While OEMs want to build collaborative relationship with suppliers, it has largely remained an elusive goal as significant time is spent in order follow up and other short-term goals. It requires significant behavioral alignment between buyer & supplier to spend quality time to build collaborative relationship. Well-designed Digital Nudges are found to be effective in freeing up time spent in regular activities and nudging them to focus efforts in long term goals of a OEM-supplier relationship, writes Divakar Karanth, Head –Client success for supply chain and innovation platforms, worxogo.
Moving away from arm’s length relationship and towards collaborative relationship with suppliers has remained an elusive goal for OEMs for decades. Though it is can be found in some form between OEMs and tier-I suppliers, it is completely non-existent between tier-I and tier-II or tier-III suppliers. Collaborative relationship is advocated to minimize supply vulnerability and hence risks associated. Developing collaborative relationship with suppliers requires buyers to spend more time in building supplier capability, do root cause analysis, improve processes at suppliers’ end, address executional challenges, etc. However, most of the time, buyers are seen spending time in firefighting on order follow up and other shortterm goals. Very little time is spent on collaborative activities by buyer or supplier unless forced to.
This is seen across organizations despite -
» WELL QUALIFIED TEAM: Most of the organizations today have a highly technically qualified buying team, however significant proportion of their time goes in order follow up with suppliers.
» PROCESS MATURITY: Across industries such as auto, industrial products, etc., the procurement related execution process is reasonably mature. This argument suggests that the buying team should have enough time to spend in developing collaborative relationship with suppliers; however, what is observed is contrary to this expectation.
» PROCESS AUTOMATION: Further, with the advancement of IT, most of the processes today are automated, thus eliminating high proportion of low value-added activities. Again, the question really is how has this released bandwidth been deployed by the buyers.
» AWARENESS OF RELATIONSHIP PRACTICES: Since Kraljic proposed the purchasing portfolio matrix (strategic, leverage, bottleneck and non-critical), significant research has gone into understanding buyer supplier relationship and brought into practice by leading OEMs as well.
While the research talks a lot about approach to better relationships, they are silent on what is required to transform relationship from transactional to collaborative one.
The answer may lie in re-imaging buyer & supplier behaviors. It is important to understand how does the buying team utilize their available time effectively:
» Do buyers chase schedules or shortages on a consistent basis?
» Does buying organizations evaluate supplier performance against schedule?
» Do they give sufficient lead time to supplier? What’s the proportion of low lead time orders and what are the implications?
» How much time is devoted in working with suppliers improve processes, develop capabilities and execute orders? etc.
Some of the wrong behaviors could get initiated in certain contexts such as frequent schedule changes, uncertain demand environment, supply chain bottlenecks, etc., and become habit. Also, while high performing buyers might be doing some of the things right, the question really is, how do you get this done from each and everyone in the team? In simple terms, this requires:
» Buyers / suppliers need to be aware of expected behaviors, for example, focus on schedule rather than shortages or complete process checks on every visit to supplier shop floor.
» Display these behaviors consistently at every instance.
Behavior economics as a subject helps in dissecting the behavioral issues that lead to delayed decisions and actions. It changes how the problems are diagnosed, designed and executed. For example, many a times, it is assumed that access to information or a service solves a problem (say access to better medical facilities). Behavior economics pushes the frontier to understand the problems that might exist even after access is given (Do people really go to hospitals even if they are accessible), thus opening new possibilities to solve given problem statement. Behavior economics & psychology suggest four behavioral impediments in achieving best of individual efficiency. These are lack of self-control, limited attention, scarcity of cognitive capability and flawed mental models or understanding.
SELF-CONTROL: Any process improvement activity to be conducted at supplier’s end always gets procrastinated despite knowing that it can improve execution efficiency which results in lower incidences of firefighting. Further, we succumb to immediate temptations. When going is good i.e. there are no executional issues at a supplier end, the buyer does not visit the supplier to spend time on improvement activities.
ATTENTION: Significant technology introduction has happened over last 2 decades in procurement supply chain, from automating the procurement process to technology to gain visibility into the supply chain. However, adoption of technology takes huge effort and time. Most of the time, hardly few of the features of any platform get used in practice. It is typically assumed if training is given, users get to understand the technology and can start using it right away. For this assumption to work, it requires user to be attentive to the specific features. If the user does not pay attention, he is unlikely to be adept at using the features. Psychology says attention is as scarce a resource as self-control. Multiple experiments have been done by psychologists where they have demonstrated that attention is paid to the aspects that typically an individual is comfortable with. Limited attention may be addressed by giving information in limited steps. Simple and timely reminders can help them completing various tasks they are supposed execute.
COGNITIVE CAPACITY: One of the assumptions when it comes to people is about their ability to process, comprehend and consume large amount of data or information. It is usual to see the management designing multiple dashboards and MIS sheets and sharing with the team assuming they too can easily process it for their consumption and hence decision making. However, in practical, this is far from truth. Every individual has limited cognitive resources available at any point time very much like physical resources such as money, staff, etc. So, increasing cognitive demand may in fact make them less likely to succeed. In practice, we tend to use fast, intuitive thinking or rules of thumb. Further, more the choices, more it is cognitively taxing for any individual and decisions get procrastinated. Simplified plans,fewer alternatives and agreed rules of thumb can drive efficiency up. In a buyer’s context, given the process maturity in the current scenario across manufacturing sector, the management should aid them with these easy to manage guidelines.
UNDERSTANDING: Many a times flawed mental models are at work, which results in adopting wrong practices. For example, suppliers most of the time are driven by the buyers with whom they work. A typical practice followed is to take those jobs on priority as asked by buyers. When multiple buyers are working with a supplier, whichever buyer sits in front of him, his jobs get priority. As the suppliers satisfy buyer’s requirements on the go, they always feel their performance is good. However, if you show with data that their performance against PO schedule date is not so good, they get surprised. Overcoming this challenge requires change in behavior from buyers and setting expectations right for suppliers. Gradually they get nudged towards focusing on schedule dates rather than shortages.
Richard Thaler & Sunstein define nudge as, “A nudge, as we will use the term, is any aspect of the choice architecture that alters people's behavior in a predictable way without forbidding any options or significantly changing their economic incentives.” To count as a mere nudge, the intervention must be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts as a nudge. Banning junk food does not.
In this digital era, where a connected smartphone is an integral part of an individual, it is possible to nudge an individual towards an expected behavior gradually over a period. Leveraging digital capabilities and using behavior economics principles, one can influence buyer and supplier behaviors. The nudges in this context can take any of the following form to assist them in their activities:
» Reminders on today’s delivery schedules
» Highlighting recent performances
» Warning on orders that may fail
» Any process checks to be executed at supplier premise
» Root cause analysis along with supplier team of a previously failed delivery, etc.
This takes away the cognitive effort in synthesizing information to manage transactional activities and drives them towards sustained behavioral change, thus addressing the cognitive scarcity challenge. Overall, this has potential to release significant bandwidth for bothbuyer & supplier, enabling them to focus efforts where it is due. The digital nudges can take multiple forms; they may be sent to the management at both OEM and supplier for appropriate intervention from their side, it could be to do a simple review or to do a GEMBA walk at supplier shop floor or conduct a knowledge workshop for supplier personnel or as simple as to send appreciative message to supplier for their performance. In a nutshell, digital nudges can be deployed at multiple levels to nudge everyone involved in purchase process execution to consistently display expected behavior. Over a period, one can expect a gradual shift towards more collaborative efforts from both OEM buyers and supplier team.
Are there pre-requisites for such nudges to work? According to Richard Thaler, nudges work best with ‘automatic system’ of human thinking. It relies on some of the cognitive biases usually associated with ‘automatic system’ such as anchoring, status quo bias, herd mentality, availability heuristic, etc. The nudge content would be such that they work to overcome these biases or take advantage of them.
A nudge design considers user’s workplace behavior type, individual performance, peer performance and expected outcomes. A good nudge engine gets better in achieving desired behavioral outcome as it works with an individual over a period and starts acting as personal assistant in work space, thus enabling the user on quicker decision making.
Further to digital nudges, other digital technologies such as leader board of suppliers or buyers, which brings a social or community element to improve goal and performance orientation. Realtime performance measure and peer comparison has the potential to drive higher performance levels. These digital interventions work best when:
» Right skill set, or ability exists: The buyer & supplier team should be competent on product technology and process requirements. Low ability or skill set does not help in achieving requisite behavior even if the motivation levels are high.
» Right working environment exists: In procurement context, it could be as simple as data integrity to as complex as managing frequent schedule changes in a mutually beneficial way. Absence of right environment can lead to lack of trust and belief, hence impact desired outcome.
» Right stimuli exist: Stimuli could be in the form of timely supplier payments or supporting suppliers financially for necessary capital investments. Individuals respond to different kinds of stimuli in different context. The stimuli can be a simple cue, call to action, request and so on.
Effective outcome, especially in complex environment such as procurement supply chain depends not just on the process or technology but also to a great extent on behavior of buyers & suppliers. Influencing them and achieving desired behavior is fundamental to sustained outcomes. The advent of digital era is an opportunity to address thus ignored age old aspect. It has the potential to aid the transformation from transactional to collaborative relationship between an OEM and its suppliers.