Your Suppliers Might Be Costing You Millions and It’s Not Where You Think
Cost leakage in global supply chains is rarely visible on a P&L—but it is always embedded in behavior.
When supply chain professionals are looking to reduce costs in their supply chain, the most obvious targets are cost of goods sold (COGS) and international freight.
These line-items tend to be supply chain professionals’ primary focus, however, elevated COGs or excess freight charges are more often than not a symptom of a supplier’s inability to effectively operate their business or manage the supplier/buyer relationship which have broader implications beyond margin pressures.
In the world of global supply chains, there is an insidious hidden cost driver which few companies consistently address, and that is chronic supplier underperformance.This significant cost driver is difficult to isolate and has wide ranging impact: from financial charges to brand damage and a business culture sliding towards perpetual firefighting.
For companies serious about sustained cost reduction—not one-time negotiations—it is necessary to look beyond COGS and view supplier performance as a set of interconnected systems and processes.
At the end of the day, exceptional supplier performance is not a question of luck. Supply chain performance is largely predictable as supply chains are comprised of relatively rational economic actors. These parties, from suppliers to individual functional departments are governed by incentives and constrained by a variety of micro and macro factors.
Ultimately, the problem is usually not bad suppliers but bad supply chain design. Supplier performance is not managed through negotiation—it is engineered through systems.
By taking a systems approach to supply chain management, companies can more easily address and prevent costly supplier underperformance. Ultimately, the problem is usually not bad suppliers but bad supply chain design. Supplier performance is not managed through negotiation—it is engineered through systems.
Examples of Supplier Underperformance
A phrase like supplier underperformance can mean many things across markets, industries, and growth stages.
In analyzing hundreds of supply chains across nearly a dozen different verticals, our firm highlights three of the most common examples of supplier underperformance in low-cost markets and in labor-intensive industries:
Inability to Provide Operational Visibility: Is tooling on schedule, have the required subcomponent been received, has an order started production, when will goods be ready for shipment, is rework complete, how is freight being consolidated-these are all examples of operational milestones which are critical to an importer’s downstream operations. All too often however, importers are reacting to operational developments rather than anticipating. The inability or worse yet, the unwillingness of a supplier to provide this vital information consistently and accurately leads to missed deadlines, sub-optimal inventory policy, and higher logistics costs. Without operational visibility, importers are just spectators in their own supply chain.
Cavalier Attitude on Recurring Issues: The costliest suppliers are not those with extreme defect rates or orders which ship weeks late, because these suppliers are quickly removed from a supply chain and their damage is relatively contained. It is suppliers who remain in a supply chain, but whose performance is consistently unacceptable which are the costliest. These suppliers see elevated though not dire defect rates, inconsistent on-time-delivery (OTD and OTIF), and poor responsiveness when problems arise. Beyond these symptoms of underperformance, the core issue is a supplier’s inability to address recurring issues.
The costliest suppliers are not those with extreme defect rates or orders which ship weeks late...it's those whose performance is consistently unacceptable which are the costliest.
Disproportionate Use of Resources: The Tragedy of the Commons in economics describes how individuals will overuse or degrade shared resources without appropriate guardrails. This very same phenomenon is all too prevalent across supply chains in low cost countries, with one of the most obvious examples seen with an importer’s quality control team. Here, an importer builds a quality control organization to address quality issues close to the source of production to prevent downstream issues. Without proper policies and guidance, suppliers in low cost countries are prone to overusing an importer’s quality control team, effectively outsourcing their own quality control efforts free of charge. In these instances, importers are essentially subsidizing a supplier’s own quality control functions while also indirectly reducing a supplier’s accountability for their own performance. This leads to rising staffing costs on behalf of an importer and paradoxically a higher rate of recurring issues as suppliers view an importer’s quality control team as a safety net thereby disincentivizing continuous improvement initiatives.
Why Underperformance Occurs
Supplier underperformance is largely a byproduct of a “set it and forget it” mindset, a mercantilist approach to supply chain management myopically focused on COGs, or a misconception on how supply chains can or should function.
Below are three major factors contributing to supplier underperformance in low-cost countries.
Failure to Confront Suppliers with Hard Data: When most people purchase a new car they research different models, features, and price points so they are prepared to negotiate with a savvy car salesman. And yet, far too many supply chain executives are still flying by the seat of their pants when confronting suppliers on underperformance. OTD data is murky because demand planning wasn’t accurate enough, quality data is debatable because standards weren’t previously agreed to, and product launch delays were somewhat tied to a domestic team’s inability to review key information in a timely manner. Without hard data or supplier scorecards, suppliers will evade accountability and resist investing in improvements. It is an importer’s duty to convince a supplier to change their behavior and hard data not anecdotes are needed .
Selective Enforcement of Terms and Conditions: Majority of importers have Terms and Conditions that are too long and complicated. This results in suppliers being unaware of key performance clauses, and worse yet, selective enforcement by importers. Effective supply chain management requires predictability. Terms & Conditions from a practical standpoint should have late delivery clauses to reduce an importer’s air freight exposure, should define how quality returns will be addressed, and even call out relevant currency or raw material benchmarks to prevent unexpected changes in pricing. Beyond the content of an importer’s Terms & Conditions, importers must also fairly and consistently enforce these performance clauses. From India to China to Malaysia, suppliers understand commerce, and until a supplier feels the pain associated with their underperformance, they rarely will take the time to address it.
From India to China to Malaysia, suppliers understand commerce, and until a supplier feels the pain associated with their underperformance, they rarely will take the time to address it.
Complacency Around Continuous Improvement: You’re busy. Everyone is busy, but continuous improvements are a cornerstone for high performing supply chains, not an annual performance to placate the C-Suite. If businesses don’t make the effort to systematically identify and address issues within their supply chain, supply chain costs will continue to rise. From SKU and supplier rationalization to design to manufacturing projects, continuous improvements can take many forms. To help institutionalize continuous improvements within a supply chain, companies should be using supplier scorecards to objectively monitor supplier performance and evaluate and address performance KPIs on a quarterly basis, before performance declines to a point of becoming a major problem. Similar to supply chain visibility, without proactively identifying and addressing supply chain issues, importers remain in the passenger seat merely taking a ride hoping they avoid bumps and calamity instead of steering their supply chains to a better state.
Moving from Managing Suppliers to Running a Supply Chain
Many organizations believe they are managing supplier performance when they are, in reality, monitoring it. True performance improvement requires ongoing execution—daily visibility, structured consequences, and active intervention when behavior deviates.
Supply chains are complex systems; however, they are comprised of relatively rational actors. To drive improved supply chain performance and along with it, lower supply chain costs, companies must recognize that visibility changes behavior, incentives drive decision making, and consistency over time yields greater results than ad hoc rapid improvement events.
In turn, supplier underperformance is rarely a surprise and almost never unavoidable. It is the natural outcome of how most global supply chains are designed, governed, and incentivized. High-performing supply chains are not negotiated; they are designed.