Why Excessive Cost Cutting Can Be Detrimental to Your Supply Chain!

However, they cannot produce the raw materials for these – where will they get the rubber for the tires, the small parts for circuits, the oil for batteries? Furthermore, the technologies and skillset required to best produce the sub-components of an automobile are often highly specialized. The costs of producing and procuring the required amount of machines and personnel required to create all these sub-components would be enormous. Even if they tried, they were still not able to meet 100% vertical integration.

Instead, enterprises should specialize on their distinct competencies. After all, whatever can be produced cheaper, faster, and better by others should be outsourced to external suppliers. In the meantime, the firm itself can specialize in a smaller amount of processes that are specific to their core compentency, and grow from this specific niche they occupy. Because of this, an organization cannot compete by itself; rather, it competes with its entire network of suppliers behind it. A product or a service cannot be delivered until the raw materials have been delivered on time and have undergone the required processes.

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The Upstream Supply Chain Supply Chain Management (SCM) recommends identifying your direct suppliers, the suppliers of your suppliers, and their suppliers, and so on. The supply chain consists of tiers. Tier 1 suppliers are those from whom your enterprise directly purchases; Tier 2 represents those who supply your Tier 1 suppliers; Tier 3 supplies Tier 2; and so on. This creates an upstream supply chain: and interrelated network of direct and indirect suppliers which support a business’s operations using in-bound logistics.

Managing this upstream supply chain is considered a major strategy. With the right strategies, your supply chain can significantly contribute to your competitive advantage. If not, it will become a major disadvantage. Any failure on the direct or indirect suppliers would lead to failures in your operations if they are not corrected or improved.

Take for example, the Toyota Company. Toyota works on a Just-in-Time (JIT) principle, wherein raw materials are delivered to Toyota factories only when they are needed. Toyota does this by creating long-term contracts with its suppliers. In the contract, Toyota would provide their suppliers with a schedule of their operations – which car/s will be produced when and where – as well as the materials they expect to procure from their supplier for that particular operation. The supplier would deliver the materials at the Toyota factory at an agreed-upon time, and these materials will be promptly transferred to their points of consumption. This strategy allowed Toyota to significantly decrease inventory costs to almost zero while ensuring that supply is always there. However, this also exposes them to the risk of suppliers not meeting the target quality standards or failing to meet deadlines, causing delays in production.
So how does Toyota avoid this? Aside from implementing severe penalties, Toyota actively helps its supply chain to improve its processes and become more competitive themselves. Remember, “the chain is only as strong as its weakest link.” The links are interrelated and interdependent – any change in one of the links ripples to the rest of the chain.

To both prevent and resolve supplier deficiencies, supplier development projects are created. You as the client create such projects for your Tier 1 suppliers. These projects should help them identify and work on their weaknesses, creating improvements in your working relationships since they are able to produce high-quality products more frequently, at acceptable rates, and at lower costs. If they experience any problems, you should also be ready to help them get out of the rut. This produces a greater sense of loyalty from the supplier to you. In turn, Tier 1 suppliers are expected to train and develop their Tier 2 suppliers, and so on. In this way, the entire supply chain flourishes, and your company would reap these benefits exponentially.

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Supply Chain Management is primarily concerned with ensuring that the right amount of the right inputs arrive at the right quality/specification, price, and place to meet the requirements of both internal and external customers.
Because of the importance of the supply chain in ensuring an enterprise’s competitiveness, managing it becomes a strategic rather than a tactical concern. Hence, it requires a long-term perspective. Some things will need to be done even if there won’t be any immediate results, and even if it is costlier at present. At the same time, some actions need to be avoided despite the possibility of short-term gain because of the future damage that could be inflicted on the entire supply chain and on your business.