If customers and suppliers work well together and have good information flows, profit-ability will automatically follow.
Having spent nearly 30 years advising global corporations, Byrnes says that many companies are using business practices that are obsolete but have been passed down from generation to generation.
Jonathan Byrnes argues that in a new age of precision markets – moving past the era of mass markets – companies must focus just as much on supply chain innovation as product innovation. In his new book, Islands of Profit in a Sea of Red Ink, he provides a step-by-step guide to analysing profitability.
The key to improving profitability, he says, is building close relationships with customers instead of keeping them at arm’s length.
“When suppliers and customers have a close relation-ship filled with trust and mutual cooperation, they work more efficiently together and logistics costs can be reduced by 30-40 percent,” says Byrnes. “This reduces the operational costs for the company and end-product costs for the consumer. It’s a win-win-win situation.”
Third party logistics (3PL), one of Byrnes’ areas of expertise, describes three steps suppliers can take to build closer relationships with customers. Each step requires different information flows between the business partners to be successful.
In the first step, a transport company takes care of one part of the customer’s business – such as a certain trade route or managing a warehouse. “This is a basic supplier-customer relationship which requires simple information flow between the two parties,” says Byrnes.
Step two further advances the relationship – to an operating partnership. The supplier helps the customer to improve its supply chain by managing part or all of it. “This is where most third party logistics companies want to be and what Wallenius Wilhelmsen Logistics has already succeeded in doing,” he says. “The supplier offers the whole supply chain operations in a seamless package. As the partners work closer together, inform-ation flow becomes more complex.”
The final step is a business partnership whereby the supplier optimises the customer’s supply chain processes, which ultimately increases profitability. Openness and trust are crucial at this stage, since the supplier must thoroughly understand the customer’s business and needs in order to know what should be changed.
Byrnes says traditionally logistics suppliers have been used to selling products and services but not customer relationships. This worked well in the era of mass markets, but in today’s age of precision markets the requirements have changed. Communication and information flow are critical to the relationship. If it is lacking, particularly in step three, there is the risk that the customer doesn’t understand what the supplier needs or that the supplier promises more than it can deliver.
“The relationship should be tightly defined and standardised so you can know what you can offer customers,” says Byrnes. “At the same time, it’s important to match the customer to the relationship, and give the customer what they want and need now, not what they might need in the future. And, last but not least, both sides must work hard to develop the relationship further.”
A common mistake suppliers often make in their customer relationships, Byrnes says, is that sales people only bring in their operations colleagues when something goes wrong. “WWL’s sales and operational people work together from the beginning to reduce the risk of something going wrong later,” he says. “Its operations managers also work with their customer counterparts to develop new ways to help the customer.”
So how deeply involved should a supplier get in a customer’s business? “The heart of the matter is that companies need to react faster and more professionally to market conditions, and improve their go-to-market strategy,” says Byrnes. “If customers and suppliers work well together and have good information flows, profitability will automatically follow.”
Moving companies away from traditional customer-supplier relationships – based on tenders and requests for proposals and quotations – need not be a dramatic overnight change. “Companies should try new innovations on their supply chain on a small scale and then expand them,” Byrnes says. “That’s the way ideas become best practices.”