New research from the NCMM shows that the best middle market suppliers tend to be the largest and fastest-growing middle market companies. These suppliers focus on fewer rather than more customers. As a result, they develop deep, collaborative customer relationships. NCMM Managing Director Doug Farren discusses these findings with contributing researcher Thomas Goldsby, Professor of Logistics at the Ohio State University Fisher College of Business.
Transcription
While most companies participate in some form of a supply chain, most research on best practices focuses on the large company perspective only. Come and learn how middle market companies can serve as perfect links in their own supply chains.
Welcome to The Market that Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid-sized companies and help you take advantage of new opportunities.
Welcome to The Market that Moves America. I'm Doug Farren, Managing Director of the National Center for the Middle Market located at the Fisher College of Business. Today, I'd like to welcome our guest Dr. Tom Goldsby. Dr. Goldsby is the Harry T. Mangurian Professor in Logistics and Chair of the Logistics and Marketing Department here at Fisher College of Business. So welcome, Tom--
Thank you, Doug.
--to the podcast. Today, we'd like to explore how middle market companies serve as perfect links in the supply chain. So much of the previous research that has been done has focused on big companies. The customers in the supply chain who have the leverage and the relationship power to set certain policies really make a lot of the decisions, determine procedures and processes, and so forth.
Our center, in conjunction with the Council of Supply Chain Management Professionals, wanted to research the perspective of middle market companies, many of which serve as the tier one, two, and three suppliers in the supply chain. To do this, we surveyed about 400 executives at middle market companies, those who had oversight-- and certainly responsibility and knowledge-- of how their companies deal with not only their customers but their suppliers. And we asked a series of questions, really just wanting to learn some of the best practices. What are the techniques and tools these companies use to serve as valuable partners and critical links and also understanding what are some of those challenges.
So first off, I'd like to ask, Tom, about some of your previous experience with the center. We have funded some academic research with you previously and just thought it might be nice for you to share a little bit of your interaction that you've had to date with the middle market and with the National Center.
Yeah, sure, Doug. So I've been a researcher on several projects. We've collaborated, in fact, with CSCMP in the past on a project. But I've been involved in multiple capacities, I'd say. And I'd, first of all, say the center's very much illuminated the middle market in my eyes.
Like you alluded in the opening, like so many business scholars and researchers, we've focused on the megas, the really large companies. And I'll have to admit, I've done that myself. But then, from time to time, you might look at smaller, family-owned businesses at the other end of the spectrum. But there's that great middle market that's gone largely under-explored, under-researched, and it's been really great to be a part of the center.
I've served on the Academic Research Committee, where we evaluate proposals from Fisher faculty as well as around the world. So it's been a great option to see interest that scholars have throughout the full spectrum of business research on the middle market and, as you pointed out, have been involved in some of the projects myself as a principal investigator.
And we've looked at things like supply chain integration, which I think we're going to talk about a little bit today, because it's very closely related to this notion of being a perfect link in the supply chain. We've looked at margin management. That was a CSCMP collaboration a few years ago where we tried to understand how middle market firms figure out where they make money, where they lose money in conducting their businesses. And then we're currently engaged in a project looking at innovation among third-party logistics companies and how they identify those opportunities for incremental and radical innovation in their service relationships-- and looking very much forward to sharing some results from that research very soon.
Great. You mentioned a project about integration. I think you worked with some colleagues on an academic paper called "Squeezed in the Middle."
Right.
Can you tell us a little bit about that before we jump into this report?
Sure. So as you pointed out, often the middle market firms are dealing with large customers downstream. And that certainly presents some challenges if you're a relatively small supplier compared to the larger counterparts that you might be dealing with as customers. But it's also true that middle market firms are also dealing with large suppliers on the inbound sides of their business too.
And so we came up with this squeezed-in-the-middle notion. And it seems to be very appropriate because when you're really cast in the shadow of large companies, upstream and downstream, it can be very difficult to figure out how to be that indispensable party in between two giants. And so that research was very helpful in identifying ways that middle market firms could cast a shadow of their own, if you will, and demonstrate some influence that they may not have by virtue of buying power alone or by virtue of market presence alone. So that research was really helpful as we started to dig a little bit deeper with the current project.
Absolutely, thank you. So let's talk a little about our perfect link study. There were some really interesting findings, I think, in the data, including the number and depth of the customer and supplier relationships that middle market companies hold and the type of mutual dependence of those relationships. What stood out to you as the most interesting findings?
Well, it's hard to choose just one. But I'll start off with a finding that I was really glad to see, right at the outset of the research, was that high-growth firms put a great deal of emphasis on their supply chain relationships. And they recognize that supply chain relationships are very important assets. There is equity, if you will, in having great relationships with choice customers and key suppliers. And so that was underscored right at the outset. That was a set of questions we asked early on.
And I will say that, again, it was the high-growth firms, the more progressive companies, that seemed to recognize that they exist within a larger ecosystem. And I think that often when you're a company that's looking to grow, you're looking to assets, resources, capabilities inside the company. You're trying to develop expertise in products and services. You're concerned with your organization.
And those are certainly things that you have to be concerned with. However, those high-growth firms were perhaps a little more adept at recognizing that there are resources, there are capabilities, outside the company that they can leverage. And so that was a particularly worthwhile finding.
I'd say another finding that I'll bring forward, and probably will revisit a little bit later in our conversation, is this notion of right-sizing of relationships. I think, too often, there's a thought that you need to allocate an immense amount of resources with one or a few key customers or key suppliers. And there is kind of this right-sizing notion that you want to have just enough of those great relationships both upstream and downstream. But you've got to be careful not to over-invest and then, certainly, under-invest. So there's kind of a sweet spot in terms of right-sizing those relationships with customers and suppliers.
Right. And we have seen through other research that the center has done, in many cases, these middle market companies can have fairly lean management structures. Do you think that poses a challenge when you think about how much time, as you were saying, to invest in these relationships.
Well, as you and I both know, there's only so much time in the day. There's only so many days in a week, in a year. And that's absolutely right. You have to figure out just how much resource not only you're willing to give but what's really required of a given relationship. And no more than today do we realize that there's only, again, so much limited time that's available, so much executive attention that can be directed toward the management of different resources. And again, these supply chain relationships have to be managed very judiciously and very carefully.
Sure I wanted to touch a little bit about some other information we saw come out through the research. And that's how effective suppliers would use resources, tools, and technologies to assist in some of these relationships-- strategies ranging from the use of third-party logistics, perhaps implementation of certain technologies and tools, but even as simple as just meeting more frequently, having more visibility and face time with both their customers and the suppliers. Do you see this as being fairly common?
I do. And that was an assertion that we were expecting to find, and it was backed up based on the results of the research. With regard to leveraging the capabilities of outside service providers, like third-party logistics companies and technology providers, we found a very strong relationship between high-growth, high-performing companies and their use of these outside providers.
But that's a really difficult proposition, to hand over responsibility of something that can be very critical to the company's success and the interfaces that they might have with external supply chain partners. To hand over that interface, to hand over operations, and-- to some extent-- to put a great deal of faith in the expertise and capabilities of those outside providers, it seems as though younger and smaller firms are more reluctant to enter into these relationships. And our findings seem to suggest that they are, in fact, the ones that might be in most need of those kinds of resources that outside providers can lend.
That said, I would say a lot of firms might think, but they're not on the radar. They're not regarded as an attractive target for a service provider. But I would counter that. I would say, in the last decade or so, there's tended to be a saturation-- if you will-- of technologies and logistics service providers among the large-cap companies. And they're, in fact, looking for smaller customers.
So let me follow up on that point a little bit. You mentioned the smaller and maybe the younger firms. And we certainly did see that in the data. Not only the fast-growing but the larger firms, those that tended to be over $100 million in revenue happened to be more proficient. Or we see more instances of these types of tactics. Are there recommendations that you could make for a smaller middle market firm? I mean, certainly, this isn't just a result of scale and size. Are there things that they might be able to do to replicate some of this?
Well, I think the first thing is not to be afraid of it and to be open to the proposition. Like I said, I think more service providers are looking to serve smaller companies. They're realizing that there's only so much growth, so much opportunity among the mega companies. And they are realizing that there's great opportunity. Just as the center has helped to eliminate the value of the middle market, I think a lot of service providers have come to appreciate it.
And so to the middle market firms, don't be afraid to shop and look for those service providers that you think can do something better, cheaper, faster, what have you. And look to gain capabilities. It does require a level of expertise to shop in a thorough manner and in an informed manner. And that's, in fact, where they might want to seek some outside expertise to help make that match, whether it's technology or logistic service operations, or any number of other potential outsourced opportunities that a company might entertain.
Great. So we talked a little bit about and explored in the research some of these so-called power dynamics. And we mentioned this as well with your other paper, "Squeezed in the Middle," the power dynamics that exists between suppliers and customers. And we found that, in some cases, the better performing middle market companies actually cede some of this control over to their customers. What are some of the advantages and disadvantages of that approach?
Yeah, that was kind of a surprising finding for me was the apparent willingness, and maybe even desire, to cede some of that responsibility to customers. And it may just simply be smart business. Realizing that if they have some high-performing customers, maybe some stars-- if you will-- in their midst, then it makes good sense to give up some of that responsibility. But I'll say that that was a somewhat surprising finding that those high-performing, fast-growth companies were willing to cede that.
On the inverse side of that, however, as we looked upstream, they were not so ready to cede that control to suppliers but were rather-- just as they might have given up a little bit of control to their customers downstream, they seemed to maintain control over the relationships they had with suppliers on the upstream side of the equation.
Sure. And so in the interest of integration, I mean, do you think companies might be looking at things like data security or new product development and viewing their customers as maybe having a little bit more advanced processes around that? What do you think is the cause?
Well, I think one thing is that, just by virtue of the supply chain network structure, they are one step closer to the end user in the supply chain. And understanding how value is created in the eyes of that end user is tantamount to having any success in supply chain management.
So assuming that that faith is placed soundly one stage downstream and they're dealing with parties that really have good fingers on the pulses of the market, those end users out there, it probably makes really good sense to listen-- and maybe even do more than that-- but to act in a way that gives up some of that influence to those downstream partners.
And then as we were just alluding a moment ago, you are one step closer to the end-use market than your suppliers. So it makes, perhaps, good sense for you to do the same in terms of informing your own suppliers about how value is created in the eyes of those end users.
Sure. So lets stick on that topic. In terms of the upstream suppliers, we also see instances where middle market companies are keeping these suppliers fairly close. Just like the customer side, they may work with fewer of them and enjoy more tightly collaborative relationships even though they may not be ceding a lot of that control that we just explored. Why do you think that might be the case?
Well, I think that, again, its perhaps-- and then this is speculation. And I apologize for not being so quick on this answer because this calls maybe for more research on our part. But it seems as though they see what's working in their own customer relationships and then maybe, to some extent, try to emulate those behaviors with their own suppliers. And as you point out, they don't necessarily have the buying power or the influence of their larger brethren.
But what's key to any party that wants to survive and thrive in any supply chain is they've got to understand where and how value is created. And to the extent that they can be that attractive party to the customers that they sell to but also be that attractive party to the suppliers they buy from, that's really key. And I think that's true whether you're small, middle, or large company.
But as we look at middle market firms, you know, it can be a little bit more trying for middle market firms. Where large companies just carry-- they have a large footprint. They have a large array of products and services, a lot of resources. And then and frankly, in many instances, companies are guided toward small suppliers. And so the middle market firms that have outgrown the small label and are not yet what we would consider large and highly influential by virtue of their market presence, yeah, there is an inherent struggle there. But again, the notion is to do something better than what someone else can do to be indispensable in their supply chain relationships.
Right. The National Center for the Middle Market provides research about and for middle market companies. We've really been focusing on providing tips, advice, best practices for these companies. In terms of the supply chain space, what might you prescribe for middle market in terms of how they can assess their overall performance, improve their supply chain relationships, and ultimately improve their overall business.
I think that this research really helped to underscore something that we had come to appreciate in supply chain management in general which is, again, you reside within a larger ecosystem. And I think it's really important, in fact, to map out the supply chain to understand where you fit in that ecosystem. It's a very simple exercise. We assign our students to do it in class all the time. Choose a product and company, and map the supply chain. And every time our students report back to companies, there is at least one aha moment in every supply chain map that they bring back.
And the key is to go as far beyond tier-one customers and tier-one suppliers as possible to understand where there might be redundancies, overlaps, and even vulnerabilities in the supply chain. So understanding where you exist within that larger ecosystem, and also with regard to competition, because you're going to find you're going to have common customers and common suppliers to your competitors. And try to understand what makes you potentially different in the eyes of those common customers and common suppliers. And always seek to bring forward that difference.
And I think, in total, just being very selective of the partners with whom you engage, both customers and suppliers. Again, I was a little surprised that our research indicated the high level of selectivity that our high-performing companies spoke of in the research. Often, we think by virtue of achieving growth, you have to grow your customer base. You have to diversify your customer base. The more the merrier. And this research seemed to backtrack on that assertion.
But rather, I think there is a risk of working with one or two customers exclusively. However, there seems to be a sweet spot that working with a small number of customers on a very intense basis makes a lot of sense. And it also seemed to underscore doing the same with your supplier relationships, which is largely consistent with contemporary thought. But it was that focus on the subjectivity among customers that really jumped off the screen when we saw it.
Well, that's great advice for middle market companies of any size. Is there anything else you'd like to add or share that we might not have covered today?
Well, I just, again, if given the opportunity, I like to speak of supply chain management being a team sport. And it's a team sport on a couple of different levels. Certainly, you have to have your organization within your four walls acting in concert. But then also, again, to the point I just made about selectivity of customers and suppliers and thinking about what team you want to be a part of-- and we often speak of all-star teams. And, Doug, you've watched those all-star games. They're not very pretty to watch. Right? There's not a lot of give and take there.
That's right.
Rather, I'd like to see my company be a member of a championship team where-- you think about a championship team. It's not a collection of all stars. It's a collection of role players, people that understand what is expected of them. And they deliver time and time again. That's what we tend to see in championship teams. And I think we should expect the same of our supply chains-- figuring out who you want to sell to, who you want to buy from, but also being concerned about those tier-two and beyond relationships. And so, again, this notion of team sport is one that I very much believe in and am always happy to encourage people to entertain.
Was a recovering supply chain professional from my former life prior to coming to the center. I can certainly appreciate that message and certainly agree with it. On behalf of the center, I'd like to thank Dr. Goldsby for joining us today. If you'd like to access additional information about this report, or any of the research that the center conducts, please visit our website, www.middlemarketcenter.org. Also, you can subscribe to this podcast on iTunes and in other places where podcasts are accessed. And we encourage you to follow the work of the center. And hopefully you enjoyed today's content. We look forward to additional podcasts in the future. Thank you for your time.