THIS EXTRACT FROM EFFECTIVE STRATEGIC SOURCING BY PATRICK BARR © 2022 IS REPRODUCED WITH PERMISSION FROM KOGAN PAGE LTD. TO LEARN MORE ABOUT THE BOOK, VISIT: https://www.koganpage.com/product/effective-strategic-sourcing-9781398605541
Constantly applying pressure to get suppliers to reduce cost will only get you so far, as it is an activity of ever-decreasing returns. Long-term value enhancement in the supply chain can only come from high-quality supplier collaboration. Adversarial buyer-supplier relationships rarely give rise to the development or endurance of a sustainable competitive advantage for either party.
The author’s research indicates that companies who regularly collaborate with their suppliers tend to benefit from higher growth, lower costs, and improved margins relative to those who don’t collaborate. One needs to be smart with supplier engagement. Those who supply strategic or critical items need to be closely managed whilst those who supply more routine products can be monitored using less time-intensive methods. The probability is that critical or strategic suppliers deliver us more than a product or service; they will in all likelihood deliver something that is intrinsic to our own company’s product value proposition. They may even provide us with what differentiates us in the market or in the eyes of our customers. Consequently, a one-size-fits-all approach to supplier management is limited in what it can deliver. An astute category manager or buyer will understand that to sustain value creation, a symbiotic relationship with certain suppliers must be created.
Supplier collaboration is not a label that is applied to any supplier relationship but a well-structured engagement program that will deliver significant positive outcomes for both the buying company and the supplier. Supplier collaboration is labor intensive, requiring participation from individuals from a variety of departments, not just procurement. A collaborative relationship is not a casual engagement; it requires commitment from both companies. Consequently, it is important to pick your suppliers wisely before embarking on an in-depth collaborative approach.
In picking your suppliers for a collaborative relationship, it is usually good to look at what the supplier can bring to the party. Do they have access to or can they invest in innovative R&D, technology, or unique processes? In many cases the supplier has a great set of ideas but may not have the wherewithal to nurture those ideas to become a commercial reality. However, through collaboration with a client company, the supplier may get access to funds or market opportunities that they could not secure on their own. Access to innovation is one of the hallmarks of a successful supplier collaboration initiative. In some cases, the buying company may even provide investment funding to develop an idea.
There are six fundamental components that must be in place for a positive and enduring supplier collaboration program to be successful:
● agreement on strategic intent and clarity of expectations
● multifunctional engagement
● robust communications
● agreement on gain sharing
● disciplined oversight and management of confidential data
● robust technology integration
1. Agreement on strategic intent and clarity of expectations
Beginning with the end in mind is of critical importance if meaningful supplier collaboration is to take place. Both companies will have their own respective business strategies, but for supplier collaboration to work, the strategies must be aligned on some key objectives. Both companies must see the other as being a key enabler in the achievement of their respective strategic goals. The purpose and intent of the collaboration must be clear to all, the critical success factors must be well understood, and there must be alignment between the expected outcomes from the collaboration and the achievement of business strategic objectives. There is no point in collaborating for the sake of it; tangible benefits must accrue from the collaboration for both parties.
Finally, the mindset and way of working need to be defined. The old adversarial or servant–master attitudes that sometimes prevail in buyer–supplier relationships need to be set aside and replaced with behaviors associated with respectful appreciation of different perspectives and a relationship of equals. We must be cognizant of the fact that many of the employees in a supplier organization may never see or even be aware of how the fruits of their labor are ultimately deployed in the market. Consequently, it is good to take time out to illustrate to the supplier’s employees how they make a difference to you and your final customer. The purpose of this is to encourage pride in their work, give them a sense of purpose, and encourage them to produce high-quality product.
2. Multifunctional engagement
In many buyer–supplier relationships, all of the communication between the supplier and the buying company is funneled through the buyer on one side and the sales or customer service representative on the other. Individuals who work in other departments in the buying company rarely speak directly to their counterparts in the supplier and vice versa. The inefficiencies and constraints in such a model will limit the potential for real development in the collaboration.
Real benefits emerge when the respective subject matter experts from both companies get to work directly with each other. In a collaborative model, the buyer or category manager becomes the orchestrator of the engagement between the two companies rather than the focal point or bottleneck of the communication between the companies. Figure 1 illustrates the difference between a traditional and a collaborative supplier engagement model. An example of cross-functional collaboration may involve including the supplier in internal sales and operations planning meetings.
As the collaboration model relies on multifunctional subject matter expert engagement, the buyer or category manager will have to solicit commitment from colleagues in other departments to invest time and effort in enabling the supplier relationship to prosper. This is not a trivial ask, as frequently those individuals not used to working with suppliers may not see a benefit for themselves in their immediate role and as such may not be motivated to participate. In this instance, the buyer will have to work with internal stakeholders to sell the benefits of the collaboration for the business and the achievement of its strategic objectives.
3. Robust communications
Like all long-term initiatives, sustaining the enthusiasm and commitment to the program is underpinned by the publication of regular compelling communications that clearly illustrate the progress being made and recognize the individuals involved. Regular, well-structured updates will keep the collaboration program top-of-mind with key stakeholders and act as a reminder of the strategic rationale for the initiative, thus making it easier to solicit support or retain resources if required. If participants feel that their work on the supplier collaboration is not being recognized by senior management, they will conclude that the initiative is not important and drift away from the process. A robust communication schedule will bolster commitment and also make it easier to hold individuals accountable, as they will know progress is being shared with a broad audience. To enable smooth communications, good tools and supporting mechanisms need to be in place.
4. Agreement on gain sharing
Probably the most contentious aspect of a supplier collaboration approach is gaining agreement on the split of benefits between the supplier and the buyer. The guiding principles should be that the split of benefits must be fair, appropriately recognize performance, and leave both companies with a positive outcome.
The split may be different depending upon the source of the benefit that is gained. For example, the buying company may make a decision to change to a cheaper raw material; in this instance, the supplier may have had little or no involvement, and as such the cost reduction that arises should flow entirely to the buyer. On the other hand, a supplier may make a capital investment that brings about efficiencies that result in a cost reduction; in this instance, the supplier is making an investment and as such should see a fair return on that investment.
Of most importance is that the principles of gain sharing are agreed up front and that a dispute-resolution process is put in place to resolve gain-sharing issues as they arise. The more transparency there is in the cost modeling, the less likely it is that disputes will arise.
5. Disciplined oversight and management of confidential data
A supplier collaboration program is in many respects like any other major initiative—the likelihood of long-term success is directly correlated with the disciplined governance of the program.
A clear scoping document detailing the structure, expectations, and accountabilities of all participants must be in place. A senior steering committee that meets at a reasonably regular cadence (perhaps every two months) should also be in place to oversee progress and nurture the development of the relationship. The oversight process will also monitor the achievement of key metrics. Participants will be motivated by the achievement of key metrics and goals if those achievements are appropriately recognized. If nobody appears to care about the achievement of the goals or metrics, then individuals may be encouraged to focus their attention on other initiatives where they will be appropriately recognized.
The need for disciplined governance becomes really apparent when we look at the transfer of complex data and/or information that is considered sensitive under the European Union’s General Data Protection Regulation (GDPR).1 The exchange and flow of data throughout the supply chain is crucial in enabling all those involved to maximize efficiencies. For example, integrated planning enables buyers and suppliers to be much more efficient in their own manufacturing facilities through the reduction in the number of changeovers, fewer schedule changes, and less of a requirement to deal with reactive “emergency orders.” Visibility to buyer forecasts may also enable the supplier to hold less stock, thus reducing working capital exposure and the risk of obsolescence.
In the services sector, where a supplier is carrying out a function on behalf of a client company, the supplier may need access to sensitive customer price information in order to carry out their duties. The exchange of sensitive GDPR data needs to be managed in a very controlled manner. In practice this will mean that both the buyer and the supplier will have to design processes, ideally with a systematic lock, that prevent the inadvertent leaking of sensitive GDPR data to a third party. The contract will also have to stipulate what the supplier is obliged to do with that data once the transaction has been undertaken or the contract ends. It is of vital importance that there is no ambiguity in terms of ownership of the data, accountability for the data, or the required action expected at each stage in the process. Where a supplier is soliciting information from third parties on behalf of a client company (for example, sales leads or call center customer complaints), it is important that the contract is very clear that the data obtained is owned by the client company and not the supplier who carries out the service. This latter point becomes extremely important when and if the client company decides to change suppliers.
6. Robust technology integration
The benefits arising from very close collaboration will be greatly enhanced if there is tight systems integration between both companies. A fully integrated supply chain of the future will deliver seamless collaboration and transparency. It is extremely important for both companies to align on a technology platform and method of integration at a very early stage in the process. In the past, the full extent of buyer/supplier integration was largely limited to the use of electronic data interchange (EDI), but now the astute use of internet of things (IoT) applications and platforms is becoming more prevalent. Many companies are now working on the near real-time exchange of data between entities and manufacturing locations. Where the quality of data and the process of exchange is reliable, companies can optimize performance through the use of machine learning and artificial intelligence (AI) to good effect. Those that are at a mature stage of supplier collaboration will use cloud-based platforms to connect suppliers and customers, thus enabling visibility through a number of tiers in the supply chain.
As mentioned in the section on disciplined oversight and data management, all companies involved will have to agree on standards as to how platforms and applications will be used; agree on data ownership rights; manage access; and agree on a nomenclature for the naming of products, components, and activities in the supply chain.
NB: All of the six aspects of supplier collaboration outlined above must be in place in advance of the collaboration program being kicked off.
Barriers to collaboration
Whilst the following barriers are in many ways the opposite of the six fundamental components of a successful collaboration program, it is important to be aware of how they may come about or emerge.
Lack of genuine commitment to the process. Given the long-term nature of a supplier collaboration initiative, commitment to the process can wane over time. Participants will become distracted and, in some cases, may well be given new priorities that will not enable them to engage to the level required. It is important to stay close to all participants and get them to reaffirm their commitment. Some people will be reluctant to disappoint you, so they may make a verbal commitment and then not follow through as promised. It is important to let them know that you will be expecting them to lead through their actions and the delivery of the outcomes. If you feel that an individual is not in a position to fully commit, then you may have to get someone else involved.
Senior executive engagement in the collaboration process is critical. It is worth making sure that the relationships are being built up and all participants are being nurtured and kept current. Consequently it may be worth both companies undertaking joint activities, such as sponsoring an event or charity activity that will bring people together in an informal setting.
Lack of agreement upon the success criteria. It is almost impossible to achieve a goal if there is ambiguity on the success criteria, the measurement process, and what constitutes a positive outcome. It is important to be able to articulate for all involved what an excellent result looks like, what a good result looks like, and what a poor result looks like. Everyone must be in agreement upon the success criteria and the prioritization of those criteria. It is highly likely that trade-offs will be required at some stage, so the prioritization is key.
Poor oversight. Like any initiative, if the quality of the governance is poor, then it is likely the outcomes will not be delivered as planned. The creation of an engagement framework, clarity of roles and responsibilities, and a disciplined approach to progress monitoring are essential if a supplier collaboration initiative is to be successful. The role of the executive sponsor cannot be overstated; if they are not seen to be actively involved, committed, and interested in the outcome, then progress is highly unlikely. An individual with strong project management skills will greatly help the quality of the oversight process.
Lack of trust. High-quality supplier collaboration requires a strong level of trust between the parties. If trust is not present, it is highly unlikely that the initiative will get off the ground. You will be able to gauge the level of trust your suppliers have by how open they are in sharing cost information and R&D plans. If it is extremely difficult to obtain access to the true costs and/or R&D plans, then you can assume that trust is low. In fairness to the suppliers, they will be taking a huge risk when sharing such information, so they may be reluctant at first. Consequently, you may have to display your trust in them by sharing some confidential information of your own or by being public about a long-term commitment. It is entirely appropriate for any and all exchanges of confidential information to be done under a nondisclosure agreement (NDA). It may even be appropriate to get the personnel involved in the process to sign individual NDAs.
Perceived unbalanced sharing of the gains. If one party is feeling hard done by, they will be less motivated to invest time and effort in the process. The unlocking of opportunities will only arise if both parties feel they share the risk and a reasonable chance of successfully achieving a decent return for their efforts.
Most companies that have sustained success in business have done so by successfully harnessing the power of their supply ecosystem. There is no doubt that identifying and collaborating with the right suppliers can and does yield greater benefits for both the buyer and the supplier in the long term. Successful organizations like Toyota, P&G, L’Oreal, and Unilever have all been very public about their commitment to developing strong supplier-collaboration initiatives and the role of such initiatives in their success.
Whilst high-quality supplier collaboration is widely believed to deliver significant performance benefits, it is not a trivial engagement. It needs to be set up properly and be underpinned by the existence of six key fundamental attributes:
● Both the supplier and the buyer organizations need to be in full agreement on the strategic intent or purpose of the collaboration and be extremely clear on the success criteria for the engagement.
● The success criteria and vision for the collaboration must be fully endorsed by senior executive management and all stakeholders.
● The collaboration will require multifunctional engagement, so the buyer will need to solicit commitment from a diverse set of participants to make the process work.
● The process will require robust communication with all stakeholders. This communication will open a level of transparency that will enable close cooperation amongst participants and form the basis of the disciplined oversight.
● In order for the process to work, data will need to flow; but when data flows, risks emerge. Strict protocols and standards need to be in place to protect the data and the integrity of the process.
● Finally, as it is expected that the collaboration will yield significant benefits to both parties, there needs to be clear agreement on how gains will be shared between the relevant parties.
Due to the level of investment of IT and human resources, true deep collaboration will probably be reserved for only a handful of important suppliers and customers. Consequently, it is important to pick the right suppliers—typically those that already perform to a high level and have access to innovative R&D, technology, or other unique assets. The focus of the collaboration needs to be on the achievement of positive outcomes for both parties.
To be successful, the collaboration will require significant commitment from all parties involved and a willingness to display a level of trust that may not at first feel comfortable.
1. The General Data Protection Regulation is a European Union law that regulates how personal information about individuals residing in the EU can be collected and processed.
Patrick Barr is the owner and managing partner of Barr Performance Coaching, based in Greater Dublin, Ireland.