Breaking Up Is Hard To Do - How To End A Supplier Relationship
Lorrie K. Mitchell
Lorrie K. Mitchell, Supplier Alignment Leader, BellSouth Telecommunications, Inc. Atlanta, GA 30375, 404/420-6068, Lorraine.Mitchell@bridge.bellsouth.com
85th Annual International Conference Proceedings - 2000
Abstract. Although we'd like to believe that strategic supplier alliances will last forever, we must come to the realization that they have a natural life cycle and will inevitably come to an end depending on the evolution of the business relationship. Even if it's your intention to continue the relationship indefinitely, if the evolving alliance evolves to an ending point, it's best for purchasing and supply professionals to be prepared.
Purchasers are interested in establishing relationships/alliances with particular suppliers in order to reduce their supplier base, improve quality, and reduce the variations gotten from multiple sources. Quality suppliers want to provide the best product/service and they expect to be rewarded for exceeding expectations. However, there are reasons and instances when an alliance relationship is no longer appropriate. It's important to remember that the reasons can be wide-ranging and although this process is a "break up," it isn't always someone's "fault" or a hostile situation.
Why Would An Alliance Relationship End? The ending of a strategic alliance may sound like a disastrous event, implying that there has been a failure on someone's part, or a breakdown in the process somewhere. But there are several reasons why an alliance may come to an end, and they are not all negative. In fact, some are positive for one or both of the parties involved. Some of these reasons include:
- Changing focus of organization(s) - If either the purchasing organization or the supplier organization has shifted their strategic direction, an existing alliance relationship might no longer be of value;
- Overall focus of organization is the same, but needs for certain products/services change - This is a situation that might occur if a supplier's product or service is becoming obsolete within the purchasing organization's needs;
- Supplier cannot accommodate needs - While this situation might occur with a negative tone if the original intent of the alliance was to meet certain objectives that now can't be met, it may also come about as change occurs that no one could predict; or
- Relationship just not "working" - This situation is the scenario that most alliance partners fear. It could result from different corporate cultures that don't blend well, individual and un-resolvable personnel issues, continuing conflicts that require great effort to repair, or the results of the relationship are just not meeting expectations. In an extreme case, there may be some drastic incident, which severs the relationship, requiring legal action to be taken.
How Can You Tell The Relationship Is Changing? A primary tip-off that the nature of the relationship is changing can be seen in requests that are made by you or by the supplier. Are multiple requests necessary before action is taken? Are requests necessary for items or service that used to be offered without asking? Perhaps a request is granted, but the requester feels like he or she is cashing in on his or her last favor with each request. Although in some instances, the purchasing and supply professional will first recognize this type of resistance in a supplier, it works both ways. As an alliance manager, a purchasing and supply professional could hear from his or her supplier counterpart that individuals at the purchasing organizations are being resistant. Alliance principals and objectives can be very well outlined at an organization level, but success is often dependent on individuals. All individuals for both organizations must be committed and the resistance can begin on either side of the fence. If the problems have roots in the purchasing and supply organization, at least the purchasing and supply manager will be able to take an active part in determining the cause and correcting it as necessary. If the problems seem to stem from the supplier organization, the outcome is a bit more unpredictable.
When you start to work out issues and compromises and you get the impression that your partner is "nickel and dime" -ing you all the way, you know that the alliance is coming to an end. Now is the time that the supplier has forgotten who the customer is. When you see the commitment of the supplier decreasing rapidly, the sharing of information dwindling, and contractual language identifying each party's dos and don'ts increasing, you know problems are brewing. When discussing a new technique or process with a supplier within the context of a healthy alliance, the response should be enthusiastic and open-minded, whether or not the idea ultimately pans out. An automatic "no" is not a healthy sign. It's easy for a supplier to be enthusiastic when the benefits are obvious, but it takes a true committed alliance partner to be enthusiastic even when they know an idea needs some work or is unfeasible as is. Healthy alliance partners will discuss with and educate each other. Unhealthy alliance partners will not experience this response; a partner unwilling to examine an idea probably signals alliance analysis is due.
After you've had all the group discussions, individual chats, pep talks, memos written, etc., you'll probably want to escalate. Start to take your issues up the line until you get some attention. Depending on the size and importance of the relationship, you will probably have some contact with those with the power to truly make some decisions, i.e., the CEO, Group President, etc. If your business is really that important to the supplier, they will hear and understand you and make something happen.
Has The Time Come To End The Relationship? Bottom-line; always have a back-up plan. Have a mental if not written notes of what actions you would need to take, who you would interface with in every aspect of the supply stream. You may want to consider reports generation, system changes, billing, EDI order placement, invoice generation, and funds transfer, inventory availability, account technical help, HelpDesk services, warranty work, training, ramp-up transition costs, etc. You've got to think about the dollars you've invested in Shared Cost Investments in the alliance relationship, and the costs that would be involved if you switched suppliers. If the costs are astronomical, you may want to rethink switching suppliers.
When you think about time and resources, you have to evaluate what time and resources you are using to keep the alliance relationship afloat and compare that with the time and resources to ramp up for a new supplier. Whatever the circumstances, every purchaser deserves a supplier who is looking for ways to say yes to the purchaser, rather than thinking of reasons why they can't deliver what you want.
Before you make the switch, naturally you've got to think about transition workflow activities. Stop and identify the interfaces throughout the process. Meet with someone in charge of each step and find out what a change would do to their part of the process. This is the point where communication will make or break it. Once you have checked out all processes, personnel, cost, etc. repercussions caused by a change of suppliers, you need to socialize this data to your end-users' upper management. Basically, you have to construct a pros and cons statement of remaining or changing the alliance relationship. When you have facts, you can discuss and get the ever-important buy-in.
What Are Some Of The Alliance-Ending Decisions To Be Made? As in any alliance relationship, this decision cannot be made in a vacuum nor can one side without the input of the other make it. These determinations need to be made not only by the partners but also by the end-users of the product/service. It is hard to imagine that you would be having a problem with the supplier without they too being affected by the impact. Chances are your discussions with the supplier are based on or were initiated by conversations of incidents described by your end-users. If you are considering significantly changing or eliminating the alliance relationship, it is imperative that you have the buy-in of your customer or end-user. They will be very interested in the alternatives you will be describing to them.
There are some specific steps you may want to consider along the way. Naturally, you will have already documented the main issues that have brought you to this point. You may be questioning whether a significant price increase or pricing structure initiated by the supplier is warranted. Perhaps service level agreements are consistently not being met or perhaps you are receiving significant kick-back from the supplier by introducing the concept. This is the age of accountability. A performance based contract is the perfect tool to integrate measurements, incentives when warranted and dis-incentives. Perhaps quality is the issue. You may be receiving daily calls from your clients questioning the quality and technical capabilities of your supplier.
These concerns need to be listed and evaluated with a similar listing of positive forces in the current relationship. At the same time, you should consider all of the other groups and departments that could be effected by a change in suppliers. Who are these groups and departments? How would this effect your user base? What systems - billing and reporting - would be effected? What would you need to do to educate and communicate this change to the user community? Once you identify all of the repurcussions of a change, the next step is to determine the dollar cost of the change.
If the list of pros to stay with the current alliance relationship is greater than the list of cons, then I would recommend a joint (purchaser/supplier) action plan that identifies the concern and also the steps on both sides that will be taken to improve the situation. Of course, complete dates with appropriate checks in between should occur. Mutually agreed upon measurements should also be included.
If the list of reasons to change outweigh the reasons to stay with the current supplier, then this is probably the time to issue a solicitation - probably a request for proposal (RFP). The RFP process will lead you through all the appropriate steps you and your client should take. Using this process, you can formally document what your needs/specifications are, ask the appropriate and necessary supplier qualifications and capabilities questions, request pricing information, and then make the decision based on the total cost of ownership most applicable to your situation.
Where Do You Go From Here? No matter who is the first to determine that the alliance relationship is ending, you will need to think about what groups and activities will be affected and in what order you will need to contact them and make them aware of what is transpiring. You've got to get a game plan together. You may want to end abruptly and quickly cut all ties, but you will need to utilize a well thought out process. Regardless whether the move is swift or gradual, you need to have a migration plan developed with total buy-in from all the appropriate players poised for implementation. If not, you had better move gradually so that your end-users see a seamless transition.
If you think the breakup has the potential to be hostile, you may want to protect your employees or assets. You might take the following steps to ensure there are no problems down the road:
- Check your current agreement for any terms & conditions that could prevent you from terminating this relationship,
- Determine any financial consequence of changing/ending supplier alliance relationship,
- Ensure upper management support,
- Identify a new supplier, and
- Have a back-up plan.
What Do You Need To Consider If You Decide To Move On? The time will always come in any alliance relationship when you will issue a solicitation to determine whom the current players are to provide the particular product/service. That's just part of doing business and acting on you market analysis. The main thing is that you don't terminate one alliance relationship until you have selected a new partner. A partner who is willing and anxious to work with you will understand that there will be a period of transition. So, no matter how anxious and apprehensive your current supplier has made you regarding the possibility of switching suppliers, there is always another anxious supplier ready and willing to start an alliance relationship with you.
Other Considerations. There are several issues you may want to take into consideration:
- Legal - It's always helpful if you can synchronize the timing of the expiration of the current supplier's agreement with the time you'd like to terminate the alliance relationship. Giving too much advance warning to your current supplier can be risky business. You may be letting yourself open to either a decrease in service level or a major play for the business. If you have a dollar commitment agreement, you'll need to evaluate what this switch will do to you financially. Perhaps you can negotiate a settlement of sorts, but you will have to determine some reasons why the supplier would be interested in exiting the alliance relationship
- Confidentiality Agreements - You have already agreed to purchaser and supplier's proprietary rights language in your executed agreement. If you have executed a non-disclosure or information exchange agreement covering a particular body of knowledge, that information will be protected as agreed upon and for the period of time agreed upon; and
- Intellectual Property Issues - If there are any open intellectual property issues, it may be difficult to bring them to fruition. It is likely that these issues were discussed and agreed upon prior to the execution of the agreement. Typically any issues of this sort are deal breakers and would be protected by the terms and conditions of the agreement even if it has expired.
Know when to regroup or disband. No alliance relationship can or should be expected to last forever. Business is dynamic and the environment is constantly changing. Ultimately, success will come down to execution - how well the alliance relationship goes about the day-to-day business of meeting customer requirements.
Purchasers should be focused on every aspect of adding value to the purchaser/supplier relationship. Developing an alliance relationship has the potential of increasing the value of the products/services provided by raising standards. Alliance relationships create win/win opportunities and REAL partnerships. When the alliance relationship is good, it can be very, very good. But when it starts to get bad, you won't be able to get out fast enough.