Collaboration with suppliers and hard-hitting negotiations are two contradictory trends in purchasing, with both claiming substantial results in terms of savings. Initiatives with names such as “key vendor partnerships” compete with others such as food manufacturer Heinz’s “Squeezing Out Costs”. In many cases the labels mean little. If you ask suppliers whether “partnerships” with various customers are real or just a smokescreen for new negotiations, the answers are mixed. The truth is that collaboration with suppliers is often not a long-term reality.
In this article, we describe the results of our research into customer-supplier relationships: what seems to work (and not work), the payoffs beyond price reductions, and how to make your company “attractive” to key suppliers.
Carrot or stick?
Collaborating with suppliers was the subject of several business books in the mid-1980s, when executives visited Japanese car manufacturers such as Toyota and Nissan. At the same time, the practice of hard-hitting negotiations was also raised to new levels in the car industry. The famous (infamous?) Jose Ignacio Lopez de Arriortua, or “Super Lopez”, at General Motors pushed hard-hitting to the extreme by unilaterally demanding supplier price reductions and mercilessly changing suppliers for cheaper prices.
Initially, Lopez and his team approached suppliers and helped them to reduce costs and improve quality. The team worked jointly with a dozen or so suppliers, obtaining improvements of 10-20 per cent in costs and quality. The problem was that GM had thousands of suppliers and would never be able to work jointly with all of them. So, Lopez simply sent letters to all the suppliers, mandating immediate price reductions of 10-20 per cent.
Unfortunately, the long-run cost is that suppliers view GM (and the other US car makers) as not at all “attractive”. Hard-hitting negotiations beget appropriate responses by suppliers, including no trust, no sharing of information, no suggested improvements and no innovation efforts. And that’s assuming they survive at all – a number of the big first-tier automotive suppliers, including Delphi and Visteon, are in serious financial trouble. Comparing the supplier opinions of Toyota with US car companies supports the downside of the hard-hitting approach; the relative performance of the Japanese car manufacturers clearly supports the link between better customer attraction and higher financial return.
There is always a counter-example, of course: Nissan was on the verge of bankruptcy in the late 1990s. Its saviour, Carlos Ghosn, coming from Renault, did the unthinkable for a Japanese car company: he dismantled the keiretsu. One of the problems uncovered was high component prices from Nissan subsidiaries. A comparison with Renault prices showed that Nissan was paying 20-40 per cent more. So while collaboration might appear to be superior to hard-hitting negotiations, there is always the danger of overly cosy relationships and complacency.
The dilemma for many companies is therefore how to become attractive to suppliers, but not to do so by paying higher prices. As one CPO put it: “If I pay more than my competitors to one supplier, I might be subsidising my competitors.” The solution we often see is purchasing leaders advancing “tough love” to suppliers – that is, to collaborate but be demanding at the same time.
As a term, “collaboration with suppliers” can be sharpened; we prefer the term “attraction,” where customers gain by being more attractive to suppliers, and vice-versa. What makes a particular customer attractive and another unattractive to suppliers?
One attraction is increased volumes. Purchasers are concentrating their volumes, reducing their supplier base and establishing closer relationships with fewer suppliers. Growth is another attribute of customer attraction: customers that are growing, as well as increasing their purchases-to-sales ratio, will generate increasing sales to their key suppliers. Customers that help suppliers to develop new competencies are also perceived as attractive.
What makes suppliers more attractive to customers? Without low prices, acceptable quality and flawless execution, no supplier will be attractive to its key customers. Beyond these, the true winning attributes are support for growth, speed, innovative ideas, help with major improvements and joint new process developments.
Co-operative relationships appear to be nirvana: everyone wins. But our research indicates that customers and suppliers often “play games” that detract from overall supply chain performance.
For example, customers:
- do not pay invoices as agreed and contract for larger quantities than those that actually materialise;
- have too many “emergency” requirements and mandate unneeded transactions;
- do not capitalise on supplier improvement suggestions.
Suppliers, meanwhile:
- do not adequately solve quality problems and are reluctant to develop innovative new products;
- are reluctant to disclose information;
- try to push through all-material price increases.
Given that companies are heavily outsourcing and selling subsidiaries, gaining the most from suppliers in terms of reducing total cost, joint improvement initiatives and innovation are becoming critical for survival. Thus, becoming an attractive customer to the most important suppliers is at the top of many CPOs’ agendas, and increasingly so for their CEOs as well.
Our research team has interviewed managers involved in a particular customer-supplier relationship called a “dyad” (the unique linkage between one customer and one supplier). To keep the project tightly focused, all of these took place in the same industry context – namely, food and beverage companies interacting with packaging suppliers. In several cases, the same suppliers were working with different customers. In each customer-supplier dyad we looked at the attraction of the customer to the supplier and vice-versa, based on the perceptions of different managers. We also tried to assess the results that the relationships have provided both to the customer and to the supplier. To ensure we have not overlooked points of view developed in other industries, we have discussed our hypotheses and results with several other CPOs who are considered experts in their companies on managing customer-supplier relationships. Some of the key findings to date follow.
What do suppliers find attractive in customers?
The answer to this question is different depending on who you ask in the supplier organisation, the position they hold or their objectives. One general observation is the difference in opinions between operational and technical personnel (in both supplier and customer) and those concerned with implementing changes (new products, innovations, price negotiations, new suppliers). The operational/technical personnel are mostly concerned with achieving flawless execution, so all changes are potential problems; on both sides of the dyad these personnel believe that “it isn’t broken, so don’t fix it”. Purchasing personnel at the customer, on the other hand, think: “If it isn’t broken, break it!”
Perhaps the most interesting people we interviewed were the key account managers of suppliers. They are on the firing line with the customer, and have strong opinions about the ways in which various customer personnel deal with their company. In general, key account managers appreciate customer personnel who are honest, trustworthy, pay their bills as agreed, and do not frequently change the people with whom they must deal.
From the supplier’s side, we found two main concepts driving their perception of customer attraction: “expected value” and “comfort”. Following a rational economic model, best-practice suppliers assess the expected value they are going to obtain from customers if they devote resources to them or propose innovative ideas. For example, one packaging supplier clearly stated that the criterion for providing innovation to its customers was the value of the particular innovation to that customer. Hence, if an innovation improved safety, then this supplier would look first to customers in the pharmaceutical industry, because they would obtain more value than customers in other industries. This particular supplier tried to assess the estimated change in sales volume and margin for different key customers, in order to evaluate the value it could expect to obtain.
“Comfort”, the second concept, is an informal consensus on the probability of achieving the expected value. It includes past experience in working with that customer, in terms of
the customer’s acceptance of the supplier’s improvement suggestions; the joint efforts to make them work; the negotiation pressure; and the general level of fairness in working relationships. In the previous example, the supplier was assessing “comfort” in terms of the probability that the customer would adopt the innovation and how hard the customer was going to negotiate. This issue prompted the same supplier in another case to offer the innovation to a smaller customer with a lower expected value. As a consequence, the larger customer requested the same innovation, but now the supplier was in a better negotiating position. The lesson is that
being overly hard-hitting in negotiation can sometimes mean that a customer is not the first in line to be offered supplier innovations.
This conclusion does, however, presume that the supplier co-ordinates decisions about offering resources and innovations to customers. If the main contact with the customer is via a key account manager and he or she is only in charge of one customer, the focus will be on bringing the best resources and innovations to that customer. Unless there is co-ordination at a higher level, innovations are typically offered indiscriminately to all customers.
What do customers find attractive in suppliers?
Surprisingly, purchasing managers are not particularly good at assessing whether their companies are attractive customers, or at identifying how suppliers judge the attractiveness of their customers. We found several suppliers with poor opinions about their “comfort” in working with a customer, while the purchasing manager in that firm thought they were attractive to this supplier.
In terms of what makes a supplier attractive to a customer, the most frequent response is innovation. Most customer companies in our research expressed a strong desire for their key suppliers to work actively to find innovative packaging solutions. But in several cases we heard from the suppliers that innovative suggestions were not well received. We see this problem as one of “alignment” (more of which later).
Purchasing personnel are continually pushed in their organisations to reduce the prices of purchased items; suppliers that can do so are naturally viewed as attractive. The flipside is also true: one large packaging supplier has a unique packaging solution and has standard prices that it refuses to negotiate on. Perhaps not surprisingly, this supplier was rated as highly unattractive in our research.
But there is a fundamental difference between price reductions that are based on negotiating muscle and those based on joint efforts by the dyad to engineer costs out of the supply chain. The suppliers that are ready to engage in these joint cost-reduction efforts are seen as attractive, but the customer also needs to invest time and energy in changing the inter-company processes.
Customers regard suppliers as attractive if they supply leading-edge customers, if they are not dependent on one customer, and if they run productive operations. Smart customers visit suppliers’ factories to assess flawless execution, productivity, use of state-of-the-art practices, and the general level of employee involvement in continuous quality improvement programmes. Their key point is: if our suppliers are incurring extra costs, we pay for them.
Supplier attraction also appears to depend on the priorities of the customer organisation at any moment in time, both in terms of strategy and the specific implementation phase of that strategy. For example, where a customer’s factory team and other managers in the organisation were focused on substantially increasing production capacity, the most attractive suppliers were those that were able to keep up with the increasing demand, while creating no problems in the customer’s factory.
Attraction is therefore a complex issue, and one that has different meanings for customer and supplier. Moreover, particular individuals on the customer and supplier sides perceive attraction differently, depending on their own situations and evaluative metrics. We have been looking for the ideal alignment and have not found it. On the contrary, we conclude that alignment is almost impossible by design because initiatives that are positive for certain managers are often disruptive for others.
For example, if purchasing finds a new supplier that provides a lower price, the purchasing manager of the customer and the sales manager of the new supplier are both happy and
their key performance indicators will reflect their happiness. But for the factory manager at the customer, this change often means new headaches are coming – in validating
the new supplier, adapting the factory processes to the new component, and modifying factory equipment – to avoid its KPIs going down too much. Typically, for 12-18 months, the operations managers are not going to appreciate the change. After this, the operational/technical managers in the customer and supplier establish a good working relationship. But, about the same time , the purchasing and sales managers are busy thinking about how to make further improvements, which once more disturb the cosy relationship at the operational level.
Differences in perceptions will inevitably lead to friction in the dyad, so it becomes important to achieve better alignment, both within each company and between customer and supplier. Alignment will never be perfect: in fact, the operative goal is to “manage the misalignment”. Doing so is not easy. Our research indicates that the dyad partners need to establish, as much as possible, a sense of shared values. Attraction will be improved when the two firms think in similar ways, see problems as joint problems – not ones to push off on the other – and there is a long-run sense of shared destiny.
Attraction does pay off, for both customer and supplier, when it is managed well. But there is one more pitfall we have seen: the dyad partners need to continually enhance their activities and mutual benefits. A partnership only remains so when there is continuous enhancement. Customers and suppliers can only invest time and energy in a limited number of relationships, but partnerships need care and feeding if they are to continue to flourish.
One customer we studied was surprised that a particular long-standing relationship with a supplier had started to deteriorate, as a result of what looked like a lack of interest on the part of the supplier. Further examination showed the supplier had found a new customer, which required resources to develop the relationship. The supplier expected to manage both sets of relationships in a proper way, but ended up dedicating its most experienced managers to the new customer. By default, the original attraction is reduced. While it may be tempting to blame the supplier, this is a bit like blaming only one party for the failure of a marriage.
Similarly, we sometimes find suppliers that are surprised by the lack of customer interest in joint improvement initiatives and innovations, or suppliers disappointed that promised sales volumes have not materialised. Customers need to establish their own priorities, and sometimes these favour shifting time and effort into different relationships. Our experience is that these shifts all too often come about without any explicit reordering of priorities.
Although we have yet to find a company that does it, we believe it makes sense for firms to segment their supplier base (as well as their customer base), then to explicitly develop plans for which relationships will produce the greatest returns.
A new and alien theme
So, what should a CPO do to obtain better results from the key suppliers? Our research indicates that being a very hard or skilled negotiator might be a good approach to suppliers of certain commodities, but not to those key suppliers from which we need ideas for improvement and innovation. When the game is about value and cost, customer attraction will pay significant dividends.
It is often hard to resist a sole focus on hard-hitting negotiation. We remember how the CPO of a major US multinational in Mexico reacted when a purchasing manager claimed he had obtained a 5 per cent discount from a US supplier for the same volume. He fired this manager, since the objective was to increase volume by 20 per cent, not to reduce the price. The supplier had already been squeezed to the point of having neither the funds nor any incentive to invest in the additional capacity to deliver 20 per cent more components.
Making your company an attractive customer to suppliers is a new and alien theme for many purchasing managers. This is because it reverses the roles of the purchaser and the salesperson – the role of the purchaser is now to convince the salesperson, rather than the other way around. The complexity of the relationship means that the immediate paybacks are far from obvious. Managing perceptions and misalignment, and helping suppliers to understand what they can obtain from your company, is certainly very different from evaluating suppliers.
But at a time when one of the most successful CEOs is demanding that his company’s purchasing people get more innovation from suppliers, the rules of the game for leading-edge purchasing might be undergoing a dramatic change.
CHECKLIST: The 10 golden rules of customer attraction
Based on our preliminary research, we have identified a set of best practices that CPOs can use to create a high level of attraction and positive results. We call them the “10 golden rules of customer attraction”.
1. Be a demanding customer to your suppliers, but do not crush them. If hard-hitting negotiation is the only tool in your bag, you have problems. Attraction does pay off, but you need to check opinions with key suppliers. Do they see you as only pushing prices?
2. Determine which relationships are important. Attraction is not to be spread around. Identify which partnerships will pay off in the long term and invest in them.
3. Recognise that attraction is double-edged. You will need to work hard to be seen as the most attractive customer to your key suppliers. This also implies joint improvement efforts, not unilateral demands for the supplier to make them.
4. Increase the comfort level of the supplier. Make sure that supplier managers know that their ideas are welcomed, acknowledged and implemented. Make it easy for suppliers to provide them to you. Be fair and scrupulously honour contractual obligations.
5. Help the supplier to properly evaluate their expected value. A typical negotiation technique is to hide information. But keeping information from the supplier leads to poor evaluation and diminished attraction (of both customer and supplier).
6. Manage the misalignment. It is virtually impossible to align the objectives of purchasing, manufacturing, R&D, finance and other functions. It is even more critical to understand and manage misalignment between the dyad partners.
7. Manage the perceptions. Understand that it is perceptions that matter, and these are often totally unrelated to reality. Proactively manage the “stories” and “feelings about a customer”.
8. Understand and manage how the supplier allocates resources and ideas. Develop the reputation of being the most open customer to new ideas, by accepting as many as possible and implementing them. Develop metrics that support implementing supplier ideas, and reward those in your company who do so.
9. Help your suppliers to leverage the learning. If you not only allow, but also deeply encourage, your suppliers to use the learning with their other customers, you will increase attraction and be the place where new learning is focused.
10. Sell the opportunities in your company to the supplier and understand which other customers and initiatives are on its priority list. You want to be at the top of it.
Carlos Cordon (carlos.cordon@imd.ch) is professor of operations management, and Tom Vollmann is emeritus professor of manufacturing management at IMD in Lausanne, Switzerland
