In leading-edge procurement, a new frontier is being established, fundamentally based on shared values and collaborative efforts, to improve the supply chain value-cost ratio. For this collaboration to work, the language and fundamental practices between customers and suppliers must evolve. These should not be superficial modifications but ones that will run deep and effect change within a company's culture.
The resulting customer-supplier relationships are different in every aspect: no zero-sum thinking, minimal negotiations but co-operative working relations and shared values. Price is the passenger, not the driver.
Procurement chiefs should be leading the search for these advanced collaborative relationships, which an article in the previous CPO Agenda (spring 2006) argued could deliver a real competitive advantage. In order for this kind of relationship to exist, let alone flourish, it is imperative to change the language used to support these special partnerships.
Many people use the analogy of marriage for this kind of supply chain partnership: they must be long term, based on mutual trust, and so on. The problem is that this advice is too general; it becomes the objective for almost all customer-supplier relationships. We see it differently. In general, the marriage analogy is best applied to only the few special customer-supplier relationships. To support the marriage conditions, one needs to change the language.
If the goal is to have open and deep communication, the language we use must reflect this goal. Language frames thought and behaviour; the changes in language need to be deliberate and permanent. When people in either party fall back to using the old terms, they need to be reminded that this is a mistake that could weaken the relationship.
In adopting the marriage analogy, it quickly becomes apparent that common purchasing language terms are not only inappropriate and counterproductive, but perhaps even insulting. For example, supplier (spouse) evaluation; supplier (spouse) selection; supplier (spouse) measurement; and so on. Rather, certain language changes need to be adopted by the supplier and perhaps even the term "supplier" should be eliminated. These examples are illustrative of more conducive language choices: customer (spouse) relationship management; customer (spouse) relationship management; customer (spouse) service; customer (spouse) retention.
Operating as one
The ultimate goal is for the two companies to operate as one. This can be facilitated by:
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integrating processes and practices associated with manufacturing planning and control;
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simplifying financial transactions and automatic payments;
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largely eliminating bids and invoices;
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creating transparency of inventories and schedules to eliminate the need for forecasting and orders;
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making continual joint improvements to create a tailor-made response for specific customer needs;
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postponing end item exact configuration leading to lower inventories and better response for both parties;
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using dedicated capacities at much higher levels.
While each of these improvements is possible, the goal is to achieve all of them. This will benefit both sides, but can only be achieved through joint effort, commitment, improved attitude and tactics, as well as a change in language. Both partners should constantly ask themselves two key questions:
A final set of changes relates to significantly modifying policy relationships in how customers and suppliers interact. In true supply chain partnerships, both firms think differently about their structure as customer and supplier. Some structures remain the same for nearly all customers and suppliers, but for true supply chain partners they need to be definitively different. These structural relationships include commodity strategy, sourcing decisions, rating and evaluation, auditing, quality, total cost of ownership, customer relationship management and supplier relationship management.
Each of these structural/policy issues requires a win-win focus that works jointly. Control is superseded by co-operation - improvement is equally important for both parties. The following "enablers" can help to achieve this:
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integration, not just of IT but frequent face-to-face time;
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cultural fit as mission critical;
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shared information, metrics, risks and rewards;
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co-residency and exchange of personnel;
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transparency on all issues.
Example 1: Toyota
Toyota is well recognised as one of the leading companies in the world for relationships with key suppliers - and the results are equally well-known. Simon Nagata, head of procurement of Toyota USA, identifies two categories of supplier relationships: pure commodity and value add. He defines value-adding relationships as those procurement partners with significant spend that involve value-added technology or those that create a differentiated value to Toyota's end products.
Toyota clearly differentiates between these two categories of suppliers, with special relationships, policies and structures for the value-adding relationships. Nagata maintains that close relationships must underlie the customer-supplier relationships for value-adding items. These are based on mutual trust, transparency and careful choice of language/communication.
Example 2: HP and Canon
Hewlett-Packard's partnership with Canon is a truly collaborative win-win relationship. Joint efforts began in the laser printers division and have flourished for over 20 years. Both companies clearly understand that they are better off collaborating than being combative.
The maturity and special culture of the relationship has manifested itself in many ways. Both companies are careful with the language they use. Canon is referred to as a "technology partner" rather than a "supplier". It may seem insignificant, but for those in the relationship this difference is critical.
A key illustration of the HP-Canon collaboration is seen in the way it treats currency rate fluctuations. Each company agrees to absorb small movements of the yen-to-dollar fluctuation and if the exchange rate moves too much to one company's advantage, the "winner" compensates the loser. This principle of "keeping the partner whole" is further illustrated when determining the sales price of laser printer engines from Canon to HP. If either company makes "too much profit" from a given model, the price is retroactively adjusted to keep the "profit in balance".
As such, the sales price is not set until the product is being sold and is determined in such a way as to benefit both the supplier and the buyer.
Example 3: Harley-Davidson
Unlike many other companies, Harley-Davidson, the famous US motorcycle manufacturer, does not segment suppliers and respond with a variation of behaviours and tactics. Rather, it uses collaborative and open communication with most of its suppliers. It views supplier relationships as a company-wide responsibility. The preservation of existing supplier relationships is not only the first priority for procurement strategy but for the entire Harley-Davidson enterprise. Incumbency is earned based on demonstrated value of quality, cost, timing and technology, and a commitment to continuous improvement.
Harley-Davidson views its suppliers as an extension of its design and manufacturing capabilities. These relationships allow the company to deliver higher-quality, cost-competitive products. A collaborative approach unites its joint supply base and allows each to mutually plan and invest for the future.
How did Harley-Davidson do it? A large part of the company's purchasing success comes from supplier loyalty. It has earned preferential treatment from its suppliers primarily by understanding how to build long-term relationships. Part of its credo is to treat suppliers with respect and always communicate openly and with honesty.
Jeff Bleustein, the company's CEO until mid-2005, summed it up as follows: "Mutually beneficial relationships with suppliers give rise to how we function. That means we are trying to have very close affiliations, close relationships with each of these suppliers. It starts with understanding that we want long-term relationships."
Fundamental beliefs
Achieving great results happens when language changes are consistent with a level of deep trust, mutual respect and genuine interest for the partner, as well as a general reduction of selfishness. But it also requires developing a strategy and high-level policies in both firms that reflect two fundamental beliefs:
In many cases, it is critical for the customer to "move up the value chain" in terms of the bundle of goods and services delivered to its end customers. This might entail working with customers on new product designs, providing mass customisation in the bundles of goods and services, delivery through new distribution channels, adding service features and/or taking over repairs and field service. It is essential that this repositioning be co-ordinated with key suppliers to find the best ways of developing joint efforts to achieve the desired ends.
Special partnerships must recognise the nature of new situations, the associated demands for new goods and services, the potential need for new delivery mechanisms, and the requirements for a speedy response. This implies a quick assessment of who can do what, best and quickest, and how to integrate new items into the bundle; there is no time for arguments/negotiations about who gets paid how much for doing what. What is needed is to get on with it and sort out all issues fairly.
In classic purchasing approaches, too much time is spent in combative conversations based on negative assumptions. All of this is costly, not only in time but also in opportunity cost. Time spent "fighting" is time not spent on effective learning. Best practices of special partnerships are only partially known at this point. But what is clear is that great results seem to be coming from somewhat ad-hoc processes; those who are achieving good results seem generally to believe in the basic ideas and just get on with it.
True supply chain partners need to be committed and confident about their joint efforts. They should expect and be focused on achieving major payoffs: in some cases we have witnessed a 20-times volume increase. It is also reasonable to expect that some supplier assets can be used at twice their current capacity. A basic goal is for the inherent productivity or efficiency of the supplier to double. For the customer, a reasonable expectation is that prices with this supplier will be based on cost plus, while the same supplier will attain significantly higher market prices from its competitors. This results in competitive advantages for the customer, while generating overall profits for the supplier.
The partnership will continually enhance the value-cost ratio through joint projects, greatly streamlined operations, faster market response and mutual competency development. This requires work - a good deal of work - and it never stops. But each project should be designed so that it has immediate payoffs as well as longer-term potential in leveraging the competencies with others.
No autopilot allowed
A special customer-supplier partnership requires "care and feeding". It is critical for people in both companies not to lose sight of the importance of this relationship. There will always be a temptation to drift off, to chase another set of ideas. And there is always the possibility that the underlying technology base of the supplier will not match the future needs of the customer. These are genuine risks and they need to be managed as carefully as possible.
We have found many times that a company's worst suppliers are its sister plants, because it is all too easy for these relationships to breed complacency. Complacency is the potential enemy in special relationships as well. At a senior level, there needs to be continual establishment of new horizons, new measures and new projects. It is not a question of "what have we done?"; it is "what shall we do next?"
Both customers and suppliers must take special care with their language if they are to develop true partnerships. These differ from the routine relations between customers and suppliers. They require a different set of strategies, policies, tactics and supporting language, and a commitment to carry out these changes for the long term. If an organisation can embrace these efforts it will be richly rewarded.
Corey Billington ( corey.billington@imd.ch ) is professor of operations management and procurement, and Tom Vollmann is emeritus professor of manufacturing management at IMD in Lausanne, Switzerland. Joe Sandor ( sandor@bus.msu.edu ) is a former CPO of Sara Lee and the Hoagland-Metzler endowed professor of practice in supply management at Michigan State University's Eli Broad School of Business in the US
