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Why Buyers & Suppliers Must Work Together

September 17, 2008

Earlier this week, I presented to a large – and highly regarded – supply management team. One of the questions that was posed related to the question of whether there can ever really be trust between buyer and supplier.

“In your presentation there was a slide relating to the focus of relationships, with “cost” on one side of the spectrum and “innovation” on the other.  One of the points discussed was that we need to carefully consider what type of relationship is appropriate for each area. We have often over-commoditized our thinking by focusing too narrowly on cost, at the expense of commitment and innovation. 

In my experience, I have seen a tendency to swing back and forth between the extremes.  For a time the focus is on cost, but we end up with suppliers that are so lean that they cannot keep up with new trends.  Then we shift to building long-term relationships based on trust, but after a while we discover that the partnerships have become too comfortable, and we find ourselves at a competitive disadvantage.

How can we utilize our contract management tools to foster commitment and encourage innovation, yet maintain a competitive edge?  Can we nurture long term partnerships that do not become complacent?”

My reply is a work in progress, but here are some initial thoughts.

This is a great question and it is of course one that goes to the heart of any ‘collaborative’ relationship – essentially “Can I trust the other party to consider my interests and not take me for granted?”
 
For now, here are a few broad comments (and I hope readers will add theirs): 
  • Why the swings back and forth? Often we find that these are driven by leadership changes, rather than any real shift in strategic needs of the business. If we are to build and sustain trust, it is critical that supply management leadership understands the impact of inconsistent behavior and is ready to deal with its consequences. Trust, once corroded, is awfully hard to rebuild.
  • How are you choosing the partners for long-term relationships? When I talk with organizations – buy-side and sell-side – they often highlight their desire for closer relationships with the other side. When I explore what they mean, they are in fact often expressing a desire for collaboration based upon relative power. In other words, where they feel relatively less powerful, they want collaboration, but in those relationships where they feel powerful, they don’t care. The point here is that collaboration has to be a mutual desire, driven by mutual self-interest – it cannot be manufactured.
  • Building from this point, the onus is on the party proposing collaboration to identify the reasons why it will be mutually beneficial. In the end, this is a question of the economic benefits that can accrue – but the driver for these could be reputation, innovation, cost benefits, reduced risks etc. The key is to discover the formula and to have both sides convinced that a long-term, stable relationship has benefits that outweigh the traditional ‘stop-go’ approach of power-based negotiation and supplier management..
  • Once the formula is understood, there is something specific to be regularly discussed and monitored. And if the benefits are truly there, it will be in the interests of both parties to demonstrate to the other that they are still ‘playing the game’. With today’s technology, you should unearth ample means to enable free information flows between the parties. After all, if it is truly a relationship of trust, there will be nothing to hide.
  • It is also essential that the parties are mature and honest enough to understand that relationships do not stay the same for ever. The original drivers may change – new products, new markets, new technologies, new competition could erode the original basis for the collaborative arrangement. The key here is to have a fair and equitable basis for its dissolution and this should be embedded into the agreement (essentially, a pre-nuptial).
  • So bottom line, a key shift here is to stop thinking about your need to gather evidence of wrong-doing and instead focus on the way you will each provide on-going reassurance to the other.

From these observations, I am sure you will readily see the point I made about the negotiation and contracting process creating a governance framework for high-performance relationships. But of course, it is not every relationship – and while collaborative instincts should permeate all long term relationships, there will be matters of degree, driven by the scale of the economic gains.

 

 

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