The advantages of the growing practice of closer engagement with suppliers
From the February 2018 print edition
Businesses have long realized the importance of teamwork and collaboration for the effective operations of their departments. This need for partnerships applies not only to internal groups, but also to external businesses, as well. In sourcing, forward-thinking organizations are also working to foster that same spirit of collaboration with suppliers. In doing so, many of those same organizations are reaping the rewards.
And those benefits are real. In 2012, McKinsey & Company surveyed more than 100 large, global companies on their supplier collaboration practices. Among the organizations that could show their collaboration efforts, the survey revealed that the EBIT (earnings before interest and tax) growth rate was twice that of their less collaborative peers. As well, a 2016 survey of CPOs by Deloitte showed that 39 percent of global procurement leaders said they planned to increase their level of supplier collaboration.
But how can sourcing professionals actually go about collaborating with their suppliers in order to get those benefits?
A primary rule of closer collaboration with suppliers is, perhaps ironically, don’t treat them like suppliers, says Ankur Thakur, sourcing manager with Dimplex North America. Rather, treat those suppliers like strategic collaborators. Suppliers don’t want to feel undermined or that they’re any less important than customers, says Thakur, who also stresses the importance of strategic partnerships. In such partnerships, no question, answer or suggestion from suppliers is wrong or rejected out of hand. He suggests approaching suppliers to work through issues, as well as brainstorming with them to find solutions. Whether it’s asking for help reducing lead times or letting them know the company needs a cost reduction and asking if and how they can help make it happen, collaborating with vendors in a transparent way can help organizations realize some of their goals.
Thakur also suggests involving suppliers upfront. For example, he suggests inviting vendors to meetings at a corporation’s headquarters and sharing with them the organization’s plans for its future for a period of, say, the following five or seven years. “It’s carrot and carrot rather than carrot and stick,” Thakur says. “Give suppliers a sense of ownership and they feel much more empowered,” he said.
This greater collaboration with suppliers comes with definite advantages, both to buyers and the suppliers themselves, Thakur says. Motivation is important, and when suppliers feel that they’re treated like business partners they are more engaged. When approaching suppliers for ideas on how to realize, for example, a seven-percent savings, an organization can offer that—if savings exceed that percentage—the supplier can then pocket the difference. Not only does such an arrangement help to keep a supplier motivated but also provides a tangible example of how they are providing value to the company they serve.
This approach can help to keep suppliers engaged rather than simply giving them marching orders and expecting them to follow those decrees, Thakur says. Benefits to an organization can include reduced costs or better lead times. At the same time, collaboration takes into account the issues that suppliers face—a more realistic approach to the relationship.
“It’s a bad approach to just tell them what to do,” Thakur notes. “You just can’t say no if they come back with a cost increase. It could be due to rising labour costs or commodity prices. You’ll gain respect from the supplier, and there’s more sensitivity. There are advantages on both sides. It’s a win-win for everyone.”
The bottom line, Thakur says, is to treat suppliers like a valued business partner rather than simply the provider of a product or service. Good ideas and innovation can come from anywhere, so it pays to remain receptive to suggestions from them. He also recommends creating a task force that can meet monthly to brainstorm innovative best practices, discuss potential cost reductions or other strategic goals.
During meetings with strategically important suppliers, sourcing professionals are able not only to share an organization’s vision but also to ask those partners for advice. Pick the brains of suppliers about what to do and for innovative ideas for altering a product in order to meet goals such as cost reductions. Thakur says that he’s had suppliers suggest, for example, changing materials that a product is made from in order to realize savings. There are experts on both sides, he stresses. “We’re giving them the power,” Thakur notes.
But not every relationship with a supplier will develop into a collaborative partnership, says Hasnain Millwala, partner at Insideseed. When power lies in the hands of a single company, negotiations and terms are always one sided, he notes. But Millwala agrees that when the relationship is a more even—involving a mutual respect and a power balance between vendor and the buyer—companies have seen collaboration unlock more value than conventional strong-arm tactics. This sort of relationship, says Millwala, can often develop due to increasingly easy access to technology that makes collaborative pilots easier. “Companies try [the technology], test it and if they derive benefit move forward,” Millwala says. “This pilot approach has resulted in some exciting opportunities.”
But despite the fact that not every relationship between buyer and supplier develops into a strategic partnership, the advantages to procurement of this greater collaboration include reduced costs and, more important, always having enough product available to sell to customers, Millwala notes. The single-biggest motivating factor in all of this, therefore, is service level. If a company invests in sharing information and creating visibility with a supplier—through sharing sales data, forecasts, better collaboration around purchase orders and so on—the expected return on investment is measured mainly through that improved service. “In addition, as a fringe benefit due to better planning, suppliers have some savings that they may pass on to you,” Millwala says.
This improved visibility means better planning (which results in fewer changeover costs), less inventory carried and a higher level of service, he notes. All of this helps suppliers through improved business predictability. Passing market knowledge along to suppliers can also help them come up with better products that feature a financial benefit (first dibs on new volume output, lower prices than competitors, and so on).
In terms of best practices for supplier collaboration, the starting point is to share forecasts and sales data, Millwala says. This allows improved planning for the supplier and helps to improve immediately both service levels and the relationship. Second, strong-arming your supplier results in a strained relationship. If, in the long run a company needs a favour from a supplier, that supplier won’t be enthusiastic to help if the relationship has benefited only one side up until that point. “Engage in joint product innovation exercises, since you are closer to the end customer than your upstream supplier, share market feedback back up the chain so your supplier can use it to refine products,” Millwala recommends. “I have seen companies engage in annual product strategy reviews with key suppliers to this effect.”
There has been a “tremendous shift” in the relationship between buyers and suppliers, which has moved from the adversarial approach of the past towards a more collaborative exchange between the two parties, says Wael Safwat, director of procurement, North America, at Black & McDonald. This shift, he notes, is driven largely by the increased maturity of both buying and selling organizations in a globalized supply chain. The primary advantage to this arrangement is business continuity. At the same time, organizations can use supplier collaboration to enhance competitive advantage to great benefit. “Managing risk is also a key advantage while driving efficiency and optimizing costs, in addition to supporting corporate social responsibility,” he says.
For the suppliers’ part, collaboration helps enable them to invest more confidently while developing their capabilities—a process that helps them to meet or exceed their customers’ expectations. This is good news, as creating value is the name of the game for suppliers and buyers alike, Safwat says. Sharing industry developments and practices allows procurement to create that value not only by understanding trends but also how those trends can help to create competitive advantage.
Awareness, communication and detail
Jim Wells of East Coast Tubulars in Paradise, Newfoundland & Labrador, notes that his organization has, for the past 10 years, worked to enhance supplier relations and increase its supplier base. That means visiting the mills that supply the company to make them aware of the country’s East Coast and the projects that the region offers. “From the relationship side it’s ‘how can we share with them what’s happening in this marketplace,” Wells says. “It’s awareness and communication and detail.”
Wells notes that he also encourages suppliers to visit and spend time in Newfoundland and Labrador. The experience can be an eye-opener for those suppliers when they realize the number of global industry players already operating in the province.
Such collaboration provides a win on both sides, he stresses. From Wells’s perspective, greater collaboration means multiple bidders can come to the table. Paradoxically, in a logistically challenged location like the province, rather than long-term contracts with a limited number of suppliers, it makes sense to expand the number of vendors. And for the suppliers, bragging rights afforded by marketing a product in a harsh environment such as Newfoundland & Labrador provides an added feather in their caps.
Communicating the reality of the situation—while maintaining a professional distance—can be key when collaborating with suppliers, Wells notes. While you don’t want to give away too much, it helps to give those suppliers a sense of what’s coming down the pike. “They wouldn’t have that information if we weren’t collaborating from a procurement standpoint,” he says. “It’s open communication about what’s happening, what’s going to happen and what’s changed.”
Collaboration can involve not only procurement and the supplier, but also the end user, Wells notes. Procurement often acts similar to a mediator or go-between in the equation, he notes. There are times when there’s value in putting vendors and end users together. And while that scenario might appear to jeopardize the procurement role, that’s not the case provided that procurement continues to bring value to that exchange.