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Have You Hugged Your Supplier Today? The Benefits As A Preferred Customer

Author(s):

Patrick S. Woods, C.P.M., A.P.P., CPIM
Patrick S. Woods, C.P.M., A.P.P., CPIM, President, Techniques In Professionalism, Plano, TX 75025, 972-208-6116

85th Annual International Conference Proceedings - 2000 

Overview. SUPPLIER PARTNERSHIPS, LONG TERM AGREEMENTS, STRATEGIC ALLIANCES; these terms sound great and are the "in words," or as the kids say: their cool! But what do they really mean? You have probably read about companies, or unfortunately, currently work for one, that give lip service to the above phrases, but in reality, continue to pummel their vendors, as one popular philosophy used to advocate: "HAVE YOU KICKED YOUR SUPPLIER TODAY?" Such companies cry: give me, give me, give me, but are not willing to give back as well.

One evening, during a dinner engagement with a supplier, I made the comment that I had come to this meeting to evaluate whether they should be a Preferred Supplier to my company. The supplier's president countered with the statement, "that's funny, I am here to determine whether my company wants you as our Preferred Customer!" Although his response shocked me at the time, it did make me realize, that a partnership, like a marriage, must be beneficial to both parties.

Thinking back over my 15 years in procurement, I can honestly say that I worked for two companies on opposite sides of the fence. One company viewed their suppliers as Preferred Customers and as a result enjoyed many long-term benefits. Another company viewed their suppliers as one would the victim in an abusive marriage and as a result suffered the penalties of constant supplier switching, missed deliveries, substantial inventory and worse case, legal battles. Although both companies will remain anonymous, they both taught me some important lessons in regards to customer/supplier relationships, lessons that are presented in this paper.

First we will discuss some of the bad effects from lack of preferred supplier partnerships or worse, "brow beating the supplier, some tools that can be used to developed preferred partnerships and then the benefits that can result.

The Bad Effects. Consider the following negative relationship factors with your supplier:

  1. Demanding more than the relationship should cover

    This would entail developing a contract, long term agreement or handshake arrangement with the supplier and then to go well beyond the intent of the relationship. For example, if you negotiate the price of a commodity based on an annual volume and then the annual volumes are dramatically reduced, and you expect the higher volume price, then you are not being a fair player.

    Another example is rejecting product based on extremely picky or non-existent requirements, simply to avoid accepting and paying for the goods. This is also displaying a lack of fairness and in some cases, you may be in violation of the Uniform Commercial Code (UCC).

  2. Always berating your supplier(s)

    Just like a child who develops a complex when it can never do anything right in front of its parents, always seeing the negative in your supplier(s) as opposed to the good, can create the attitude, "what's the use" and as a result, stifle creativity. At this point, I am not advocating that you simply overlook your supplier(s) imperfections, but again, is your company bordering on the picky and are you "destroying the trees" instead of "preserving the forest."

  3. Micro-managing the customer-supplier relationship

    If you have selected the right supplier-partner, then they will probably have the capabilities to provide e-commerce, on-site bin stocking, management of problem issues, etc. Are you letting them do the job they are being paid to do, or do you micro-manage them to the point that there is major "reinventing of the wheel?"

  4. Arguing with every supplier criticism/feedback of you as the customer

    Studies have shown that strong customer-supplier relationships occur when the customer allows its supplier(s) to provide honest feedback or criticism as to how the customer is doing in the relationship. First, do you allow this happen and second, if the feedback is genuine and true, do you accept it as a means for improvement or argue every point?

  5. Giving lip service "only" to a contract/long term agreement

    It has been my experience that most contracts or long term agreements that are authored by the customer, are very one-sided and do not provide benefits for the supplier. First, are your agreements fair to both parties and second, do you honor in action, your responsibility to the supplier?

    As an example, if the agreement states that cost savings achieved will be split 50/50 between the customer and the supplier, does the supplier get their fair share?

  6. Entertaining "sharp practices" in relation to your supplier(s)

    NAPM's Ethics Policy discourages sharp practices. A sharp practice is one that is not technically illegal, (i.e. in violation of federal, state or local laws) but is probably way over the line of unethical behavior.

For example, if you request that 3 suppliers provide a quotation and/or proposal and you share confidential information (i.e. costing, technology, proprietary drawings, etc.) from one supplier with another supplier, then this violates fairness and could be termed a "sharp practice." Furthermore, if it gets out in the supplier world, that a buyer/company is doing this, then the trust, perception and credibility of the customer is diminished.

Notice, we can state the six (6) terms again and they represent the underlying effect on the customer/supplier relationship:

  • Demanding more than the relationship should cover
  • Always berating your supplier(s)
  • Micro-managing the customer-supplier relationship
  • Arguing with every supplier criticism/feedback of you as the customer
  • Giving lip service "only" to a contract/long term agreement
  • Entertaining "sharp practices" in relation to your supplier(s)

As a result of the six (6) factors and possibly others, the end result is damage to the customer-supplier relationship. A classic example of this was the tactics employed by the head purchasing manager of a major U.S. car manufacturer. His tactic was to go to every current supplier and demand "across the board" price cuts regardless of the previous concessions and costing structure. The result was a temporary short term benefit, but the suppliers began to take short cuts on quality and delivery and most important, would no longer invest time and make suggestions on future development projects. As a result, this car company was behind the curve on new automobile development, for years!

The Clarifier. No, I have not been hired by the National Association Of Suppliers, (assuming that an association exists), to make this presentation. Nor am I advocating that we roll over and let our suppliers take advantage of us (i.e. price increases, poor quality, poor delivery, etc.). But think for a minute, if you were in your supplier' shoes, would you rather do more, give more and develop more for a customer that wants you to treat them as a Preferred Customer or for a customer that displays behavior similar to the "squeeze the last drop of blood" mentality in the example above? Unfortunately, there are many companies that still believe that unless I have "kicked my supplier today," then I have not properly done my job as a purchaser.

Consider companies that display the philosophy:

Employees First
Customers Second
Profits Third

as opposed to many companies that advocate:

Profits First
Customers Second
Employees Third

In actuality, the results achieved from the first philosophy is:

Employees First

empowered and respected to treat

Customers First

and as a result, the customers and employees are satisfied so

ProfitsSoar

Now, replace employees with the word, "supplier:"

Suppliers First
Customers Second
Profits Third

If you consider the point that supplier provided services and material is the lifeblood of our operation, that most value is added in the development phase of the project with early supplier participation, and that all cost savings go straight to the bottom line, then the philosophy immediately above begins to make sense.

Partnering Tools. There are three (3) tools that have been successful in enhancing customer-supplier partnerships. In-depth discussions are beyond the scope of this presentation, but they will be recommended at this point with encouragement for further research.

  1. Supplier Benchmarking: The purpose of benchmarking is to develop a best-in-class standard by which to measure your supplier(s), quantify and weight each standard according to its importance to your organization, and develop a scorecard to summarize and apply the findings in the context of a Best In Class, Acceptable, Marginal or Unacceptable supplier.

    The benchmarked supplier can then be evaluated in the light of this summary and compared with Best In Class standards. Key areas explored could be background information such as the supplier's locations, publicly or privately held and subsidiaries.

    Quality assurance which could include the following questions:

    1. Does the supplier have a documented (in writing) quality system in place?
    2. Are Statistical Process Control (SPC) techniques incorporated as part of their system?
    3. Is there a continuous quality improvement plan in place?
    4. Does the supplier set annual quality objectives with appropriate measurements?

    General Management/Financial which could include the following questions:

    1. Does a formal system exist for the development of an annual business plan?
    2. Is the supplier's overall mission identified (Mission Statement)?
    3. Does the supplier's management possess a high level of organizational and managerial skills?
    4. Are financial audits performed annually?
    5. Is the supplier willing to share key financial data with you (i.g. assets, liabilities, total debt, sales

    Delivery which could include the following questions:

    1. Is the supplier aware of your delivery and cycle time goals?
    2. Does the supplier positively respond to requested schedule changes?
    3. Are P.O. acknowledgments returned within the time frame, accurate and complete?
    4. Is there a plan for reducing lead-times?

    Pricing which could include the following questions:

    1. Does the supplier have defined programs to control its utility and operating costs?
    2. Are there processes for controlling and leveraging raw material costs?
    3. Is there sufficient knowledge of industry and market trends to control raw material costs?
  2. Contract Language: The key point that will demonstrate good customer/supplier relations is in the area of cost reduction. We may expect our supplier to recommend opportunities to reduce cost, but as the customer, we have to provide the resources to receive and review the opportunities as well as to implement if feasible.

    I have heard many a supplier voice a valid complaint that in the past they have suggested some very attractive cost reduction ideas but these ideas did not make it past the buyer's desk or even worse, his/her "FILE 13." To prevent this problem, as noted in the language below, it is recommended that you, the customer form a "steering committee" which is made up of 1 or 2 customer representatives as well as 1 or 2 supplier representatives (number of individuals depends on the complexity of the agreement). This committee would be responsible for meeting on a quarterly or semi-annual basis to review and/or generate cost reduction ideas.

    The supplier benefits in that cost reductions in excess of the minimum percentage would be shared. Sample language describing cost reduction is as follows:

    Cost Reduction Goals. Supplier agrees to provide customer with total annual cost reductions of % under this agreement. Cost reductions will be measured on the total value of products purchased under the agreement on an annual basis. If supplier does not provide the agreed cost reduction percentage in a given year, supplier will rebate the amount of the shortfall to the customer within 45 days after the applicable year. The parties will share cost reductions in excess of % equally, as described below.

  3. Supplier Ratings: Developing a supplier rating system and objectively assessing your supplier(s) quality, delivery, customer service and other key areas on a regular basis (i.e. weekly or monthly) can go along way in cementing your relationship.

Notice in the examples above of benchmarking, contract language and supplier ratings, I am not advocating that you give your supplier(s) a "free ride" or overlook performance factors, in fact, in each case, the supplier has to work very hard to maintain the relationship. The difference is that the supplier is looked at objectively and treated with fairness.

Top Ten Benefits. Based on my experiences in working in positive customer-supplier relationships, I have reaped the following 10 benefits:

10. Your supplier(s) will promote your company to the business world as one who displays fairness and high ethical principles.

9. In our changing business marketplace, if your supplier(s) should also become your customer(s), then you have strengthened the relationship for future growth.

8. As your relationship continues and grows, you will eliminate or minimize the costs of trying to locate replacement sources of supply.

7. By saving the time in trying to find replacement sources of supply, you can now focus on other strategic projects.

6. Your partnered supplier(s) will be willing to share new ideas, new opportunities with its key customer, you.

5. By utilizing good customer-supplier relationships, your company will have an edge over the competition who may still be practicing old "mentality."

4.With contract clauses such as "50/50 Share," the supplier now has incentive and will/ should make improvements.

3. Since your supplier relationships are positive, this should lead to a lower stress level with happier purchasing employees.

2. Since their supplier relationships are positive, this should lead to a lower stress level with happier supplier employees.

And the number reason for becoming a Preferred Customer to your supplier is:

1. As your supplier works to assist you, its Preferred Customer in reducing the costs of purchases, this goes straight to the bottom line!

Parting Thoughts. Trying to work toward being a Preferred Customer to your Preferred Supplier is in line with the 80/20 rule. Twenty percent of your suppliers should constitute eighty percent of your dollars. This is another incentive to reduce your supply base to a manageable number. Additionally, your suppliers have the same priorities. The larger a customer you are to them, the more they are willing to work with you in the programs mentioned above.

Why not, set up a meeting with your key suppliers, communicate with them your desire to be their Preferred Customer? After you pick them up off the floor (fainting from shock), they may be willing to get down to business and look for ways to help you and as a result, help themselves.


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