Managing supplier relationships used to be a zero sum game. Most companies focused on short terms goals where price was the main focus. Bullying suppliers were commonplace in some organizations. Employees took great pride in “facing down suppliers” and relationships were viewed on “how much money we will make”. However, with the increase in outsourcing and volatility in commodities, supplier relationship management (SRM) has moved to the forefront of organizational strategy. Companies are spending increased time on their selection criteria and determining clear best practices to manage partner relationships. However, few companies have mastered supplier management and SRM is in its infancy.

The question of quality

With the increase in outsourcing and the growth in world trade, product quality is increasingly an important factor. Many companies in the pet food, toy and dairy industry are still reeling from recent quality scandals in China and other parts of Asia. These scandals have put increased pressure on companies, as consumers are progressively more concerned about product quality. These quality scandals of late, as well of those in the apparel industry over the past decade, have highlighted the importance of managing relationships and the importance of supplier tracking and auditing. The days where companies could plead “we don’t have control over our suppliers” are gone. Environmental concerns and an increased scrutiny of labour practices also are demanding improved supplier relationships.

Outsourcing to the “unknown”

With outsourcing to Asian countries on the increase, companies need to understand culture issues. Many companies have been burned when outsourcing manufacturing to countries such as India and China. Management practices that worked in one country are not necessarily going to work in another country and companies need to change the way they think and work in other markets. Country values are also different. For example, cutting legal corners is seen as a survival technique and is much more tolerated in some countries. It is important to understand the value system of each country and it is important to assume nothing.

Outsourcing to emerging markets provides companies with unique challenges. Companies must develop contingency plans as delivery delays are normally more frequent. As one executive put it, “getting on time deliveries from our Asian suppliers, is one of our key challenges”. Working in the “unknown” also provides companies with unique legal challenges. Foreign companies trading in China and India have complained in the past about unfair legal practices. Companies must avoid disputes and ensure contracts are clear to all parties involved.  Do not assume all parties will read the fine print and try to avoid legal terms. Always aim to simplify matters for suppliers. Consult lawyers that not only understand local laws but also cultural issues. The interpretation of the law can differ from country to country and cultural issues need to be taken into consideration.

Technology

In recent years, companies have seen technological advances in managing supplier relationships. The day of managing suppliers with spreadsheets are gone, and SRM is increasingly complex. Companies are demanding increased visibility. The need for real time information is on the increase. Companies are investing significant resources in managing suppliers and the use of supplier relationship software is becoming more common place. Supply chain managers are increasingly using the web to collaborate and to communicate with supply chain partners.

Find the right partners

Previously, partner selection only focused on price, with value sometimes taking a backseat. Today, companies are spending increased time and resources to develop and implement a comprehensive supplier qualification process. Companies need to establish a strategic road map and clear selection criteria. For example, the selection criteria may include important components such as strategic vision, capability, capacity and environmental issues. Companies need to evaluate if potential suppliers meet their required standards. Furthermore, supplier selection is not just limited to procurement departments, and companies are increasingly making use of cross functional teams. Employing external agencies to monitor and track supplier relationships is also on the increase.

Building relationships

Companies must always act with the relationship in mind. Companies must have a clear relationship development plan for each partner with clear goals. Building trust is key in any relationship, and trust must be built at all levels of the organization, and not just at senior management level. For example, companies can introduce department induction programs and in some cases even embed suppliers in the organization. The more partners understand each others businesses, the better for all parties involved. With clear communication channels, partners will have the confidence to address problems head on.

Advantages of relationships

One of the key advantages of long term relationships is cost reduction. Companies work together to solve supply chain problems and learn from one another. Better collaboration and communication will lead to increased sales. Improved collaboration can also lead to better demand planning and route scheduling. For example, when Kellogg evaluated Tesco’s inventory levels it realized that most out of the stocks occurred in the middle of the week. Kellogg worked with Tesco and changed its delivering schedule to accommodate the retailer. By changing the delivery scheduled, Kellogg reduced stock outs, increased sales and improved both customer and consumer satisfaction. As the Kellogg example demonstrates, working with suppliers can provide mutual benefits to all parties involved.

In today’s world, companies require suppliers that are results orientated and are demanding increased speed from suppliers. Not all suppliers are equal and all suppliers need to be segmented. Segmentation is critical, as it will determine the importance of the partnership and how much time companies need to spend on building supplier relationships.  All members of the supply chain must have clear accountability and each member of the team must be aware of his or her duties. Companies need to monitor compliance and implement and communicate clear Key Performance Indicators (KPIs). In today’s high speed world, SRM is on the forefront of any successful company.  SRM has changed significantly over the last couple of years, and suppliers are now seen as an extension of the business.

1. Culture – understand culture issues and don’t assume anything. Change your thinking when working in other markets
2. Relationships – build long term relationships with suppliers and always act with the relationship in mind
3. Contracts – don’t assume all parties will read the fine print and try to avoid legal terms. Avoid disputes and ensure contracts are clear to all parties involved
4. Qualification – implement a supplier qualification process and make use of external agencies. Obtain the right expertise for the job
5. Training – arrange joined training sessions and focus on building supplier capability. Keep in mind there is a lot to learn from local suppliers
6. Contingency plans – develop contingency plans as on time delivery can sometimes be challenging. Communicate problems to key stakeholders

• The supplier has a large part of its businesses in depressed industries
• It has raw material shortages or cannot meet the agreed lead times because of late purchase order placements
• It has heavily cut investments in R&D, IT, equipment or resources
• The quality of supply is deteriorating
• The supplier has entered into significant contracts with new customers
• Staff is being laid off
• Additional discounts are offered for early payment or require cash in advance
• The supplier is restating earnings and outlooks
• It has high-labour content that requires a large weekly payroll

1. Expertise – Do they have the required expertise?
2. Alignment – How aligned are they with our organizational goals and strategy?
3. Culture – Do we anticipate any culture clash?
4. Organizational Fit – How will the partnership work with our organization structure?
5. Collaboration – Will it improve overall collaboration?
6. Management - What do we know about their management?
7. Partners – Are they working with strong supply chain partners?
8. Visibility - Will it improve visibility in the supply chain?
9. Cost – Do we understand cost to serve and total cost?
10. Process impact – How aligned are our processes?
11. Technology – What software are they using and will we have any integration challenges?
12. Efficiency - Will it improve efficiency?
13. Closeness – Will we get closer to our customers or end consumer?
14. Flexibility – How flexible is their system?
15. Implementation risk – How long will it take and what guarantees do we have?
16. Barriers – What challenges will we encounter?
17. Regulations – Are there any regulatory issues we need to be aware of?
18. Safety - What is their safety record?
19. Financial – How financially stable are they?
20. Quality – Will we maintain or improve quality standards?
21. Trust – Do we trust them?

Shared Key Performance Indicators. Business Intelligence (BI) applications share Key Performance Indicators (KPIs) to integrated members of the supply chain. KPIs are normally displayed on a dashboard, and each member updates its own information.

Increased visibility. Big retailers like Wal-Mart also employ Vendor Management Inventory (VMI) systems to increase visibility and reduce stock outs. VMI makes it less likely for companies to run out of stock as it makes use of integrated systems and procedures. In some cases retailers don’t own the stock, and stock is shipped on a consignment type basis.

More Responsive. In a well integrated system, members can track each order and gain insight into delivery times and quality of product delivered. Advanced BI applications can analyze each step of the process and identify potential opportunities. This increased visibility allows the chain to operate at a greater speed, and in the process allow more flexibility.

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