The Benefits of Treating Your Suppliers Like Partners

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Spend Matters welcomes this guest post from James Gellert, chief executive of RapidRatings.

In 1983, Peter Kraljic, a McKinsey consultant, wrote a famous call to action for corporate buyers to become more proactive about their relationships in supply chain management.

Kraljic explained that buyers should try to understand their financial risk and potential effects on the profitability of the company they’re trying to work with. In order to maintain long-term cost competitiveness, Kraljic calls for a complete change of perspective from being a purchasing and operating function to a supply management and strategic function.

Suppliers and buyers haven’t always had the best relationship beyond the transaction. Historically, the relationship was focused on getting the lowest price and reliable delivery. While this made sense on paper, it inevitably created a zero-sum game, as suppliers were often seen as expendable. Suppliers knew they could be replaced at any time and therefore had little interest in being flexible or working in the purchaser’s best interest.

While many companies have since rethought this Draconian approach and have been successful in creating overall value beyond the transaction, those companies that have truly realized the benefits of treating suppliers like partners are able to transform themselves into a more focused, nimble and cost-effective global competitor.

One of the most important elements of building this type of transparency and collaborative relationship with suppliers is to have an open dialogue with your supplier on their financial condition and to be clear about what’s going on with the company. Otherwise, both sides of the business can suffer.

Transparency and Collaboration

A relationship based on transparency and collaboration allows both parties to grow together. According to the Global Supply Chain Institute, supply chain transparency — and the underlying tenets of supply chain integrity — creates the key foundation for sustainable supply chain management. It’s important to keep the communication channels open with suppliers and vice versa, as there are many benefits of commercial transparency in business relationships. Here are the top three.

Improve your risk management. Knowledge is power when it comes to risk management. Being able to understand a supplier’s strengths and weaknesses allows you to plan more effectively for the future. Additionally, incorporating a sense of transparency optimizes decision-making on resourcing, disruptions, reputational risk and more. This means fewer costly surprises in your supply chain.

Enhance stability, operational resilience, and business continuity. Supplier collaboration is a vital stabilizer in helping supply chains operate efficiently and effectively. Having greater visibility into supplier risks results in faster recovery times from disruptive events, as well as gives both sides the ability to collaborate on risk avoidance strategies. By continually having an open dialogue with your suppliers, companies can address issues within the supply chain and react quickly.

Uncover hidden opportunities. As your company grows, you’ll need to know if your suppliers can grow with you. Increased and ongoing communication allows you to know your supplier’s financial history, understand the supplier’s future growth potential and, therefore, align with your expansion goals.

Whether your main goal is to manage supplier relationships, prevent disruptions or protect your bottom line, the key comes down to transparency. Trusting that your suppliers will be able to meet your business demands requires a shifting mindset – it defies the traditional transactional exchanges and works towards building a strategic partnership. Through transparency and effective communication of goals and concerns, you can have a stronger partner by your side, which will only enhance your business and its overall efficiency.

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Voices (2)

  1. Ryan:

    Treat your suppliers like gold. Work as hard on building a good supplier relationship as you do building a relationship with your customers.

  2. Serge Milman:

    There is nothing wrong with a buyer/vendor relationship, wherein each party seeks to maximize value through a mutually beneficial relationship.

    Partnership, however, is a loaded concept. Often vendors ask and sometimes demand to be treater like a ‘partner’, yet only offer standard terms & conditions in return. Partnership is a two-way street and, in my experience, must be earned, rather than given.

    To evaluate, ask yourself the following
    – Which of my vendors has gone above and beyond to meet our needs in the past 12 months?

    – Have our vendors been responsive and accommodative when asked for a concession during a ‘fire-fight’?

    – Do we have any credible proof-points to show that a vendor is aligned with our interests?

    Based on experience, a typical Global 1000 firm may have fewer than a small handful of ‘partners’. And there is nothing wrong with this in any way. Firms should not force something that is un-natural.

    Consider: many of us know hundreds, maybe thousands of people, yet most have only a handful of close friends. It would be extremely un-natural to force each of our personal relationships into a close friendship status. So too for buyer / vendor relationships.

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