Very close supplier-customer partnerships
are an essential characteristic of modern
“lean” value systems. These systems, as so
much else, were developed by Toyota and
others in Japan over a period of 20-30 years.
They entail tightly controlled, preventionbased
processes; no duplication of effort or
capability; shared continuous improvement;
and more technical (and more relevant)
aspects such as extensive data sharing, EDI,
paperless ordering and delivery systems,
automatic payment techniques, etc.[3-6].
There is now a large body of evidence to
demonstrate that “lean” production and distribution
are systematically superior to traditional
“mass production” in all essential
respects – quality, cost and customer service –
by an order of magnitude. The data in Table II
shows the level of performance advantage
achieved.
The lean approach has been adopted by
many of those companies which could be
characterized as “world-class”. Lamming[5]
and his colleagues argue persuasively that all
significant product value systems will ultimately
adopt the lean approach, particularly
in respect of those technical transactional
elements most relevant here. A detailed
review of the operational characteristics of
lean world-class companies is beyond the
scope of this article. However, one key characteristic
they exhibit is what might be termed
an enlightened approach to supplier
management.
As a simple example, a selection of worldclass
UK companies would include such
names as Beecham, Glaxo and Welcome (as
was) in health care; Sainsbury and Tesco in
food retailing; and Boots, Great Universal
Stores and Marks & Spencer in general retailing.
Recent creditor levels for this group of
companies were almost 30 per cent lower (in
terms of payment days outstanding) than for
comparable large firms in the health, food
and retail sectors. Simultaneously the
operating margins of these eight world-class
companies ranged from 40 per cent to 150 per
cent above their sector comparators. For the
most part the companies designated as worldclass
also had far lower stock levels, particularly
Sainsbury, Tesco and Marks & Spencer.
These three companies are bywords for excellence
in British retailing and also stand up
well in international comparisons.
It is of course unlikely that there is a direct
critical causal relationship between creditor
days and margins achieved. Both are outcomes
of a wide range of operating factors.
However, the substantially lower level of creditors
would appear to reflect a fundamental
difference of approach to supplier management
within the world-class companies.
Wal-Mart, the US retail discounter, provides
another revealing example. Wal-Mart has
grown at an extraordinary pace over the past
15 years, to become the largest, most profitable
retailer in the world[7,8]. In the process,
Wal-Mart has revolutionized operating practices
in the US retail industry, a quite remarkable
achievement. Very close, responsive
supplier relationships have been a key strategic
element in this development. Wal-Mart
expects the highest standards of performance
from its suppliers. It provides excellent performance
in return, for example better terms,
with the average time to pay suppliers just 29
days. This compares to 45 days for K Mart (i.e.
55 per cent higher). Back in 1979 K Mart was
much larger than Wal-Mart, with eight times
as many stores. Today it is a poor second in
every important respect (e.g. over 40 per cent
more stock).
Clearly there is much more to Wal-Mart’s
success than how quickly suppliers are paid.
Nevertheless, responsive supply partnerships,
what has been termed “shared destiny”
procurement, is clearly a key element contributing
to the success of Wal-Mart and the
best lean, world-class companies. Sainsbury,
Tesco and Marks & Spencer in the UK display
a similar pattern. In essence, suppliers must
be treated with the same care and consideration
as employees. (No responsible manager
would dream of paying his staff 50 days late.)
However, “shared destiny” relationships
can quickly founder when a large company
embarks on a “working capital programme”.
Extending the supplier payment period is
always the easiest option. Outdated and
discredited adversarial attitudes soon
re-emerge. There is a good deal of evidence to
support the view that UK companies are particularly
remiss in this area. For example, the
level of late payment in the UK is much
higher than elsewhere in the EEC, even compared
with such supposedly poor performers
as Italy, Ireland or France[9] (see Table III).