Building Preferred Relationships With Key Suppliers

Author(s):

Robert F. Smith, C.P.M.
Robert F. Smith, C.P.M., TTB, Inc. 1192 Scott Ave. Suite 301, Winnetka, IL 60093-1441, Phone: 847/446-5480, Fax: 847/446-5081, E-mail: robert.smith@ttbweb.com

86th Annual International Conference Proceedings - 2001 
PURPOSE

The purpose of building preferred relationships is to maintain competitive costs in the short and long term. This includes being the first to get a competitive advantage over others in the market and the last to receive a price increase, longer lead times or a reduction of service below your needs. Additionally, it is the ability to expand the business relationship to one of open joint inquiry to promote the economic goals of both participants.

ADVANTAGES OF PREFERRED RELATIONSHIPS

The advantages to the buyer can include lower prices, deferred increases, fixed prices, warehousing and distribution economies, securing use of new technology, guaranteed availability of product or resources, increased responsiveness, joint market ventures, consigned stock, deferred payment, return of inventory and on site services. Advantages to the seller can include guaranteed quantity, guaranteed margin, joint product development, distribution economies, reduced selling expense, long term commitment, lower risks, ability to negotiate long term arrangements for raw materials and other needed resources, access to new channels of distribution and new customers.

IDENTIFYING KEY SUPPLIERS

Key suppliers are those suppliers with whom you spend a significant amount of dollars, who have a major impact on the performance of your organization, and to whom you are a significant customer. You can be a significant customer by virtue of the amount of dollars you spend or the market share you represent to the supplier. It is possible to have as few as one key supplier.

To achieve a preferred relationship there must be an acknowledged codependence on the part of each party and a desire to work together for mutual gain. As a customer you may represent a large stream of revenue, a new channel of distribution, a source of new technology or an opportunity to explore new markets.

Key suppliers often come out of the existing supply base. However, the first question to ask when identifying potential candidates is "is this supplier or potential supplier the best in the market place"? The second is "are they interested in building a preferred relationship with me and my company"? A no answer to either question means you should continue to search the market place. A key supplier with whom you already have a strong preferred relationship in another product area may also be a good candidate.

DEVELOPING TRUST

Success of a preferred relationship is based on the trust each party has and the belief that the other party understands their needs and will provide support and assistance in achieving them. Trust is gained by performance to a high level of expectations over time. Trust can also be built quickly by exceptional performance during a significant event. Understanding and acknowledgement of the goals and needs of the other party in the business relationship is essential in developing a preferred relationship.

RELATIONSHIP MANAGEMENT

Maintaining a preferred relationship demands the constant attention of both parties. The relationship must produce economic gains for both parties and meet the goals of each organization. It must actively pursue new ways to prosper. The management of both organizations must clearly understand this and be committed to actively involve their resources to accomplish the goals of both organizations. New personnel who become assigned to support the relationship must be trained to understand why the relationship exists, the obligations of each party, and the advantages gained by each organization.

The buyer must have a clear and comprehensive understanding of the market, those things that effect supply, demand and price, for a preferred relationship to exist. Often the arrangement means shifting sourcing to a single source of supply. The increased risk of loss of supply continuity and the loss of a source of market place information must be overcome by the advantages provided by the preferred relationship. The buyer must develop alternative methods to monitor the competitive market. The relationship must have the ability to adapt to changes in the market. The primary goal of the buyer must always to be at an economic advantage in relation to competition.

The goals must be reviewed to determine that they still meet the overall goals of both organizations. Organizational goals change over time for several reasons often for reasons that are beyond the control of either party. When this happens it may lead to alteration of the relationship or a termination. Since a preferred relationship is an economic it is wise to have in place an orderly arrangement for ending it if the need arises.

SUMMARY

The development of preferred relationships with key suppliers can result in significant economic gains and reduction in risks for both buyer and supplier. While the time required to develop these relationships is high, the effort is well worth the cost. The business relationships that built America in the eighteenth century continue to have value in the twenty first.


Back to Top