How to Build a Better Supplier Partnership

The days of going it alone in manufacturing are long gone, if ever they existed. As companies cast off all but their core competencies or extend their supply networks across oceans and continents, their inherent risks increase and their assemblage of suppliers becomes increasingly important.

Partnering with suppliers (or customers) to develop deep, mutually beneficial relationships over the long-term is frequently cited as a means by which to lessen that risk and develop true supply chain excellence. The reality has been less pretty.

"The term customer-supplier 'partnership' has been used very loosely over the years. I've heard it referred to as the 'P word' with a negative connotation," says Sherry Gordon, author of "Supplier Evaluation and Performance Excellence" and president of management consulting firm Value Chain Group. "Suppliers are sometimes wary of some customers using the term, as customer firms may erroneously view partnerships as a way to get more out of the supplier" -- price concessions, for example -- without any mutual give and take.

Sherry Gordon: "Customers must learn to listen to suppliers rather than think that they are firms needing to be 'managed.'"
Gordon likes the Institute for Supply Management's definition of supplier partnership: a commitment over an extended time to work together to the mutual benefit of both parties, sharing relevant information and the risks and rewards of the relationship. By that definition, "very few customer-supplier relationships qualify as partnerships," she says.

Then there are companies such as consumer-goods giant Procter & Gamble and Toyota, which often are cited as companies with a strong regard for partnering and collaboration. During P&G's supplier summit last fall, the company spoke of its view of suppliers as an extension of the company. "We expect the best from our business partners, and we are focused on growing long-term relationships that are sustainable, innovative and create joint value," said Rick Hughes, chief purchasing officer.

With a true customer-supplier partnership as a goal, how does a manufacturer proceed to achieve that end? Several manufacturing and supply chain authorities weighed in.

The customer must change, too. A partnership is not only about the supplier making changes on its side of the equation, Gordon says. "Customers must learn to listen to suppliers rather than think that they are firms needing to be 'managed,'" she says. "An example of this is a supplier day that I was recently involved in where key suppliers came to offer their best ideas to the customer and the customer was just supposed to listen without refuting what the suppliers were saying. This day resulted in big and small, strategic and cost-saving ideas being offered to the customer. So why hadn't these ideas ever come up before? Some of them had, but the customer wasn't open to them or looking to reap the value of the ideas."

CEOs play an important role. An excellent supply chain strategy or truly gifted supply chain leader rarely reaches full potential without the CEO setting the tone, and the same holds true when it comes to collaborating with external suppliers, according to "The New Supply Chain Agenda: The Five Steps that Drive Real Value." "The CEO must create an environment for collaboration with suppliers and customers to flourish," write authors Reuben E. Slone, J. Paul Dittmann and John T. Mentzer.

Similarly, Gordon says that mutual access and communication between senior leadership is important to developing partnerships. It's a signal at each firm that the relationship is important, and it provides a means to quickly resolve challenges that may arise, she says.

"Real partnerships are difficult to nurture without senior-management access and involvement," according to Gordon.

Peplin can quickly present the benefits his firm brings to a partnership: quality, integrity and a problem-solving nature, among them. "We do things right, and we're always getting better. We're a top performer. That's part of being a partner," Peplin says.

In return, Talan Products boasts a cadre of key customers who bring loyalty and long-term relationships on their side of the equation, and they pay their bills on time. Relationships with several key customers date back 20 years or more.

One such partnership with a long-term customer is built on an evergreen contract that automatically renews each year for two years. That means it takes two years to escape the contract in the absence of a mutual decision by the parties. "If somebody decides to non-perform, you've got to live with the other guy for two years. What that means is you are going to fix the problem," Peplin says.

Talan Products' embrace of partnering paid dividends during the recent recession, when in 2008 soaring steel prices preceded a fourth-quarter price dive and a suddenly tanking economy. The abrupt change in fortunes left many companies, including Talan Products, with pipelines clogged with high-cost material and customers that weren't taking any product.

A bad situation could have been worse if Talan Products' partners along the supply chain hadn't worked together to mitigate the hurt. "We developed a creative way to deal with a unique problem," Peplin says.

Arizona State University's Mark Barratt, meanwhile, provides a word of caution with regard to the notion of win-win propositions. Barratt, assistant professor in supply chain management at the university's W.P. Carey School of Business, doesn't believe "mutually beneficial" automatically translates into a 50-50 proposition. "That's unrealistic, and that's part of the problem. People enter into [a collaboration] thinking win-win and split down the middle, and it's not" necessarily so. There is still a power balance in the supply chain, he says.

Barratt's caution is not one about which Peplin worries. "If we're both happy, that's 50-50," Peplin says. "If either one has a problem, they pick up the phone and say, 'Look, we have a problem.' And then everyone works to fix it."

Share decision-making. Barratt warns against the idea that simply sharing information is a collaborative relationship. Without joint decision-making, sharing information tends to raise expectations for improved performance without delivering significant reward, Barratt says.

Mark Barratt:
"If you think about personal relationships, a lot of the characteristics or traits of successful personal relationships apply [to collaboration]."
"It's easy to share information and have the expectation that things are going to improve, but if you don't go through that whole process of deciding when, with whom, where, how, in what format, often the results are disappointing," he says.

Constant care and feeding required. Partnerships come down to relationships. "Maintaining a relationship requires constant care and feeding, a bit like a marriage," Gordon says. "Like any relationship between people, customer-supplier partnerships take time and effort. This may mean that both the customer and supplier regularly evaluate each other and the relationship, just to make sure that issues are resolved and that they stay on track. Mutual respect, a two-way flow of information and listening are important. Ideally there should be alignment between firms on the value of the relationship, business ethics, standards of excellence and commitment to continuous improvement."

Barratt uses a similar analogy. He outlines a need for mutual effort and understanding, as well as shared key objectives. "If you think about personal relationships, a lot of the characteristics or traits of successful personal relationships apply [to collaboration]," he says.

All that said, the "people" aspect can be challenging, and to some extent it's because people are "not the rational beings most employers imagine us to be," Barratt suggests. As an example, he asks how often in personal relationships do people respond more quickly to someone they like than dislike. "In a supply chain context, that very much happens," he says. "Relationships we have with customers and suppliers vary considerably, and how they act and respond varies accordingly. And it's not always the biggest customer or biggest supplier that gets preferential treatment."

To that end, managing people is vitally important to building a collaborative customer-supplier relationship, Barratt says. It is imperative, therefore, to get the right people in the right positions.

Use technology wisely. Without a doubt, technology offers opportunities for increased visibility and speed of information sharing. And while Barratt acknowledges good technology tools exist to advance collaboration, he believes they are not a requirement in the early stages of developing supplier collaborations. On a small scale, a spreadsheet and e-mail should suffice, he says.

His reasoning is simple: Early on, collaboration can be a hard sell; therefore the focus should be on developing the initiative, getting people on board with the initiative and gaining some momentum. Get the technology involved too early, and focus shifts to the technology rather than the initiative, "and that's not where it should be," Barratt says.

Once supplier collaboration has gained some momentum, technology can be a significant enabler of sharing large volumes of information, the assistant professor says.

Be prepared to develop new types of partners in the international arena. This tip is provided as a concluding thought because it speaks to more than building relationships with traditional partners. In this instance, it addresses a need to broaden supplier relationships to include non-traditional partners such as foreign governments.

Management consulting firm Accenture suggests that partnering with non-traditional sources may become necessary in the search for scarce resources, or resources concentrated in one region or country. For example, the consulting firm notes, Bolivia has more than half of the existing stores of lithium, an essential resource required for lithium-ion batteries.

Tightly controlled resources "means that manufacturers will have to dynamically reshape their operations to accommodate different supply arrangements and new partners in the international dance," Accenture states in the white paper "What's Your Plan for 2025?" The report addresses a host of new risks, challenges and complexities manufacturers will face as they manage global supply chains. "Scarce resources will entail greater political diplomacy on the part of manufacturers in dealing with governments, regulators and citizen groups."

Manufacturers that depend on these scarce commodities should be thinking now about how to interact with these "new" supplier types, by investing in the host countries "either through their own operations or in partnership with state-owned or local enterprises." Entirely new supply chain designs may emerge with these new realities, Accenture predicts.