Michael has a degree in international business and currently works for a global e-commerce company.
Supplier Relationship and Value Creation
Professor Jerry Porras of Stanford University conducted research into 18 highly successful US companies that managed to maintain high profitability over the long-term. The common denominator he identified is that the founders set out not to create a company that spent its time, energy and resources on developing itself and its wealth of knowledge, but on creating value.
The focus on creating value is what built resilience and enabled these organizations to keep thriving through tough storms in the business world, when many other companies capsized. They also ensure that all company operations were aligned with a clear vision and that alignment remained consistent throughout the company.
A key determinant in the process of creating value is establishing a fruitful relationship with the right supplier. As is true in personal life, every relationship requires time and commitment. This applies to the business environment as well. Sustainable profitability that is mutual requires patience and consistency. Here are four tips on how to find and build a thriving relationship with a supplier.
1. Understand the ripple effect
2. Have the right selection criteria
3. Pursue the symbiotic advantage
4. Build with the future in mind
1. Understand the Ripple Effect
Back in 2016 when Tesla acquired Grohmann Engineering, which was one of the world’s leading advanced automation suppliers, the CEO promised that the latter would still keep its existing contracts with major customers like BMW and Daimler. The goal that Tesla had at the time was to design 500,000 electric vehicles per year.
After a while however, the promise to honor the other contracts was rescinded. Grohmann Engineering, a company that had been in existence since 1963, was suddenly being compelled to stop its operations toward its long-standing high profile clients and only focus on the Tesla project. This led to unrest among its workers and the eventual departure of the company head, Klaus Grohmann.
Tesla had itself started as a customer of Grohmann. Now it was in the thick of controversy. Opposition arose from clients who had not even been made aware beforehand concerning the termination of their contracts and were demanding that they had to be honored.
You can imagine the situation. Their businesses depended on Grohmann playing its role as supplier, but now another rather unexpected dynamic had taken over. This goes to show the importance of staying updated on a supplier such that one is able to make the necessary adjustments and avoid being left without recourse.
Another case in point occurred when Canadian and American customers broke off ties with Vista Outdoor. The company sells outdoor and sports supplies as well as assault weapons, the likes of which were used in school shootings such as the murders of 17 people in a Florida high school.
Shoppers had begun boycotting stores that were connected with Vista, even if those stores were not selling firearms themselves. There was a petition asking another company, Mountain Equipment Coop (MEC), to cease selling products supplied by Vista. According to the CEO of MEC, the decision to cease supplying Vista products translated to a 430 million dollar loss in revenue. This is an example of how an isolated incident involving a supplier can create a domino effect on other businesses within its network.
2. Have the Right Selection Criteria
One reason why many businesses struggle is how they go about choosing their suppliers. Most business owners simply look for a supplier that will provide them with the resources or products they need at the lowest price. A visionary owner, on the other hand, will think long-term and see beyond price advantages.
The goal is not just to pursue growth and profitability. it is to pursue sustainable growth and profitability. Therefore, to be effective, a supplier development program must always begin with identifying the right supplier.
There was a case of an Asian supplier who agreed to a deal when it was presented to them over a shared meal. This supplier had rejected the same deal when it was presented to them via PowerPoint slides by a different company. It is necessary to understand the culture of your supplier.
Research into the core values and the ethos of the supplying company before you enter into a relationship with them. What is their long-term strategy? Do their values agree with yours? For example, if one of your values is environmental protection, it would be easier to negotiate a symbiotic partnership with a supplier that is like-minded.
The supplier you choose needs to be abreast of the changes taking place in the market sector you are operating in. They should be adaptable to the dynamism of the industry. If the supplier typically lags behind when it comes to technological trends and fails to factor the evolving needs of the consumer into product features, they may not be the type your business needs.
For example, in the food industry, increasing numbers of consumers are moving toward plant-based meals and other healthier alternatives compared to what the trend used to be. A supplier in this industry should be able to catch on to the changes and adjust their production accordingly.
The supplier needs to be financially stable. Researching into their past records will yield insight into what the trend has been historically. Have they been able to meet their financial obligations including managing loans and taxes?
The information is useful because if the supplier suddenly goes bankrupt owing to internal cash flow problems, you may quickly find yourself out of supplies. There will be no time to prepare and this will impact your ability to meet customer needs. You will be compelled to source materials from a new supplier on short notice to avoid losing out to the competition. This could an expensive and unnecessary drawback.
It is preferable to find a supplier that is willing to support the sales process. An increase in the number of customers for your business translates to more orders and therefore an increase in their business as well. Look for a supplier who is willing to engage with you instead of just sitting back and waiting for your orders.
Some suppliers actually offer training for business owners they supply to as a way of enabling them to become more profitable. Others offer Supplier Relationship Management (SRM) technology for their customers to use without charge because they value a win/win situation.
Check for any special discounts, grants, or other incentives the supplier provides. Instead of relying on bank loans which typically come with high-interest rates, you may find a supplier who is willing to offer long-term payment terms. Alternatively, you may find a supplier with a bigger budget which they are willing to allocate to joint promotions.
3. Pursue the Symbiotic Advantage
The problem with approaches to business growth that emphasize individual pursuit, is that they overlook the real need of the customer. The customer is ultimately only interested in the result of the commercial process - the aggregate value obtained from all the moving parts.
So if the players work independently, each pursuing his own independent path and seeking to optimize performance without reference to the other, the result is wasted productivity that cannot be undone. The players involved could be so busy chasing their own agendas, they do not realize they are actually settling for fair instead of optimal achievement.
The Inclusive Approach
The Inclusive Approach is one that views all participants who have a stake in the business, including customers, shareholders and suppliers, as partners. One company that pursued this approach in the automotive industry, is Unipart. They had an open-book policy through which their supplier company Senior Flexonics was able to share with them information, including details such as costs of overhead, raw materials, and even profit margins. This enabled both to foster closer ties with each other and it became a win/win situation.
Those who pursue the inclusive approach to business realize that maintaining a long-term relationship with their suppliers does significantly bring down costs and increase their profits. The transparency between a customer and supplier enables them both to team up as allies working as a united front to achieve optimal results.
Model B Relationship
What was prevalent in the automotive industry was the Model A relationship, where interactions with suppliers were short-term and based on competition. Unipart shifted from the power struggles of a Model A relationship to a Model B relationship. The latter involves a long-term approach where instead of pursuing separate directions in business, both client and supplier bring their visions together and share them. Unipart's agenda was to ensure that the costs kept decreasing while customer satisfaction kept increasing.
The Model B approach makes it possible for you to reduce costs by working along with your supplier instead of simply being a recipient of their goods. This is a symbiotic relationship that benefits both businesses mutually. Aspirations boil down to a common objective.
Vision for Mutual Growth
The only way to curb the disadvantages of singularity is to take a few steps back and view the broader picture. Seek the common advantage. It doesn't matter whether you are a home-based entrepreneur making organic cookies, or a transnational enterprise providing packaging solutions. The link forged by working closely with your supplier and those who supply them helps you quickly identify where the leaks are.
You will be able to identify where losses are being incurred, what can be done to correct them, and how costs can be brought down substantially. You could study the process by which your supplier sources materials, identify ways of simplifying it to reduce expenses, and reap the benefits. Cost reduction on their part means a higher profit margin on yours.
Granted, forming this kind of partnership or alliance may not come easy because of the traditional way of doing business that has prevailed over time. it requires openness and trust that does not develop overnight. However, this is the symbiotic relationship that has contributed greatly to the success of companies like Unipart and Senior Flexonics.
4. Build With the Future in Mind
Where there is a solid relationship of trust, a supplier can do more than provide discounts or wholesale prices. You are able to identify new opportunities that did not exist before. They could inform you in advance of new products, accessories, or added features they are about to launch such that you stay ahead of the competition. They may also extend you credit advantages, for example, allowing you to pay them after your customers have paid you. Another benefit is that they can advise you on logistics, including alternative means of shipping to your customers that can bring down your costs.
The element that fosters a symbiotic relationship is trust. This is not simply about completing orders, receiving shipments, and scoring high on SLAs. Seek to develop close ties. Also, leverage the use of technology in form of platforms that offer you end-to-end supplier relationship management tools and resources. These include Salesforce, Simmeth System, ITESOFT, and Qualityze.
The Meeting of Minds
Onsite assessments, visits, and tours should be arranged and encouraged. Much can be gained from recommendations or suggestions provided by a supplier, owing to the experience they have in the industry. The interchange of ideas is important as each party stands to benefit through learning how to improve operations.
For instance, if you are an organic cookie business owner, you could schedule an appointment to tour the farm where ingredients are sourced from. If you are an event planning business, you could invite the supplier to one of your events in order for them to see you in action and learn more about your future plans.
Be interactive. Whenever a conflict or thorny issue arises, call them to discuss a resolution instead of simply sending out an email. Written communication can often be misunderstood since it does not always convey intentions in their entirety.
Building a partnership of this nature will place you in a favorable light when the unexpected happens. An example of such is when the orders coming through are not enough for you to pay for the latest shipment. Or it could be the opposite case where a sudden surge in demand has taken place, resulting in the need for supplies to be urgently delivered. There are many such instances in business where having quality supplier relationship management in place is pivotal to a business.
A customer may have their means of communication with a supplier blocked or impeded in some way, especially if the supplier is overseas. This was the situation many customers found themselves in when they were locked out of the WeChat platform they were using to communicate with Chinese suppliers. Ensure that the connection with your supplier extends beyond just social media or other regular or impersonal avenues of communication.
In the build-up to the Beijing Olympics, the Chinese government ordered all chemical companies within a certain radius of the stadium to be shut down. This was because there had been a set deadline for the improvement of air quality in the area and progress was not being made quickly enough.
When incidences like these happen it means loss of production for the customers who depend on such suppliers. The latter are limited in their ability to serve customers and have no choice but to be selective on who they will distribute to. Those who have invested time in developing a solid relationship with the supplier will tend to be preferred above others.