Maximizing the Effectiveness of Supplier Relationships

In every supplier relationship there are key pieces of information, besides the actual product or service provided, that have to be exchanged for business to be carried out successfully. All too often, requirements or deliverables are not clarified sufficiently, leaving one (usually both) parties short on something – information, money, or end products and services. So what considerations are involved, and how can a manager make sure both organizations get what they need, when they need it, in a way that provides maximum benefit to both?

Over the years I have often observed the waste and inefficiencies that result from poor communications between customer and supplier, and the less-than-optimal results for both. The most frequent observed result is that the product or service failed to meet the customer’s requirements when delivered, or is delivered late, but there is usually a pretty involved story behind this.

Most often incorrect, late, or faulty product or service was a result of unclear communications as to what was needed, and sometimes what was possible, from both sides. Many customer organizations have established guidelines, specifications, and standards for their requests for quotes and proposals, and the statements of requirements they convey to their suppliers. Formal standards for these communications are very good, and establish baselines for the agreements that will govern the mutually profitable relationship going forward, but they can easily be overdone, resulting in needless inefficiency and decreased quality in the communications, relationship, and end results.

For example, a major corporation I know has so many documents and standards used in contracting with suppliers that no single person seems to know of them all, let alone understands them or how they are intended to work as a system. Just in the area of getting plans from suppliers, they specify more than fifty key events that they want the supplier to include in their plans, many of which would normally be invisible to the customer company, and on which the customer can have no direct control in any case. The burden imposed by requiring the supplier to report all this detail is considerable, and the net result is that both supplier and customer companies dedicate needless time and effort to specifying, demanding, obtaining, analyzing, and reporting the information. Both organizations fail to report or analyse the huge volume of information involved, and the information is usually incomplete if it is reported at all. Even if it is reported, there is too much information to be worth analyzing, and, most importantly, the critical pieces of information are buried in the morass of partially-reported data, probably never to be seen. The net result is, neither supplier nor customer get the critical information they need, and they are lucky if the product or service is delivered on-time or meets the customer’s requirements.

What both sides are missing is that there are always a handful of key points, some would call integration points, where information or materials needs to be passed from one side to the other. Requiring or reporting on any more than the key items is wasteful and can prevent either or both sides from understanding what really needs to be done, with predictable results.

There is another risk, too. When the customer gets too deep into the supplier’s business, and begins to try to influence or otherwise manage supplier operations, the situation gets worse yet. When the customer is taking any control, however slight, of the supplier’s processes, the supplier no longer has complete ownership of them. This means the supplier has an “out” if things go wrong, as they can point to the customer as the source of the problems. It also means the supplier no longer necessarily has full control of their own processes, which can inhibit their ability to do the best possible work. At this point, the customer has not only impeded the abilities of the supplier, but made themselves partially responsible for things that might go wrong. Now the customer has less standing from which to hold the supplier responsible for what they provided, and both sides have wasted effort on an overly-involved relationship involving a lot of needless work that added no value to the process for either side.

As a third point, both customer and supplier have to have extra people, time, and other resources to handle the paperwork involved, increasing cost for both, and reducing the profitability of the relationship. Is it any wonder that a supplier, sometimes with a long term relationship with the customer, sometimes refused the business, seeing that the requirements of the customer based solely in bureaucratic standards and paperwork make the deal unprofitable? I have seen this happen more than once.

A fourth pitfall is that the supplier changes their requirements after the agreement is in place and work has been done. This is infamously known in project management circles as “scope creep”. Up to a point, a change of requirements may have only small impact on cost, timing, or product function, but, after that, changes in the scope of the deal create a need to rework the agreement on the fly, frequently a messy process requiring even more paperwork, time, and cost, and saddling both organizations with increased risk. A lack of organizational or managerial discipline on the customer side can quickly make the deal unprofitable and problematic for the supplier, and much more risky for the customer.

To manage a supplier-customer relationship successfully requires seeing the relationship as a system in which a focus on a few critical pieces of information, and the avoidance of bureaucratic overhead and too much influence by either party on the other, will provide the best result. Trust between organizations must be strong for best results. The identification of the most critical elements of time, cost, function, and quality-related information, and the efficient exchange of that information, should be the focus of both organizations, along with a resistance to going overboard and asking more than is truly required to get the job done.

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