Partnerships in sourcing, selling and retaining the loyalty of the employee can tighten relationships with all stakeholders in pursuit of sustainable quality and mutuality of obligation.
Let’s start with procurement. Once high on the management yawn factor, it is an important matter, more so with just in time supply chains and limited warehousing. Partnership sourcing, aka strategic sourcing, means it is just as important to build relationships and learn to work together with suppliers as it is to build relationships with customers.
The emphasis in buyer-supplier relationships is shifting from a one-sided take the lowest of three competitive bids, to a mutually beneficial relationship concerned with quality, competence, reliability and flexibility. When suppliers are seen as experts, they become valuable partners instead of a switchable commodity.
Treating suppliers as partners:
- This helps control and trim costs and boost speed in today’s predatory world economy
- It improves quality by sharing knowledge: make use of suppliers’ expertise to help design parts or the product/service itself
- It slashes transaction costs if dealing with fewer suppliers; like customer loyalty, it costs less to deal with existing suppliers who know your business well
- It creates value by improving performance through the entire value chain
How customers work with suppliers as partners:
- develop and agree longer-term shared goals
Strategic sourcing in European manufacturing companies:
- purchased materials rank from 40-80% of turnover
- companies are achieving up to 10% reduction in material costs
- 60% of companies have a regular presence at suppliers (40% 5 years ago)
- companies are reducing supplier base by 3%/year
- leading companies moving to ‘lifetime agreements’ or multi-annual contracts; old companies still using individual purchase orders
- emphasise mutual benefit over quick fix of one-off unit price reductions
- concentrate business in fewer suppliers; give them a longer-term commitment; involve them in design and planning
Companies go for quality over quantity
- Across Europe the number of suppliers has been reduced by between 45 – 70%
- support and be supported in areas like new product and business development
- change attention from price to costs (eg storage, handling, transport, packaging, compliance, defects, late deliveries, lost customer satisfaction
- some companies go so far as to treat suppliers like a department of the company
Laura Ashley
An old case but the example is still valid
A partnership with Federal Express has help Laura Ashley gain enormous cost advantages. Fed Ex is part of management team and on the board; makes it easier to achieve strategic objectives of high quality service, prompt delivery, near 100% stock availability: couldn’t do it so well when deliveries handled in-house.
Through electronic data interchange, customers and suppliers can share business documents and real-time information in seconds (e.g. barcodes trigger re-order)
Tesco
Tesco exchanges 13 weeks’ worth of sales forecasts with suppliers; will no longer deal with suppliers that are not part of its new automated system for ordering and paying for goods.
- Many businesses now do not chase every penny; won’t drop good supplier if a rival offers to do work more cheaply; count relationship as part of investment
- Some leading edge companies loan suppliers equipment, people, financing
Many leading edge companies look for supplier-partners that share their values:
- sharpens their skills by teaching them their own techniques including supplier’s employees do courses at the company ‘University’ in e.g. cycle time reduction, customer satisfaction
- nurtures relationships, but fans gentle competition by visiting suppliers’ plants, grading on how they’re doing relative to their competitors
- emphasises helping suppliers to reduce their costs and increase profits
- have ‘council of suppliers’ to rate the purchaser’s own practices and offer suggestions for improving e.g. production schedules, design layouts
- know more about supplier for upfront prevention e.g.
- review detailed financial information about the supplier
- check references
- ferret out possible problems which, if they happen, customer can step in and help rather than change supplier
- old-style supplier audits mainly found faults in order to negotiate down price; new partner appraisal: a wider assessment of supplier performance; act as advisor, focusing on areas of mutual improvement
Role of engineering subcontractors in the Midlands is changing to reflect new relationships. Traditionally provided short-term extra capacity for manufacturers during peak demand; now a vital part of manufacturing strategy as contractors move to outsourcing. Forging longer-term relationships. Win-win:
- manufacturers: concentrate on what can add most value
- subcontractors: become specialists, and spread own capital investment across longer-term contracts (rather than resisting investment because of inability to predict payback)
Potential difficulties with supplier partnerships
- loss of confidentiality and freedom to switch supplier at short notice
- may become too dependent on supplier and be held to ransom on price, delivery times etc later
- takes more management time than straight traditional supplier relationship
- controlling managers (e.g. finance departments) may baulk at transfer to supplier of information needed to create value
- if go down path of just-in-time, can actually result in a more tyrannical relationship than traditional customer-supplier: creates more pressure on partner to be responsive with little room for stock control or forward planning
- if relying on one supplier as source for one product/service, exposed to smallest supplier problems
- not every company yet has relationship management skills: need different skills for people-managing ongoing relationships than simply choosing one-off lowest cost
- understanding the difference between partnership and adversarial relationship: not easy especially if partner has other, more traditional relationships with other companies
- for supplier opening books to customer and agreeing set margin in exchange for long-term contract, risk that customer may insist on unreasonable conditions after lock-in e.g. even shorter delivery times