As of this writing, all signs are pointing toward recovery, and economic indicators (take your pick) are suggesting a better ending to 2010 than we experienced in 2009. Optimistic whispers in the first few months of this year became clearly audible announcements when Quarter 1 earnings were released. Demand is on the rise, slashed capacity is beginning to fill up, and at many companies, earnings will exceed expectations.
Despite the fact that business is improving in most industries, companies will continue to struggle for some time to overcome the effects of the recession on their supply chains. This is especially true for those that made drastic decisions and acted in ways that altered their supply chain capacity and supplier services.
Customer-supplier relationships have been caught up in this turmoil and have often suffered as a result. The economic upheaval of the past 18 months has left many relationships weakened, damaged, or even severed. With demand increasing, now is the time for buyers and suppliers to assess the current state of their relationships and then address or resolve any concerns. This can be accomplished through a four-step process that includes acknowledging what has happened, identifying the causes of any problems, agreeing on and implementing corrective actions, and following up and maintaining the improved relationship.
These steps should be carried out within your company's supplier relationship management (SRM) program. SRM is a formalized process through which companies build strong, collaborative relationships with their vital suppliers to make improvements and achieve their mutual supply chain goals. If you do not already have a formal SRM program, then following these steps can serve as the foundation for this type of initiative. Customers and suppliers that adopt this process and commit to continuing it in the future will not only reaffirm and strengthen their partnerships but will also ensure that they create an effective, flexible supply chain.
Step 1: Acknowledge past mistakes
Start out by evaluating your current relationship with your most critical suppliers. This assumes that you have already segmented your supply base and identified your most important suppliers. You can follow this process for all suppliers, of course, but to maximize the value of your efforts, it's a good idea to address the most essential suppliers first. Once the top suppliers have been singled out, you can assess the current state of your relationship with each of them individually.
The most important part of this first step is to identify and acknowledge the mistakes that were made on both sides. Ask the following questions and examine your answers carefully: Is this relationship in turmoil? If so, what were the actions that created this tension, and why were those actions taken? What were the outcomes of those actions, and what position are you or your suppliers in now as a result? How does the supplier feel toward you, and how do you feel toward the supplier? Do you deem the relationship to be weakened, damaged, or severed? Is the relationship meaningful for your company, and will improving that relationship bring value to both parties? By answering these questions, you will define the roadmap toward reconciliation and improved effectiveness—or to accepting a separation, if that proves necessary.
Once you have determined that the relationship is worth repairing or saving, it is time to pursue open and honest communication with that supplier. Integrity and trust are the basis for any relationship, and addressing difficult topics in a frank and objective manner will be appreciated by everyone involved.
Coming to the table in an open manner is just the beginning, however. The magnitude of the strife in the relationship will dictate the level of effort required to address it. Weakened relationships, while still requiring direct and concerted effort, can be more easily repaired than those with damaged elements or those that have been severed. A special note on severed relationships: If you are not sincere about reconciliation, then do not waste your time or your supplier's time. The amount of time and patience required to rebuild a previously severed relationship can be substantial, and if either party lacks commitment, true reconciliation becomes doubtful.
Step 2: Find the real source of the problem
The most delicate part of this process involves identifying the root cause of the problems. Bringing in a neutral third party to help both sides review the current relationship and past experiences is one way to maintain objectivity during these discussions. In this type of conversation, emotions and personal involvement tend to rise to the surface, and the "effect" part of "cause and effect" often becomes the focal point. This is a situation you should strive to avoid. If participants fail to consider the root of a problem, only the symptom will be treated, and another one that may be even more harmful to the relationship will inevitably appear.
In reviewing the events of the last 18 months, many customers and suppliers may point to the economy and decreased demand as the cause of relationship strife and discontent. There's no denying that the economy was an underlying factor. As orders plummeted, original equipment manufacturers (OEMs) reduced capacities to attempt to match output and expenses to very weak demand. Many suppliers were unaware of the dramatic steps taken by OEMs and were left with buildup in their inventories of up to 50 percent—with no buyers for that stock in sight. These high inventory levels caused a variety of problems for suppliers and, in the worst cases, resulted in bankruptcy.
While the economy and declining demand clearly play a role here, poor customer-supplier relationships and the lack of strong communication channels appear to be a major cause of the devastating inventory buildup. This might have been avoided by improving forecasting tools or enhancing operational capabilities to more quickly respond to downward shifts in demand. Both are sound actions to pursue at any time, but neither will resolve the lack of customer- supplier communication that will continue to cause problems in the future.
An important question to ask here is: "Were there warning signs before the problem occurred?" As both customer and supplier consider this question, they should reflect upon quantitative (on-time delivery, payment cycles, fill rate) and qualitative (quality, customer service, safety) measurements that may have signaled trouble ahead. Discussing these measurements or signals as well as the customer's and supplier's responses to those developments will help to establish where specific problems originated.
Step 3: Identify and implement corrective actions
Now that the root causes of relationship strife and their leading indicators have been identified, the next step is to define and implement corrective actions. These actions can include procedural changes, changes in safety stocks, increased communication requirements, or even changes in personnel. Observe the impact of these corrective actions on the original symptoms (the "effect") and ensure that the resulting improvements can be objectively measured and quantified. For example, a procedural change could reduce the amount of time required to process a transaction, therefore the number of transactions per hour will increase. Moreover, increasing safety stock and boosting communication requirements (such as sending status updates more frequently) may yield higher service levels, which can also be measured.
It's wise to avoid subjective measurements, which may invite interpretations that lead to more disagreements and conflicts. Be sure to incorporate these measurements into an existing customer-supplier scorecard process, or if none exists, take the opportunity to create one that can be reviewed periodically. The solutions you develop can and should vary based on the type of relationship you have with your supplier:
Carrying out the solutions you agree on most likely will involve increased sharing of operational and business information, such as supply inventory levels, point-of-sales data, and market trends that are beneficial for both customer and supplier. Frequently, an investment in information technology software can facilitate and enhance this kind of extensive data sharing.
Step 4: Monitor and maintain the relationship
After implementing corrective actions, you'll need to conduct management reviews in which progress is discussed, milestones are recognized, and changes to planned milestones are decided upon when necessary. It almost goes without saying that these reviews should be carried out in a timely fashion. The definition of "timeliness," however, depends upon what activities are being measured and on their inherent cycle times. The review should occur within a time frame that allows sufficient data points identifying change to be generated. A premature review will show lack of progress and can lower confidence levels. At the same time, a late review or prolonged periods between reviews can jeopardize momentum or even introduce confusion if environmental components have changed and/or new variables have been introduced since the previous review. Matching management reviews to meaningful data generation will help avoid these pitfalls and keep the momentum toward positive relationship change.
The successful repair of a customer-supplier relationship will heavily depend on the involvement of the leadership teams and the commitment of both sides to the process. If continuing the relationship will bring value to both parties, then their commitment to achieving success (and to maintaining the relationship) should be explicit. In other words, leadership's involvement in supplier relationship management demonstrates the importance of this activity to the organization.
Nevertheless, sustaining the relationship can be difficult even when there is great support from the leadership of both customer and supplier. It makes sense, therefore, to consider turning the relationship management activities that have been developed to address specific problems into a formalized program supporting continued improvement. Leverage the scheduled reviews, progress metrics, and milestones to shape the content of a formal customer- supplier management process. Expand team and individual involvement to other levels of the organization as appropriate.
Remember that a customer-supplier relationship is a two-way street— throughout the "monitor and maintain" phase, both sides should be openminded and go out of their way to learn from each other. For example, the customer can teach the supplier that it needs to provide more than just the right product at the right price, and the supplier can teach the customer that it requires more information than a basic forecast if it is to support the customer's supply chain success.
Relationships: The foundation of success
Now is the time to assess your customer-supplier relationships, as your company recovers from the Great Recession and prepares for an upturn in business. If those relationships are weakened, damaged, or severed, consider taking the following steps: Objectively acknowledge the past and open a clear communication channel with the sincere intent of building a mutually beneficial relationship. Discuss and discover the sources (the "cause") of the problems and develop corrective actions. Be careful not to fall into the trap of addressing symptoms (the "effects"). Follow through with corrective actions and continue to monitor and maintain the relationship. To improve the likelihood of success, ensure that there is leadership support from both customer and supplier.
Remember, solid, healthy customer-supplier relationships form the foundation of an enterprise's success. Companies that continue to suffer because of weakened, damaged, or severed relationships will surely lose to their competition.