Benefits Of Supplier Partnerships Done Right

Purchasing agents' understanding of differentiation is limited to price. You can only outperform your competition under these commodity rules if your strategy is cost leadership.

About 10 years ago or so the concept of "partnering" was developed. The idea was to simplify the procurement side of the business by reducing the number of suppliers, creating "partnerships" with the remainder and eliminating costly redundancies. Now, what did the customers do with that idea? As soon as they reduced suppliers and got near monopolistic bargaining power against a smaller base, partnering quickly turned to spousal abuse. Unrealistic price reductions were shoved down the small supplier's throat, little information was shared with the supplier that would have helped it meet cost reductions and profit goals, and many purchasing organizations fell into some severe ethical lapses. In some cases, overseas competitors were invited to bid against American suppliers, and the buyers were happy to accept the overseas bid, which in total was below the American vendors' material cost.

Some years ago I saw a sign in a shop that read "Never Try To Teach A Pig to Sing—It Wastes Your Time and Annoys the Pig." It struck me that this was worth emblazoning in the mind of every vendor in America. "Never Try To Talk Value to a Purchasing Agent—It Wastes Your Time and Annoys the Purchasing Agent." Purchasing agents' understanding of differentiation is limited to price. You can only outperform your competition under these commodity rules if your strategy is cost leadership. The corollary is that anything you do to add value to the product or service on behalf of this customer is wasted money and wasted effort.

But something different is happening. A new breed of procurement professional has emerged. The partnering concept has been revisited by some enlightened folks, and they are making it work to the benefit of the entire supply chain. The enlightened are trying to get a lower price while helping their suppliers provide high quality service at competitive margins for the supplier. Sounds too good to be true, but the trend is clearly there, and we want to take a look at the principles of partnering to get a fresh look at how you, the supplier, can better approach the enlightened companies who will be your lighthouse customers in the years to come.

The first axiom is that partnering has to be based on increased productivity all along the supply chain. Every dollar of unnecessary cost has to be squeezed out of the chain. Those who have been through this will tell you that in squeezing out the costs, you also take valuable time out of the fulfillment cycle. The result, of course, is a hyper-competitive environment that is difficult for another company to emulate. It is also expensive to copy because the supplier/customer relationship is based on economic functionality and raises switching costs for the customer.

For most companies, the starting point is inside the firm. I would not have thought when we first started down this road that the biggest improvements would be in the front and back offices. You can have a big payoff here by just reviewing incoming order, billing and servicing procedures for productivity gains. The basic process is to make a flow chart of what you are doing now. This is often referred to as "stapling yourself to an order" to determine the "as-is" condition of the process. Then determine the "to-be" process that improves productivity and develop an action plan to close the gap. It is critical at this step to identify the metrics that you will use to determine your progress toward goals. This is reasonably easy for a company that has many locations. Simply lay out a matrix of the key result areas of the business on one leg against your various locations. Fill in the values in the boxes, and at the last column, identify the best metric from each location. That will he a pretty good vector as to what your objective should be for all locations.

Next, do the same for the top 20 percent of your customers. Simply identify the key metrics of customer service, quantify best in class, and start working your processes toward those goals.

If you are like most manufacturing companies, you simply will not be competitive if your next step is not toward considering lean manufacturing or some variation of the "just-in-time" school. This is almost a commodity service that most customers demand from their suppliers.

You are now ready to move from a preferred supplier to partnered supplier status. Senior management has to become involved to determine the basis for a partnered relationship. You are really committing the assets and resources of your business here, and I leave it to you to qualify what level in the customer hierarchy you will feel comfortable with. Regardless of the level, make certain that you are dealing with the enlightened rather than grazing with the dinosaurs. At a minimum, the customer should he ready to agree to regular executive progress reviews.

At this point, you need to start developing the processes and metrics that reach into the income statements, balance sheets and cash flow statements of your suppliers, yourself and your customers. Look for inefficiencies and redundancies across the interfaces of these other firms and start targeting "best processes" and their corresponding metrics, just like you did for your internal processes. Your CFO and other financial experts can be worth their weight in gold in helping develop these. And now you're an expert because you went down the learning curve on your own first.

This takes a lot of effort and commitment from the entire organization. The company that wants to excel needs a clear strategy that communicates the importance of partnering to everyone in the company. Developing the strategy also builds the commitment of those who will have to implement in a partnered environment. A properly developed strategy communicates to senior management and the rest of the company why such effort is strategically important and worth the effort.

By the way, here is the best-kept secret of purchasing management—they never get fired for accepting a quote that was 10 percent higher. There have, however, been a lot of purchasing agents fired for late delivery of critical parts and services.

Reprinted with permission from The Family Business Report sponsored by the Goering Center at the University of Cincinnati College of Business Administration.