BCG Supply Chain Expert on How to Overcome New Challenges (Full Q&A)

This is a difficult environment for some of the world’s largest companies. What do business owners need to understand about the supply chain heading into 2023? We asked Daniel Weise, a managing director at Boston Consulting Group (BCG), who oversees its procurement business line.

Weise joined BCG nearly 20 years ago as an automotive industry specialist and now, as CEO of the subsidiary INVERTO, focuses on supply chain operations across industries. He’s also the co-author of Profit from the Source: Transforming Your Business by Putting Suppliers at the Core, which Harvard Business Review Press released in June.

b.: How do you think the relationship between organizations and their suppliers has shifted in the 21st century?

Weise: Once upon a time, suppliers were often located close to the companies that bought their goods and services. The internet changed that. These days, suppliers can be located across the world — and yet they are still never more than a click away from the buyer.

Apple, for instance, buys goods and services from many different suppliers in many different countries. Indeed, it would have been impossible to produce the iPhone before the internet-powered age of company-supplier collaboration. Although this iconic smartphone is designed in Cupertino, California (where Apple has its headquarters), it is manufactured from raw materials and components sourced from 43 countries across six continents and assembled by workers at Foxconn’s factory in Zhengzhou, southwest of Beijing.

As well as bringing together buyers and suppliers that may never have previously connected, the internet has helped strengthen the company-supplier bond and changed the way companies and suppliers work together. This has helped transform the fortunes of many companies — [for] buyers and suppliers. Prior to the internet, the dialogue between companies and their suppliers focused on costs, not least because the average company spends more than half its budget on procuring goods and services from these external vendors. But, as I explain in my new book, Profit from the Source, published by Harvard Business Review Press and co-written with my Boston Consulting Group colleagues Christian Schuh, Wolfgang Schnellbächer and Alenka Triplat — suppliers are a scalable source of competitive advantage. They can help companies create products and services that are not only lower cost but also lower risk, more sustainable, higher quality, more innovative, and faster to market.

b.: As supply chains continue to recover from the COVID-19 pandemic, what changes can organizations make?

Weise: To alleviate the current pressures, CEOs should consider setting up a 24/7 procurement and supply chain war room. This is what Apple, Dell, and others did when the semiconductor crisis first struck in 2020. Also, they should: make a non-cancellable and nonreturnable commitment to suppliers for an 18-month-to 24-month time horizon; ensure their suppliers earmark specific components for their sole use; and collaborate with suppliers to track and trace every order.

Longer term, CEOs should make the systemic changes that will ensure they are well prepared to deal with the next crisis when (not if) it comes.

As we explain in Profit from the Source, the key thing they need to do is make their top suppliers and their procurement capability their leadership imperatives. What do we mean by this? At a personal level, they should spend more time with their top suppliers, nurturing 1-to-1 relationships with the CEOs of the 20-40 companies that account for half of their supplier budget.

At a company-wide level, they should revamp their procurement function. To do this, they should consider establishing what we call a “bionic” function that blends the power of AI and other advanced technology with the power of human ingenuity, creativity, and judgment. This will require them to equip the function with automated systems that can deal with the 95 percent of suppliers who are not strategically important and staff the function with ambitious, go-getting people (rather than deskbound administrative types) with the entrepreneurial, strategic, diplomatic and analytical skills to deal with the 5 percent of suppliers who are strategically important.

b.: A lot of the advice in your book relies on persuading suppliers to make significant systemic changes. How would you navigate a situation where the supplier isn’t willing to do so?

Weise: The first thing to say is that buyers should differentiate between different types of supplier. The fact is that some of their suppliers are more important to them than others. So, the approach to those we call “A” suppliers needs to be more personal than the approach to their other suppliers. These “A” suppliers may only number between 20-40 companies, but as a group they likely account for 50 percent of a company’s supplier budget and supply goods and services that are critical to the company’s success. As a result, they are normally the first suppliers that CEOs will consult when looking to make cost savings. The big question is: how can CEOs have such a tricky conversation in a way that does not wreck their carefully nurtured relationships? In Profit from the Source, we recommend some ways to do this. Above all, we point to what we call a 360o program — so-called because it allows a company to provide an exclusive wraparound package of business support to suppliers in return for securing an upfront commitment to double savings every year for an initial three-year period.

One of our clients — a major automotive company — introduced this program when it needed to find a multimillion-dollar package of savings in a single quarter to create the financial headroom required to invest in electric vehicles. To start with, the chief procurement officer struck up a series of personal 1-1 relationships with the CEOs of the big suppliers. The purpose was to accelerate the typically cumbersome negotiations with suppliers by bypassing all the commodity managers and raising the discussion to a strategic level. Then, the CPO asked the supplier CEOs to make an upfront commitment to double savings in one year across all the commodities. As an incentive, the CPO offered the suppliers a customized package of business support: for instance, helping the suppliers achieve their challenging cost-savings targets and divulging some of their own closely-guarded secrets on how to boost profit margins. The results were remarkable — for the automaker and its suppliers. In the first year, 20 of the 30 “A” suppliers signed up to the program, and the CPO met his savings goal. Likewise, the suppliers saw their businesses grow to such a degree that the other 10 key suppliers who had declined to participate in the first year subsequently decided to join the program.

b.: How might organizations — even smaller ones — miss out on potential growth opportunities by not hiring a chief production officer?

Weise: It isn’t the job of the CPO to oversee production. On the other hand, we do think it is the job of the CPO to own the product life cycle. In other words, we think the CPO should be actively involved in every stage of a product’s life: from concept development and the award of supplier contracts to the start of production and through the end of production.

But if this is to happen, the CPO needs to be given a fresh, strategic mandate. In most companies, the CPO focuses on supporting the corporate strategy and improving the bottom-line through cost savings.

By contrast, in some of the more advanced technology companies, the CPO focuses on shaping the corporate strategy and increasing the top line (as well as improving the bottom line) by generating profitable growth. They have a mandate that empowers them to make decisions relating to the design, sourcing, manufacturing, production and distribution of the company’s products.

Even though some of the world’s most successful companies take this approach, we find that many CEOs are quick to question why they should give the CPO not just a new mandate but a new strategic mandate. After all, as one senior director of a FTSE 100 company said to us, “aren’t the CPO and procurement team simply the company’s shoppers?”

Our answer to these skeptical CEOs is “No!” In our experience, when the CPO is centrally involved in all the critical stages of a product’s evolution, they significantly lower costs and ensure that the company benefits from the accumulated knowledge and expertise of suppliers in a way that generates value across five other sources of competitive advantage: innovation, quality, sustainability, speed, and risk reduction.

b.: Why do you think some corporate executives are still skeptical about following through on ESG changes, especially given research that says sustainable business practices can increase profits?

Weise: Actually, we think that many senior executives at the top companies are now fully committed to the ESG movement. Look at Microsoft, for example. It has vowed to become not just net zero (when companies remove as much carbon as they emit) but carbon negative (when companies remove more carbon than they emit). So, the battle to win hearts and minds in the boardroom has been largely won. Now, the battle is to persuade senior executives to use the best tools to deliver on their promises. The options are many and varied. But, in our view, the best way they can honor their promises is by working closely with their suppliers.

That’s because suppliers are the biggest emitters of greenhouse gasses — not the companies themselves. It is an extraordinary fact that some 90 percent of the carbon emissions generated by all the companies in the FMCG-products supply chain up to the point of sale are created by suppliers, according to research by Boston Consulting Group and the World Economic Forum. For other sectors, the percentage of these so-called Scope 3 emissions is similarly high: fashion (85 percent), food (83 percent), automotive (82 percent), construction (81 percent), and electronics (77 percent).

So, the message is clear: if CEOs are to stand any chance of achieving their goal of being net zero or even carbon negative, they need to tackle their suppliers’ carbon emissions. 

b.: How would you convince an executive that is unsure about prioritizing ESG over other costs?

Weise: If any executive is still unsure about prioritizing funding toward ESG obligations, then frankly they have a problem. That’s because a company that isn’t sustainable is, by definition, unsustainable — and that means it doesn’t have a future. Of course, there are greater costs associated with the process of meeting sustainable ESG obligations. But as we recommend in Profit from the Source, CEOs can minimize the “hit” on their bottom line if they collaborate with all the key companies in their supply chain.

To explain what we mean, we often point to an example from the automobile industry. Automakers are coming under mounting pressure from consumers to build vehicles that don’t harm the environment. How can they satisfy these consumers — especially since they rely on the big steelmakers who are among the biggest polluters in the supply chain (as a result of the power and heat needed to create the fusion of iron and carbon)?

Their challenge is to persuade the steelmakers to become net zero. But this isn’t an easy task given that the steelmakers would need to increase prices by around 50 percent to cover the costs of upgrading or rebuilding its factories. Fortunately, there is a solution.

According to our BCG colleagues, automakers could reward pioneer steelmakers manufacturing “green steel” by paying the increased costs required by the steel company. Perhaps surprisingly, this wouldn’t require the automaker to raise their prices by 50 percent. In fact, the price tag for a typical [$36,000] car would only have to rise by a modest [$600]. That’s because it is a fact of supply chain economics that raw materials such as steel account for a fraction of the price paid by the consumer, even though they account for the bulk of the end-product’s overall carbon footprint. Of course, a [$600] increase is still a price rise — but the automaker should benefit from first-mover advantage and an enhanced reputation in the eyes of consumers.

b.: Which parts of your morning routine help position you for a successful day?

Weise: I travel a lot to meet and work with clients. In some very hectic weeks, I can be in a different place every single day. So, my morning routine is important to me. I normally wake up early and get going with a strong cup of coffee. I then do a workout — a 45-minute session in the gym or a run through the streets. This familiar start sets me up for the day and ensures that I have some continuity wherever I am.

Profit from the Source: Transforming Your Business by Putting Suppliers at the Core is available now.