From Vendor to Partner. Why and How Leading Companies Collaborate with Suppliers for Competitive Advantage

Transcription

1 From Vendor to Partner Why and How Leading Companies Collaborate with Suppliers for Competitive Advantage

2 From Vendor to Partner: Why and How Leading Companies Collaborate with Suppliers for Competitive Advantage JONATHAN HUGHES Despite the emergence of supplier relationship management, 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 International Association of Commercial and Contract Management (IACCM) and the Strategic Account Management 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 collaboration; examines several successful partnerships involving leading companies; examines what constitutes a good business-to-business relationship; and recommends steps companies can take to begin to transform their key supplier relationships into real partnerships Wiley Periodicals, Inc. In a global marketplace characterized by ever increasing levels of competition, companies need to reorient themselves to systematically identify and capitalize on ways to create value with their suppliers. According to a recent study conducted by Industry Week and IBM, more than 62 percent of purchasing executive respondents said that supplier collaboration was the most effective means by which to (further) reduce costs and increase profitability significantly more than those who named global sourcing, and nearly twice as many as named spend analysis. 1 The case for collaboration is not a new one yet it still remains aspiration far more than reality. Supplier relationship management (SRM) programs can be vehicles for instilling collaboration, but they are often implemented without systematic efforts to build the trust and mutual commitment essential to collaboration, and without the cross-functional involvement essential for capitalizing on value creation opportunities. Partnering with key suppliers, not merely purchasing from them, requires a high degree of coordination across multiple boundaries within companies, and a fundamental change in how the entire enterprise views, and interacts with, suppliers. Why Supplier Relationship Management Matters In many fundamental ways, the emerging discipline of supplier relationship management is analogous to customer relationship management (CRM). Just as companies have multiple interactions over time with their customers, so too do they with their suppliers negotiating contracts, purchasing, managing logistics and delivery, working on product design and specifications, etc. These various interactions with suppliers are not discrete and independent instead they are accurately and usefully thought of as comprising a relationship. It seems intuitively obvious that there is value in understanding customers better by tracking and analyzing all of a firm s interactions with them, which helps a company market to, sell to, and service its customers more effectively, leading to more revenue and higher profits. Management can also make more effective decisions about how to allocate finite resources across the customer base, based on a better understanding of the value that might potentially be realized from each customer. However, it is not equally obvious that there is a parallel benefit to understanding suppliers in the same way Vantage Partners. Reprinted by permission of Vantage Partners. All rights reserved. Published online in Wiley InterScience ( Global Business and Organizational Excellence l DOI: /joe l March/April 2008

3 SRM: The Discipline of Systematic Collaboration with Suppliers Many companies have implemented a formal SRM function within their procurement organization. Despite an increasingly high degree of interest in SRM, there is no standard defi nition of the discipline, and much of the business literature on SRM, as well as much actual business practice, is confused and contradictory and at times at cross-purposes with collaboration. Furthermore, with software vendors increasingly at the forefront of the SRM wave, the discipline risks becoming like customer relationship management (CRM), a powerful concept overshadowed by a myopic focus on software tools for data management, with little attention paid to the critical changes needed in business processes and the interpersonal aspects of business relationships. We defi ne SRM, when properly understood and implemented, as 1. The systematic, enterprisewide assessment of suppliers assets and capabilities with respect to overall business strategy 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 realized through those interactions In practice, SRM almost always entails expanding the scope of interaction with key suppliers beyond simple purchasing and fulfi llment transactions to encompass activities such as joint research and development, sharing of strategic information about marketplace trends, joint demand forecasting, and the like. It often also entails elimination of interactions that consume signifi cant resources but add little value for example, time and energy spent specifying exactly how a supplier should execute tasks and then auditing compliance. SRM also involves putting in place the organizational capabilities needed to manage more complex supplier interactions to manage them strategically, as part of an overall relationship, rather than tactically through the various and separate organizational and functional silos R&D, Purchasing, Finance, Manufacturing, and others that affect or involve suppliers. 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 opportunities; and the like). Nonetheless, these interests are 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 buys a lot at low prices? Not in an analogous way. Typically, a high-volume, low-price supplier is a commodity vendor: relatively easy to replace, and by most measures not a source of competitive advantage. An important supplier is distinguished by other factors, such as product and service quality, willingness and ability to innovate, and products and services that help a customer differentiate its own products in the marketplace. It is these suppliers that represent sources of significant potential value, and that effective SRM programs can identify and target for development and systematic management. Unfortunately, a majority of SRM programs are launched without formalizing a clear business case for the results to be achieved. As a result, too many SRM programs end up as a set of administrative activities (meetings, compilation of scorecards, etc.) that do little to enhance collaboration or deliver tangible benefits. (See the Sidebar above for a discussion of what constitutes a well-designed and properly implemented SRM program.) The Case for Collaboration According to a global research study on customersupplier collaboration conducted by Vantage Partners in 2006 and 2007, customers report realizing an average of 40 percent more value from their most collaborative key suppliers compared with their least Global Business and Organizational Excellence March/April 2008

4 Exhibit 1. Potential Forms of Value from Customer-Supplier 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 new markets (geographic, demographic, etc.) Preferred access to capacity during allocation periods Joint demand forecasting Exchange of information on market and consumer trends Top-line revenue contribution Supplier investment/ shared investment Most-favored customer pricing Design-to-market cycle time reductions Reduction in serious adverse business events Capital expenditure avoidance Joint reduction of redundant supply-chain activities Bottom-line savings Joint demand management efforts Joint design for low-cost production collaborative key suppliers. Similarly, suppliers report delivering an average of 49 percent more value to their most collaborative key customers compared with their least collaborative key customers. 2 Sources of Value The data above raise several questions, including, What form does additional value created through collaborative relationships with suppliers take? There is no single, simple answer. Specific opportunities will vary significantly from company to company (depending on industry, market position, strategy, etc.). Equally important, there will be very different collaboration opportunities with different suppliers. While not exhaustive, Exhibit 1 provides a framework within which executives across the enterprise can think about the potential forms of value that can be realized through effective collaboration, and through more strategic and systematic management of interactions with suppliers. Defining Collaboration The data on the value of collaborative relationships also raise the question of what constitutes such relationships. Clear definitions of collaboration are hard to find, and so we propose the following: Collaboration occurs when two (or more) companies work together to achieve one or more common objectives, and/or when they work actively to help each other achieve their respective objectives. Exhibit 2 compares the attributes of the least collaborative relationships with those of highly collaborative relationships. True collaboration is not business as usual. It requires dismantling traditional ways of thinking about and managing traditional purchasing relationships. For collaboration to occur, customers and suppliers need to view and relate to each other as partners and commit to joint value creation, and to enabling each other s success. (We ll examine the dynamics in these relationships in more depth later in the article.) March/April 2008 Global Business and Organizational Excellence

5 Exhibit 2. Comparison of Least and Most Collaborative Relationships Attributes of least collaborative relationships Attributes of most collaborative relationships Low level of trust; significant fear of opportunistic behavior by partner Relatively little information (about plans, priorities, capabilities, etc.) is shared Focus (as evidenced by metrics, decision making, etc.) is on maximizing short-term unilateral value 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 company s actions 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 ensuring success of partner Differences are respected and leveraged as a source of innovation and value creation Conflicts are resolved on the merits ; partners search out (or create) and apply objective criteria aimed at producing fair and reasonable outcomes When is true collaboration worth the effort? Almost every company has a number of suppliers often more than they realize with whom true collaboration is the key to unlocking tremendous incremental value. Such opportunities to realize potential value Require close integration of planning and operations between partners (e.g., extensive sharing of information, extensive integration of processes, coordinated decision making, etc.) Call for significant investments in time, effort, and/ or capital by both sides. Entail a high degree of risk notably the risk of opportunistic behavior from the other side, and various forms of competitive risk. Barriers to Collaboration Despite stated aspirations to increase collaboration with suppliers, and significant evidence that points to the value of increased supply-chain collaboration, most companies continue to keep their suppliers at arm s length, and treat their strategic suppliers in ways that are only marginally or intermittently different from the way they treat their commodity vendors. It is worth noting that suppliers often reciprocate by continuing to align their efforts, polices, and incentives around short-term sales objectives, rather than maximizing the value they deliver to key customers. Even those companies that have implemented formal SRM programs have usually done so with half measures, being unable or unwilling to truly transform these important business relationships. Our research on collaboration indicates a number of common customer and supplier behaviors that impede the creation of value (see Exhibit 3 and Exhibit 4, respectively). Several of the most frequently cited behaviors including a short-term focus, lack of internal alignment, lack of transparency, and unwillingness to make long-term commitments have an especially toxic effect on customer-supplier collaboration. Emphasis on Short-Term Gains Rather Than Long-Term Value Building and sustaining collaborative relationships requires a willingness and ability to consistently avoid actions that create short-term benefits but undermine significantly greater potential to realize long-term value. Global Business and Organizational Excellence March/April 2008

6 Exhibit 3. Types of Customer Behavior That Prevent Suppliers from Delivering More Value Focus on short-term, easily quantifiable savings 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 Use of one-sided contract language Not enough access to senior management Limited access outside of Procurement According to sell-side respondents According to buy-side respondents 1.0 Never 2.0 Sometimes 3.0 Often Exhibit 4. Types of Supplier Behavior That Prevent Suppliers from Delivering More Value Supplier executive focus on short term revenue and margin 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 Tendency to make unrealistic commitments to win contracts Unwilling to make long-term commitments to customers 1.0 Never 2.0 Sometimes According to sell-side respondents According to buy-side respondents 3.0 Often Data from Vantage Partners study reveals that nearly three-quarters of supplier respondents and about two-fifths of customer-side respondents believe that in their most important relationships, the customer is either significantly or primarily motivated by a focus on price rather than total value (see Exhibit 5). Another quarter of the suppliers, along with more than half of the customer-side respondents, see the customer as somewhat motivated by price rather than total value in these key relationships. 3 This is a devastating indictment. The average procurement organization is focused on and rewarded for price reductions and short- March/April 2008 Global Business and Organizational Excellence

7 Exhibit 5. Perceptions of Customer Motivation: Price vs. Total Value 100% Supplier perception of customer motivation by price vs. total value Customer perception of their own motivation by price vs. total value Percentage of Respondents 75% 50% 25% 0% NOT motivated by price considerations rather than total value SOMEWHAT motivated by price considerations rather than total value SIGNIFICANTLY motivated by price considerations rather than total value PRIMARILY motivated by price considerations rather than total value term cost savings. A senior sourcing executive at a Global 2000 high-tech manufacturing company, which has a relatively mature and sophisticated procurement 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 regularly switched out key suppliers when we found a new supplier (often in a low-cost region) offering a significantly lower bid price. Despite serious reservations 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 negotiating new contracts far outweigh the original cost savings. And that s before we even try to estimate the lost sales that occur during the transition. The over-emphasis on short-term and overly narrow measures of value is endemic to both customers and suppliers. The goals and incentives that shape the way companies act toward their customers are, in general, overwhelmingly focused on selling, not on delivering maximum total value to customers. This is not surprising inasmuch as the management of key customer relationships is generally owned by sales organizations that are structured, equipped, and compensated to drive sales and meet quarterly and annual revenue goals. Even strategic account management groups are typically part of the overall sales organization and reporting line, and subject to similar short-term revenue and margin pressures. The vast majority of companies defines and employs performance metrics and incentives for their most important suppliers that are strikingly similar to those they use for the rest of their commodity vendors. Even those companies that have implemented supplier scorecards with key suppliers as part of their SRM programs generally focus on short-term objectives and easy-to-measure indicators rather than the drivers and realization of long-term total value. Because shortterm metrics and incentives drive behavior and thus, ultimately, results, they systematically act to limit collaboration and constrain the investments (of time, effort, and capital) without which major opportunities to realize additional value cannot be realized. 4 Global Business and Organizational Excellence March/April 2008

8 Lack of Internal Alignment Suppliers and customers both cite lack of internal alignment as a major barrier to collaboration and value 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 to contribute ideas and assign researchers and engineers to joint development teams, and a number enthusiastically 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 incorporated novel and proprietary supplier inputs. No sooner did this happen than the procurement organization noticed these areas of sole-source spend. Seeking to commoditize what they identified as high-priced inputs, they immediately searched out or tried to develop alternate sources. Before long, they too were successful at what they were rewarded for, namely, reducing costs. Of course, not long after that, R&D found itself with some very unhappy suppliers complaining about breaches of faith and goodwill, and refusing to participate in further joint development efforts. 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 executives to be in the hundreds of millions of dollars. Suppliers and customers both cite lack of internal alignment as a major barrier to collaboration and value creation. Collaboration with suppliers can only happen when there is a high degree of alignment and collaboration within both customer and supplier organizations. And this requires that various functional areas across the enterprise (from Procurement, to R&D, to Marketing, to HR) all speak the same language when it comes to supplier management and collaboration, and all work in a coordinated fashion to maximize the value inherent in key supplier relationships. Risks (Real and Perceived) A number of the behaviors cited in Exhibits 3 and 4 as the most significant barriers to delivering longterm value stem from fears and perceived risks on the part of suppliers and customers. Consider the following story from a sourcing executive at a microchip company that had entered into a closer, more collaborative relationship with a key supplier: This particular supplier had great technology and talented engineers. We saw potential to move beyond a traditional purchasing relationship into one where we actually worked together on the design and development of new technology. We did so with initial success, and then found ourselves very dependent upon them. Sure enough, once we gave up competitive leverage and lost the ability to switch them out, their prices began to rise precipitously. The fear of being extorted acts as an enormous barrier to collaboration, making companies reluctant to share information, enter into long-term contractual arrangements, make investments, or work with suppliers in ways that reduce leverage and create greater dependency. In addition to concerns about opportunistic behavior from business partners, companies frequently fear that by sharing too much information, they will enable a supplier to evolve into a direct competitor. Such risks should not be discounted, but neither should they be allowed to escape, as they often do, reasoned assessment. At many companies, simply raising the possibility of creating a competitor is sufficient to prevent joint research or development efforts with suppliers. Reliance on traditional vendor contract language to govern integrated, collaborative arrangements leaves both sides unprotected, and indeed, a traditional customer-vendor approach to negotiating contracts will March/April 2008 Global Business and Organizational Excellence

9 Exhibit 6. Key Customer and Supplier Perceptions of Commitment to Each Other Percentage of Respondents 100% 75% 50% 25% Sell-side perception of key customer commitment to their success Buy-side perception of key supplier commitment to their success 0% NOT very committed to our success SOMEWHAT committed to our success VERY committed to our success generally leave critical issues significantly underdiscussed, 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 Exhibit 6). 5 Our research and experience indicate that this perceived lack of commitment is rooted, to a significant degree, in reality. For example, the head of strategic account management at a packaging supplier told us that his company had made an enormous investment to create a dedicated joint innovation center for a top customer; within a year, after realizing significant innovation gains, that customer put most of its business with this supplier out to bid. Such bitter experiences are hard to overcome. Buy-side and sell-side executives and relationship managers are often aware of a similar lack of commitment on the part of their own company toward its key customers or key suppliers. One high-tech sourcing executive gave this example: We have periodically negotiated so aggressively with our key suppliers that we knew we were depriving them of the margin they needed to operate a healthy business. Sure enough, a year or two into the contract, they re out of business, and... we incur losses that dwarf the negotiated price savings we achieved on paper. We can see it all coming, but we can t stop ourselves. Such findings should be cause for grave concern as companies become increasingly reliant on outside suppliers for non-core activities and on external expertise to drive innovation. Without a high degree of confidence in their key suppliers commitment to their success, customers are reluctant to share information or enter into long-term relationships, fearing a loss of leverage through which to ensure effective performance from suppliers whose genuine commitment they (with reason) doubt. In the absence of a genuine commitment from key customers to their success, and subject to the uncertainty of short-term contracts, suppliers are similarly reluctant to share information or make investments that could Global Business and Organizational Excellence March/April 2008

10 yield significant value to customers. Consequently, both sides find themselves locked in a self-perpetuating cycle where the imperative to avoid loss of leverage 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 produced significant value. Very few companies, however, have successfully embedded collaboration with key suppliers into the fabric of how they conduct business. 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. Those companies that are able to institutionalize consistent collaboration with key suppliers recognize that radical cultural transformation is required. This entails not only formalizing new ways of interacting with suppliers but also actively dismantling existing business processes and policies that impede collaboration. 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. Expanding the Scope of Interaction As long as interactions between customers and suppliers occur primarily or exclusively between their sales and procurement personnel, significant value is bound to be lost. Not surprisingly, broadening supplier access to stakeholders beyond Procurement emerged as a top priority from our research, with roughly 60 percent of buy-side respondents and 70 percent of sell-side respondents noting this as a critical means of increasing the value customers derive from their key suppliers. 6 Kraft Foods is a good example of a company that has systematically expanded the scope of interaction with suppliers beyond the sales and procurement organizations, with such efforts facilitated by a dedicated SRM team within the procurement organization. Rather than continue to rely primarily on in-house solutions to technical challenges and then source to defined specifications based on price, Kraft has adopted what it terms a non prescriptive approach engaging its suppliers as true partners in jointly developing optimal solutions. For example, technical staff from Kraft and a key supplier, along with one of the supplier s suppliers, worked closely from the very outset of a major development project. The result was commercialization of Snack n Serve, a patented packaging system with an innovative re-close feature. Beyond the initial patent granted, five additional patents are pending. In addition to collaboration between the supplier s and its own technical staffs, Kraft also has promoted senior management interaction with key suppliers. Joint strategic planning sessions enabled Kraft to coordinate and thereby enhance efforts to expand its footprint in Latin America. In addition, joint innovation sessions held with key suppliers in Costa Rica, Brazil, Mexico, and Argentina led to the introduction of new Kraft products in the region, as well as to new affordable packaging formats that enable Kraft to be more cost-competitive. Engaging in joint product development, sharing and aligning technology roadmaps, reengineering business processes for greater efficiency, and the like are all opportunities for interaction and value creation that require perspectives and competencies from across the enterprise (R&D, Manufacturing, Logistics, Marketing, etc.), at both customer and supplier. Likewise, comprehensively assessing a company s long-term goals and challenges, and analyzing where and how to best leverage a supplier s expertise and capabilities in response, requires the involvement of multiple parties within the customer all with different ideas, goals, and ways of operating. March/April 2008 Global Business and Organizational Excellence

11 The need for such involvement and alignment and the opportunities they create for additional value exists not only at a functional or business-unit level but also across the enterprise. To facilitate such enterprise-wide alignment, a major pharmaceutical company established a cross business unit committee that meets quarterly to review key metrics designed to highlight areas for supplier improvement and development; provide early warning of potential problems across suppliers; and ensure the ongoing health and viability of preferred suppliers. The committee compares metrics across suppliers in order to diagnose systemic problems. It also identifies new collaboration 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 supplier would want and be able to move into a competitive 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, companies that are successful at collaborating focus less on avoiding loss of leverage and more on ensuring that dependence is mutual, and that clear opportunities for future joint gain act as a strong disincentive to opportunistic behavior. 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. Such companies also expend the time and effort required to put in place innovative contracts that go beyond traditional purchasing boilerplate in order to clearly define intellectual property ownership; clarify exclusivity and non-compete obligations; and define supplier rights to commercialize new technology in specific markets or after a defined exclusivity period. Best practices also include working with suppliers to map out and agree to a declining cost curve for newly innovative products or solutions, as experience and increased volume produce efficiencies, and incorporating risk-reward sharing and/or clear performance and service-level expectations and incentives into agreements. A win-win arrangement between Kraft and a key supplier for reducing risk and sharing value contributed to their successful collaboration on the Snack n Serve development project described above. Kraft gained 5 percent incremental sales growth for Kraft s Chips Ahoy! Chewy cookies. It negotiated exclusive rights in perpetuity to the packaging technology in the cookie category, while the supplier retained the right to pursue significant opportunities to commercialize the technology with other customers in different market segments. The supplier was granted an initial increase in price, with both sides agreeing to an aggressive plan for next generation cost reductions. Companies that focus on creating joint value must still set prices and determine how to share the gains from collaborative efforts like joint product development. Those that are most successful engaging in collaboration have found that a fundamental change in mindset is required. Rather than focusing on how to use leverage to extract the maximum value from suppliers, those who interact with suppliers need to begin to assess what is the most fair and appropriate way to allocate gains and share jointly created value with key suppliers. Instead of adversarial or coercive tactics, many of which revolve around explicit or implied threats to terminate the relationship or reduce its scope, both sides, metaphorically (if not literally), sit side by side to come up with a mutually acceptable solution based on objective criteria. This is one of the Global Business and Organizational Excellence March/April 2008

12 Exhibit 7. Three Dimensions of a Business-to-Business Relationship Procedural Relationship Substantive Relationship Relationship Dimension 3 Relationship Dimension 2 Relationship Dimension 1 Key issues How much do we trust each other? In particular To what extent do we believe they will 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? 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? Key issues What is the actual value of our interactions? What is the potential to realize value through any (other) interactions we might have? What do we do separately that we could do more effectively or efficiently together? animating insights behind the procedure known as target costing (or similarly, should-cost analysis) most notably employed by Honda and Toyota. Rather than relying on leverage, demanding arbitrary price concessions, utilizing cost-plus formulae, or relying 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 can and should cost. Obviously, such an approach does not eliminate contention, but it does transform inevitably difficult negotiations over value allocation into a joint endeavor. Conducted in a spirit of true commitment to a fair outcome for both parties, it also opens the door to creative problem solving in a way that more common and adversarial approaches do not enable and in fact actively shut down. Building Collaborative Relationships Capitalizing on the power of collaboration is a function of two major changes: (1) changing (specifically, broadening) the scope of interactions with key suppliers (i.e., what interactions occur), and (2) transforming the manner in which customers and their key suppliers interact (i.e., how customers and suppliers deal with one another). Companies that consistently treat their most important suppliers as partners rather than vendors work at both the procedural and the substantive aspects of the relationship. The Anatomy of a B2B Relationship The model shown in Exhibit 7 defines three dimensions of business-to-business (B2B) relationships: Dimension 1, the collective set of interactions between two or more parties the substantive relationship March/April 2008 Global Business and Organizational Excellence

13 Dimension 2, the manner in which interactions are conducted which, together with Dimension 3, constitutes the procedural relationship Dimension 3, perceptions and beliefs the parties have about one another which, together with Dimension 2, constitutes the procedural relationship Expanding the scope of interaction between customer and supplier (e.g., joint innovation and early-stage product design efforts), defining more robust contracts, and implementing more equitable value-sharing arrangements all address the substantive side of customer-supplier relationships. While taking such steps is important, efforts to change the substantive dimension of relationships gain only limited traction absent a systematic focus on transforming the procedural dimension as well. Companies that are most successful at collaborating with suppliers demonstrate a deep understanding of what good relationships entail, and in particular what it takes to create and sustain them. These companies spend significant time systematically nurturing and managing the procedural dimension of their supplier relationships building trust, investing in understanding their suppliers and helping their suppliers understand them (strategically, operationally, and culturally), and ensuring 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 Procurement for Kraft Foods, articulates Kraft s approach 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 they trust most, the one that works with them most effectively to help them improve, and the company most willing and able to share information and resources with them to achieve more than either of us could independently. 7 People tend to think of a good business relationship only as a consequence of the value it creates. Although beliefs and interactions that characterize a relationship will, over time, be influenced by the value each side receives, the procedural dimension of business relationships is also a critical enabler of value creation, as illustrated in Exhibit 8. The way in which companies manage the procedural dimension of their key supplier relationships not just what they do, but how they work together has a huge impact on the value they realize. The way in which companies manage the procedural dimension of their key supplier relationships not just what they do, but how they work together has a huge impact on the value they realize.. Both our research and experience working with clients reveal a near-universal acknowledgment of the importance of the procedural dimension of relationship management, marked by constant references by executives and managers (both inside and outside of Procurement and supply chain management) to communication and trust as critical issues in customersupplier relationships. At the same time, very few individuals are able to articulate a coherent view of why and how the procedural dimension of relationships matters, much less how a company can do anything to actively manage such soft and seemingly intangible issues. A Focus on the Interpersonal Level Collaborative relationships with key suppliers which are more complex, interdependent, and strategic than simple purchasing relationships depend in large part on the ability of multiple individuals on both sides to regularly solve problems, make decisions, and resolve conflicts in the face of multiple, competing priorities some shared, and some not. Because more complex interactions tend to require the application of human intelligence and judgment, their success depends on whether people are able to Global Business and Organizational Excellence March/April 2008

14 Exhibit 8. Casual Connections in a Business-to-Business Relationship Perceptions of and beliefs about key customers/key suppliers are largely formed by the collective experiences individuals have interacting with each other Net value in a relationship is a function of what interactions customer and supplier engage in, as well as the manner in which individuals from each company interact (i.e., the efficiency and effectiveness with which those interactions are executed) Relationship Dimension 3 What parties believe about each other Relationship Dimension 2 How parties interact Relationship Dimension 1 What interactions parties engage in What individuals believe about each other, and each other s organizations, affects both what they do or do not do, as well as how they interact Over time, the value produced by the interactions between customer and key supplier affects beliefs about each other, which creates a feedback loop that further affects the scope and nature of their future interactions work effectively together. Yet most companies that implement SRM programs focus on things like supplier summits, new supplier relationship manager roles, and software tools for more efficient exchange of information with suppliers, while effectively ignoring the deeper, less tangible but more critical issues that lie at the heart of collaboration namely, the interpersonal dimension of relationship management. Consider the experience of a manufacturer of industrial equipment that agreed to collaborate with a key supplier on a new product design that would yield better performance as well as lower manufacturing cost and lower defect rates. A joint engineering team of the best and the brightest from each company was assembled. Unfortunately, the individuals on the team neither respected nor trusted one another. They also believed that the other company was committed to systematically taking advantage of its business partners in order to maximize gains for itself. Consequently, information was withheld rather than shared, ideas proposed by individuals from one company were attacked or ignored by individuals from the other, and six months after it began, the effort was disbanded, each side blaming the other (somewhat schizophrenically) for a combination of incompetence and conscious sabotage of the effort. The original business case (which ran into the tens of millions of dollars in benefit to each side) was never realized, and each side wasted the time and effort of some of its most talented people for half a year. Debriefing the effort a year later, one of the executive architects of the deal explained: I really thought that if the business case was there, although it might be difficult, rational self-interest would inevitably lead to success. Now I know that s March/April 2008 Global Business and Organizational Excellence

15 not true. I also thought that a group of engineers would behave rationally, that something as soft as relationship management didn t matter. I now know firsthand that people don t 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 hominem attacks, defensiveness, and absolutely irrational, ego-driven arguments about who was more or less competent, who was ethical and who wasn t, and who had secret agendas. Because the procedural aspect of customer-supplier relationships depends heavily upon the quality of interactions between individuals, individual skills training is a necessary part of a company s comprehensive strategy for building collaborative relationships. We have identified five core competencies that lie at the heart of effective collaboration, and that must be developed not only among individuals in the procurement 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 party s contributions to a situation or outcome, rather than by attempting to allocate and assign blame The ability to explore and learn from different perspectives and opinions, rather than focusing on assessing who or what is right or wrong The ability to develop solutions that maximize joint value by exploring the underlying interests (needs, goals, constraints) of each party, rather than by haggling over positions (preconceived solutions or demands) and trading concessions The ability to resolve conflicts through the identification and application of relevant criteria, rather than through threats, bribes, or coercion, thereby setting useful precedents for the efficient resolution of future conflicts The ability to manage strong emotions (e.g., frustration, anger, anxiety) one s own and those of others in a constructive way so that they do not impede effective problem solving and collaboration A Focus on the Organizational Level Many companies that address procedural issues solely through skills training have processes, policies, and procedures that militate against the very skills they teach to those who manage relationships, or interact, with key suppliers. Leading companies that are most successful collaborating with suppliers stand out, not only in their focus on the procedural dimension of relationship management, but also by virtue of the sophistication with which they analyze and adjust policies, business processes, and management systems to enable effective collaboration at both the interpersonal and the organizational level. Many companies that address procedural issues solely through skills training have processes, policies, and procedures that militate against the very skills they teach to those who manage relationships, or interact, with key suppliers. Executives across the enterprise need to create an environment in which the many individuals who interact with suppliers are optimally enabled and encouraged to exhibit collaborative behaviors. This requires formalizing new business processes, as well as adjusting existing business processes, that serve to structure interactions among the myriad individuals at customer and supplier, including: Development of sourcing strategies Supplier evaluation and selection Negotiating and contracting Supplier development Joint business planning Coordination of day-to-day operations Global Business and Organizational Excellence March/April 2008

16 Performance and value measurement Issue escalation and resolution As an example, the large pharmaceutical company mentioned earlier has developed a supplier performance management process that is collaborative and improvement-focused rather than coercive and punitive. The company s relationship managers have regular meetings with their counterparts at suppliers to review results. Working together, they diagnose potential sources of performance problems and discuss how they can collaborate to improve the supplier s 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 can improve the way it works with them. KLA-Tencor Corporation (KT), the leading manufacturer 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 to brainstorm 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 acquisition to expand both its capabilities and geographic reach. KT helped the supplier to complete the acquisition and to leverage the acquisition to grow its business beyond the sum of the merged companies. Scott Paull, KT s chief procurement officer, concludes: It was in KT s long-term interest to actively help our supplier be successful. We get the benefit of their improved competitiveness and capabilities. And they get to grow their business and leverage that with other customers as well. KT also received warrants that give us the option to take an equity position in the firm if we so choose, and that could be beneficial to both of us. As is often the case with collaborative efforts, it will take years to fully evaluate the benefits. Nonetheless, in an early sign of success, the supplier achieved sufficiently high growth that a grant of additional warrants to KT was triggered. Such a level of strategic engagement and cooperation is evidence of the trust and commitment to mutual success that each partner brings to this relationship, and of the willingness to pursue innovative collaborative practices that have the potential to generate significant long-term value. A New Paradigm for Interpersonal Collaboration and Relationship Management Companies that aspire to value-maximizing collaboration with suppliers need to change their organization s prevailing perception about what makes a relationship good. Without doing so, it is exceedingly difficult to build and manage such nontraditional arrangements. Most individuals are unable to articulate a clear definition of what constitutes a good business relationship. Based on observation and extensive research, however, a very common (but usually implicitly held) definition emerges: You do what I want. I keep you happy. We like each other. We have little or no conflict. Companies that aspire to value-maximizing collaboration with suppliers need to change their organization s prevailing perception about what makes a relationship good. This common picture of what constitutes a good relationship provides little useful guidance on how to build one. Insofar as it involves a relationship where suppliers do what customers want, it is unrealistic especially if suppliers hold a similar theory of what constitutes a good relationship (namely, that their customers do what the supplier wants). Moreover, while interpersonal affinity may be helpful, it is not nearly enough to make a complex relationship be- March/April 2008 Global Business and Organizational Excellence

17 Exhibit 9. Strategies for Managing Supplier Relationships OPTION A The Hard Approach (focus on substantive dimensions) Seek to minimize dependency and maximize 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 procedural dimensions) 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 procedural and substantive dimensions) Seek to maintain a balance of dependency Make decisions and resolve disagreements with partners by discussing what ought to be done. Jointly identify and apply objective standard and criteria. Avoid making, or yielding to, threats Aim to maximize two-way information sharing, but disclose information incrementally, as trust is earned and built. Don t disclose information when the risks outweigh the likely benefit. When problems arise, explore how each side contributed, and how best to solve problems. Avoid the distraction and static caused by arguing about assignment of blame. Resolve issues of accountability for the cost of problem solution or remediation, side-by-side and on the merits. tween companies successful when large numbers of people need to work together, and who those individuals are regularly changes. To a large extent, this common view of a good relationship is a fantasy we might think we want relationships like that with suppliers and other business partners, but we re not going to get them. Moreover, even when such relationships exist, they rarely produce significant value they are captive vendor relationships; they do not nimbly respond to or weather change; and they do not produce breakthrough savings, substantial innovation, or otherwise contribute to competitive advantage. It is specifically this way of thinking about relationships that drives (again, usually unconsciously) most companies to believe that building (or preserving) a good working relationship means that they cannot assertively pursue their business objectives, and that they must make substantive concessions by not aggressively negotiating for the best price, not holding suppliers rigorously accountable for commitments made around project scope or delivery schedules, and the like. The common view that good relationships must be bought produces an irresolvable paradox at the heart of relationship management, with buy-side and sell-side executives and relationship managers often struggling to choose between, or artfully combine elements of, the two basic approaches outlined in Exhibit 9: Option A, the Hard Approach focus on maximizing value today (often at the expense of suppliers), recognizing that the tactics employed to do so will likely damage relationships, and hence reduce opportunities to realize value over the longer term; or Option B, the Soft Approach sacrifice substantive business value today in the hopes of getting greater value tomorrow. Fortunately, there is a third way, Option C in Exhibit 9, a more constructive approach we term Principled Collaboration. This approach coherently integrates both the substantive and the procedural dimensions of relationship management, and transcends the false choice of either relying on leverage to achieve business results or making concessions to preserve or buy a

18 good working relationship. This approach to relationship management emphasizes mutual, balanced dependency between partners, as well as mutual accountability. This does not mean less stringent expectations for our suppliers, says Kraft Foods SVP of Global Procurement 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. 8 While such an approach is still relatively rare, Kraft and others have demonstrated that it can be learned. Conclusion Individual skills training is one lever for instilling the competencies required for collaboration between customers and key suppliers. But companies cannot stop there. Reward systems, corporate policies, formal work processes, and management behavior all need to be aligned in order to produce such behavior consistently across all the parts of the enterprise that interact with suppliers. Only then can companies institutionalize a new view of key supplier relationships as a strategic asset and a source of competitive advantage as opposed to merely a cost center and new ways of interacting with suppliers including openness to learning from different perspectives and an ability to find creative solutions to competing goals and objectives. In this way, arms-length vendor arrangements can be transformed into true partnerships, and companies can finally unlock the tremendous value that such relationships can deliver. Notes Industry Week value-chain survey, Industry Week in conjunction with IBM Business Consulting Services, with assistance from APQC, September J. Hughes, J. Weiss, S. Morton, & C. Kim, Customer-supplier collaboration study (Boston, MA: Vantage Partners, 2007). The study involved more than 300 companies and more than 500 individual survey responses from both buyside and sellside executives and relationship managers. 3. Ibid. 4. This is especially true since incentives and management systems at most companies are generally biased in favor of limiting downside risk, rather than maximizing upside opportunity. Missed opportunities are, by their nature, intangible and hard to quantify, and as a result, often have limited impact on executive decision making and day-to-day employee behavior. 5. J. Hughes et al., Customer-supplier collaboration study. 6. Ibid. 7. J. Hughes, Supplier metrics that matter, CPO Agenda, Autumn, Ibid. Jonathan Hughes is a partner at Vantage Partners, a consulting firm spin-off of the Harvard Negotiation Project, and the head of Vantage Partners Sourcing and Supplier Management Practice in Boston, Massachusetts.

19 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

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