Procurement organizations manage an often-complex web of relationships with suppliers and vendors, connecting with these external partners to resolve cost disputes, create or renew agreements, discuss, resolve operational issues, and ensure the business continues to procure the goods or services that they need to do their job at a fair price.
An inclusive procurement strategy proactively manages these supplier relationships to create long-term, strategic partnerships that can withstand the storm of market uncertainty and changing needs. By treating suppliers as valued partners, procurement can shift from an old outdated us-vs-them mentality and create immeasurable benefits on both sides of the aisle.
WHAT VALUE DO SUPPLIER RELATIONSHIPS PROVIDE?
Supplier relationships refer to the type of partnership that your organization has with external vendors of goods and services. This includes suppliers that have established contract agreements as well as suppliers that do not have an agreement but that the business cuts purchase orders to on a regular basis.
Historically, procurement organizations have viewed suppliers as rivals, or at best, cautious allies. This type of mindset has led to a culture of aggressive cost negotiations and an impetus to pit suppliers against each other to achieve price concessions at any cost. While this can lead to short-term gains, this adversarial mentality makes it more difficult to achieve lasting savings and creates a significant amount of unnecessary work for both procurement and for the supplier team.
By pursuing a conscious and ethical supplier relationship management program, you can begin to rebuild, repair, and improve existing supplier relationships and create a culture shift throughout the organization. This change creates savings in any market, provides service and quality benefits, reduces the day-to-day tactical work from procurement, and increases the respect from the people with whom you work on a day-to-day basis. All the tangible benefits aside, it’s also the right thing to do and will be noticed and appreciated by your suppliers.
THE DOWNSIDE OF SHORT-TERM THINKING
Let’s explore a hypothetical example of an organization that does not value their supplier relationships. Hamburgers R Us is a mature, established food company that has expanded rapidly throughout the US and their procurement organization has pushed for hard savings above all else.
Key vendors have been asked to decrease their cost by 3% year-over-year or risk having their volume reduced. Supplier performance meetings have generally been reactive, contentious, inefficient, and focused on grievances from the business.
Requests for proposals and quick bids
For requests for proposals (RFPs) and quick bids, vendors have little to no trust that the best and last bid will be accepted by the business, so they have learned to pad their best and latest bid by 5-10% as part of the process. That way when Hamburgers R Us asks for more concessions, they have some built-in flexibility to provide further reductions.
Vendor payment terms
For vendor payment terms, Hamburgers R Us has aggressively pushed to move vendors to favorable discount payment terms, citing key performance metrics (KPIs) and strategic goals directed from the Chief Procurement Officer (CPO). Vendors have been very hesitant to agree to these payment terms however, because they do not trust that they will be paid on schedule. These vendors are already managing late payments from Hamburgers R Us and are concerned that these new discount terms will worsen their existing cash flow issues.
Uncomfortable suggesting changes
Vendors do not feel comfortable suggesting process changes, product substitutions, or alternative savings strategies. For one, they do not have that one person with whom they have built a trusted working relationship. They also worry that Hamburgers R Us might accept the process change and then use it as a rationale to push for even more price concessions.
Everyone dreads cost season
Finally, the actual representatives from the supplier’s report being demoralized and treated harshly. They report a culture of passing the buck and feel no loyalty to their main contacts at Hamburger R Us. Cost season is a mountain of work that everyone dreads, and price increases often resort in stalemates with suppliers threatening to stop shipment of the product until Hamburger R Us comes to an agreement that works for all parties.
This is just an example, but it is very common for procurement organizations to employ some or all these negative business strategies illustrated in this example ingrained into their organizational mindset. Recognizing these lingering negative factors is the first step to affecting real change.
STRENGTHENING SUPPLIER RELATIONSHIPS
Upon recognizing a need to improve your relationships with suppliers, there are several key next steps to influencing and implementing change:
Recognize and name the problem
Without a recognition that challenges exist, there will be inertia to any amount of change. Holding steadfastly to the status quo is very appealing, however by highlighting the benefits that we have discussed and having a concise, clear message allows you to persuade people and make them feel invested in the journey.
Identify key suppliers
Identifying your most strategic suppliers will be the first priority for improved relationships. These could be suppliers that provide business-critical goods and services, or it could be suppliers that provide the largest amount of spend. Include quick-win suppliers as well – these are suppliers with whom you already have positive relationships who can provide initial successes to demonstrate to your peers and the broader organization this transformation will work.
Create a cadence of communication
Reactive communication breeds mistrust, inefficiency, and uncertainty. Conversely, proactive communication breeds creativity, accountability, and collaboration. Standing monthly, bi-monthly, or quarterly meetings with the supplier representative to review and assess identified KPIs, address outstanding issues, and brainstorm on win-win process changes and product substitutions build trust and productivity.
Be a good customer
Small changes will amplify and create significant positive relationship windfalls for your organization. Pay suppliers on time and be responsive to their complaints and questions. Be honest and transparent throughout the RFX/Bid process. For suppliers that are removed from a bid process, provide constructive feedback so they can improve for the next iteration of the bid. Tie prices to publicly available indices whenever possible to free up time on both ends and focus on the big picture. Above all else, be kind to the representatives that interact with your organization. Treat them like human beings and when there are issues or problems that come up, address them proactively and respectively. The representatives will appreciate the open dialogue and will be much more likely to collaboratively partner with you to solve issues when they feel valued and respected.
Provide awards and recognition
Some companies will create a supplier recognition program that rewards suppliers who meet or exceed their KPIs. Other companies will outline stretch KPI metrics in their contracts and provide cost rebates to incentivize suppliers. Whatever the approach, the goal is to reward suppliers who are consistently meeting and exceeding expectations over the long-term and to cultivate productive business relationships.
By incorporating the above strategies, you can contribute to an inclusive procurement strategy and help create a procurement organization of the future.
