All my professional life has been about supply chain but over the last six years I’ve been engaged with external manufacturing businesses. My career with pharmaceutical multinational Brazilian-based companies went through different areas of supply chain excellence: demand management, planning, S&OP, procurement, logistics, distribution, exports/imports, warehousing. Suddenly, someone got the brilliant idea of using all this background on external production management. I confess I was quite surprised with that suggestion as I used to think that to manage an external supplier would be more related to a procurement role. I proved myself very wrong.
Managing external partners might be the situation when you have to use all your supply chain knowledge with an extra dose of psychology, change management and relationship building skills to end up with a successful situation.
I will not go deeper into the supply chain topics, but only one with a clear perspective of the inter-relations between planning, forecasting, COGS, distribution and material movement and logistics can put all figures together in the same page and agree about delivery dates, costs, roadblocks and service level. Not an easy task when it happens inside your own company, and even more complex when it relates to other company’s expected results, capacity plan and daily tasks.
Moreover, when we talk about Brazil and its social-political situation we have a great challenge to overcome. Brazil is 8.514.000 km2 in area, and is home to 204 million people. (2010 data). In 2014, Brazil’s estimated nGDP was as high as US$ 3,072T. Just to compare, Canada has 9.984.000 km2 and is home to 34 million people, with an estimated GDP of US$ 1,793T. Brazil is a giant that offers a Human Development Index (HDI) of 0.755 and his bad mood becomes apparent when we notice Canada has an HDI rating of 0.913. To keep things working, Brazil’s logistical issues result in costs that that represents GDP’s 11.7%, a tad higher than USA’s 8% 2013-based costs.
Inserted in this scenario, we have a business that suffers from the VUCA world we’re in. Volatility, uncertainties, complexity and ambiguity questions drives us into some arguing that changes every day and quite often, when exposed to endless internal discussions, someone brings up the brilliant idea of outsourcing your production, like transferring part of our problems to someone else would solve the irrational equation we face. The VUCA only makes all decisions even more complex and prone to review, and one must be really sure that this decision is the best one on a mid-term or long-term evaluation. Don’t expect short term answers.
The production of consumer/pharmaceutical goods in such an environment is prone to the same challenges. Of course no complex infrastructure scenario is involved, but we must guarantee that our partners have such a stable situation that there’s no risk of having a plant closed with my raw materials and finished goods within. The outsourcing decision is not an easy one and is always subjected to questioning.
On such a complex scenario, our daily challenge is to mitigate situations where we have someone supposed to produce my products and striving to survive in a competitive industry. The only way to have such a reliable output is to maintain a trustful relationship between companies. The company in which we deposit our goods and our brand must surely deal with topics like proper training of their personnel and a correct use of devices such as production equipment with a risk plan in place.
Looking at the broader view, over the last twenty-or-so years many companies have increased the usage of external manufacturing partner companies along their supply chain process as most have identified the correct core-business and migrated to this solution. As pharmaceutical companies we are not different, but with one added roadblock for proper service providing, which is the need for robust Good Distribution Practices & Good Manufacturing Practice systems that guarantee that all offered services are in compliance with the strict requirements we face – even some pharma-based companies working with OTCs and Cosmetics must follow good manufacturing requirements. In spite of having quality systems in place that have proven themselves as state-of-the-art service providers and verified through frequent audits, there is a natural tendency to control these activities from a vendee perspective and hence increase these controls over activities from time to time. When we have systems and processes with proven reliability and confidence, it’s time to move one step further towards other activities that once were kept in our hands. This kind of virtuous dynamic cycle system, although being a recognized value-added one, needs some intelligence to be supported as we frequently get ourselves in crossroads like having the right partnership with a profitable relationship to both companies, and with a partner that is either reliable or committed to the common success.
One special look on productivity X costs guarantees that we’re outsourcing at a cost competitive base that makes both business interesting to any company and attracts other players to the equation.
After defining what we do want and need in a long-lasting relationship, only its adequate management will turn this model into reality. An effective Relationship Management goes beyond a governance model overcoming the sense of "the processes of interaction and decision making among the actors involved in a collective problem that lead to the creation, reinforcement, or reproduction of social norms and institutions."1
This relationship management naturally includes metrics and actions that are monitored as any in a governance model, but also aggregates values and behaviors that although being somewhat intangible are the fundamental stone on the way we want to do business. When we rely on values that are common to both companies – or that are built up together - the basic idea is to increase CMO/3PL reliable productivity. This is something that both parties want, since it permits continuous growing and is what will add value to the company, either to the vendor or vendee. The Virtuous Cycle that results from this relationship has just one target: an everlasting consistent service level. We want our counterpart to be successful and the mental image I have is that of a paddle ball game, beach tennis like, where the objective is to play in such a way that our “opponent” hits and continues giving the ball back to me.
I’ve mentioned earlier the need and benefits of a correct relationship management, but what does it really stands for? From my perspective, it’s basically the approach and the way we interact with others. The point is to understand the others perspective/constraints and negotiate it in a win-win agreement, most of the time with no direct monetary values involved. Someday you might have to watch the game with your not-so-dear father-in-law, and deal with it the same way you deal with complex situations at work. If it happens frequently, deeper discussions are needed but always with respect and focused on the main topic. I believe that economics, administration and negotiation background are needed for someone in an external relationship model, but Conflict Management trainings are the ones that do make the difference in this role.
In a 3PL or CMO – Contract Manufacturing Organization – you will always seek to optimize a committed business relationship over an engagement-type one. To differentiate both, I use the “Eggs and Bacon Postulate” comparison, simply explained as: For your brunch, when you want bacon and eggs, the chicken is engaged in the process, while the pork is committed. Not that your professional partners have to be sacrificed – lucky them! - but the level of involvement we have is remarkably different. We want a 3PL that suffers and succeeds with us.
Engagement vs. Commitment
In order to get a strong and respectable connection one simple point is needed: Trust.
The successful cases I’ve encountered in recent year of external relationship management are the ones where one part is so honest and trustful to the other that some sensible point are led into a second level. It’s not surprising to see that parts get so engaged on customer service that prices and costs are relegated to a later discussion discussion. In recent international seminars I’ve been present the world most mentioned is trust - and proper relationship. One doesn’t exist without the other and they are very hard to build – but easily lost when stressful situations arise.
The building of a trustful environment requires people really interested in moving forward together. The decisions, strategies, forecasts and other complex points must be openly discussed – as far as it doesn’t affects your business information restrict policy.
The example I use to mention is related to adequate planning. How many of you invite your CMO or 3PL to your S&OP process and meeting? I can assure that very few companies do it. From one end what questions might be discussed in an S&OP meeting that is really confidential? If you’re talking about sales and distribution, you must remember that your 3PL or 4PL has all the information once discussed: prices, cost of goods, customer volumes, etc. Why don’t you invite your partner so he can have this information with a three months advance notice so they can prepare their capabilities to meet you desired service levels? They will really be considering themselves as part of the game and can plan in advance with proper warehousing, labor work or additional fleet.
This is a situation where you build up bridges using information that is not “restricted” and can be shared in advance. I did it before and can assure it works well. If nothing else works, at least your provider is aware of future plans and won’t surprise you with feedback like “We can’t do it”.
As a matter of fact, to effectively manage your manufacturing partner through an improved external relationship management, some steps might be considered. First, one must be sure to have a strong Customer Relationship Management - CRM - equivalent implemented for formal governance and in this sense a Vendor Managed Inventory – VMI - process would even improve this control. My first VMI, established in late 1996, was managed by my chemicals’ transport company. But please also take into account that a solid Sales and Operations Plan Process permits a feasible delivery route through the use of planned dispatches, with transit times within 48 hours for most customers. And one question here: have you ever wondered about bringing your 3PL to your companies’ S&OP? If not, why? Have you ever thought how committed they’d be upon joining you into this process? The open-hearted talk obtained through this relationship model guarantees full support to quality, and avoids unnecessary risks taken by the 3PL.
Other hints for a productive trust-building exercise:
- Be present – your partner must feel you’re with them so visit them as much as you can. You must know their capabilities, problems, layouts, etc so they feel they can rely on you if any last-minute situation happens. And for your organization people will notice you have a proper speech when discussing outsourced capabilities
- Don’t think “it’s just their work”. It’s YOUR WORK to get them knowing what to do. Your partner’s mission is to produce or distribute for you but your companies’ task is to provide means thyat they can do it. I’ve seem situations where the CMO received a wrong formula and the contractor asked for in-compliance product. Wow!
- Be honest and opened. As simple as that.
- Ask yourself how to make their life easier, and not take the most outcomes from the other side. Try to work for them! Many colleagues transfer the problem to partners and expect full answers. This is not the best way to build trust.
- Statistically Thinking X Critical issues balance. Please, use the statistical thinking approach. Sometimes one event does not reflects the full picture you have, so consider being more flexible in some decisions or actions. Unless you face a show-stop situation (eg.: compliance or quality issues) try to understand what happened and learn from the situation.
I do believe that the main steps to success in this journey can be easily achieved through use of simple steps.
Relationship management is an exercise of patience and tolerance - internal and external to your company, but when properly done I guarantee you will build up MASSIVELY STRONG bonds that can positively reflect in your daily challenges.
References
- https://en.wikipedia.org/wiki/Governance