Companies develop and upgrade systems and procedures continuously to increase their effectiveness. Different types of projects are initiated to optimise internal effectiveness, but also have an impact on the effectiveness of external partners – suppliers of products and services, for instance. Ideally, companies should strive to optimise both internal and external effectiveness simultaneously. But, in fact, projects aimed at optimising company effectiveness often end up compromising supplier effectiveness. This happens because the projects cause incompatibility, which sets off a struggle for effectiveness between buyer and supplier. The results can be unexpected and have costly side effects on both sides that erode the sought-after optimisation advantages.
“Compatibility” describes how one system (in this case a company) fits with another. It covers the ability of a company to work successfully with a given supplier. A high degree of compatibility creates optimum internal and external effectiveness. As this article will demonstrate, the ability to create, maintain and, in some cases, restore compatibility needs to be a prime task for the purchasing function.
E-procurement provides a good example of the problems associated with incompatibility. When the first wave of e-business hit industry, a number of large companies developed IT solutions through which trade with various suppliers was to be conducted. Large investments were made and purchasing organisations and procedures were changed.
But many of these companies paid inadequate attention to supplier compatibility issues associated with e-business. They failed to realise before making the investments that smaller suppliers, in particular, were incapable of and unwilling to develop the necessary IT systems and procedures. Many companies were unsuccessful in persuading their suppliers. The adaptations required to close the gap and secure compatibility were simply too large. Hence, the developed systems and procedures became obsolete and projects had to be closed down or postponed.
The effects of incompatibility
Optimisation projects, aimed at increasing effectiveness in different company systems and procedures, can take a variety of forms. Development of IT systems, manufacturing processes, logistics systems, organisational structures and administrative procedures increase internal effectiveness, but also entail changes to the company’s interfaces with specific suppliers.
The adoption of lean production, for example, which is a major trend in many industries at present, optimises internal manufacturing processes. But conversion to lean also requires various types of adaptation from suppliers, which are required to meet new just-in-time and quality demands. If such optimisation projects are not properly co-ordinated with suppliers, the result is incompatibility, which in many cases releases a series of events upstream that eventually end up backfiring. This is a complex process, which may be difficult for purchasing professionals to grasp (see figure 1).
Incompatibility results in various exchange problems. Normally, supplier personnel adapt their systems and procedures to restore compatibility and secure future business. However, these adaptations are not effortless – they require resources and work hours. They may involve the abandonment of a supplier’s own systems and procedures and entail a loss of investments.
Moreover, supplier effectiveness is reduced as a result of the switch away from an existing optimised solution. These issues tend to affect the relationship between the parties, most often in a negative way. In many cases, resistance towards adaptation starts to build among supplier employees.
This is where the unexpected negative consequences start to appear in the company. Because the supplier resists adapting, the customer company has to readapt to restore compatibility. This can involve major modifications to the same systems and procedures that were just developed, and in severe cases may force a company to abandon them completely. The result is a reduction of internal effectiveness
in the company. In some instances, the costs of such a project may end up exceeding the rewards.
The challenges of communication and co-ordination
Our research shows that a lack of communication and co-ordination between different levels of an organisation and between organisations (for the purposes of this article, between management and buyers at the customer and sellers and management at the supplier) is a major cause of incompatibility. Communication and co-ordination becomes even more challenging when the following conditions are present:
-
Internal orientation. Many business models evolve around what can be done and developed internally. External effects of strategic decisions are dealt with in a reactive fashion when they arise.
-
“We are the customers”. Traditional attitudes are still found frequently among purchasing managers, who expect suppliers to adapt 100 per cent to their demands, simply because they are the customers.
-
Limited visibility. Some companies lack an understanding of supplier processes, procedures and systems. This means that external effects of internal changes cannot be assessed accurately.
-
Unwillingness to admit problems. Many key account managers (or other supplier employees) do not share their perceptions of changes made by customers. They may be uncomfortable with confronting important customers because they fear business repercussions. Alternatively, they may be too optimistic about their ability to adapt.
Communication serves two main purposes: first, to ensure planned and timely co-ordination of the changes, allowing adaptations to be made; and second, to negotiate between objectives at the different levels. Usually there is a difference in objectives at different levels of the organisation. Company management may be aiming for an overall increase in company effectiveness (internal), while managers in the supplying company tend to favour supplier effectiveness. Purchasers and sellers are placed in between, having more local objectives (eg, purchasing key performance indicators) and needing to consider the objectives of the partner.
The power to make decisions regarding the initiation of most optimisation projects lies at management level. Ideally, new company-wide systems and procedures are intended to fit broadly with other internal systems and standardised to ease co-ordination and use by employees internally. The purchaser is responsible for adopting the new system or procedure and making it work with particular suppliers. Therefore, purchasers have to communicate upwards to convey information about the effects of optimisation projects on specific supplier relationships. Moreover, management needs to take potential critical effects on supplier relationships into account when deciding to make changes.
Purchaser communication with their counterparts at the supplier is essential, both to inform them about the intended changes and to obtain information about the potential effects of these changes. Purchasers must answer questions such as:
- Is this specific supplier running systems that are compatible with our new system?
- How many adaptations are needed by this supplier?
- Do we have a relationship with this supplier that is able to support facilitation of the changes?
Purchasers need to understand suppliers’ level of maturity with regards to systems and procedures. One of our research projects involved a small supplier without any computer equipment and with no capabilities or intentions to create even the simplest PC interface. A buying company should be aware of these circumstances and realise that expecting adaptations from such a supplier may be unrealistic. If the supplier is indispensable, the buying company has to make the adaptations itself.
On the supplier side, the seller is responsible for adapting to the new customer systems and procedures. Management at the supplier will be drawn into the process if the required adaptations involve major changes in supplier systems and procedures.
Who is going to adapt?
Before they implement new procedures and systems, companies need to map out supplier procedures and systems, as well as their willingness to adapt. This analysis forms the basis for co-ordinating the change and deciding who is going to adapt. It should be carried out for key suppliers that are potentially affected by the change. To maintain compatibility, either supplier or buyer needs to adapt. In most cases, mutual adaptations are necessary and both parties need to have a clear picture of what is required on either side. Adaptations need to be negotiated, in a process that resembles price negotiations, and extensive communication is essential.
Another key word is flexibility. Systems and procedures should be designed with flexibility in mind. Even if they have been adapted initially, future changes may still be needed. New optimisation projects are bound to happen and the worst position to be in is one where systems and procedures on both sides are too rigid to allow future adaptations at reasonable costs.
Flexibility as a competitive factor is frequently found among wholesalers. Their ability to continuously adapt systems and procedures to any customer account means that customers are spared the efforts. Systems flexibility, for instance, can be built in by having a competent IT department that can program a systems buffer that is compatible with any customer system.
The impact of relationship management
Any optimisation project that requires adaptations from suppliers needs to build on a strong relationship. If the two companies experience exchange problems, the business relationship is put to the test. Problems can eventually turn into conflict, threatening the future of the relationship.
If adaptation demands that the supplier diverges from existing systems and procedures, the results can be lower effectiveness and wastage of previous investments on the supply side, which in turn can lead to annoyance and discomfort among supplier employees. In such a scenario, communication with the supplier about the buying company’s changed systems and procedures might not be sufficient to trigger supplier adaptations. Motivation of key supplier personnel through relationship management may be necessary by,
for instance:
1. Demonstrating commitment to the change.
2. Communicating the necessity of making the change.
3. Demonstrating care towards the supplier’s business.
4. Designing the system and procedure to provide supplier benefits too.
5. Offering compensation.
Different supplier attitudes towards change need to be taken into account. Some suppliers will perceive any change as a learning possibility, while others favour stability. When confronted with changes, some suppliers tend to be unrealistic or cover up their lack of willingness to adapt. Therefore, purchasers need to promote openness, honesty and trustworthiness to encourage supplier employees to freely communicate their opinions regarding the changes. The attitudes of supplier personnel should be known to the purchaser, so that costly surprises can be avoided.
A producer of automation equipment found that a small supplier of key components proved unwilling to adapt. Increasing sales led the company to initiate projects with the purpose of stepping up capacity. The director of the supplying company was approached to gauge his willingness to increase capacity accordingly. The answer was positive – the supplier would buy additional machinery and adapt to maintain compatibility.
However, somewhere in the expansion process the supplier decided not to expand and instead to outsource the extra work to a few small firms in the local area, without notifying the customer about this decision. Components were produced by these firms and transported to the supplier, which then delivered the batches to the buying company. The purchasers did not discover what the supplier was doing until delivery performance started plummeting.
With the new outsourcing set-up, transport and planning had become too complicated, resulting in many late deliveries. Furthermore, quality control became an issue because the components were produced in three different factories, impeding uniform quality and problem solving. When the purchasers finally found out, they made a number of internal adaptations and negotiated a solution with the supplier to restore compatibility. However, the exchange problems had generated high costs and the new agreement involved a decrease in effectiveness for the buying company.
Compatibility and attractiveness
Avoiding incompatibility is one aspect of this discussion. But there are also gains to be made from making compatibility an essential feature of purchasing strategy. In past and ongoing research we have found that compatibility plays a major role when suppliers evaluate the “attractiveness” of customers. This evaluation forms the basis for how suppliers devote attention and assign their resources among customers.
Increasingly, companies are finding that they have to compete with other customers for supplier attention and resources. This phenomenon is even more pronounced at a time when many industries are changing towards sellers’ markets. Companies that manage to design systems and procedures with interfaces that are compatible with those of suppliers are likely to be more attractive. In fact, it is not far-fetched to imagine that companies might design their systems and procedures to be perfectly compatible with individual key suppliers, in order to maximise value from these relationships – a kind of reverse customisation or “supplierisation”. This would indeed represent a radical change from old-school procurement, where suppliers are the ones making the adaptations.
The value gained from supplier compatibility clearly needs to be weighed against the sacrifices to internal effectiveness. In many instances, companies are actually in positions where they can achieve high levels of compatibility at low cost, without substantial losses to internal effectiveness.
One buyer-supplier relationship we studied suffered from incompatibility as a result of different contracting procedures. Long, detailed contracts were written by company lawyers and presented to suppliers, who were required to sign. The director of the supplying company, who was responsible for all customer contact, was used to operating completely contract free and therefore faced significant adaptations in order to comply. The new procedure would require him to spend a significant amount of time reading jargon-laden contracts and negotiating the terms, and possibly hiring the services of a lawyer. He found these demands too onerous and therefore refused to sign the contract.
The purchaser insisted at first, but soon realised that it would have to adapt the procedure if the relationship with this supplier was to be maintained. This adaptation consisted of cutting 50 pages, leaving out the technical legal passages, and loosening up the performance demands. The resulting procedure largely maintained buying company effectiveness, while restoring compatibility and supplier effectiveness. Although the revised procedure did not provide the same level of legal protection to the customer, it did preserve the business relationship.
Striking the right balance
Clearly, companies should not seek to achieve compatibility by neglecting the development of internal systems and procedures, since they are likely to be outpaced by more aggressive competitors. The challenge is to continuously develop increased internal effectiveness while simultaneously co-ordinating developments with suppliers. In the case of key relationships it may be worth “supplierising” to specific suppliers, if the benefits outweigh the costs.
Most companies will come a long way by simply avoiding severe incompatibilities. In all cases it pays to be informed about both supplier systems and procedures and attitudes towards intended changes. The ability to listen and communicate is critical to avoid relational problems. Furthermore, motivation of supplier employees may be necessary in many projects. If you listen and adapt on the issues where it requires least resources on your side, then your suppliers will be more likely to adapt when you really need them to.
It’s a game of give and take. If this challenge can be mastered, then compatibility can actually become a source of competitive advantage.
CASE STUDY: GRUNDFOS
When ERP had unforeseen consequences
Grundfos, the largest pump producer in the world, has been through a development process that took its purchasing organisation to best-practice standard. During this process it learned valuable lessons about compatibility, which led the company to improve its pre-project planning and co-ordination with suppliers.
One of the improvement projects involved the implementation of an enterprise resource planning (ERP) system, changing the interface to 26 chosen key suppliers. The new solution required suppliers to log into the system and retrieve production planning data, send purchase orders and manage Grundfos inventory. The producer’s aim was to optimise inventory levels, reduce resource consumption and standardise procedures across the 26 supplier relationships, thereby increasing its purchasing effectiveness. The company also saw benefits for suppliers by granting access to its planning data and IT functionality and thereby opening up possibilities for them to optimise their production planning.
Supplier personnel attended two days of training at Grundfos where they were shown how to use the system. They appeared positive about this and the Grundfos people were comfortable that things would go well. However, several interesting events took place when the go-live date finally arrived.
Incoming logistics personnel at various Grundfos plants started receiving batches without a confirmed bar code and order number. Consequently, the system could not accept the deliveries, which were stranded in the warehouse. Meanwhile, production line employees were asking for supplies. It transpired that personnel at one supplier had not been willing to use the new system to create orders. But they knew Grundfos needed supplies and therefore sent batches without having any orders. In other words, incompatibility remained because the supplier did not adapt to the new system.
Later, Grundfos discovered that the introduction of its new system had been perceived as problematic by this supplier. Adaptation implied that the supplier would have to abandon its successful and effective electronic data interchange (EDI) interface with Grundfos. In addition, adaptation would entail new investment and consume resources specifically aimed at the Grundfos account.
This supplier also regarded the promised benefits as irrelevant. It manufactured large batches to inventory in a traditional mass production set-up and didn’t need the increased visibility and lean planning tools offered by the system. Most of its other customers did not offer vendor-managed inventory data. To make matters worse, the supplier actually found the additional functionality and visibility somewhat confusing. This both irritated and demotivated staff working on the Grundfos account.
Grundfos employees, meanwhile, believed they had communicated the changes and were surprised to learn about the supplier’s perception. They reacted by requesting meetings at supplier facilities in an effort to solve the problems and negotiate adaptations. At these meetings, Grundfos purchasers learned about the issues from the supplier’s perspective. As a result, they agreed to loosen their demands and go for a combined solution, one that meant lower internal effectiveness but restored compatibility between the two companies.
The supplier would stick to large batch production and not use the planning tools provided by the ERP system. However, it agreed to use it to create purchase orders, which meant that flow disruptions of the type described above could be avoided in the future. Despite the operational and other difficulties caused by this episode, the subsequent rounds of communication and negotiation actually had a positive impact on the overall relationship between the two firms.
Chris Ellegaard (ce.marketing@cbs.dk) is associate professor of purchasing and supply management at Copenhagen Business School in Denmark
