And that’s a problem. Here’s the reason. Decades of research proves that positive, productive partnerships with suppliers result in improved profits and other benefits—including supplier willingness to share new technology, assign their best personnel and provide support beyond contractual obligations. That’s a great opportunity. But building and sustaining relations is a team sport, requiring collaboration across the C-suite.
To understand this more deeply, manufacturers typically spend half their revenue on purchased goods and services. For non-manufacturing companies, it’s about a third. Firms with poor supplier relationships pay an average of an 3% to 8% piece price premium, based on the suppliers’ forecast of how they expect to be treated over the life of their contract.
This data comes from Planning Perspectives, Inc., a Michigan-based company-supplier relations firm. Led by President John Henke, Ph.D., PPI has conducted surveys to determine suppliers’ perceptions of working relations with client companies since 1990. Their research shows that stronger relationships between customers and suppliers results in greater price and nonprice benefits for the customer, as well as greater supplier contribution to the customer’s profit.
“There’s real money to be made from good relations with suppliers,” Henke says. “While OEM leaders often believe that simply pressuring suppliers to reduce price is the path to improve profit, our research shows collaboration and building trust are far more effective in realizing sustained profit contributions from suppliers.”
Alignment is key to improvement
While the chief procurement officer leads the development of trust with suppliers, Henke says the CEO and top leaders in Finance, Engineering, Manufacturing and program teams—and every level of the Purchasing organization—play key roles in shaping and maintaining a collaborative strategy.
Beyond sharing a collaborative philosophy across the C-suite and at every level of purchasing, there are 4 ways companies can build trust, strengthen supplier relations and generate higher value for customers and stockholders.
1. Develop enterprise metrics. Behavior follows what’s measured. Work across your organization to define quality, cost, capital utilization and other key metrics that drive enterprise value. Understand the role each function and your suppliers play to achieve the metrics and create shared accountability to deliver them.
2. Communicate openly and often. Share metrics, requirements and specifications with suppliers early and communicate changes and feedback in a timely manner. Ensure information is complete and clear. Encourage questions and listen to suppliers’ suggestions. Share best practices or lessons learned from other suppliers or areas of your business. Leverage supplier advisory boards to raise issues, prioritize concerns and address them.
3. Create shared solutions. Encourage your company’s engineers, program teams, Manufacturing, Purchasing and Finance employees to visit suppliers and understand their business. Involve suppliers in developing vs. dictating solutions. Ensure your program and Engineering teams invest resources to work on current and past model components that still require refinement.
4. Provide enterprise rewards. Every link in the customer value chain needs to make money— including suppliers, so they can invest in capital, R&D and product development. Ensure you meet commitments in terms of volume, payment terms and resources. And when metrics are achieved, ensure suppliers reap the rewards along with your own team. Reward top suppliers with more and better business and make those decisions visible so others are motivated to earn more too.
“If companies consistently invest in these steps over time, they will earn their suppliers’ trust,” Henke says. “That trust translates into multiple benefits that improve an OEM’s competitiveness and greater supplier contributions to the OEM’s profits.”