you achieve lower price, and that’s something that has made mankind wealthier through the course of the 20th century, in aggregate. Obviously, some countries are much poorer than others. But the interesting thing is that what we have discovered in the 21st century is that you have also tons of diseconomies of scale. It’s very complex, very difficult to be super good at everything; it does not scale. So that’s why, in many situations, vertical integration would be the best, but you realize that if you do that, you kind of lose your focus. Unless you have like the physical forces of the market, as sometimes like in tires, in the way you manufacture the tires themselves. If you don’t have super strong forces that push you toward that, you’re better to have some kind of specialization. And that’s interesting because what we are seeing is that, for example, when it comes to retail, very innovative actors like Amazon are revisiting what it means to be a good retailer. It means to be able to ship one unit and do same-day delivery with very high quality, very low cost. So it’s a new game, and they revisit entirely the sort of competencies that you need to achieve that. I believe that if we go back to your point about suppliers that can become your competitors, the companies that benefit the most from this sort of thing are the companies who find angles to really add tons of value, even if ultimately it looks like it’s the same product that gets served in the end. It’s just that it’s not exactly the same thing to have your Amazon Prime same-day delivery as opposed to taking your car, driving half an hour, and going to a mall to get the one item you need. So, in the end, it can be very different from the client perspective.
Kieran Chandler: Okay, and let’s talk a bit about that client perspective. Here at Lokad, one of the key challenges we see is that there’s a huge variation in lead times. I mean, we’re working in a really international supply chain; you’ve got suppliers in China, in Europe, and in South America. That international supply chain means that lead times can become incredibly variable. Muddassir, are there any techniques we can… How can we ensure that suppliers are more consistent? This is a very important question to answer, as it is one of the most underrated problems.
Muddassir Ahmed: I think we can answer this question in two parts. The first and most critical is to understand the impact. There are actually four key issues with supplier lead time variation.
First, it affects inventory. If the supplier is not supplying on time, it impacts safety stock, which is calculated by total demand, total lead time, and supply variation. Lead time variation forces you to carry more stock, which means higher inventory carrying costs and a higher cost of producing goods. This results in you not making enough money.
Second, the other impact is not having the right inventory, which means that the demanded items are not there. This causes production delays or stoppages, and people may end up producing goods they shouldn’t produce or having idle capital. Machines sitting idle lead to higher fixed costs.
Third, it affects the ability to supply to your customers, which means a loss of sales and revenue. This leads to the fourth issue, which is the loss of market share. I have seen examples where suppliers are not supplying for some time, and the end customers are not getting the goods, causing someone else to gain market share that you may not get back.
Finally, this leads to poor relationships between customers and suppliers across the supply chain.
In order to solve this, I see the issues from two angles. One is a more reactive supplier development, where you have the right KPIs, measure on-time delivery, and total lead time. You tell them how to improve, but you don’t get involved. Be tough with them in some instances. However, I prefer a more strategic approach, where you work with the supplier to understand what’s happening and collaborate to improve. For example, with suppliers that represent 20% of your demand but 80% of your risk, I would go and work with them, have value stream mapping events, and develop action plans to help them improve their inconsistent lead times. This also helps build relationships and ensure long-term sustainable performance from the supplier. Both reactive and strategic approaches can be mixed, depending on your resources and relationships with your suppliers.
Kieran Chandler: We’ve previously discussed sharing forecasts and information between different companies, including with your suppliers. How does that actually work in practice?
Joannes Vermorel: In my personal experience, sharing forecasts works poorly. It’s a fairly intricate and complicated process. The problem is that forecasts themselves are imperfect. If forecasts were perfect, it might work, but usually, they’re not. Simpler techniques tend to work better but require a higher level of trust. For example, what I’ve seen work successfully is suppliers sharing their stock levels with their clients. This is frequently done in the automotive industry, for example, with car parts. You can literally probe the stock level of your supplier. This stock is not dedicated to you, but at least you get a sense of whether you are driving half of the consumption of the inventory of the supplier, in which case you really need to have a tight relationship with the supplier, or if you’re driving half a percent of the consumption, in which case the relationship is less critical.
Kieran Chandler: So, that’s the sort of things that can steer the discussion toward where you are, basically, the dominant client and the supplier is creating a buffer primarily for you. Thus, normally you would have to pay for it, and it’s a fairly reasonable expectation in a situation where you’re very marginal. And then you can have all sorts of other similar problems, where you can have many situations with replacements, substitutes, and complicated options, where maybe your supplier might even know more about it than you do. So you need to get closer to even figure out what the alternative options are because you might think, “Oh, I have a problem, I have a stock-out,” and then the supplier might actually have an answer readily available which is, “No, you have this product that is slightly more expensive, so you would normally not pick it, but it can address your short-term problem.”
Muddassir Ahmed: From my perspective, having a good relationship with your supplier is important because it’s pretty simple. If your supplier is giving you good customer service, which is four elements: good cost, on-time delivery, quality, and consistent lead times. If you’re supplying at a good cost, on time, with the right quality and risk assessment, your customers are happy. When your customers are happy, you’re getting consistent business, you’re giving your supplier consistent business, everybody makes money, and life is good. So, for me, it is sometimes as simple as that, nothing more complicated.
Joannes Vermorel: In order to extract the maximum value from their relationships with suppliers, companies need to get closer to them, IT-wise. I frequently observe how much unplanned work goes into dealing with mundane problems with suppliers, like order reconciliation or misunderstandings on even things as basic as the quantities that were supposed to be ordered, the time of delivery, and everything. So, to have a high-quality production grade EDI where the data is flowing flawlessly goes a long way. Beyond that, I very much agree with what Muddassir said, which is if you want to do anything beyond that, you need to know your suppliers and knowing them takes time and effort. You will have to pay for that, and you need to prioritize. But ultimately, there is no free lunch. Usually, it’s better to have potentially informal discussions with suppliers, trying to pinpoint things that you’ve not even started to consider, as opposed to investing a lot of time on unreliable numbers like moving forecasts around. Your suppliers can see your historical orders as well, so they can do a forecast on their own. It’s not very clear that your forecast is going to be much better than their forecast. The problem is that forecasts can be gamed, so they cannot really trust your forecast to be completely accurate. So, back to basics: perfect IT execution plus high-level intelligent discussion will go a long way in having good responsive suppliers.
Kieran Chandler: Brilliant, we’re going to have to leave it there, but thank you both for your time. Thanks for tuning in this week, and we’ll see you again in the next episode. Bye for now.
