In Recession and Recovery, Putting Supplier Relationships First (Part 1)

In the second post in this series later today, I will share some findings from recent IACCM research and analysis suggesting that many procurement organizations believe that it is their charter to focus on supplier relationships, management and overall development, but that they rarely prioritize these sorts of investments over those in core purchasing automation and sourcing areas. In this first post of this mini-series examining the topic of putting relationships first, below, I'll suggest a few of the symptoms that can result from backburnering relationship management in favor of just focusing on purchase cost reduction and item-level savings.

And in the coming weeks, I'll offer up a prescription -- a relationship management cocktail, if you will -- for putting supplier engagement and development back on track, even in an environment where your team is feeling the heat to drive savings and efficiency gains. Let's start this examination by sharing five of the most common symptoms I've observed when relationship management is not a priority:

  1. Overall supplier risk goes up -- The incidents of supplier failure, disruptions, negative impact on brands, customers, etc. increases as a result of a failure to effectively manage relationships. Why? Those companies focusing on relationship management can often intervene early as initial symptoms of underlying risk maladies and overall business risk present themselves versus waiting for early symptoms to manifest into a dangerous state.
  2. The cost of supplier risk incidents increases -- When procurement organizations fail to focus on relationships and delay intervention and supplier development engagement when risks present themselves, the potential cost of disruption can be significantly higher down the line. The other way of looking at this is just as much of the cost of a widget is locked in during the design phase and is harder to impact later in the sourcing process, the longer an organization waits to insert itself in many types of risk incidents, the more costly intervention and responses can become, as speed becomes paramount and indirect and direct costs increase (e.g., shutting down a line).
  3. Old measurement habits (e.g., PPV) stick around -- Old procurement measurements such as PPV (purchase price variance) are as ancient as the profession. Yet for many reasons, these types of techniques and KPIs for measuring procurement performance -- really purchasing performance, if you ask me -- often hinder rather than enable companies to excel at the function. The organizations that prioritize year over year cost reduction for similar items without focusing on the broader supplier relationship -- and collaborative supplier development and cost take out -- are more likely to perpetuate legacy KPIs and management approaches, therefore cheating shareholders and customers of procurement's true potential.
  4. Procurement loses control of quality -- Procurement teams that under-invest in supplier relationships and performance management are often one step removed from overall supplier quality. It is important to note that this does not necessarily imply higher defect rates, lesser on-time performance or other related degradations depending on a variety of factors outside of procurement's control. Yet it does indicate a lesser chance of being able to monitor, manage, stabilize and improve quality and related overall supplier performance when issues do arise.
  5. Companies pay less on a unit cost basis but pay more on a total cost one -- The most costly aspect of a failure to focus on supplier relationships at the expense of other procurement areas can actually come back to hit the wallet the most: higher total costs. Our extensive interviews and research on the subject suggests that companies that focus on developing suppliers and monitoring overall relationships are more likely to encounter suppliers that come up with creative ways of reducing overall supply chain costs (e.g., based on product/packaging redesigns, materials substitution, inventory adjustments, etc.) than those that continually focus on just unit-price related metrics.

Jason Busch

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