What can Procurement learn from Volkswagen’s unfolding Supply Chain disaster?
It’s rare that a Procurement related story makes it to mainstream media. It is currently happening with the story about how Volkswagen’s production lines have been put to a stop when two suppliers stopped deliveries. Apparently, they stopped deliveries to protest against a contract cancellation. The latest news show that an agreement has been found and that shipments will resume.
Some of the recent coverage in mainstream media:
CNN: http://money.cnn.com/2016/08/23/news/companies/volkswagen-production-golf-germany/
Wall Street Journal: http://www.wsj.com/articles/volkswagen-settles-supply-dispute-resumes-production-1471943564
Because the story is unfolding and because I am not following it closely enough, I will not detail more than what I did so far. I will only focus on what Procurement practitioners can learn from it.
For an up-to-date and complete coverage, I recommend the posts on the topic that Peter Smith from Spendmatters UK recently wrote (and will continue to write as more info comes out).
The VW story is an interesting case as it could be (I use the conditional because the reasons behind the contract cancellation, how it was actually managed on both sides… are still not clear) an illustration of a major Procurement “fail”. And, at the same time, it is a reminder of the impact and role of Procurement (that is not just about low prices).
A procurement fail? Maybe…
Again, the full story is still not told so it is premature to talk about what happened and the root causes. But, it is possible to “brainstorm” about what they could be. As Smith wrote here and, as I commented on Twitter:
the root cause(s) could be:
- Poor risk management: identifying sensitive parts because of single sources, criticality (from a design & function point of view, from an alternate point of view…), and of many other aspects is a must for Procurement. It is the base to building contingency plans (2nd source, alternate design, standardization…). Especially if you have just-in-time (JIT) in place for a part!
- Excessive focus on KPIs: as Smith writes, reducing the number of suppliers has (and still is) a critical KPI for many Procurement organizations. This can create tricky situations: self-created monopoly, high dependency from some suppliers, high dependency of suppliers to your business (which also comes with risks),…
- Short-sightedness: the excessive focus on KPIs is often the reason why organizations forget the mid- and long-term views of business and actions. The contract cancellation that started it all should have been decided with all cards in hands to estimate potential impacts.
- Poor contract management: as mentioned above, the decisions to cancel a contract was probably taken without looking at all the effects and possible collateral damages. This can happen because of silos (organization & information) or because of a lack of complete and accurate data.
- A wrong attitude in managing suppliers. This is a trap in which many large corporations fail. They use their size and name as a lever to ask suppliers to do anything. Some suppliers do, some don’t. And, like the David & Goliath story, the smallest may impose its will. It is because the large company may not have understood what her Achilles heel actually is. Many examples exist. It includes asking for savings and rebates that are not reasonable (Tesco in the U.K. has had its own “popularity” due to such practices). Another example is about considering suppliers as “consumables” and not business partners. This is often exemplified by an unbalanced communication (or lack thereof) between the two parties.
For sure: a reminder of what Procurement is all about!
Whatever the root cause(s) may be the story is, for sure, a superb reminder of a situation that Procurement should prevent. By preventing such disruptions, it illustrates the value that a professional Procurement organization could deliver to companies. This is how Procurement could elevate its position to being a strategic function!
For example, the VW story is a real-life example of the post below: one single supplier can stop all your production and your source of income!
Also, by being a potential example of several fails, it illustrates why Procurement has to evolve to survive:
Part of the needed evolution is about the way Procurement sees and manages suppliers:
and about critical capabilities that will contribute to positioning Procurement as a strategic function:
To conclude, many people, me included, write and talk about the need for Procurement to reinvent itself to survive by focusing on value.
All these articles and talks may sound a bit theoretical to some. But, the thing is that a story like the VW one is a vivid example of why a change is needed. I hope it will be a wake-up call for many Procurement practitioners and create the right sense of urgency!
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