For decades businesses have been urged to maximize relationships with suppliers. So how are we doing with suppliers and supply chain management?
Some of the problems Sarkar sees with the way most companies manage relationships with suppliers are focusing too much on price, taking an adversarial position, failing to set expectations, ignoring feedback from suppliers and employing only penalties rather than using incentives to improve performance.
Benefits of Better Supplier Relationships
Maximizing supplier relationships can bring a host of supply chain management benefits, according to experts.
“There's a lot of value that goes beyond cost reduction, like growth and innovation," says Michael Hales, a Chicago-based partner with consulting firm A.T. Kearney and co-author of Supplier Relationship Management.
That's not all, says Michael Higgins, CEO of Framingham, Massachusetts-based spend management software company PurchaseControl.
“If you maximize the relationship with your suppliers, you get the best information [faster], the best pricing pro-rata your volume, better delivery where available and above all reliability of supply based on mutual respect and preferred customer status," Higgins says.
There is little point in maximizing a supplier relationship if it's a one-time buy, but there are still certain parameters that could affect your reputation in the marketplace at a future time if you are not fair to that supplier.
—Michael Higgins, CEO, PurchaseControl
Perhaps the most important long-term benefit to this approach to supply chain management, according to Sarkar, is that a business that maximizes supplier engagement can get a heads-up on invaluable ideas.
“Suppliers will bring them new innovations," he says.
Techniques of Maximizing Supplier Relationships
Making the most of supplier relationships starts with choosing the right suppliers. It's probably not worth it to invest the time and energy to develop deep relationships with every supplier.
“Find those few suppliers that can help you grow and have a competitive advantage," Hales says.
Hales suggests starting with the 1 percent of your suppliers that have the best current performance as well as the most potential for helping your business reach its strategic supply chain management objectives.
After choosing some candidates, Hales suggests having a meeting or series of meetings to discuss how you and the supplier can maximize the relationship.
“Set up some type of periodic engagement, as top-to-top as you can," he says. “Not just with your procurement department and their sales rep. You want to get senior management of the two enterprises engaged."
At the meetings, discuss mutually beneficial improvements you can make to the way you work together. Sarkar suggests laying out your business objectives rather than simply specifying performance requirements.
“Don't just tell them what to do," he says. “Tell them what you're trying to achieve."
Suppliers appreciate greater transparency, says Higgins.
“Information is king," he says. “Tell them if a big order is coming or there's going to be a drop in demand. Ask them about their views of the industry. Above all tell them if there is going to be cash-flow problem."
These discussions can also be used to define the key performance indicators (such as on-time deliveries) that will be used to benchmark supplier performance, Sarkar says. And he warns against relying heavily on penalties when performance slips.
“If the supplier does a better job, give them 1 or 2 percent of the contract value as recognition of them and their team doing a better job," Sarkar says. “Once you start giving incentives, you get attention. Incentives work very well."
Risks of Maximizing Supplier Relationships
One possible way to go wrong is by seeking deeper relationships with the wrong supplier or too many suppliers. Vendors that supply key components, are already doing a good job, are seen as long-term sources and can potentially share innovations are candidates for maximizing engagement.
“For the remaining 99 percent, they need to find a way to be really efficient," Hales says.
At the same time, taking an overly mercenary attitude with less-critical suppliers could negatively affect supply chain management, too.
“There is little point in maximizing a supplier relationship if it's a one-time buy, but there are still certain parameters that could affect your reputation in the marketplace at a future time if you are not fair to that supplier," Higgins says.
Maximizing supplier relationships may be difficult if the supplier is a lot larger than you or simply not open to the idea. It can create problems if suppliers think your willingness to cooperate is a sign of weakness.
But even if it's still a largely aspirational goal after decades of effort, building deeper supplier relationships remains an objective worth pursuing for many businesses seeking better supply chain management.
“The best find a way to maximize supplier relationships," Hales says. “They build a special relationship with a select few suppliers that can help them to grow into a new geography, to grow into a new product category or range of services or to innovate."
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