This article first appeared in Forum, The Edge Malaysia Weekly on September 26, 2022 - October 2, 2022

Everywhere in the world, businesses are grappling with disruptions in trade and supply chains caused by pandemics, wars and geopolitical tensions amid rising economic nationalism. In Malaysia, a country that relies on imported raw materials for the bulk of its manufacturing outputs and exports, supply chain disruptions have raised the cost of imports, impacting production, cash flow and bottom lines amid a weakening domestic currency.

In tandem, the reopening of economies worldwide following the pandemic has created a surge in demand for raw materials, but China’s zero-Covid policy and high fuel prices from the Russia-Ukraine war are deepening the fractures in global supply chains, adding to supply constrictions, distorting logistics costs and fuelling inflation.

These dynamics are behind the global semiconductor shortage saga, which has impacted production across the automotive, consumer electronics and household appliances industries. Malaysia is the world’s seventh largest exporter of semiconductors, which in 2021 accounted for 62% of the country’s total electrical and electronic (E&E) exports, valued at RM281.38 billion.

It is a major centre for chip testing and packaging, and home to multiple key international semiconductor manufacturers, several of which reportedly closed some of their facilities during the height of the pandemic in 2021 when the delta variant hit. 

With Malaysia’s E&E sector expected to remain a key growth driver in 2022, benefiting from strong global semiconductor sales, and projected to grow by 13.6% according to data by AmBank, supply woes in the sector are likely to drag on.

So how can business leaders weather prolonged supply chain disruptions and be better prepared for future shocks? 

In an age where the links between companies and their suppliers have either been weaponised or compromised by disruptive events and occurrences, business heads need to rethink their approach to how they manage their suppliers. CEOs today spend a mere 1% of their time with suppliers, which goes some way to explain why so many companies are struggling in the current crisis. This needs to change.

In our latest book, Profit from the Source, we unveil a fundamental secret to a CEO’s supplier relations in troubled times — procurement. As owners of the company’s relationship with its suppliers, the role of procurement has never been more important. No other business function offers the same holistic view of the company — from suppliers who provide the organisation with raw materials and components through to consumers who buy the finished product.

Smart CEOs get this. By now they would have understood that by empowering their procurement, they can elicit maximum value from supplier relationships and tap all the key sources of competitive advantage: not just cost savings, but also innovation, quality, sustainability, speed and risk management. 

The key to success lies in how a company engages with its suppliers for its own needs and how it works with its network of suppliers to strengthen and evolve the ecosystem in its industry. Profit from the Source outlines a set of 10 practical principles to help business leaders deliver these changes, some of which we have outlined below. 

Forge dynamic relationships with the most important suppliers: The relationship between procurement and suppliers must be mutually beneficial rather than be an arm-wrestling match to see who can squeeze the best deal. Working with suppliers rather than against them can make all the difference in times of disruption where only the strongest relationships will see the company through.

Achieve breakthrough innovations by pooling research and development (R&D) resources with suppliers: business leaders are facing increasing pressure to offer “the next best thing” in terms of products. As both the company and its suppliers engage in R&D, why not invest in it together to co-develop innovations that give them first-mover advantage in the market?

Deliver unbeatable quality by joining forces with suppliers to wage a war on errors: Achieving a “zero defects” goal that applies to every stage of the product lifecycle from design to production and distribution is best achieved through collaboration with suppliers. 

Become truly sustainable by allying with suppliers to meet environmental, social and governance (ESG) standards: Companies that work with their suppliers to develop sustainable products and services are more likely to avoid sustainability breaches and prosper in the new ESG-conscious world.

Go twice as fast by collaborating with, not competing against, your suppliers: The era of same-day delivery and instant gratification calls for working closely with suppliers to reconfigure the procurement, supply chain and product development processes.

Ultimately, to succeed in challenging times, CEOs must ensure supply continuity while managing costs, operating sustainably and achieving breakthrough innovations in line with global trends. Lessons learnt from the global semiconductor crisis have seen some of the industry heavyweights adopt long-term strategies to build the competitiveness of their supplier networks and optimise the entire value chain, including domestic supply chains, to better prepare for challenges and market volatilities. 

These developments range from process improvements aimed at de-bottlenecking and addressing prevailing capacity constraints within the industry, to billion-dollar investments in state-of-the-art facilities equipped to manufacture semiconductor parts to meet the rising demand for electric vehicles, charging and storage infrastructures as the industry moves towards decarbonisation.

Capitalising on Malaysia’s attractiveness as a key investment destination in the E&E sector, new partnerships are being forged with international players to increase collaboration in technology development and local wafer manufacturing. Long-term agreements with international chipmakers in China and Taiwan are being reinforced to ensure stable business continuity and growth in case of market downturns.

Manufacturers are increasingly working with their customers to improve technology cooperation to further optimise the entire ecosystem. These developments will not only benefit the semiconductor industry in the long run, but also the entire E&E sector in Malaysia.

The semiconductor crisis has lessons that CEOs from all sectors can draw from, and what it really comes down to is this — adopt long-term supply chain strategies. Combining expertise, investing in innovation and expanding capabilities can generate extraordinary value throughout the supply chain ecosystem, allowing domestic vendors to thrive as well.

Regardless of the industry, suppliers are a precious source of commercial intelligence. A robust procurement function can help CEOs tap into the latest news about competitors’ current and future products, information about up-to-the-minute trends, and the latest thinking on faster, better and safer ways to source and make products. This ultimately allows business leaders to prepare for shocks, overcome global supply chain challenges and benefit from mutually profitable relationships that reduce risk and provide for greater business continuity.

Alex Dolya is managing director and partner at the Boston Consulting Group. Chittaranjan Jha is partner and associate director at the Boston Consulting Group.

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