Supply-Side Economics: 10 Strategies for Building and Maintaining Profitable, Lasting Partnerships with Your Suppliers

BY JULIE A. PALM

Quick! Name the people most vital to your company’s success. Did you say your employees? Yes, definitely important. Customers? Of course.

But what about your suppliers? They may not have jumped immediately to mind, but whether your business thrives or withers is rooted in your relationship with your suppliers.

puzzle piece suppliers

If  “suppliers” wasn’t your first thought, you aren’t alone. “Businesses spend up to 80% of annual revenue with external suppliers, depending on industry,” but business leaders devote much less attention to managing supplier relationships than they do to managing their staffs, according to a study from Grosvenor Management Consulting, a firm with offices across Australia. The 2016 study was done in partnership with Procurement and Supply Australasia, a provider of information and education to procurement professionals in Australia and New Zealand.

Perhaps as a result of their own inattentiveness, businesses overall have a slightly negative opinion of their relationships with suppliers and “are more likely to speak badly about their supplier’s performance than recommend them to their peers,” the Grosvenor/PASA study shows. That, to say the least, is not ideal.

The price of poor relationships

Poor supplier relationships can negatively impact your business in a number of ways. Let’s start with the money.

In 2015, a study of relationships between automakers and their suppliers made major news in the world of supply chain management. “Poor Supplier Relations Costing U.S. Automakers Millions” blared the headline on the news release announcing the research. Then came the opening paragraph, with this stunning finding: “Ford, General Motors, FCA U.S. and Nissan collectively would have earned $2 billion more in operating profit last year had their supplier relations improved as much as Toyota’s and Honda’s did during the year.” (FCA U.S. is the North American arm of Fiat Chrysler Automobiles N.V.)

money signThe findings were from the Annual North American Automotive OEM-Tier 1 Supplier Working Relations Index, which tracks suppliers’ perceptions of their relationships with automakers. Planning Perspectives Inc., a Birmingham, Michigan-based consultancy that specializes in company-supplier relations, then uses its index to calculate the economic value of those relationships.

This year, Toyota and Honda improved their WRI ranking a combined average of 8.7% over last year’s levels,” said PPI president John W. Henke Jr. when announcing the 2015 findings. “Using our economic model, we know that if supplier relations at Ford, Nissan, FCA and GM also improved by 8.7%, they each would have realized significantly higher operating income—an estimated $2.02 billion collectively. At the low end, Nissan would have generated another $261 million, and, at the high end, GM would have earned another $750 million, with Ford and FCA in between.”

Simply put, according to Henke, Honda and Toyota were more committed to good supplier relations than their four competitors—and it literally paid off in higher operating income. Here’s one obvious way poor supplier relations hurt the bottom line: Companies receive smaller concessions on price from suppliers and have to try harder to get them. But there are nonmonetary prices to pay, as well. For instance, companies without good working relationships are assigned support staff by their suppliers and are at the back of line when suppliers offer up their latest innovations, Henke says.

On the other hand, a good relationship with your suppliers means you get needed components and equipment on time, materials always meet your specifications (no returns), your machines are installed and repaired quickly, and you pay a fair price for what you procure. Those are the basics.

handshake close upIn stellar relationships—ideally the kind you want to build—suppliers become partners, helping you to manufacture better products, lower your costs and streamline your manufacturing processes. They understand not only your company and your customers but also the broader bedding industry and have a vision for advancements that can improve your business, along with theirs.

Henke describes it this way: For any manufacturer-supplier relationship to succeed, it must be built on strong basic business practices. He defines those as “foundational activities” all manufacturers and their purchasing managers must do, including treating suppliers fairly; honoring contracts; abiding by fair, equitable financial practices; and valuing suppliers’ intellectual property. According to Henke, purchasing managers also must have the skills and knowledge required to do their jobs, be trustworthy and honest, and resolve issues quickly and effectively—among other things.

“Once an OEM (original equipment manufacturer) has the foundational activities in place, then working on improving the relational activities—which drive the Working Relations Index—will have meaningful impact,” Henke says. “These activities involve the nature of the relationship—whether it’s adversarial or collaborative—and include the degree of open and honest OEM communication, how much help the OEM provides the supplier to reduce cost and improve quality, how much the OEM hinders the supplier in doing its best job, and finally, the long-term profit opportunities the supplier perceives are available from working with the OEM.”

Going back to the study of automakers, Henke says, Honda and Toyota excelled at those foundational activities and focused “on improving their relational activities” while their competitors struggled to master the basics of supplier relations.

Broadly speaking, strong supplier relations make companies both tougher and more innovative, finds Amsterdam-based PricewaterhouseCoopers Accounting N.V. in a 2013 report on supplier relationship management.

“Companies with mature supply and risk management practices are more resilient,” the team at PwC found. “They are less vulnerable to disruptions and recover faster. If companies invest in flexibility in their supply chain, they are better able to endure disruptions than companies that fail to do so. Our research indicated that such companies also perform better in all aspects of operational and financial performance.” (Italics added.)

Partnerships with suppliers also drive innovation, in part by cost-sharing expenses related to research and development.

“Chief executive officers ranked innovation as the No. 1 approach to growth,” the PwC report says. “Increasing competitive pressures and a need to deliver growth means they recognize the need to bring new products and services to the market quickly and efficiently. … Open innovation with external partners is the next step in innovation excellence.”

Relationship goals

How can you improve relations with your most important suppliers? Here are 10 strategies:

No. 1: Pick the right partners from the start.

That’s one of the best practices recommended by a team from Deloitte Consulting GmbH, a management consultancy in Munich, Germany, studying supplier relationships. When choosing suppliers, “look beyond strategic and financial fit and consider differences in corporate culture, operating model and business practices, as well,” the Deloitte team recommends. “Additionally, think of what tomorrow’s competitive advantage could be and which suppliers could support it.”

No. 2: Create mutually beneficial relationships.

Making a deal that stretches the resources and capabilities of your supplier or puts it at a financial disadvantage just to earn your business hurts you both in the long run. “When negotiating with your strategic suppliers,” the Deloitte group suggests, “make sure that you negotiate a win-win deal for both parties, considering immediate actions as well as future engagements. Foster collaboration by training your employees in conflict management, problem solving and networking skills.”

No. 3: Value your suppliers’ expertise and experience.

“Chances are your supplier has seen it all. They serve dozens of clients every day. You should take advantage of their expertise and ask them for their input when trying to solve a business problem rather than asking them to merely execute your ideas,” according to the report accompanying the Grosvenor/PASA study. “Consulting your supplier when solving problems shows that you value their experience, creates a sense of ownership and keeps everyone motivated. But above all, it leads to much better solutions.”

Ideally, you reach the point with suppliers that they sometimes come to you with ideas and answers without any prompting.

No. 4: Don’t expect the impossible.

Your best suppliers will do whatever they can to meet your needs, but such commitment on their end should come with respect on your end.

For instance, give suppliers as much lead time as you possibly can, says Bob Reiss, an author and serial entrepreneur in Delray Beach, Florida, who wrote widely on a variety of business topics for Entrepreneur and other publications before his recent semiretirement.

“Unless there’s a good competitive reason not to, share with them an honest projection of your needs, and keep them abreast of any significant changes in that estimation,” Reiss says. “When developing your lead times, it helps to be knowledgeable about your suppliers’ production methods and needs.”

Remember, it’s a partnership.

No. 5: Choose the right key performance indicators.

“Select measures that are relevant to your suppliers and your own business based on your mutually defined strategic objectives and be specific on how those goals should be measured. Communicate openly and continuously and ensure information flows in both directions on a real-time basis,” the Deloitte advisers recommend.

No. 6: Forget sticks; use carrots.

This is Management 101: People generally respond better to rewards than punishments. In managing suppliers, be clear about performance goals and provide constructive, positive feedback when they are met.

“Champion organizations keep motivation up, actively develop suppliers, lead by example and reward high achievement,” the Grosvenor team says.

Carrots can include everything from expressing genuine appreciation more often to taking your account manager to lunch to giving a supplier more of your business.

No. 7: Be judicious with the sticks.

Gerard Chick, an expert in procurement and supply management based in Nottingham, England, who writes for Supply Management and other publications, acknowledges that there are times when suppliers will make mistakes or underperform. “If you have to give a warning, allow the supplier the opportunity to correct the problem,” Chick says. “Help them to improve their performance as longer term relationships yield loyalty and better service.”

That said, ongoing bad service can’t be tolerated. There are times when terminating a supplier relationship is the best thing, he says.

No. 8: Be honest about your backup plans.

Bedding industry suppliers increasingly want to be one-stop shops for mattress manufacturers. This has a lot of upsides. Working with a company that can provide you with many or most of the supplies, components and equipment you need allows you to better coordinate your manufacturing and delivery processes and, of course, reduces costs. But having relationships with other providers ensures you don’t have disruptions in supply chains and is simply smart business.

But be upfront about it, Reiss says. “It’s not prudent to rely on one supplier,” he says. “If that supplier has a strike or a fire, you don’t want to be in a position where you’d be shut down, too. So keep a second or multiple suppliers on hand, and don’t be embarrassed to tell your key supplier that you’re doing so. They will appreciate your honesty.”

No. 9: Find out what your suppliers think about you.

Deloitte recommends companies annually survey their suppliers to answer such questions as, “What does the market think about us?” and “What do suppliers identify as key strengths and opportunities in working with us?”

No. 10: Find out what you think about your suppliers.

You should regularly evaluate suppliers based on key performance indicators—ideally ones you’ve developed in partnership with your suppliers and based on mutually defined objectives.

“There are lots of techniques for rating a supplier’s performance: evaluation forms, surveys, system metrics and software,” Chick says, “but by developing a customized method, you can ask your own teams to rate your suppliers. You can review how many corrective actions you’ve had to issue a supplier, how many products you had to scrap or return, or how many customer complaints you received due to bad service.”


From procurement to SRM

They used to be simpler, these manufacturer-supplier relationships.

“In the past, procurement was expected to ensure the timely availability of products and services while also being responsible for accurately processing transactions” and that was about it, says a team from Pricewaterhouse-Coopers Accounting N.V. in Amsterdam in a 2013 report on supplier relations.

By the 1980s and 1990s, the role of procurement was evolving to include more strategic sourcing initiatives though still operated in a functional silo of supply management. Later, companies began to adopt a more cross-functional, process-oriented approach, drawing in people from areas such as product development. Today, PwC argues, the emphasis is on collaboration with suppliers: “Organizations are starting to realize that they have become more reliant on suppliers in terms of innovative power, security of supply, corporate social responsibility and delivering on-going cost savings. Together with sustainability, strategic partnering is at the top of the corporate agenda of many global organizations.”

For many bedding manufacturers, strategic partnering took on greater importance a little over a decade ago when the federal open-flame standard—and its attendant record-keeping and testing protocols—required mattress makers to rethink and retool how they manufactured mattresses and foundations intended for U.S. consumers. Many suppliers of FR components and testing services took the lead in helping manufacturers comply with the 16 CFR Part 1633 standard, cementing those relationships. Since then, the shift toward ever-more collaborative relationships has only accelerated. It’s driven in part by business consolidations on both the manufacturing and supply sides and by changing business models, like the rise of e-commerce, in which many players function primarily as marketing companies with suppliers providing core manufacturing functions.

With the manufacturer-supplier relationship so vital and complex, there is a formal field of management devoted to it: supplier relationship management, often shortened to SRM.

In its report, PwC defines SRM as “a systematic approach for developing and managing partnerships. It is focused on joint growth and value creation with a limited number of key suppliers based on trust, open communication, empathy and a win-win orientation.”


Trust but verify

Through your relationships with suppliers, your company can be exposed to both reputational and regulatory threats, according to consultants at Deloitte Consulting GmbH, a management firm in Munich, Germany. But regular audits of your suppliers can help you assess and mitigate those risks.

In a 2015 report on supplier relationships, a team from Deloitte recommends your audit delve into three main areas:

  • Financial stability and business continuity, including “conformance with financial requirements, liquidity and debt ratios; (and) ability to manage crisis and ensure supply continuity”
  • Legal and ethical standards, including “compliance with sustainability, safety and labor standards; and conformance with applicable laws and regulations”
  • Traceability of products and services, including “conformance with declaration guidelines and tracking requirements throughout the supply chain.”

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