Collaborative Supplier Relationships: The Key to Procurement Success
Here are ways that companies can build highly collaborative supplier relationships.
By Marisa Brown
As supply chains become more complex and interconnected, procurement professionals will need to rethink the ways they build and manage supplier relationships. Organizations are increasingly dependent on suppliers to help reduce inefficiencies and excess cost, drive innovation, mitigate risk and maintain competitive advantage. With the advance of blockchain, e-procurement and automated transactions, the need for trust and transparency between buyers and suppliers is greater than ever.
Even the most market-dominant buyers would be unwise to bully, browbeat or micromanage suppliers in this environment. And yet, many organizations continue to apply these short-sighted approaches to supplier relationship management (SRM). SRM is the discipline of strategically managing all interactions with third-party suppliers to maximize value. The application of formal SRM is gaining momentum — but unfortunately, most organizations are stuck on the approaches and objectives of the past.
An APQC poll found that among organizations with SRM approaches in place, 80 percent rely on SRM to reduce risk and 72 percent rely on SRM to monitor contract compliance and service levels. These are dangerously outdated focus areas for organizations in 2019. Shifting risk onto suppliers and micromanaging contract terms is counterproductive and prevents SRM from delivering maximum bottom-line impact.
Leading-edge organizations apply SRM to drive innovation and competitive advantage, and the key to their success is building collaborative relationships with strategic suppliers. In SRM, collaboration does not mean compromise or the absence of conflict. It’s not a mindset or a slogan, and it’s certainly not a one-size-fits-all approach to be used with every supplier. Instead, collaboration is a relationship model – built on guiding principles and reinforced through key behaviors – that allows buyer and supplier to realize mutually beneficial outcomes. In short, it’s a win-win.
Start at the Beginning
It’s little wonder that traditional SRM often yields frustration and disappointment for both parties: It applies only in the final phase of procurement, after expectations and contract terms have been set. To build collaborative relationships with suppliers, you need to start at the beginning and focus on the bigger picture: the potential for an enduring and mutually beneficial partnership.
First, you need to identify candidates to collaborate with. Building collaborative relationships takes time and effort, so you cannot invest in collaboration with all suppliers. Buyers can maintain transactional relationships with suppliers that provide low-cost, standardized goods in saturated markets. However, collaborative partnership is required when working with suppliers that are essential to the achievement of organizational objectives. Scrutinize these strategic suppliers not only in terms of price and quality, but also trustworthiness, transparency and compatibility.
Establish Guiding Principles
Almost every buyer/supplier relationship begins with two distinct visions of desired outcomes. To build a collaborative relationship, buyer and supplier must align on a shared vision and establish guiding principles that will enable the vision. The principles will guide partners not only throughout the negotiation process, but throughout the term of the relationship. A clearly-defined and mutually-agreed-upon set of guiding principles is necessary to prevent opportunism and competitive tit-for-tat moves.
Guiding principles can and should be unique to each relationship, but those defined by supply chain management researcher Kate Vitasek as part of the Vested model are an excellent starting point. Vitasek identified six guiding principles that help partners build and maintain trust:
1. Reciprocity – parties will make fair and balanced exchanges in the acceptance of risk and investment of time and money.
2. Autonomy – parties will work as equals and abstain from self-interested power plays.
3. Honesty – parties will be transparent about their capabilities, intentions and experiences.
4. Loyalty – parties will be loyal to the relationship and its objectives.
5. Equity – parties’ risk and reward may not be equal but will be equitable and fair.
6. Integrity – parties will commit to consistency and trustworthiness in their decisions and actions.
The parties can negotiate as partners to determine the scope of work, pricing, and – importantly – measures. This stands in stark contrast to the one-size-fits-all performance frameworks many organizations currently force on their suppliers. Because the supplier is the expert on the product or service being provided, its insight is key to identify the most meaningful measures.
Practice Collaborative Behaviors
Throughout the partnership, both parties should reinforce their commitment to collaboration through their actions. Daniel Coyle, author of “The Culture Code: The Secrets of Highly Successful Groups,” identified three key behaviors that promote collaboration and propel groups toward greater productivity. These behaviors can be used to build cohesion and collaboration not only within the organization, but with external partners.
The first key behavior is “build safety.” Establish a safe environment that allows individuals to feel comfortable admitting mistakes, sharing ideas and asking questions. According to Coyle, safety is like a light switch: If we feel safe, we connect; if we don’t feel safe, we don’t connect.
The second key behavior is “share vulnerability.” Demonstrate behaviors that show risk is shared among both parties. This begins with one party (typically, the leader, or in this case, the buyer) openly sharing their own challenges and limitations, which encourages the other party to do the same. This promotes transparency and the idea that “we’re in this together.”
The third key behavior is “establish purpose.” Collaboration is never an end in itself; both parties need a clear, well-established purpose to drive collaborative efforts. Coyle recommends explicitly defining and continually promoting the purpose through mantras. For example, turn guiding principles (e.g., “Reciprocity”) into short, easy-to-remember mantras (e.g., “We’ll treat each other fair and square”). Mantras may seem corny, but they help people know what to do when problems and issues arise.
The Takeaway: Collaboration Delivers Bottom-Line Benefits
For procurement professionals to succeed in today’s complex and competitive landscape, collaboration is not a nice-to-have – it’s a requirement. Research from IBM finds that organizations with collaborative supplier relationships achieve twice the revenue growth and five times the gross profit growth of their peers. Start building collaborative relationships now or prepare to fall behind.
For more information, see APQC’s Reinventing Supplier Relationship Management white paper and research on next-generation SRM conducted in collaboration with Kate Vitasek, Bonnie Keith and Emmanuel Cambresy.
Marisa Brown is senior principal research lead of supply chain management for APQC, an authority in benchmarking, best practices, process and performance improvement, and knowledge management.