Supplier Relationships

Suppliers Are An Extension of Your Company

An effective supply chain relationship is a dependable source of high quality goods or services utilized to create value for the end customer. As it does so, it also brings profit and competitive advantage to the provider. Intense world-class competition and other technological developments have created a need for heightened responsiveness and flexibility that has effectively altered traditional supply chain relationships.

The need has become so acute that we now discuss Supplier Relationship Management (SRM) in ways that echo Customer Relationship Management. Rather than specifically seeking the greatest short-term advantage in each transaction, customers and suppliers seek to work together for the long-term mutual advantage.

The Old School

The principles of good SRM run counter to the traditional model of buyer-supplier relationships at "arm's" length. Buying was war and someone was going to come out a winner. The focus was creating tactics to win each battle, assuming that would in the long run win the war.

Of course, any supply chain organization should recognize the value of a traditional arm’s length relationship and utilize it when it is appropriate. Not all supply chain relationships are considered strategic. When a company requires only a one-time buy or a true commodity, it makes sense to use traditional techniques and more recent innovations such as Internet auctions.

Moving Forward in Relationships

Companies generally can’t change their procurement processes overnight, so it is useful to describe the stages they often follow as they move from transactional to strategic relationships with suppliers. These stages were first identified during research described in “A Survey of Supply Chain Progress,” published in Supply Management Review in September of 2003. Based on the responses to the survey, the researchers identified five stages an organization can work through as it transforms its purchasing operations.

• Internal integration and process improvement. Purchasing managers focus on integrating the spend from different operating units to get volume discounts and improving processes to eliminate waste.
• Separation of transactional from strategic relationships. Managers categorize purchases and use e-tools and other techniques to drive down costs of true commodities, while reaching out to suppliers of critical materials or components to establish long-term relationships.
• Suppliers as an extension of R&D and manufacturing. Cross-functional teams work with buyers to encourage innovations from suppliers that will create value for both companies. Teams also help drive down suppliers’ own costs by doing things such as reworking product specifications or bringing them into lower cost, volume purchases for their own supplies.
• Strategic relationships move up and downstream. Value-adding collaborations and cost-transparency work up and down the supply chain from raw materials to end users. Companies share forecasting and other data to help synchronize operations.
• Theoretical end-to-end integration. Rarely achieved, the entire supply chain works essentially as one family of companies, sharing and communicating data and achieving efficiencies that give them sustained competitive advantages.

To move through these stages, companies must develop core values that emphasize compatibility, cooperation, communication, trust and commitment. These characteristics of interpersonal relationships also apply to organizations. Supply chain relationships behave just as all human relationships. Some are stronger, resilient, harmonious and can stand the test of time, while other relationships are full of conflict, unreliable and crumble under pressure. The challenge in the rapidly changing competitive environment characteristic of the new millennium is to select, develop and maintain those supply chain relationships that can evolve over time to continually meet and exceed the needs of a dynamic relationship for the benefit and gain of all parties involved.

Visionary supply chains display six key characteristics (described by Richard Barrett in Liberating the Corporate Soul: Building a Visionary Organization (1998)):

• A values-driven culture
• Continual commitment to learning and self-renewal
• Continual adaptation to internal and external environments
• Strategic alliances
• A willingness to take risks
• A value-based approach to performance measurement

The most significant characteristic of visionary supply chains is their commitment and ability to continually renew and transform themselves to changing environmental conditions. They adapt as a chameleon does seeking to create harmony in their environment and reap the competitive benefits of this state.