Collaborative vs Transactional Approach to Supply Chain Management
Which delivers better results and a greater overall value?
By Jean Regan, President & CEO
Let’s cut to the chase: we’ve long held that a collaborative approach to supply chain management will deliver better results and value. Since concepts like this can be tossed around without a true understanding of them, first let’s take a minute to break down what a collaborative approach really means when it comes to supply chain management.
A transactional approach is not necessarily just selecting the lowest cost provider. It means painstakingly outlining all your company’s requirements, and then bringing them to the market and seeing which company can meet them best. Ultimately, most companies can’t find exactly what they want and then need to decide where they want to compromise. And this leads to lots of frustration.
However, one thing that’s often done by the U.S. government, the world’s largest single sourcing entity, is to work with suppliers on defining requirements before going out to bid. This collaborative approach often results in one of the suppliers that helped define the requirements being the best fit. And while you might be thinking that an outside supplier would only shape requirements to be advantageous to themselves, the entity doing the sourcing is free to work with as many parties as they want in this process and to reject any ideas they don’t like. Treating the process this way, as you might imagine, will result in a very different RFP.
While the transactional approach of bringing rigid requirement to the market is not great, an even worse approach in this same category is pursuing the least cost provider.
Last year, when we held an interview with MIT professor David Simchi-Levi to get his thoughts on how the pandemic will impact supply chains both now and in the future, he shared part of how we got into a situation where shelves were empty in stores for weeks on end:
“Companies invested in low-cost sourcing practices. And low cost sourcing practices said ‘Hey, let’s find the lowest cost sourcing strategy and if it’s in China, it’s in China.’ We see the consequences of this right now.”
He went on to advise that companies work more closely with their suppliers to identify where they’re sourcing from and follow the supply chain back as far as possible.
Another reason that a transactional approach that relies on lowest cost provider is worth reconsidering is that the old ways of lowering transportation costs don’t necessarily work in today’s market. For example, in a recent webinar, Pitt Ohio CMO Geoff Muessig explained the flaws in RFPs from shippers that are primarily based on the belief that volume considerations are of paramount importance.
Pitt Ohio and other carriers have repeatedly emphasized that the best RFPs address the operational characteristics of the freight and the extent to which a company’s freight “fits” within a carrier’s networks.
Here at TranzAct, we wholeheartedly agree with Geoff’s advice that “the bigger opportunity of working with a 3PL for shippers is the information that they can access collectively and harness to make their entire supply chain more efficient.” Sourcing events that are focused on ways shippers can increase the fit factor, are most likely produce great results, especially now.
One last reason we value a collaborative approach versus a transactional one is that a collaborative approach can unearth potentially unknown benefits. During another recent webinar, U.S. Xpress CEO Eric Fuller shared that carriers still care about loyalty when it comes to relationships but there’s more to the picture. He went on to explain that one area that carriers value—and track—how drivers are being treated. As he shared with us:
“Shippers that we have long-term relationships with—we’ll be prioritizing those shippers. I would say though in general, there are a lot of factors that go into it. We talked a lot about rates, but rates really aren’t 100% of the factors on who we’re going to do business with and what scale. And a lot of it is how they treat the driver, the driver experience at both at the pickup location and the delivery location, and we are starting to use technology to aggregate all that data from our drivers.”
Eric went on to say that they’re also tracking the amount of time a driver spends at a location, and not just the total time, but the time for the different activities involved. There’s no need to explain why this is a priority for them in an environment where drivers are still in demand and wages increases are being used to maximize retention.
While the pandemic may make collaborative relationships harder to pursue and develop in some ways at present, we know that many companies are seeing how valuable it has been to share the same goals with a trusted partner. We hope you’re convinced about this approach, but if you’re still in consideration mode, we encourage you to talk to other shippers or simply give it a try.