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Can suppliers be trusted?

January 30, 2014

The recent comments by UK Government CPO Bill Crothers reflect sentiments felt by many customers towards their suppliers – that they are exploitative and cannot be trusted.

Mr Crothers was commenting in the wake of some highly publicized incidents in the UK of extensive over-charging and poor contract performance. He was careful to limit his remarks to ‘some’ suppliers and not industry as a whole.

Buyers in many organizations have an innate distrust of suppliers. I recall speaking to a group of supplier relationship managers at a major international bank who universally took the view ‘all suppliers are evil’. There is no question that customers and suppliers often go through rituals that ultimately detract from the value both could achieve – and that certainly includes a tendency by some suppliers to over-commit or deliberately under-price.

A significant part of the problem is that many buying organizations simply have not adjusted their business model to deal with the changing nature of what they buy. Most of the problems seem to arise in relatively long-term service or solution contracts, where success is determined by an output or an outcome. Many buyers appear still to be using selection criteria and negotiation approaches that are suited to commodity purchases. They fail to undertake fundamental research regarding supplier organization, measurement systems or performance capabilities that are key indicators of underlying management culture. They do not alter the weightings for evaluation or consider the contract terms that are needed to drive performance. Instead, they rely on tough price negotiation and risk allocations that impose negative incentives.

Further, in many cases the oversight of performance is passed to business groups with few qualifications to undertake the task. Even honest suppliers often struggle to perform when the quality of interaction and management is poor – and for the less scrupulous supplier, there is a strong temptation to take advantage and to make up margin.

My observation – as yet untested by research – is that one warning sign for buyers may be the strength of the Finance function within a supplier. It seems to me that this is often related to weak ethical standards, especially if the Legal function is weak or subordinated to Finance. Another indicator may be the reporting line of the contracts or commercial staff. These organizations can place such strong emphasis on financial targets and goals that they overwhelm good judgment and result in the sort of ‘appalling behavior’ that Mr Crothers highlights.

I know that the UK Government has been taking steps to address these problems and organizational weaknesses. Other governments are pursuing a similar path. But businesses generally seem to struggle with adjusting their organizational design and capabilities to deal with new commercial and relationship models. And meantime, there are some unscrupulous suppliers who will take advantage and thereby damage the supply environment for everyone.

 

 

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