from vendor to partner

8/12/2019 From Vendor to Partner

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From Vendor to Partner

Why and How Leading Companies Collaborate

with Suppliers for Competitive Advantage


2/20

Despite the emergence of supplier relationship man-

agement, many types of barriers prevent companies

from transforming traditional purchasing relationships

with key suppliers into powerful collaborations that

can produce substantial value for both parties. This

study was conducted in collaboration with the Interna-

tional Association of Commercial and Contract Man-agement (IACCM) and the Strategic Account Manage-

ment Association (SAMA). The secret of collaborative

customer supplier relationships is not only what the

parties do together but also what they believe about

each other and how they interact. Using recent survey

data, the author discusses the behaviors, perceptions,

and practices that inhibit vendor-customer collabora-

tion; examines several successful partnerships involv-ing leading companies; examines what constitutes a

good business-to-business relationship; and recom-

mends steps companies can take to begin to transform

their key supplier relationships into real partnerships.

2008 Wiley Periodicals, Inc.

In a global marketplace characterized by ever increas-

ing levels of competition, companies need to reorient

themselves to systematically identify and capitalize

on ways to create value with their suppliers. Accord-

ing to a recent study conducted by Industry Week

and IBM, more than 62 percent of purchasing ex-

ecutive respondents said that supplier collaboration

can be vehicles for instilling collabor

are often implemented without sys

to build the trust and mutual comm

to collaboration, and without the c

involvement essential for capitalizin

ation opportunities. Partnering with

not merely purchasing from them, degree of coordination across mu

ies within companies, and a fundam

how the entire enterprise views, and

suppliers.

Why Supplier Relationship Managem

In many fundamental ways, the eme

of supplier relationship managemento customer relationship manageme

as companies have multiple interact

with their customers, so too do they

pliersnegotiating contracts, purcha

logistics and delivery, working on

and specifications, etc. These vario

with suppliers are not discrete and

instead they are accurately and usefas comprising a relationship.

It seems intuitively obvious that there

derstanding customers better by tra

lyzing all of a firms interactions wi

helps a company market to, sell to,

From Vendor to Partner: Why and HowLeading Companies Collaborate withSuppliers for Competitive Advantage J


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With customers, the overwhelming goal is sales.

There may be objectives beyond profitable sales that

matter with some customers (reference-ability

which drives sales with other customers; reducing

cost of sales; getting early insights about needs and

preferences that may represent major market oppor-

tunities; and the like). Nonetheless, these interestsare largely peripheral. The best customer is one who buys

a lot at attractive margins. Companies want as many

of these customers as possible.

But is the best supplier one from which a company

marketplace. It is these suppliers that re

of significant potential value, and tha

programs can identify and target for d

systematic management. Unfortunately

SRM programs are launched withou

clear business case for the results to be

result, too many SRM programs end uministrative activities (meetings, comp

cards, etc.) that do little to enhance c

deliver tangible benefits. (See the Sid

a discussion of what constitutes a we

properly implemented SRM program.

Many companies have implemented a formal SRM function within their procurement organization. Despite an

high degree of interest in SRM, there is no standard definition of the discipline, and much of the business literatu

as well as much actual business practice, is confused and contradictory and at times at cross-purposes with co

Furthermore, with software vendors increasingly at the forefront of the SRM wave, the discipline risks be

customer relationship management (CRM), a powerful concept overshadowed by a myopic focus on software tomanagement, with little attention paid to the critical changes needed in business processes and the interperso

of business relationships.

We define SRM, when properly understood and implemented, as

1. The systematic, enterprisewide assessment of suppliers assets and capabilities with respect to overall busines

2. Determination of what activities to engage in with different suppliers

3. The coordinated planning and execution of all interactions with suppliers in order to maximize the value realiz

those interactions

In practice, SRM almost always entails expanding the scope of interaction with key suppliers beyond simple pur

fulfillment transactions to encompass activities such as joint research and development, sharing of strategic

about marketplace trends, joint demand forecasting, and the like. It often also entails elimination of intera

consume significant resources but add little value for example, time and energy spent specifying exactly how

should execute tasks and then auditing compliance. SRM also involves putting in place the organizational capabil

to manage more complex supplier interactions to manage them strategically, as part of an overall relationship,

tactically through the various and separate organizational and functional silos R&D, Purchasing, Finance, Ma

and others that affect or involve suppliers.

SRM: The Discipline of Systematic Collaboration with Suppliers


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collaborative key suppliers. Similarly, suppliers re-

port delivering an average of 49 percent more value

to their most collaborativekey customers compared

with their least collaborativekey customers.2

Sources of Value

The data above raise several questions, including,

What form does additional value created through col-

laborative relationships with suppliers take? There is

no single, simple answer. Specific opportunities will

vary significantly from company to company (de-

pending on industry, market position, strategy, etc.).

Equally important there will be very different collab-

Defining Collaboration

The data on the value of collaborativ

also raise the question of what consti

tionships. Clear definitions of collabo

to find, and so we propose the follo

ration occurs when two (or more) co

together to achieve one or more com

and/or when they work actively to h

achieve their respective objectives.

Exhibit 2compares the attributes of t

orative relationships with those of hi

tive relationships True collaboration

Preferred access

to new technology

Shared insights

about marketplace

Access to supplier logistics,infrastructure and network

of business relationships

New product or

feature development

Assistance entering newmarkets (geographic,

demographic, etc.)

Preferred access

to capacity during

allocation periods

Most-favored

customer pricing

Joint reduction of

redundant

supply-chain activities

Joint design for

low-cost production

Supplier investment/

shared investment

Bott

sa

Capital expenditure

avoidance

Joint demand

management efforts

Joint demandforecasting

Exchange of

information on market

and consumer trends

Design-to-market

cycle time reductions

Reduction in serious

adverse business events

Top-lin

cont

Exhibit 1. Potential Forms of Value from Customer-Supplier Collaboration


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When is true collaboration worth the effort? Almost

every company has a number of suppliersoften

more than they realizewith whom true collabora-

tion is the key to unlocking tremendous incrementalvalue. Such opportunities to realize potential value

Require close integration of planning and opera-

tions between partners (e.g., extensive sharing of

information, extensive integration of processes, co-

ordinated decision making, etc.)

Call for significant investments in time, effort, and/

or capital by both sides. Entail a high degree of risknotably the risk of op-

portunistic behavior from the other side, and vari-

ous forms of competitive risk.

It is worth noting that suppliers often

continuing to align their efforts, poli

tives around short-term sales objectiv

maximizing the value they deliver to Even those companies that have impl

SRM programs have usually done so

sures, being unable or unwilling to t

these important business relationships

Our research on collaboration indicat

common customer and supplier beh

pede the creation of value (see Exhibi

4, respectively). Several of the most f

behaviorsincluding a short-term focu

nal alignment, lack of transparency, an

to make long-term commitmentsha

toxic effect on customer supplier colla

Exhibit 2. Comparison of Least and Most Collaborative Relationships

Low level of trust; significant fear of

opportunistic behavior by partner

Relatively little information (about plans,

priorities, capabilities, etc.) is shared

Differences (in goals, expertise, strategies, etc.)

produce friction and undermine trust

Conflicts are resolved on the basis of who has

most leverage at any given point in time

High level of trust; confidence that a companys act

will be fair and take partner interests into account

High degree of transparency about plans, priorities,

capabilities, etc.

Focus is on maximizing long-term value, and ensuri

success of partner

Conflicts are resolved on the merits; partners sea

(or create) and apply objective criteria aimed at pro

fair and reasonable outcomes

Differences are respected and leveraged as a sourc

innovation and value creation

Focus (as evidenced by metrics, decision

making, etc.) is on maximizing short-term

unilateral value

Attributes of

leastcollaborative

relationships

Attrib

mostcollab

relatio


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Accsel

Acc

res

1.0

Never

2.0

Sometimes

Lack of internal alignment

Lack of transparency about needs, priorities, etc.

Customers involve suppliers too late

Lack of respect for supplier expertise

Unwilling to make long term commitments

Overly rigid RFPs and bidding processes

Focus on short-term, easily quantifiable savings

Use of one-sided contract language

Not enough access to senior management

Limited access outside of Procurement

Unwilling to enter into at-risk arrangements

Lack of internal coordination

Incentives encourage a focus on short-termsales

instead of building long-term partnerships

Not offering enough transparency

Supplier-sided contract language

Track record of using info about customers

as leverage at the negotiation table

Supplier executive focus on short term revenue

and margin

Tendency to make unrealistic commitments

to win contracts

Unwilling to make long-term commitments to

customers

1.0

Never

2.0

Sometimes

Acco

sell-

Accoresp

Exhibit 3. Types of Customer Behavior That Prevent Suppliers from Delivering More Value

Exhibit 4. Types of Supplier Behavior That Prevent Suppliers from Delivering More Value


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term cost savings. A senior sourcing executive at a

Global 2000 high-tech manufacturing company,which has a relatively mature and sophisticated pro-

curement organization, acknowledged:

We are often driven by short-term savings targets

oriented around price measures to do things we

know do not make sense. For example, we have reg-

ularly switched out key suppliers when we found a

new supplier (often in a low-cost region) offering a

significantly lower bid price. Despite serious reserva-tions about their ability to deliver required volumes

at required quality levels, we made the switch. Then,

as we had suspected, they failed to deliver. The costs

of finding new suppliers, certifying them, and nego-

tiating new contracts far outweigh the original cost

savings And thats before we even try to estimate

prising inasmuch as the management

er relationships is generally owned bytions that are structured, equipped, an

to drive sales and meet quarterly and

goals. Even strategic account managem

typically part of the overall sales orga

porting line, and subject to similar sho

and margin pressures.

The vast majority of companies definperformance metrics and incentives fo

portant suppliers that are strikingly s

they use for the rest of their comm

Even those companies that have impl

er scorecards with key suppliers as pa

Percentage

ofRespon

dents

0%

25%

50%

75%

100%

NOT

motivated by priceconsiderations rather

than total value

SOMEWHAT


than total value

SIGNIFICANTLY


than total value

PRIM

motivatconsidera

than t

Supplier perception of customer motivation by price vs. total value Customer perception of their own motivation by price vs. total value

Exhibit 5. Perceptions of Customer Motivation: Price vs. Total Value


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Lack of Internal Alignment

Suppliers and customers both cite lack of internal

alignment as a major barrier to collaboration and val-

ue creation. Consider the case of a consumer products

company that desired to tap into the R&D expertise

and patent portfolios of key suppliers to develop new

and innovative products. It asked its key suppliers tocontribute ideas and assign researchers and engineers

to joint development teams, and a number enthusi-

astically agreed to do so. Such efforts were, on the

customer side, driven and managed by R&D. Before

long, these efforts yielded some notable successes.

New products were brought to market that incorpo-

rated novel and proprietary supplier inputs. No soon-

er did this happen than the procurement organization

noticed these areas of sole-source spend. Seeking to

commoditize what they identified as high-priced in-

puts, they immediately searched out or tried to de-

velop alternate sources. Before long, they too were

successfulat what they were rewarded for, namely,

reducing costs. Of course, not long after that, R&D

found itself with some very unhappy suppliers com-

plaining about breaches of faith and goodwill, and re-

fusing to participate in further joint development ef-forts. R&D and Procurement were completely out of

sync in their focus on their different respective goals.

Collaboration with key suppliers was largely shut

down for years as a result, with the lost opportunities

on just one critical relationship estimated by key ex-

ecutives to be in the hundreds of millions of dollars.

to HR) all speak the same language w

supplier management and collaboratio

in a coordinated fashion to maximize

ent in key supplier relationships.

Risks (Real and Perceived)

A number of the behaviors cited in 4 as the most significant barriers to d

term value stem from fears and percei

part of suppliers and customers. Cons

ing story from a sourcing executive

company that had entered into a close

orative relationship with a key supplie

This particular supplier had great tectalented engineers. We saw potential

yond a traditional purchasing relation

where we actually worked together o

and development of new technology. W

initial success, and then found ourse

pendent upon them. Sure enough, onc

competitive leverage and lost the abi

them out, their prices began to rise pre

The fear of being extorted acts as an

rier to collaboration, making compan

share information, enter into long-te

arrangements, make investments, or

pliers in ways that reduce leverage an

dependency. In addition to concerns

nistic behavior from business partn

frequently fear that by sharing too tion, they will enable a supplier to ev

rect competitor. Such risks should not

but neither should they be allowed to

often do, reasoned assessment. At m

simply raising the possibility of creatin

i ffi i t t p t j i t h

Suppliers and customers both cite lack of internal

alignment as a major barrier to collaboration and

value creation.


9/20

generally leave critical issues significantly underdis-

cussed, and fail to involve the technical perspectives

and degree of legal and commercial expertise needed

to produce effective contractual arrangements.

Lack of Commitment

Our study found that approximately 90 percent of

suppliers believe that their key customers are only

somewhat or not at all committed to their success,

while about two-thirds of buy-side participants had

similar perceptions about their key suppliers (see Ex-

hibit 6).5 Our research and experience indicate that

this perceived lack of commitment is rooted, to a sig-

nificant degree, in reality. For example, the head of

strategic account management at a packaging supplier

told us that his company had made an enormous in-

vestment to create a dedicated joint innovation center

for a top customer; within a year, after realizing sig-

ifi i i i h f

key customers or key suppliers. One h

ing executive gave this example:

We have periodically negotiated so agg

our key suppliers that we knew we w

them of the margin they needed to ope

business. Sure enough, a year or two tract, theyre out of business, and . . . w

that dwarf the negotiated price saving

on paper. We can see it all coming, but

ourselves.

Such findings should be cause for gr

companies become increasingly reli

suppliers for non-core activities and pertise to drive innovation.

Without a high degree of confidence i

pliers commitment to their success, cu

luctant to share information or enter

0%

25%

50%

75%

100%

NOTvery committed to our success

SOMEWHAT

committed to our success

VERY

committed to ou

Sell-side perception of key customer commitment to their success Buy-side perception of key supplier commitment to their success

Percentage

of

Respondents

Exhibit 6. Key Customer and Supplier Perceptions of Commitment to Each Other


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yield significant value to customers. Consequently,

both sides find themselves locked in a self-perpetuat-

ing cycle where the imperative to avoid loss of lever-

age limits collaboration and constrains the realization

of value.

Creating Value Through Collaboration

Many companies can point to the occasional success

story of how collaboration with a key supplier pro-

duced significant value. Very few companies, how-

ever, have successfully embedded collaboration with

key suppliers into the fabric of how they conduct

business. Even as formal supplier relationship man-

agement programs proliferate, they are rarely imple-mented with an explicit focus on true collaboration,

and have achieved limited results in consequence.

Those companies that are able to institutionalize

consistent collaboration with key suppliers recog-

nize that radical cultural transformation is required.

This entails not only formalizing new ways of inter-

acting with suppliers but also actively dismantling

existing business processes and policies that impede

collaboration.

Expanding the Scope of Interaction

As long as interactions between customers and sup-

pliers occur primarily or exclusively between their

Kraft Foods is a good example of a

has systematically expanded the scop

with suppliers beyond the sales and p

ganizations, with such efforts facilitat

ed SRM team within the procuremen

Rather than continue to rely primar

solutions to technical challenges anddefined specifications based on price

opted what it terms a non prescript

engaging its suppliers as true partner

veloping optimal solutions. For exa

staff from Kraft and a key supplier, al

the suppliers suppliers, worked closel

outset of a major development proj

was commercialization of Snack n Se

packaging system with an innovative r

Beyond the initial patent granted, five

ents are pending.

In addition to collaboration between

and its own technical staffs, Kraft also

senior management interaction with

Joint strategic planning sessions enab

ordinate and thereby enhance effort

footprint in Latin America. In additio

tion sessions held with key suppliers

Brazil, Mexico, and Argentina led to t

of new Kraft products in the region, a

affordable packaging formats that ena

more cost-competitive.

Engaging in joint product developme

aligning technology roadmaps, reengin

processes for greater efficiency, and the

portunities for interaction and value c

quire perspectives and competencies f

Even as formal supplier relationship management

programs proliferate, they are rarely implemented

with an explicit focus on true collaboration, and

have achieved limited results in consequence.


11/20

The need for such involvement and alignmentand

the opportunities they create for additional value

exists not only at a functional or business-unit lev-

el but also across the enterprise. To facilitate such

enterprise-wide alignment, a major pharmaceutical

company established a crossbusiness unit committee

that meets quarterly to review key metrics designedto highlight areas for supplier improvement and de-

velopment; provide early warning of potential prob-

lems across suppliers; and ensure the ongoing health

and viability of preferred suppliers. The committee

compares metrics across suppliers in order to diag-

nose systemic problems. It also identifies new collabo-

ration opportunities that involve multiple suppliers,

and ensures that supplier management best practices

are shared across the company.

Mitigating Risk and Sharing Value

Companies such as Kraft Foods that regularly and

successfully engage in joint research or development

efforts with suppliers have codified ways to analyze

and manage the attendant risks. Most fundamentally,

they systematically analyze the likelihood that a sup-plier would wantand be ableto move into a com-

petitive position. Far more often than not, the answer

turns out to be unambiguously in the negative. They

then weigh the probability-adjusted risk against the

upside benefits of collaboration. More subtly, com-

panies that are successful at collaborating focus less

on avoiding loss of leverage and more on ensuring

that dependence is mutual, and that clear opportuni-ties for future joint gain act as a strong disincentive to

opportunistic behavior.

beyond traditional purchasing boilerp

clearly define intellectual property ow

exclusivity and non-compete obligati

supplier rights to commercialize new

specific markets or after a defined exc

Best practices also include working w

map out and agree to a declining cost innovative products or solutions, as

increased volume produce efficiencie

rating risk-reward sharing and/or cle

and service-level expectations and

agreements.

A win-win arrangement between K

supplier for reducing risk and sharing

uted to their successful collaboration

n Serve development project describ

gained 5 percent incremental sales gro

Chips Ahoy!Chewy cookies. It nego

rights in perpetuity to the packaging

the cookie category, while the suppl

right to pursue significant opportunit

cialize the technology with other custent market segments. The supplier was

tial increase in price, with both sides

aggressive plan for next generation co

Companies that focus on creating jo

still set prices and determine how to

from collaborative efforts like joint opment. Those that are most success

collaboration have found that a fund

in mindset is required. Rather than fo

to use leverage to extract the maxim

suppliers, those who interact with suCompanies such as Kraft Foods that regularly and


12/20

animating insights behind the procedure known as

target costing (or similarly, should-cost analy-

sis) most notably employed by Honda and Toyota.

Rather than relying on leverage, demanding arbitrary

price concessions, utilizing cost-plus formulae, or re-lying on competitive bidding to try to force the lowest

price, Honda and Toyota both work backwards from

estimates of what the market will bear for the final

product. They then work closely with key suppliers to

determine what various components and subsystems

d h ld b l h h

Building Collaborative Relationships

Capitalizing on the power of collaborat

of two major changes: (1) changing (spe

ening) the scope of interactions with ke

whatinteractions occur), and (2) transfoner in which customers and their key s

(i.e., howcustomers and suppliers deal

er). Companies that consistently treat th

tant suppliers as partners rather than v

both theproceduraland the substantiv

Relationship

Dimension 3

Key issues

How much do we trust each other?

In particular

To what extent do we believe theywill do what they say they will do?

To what extent do we believe they

will actively try to help us and avoid

actions that would harm us?

Relationship

Dimension 2

Key issues

How efficiently do we communicate?

How well do we understand each

other (goals, capabilities,

constraints, etc.)?

To what extent do we rely on

persuasion rather than leverage and

coercion to resolve our differences?

How efficiently and creatively do we

solve problems together?

Relationship

Dimension 1

Key issues

What is the actual value

interactions?

What is the potential to

value through any (othe

interactions we might h

What do we do separat

could do more effective

efficiently together?

Procedural Relationship Substantive Relati

Exhibit 7. Three Dimensions of a Business-to-Business Relationship


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Dimension 2, the manner in which interactions are

conductedwhich, together with Dimension 3,

constitutes theproceduralrelationship

Dimension 3, perceptions and beliefs the parties

have about one anotherwhich, together with Di-

mension 2, constitutes theproceduralrelationship

Expanding the scope of interaction between custom-

er and supplier (e.g., joint innovation and early-stage

product design efforts), defining more robust con-

tracts, and implementing more equitable value-shar-

ing arrangements all address the substantive side of

customer-supplier relationships. While taking such

steps is important, efforts to change the substantivedimension of relationships gain only limited traction

absent a systematic focus on transforming the pro-

cedural dimension as well. Companies that are most

successful at collaborating with suppliers demon-

strate a deep understanding of what good relation-

ships entail, and in particular what it takes to create

and sustain them. These companies spend significant

time systematically nurturing and managing the pro-

cedural dimension of their supplier relationships

building trust, investing in understanding their sup-

pliers and helping their suppliers understand them

(strategically, operationally, and culturally), and en-

suring that the interpersonal interactions so crucial to

effective interfirm collaboration are characterized by

mutual respect, creative joint problem solving, and a

commitment to fairness.

Marcia Glenn, senior vice president of Global Pro-

curement for Kraft Foods, articulates Krafts ap-

proach to its key supplier relationships this way:

We want to earn access to their best ideas and their

most talented people by being the company whom

though beliefs and interactions that ch

lationship will, over time, be influenc

each side receives, the procedural dim

ness relationships is also a critical e

creation, as illustrated in Exhibit 8. Th

companies manage theproceduraldim

key supplier relationshipsnot just w

howthey work togetherhas a huge

value they realize.

Both our research and experience wo

ents reveal a near-universal acknowl

importance of the procedural dimens

ship management, marked by constan

executives and managers (both insideProcurement and supply chain manag

munication and trust as critical issue

supplier relationships. At the same

individuals are able to articulate a co

whyand howthe procedural dimens

ships matters, much less how a compa

thing to actively manage such soft an

tangible issues.

A Focus on the Interpersonal Level

Collaborative relationships with k

which are more complex, interdepen

The way in which companies manage the

dimension of their key supplier relati

just whatthey do, but how they wo

has a huge impact on the value they re


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work effectively together. Yet most companies that

implement SRM programs focus on things like sup-

plier summits, new supplier relationship manager

roles, and software tools for more efficient exchange

of information with suppliers, while effectively ignor-

ing the deeper, less tangible but more critical issuesthat lie at the heart of collaborationnamely, the in-

terpersonal dimension of relationship management.

Consider the experience of a manufacturer of indus-

trial equipment that agreed to collaborate with a key

in order to maximize gains for itself.

information was withheld rather tha

proposed by individuals from one com

tacked or ignored by individuals from

six months after it began, the effort w

each side blaming the other (somewhacally) for a combination of incompe

scious sabotage of the effort. The or

case (which ran into the tens of mil

in benefit to each side) was never rea

side wasted the time and effort of so

Net value in a relationship is a

interactions customer and sup

as well as the mannerin which

each company interact (i.e., th

effectiveness with which those

executed)

What individuals believe about each

other, and each others organizations,

affects both whatthey do

or do not do, as well as how

they interact

Over time, the value produced by th

between customer and key supplie

about each other, which creates a f

further affects the scope and natur

interactions

Relationship

Dimension 3

W hat parties believe

about each other

Relationship

Dimension 2

Howparties interact

Relationship

Dimension 1

What interactions

parties engage in

Perceptions of and beliefs about key customers/key

suppliers are largely formed by the collective experiences

individuals have interacting with each other

Exhibit 8. Casual Connections in a Business-to-Business Relationship


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not true. I also thought that a group of engineers

would behave rationally, that something as soft as

relationship management didnt matter. I now know

firsthand that people dont check their emotions at

the office door. All the emotional energy that, in a

collaborative, high-performing team, is channeled

into exchange of ideas and creative debate became,

in this situation, absorbed and reflected by ad hom-inem attacks, defensiveness, and absolutely irratio-

nal, ego-driven arguments about who was more or

less competent, who was ethical and who wasnt,

and who had secret agendas.

Because the procedural aspect of customer-supplier

relationships depends heavily upon the quality of in-

teractions between individuals, individual skills train-ing is a necessary part of a companys comprehensive

strategy for building collaborative relationships. We

have identified five core competencies that lie at the

heart of effective collaboration, and that must be de-

veloped not only among individuals in the procure-

ment organization, but across all individuals who

interact with, or need to begin to interact with, key

suppliers:

The ability to diagnose problems by identifying

each partys contributions to a situation or out-

come, rather than by attempting to allocate and as-

sign blame

The ability to explore and learn from different per-

spectives and opinions, rather than focusing on as-

sessing who or what is right or wrong

The ability to develop solutionsthat maximize joint

value by exploring the underlying interests (needs,

goals, constraints) of each party, rather than by

haggling over positions (preconceived solutions or

d d ) d t di i

tration, anger, anxiety)ones ow

othersin a constructive way so th

impede effective problem solving

tion

A Focus on the Organizational Level

Many companies that address procedly through skills training have process

procedures that militate against the

teach to those who manage relationsh

with key suppliers. Leading companie

successful collaborating with supplier

only in their focus on the procedura

relationship management, but also by

phistication with which they analyze acies, business processes, and managem

enable effective collaboration at both t

al and the organizational level.

Executives across the enterprise need

vironment in which the many individ

act with suppliers are optimally enablaged to exhibit collaborative behavior

formalizing new business processes, a

ing existing business processes, that se

interactions among the myriad individ

er and supplier, including:

Many companies that address proce

solely through skills training have proce

and procedures that militate against t

they teach to those who manage rela

interact, with key suppliers.


16/20

Performance and value measurement

Issue escalation and resolution

As an example, the large pharmaceutical company

mentioned earlier has developed a supplier perfor-

mance management process that is collaborative and

improvement-focused rather than coercive and puni-tive. The companys relationship managers have regu-

lar meetings with their counterparts at suppliers to

review results. Working together, they diagnose po-

tential sources of performance problems and discuss

how they can collaborate to improve the suppliers

performance and to increase the value the supplier

gets from the relationship. Suppliers are also invited

to share feedback with the company on how it canimprove the way it works with them.

KLA-Tencor Corporation (KT), the leading manu-

facturer of inspection and metrology equipment for

the semiconductor industry, is also an example of

an organization willing to adopt new processes and

structures to extend forms of collaboration with key

suppliers. KT invited the CEO of a key supplier tobrainstorm ways that KT could help them grow and

improve their overall competitiveness. This was one

of the factors that led the supplier to make an acqui-

sition to expand both its capabilities and geographic

reach. KT helped the supplier to complete the acquisi-

tion and to leverage the acquisition to grow its busi-

ness beyond the sum of the merged companies. Scott

Paull, KTs chief procurement officer, concludes:

It was in KTs long-term interest to actively help our

supplier be successful. We get the benefit of their im-

proved competitiveness and capabilities. And they

get to grow their business and leverage that with

ficiently high growth that a grant of

rants to KT was triggered. Such a le

engagement and cooperation is evide

and commitment to mutual success th

brings to this relationship, and of the

pursue innovative collaborative prac

the potential to generate significant lo

A New Paradigm for Interpersonal Col

Relationship Management

Companies that aspire to value-maxi

ration with suppliers need to change

tions prevailing perception about wha

tionship good. Without doing so, i

difficult to build and manage such no

rangements. Most individuals are una

a clear definition of what constitutes

ness relationship. Based on observatio

research, however, a very common (

plicitly held) definition emerges:

You do what I want.

I keep you happy.

We like each other.

We have little or no conflict.

This common picture of what constit

Companies that aspire to value

collaboration with suppliers need to

organizations prevailing perception

makes a relationship good.


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tween companies successful when large numbers of

people need to work together, and who those indi-

viduals are regularly changes. To a large extent, this

common view of a good relationship is a fantasywe

might think we want relationships like that with sup-

pliers and other business partners, but were not going

to get them. Moreover, even when such relationships

exist, they rarely produce significant valuethey are

captive vendor relationships; they do not nimbly re-spond to or weather change; and they do not produce

breakthrough savings, substantial innovation, or oth-

erwise contribute to competitive advantage.

It is specifically this way of thinking about relation

like. The common view that good rela

be bought produces an irresolvable

heart of relationship management, wi

sell-side executives and relationship

struggling to choose between, or artfu

ements of, the two basic approaches

hibit 9: Option A, the Hard Approa

maximizing value today (often at the

pliers), recognizing that the tactics eso will likely damage relationships, an

opportunities to realize value over the

Option B, the Soft Approachsacri

business value today in the hopes of

value tomorrow.

OPTION A

The Hard Approach

(focus onsubstantivedimensions)

Seek to minimize dependency andmaximize leverage

Make threats (genuine and/or

bluffing)

Refuse to compromise, or do so

stubbornly

Withhold information, and act

unpredictably to gain advantage

Blame partners for problems, without

examining own contribution

OPTION B

The Soft approach

(focus on proceduraldimensions)

Ignore questions of leverage

Make requests (without consequences)

Be flexible and give in, even to

unreasonable and arbitrary demands

(to preserve relationship)

Be transparent, trustworthy, and

unreservedly trusting

Accept total responsibility for

problems without holding partners

accountable for their actions

OPTION C

Principled Collaboration

(integrated managment of

proceduralandsubstantivedim

Seek to maintain a balance of dependen

Make decisions and resolve disagreements

by discussing what ought to be done.

Jointly identify and apply objective standard

Avoid making, or yielding to, threats

Aim to maximize two-way information sh

disclose information incrementally, as tr

and built. Dont disclose information whe

outweigh the likely benefit.

When problems arise, explore how each

contributed, and how best to solve probl

the distraction and static caused by argu

assignment of blame. Resolve issues o

accountability for the cost of problem so

remediation, side-by-side and on the me

Exhibit 9. Strategies for Managing Supplier Relationships


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good working relationship. This approach to relation-

ship management emphasizes mutual, balanced depen-

dency between partners, as well as mutual accountabil-

ity. This does not mean less stringent expectations for

our suppliers, says Kraft Foods SVP of Global Pro-

curement Marcia Glenn. In many cases it means just

the opposite. But it also means that we are committed

to actively helping our suppliers be successful.8While

such an approach is still relatively rare, Kraft and oth-

ers have demonstrated that it can be learned.

Conclusion

Individual skills training is one lever for instilling the

competencies required for collaboration between cus-

tomers and key suppliers. But companies cannot stopthere. Reward systems, corporate policies, formal

work processes, and management behavior all need to

be aligned in order to produce such behavior consis-

tently across all the parts of the enterprise that interact

with suppliers. Only then can companies institution-

alize a new view of key supplier relationshipsas a

strategic asset and a source of competitive advantage

as opposed to merely a cost centerand new ways

of interacting with suppliersincluding openness to

learning from different perspectives and an ability to

find creative solutions to competing goals and objec-

tives. In this way, arms-length vendor arrangements

can be transformed into true partnerships, and com-

panies can finally unlock the tremendous value that

such relationships can deliver.

Notes

1.2005 Industry Week value-chain survey,

conjunction with IBM Business Consulti

assistance from APQC, September 2005.

2.J. Hughes, J. Weiss, S. Morton, & C. Kim,

collaboration study (Boston, MA: Vantag

The study involved more than 300 compan

500 individual survey responses from bothside executives and relationship managers.

3.Ibid.

4.This is especially true since incentives and ma

at most companies are generally biased in

downside risk, rather than maximizing up

Missed opportunities are, by their natur

hard to quantify, and as a result, often ha

on executive decision making and day

behavior.

5.J. Hughes et al., Customer-supplier collabo

6.Ibid.

7.J. Hughes, Supplier metrics that matte

Autumn, 2005.

8.Ibid.

Jonathan Hughes is a partner at Va

a consulting firm spin-off of the Ha

tion Project, and the head of Vantage

ing and Supplier Management Prac

Massachusetts.


19/20

About Vantage Partners

A management consulting firm spin-off of the

Harvard Negotiation Project,

Vantage Partners helps companies achieve

breakthrough business results by transforming

the way they negotiate with, and manage relationships with

their suppliers, customers, and alliance partners.

To learn more about Vantage Partners or

to access our online library of research and white papers,

please visit www.vantagepartners.com.


20/20

from vendor to partner

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