Several years ago, a company that produced capital equipment initiated a firm-wide project designed to gain an advantage against competitors in a market that cared about both product quality and cost. The firm’s leadership put pressure on basically every department in the organization to come up with new ideas that could translate into marketplace success. Their efforts yielded some results, but the outcome fell far short of what had been hoped when the project had been started.
What this firm failed to realize was that it had one hand tied behind its back. Third-party suppliers contributed on average just over 60% of the value of the firm’s products as they left the warehouse. Years of aggressive supply chain management had ensured that the firm was paying rock-bottom prices for the ingredients purchased from those suppliers. While such supply chain contributions are important and valuable, goals such as those established by this firm require much more than low prices in the way of contributions from suppliers.
Today, many firms are in the same situation as the one described above, with a high share of their value added linked to ingredients purchased from suppliers. Executives must realize that suppliers can contribute far more than just lower prices and security of supply. Suppliers must bring innovations to the table. They must identify strategies that improve manufacturing and other processes. They must deliver ingredients and equipment that yield energy efficiency and environmental gains, and that address new regulatory challenges. In some instances, they must even contribute by easing the challenges of entering new global markets. And those examples are just a few drawn from the roster of contributions that I have observed strong suppliers making to their customers.
Almost every company that I have interviewed over the years can cite a “supplier success story”, describing an instance in which a supplier truly made a contribution. But a far smaller fraction of those companies can cite what they are doing to motivate future supplier success stories. They are, unfortunately, like the firm described above, operating with one hand tied behind their back. They are failing to establish their position as a preferred customer, one that attracts best-in-class suppliers and motivates their strongest contributions.
Releasing the hand tied behind your back is not an easy process, particularly for firms that have managed their relationships with suppliers so as to promote competition with a singular focus on gaining price concessions. To tap the contributions that suppliers can make in other areas requires new approaches to key relationships and often a trust-building period to overcome suspicions.
The mindset of being a best-in-class customer must become the foundation of the relationship with suppliers that are viewed as being in a position to make a strategic contribution. Not all suppliers are in that position, and a first step in the process involves identifying those suppliers that have the potential to make meaningful contributions. That potential depends on what they supply and also on the extent to which they have insights that can become critical to future growth and profitability. In my experience, the roster of such strategic suppliers is typically short. Two key tests that can help to identify strategic suppliers involve assessing how important their ingredient is in the eyes of your firm’s end customers and quantifying how many of your firm’s own processes and costs are linked in one way or another to the supplier’s product.
For those suppliers that have the potential to make a strategic contribution, a different approach to managing the relationship is required. Many firms serving business markets have long ago implemented a strategic accounts team, with a dedicated account team focused on important customer relationships and a distinct cadence and focus to those large, highly important customer relationships. The same philosophy applies to strategic supplier relationships.
As one example of the difference in how strategic supplier relationships are managed, a best-in-class customer will actively involve strategic suppliers in end customer relationships. The supplier’s ability to deliver value along many of the dimensions cited earlier depends on their understanding of what matters to the end customers. Many times, suppliers that have been involved in end customer relationship see analogies to challenges they’ve faced – and overcome – in support of other customers in other business environments. Ensuring that suppliers are aware of your firm’s end customer challenges is prerequisite to their ability to help you solve them.
As a second example, in strategic supplier relationships, a “systems perspective” is required, with both firms being open to changes in the roles and boundaries between them and looking at how each of their decisions and processes impact on those of the partner firm. It’s a simple principle of optimization that when you focus on the whole system instead of its components in isolation, you have more options for improvement. This applies when suppliers and customers are confronting problems. Sometimes the solution requires a new way of doing things, shifting responsibilities from one firm to the other or making changes in processes in one firm that open the route to savings in the other. The gains from such collaborative efforts at problem solving can be substantial, and create a value pool that can be shared between the two companies.
Finally, three themes occur repeatedly in discussions with suppliers about their best customers. The first of these involves the information flow and the communications between the two firms. Suppliers say that their best customers tell them what they need to know in order to be successful. The second observation is that suppliers feel their best customers accept them as part of the team, as opposed to keeping them at arm’s length. Such inclusion motivates suppliers to come to those customers with new ideas, even ones that are still “works in process”. The third theme is that there is an openness to the relationship, with quite a few people involved across the various departments and functions in the two organizations. As a result of those multiple touch points, the people that have the potential to spot an opportunity already know one another and are easily able to connect with one another.
Today’s business environment will continue to challenge most businesses and require them to undertake initiatives like the one described at the beginning of this article. The firms that are able to bring all of the resources available to bear on these challenges – including the resources that can be provided by strategic suppliers – will be those that prosper and reward their shareholders. Basketball superstar Michael Jordan once said “I don't do things half-heartedly. Because I know if I do, then I can expect half-hearted results.” Supplier insights and contributions are among the resources that must be tapped in order to avoid half-hearted results and one hand tied behind your back responses to business challenges. Identify those suppliers that can be a part of your firm’s success stories and implement the best customer practices that will enable them to do so. The payoff will be enormous.