Thoughts for Discussions A Way to Build Great and Lasting Vendor Relationships - Vendors Measuring Your Performance. Ron Lewis author, 12/2010 all rights reserved A culture of blame. Are you experiencing dysfunctional vendor relations and are at a loss as to what to do? You may not be alone. From many conversations I have had with builders and General Contractors (GCs) over the years, they often view material suppliers with contempt, blaming them for poor performance instead of embracing vendors as value adders. This contempt can be magnified by the often ill-fated execution of bidding to find the lowest cost supplier. Root causes of poor supplier performance can often be traced to poor buyer (GC / Builder) performance. Why? None or poorly written purchase orders, last minute demands for materials, constantly changing expedited orders, claims that invoices reflect wrong prices, claims that materials were not delivered to the right location or in the right quantity/condition. Sound familiar? Buying the cheapest has its flaws. Making successful vendor relations a strategic objective and abandoning the narrow view of buying solely on the basis of price can yield far greater results and when done well, also yield very competitive if not best pricing from preferred vendors. Great GCs and builders know they don t make money out of the skins of the vendors they make it by acknowledging the strengths of their (vendors) backs. Plumbing the depths for the low cost vendor when motivated solely by greed often ends up badly. Is your strategy based on how much money you can save by attracting the cheapest seller? How would you like it if your customer admitted they hired you only because you were the cheapest and your value proposition or quality reputation had no bearing on the buyer s decision that they were hiring you solely to maximize their margin? Important, yes. present state of vendor relations, not so good. A strategy that results in great vendor relations is considered essential by other experts. For the home building industry it appears there is much room for improvement. Purchasing Magazine (recently mothballed) often wrote about the executive level and strategic importance of procurement (vendor relations). Recent articles in a popular home building industry Thoughts on Vendor Relations Strategy by Ron Lewis of R B Lewis & Associates, copyright protected-2.doc Page 1 of 6
magazine reported on the state of supply chain relations (vendor relations) in home-building. Their conclusion: ill health. Chronic mediocrity. In the past I found establishing a preferred vendor strategy and committing to measuring performance in key areas that drive successful vendor relations was considered a foreign notion to most vendors/builders/gcs. It seems that tolerating chronic mediocrity was a shared condition. Yet radical improvement was critical to success. Why? Self-serving interests. I could no longer endure chronic mediocrity, materials not on time, the wrong materials on site, back orders, invoicing nightmares. I knew the list of valid complaints by the vendors was equally vexing to them. I needed the vendors to be A performers on our team, given the pace I set and the need for exemplary cost effectiveness. The wasted time of chasing missing stuff and arguing over invoice errors (whose errors?) had to end. From the Miller Heiman Sales Performance Company s Hierarchy of Buy-Sell Relationships:.aligning yourself with value-adding vendors is a matter of enlightened self-interest vendors helping to lower costs, boost profits of course I am going to work with those types of vendors. And pay the freight with a smile. Once you have decided to be proactive, make successful vendor relations a strategic initiative and be rid of this aspect of chronic mediocrity - here is one way to proceed. Where to start the transformation? Look first internally when you are finally ready to implement your vendor relations strategy. Create the right conditions for strong supplier performance. Collaborate with your suppliers and develop their scope of services consistent with each other s identified needs. Articulate clearly defined responsibilities, yours and theirs. Perform to high standards and demand they do too. As Lee Evans was fond of saying: Inspect your Expects. Verify you are performing. Verify they are performing. Then ask your high performing suppliers to measure you. Next step. To implement the strategy I collaborated with the owners and executives of the suppliers we opted to partner with. We created compacts that became formal written agreements; including but not limited to establishing who did what when and how in the areas of: Ordering procedures and lead times (Purchase Order system a must!) Delivery procedures, materials bundling (all in the best interest of the installer) Invoicing procedures (isn t it a pain when the invoice is not aligned with the PO?) Other items that had mutual benefit. Thoughts on Vendor Relations Strategy by Ron Lewis of R B Lewis & Associates, copyright protected-2.doc Page 2 of 6
In contract language for material suppliers this would be referred to as the Work. Critical mutual commitments. Key phrases or words amplifying a commitment to do well together found in the agreements: accepts the relationship of trust and confidence established by this AGREEMENT and covenants to cooperate with the each other and to utilize best skill, efforts, business administration, supervision and judgment in furthering the interests of the each other;. to furnish at all times an adequate supply of materials; and to perform the Work in the best way and most expeditious and economical manner; furnishing and approving in a timely way information required and making payments to the VENDOR in accordance with requirements of the Contract Documents. conducting themselves in a respectable, courteous and professional manner in all dealings with each other and all other parties associated with the Work. attempts to establish an environment where trust and teamwork can flourish and disputes are prevented. this Agreement attempts to outline the foundation for the successful relationship between the GENERAL CONTRACTOR and THE VENDOR What comes next? Measuring results. After the planning and implementing phases (implementation included weekly score cards conveyed from vendors to us) it was time to have the vendors measure our performance. Trying to adhere to a well known quote, If you can t measure it you can t manage it can yield intimidating feelings about how things are measured, though it is far less confounding then one might think. Key areas I opted to measure: 1. Honoring lead times 2. Perceptions on ease of working with GC 3. GC s reasonableness in dealing with problems 4. Completeness of PO s 5. Clarity of GC s expectations on delivery / handling of materials 6. Project readiness upon delivery Thoughts on Vendor Relations Strategy by Ron Lewis of R B Lewis & Associates, copyright protected-2.doc Page 3 of 6
7. Invoicing process 8. On time payments 9. Profitability 10. Overall rating We created and emailed a spreadsheet that contained 10 questions, each with an answer scale and the scale defined. A sampling of the questions we asked our vendors: A) Honoring agreed upon lead times enabling you to manage your inventory and delivery schedule for us based on our needs 1. More often then not GC failed to honor lead times 2. Better than 1 but not yet a 3 3. More often then not GC honored lead times 4. Better than 3 but not yet a 5 5. GC consistently honors lead teams and often exceeds our expectations B) Reasonableness in dealing with problems 1. When problems arise relating to servicing GC, more often then not GC s reactions are unreasonable and more focused on the problem than a solution 2. Better then 1 but not yet a 3 3. When problems arise more often then not GC reactions are reasonable and more focused on a solution than the problem 4. Better then 3 but not yet a 5 5. When problems arise GC s reactions are timely, focused on root causes, contain suitable feedback to efficiently facilitate remedy Thoughts on Vendor Relations Strategy by Ron Lewis of R B Lewis & Associates, copyright protected-2.doc Page 4 of 6
The results, reflecting more than $5,000,000 in transactions over a 16 month period: Follow up input. In follow up conversations vendors admitted we were the easiest to work with, most organized large project GC they had ever serviced. We received comments from companies, some of which had been in business more than 30 years. While the vendor executives were reticent about putting this in writing, I was told repeatedly that our pricing was the lowest they offered to any of their accounts; including those with whom we had long standing business relations, largely because those companies were too disorganized. Yet we scored a 4.125 average on a scale of 1 to 5, for vendor profitability. Anchored in how we worked. Of the eight major suppliers, one was dropped at the conclusion of the first project because as a single solution (product) vendor their one product yielded too many (manufacturer caused) problems and consolidating was achieved at no increase in costs. Further, for the next $5 million + project, the vendor team was pre-qualified; instead of finding new vendors and having to again forge successful relationships, we opted to strengthen already good ones. A far more enjoyable initiative. Plus, as a result of the strengthened relationships, I had far greater confidence in the vendor compelling improved supply-chain performance from the distributors / manufacturers. Given the vendors were mostly negotiating on my behalf; Thoughts on Vendor Relations Strategy by Ron Lewis of R B Lewis & Associates, copyright protected-2.doc Page 5 of 6
my trust in them to work in my best interest grew as their trust in my ability to help them be efficient grew. Results: not just great prices, but great service, products and processes, vendors committed to and performing at a high level of efficiency. Conclusion. Strategy implemented. Successfully. It all started with a fierce determination that status quo was not good enough, chronic mediocrity as a condition that had no place in business and a fervent belief that by being surrounded with the right vendors we could together achieve excellence. What a concept. All implemented by a GC with less than 10 employees. What to do next: You can improve your relationships with your vendors. I can help. Contact me and we can discuss your specific situation. Of course, our initial discussion is free and there is no further obligation. You can contact me through the information below: Ron Lewis 518.636.7919 ronlewis@rblewisassociates.com www.rblewisassociates.com Thoughts on Vendor Relations Strategy by Ron Lewis of R B Lewis & Associates, copyright protected-2.doc Page 6 of 6