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Driving Supplier Relationships to Extract Maximum Value
Bill Michels, ADR North America LLC

Many merchandisers and buyers work really hard to find suppliers, negotiate pricing, and put contracts in place. Then what? Do suppliers simply meet their contractual obligations? Do we maximize the true value of the relationship, beyond price and contract terms? In most cases, the relationship is not managed and supplier performance slowly declines, forcing us to re-source the category.

What is the correct relationship? Simple – the minimum required to meet your business needs. As we integrate business systems, develop suppliers, and invest time, energy, and money, supplier relationships become more complex. Since these relationships require more time and effort, we need to choose suppliers carefully.

There are basically four types of supplier classifications:

1) Competitive Leverage Suppliers
In this classification, there are multiple suppliers and competition is fierce. Since these suppliers are commoditized, most need to provide exceptional value in order to have a real strategic impact on your business.

Approaches:

  • Maintain an arm's-length relationship.
  • Let market competition drive cost, value, and performance.
  • Drive out complexity and minimize your time spent with these suppliers.
  • Use lots of quotations, requests for proposal, e-procurement, and reverse auctions.

2) Preferred Suppliers
These suppliers have earned a more secure place through proven performance. You should seek a longer-term performance-backed relationship.

Approaches:

  • Move away from competitive leverage if the supplier is willing to provide some strategic advantage to your organization.
  • Create performance metrics around price, delivery, quality, and complexity reduction with fees or other incentives for non-performance. Measure the supplier's actual performance on a predetermined basis.
  • Occasional use of market testing to verify that the supplier has maintained a sufficient level of competitiveness.

3) Performance Partners
This category is reserved for suppliers who consistently deliver performance and value, which drive competitive advantage for your company. This supplier is moving toward single source status as long as they continue to perform well.

Approaches:

  • Rigorous performance standards need to be jointly developed and agreed upon. Measuring performance and delivering value assures high quality response, flexibility, and competitive advantage.
  • Share data, resources, and development of common goals.

4) Strategic Alliance
Suppliers rarely reach this category, which involves cross control/joint ownership, interdependency, and sharing of resources and revenue. Strategic alliances are rare in the retail sector due to a large competitive leverage supply base.

Not every supplier relationship should be a strategic partnership. In fact, fewer partners are more desirable due to the resources, time, and money required to develop strategic relationships.

What is Value?
Value consists of all the intangibles you get, especially things beyond good quality and delivery. For example, what distinguishes a supplier from their competition? What extras can your suppliers give you that you can provide to your customers? Maybe it's brand recognition, product innovations, or quick/steady service that allows you to carry less inventory.

Value benefits aren't available only with strategic suppliers. Increasing value can actually work best with a leveraged supplier. Since these relationships don't tend to be deep, the supplier is interested as long as they can profit from us. Otherwise they can quickly focus on a customer with a higher profit potential. Focusing on value creation with selected suppliers will not only keep them competitive, but since their margins are not being continually squeezed, they will be more motivated to offer you added value not shared with other customers.

One grocery chain defined value quite specifically for its bakery industry suppliers. The wanted the lowest cost producer, commodity hedging to offset risk, in-store merchandising, category management, supplier managed inventories, R&D, private labeling, innovation first, and merchandising advertising support. If you get the performance requirements right, enormous value can be extracted across the supply chain.

Value for All
Do you know how your suppliers perceive the value of their relationship with you? Your suppliers may not value their relationship with you as much as you realize. A supplier used to respond quickly to your inquiries, but now it takes a few days to get a reply. At one point, they saw a lot more value in your business than they do today. Maybe they were attracted to your market position and brand image. Or they may have viewed your business as an opportunity for growth.

Supply chain professionals can expend significant resources classifying and segmenting their supply base. It is naive to think that suppliers don't do the same with their customers. And supplier classifications of your business can change rapidly.

Your strategy should include an awareness of how your suppliers have segmented you as a customer and, based on their criticality to your business, you should take the necessary steps to improve their perception of you as a customer.

The only difference between a new supplier and your old one is the time, effort, and money that your company invests in them. Choose the right relationship, drive it for value, and you'll have true competitive advantage.


Bill Michels, President, ADR North America LLC
Bill Michels is President ADR North America LLC, a specialty-consulting firm that focuses on purchasing and supply chain management. Bill is also President of ADR-ISM Supply Chain Management Consulting (Shanghai) Co., Inc. and a Senior Vice President of The Institute for Supply Management. Before starting ADR in North America, he had a distinguished career in senior management with SCM Corporation, Smith Corona Typewriters, Durkee Famous Foods, Boise Cascade, Campbell Soup Company and Vlasic Foods.

Well known in the supply management and operations management community, Bill is a sought-after speaker and writer with many publications, including co-authorship of the book, Transform Your Supply Chain. He has been honored 7 times in the Supply & Demand Chain Executive's "Pros to Know" group. Bill earned a BS in Business Administration with honors from Rochester Institute of Technology and an MBA from Baldwin Wallace College. He holds a CPSM (Certified Professional Supply Manager) and a lifetime C.P.M. (Certified Purchasing Manager) from the Institute for Supply Management.

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