That’s according to a new report by the National Center for the Middle Market, which looks at supply chain management and casts doubt on the adage, “It’s not personal, it’s business.” The report identifies the human element as a key point of divergence in middle market supplier outcomes and concludes that suppliers who have strong personal relationships with clients are largely the fastest-growing.
“It still comes down to a people sport,” says Ward Melhuish, principal and advisory services leader at Grant Thornton. “Even though it’s business and a transaction, it goes beyond just saying our IT systems are connected, and I can process things faster. It’s making the human effort and involvement and interest. That makes a difference when it comes to the middle market.”
The human element is often easier said than done. Many companies are so focused on the big picture and strategy that they don’t have the bandwidth to focus on the intricacies of supply chains, especially if everything seems to be working. For the same reasons, many businesses are ignorant of the breadth of components that comprise the chain that leads to their loading docks.
It’s not just the companies’ fault. Supply chains can be complex, especially for today’s smart products. Try to imagine what the supply chain of an iPhone looks like. According to the website CompareCamp.com, the chain for the iPhone 6 (Apple’s previous model), includes 349 different Chinese companies, 139 Japanese businesses, 60 American suppliers and others from 28 additional countries.
“If we want to capture the entirety of the supply chain, we’re going to go back to dirt,” says report co-author Thomas Goldsby, a logistics professor at The Ohio State University. “Everything starts from the raw material standpoint, and assuming we’re talking about virgin materials, then you would go back to your own extraction.”
It’s not just iPhones that have unfathomably long global tentacles. Even food items can be traced back many steps if you try to identify the origin of each ingredient and all the packaging.
Goldsby issues a semester-long assignment for supply chain students at The Ohio State University to map the supply chain of a simple product. “They might use a 12-ounce can of Coca-Cola or a Papa John’s pizza and try to map as far up- and downstream as possible. If you just look at one ingredient in that pizza, you can realize Papa John’s is dealing with hundreds of different tomato farmers back at tier two, tier three. Things get complicated really fast.”
The report found that relationship management is so critical to supplier success that it’s actually influencing outcomes many people would consider counterintuitive. It turns out the best-performing middle market supply chains have fewer customers. Thirty-nine percent of large middle market companies (defined as those with annual revenue between $100 million and $1 billion) say their businesses are highly dependent on one or two critical customers. Roughly the same (40%) of the fastest-growing middle market suppliers report similar findings. The explanation, according to report authors, is in the strength of relationships. Successful suppliers focus on generating more business with existing partnerships rather than winning new customers.
“Sometimes in supply chain management, the term is two and one. I don’t want to have a lot of suppliers, I want to have two good ones and then another one in reserve,” Melhuish says.
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The report focused on supply councils as one way to forge stronger relationships and get a better handle on issues that may arise during the acquisition process. Here, all members of a supply chain—from raw materials to consumer-facing storefronts—are invited to shed light on the idiosyncrasies within their particular link with the hope that developing a better understanding of the chain as a whole can lead to improved best practices.
“The top performers were much more likely to employ these supplier councils, and frankly, it’s where the supply chain is regarded as an area of emphasis,” Goldsby says.
More important than “Kumbaya” moments at supply summits is unlocking the secret to becoming the strongest link in the chain for customers. Performance guarantees go a long way, but the reality is a supplier will never be considered indispensable if it only does the minimum asked of it.
“Something that increasingly is on the table for a big tier-one supplier or big tier-one customer is to simply phase [suppliers] out, either through a takeover of production activities, logistics activities, distribution activities, consulting or whatever,” Goldsby says. “[Your argument] has to go beyond any argument of volume or human efficiency. It has to be something else, making life not just cheaper but maybe better in some way for the supplier upstream or that customer downstream.”
Becoming indispensable is trickier for middle market companies, which often don’t command the attention and deferential treatment of major corporations. But it can be accomplished by meeting subtle demands not necessarily communicated by the customer during the normal course of business, but made knowable by taking the extra time to personalize the business relationship between buyer and supplier.
“The perfect link doesn’t mean that you have one fixed set of capabilities or assets that are leveraged in the same way routinely,” Goldsby says. “Rather, you have a set of capabilities and the ability to flexibly accommodate whatever that supply chain is calling for. That’s really what middle market firms in particular have to be focused upon.”