Highly collaborative supplier relationships generate value beyond cost-savings. Learn how you can nurture more collaboration between you and your suppliers.
The COVID-19 pandemic had a significant—and lasting—impact on supply chain management. Described as supply-and-demand shock by the Harvard Business Review, the state of the global economy at the height of COVID-19 “exposed vulnerabilities in the production strategies and supply chains” in virtually every product-based industry: consumer goods, automotive, raw materials, agriculture, electronics, pharmaceutical, and the list goes on.
With transportation costs on the rise and the risk of renewed shortages with additional lockdowns, buying organizations must embrace a flexible business strategy, “the ability of an organization to respond to changes in the environment in a timely and appropriate manner with due regard to the competitive forces in the marketplace” as defined in one article on managing strategic flexibility.
Business leaders must focus business objectives on building and buttressing future-ready supply chains and what McKinsey & Company describes as the “optimal resilience” that arises from “cross-silo efforts that ensure an agile response to fast-moving events”.
However, supply chains are just one part of the equation. Supplier relationships also have a significant and measurable impact on not just revenue but also other “significant new sources of value”, as detailed in a study by McKinsey & Company.
As the McKinsey & Company study found, “companies that regularly collaborated with suppliers demonstrated higher growth, lower operating costs, and greater profitability than their industry peers”, with “leaders in supplier development and innovation tend to beat industry trends by ~2x in growth”.
In this article, we’re examining supplier relationships in depth and how strategic supplier-buyer relationships can provide benefits beyond profits to both the vendor and the buying organization.
Supplier relationships can range from a purely transactional 1-to-1 exchange on one end to a highly collaborative, or strategic, partnership on the other end.
With supplier relationship management (SRM) and supplier performance management (SPM) systems, the focus is often on the transactional side of the relationship: cost savings, invoicing, order history, catalog management, point-of-contact information, and so on.
While no one is disputing the SRMs, SPMs, and other supplier management systems are business-critical—they absolutely are—the relationship between buyers/buying org and suppliers needs to evolve in order to generate the benefits reported by McKinsey & Company, namely: higher growth, lower operating costs, and greater profitability.
In a nutshell, today’s most agile and profitable buying organizations are not managing their supplier base—they’re collaborating with them.
As Patrick Barr writes in Effective Strategic Sourcing: Drive Performance with Sustainable Strategies for Procurement, “supplier collaboration is not a label that is applied to any supplier relationship but a well-structured engagement program that will deliver significant positive outcomes for both the buying company and the supplier. Supplier collaboration is labor intensive, requiring participation from individuals from a variety of departments, not just procurement. A collaborative relationship is not a casual engagement; it requires commitment from both companies. Consequently, it is important to pick your suppliers wisely before embarking on an in-depth collaborative approach.”
To sum it up in one sentence: Supplier collaboration requires commitment and an understanding of which suppliers are best suited for a collaborative, rather than transactional, relationship.
Typically, collaborative relationships will be with Tier 1 suppliers; however, further in this article, we explore why oversight and insight into all tiers of supplies can help you better manage your supplier partnerships as a whole.
The same insightful McKinsey & Company article on taking supplier collaboration to the next level notes that “governance of collaboration projects should be cross-functional, with appropriate incentives introduced throughout the organization to encourage full participation and ensure both parties pursue long-term win-win opportunities, not just short-term savings”.
McKinsey & Company describe the paradigm shift from cost-based to value-based as “difficult to come by”, citing that most companies might prefer quick wins and short-term gains over collaborative initiatives that may be harder to quantify initially and provide little or no gain in the short-term—but, as we saw from the data McKinsey & Company analyzed, collaborative initiatives provide significant value once established.
Aside from cross-functional engagement, a few other barriers to collaboration include:
By acknowledging these and other barriers, buying organizations can begin the shift towards greater supplier collaboration.
CRM platform Hubspot reported that a 5 per cent increase—just 5 per cent—in a company’s customer retention rate could improve revenue by at least 25%.
Retention rate is often affected by brand loyalty, brand reputation, and customer satisfaction. Highly collaborative relationships with suppliers can have an impact on all of the above, by providing quality materials or goods that help make your company’s name synonymous with excellence and trustworthiness.
Retention rate and revenue are just a few of the benefits of a truly collaborative relationship between vendors and buying organizations. To name a few more:
As the team at McKinsey & Company point out, “excelling at supplier collaboration requires a more active and engaged working relationship with suppliers”.
Here are nine ways that you can achieve that:
You likely can’t invest the time and energy to collaborate with all of your suppliers—nor should you. However, before you can choose which Tier 1 suppliers you want to collaborate with, it’s important to understand who is already bringing the most value already to your organization, whether that’s through demonstrated innovation or fast replies or a combination of these and other elements that you’ve identified as business-critical.
By extending the conversation with your suppliers from the practical to the tactical, you can significantly improve both your processes and your products. Provide timely feedback to your suppliers and ask for feedback in return to create a truly collaborative improvement loop. Generate high-value discussions by asking vendors to weigh in on design and sustainability initiatives, ideas for how to improve products, ideas for new products, etc.
Help vendors feel connected to each part of the supply chain, not just their part. Sustain enthusiasm and collaboration by sharing product updates with your suppliers regularly, e.g. which products sold out, which products performed better than expected, how the shipment arrived, 5-star reviews that mention how the product improved someone’s life, and so on.
The most successful supplier relationships are ones where the supplier and the buying organization are aligned strategic partners, generating tangible benefits for both. Think of it as a win-win, never a win-lose, situation. Set benchmarks, and help suppliers meet them by sharing data and taking a transparency-first approach.
Similar to the point above, you should encourage suppliers to reach out to you by sharing updated contact information and essential points-of-contact. Always make it a two-way conversation and remind everyone on your team (including yourself) that you and your suppliers have common goals to deliver the right product to the right market/consumer.
Smaller suppliers or suppliers who are diverse (owned 51% by women or persons who belong to a marginalized group) are usually more open/interested in providing input and sustaining a highly collaborative relationship with you. To learn more about other benefits of diverse suppliers, read our article on the undeniable benefits of a supplier diversity program.
Capturing and analyzing supplier and product data throughout your supply chain can help you identify bottlenecks, opportunities for improvement, and risks across supplier interactions. Data can also help you investigate whether or not your current supplier collaborations are progressing as they should.
While supplier collaboration typically occurs only with Tier 1 suppliers, it’s important for your organization to have visibility into all tiers to understand the impact of each on your supply chain. By maintaining a holistic view of your suppliers, you gain more insight into the point-of-view of your Tier 1 suppliers (i.e. their perspective) and you can also identify potential supply chain issues with Tier 2 and Tier 3 suppliers.
Incentives can be an effective way to nurture stronger relationships with suppliers. By offering incentives, businesses can encourage suppliers to meet and exceed performance targets, provide better quality products, and deliver goods and services on time. Incentives can take many forms, such as bonuses, increased orders, longer-term contracts, or access to new markets.
As the Harvard Business Review deftly points out in an article on global supply chains in a post-pandemic world, “manufacturers worldwide are going to be under greater political and competitive pressures to increase their domestic production, grow employment in their home countries, reduce or even eliminate their dependence on sources that are perceived as risky, and rethink their use of lean manufacturing strategies that involve minimizing the amount of inventory held in their global supply chains”.
By investing in and committing to the supplier collaboration frameworks outlined above, companies can get ahead and stay ahead of the competition by increasing their profitability, market share, and becoming (or remaining) industry leaders—while also helping suppliers to benefit more from the business relationship too.