The Future of Purchasing and Supply: Elevating Relationships

#8 Take the Initiative: Continuing coverage of the trends shaping the profession

By Roberta J. Duffy, writer for Purchasing Today®.
February 2000 Purchasing Today®, page 31.

Hunting for cost reductions, process improvements, and streamlined operations? Stop searching and start building relationships that - when managed effectively - will result in these objectives, and much more.

Price is king. However, street-fight price negotiations only go so far and that isn't enough anymore for most competitive organizations today that need to continuously take out price, drive down costs, smooth processes, and tap innovation wherever it exists within the supply market. It's something most business professionals can relate to. "I'm so busy putting out the fires, I don't have time to go look for the kid with the matches." When a purchasing and supply management department is bogged down with transactional activities, it cannot focus on making strides within the larger context of relationships, which is where deeper and more sustainable value is added.

"In order for organizations to maintain a competitive advantage, more focus will be placed on trust building, communication, and joint planning and developments. Dedicated groups of individuals will be charged with handling the strategies of relationships with suppliers and customers." These are the predictions in "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," a 1998 study conducted by NAPM, the Center for Advanced Purchasing Studies (CAPS), A.T. Kearney, Arizona State University, and Michigan State University.

While traditional arms-length price relationships serve a purpose in many situations, for many products or services today, they don't produce much value in the long run. As more strategic applications of purchasing and supply management have been developed in recent years, senior executives expect purchasers to get more than just price from their suppliers. The tools of quadrant or portfolio analysis provide a framework for how to focus a firm's supply needs against the supplier market. Wherever a product or service falls in the quadrant then defines the most value-added relationship to pursue.

Getting It Right

While the possibilities of seamless, value-added relationships existing throughout the entire supply chain are promising, organizations should first take steps to enhance and optimize internal organizational relationships if the external relationships are ever to succeed. Many purchasing organizations will team with the internal business units to devise a commodity strategy or business plan. They can discuss forthcoming plans based on the firm's overall objectives; determine product, service, and commodity requirements based on those objectives; and then analyze the supply market. This all takes place prior to negotiating and establishing a relationship with the external supplier. To be so cognizant and mindful of internal customers' needs and objectives, purchasers may be trained jointly with them or co-locate - walk a mile in their shoes, so to speak.

The supply chain management organization at BellSouth, based in Atlanta, knows that relationship management will be vital to its success. Lorrie K. Mitchell, supplier alignment leader for BellSouth, says her team takes the approach that everyone in the supply relationship is either going to win or lose. "It's either all or nothing," she says. "When both parties realize that the ultimate goal is to maximize the relationship, it becomes obvious that sharing information and becoming more involved with each other is the best way to achieve that." Opening up and sharing information establishes an environment in which the supply chain members - suppliers and customers - can work collaboratively. And many suppliers are eager to do this.

One of Mitchell's suppliers says that he appreciates being involved and learning more about the customer because it increases the supplier's visibility within the organization, which leads to more involvement and more opportunities to jointly add value. For example, Mitchell and her suppliers often travel together to BellSouth entities, working as a team to discuss sourcing strategies with them. Conversely, one of Mitchell's suppliers sits on a board for the second-tier supplier and has requested that BellSouth join the meetings so they could be there together as a team communicating their common goals. In fact, the supplier sees this as such a positive step that he predicts there will be a day when suppliers are compensated based on how much ultimate savings they bring to their customers, with the groups sharing cost savings.

Changing the Mind-Set

Invariably, there will be a time when it's necessary to sell these relationship management concepts to others in the organization. Executive support might be needed for financial, time, and personnel resources, so those executives will need to see the benefits - long-term value - of concentrating on relationship management, as opposed to transactions. Top executives realize what an asset relationship management will bring to their supply chains. "BellSouth has recognized the significance of the financial contribution that an end-to-end integrated supply chain can provide. BellSouth's new dynamic supply chain synchronization efforts will result in a fully integrated information system," says Timothy D. Houghton, network vice president at BellSouth. With full organizational support - from senior executives and other business units within the organization - supply chain optimization is possible.

Also, purchasing organizations will need buy-in from the supplier organization if the relationship is to be successful. University of Southern Mississippi's Alvin J. Williams, Ph.D., agrees. Williams, chair and professor of management and marketing, suggests taking the same approach that would be used to market any other proposal - look for a match in the needs and expectations of both parties. They must coincide on:

  • Product or concept
  • Communications or promotions
  • Value assessment (including, but not limited to, price)
  • Logistical or distribution concerns

What this means to the purchasing and supply professional is that the emphasis is placed on the selection process - selecting supply partners that are considered to be solid relationship candidates, as opposed to selecting them based on traditional metrics such as price.

This parallels a philosophy of William S. Wehr, C.P.M., corporate director of quality systems for Lewis-Goetz and Company, a rubber products distributor in Pittsburgh. Wehr says that the evaluation criteria should be based on the strategic objectives of the purchasing organization and its supplier relationship expectations. The metrics become "How will a supplier contribute within our future framework? How well will the supplier be able to perform according to the objectives we will develop in coming years?" Notice that price is not mentioned anywhere. The idea is that if a purchasing and supply organization has chosen the best supplier that can be committed to the relationship and continuous improvements, the starting price is not even a factor, because it will always improve to equal the best value for both parties. If all other objectives are successfully met, the "best" price becomes a healthy byproduct.

"I foresee a day when the source evaluation process will be entirely focused on the relationship potential. A cross-functional team will evaluate suppliers based on a variety of relationship factors, but not price. Then once a supplier is chosen, the price would be established without negotiation," says Wehr. It sounds risky, but if done properly the motivation will exist for both parties to reduce costs, and the price will automatically fall into line. "It would eliminate a great deal of burden for the purchaser and solidify long-term sourcing," he says.

Creating the Environment

"The Future of Purchasing and Supply: A Five- and Ten-Year Forecast" predicts that relationship management will take center stage as far as purchasers and suppliers are concerned, but what elements must be in place in order for that to occur?

First, the environment must be right. There must be an environment of senior executive support and trust within the purchasing organization if it's going to exude and foster trust among supply partners. One method is to empower employees with responsibility. When senior management allows subordinates to have more decisionmaking authority, it builds trust, not only within the organization but also with suppliers, who will see this as evidence of the relationship they can expect. BellSouth's Mitchell says that a trustful atmosphere is enhanced when she sees empowerment given to her supplier counterparts by their management. "We both know that each other's organizations take the relationship seriously when executives believe in us that much," she says.

In addition to trust, an appropriate organizational structure can help to facilitate effective relationship management. "It's best if the environment is one that is more accepting of creative approaches, with less rigidity," says Williams. "A collegial atmosphere, where authority is more widely spread and diverse, can be more entrepreneurial and allows relationships to breathe and grow."

A third important factor to most effectively allow purchasing and supply managers to build relationships is giving them the time and tools to do so - many systems and organizations still measure purchasing and supply professionals on transactions. "We need to shift transactional activities to the requestor," says Wehr. "Purchasing and supply can then manage the larger relationship. It's the difference between someone directing traffic from the middle of the intersection and personally going out and pushing each car through individually."

A Plan in Motion

Once the environment is prime for relationships to succeed, organizations need a strategy that clearly outlines relationship expectations. This road map will become the guiding force for choosing supply partners and measuring performance. Throughout the relationship, this strategic plan guides the activities, helping to overcome one of the biggest barriers to successful relationships: a lack of structure. "Because relationships are often associated with 'soft' issues, provoking thoughts of warm-and-fuzzy topics, people think they just evolve or come about through intuition and never attach anything tangible," says Lewis-Goetz and Company's Wehr. Unfortunately, these relationships don't necessarily service the needs of the organization. With a structured plan that can be adhered to and communicated, a relationship can continue to meet goals and achieve objectives even as personnel change. All individuals and all parties can focus on the defined strategic objectives.

For a purchaser-supplier relationship to be truly successful, both parties must also feel like equals, working toward the same goals. Timing can play a large role. Instead of saying "if it ain't broken, don't fix it," think "if it ain't broken, then it's a good time to look at how to improve it." Scheduling meetings and approaching subjects for improvement before there are problems that need immediate attention are good ways to strengthen a relationship. If the discussion is initiated by the purchasing organization at this point, it allows the supplier to feel more proactive in improvements, rather than reactive and defensive.

Mitchell stresses that it's not only the specific information that is being shared, but just the fact that information is being shared that enhances the relationship. "Sometimes we aren't always able to predict specifically what we're going to need, but we do know what projects are planned and we make a point of sharing that knowledge with the supplier," says Mitchell. "By at least telling them some possible ranges of information, we've created an awareness for them. Most important, we're just being honest, so we've earned their trust."

A Look Toward the Future

So, what will relationships look like in the future? In addition to "relationship capabilities" becoming a core evaluation criterion and purchasers actively solidifying strategies with internal customers, there are more predictions. The study says relationships will be elevated to such priority that supplier and customer relationship management centers could be combined into a single office, where knowledge can be leveraged across the supply chain. This makes sense, especially for large, global organizations, because it allows the organization to truly take advantage of its synergies and size.

With this type of structure, however, comes other changes. Transaction processing will be minimized, with many of the non-core activities being outsourced, and with the purchasing and supply management professionals strictly managing and building supplier and customer relationships. The question arises as to how to evaluate individuals in this new role. The skill sets required for success will also see a shift. Look for professionals with a background in human resources and strong leadership skills to shine in this area.

There will be other issues that surface as a result of more complex and integrated relationships, especially surrounding objectivity. In some cases, a purchasing professional who has developed a closeness with a supplier might be criticized for being blind to the faults of the supplier or losing the objectivity to seek out and evaluate new suppliers when it's justified, for example as a supply market becomes more competitive.

Effective supplier relationships are not going to materialize overnight. Purchasing and supply managers cannot flip a switch and instantly instill trust, open dialogue, and unprecedented joint ventures. However, initiating situations which are conducive to more comprehensive relationships - sharing information first, inviting supply chain partners to be involved, and being honest - opens the door to reciprocal actions. Even more important, it establishes a strong foundation for ideas to grow and future challenges to be solved.

Initiative #8: Relationship Management

"Box page 32"

The 1998 study, "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast," offers the following predictions on relationship management:

  • There will be increasing focus on relationships, with both suppliers and customers, because of increasing global competitiveness, limited resources, and the need to maintain flexibility.
  • A dedicated group/individual may be designated just to handle the strategy of the relationship and coordinate activities and processes.
  • A highly skilled cross-functional, strategic team will be required to address all aspects of a relationship, with little bureaucracy.
  • The focus of relationship management will be on trust building, communication, joint efforts, and planning, and fostering interdependency will be increasingly studied and managed to achieve competitive advantage.
  • Specific attention will be paid to relationships, since sometimes customers, suppliers, and competitors will overlap. Management of these entities will need to be aligned.
  • Transaction processing will be minimized with considerable tactical/non-core competency purchasing-related activities outsourced to full-service third parties.
  • Cross-enterprise relationship management increasingly will have a senior executive focus at the highest organizational levels - with a slow migration. However, reporting does not have to be directly to the CEO.

18 Initiatives, 18 Opportunities

"Box page 32"

In May 1998, NAPM and the Center for Advanced Purchasing Studies (CAPS), in conjunction with A.T. Kearney, Arizona State University, and Michigan State University, released "The Future of Purchasing and Supply: A Five- and Ten-Year Forecast." This comprehensive study, which included interviews with and surveys of CEOs and hundreds of purchasing and supply professionals, outlined 18 key initiatives that will affect the purchasing and supply function in the coming years. Purchasing Today® presents this ongoing series each month, examining a portion of the study. Below is a list of, and links to, the initiatives and the articles that have appeared thus far in the magazine.

Coming Soon ...

The following are trends that have also been identified in the study and will be examined in upcoming issues of Purchasing Today®.

  • Process Uncoupling
  • Global Supplier Development
  • Virtual Supply Chain
  • Source Development
  • Competitive Bidding/Negotiations Strategy
  • Strategic Supplier Alliances
  • Complexity Management
  • Performance Measurement