One of the initial lessons of successful new procurement managers on the front lines of direct materials environments is that relationships are often far more important than contracts in everyday activity with suppliers. As the recent commodity climate has shown, honoring a contract (on either side of the buying/supply equation) is not something that those engaged in procurement and direct materials selling are particularly good at when markets change quickly (e.g., failure to honor a 90-day price lock when raw material prices increase or decrease).
Yet focusing on a supplier partnership requires trust. We recount one story told by a major automotive procurement CPO from a company with a known reputation for supplier partnering. He told Spend Matters about a time when his organization was notified of a price increase without the chance to collaborate to understand how to minimize the impact of the underlying elements of the price change.
Rather than paying the price increase, the company forever ended its relationship with the vendor, opting to airfreight the replacement material from other suppliers by chartering a jet for an extended period of time until additional local supply could be qualified from different vendors. The value of the partnership was that important to this provider and to this date, over a decade later, this buyer has still not done business with the supplier that raised prices without the chance to collaborate together to minimize an increase.
Still, in many cases, incumbent supplier relationships can span generations (and are particularly hard to displace and augment in too many cases). From the SMB market to the Global 2000, incumbent relationships, especially as organizations move up the direct spend value chain away from commoditized areas (e.g., PCBs), can work their way into companies even with standardized sourcing processes. This all too often leads to complacency (e.g., an unwillingness to pursue other supply options or benchmark the market) rather than maximizing the potential trust inherent in longer-term agreements based on an open information exchange.
Another challenge with partnering is that far too many procurement organizations continue to prioritize transactional efficiency over longer-term partnering. Supplier engagement is key to product innovation in so many markets, yet procurement organizations are typically set up to drive savings and vendor compliance rather than to foster innovation by working collaboratively with their partners.
This post is based on excerpted content from the Spend Matters Perspective: A Direct Materials Guidebook – Six Key Principles for the Manufacturing Road Ahead. The paper is part of the Spend Matters Research Library, a service that offers free access to over fifty Spend Matters papers to qualified procurement and supply chain practitioners. Providers, including software companies, consultants, BPOs, staffing firms/MSPs, etc., can access the Spend Matters research library by becoming Spend Matters PRO Core (single seat) or Premier (company-wide) access members.