Great ResignationClimate ChangeLeadershipInflationUkraine Invasion

It’s time for CEOs to put suppliers first

Cars being transported on a freight train at a depot in Germany
In 2021, the semiconductor shortage forced the auto industry to cancel plans to build some 10 million cars.
Daniel ROLAND - AFP

It feels like we’re living in the age of crises: first the U.S.-China trade war, then the worst pandemic for a century, then rampant inflation not seen for 40 years, and now the first conflict between European neighbors since the Second World War.

For business leaders running international companies with supply chains that stretch around the world, the challenges are undeniably immense. Many have been quick to make their excuses, claiming these were unexpected “black swan” events that could never have been predicted, and issue warnings that the severe disruptions will negatively impact their financial performance.

But should they have been better prepared? In a word, yes. None of these events was a “black swan” event, a term coined by bestselling author Nassim Nicholas Taleb to describe a random, highly improbable occurrence. On the contrary, they were what the business writer Michele Wucker has called “gray rhino” events: highly probable, highly predictable, high-impact but neglected threats that were charging toward companies like a crash of rhinos.

After Russia’s annexation of the Ukrainian region of Crimea in 2014, no one should have been surprised by the subsequent invasion of the whole country in February this year. After the devastating impact of the SARS epidemic in 2003, the H1N1 influenza pandemic in 2009, and the West Africa Ebola outbreak in 2014—all of which were, like COVID-19, caused by zoonotic viruses that spread from animals to humans­—can anyone really say they weren’t warned?

So why were the leaders of some of the great multinationals caught out by these events? Why did they misread or ignore the signals? In our view, it is because today’s CEOs are too introspective, too focused on the here and now, and oblivious of what is happening in the rest of the world.

Research from Harvard Business School found that CEOs spend only 1% of their time with their suppliers. Given that suppliers account for more than half of a typical company’s budget, this is not only impractical, it borders on the absurd. 

Suppliers are providers of mission-critical components, parts, raw materials, and services such as manufacturing. When they stop, the company they supply stops, too. Suppliers are a precious source of commercial intelligence: 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. As such, they are a window to the world beyond the confines of the corporate headquarters.

So how can CEOs better predict and prepare for supply-chain disruptions in the future?

They should put suppliers at the very heart of their business. For too long, these vendors have been marginalized, treated as dispensable, come-and-go providers of goods and services who can be hired in good times and fired in bad times. At a personal level, CEOs should make supplier relations their leadership imperative by spending more time with them. In particular, they should nurture one-on-one relationships with the CEOs of their top suppliers, the 20 to 40 companies that account for half of their supplier budget. So often, CEOs are surrounded by corporate yes-men.

Supplier CEOs, who are unencumbered by institutional loyalties, can tell the CEOs what they should hear: How it really is. At a companywide level, CEOs should raise the profile of the chief procurement officer and revamp their procurement function, which “owns” the corporate relationship with suppliers. It is no coincidence that Apple, the first public company to reach a market valuation of more than 3 trillion dollars, is run by a former senior vice president of worldwide operations with responsibility for procurement: Tim Cook.

One of the world’s leading makers of premium automobiles is prioritizing its suppliers and, by association, its procurement function. Starting in 2019, and under pressure to slash costs by a whopping $500 million in the space of one quarter in order to create the financial headroom to invest in electric vehicles, the leaders fast-tracked the typically cumbersome negotiations with suppliers by bypassing all their commodity managers, making a direct approach to the CEOs of their big vendors, and demanding an upfront commitment to double savings in one year across all the commodities. As an incentive, they offered these suppliers a wraparound package of business support: for example, helping the suppliers achieve their ambitious cost-savings targets and sharing some of their own secrets on how to boost profit margins. It worked. In the first year, 20 of the 30 key suppliers signed up for the program, and the company met its goal. And every year since then—and now, even as inflation has eaten into profit margins—the automaker has continued to receive cost savings from its suppliers.

But the bigger prize of the closer working relationship with suppliers has been the way the automaker has not only weathered some of the recent storms rather better than its rivals, but also won a reputation as a corporate sustainability pioneer.

In 2021, when the semiconductor crisis struck, the automaker was able to ensure continuity of supply and keep its factories open. So while the auto industry as a whole was forced to cancel plans to build some 10 million cars, this automaker did not have to cancel a single car from its planned production schedule.

As a result, the automaker increased its market share and, at a time when cars were being sold at a premium, enjoyed higher-than-ever profit margins. At the same time, it was able to launch an industry-leading program to cut carbon emissions and reach “net zero.” That would have been impossible without the collaboration of suppliers.

If CEOs follow the example of this automaker, we are convinced that they too can stay one step ahead of their rivals. But for this to happen, they’ve got to stop making excuses, get better prepared for every eventuality, and put their suppliers and their procurement function at the heart of their business.

Christian Schuh, Wolfgang Schnellbächer, Alenka Triplat, and Daniel Weise are partners at the Boston Consulting Group and the coauthors of Profit From the Source: Transforming Your Business by Putting Suppliers at the Core.

The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not reflect the opinions and beliefs of Fortune.

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