A Challenge for Buyers by Jolito Ortizo Padilla

The importance of supplier relationship management is nothing new. But the theory is undergoing somewhat of a change.

According to Jurgen  Nelis, head of direct and indirect materials operations at pharmaceutical firm Roche, everybody is already doing it (whether they know it not). "It's something you do everyday with varying degrees of success".

As everybody knows, good SRM can lead to cheaper prices, faster time to market, more flexibility and innovation.

But what is changing is that businesses rationalize their supply base those vendors left standing are becoming more powerful. And, if the relationships with these fewer, stronger suppliers are not managed properly they could present a risk to the business.

Why We Do It

"Most competitors are roughly equal so supplier relationships can give you sustainable advantage, " argues Professor John Henle, Oakland University lecturer and President of management consultancy Planning Perspectives.

He says being the "customer of choice" is increasingly important and the better the relations the more likely they will be that customer of choice.

"This becomes particularly important if it's a seller's market," he adds.

Luc Voltarier, executive in residence, purchasing and operations management, at the Institute for Management Development in Switzerland , agrees. He points out that research shows suppliers are more and more careful to pick the right buyers- "so it's the suppliers choosing you".

This is borne out by Peter Trujen, CFO at consumer marketer Newell Rubbermaid: You have to be attractive otherwise if there's a bigger partner the supplier will go with them.

Furthermore , Henke says, since some suppliers will be providing goods to your rival as well as your company, they can compare how they are treated by each, which can in turn influence their behavior.

The Benefit

So there are some risks if you don't manage your relations with your key suppliers, but what of benefits?

One of the most persuasive arguments comes from Henke, who believes he and his team are on the cusp of directly correlating strong supplier relations with a percentage difference in prices.

He leads an annual review of tier one suppliers of car manufacturer in North America-Chrysler, Ford, General Motors, Honda, Nissan and Toyota.Having studied 15 years' worth of data from Working Relations Index (WRI) -which scores companies' suppliers relations from 0-500, with a rating above 350 considered strong-he said: "We think when the WRI goes up 10 percent the cost of goods comes down 1 percent."

"This is preliminary research , but even if it's half wrong it doesn't matter because we're talking about millions of dollars. The cost of good supplier relations doesn't even come close to the savings you can make."

Such stark terms may be hard to prove, but Henke says even anecdotal evidence supports the theory:" Some suppliers charge different amounts to different companies depending what they have to go through to get business."

He adds that if you go about SRM correctly, you can insist on more from your suppliers. If you can guarantee business and they know you will support them when things go wrong, and work with them to improve things until you can't anymore , then suppliers will stick with you, not just switch allegiances."

Not only you be offered better prices, Henke argues working closely with suppliers can help make money. "As strange as it may seem, greater profits as a buyer also means greater profits as a supplier."

Barbara Kux, CPO at Royall Philips Electronics , says the company has selected 30 strategic suppliers, a move which has reduced the time to market of some goods by 50 percent. " we're twice as fast , " she says.

Nelis says good SRM led to a similar experience in Roche. " We had two suppliers of a particular product, we were running out of capacity so needed a third but we didn't really want one because of intellectual property. So we sat down with our two suppliers and they agreed to work together to improve productivity, even though they were from very different backgrounds."

Trust and Respect

All good motivations, but how do you go about SRM?

Henke says it is up to buyers to determine the nature of the relationship. "Suppliers cannot decide what sort of relationship they will have with you, suppliers can only react to the way a buyer behaves."

Volatier believes this leaves buyers with two choices: "The power game , or the trust game, it's  up to  you.

"For the past 20 years the game has been easy. You whistle, you get a supplier, hit them on the head, get a good price and call them back in 12 months.

"But people are reducing the number of suppliers, which means suppliers are becoming more powerful, they have a greater stake in your business."

Barbara Lavernos, head of purchasing at L'Oreal , says procurement has been building long -term relationships with suppliers for past few years to support growth. Their approach is based on mutual respect, transparency and sharing information.

"The CEO wants to make L'Oriel a top performer and one of the world's most respected companies. Being respected also means being respected by our suppliers."

Volatier said the challenge for buyers was to apply just the right amount of pressure: "For years we've trained,  selected and incentivised people to squeeze suppliers and treat them as beasts. Suppliers don't stand a chance. The more pressure you put on the better you feel, but the more value you destroy. Of course you value need to be competitive but you also need to develop relationships."

Time, Effort and Measurement

Once buyers have identified who to partner with, Henke suggests measuring the health of the existing relationship.

"Look at where your supplier relations are and where you want them to be. You need to know the status of your supplier relations in absolute terms across different sectors, sizes, countries and find out how your perception compares to that of your suppliers."

He says in a manufacturing environment the key components that drive relationships are: communication (is it adequate and fast enough?, whether you help the supplier (to improve cost and quality, for example); or hinder them (by making late and excessive changes).

He adds the final driver for a supplier is what opportunity they have to make a profit. "There's nothing about cost savings," says Henke.

And don't expect strong supplier relations to happen overnight, warns Nelis.

"You have to invest time in this, it's not a set job or something you just do in the evening. You need the supplier to invest time in it, too. If someone in the team doesn't see the value of the relationship you will not be successful."

He says the following factors are critical to successful SRM:

- A management mandate:make sure your company wants to do SRM".
- Global supplier relationship managers with adequate skills and passion."You need someone who can bring the companies together, which traditional negotiators won't be able to do." He adds that separating your SRM and category managers is key because one person cannot do both jobs when it comes to negotiation.
- Establish behavioral norms. "Ensure internal alignment and manage stakeholders."
- Realize quick wins to motivate and create long-term value.
- Establish mutual interest and relationship targets.
- Don't wait for the right time to star- it will never happen, just start.
- Lastly, performance needs to be measured, "because only what's measured gets done. So have join targets for the relationship to increase productivity, for example, or to mitigate risk."

So how does this work in reality? "At least once a year we want to see major stakeholders of two companies at the table." At these sessions they seek to understand each other intentions and priorities, exploit common ground goals and setting an action plan.

In conclusion, according to Nelis, SRM is like a sheepdog; " you need to lead from the back , realize its bark is worse than its bite and that you don't want to lose anyone along the way."