Susan I. Scott, C.P.M., C.I.R.M.
Susan I. Scott, C.P.M., C.I.R.M., Sr. Consultant, Harris Consulting, Inc, Lexington, MA 02420, 781/674-0041, Susiscott@aol.com
Abstract: Much has been written about how to develop supplier relationships, how to create supplier partnerships, and how to select potential partners, but, although over 50% of supplier partnerships fail, little has been said about how to effectively end supplier relationships. The issues addressed in this workshop relate to the reasons for the dissolution of supplier relationships, recommended courses of action during transition, and the behaviors and techniques most likely to keep hostility and customer disruption to a minimum.
Our Objective. Our goal is to create a seamless transition from the old to new supplier, without jeopardizing our customer satisfaction, our income statement, or our reputation. Too often we end failed partnerships with acrimony, bitterness, and hostility on both sides, rather than with the professionalism appropriate for the small world in which we work. We might someday need one of these vendors again or we might someday find one of their executives working at another supplier on whom we are dependent. But before we talk about how to end the relationship, let's talk first about what circumstances might lead us to terminate a partnership, or cut off a supplier.
Termination Types. Usually these circumstances fall into two types (from a buyer's perspective): voluntary or involuntary. Among the voluntary reasons, one of he most frequent is unsatisfactory performance. Usually we don't abandon a supplier in whom we've invested years of business. However, if we continue to send in quality teams, work on solving repetitive problems, and we keep seeing recurring fallback or a lack of responsive change, then we will eventually give up and look for a supplier who will prove more responsive or more capable. Likewise, if we make substantial efforts to work with our supplier on cost reduction, and yet meet considerable resistance to value engineering, kaizen, and other proactive cost reduction activities, we will often seek out a more cost-effective supplier to meet our competitive market needs. If we regularly shop on price, we would frequently be changing for this reason.
Involuntary change would result from a supplier's bankruptcy or the unexpected risk of it. Termination could also be our reaction to the acquisition of our supplier by another entity, maybe resulting in the closing of the plant we used.
Whether acquired or just re-engineered by the Board of Directors, a management change that introduces incompatible philosophies can disrupt our relationship and lead to a divergence in vision and goals. The new CEO may want to enter new markets or to introduce new core competencies, to the detriment of the old. We must be prepared to change suppliers in this instance, since a partnership not backed by committed management will seldom work. Finally, some corporations like P&G are examining their customer base and dropping those customers who are not profitable for them. Using the 80/20 rule, corporate sales executives are disengaging from customers whose consumption of resources is disproportionate to the level of profit they bring the firm.
In addition to all these other reasons, the most prevalent reason for dissolving a supplier partnership is broken trust. Once you can no longer rely on a partner to back up their word with action, to tell you the truth about downtime or quality issues, or to share true and accurate cost information, the relationship deteriorates quickly. It is not always the supplier who breaks the trust either. Nor is it always intentional. Failure to communicate issues that affect the supplier directly can damage trust.
"Walk the Talk" is easy to say but often hard to do. We need to ensure that neither we not the supplier have unrealistic expectations of the relationship. It is useful to spell out exactly what are expectations are in the contract- what level of savings, support, quality, etc. In performance review meetings, spell out service expectations, attitudinal expectations, response time goals etc. Be sure we all agree on what is a reasonable expectation. Allow for human error by setting up a process for problem resolution: e.g. the 7D systems: data presented before judgments are made. Objective evaluation of the facts to determine root cause and corrective action. By meeting frequently to review performance, you can coordinate your measurement methods and mechanisms such that there is no disagreement on the accuracy and no charges of inappropriate subjectivity. This is common sense, but not common practice.
Sometimes, even with the best efforts of all concerned, a supplier is unable to meet our needs well enough to retain the business. For the sake of our corporation, we must change suppliers, transitioning as gracefully as we can from the old to the new. We would prefer that the change be invisible to the user ... at best the user will notice improved service and quality, but suffer no downside from the change. To minimize disruption, we usually need to minimize the supplier's hostility so we can get cooperation for the transition.
Exit Strategies. Strategies that cause hostility are those that make the supplier feel unfairly treated, such as:
If we are doing regular performance reviews, it should be no surprise to the supplier that the relationship is coming to an end. Nor should we have to surreptitiously move our business out under the cloak of reduced volume and other excuses for steadily decreasing business.
I'm not saying you won't want to temporarily increase inventory prior to the change, but I do not favor the "back door approach" as an exit or entrance strategy. It puts you in a bad light. Will not your new supplier think that if things get bumpy with him, you'll treat him the same way? Moreover, the sneaky approach could hurt your reputation in the marketplace. Nor do we want to put the supplier on the defensive by denigrating their company or people. Just because we've been unable to solve our problems to our mutual satisfaction does not mean the supplier firm is no good. It merely indicates we misjudged our needs, their core competencies or our ability to match our requirements to their process capabilities.
The most difficult part is to avoid letting emotion rule in the break-up.
One party or another tends to become defensive or to feel short-changed, and then the "you owe me" argument pops up. e.g." I suffered with poor quality for 5 years, giving you resources, so you owe me recompense for the improvements we made in your tool at no charge."
What is the best way to seek a friendly divorce? Avoid creating a feeling of injustice on the supplier's part by firing multiple warning shots when performance, management, or cost is entering the "red zone". Don't hide your dissatisfaction or your intent to shop around for other options. IF you are afraid this will jeopardize your deliveries or future quality, talk openly with the supplier to remind him that paths often cross more than once in the industry and allow him to find a way to cure the problem (even if you are part of the problem) or find replacement business in advance of your departure. Plan carefully what you will say to avoid triggering a hostile response. It may be wise to have a proposed phase out plan ready to start discussions. Gather information from Accounting on what invoices are outstanding and tally your estimated liability for in-process orders.
The lawyers may need to be involved, but in the first meeting I would suggest they are secondary players. This creates a friendlier atmosphere that will allow more compromise (unless you are dealing with a bankruptcy).
The 3 P's. Keeping in mind the 3 P's can help you minimize the hostility you encounter in this termination.
Transition. Change happens. Goals diverge. Point out to the supplier that we may both be better off apart. Seek to minimize the pain by speedy and equitable handling of transition issues. List clearly what you need from the supplier. Namely, that he stop work as instructed, agree to the contract termination and moreover, terminate his sub-contracts promptly. You also expect your supplier to protect and ship back your property, advise you of legal or other sub-tier issues, submit settlement charges promptly, and to work with you on inventory disposition at the lowest cost to both parties.
Recognize in turn what the supplier needs from you. Primary considerations of his are likely to be: a fair presentation of facts surrounding termination, prompt settlement of outstanding charges, and assistance with inventory disposition - in recognition of your contribution to those same inventory levels (via poor forecasts, advance PO's etc). Remember, both you and the seller need to set a reasonable time frame for transition. If you were a large portion of the seller's business, see what you can do to come up with viable suggestions on filling the capacity gap you'll leave.
And lastly, create a Contract Closeout Checklist, a formal review of all the details and issues, showing responsibility and completion date, so there are no lingering questions on who keeps the cat?
Results. The desired results of this professional and equitable process are:
I hope as a result of thinking through your options and creating a professional plan of separation you can disprove the old maxim that ' marriages are made in heaven, but the divorce is the very devil'.