Building Deeper Supply Chain Relationships

Buyer-supplier relationships have come a long way in the past few decades. The role of procurement, as seen by the organization, has evolved. The earliest outlook towards the supply chain function was that of just a timely provider of materials. This changed in the 80s when the supply chain and procurement divisions started being looked at as areas of efficiencies and productivity improvements. Rigorous measures for cost-cutting, supplier rationalizations, just-in-time forecasting were carried out. The era of globalization brought further changes in the role of the supply chain. Companies started focusing on their core competencies and getting out of peripheral activities by outsourcing them. The role of procurement became to manage a multitude of vendors as more and more activities were being moved out of the organization. This led to a wave of transactional relationships where the focus was more on outsourcing and less on considering the suppliers as “partners”.

According to a 2003 Price Water House Report, the direct result of outsourcing has been that 3rd party procurement costs contribute fifty to eighty per cent of total expenses. This points to a high reliance on the suppliers for meeting demands of supply reliability, innovation, cost-cutting among others. To address this issue, the latest thought has moved towards strategic supply chain management. This field, also known as supplier relationship management, is essentially about building deeper relationships across the value chain with a focus on mutual growth.

Depth of Supply Chain Relationships

Supply chain relationships can be built on various levels of depths. Broadly speaking, these are:

  • Arms length relationship – This is a typical vendor relationship where the product being offered is undifferentiated and available readily in the Price is the key criteria for buying. Further, the margins for the supplier are low, leaving little room for investing in long-term joint projects or relationships.
  • Collaborative relationship – This approach is of developing a key supplier relationship where there is commitment from both parties to work collectively in efficiency improving measures like better forecasting, on time delivery, technical troubleshooting and jointly developing new
  • Strategic alliance – This is a deep relationship that is established only by mutual trust and belief in each other’s Firms can go to the extent of altering their objectives to be more aligned to the goals of their supply chain partners. In this special type of relationship, confidential information is shared, assets are invested in joint projects, and significant joint improvements are pursued. The objective is to share knowledge and to reduce duplication and waste while facilitating improved performance.

 

RelationshipCharacteristics1Figure 1: Strength of supplier relationships
(Source: Tony Lendrum, Strategic Partnering Handbook)

When to get into deeper relationships with suppliers?

Empirical evidence suggests that is not possible to develop strategic alliances with all your suppliers. This process requires deep commitment and effort, and it is not viable to have such a relationship across the supplier base.

An article in the Harvard Business Review on Supplier Relationships gives examples of how companies have developed frameworks to decide when to pursue deeper engagements. For example, at Wendy’s, a matrix is used between volume of buying and complexity of the purchased commodity. Thus, suppliers of straws will be considered low value even though they supply huge volumes because they provide products with little complexity in terms of taste, texture, or safety. Only if both volume and complexity are high—as is with key ingredients—does Wendy’s seek a partnership. Similarly, Colgate-Palmolive uses the criteria of cost reduction and innovation as filters for strategic alliances. Suppliers who can bring to the table both high cost reduction and high commitment to innovation are considered for developing as partners.

 

How to Identify Partners across Supply Chain

(Source: Interim Management Purchasing report)

The above framework given by Interim Management Purchasing is on the similar lines and uses the value created and compensation generated as key criteria to identify suppliers with whom collaborations can be worked out.

By reserving the special relationship for select suppliers, companies can concentrate efforts on developing these relationships over long term.

Can a deep relationship be measured?

According to an article by Jeffrey and Choi in the Harvard Business Review, when an Original Equipment Manufacturer (OEM) benchmark survey, where automotive component suppliers rated the OEMS, was conducted in the US in 2003, the Japanese OEMs Honda, Toyota, Nissan were ranked much higher than the American OEMs. This was a direct result of the collaborative culture that Japanese companies try to develop with their suppliers. Although the depth of a relationship is difficult to quantify or prove, in the long run there are many advantages that directly contribute to the bottom line.

Leveraging relationships

  • Technology development and innovation – By entering alliances where joint development can take place, innovations can be exclusively used by customers, giving them a distinct competitive The article in INTECH by Brandes gives a good example of how Volvo and Autoliv developed a long-term relationship, which made Volvo one of the safest commercial vehicle manufacturers. Although Autoliv also develops and sells Safety Systems to competing OEMs, the mutual trust between Volvo and Autoliv, which has developed over several decades, makes sure that the technologies that Volvo funds remain exclusive and yet Autoliv is able to make good margins on them.
  • Supply reliability and efficiency – Efficiency in material management is key to supply chain success. Accurate forecasting and constant communication between supplier and customer can help reduce inventory pile up and reduce costs at both A prime example of deep relationship in this reference is between P&G and Wal-Mart, who have worked together to establish long-term supply chain linkages, share forecasts, and enter into pricing agreements. This level of information sharing and jointly working on supply chain efficiencies is a win-win for both the parties.
  • Faster adaptability to market changes – The benefits of technology evolution at every step of the value chain have to be passed on to the next level in. The relationship between Dell and Intel makes sure that the developments that are taking place at Intel’s labs are shared with Dell so that the machines can be designed to keep pace with the fast changing If the mutual trust is not strong enough, there will be a lag in translating the benefits across the chain, which can be a game changer in a cutthroat industry like technology.
  • Lesser need for developing and managing multiple suppliers – Partnerships are costly and time consuming to If an organization has to work with multiple supplier relationships and develop them, the resources get spread too thin, thereby not resulting in any long-term value creation. Having a consistent supply chain partner can reduce unnecessary leakages of resources.

To summarize, in a world of volatility, uncertainty, complexity and ambiguity (VUCA), it is extremely important to leverage partnerships across the value chain and strengthen the competitive advantage. Supply Chain Relationship Management can give the additional boost required to survive and thrive in this competitive business world.

————-

Parth Shah is a first year student of the PGP in IIMA. He hails from Mumbai and has completed his Chemical Engineering from the Institute of Chemical Technology (UDCT). He has worked for three years in the chemical industry in sales, marketing and business development domains.