Supply chain management is increasingly recognized not simply as a way to hold down costs and keep operations running smoothly, but as a path to competitive advantage by satisfying customers with more value, innovative service and speed. While it is commonly known what big companies do to manage their supply chains, it has been difficult to assess the capabilities and behaviors of the Tier One, Two and Three suppliers who are links in those chains, providing raw materials and parts and services, like distribution and fulfillment. Many of these suppliers are mid-size businesses, which tend to be privately held enterprises. As a result, there is little data and not much academic knowledge or thought leadership about the best practices of these firms.
To determine what makes suppliers a “perfect link” in the supply chain, the National Center for the Middle Market (NCMM), located at The Ohio State University Fisher College of Business, collaborated with the Council of Supply Chain Management Professionals (CSCMP) to explore the key behaviors, barriers and opportunities facing mid-size firms. The research focused on reaching companies who supply component parts or provide value-added services. The NCMM and CSCMP explored the strategies and behaviors of these suppliers to describe what they do and to identify recommendations and best practices for other mid-size companies to emulate.
A survey of 400 middle market leaders responsible for the supply chain functions at middle market firms across the U.S. supported some assumptions, but also revealed surprises:
- Top performing suppliers have a much less diversified customer base than their peers. Often these top suppliers have just one or two key relationships. These are deep, collaborative relationships that start at the leadership level and extend down through the organizations, which results in frequent communication, joint planning and continuous improvement. Nearly half (44 percent) of the fastest-growing suppliers reported that they are their customer’s sole source of the product or service they offer. Perhaps due to this interdependence, most suppliers feel their key customers would be willing to help them in a financial crunch if necessary.
- Effective suppliers focus on their core capabilities and use external help when needed. The majority of fast-growing suppliers (61 percent) use 3PL providers to assist with functions such as warehousing, transportation and customs brokerage. The primary motivation is not necessarily cost, but increasing service levels. Approximately half of the suppliers surveyed participate in some type of supplier council, allowing them to collaborate with other suppliers and exchange ideas and best practices, as well as work together to increase efficiency across various channels and components. Finally, in addition to 3PL providers, other aspects of supply chain management are increasingly outsourced — areas like data management and security, as well as supply chain planning.
- The largest middle market suppliers leverage the advantages of scale, resources and expertise to their advantage. Because of size, larger firms ($100MM and above) see themselves as being more proficient suppliers and generally report themselves as being more satisfied with their overall supply chain performance than smaller companies. These larger players also view themselves as more valuable to their customers, and less vulnerable to supply chain risk as they have the ability to absorb market shocks, such as natural disasters, port shutdowns and other disruptions. However, smaller firms are not automatically excluded from enjoying supply chain success simply because they might lack these resources. Instead, smaller middle market suppliers can still develop the same behaviors, relationships and customer-supplier interdependencies that are deemed critical to being a “perfect link.”
- Ceding some control to customers can lead to greater overall success. The general perception for mid-size firms is that they can sometimes feel “squeezed in the middle” between larger customers and suppliers. Giving up some level of control over certain decision points can prove beneficial. For example, a customer may introduce data security procedures and accompanying software/systems to manage the flow, storage and protection of sensitive supply chain information. The research demonstrates that only companies serving a greater number of small customers maintain closer internal controls, while the “perfect link” is a more willing adopter of customer systems and processes.
Why do these insights on perfect-link companies in the supply chain matter? First, they show some of the ways that leading companies manage their supply chains to increase competitive advantage, not just to manage costs. Second, these insights underscore the critical role of the middle market in the American economy.
The middle market, which is made up of approximately 200,000 companies across the U.S. with annual revenues between $10 million and $1 billion, is a major driver of the U.S. economy. One-third of private GDP and jobs are found in this segment, and the continued growth and integration of these firms across the supply chains of American business will be a key driver of continued prosperity and competitiveness.
Doug Farren is Managing Director of the National Center for the Middle Market.