Lorrie K. Mitchell, C.P.M., A.P.P.
Lorrie K. Mitchell, C.P.M., A.P.P., Partner, Mitchell Enterprises, Duluth, GA 30096, 770-448-1190/4544, 404-808-8804
Abstract. Supply Chain Management (SCM) Departments select suppliers on the basis of their capabilities and the potential win/win relationships that may be developed. No longer do we proceed as a procurement department, selecting suppliers solely on the basis of price. We've determined that we can get the maximum from the suppliers we select by understanding what makes them successful in their business. We've discovered that selecting the supplier with the lowest price does not guarantee a successful mutually beneficial relationship between the buyer and the supplier.
In the past, SCM has fought the stigma with their clients of always selecting the supplier providing the least expensive products and/or services. The fallacy was that procurement was only concerned with money. The goal of SCM today is to facilitate the selection of a supplier who can best meet the client's needs and then at the fairest negotiated price. How do you accomplish this, you ask. The answer is simple, and you've heard it numerous times before. Communicate, communicate, communicate AND THEN educate, educate, educate!!! Start first with your client and then move on to your suppliers. Don't wait for your clients to come to you. Rather, proactively look for forums to educate and communicate with your clients.
Techniques to increase communication and trust between buyer and supplier achieve client buy-in and participation from the onset. These techniques force SCM to really talk to their client and encourage the client to become involved in their business. The client becomes aware of the importance of developing a strong mutually beneficial arrangement. By identifying the activities involved in the process and ensuring that the client has no surprises, SCM can keep their client informed.
You may want to develop your own personal Client Guidelines. In order to communicate and educate, you need tools. Client Guidelines is a document you can share with your client that will set their expectations and identify deliverables — deliverables they'll be providing to you. If your goal is to select the right supplier, you, as the SCM manager, have got to be able to identify what your client is looking for, determine which suppliers have the product/ capabilities you need, negotiate a fair and reasonable price, and develop and maximize the relationship. Selecting a supplier based on technical, economic, and relationship criteria and then developing a Performance Based Contract (PBC) creates win/win opportunities and REAL partnerships for both the buyer, his client, and the supplier.
Develop and maximize the relationship only with a supplier(s) interested in sharing risk AND success with you. The development of the buyer/supplier relationship and the establishment of a PBC will ensure a successful working relationship with the selected supplier. This is simply not only a tool, but also a "good business" approach to successfully working with a supplier. In this world of Win/Win negotiations and contracts, all SCM managers are interested in working with a supplier that REALLY wants to work with them, i.e., establish a true "give and take" relationship.
A PBC is the necessary tool to foster a long-term relationship with the supplier, whereby, both the buyer and supplier focus on their long-range financial and value-added benefits. A PBC is the relationship that develops and manages the use of specified rewards for meeting or exceeding contract objectives and penalties for failure to meet those contract objectives.
Buyers are demanding high quality, innovation, and excellent service at fair and reasonable prices. Quality suppliers want to provide the best product/service and they expect to be rewarded for exceeding expectations. A PBC provides an opportunity for shared risk while maximizing the opportunity for mutual success.
Can/Should All Contracts Be Performance Based? Developing a PBC is NOT about writing a clause. A PBC cannot be negotiated and put on a shelf. It forces both parties to talk and become involved in their business. So, if you're making a one (1) time purchase, you probably will not want to expend the time and commitment necessary to develop and implement a PBC. If no further communication is planned with the supplier, a PBC would hold no payback for you. On the other hand, if you are interested in developing a relationship with a supplier AND both parties are willing to make the necessary time commitment, then a PBC would be an excellent alternative. As a result, the quality, process, and planning benefits not to mention mutual cost savings are endless. The benefits will only be limited by your own imaginations.
What Type Of Relationship Should Exist/Be Developed With The Supplier And How Does A Client/End-User Participate In This Process? A PBC IS about developing a strong mutually beneficial arrangement where both parties have something to gain and something to lose if their "partner" is experiencing a problem. When both sides go through a strength and weakness identification process, a certain alignment and synergy are established. Buyers now realize this is necessary to achieve and maintain a competitive advantage in today's marketplace.
What Type Of Environment Is Conducive To Making This Type Of Relationship Work? There are many factors to consider in this new environment. Is there a strong communication and sharing of information between the supplier and buyer? Between the supplier and the customer/end-user? A good specifications/capabilities document is critical. Communication and buy-in of the customer/end-user are critical since ultimately, they will be implementing the PBC. Will these individuals possess the ability to solve deviations from the specifications/capabilities document in an amicable/win-win manner or are they going to contact their SCM manager (to act as a policeman) every time there is a deviation from the agreed upon document? This could make a big difference in the success of the PBC. Both parties need to know that the other will go beyond the agreed upon terms and conditions to make this a successful and profitable relationship. Both parties need to have that security in the relationship.
What do you base performance on? The identification and establishment of performance indicators and the associated outcome criteria are a must. Although performance measurements will vary depending on the product/ service, customer satisfaction, product/service quality, support process performance, end-user satisfaction, efficiency, supplier performance, and/or measurement methods, each relationship needs to determine exactly what will it will take to make it a success.
What Characteristics Should the Buyer and Supplier possess? Interpersonal communication skills are paramount. Being able to clearly express what you need and being able to listen and comprehend what you will receive are extremely important. Effective problem/ conflict resolution, analytical ability with an innate good business sense, creative negotiation strategies, innovative ideas, all with a strong customer focus will make this PBC relationship a success. Occasionally both sides will not see things the same way. At that time, a resolution that both parties can live by must be negotiated. A strong focus on the needs of the other party will make both parties successful.
We are all familiar with the various "Win-Win" negotiation combinations. You may think that the win/win combination is utopia, but it's the only combination that will make you successful. If either you or the supplier is on the losing end of the combination, you can both be assured of being shortchanged in the process. If you and the supplier rank in the lose/lose category, you both need to be looking for other opportunities! The only workable, successful combination is for the buyer and supplier to both win. The only way to achieve that is by showing trust and providing understanding of the other side's concerns and needs.
Suppliers who maintain a safe and healthy work environment are usually more successful in motivating its employees. A compensation and recognition system for individuals and teams who support the business and performance objectives must be in place. The supplier must have a vision, mission, or purpose of overall direction that clarifies its commitment to quality and customer focus that is clearly understood by all of its employees. All of a supplier's employees across the company must work together to effectively support the goals and business direction of the company.
How Do You Implement This Type Of Program? Implementation will certainly flush out any concerns not initially addressed by both sides. As mentioned earlier, clear and timely communication is the key. Internal audits/review sessions to assess compliance to process control requirements, to determine the effectiveness of its process control methods, and to identify opportunities for improvement are important to a program's success. Such review sessions should be performed with scheduled regularity. Action must be taken to correct any deficiencies found in these review sessions. The customer/end-user needs to periodically review supplier performance and to plan at the overall company or department levels to assess the success of the program and identify areas of deficiency where action needs to be taken. Implementation should be monitored to ensure that the action taken indeed resolves the problem.
As mentioned earlier, the use of a PBC is more than just the inclusion of a clause in a contract. It's a cooperative relationship that has to be established in order for all parties to be successful. The establishment of a PBC is a "good business" approach to successfully working with a supplier. In this world of Win/Win negotiations and contracts, all SCM managers are interested in working with a supplier that REALLY wants to work with them, i.e., establish a true "give and take" relationship. A PBC allows both parties to focus on their strengths and assist the other in eliminating their weaknesses. Both parties may then mutually establish their critical success factors. Developing a PBC has the potential of increasing the value of the products/services provided by raising standards, creating win/win opportunities and maximizing REAL partnerships.