The Reality of Strategic Relationships: Ten Keys to Success
Jon Hughes, M.I.P.M., M.I.T.D.
Jon Hughes, M.I.P.M., M.I.T.D., Chairman ADR International Purchasing Consultants, Bracknell, Berkshire, UK, RG12 1RP, 44/1344/303078.
William L. Michels, C.P.M.
William L. Michels, C.P.M., Director of North American Consulting ADR International Purchasing Consultants, Ann Arbor, MI 48106, 313/449-2010.
80th Annual International Conference Proceedings - 1995 - Anaheim, California
Systematic Source Management. The aim of this paper is to guide the reader through a number of key features of strategic relationships. It will enable you to assess, profile and challenge your purchasing approaches with key suppliers in this area.
However, this is a subject which cannot be disengaged from the broader field of systematic source management. It is where commercial relationships, negotiating skill and long-term business needs overlap. It is about challenging the traditional thinking that often dominates the purchasing area. Developing strategic relationships is characterized by the building of fundamentally different ways of working with suppliers, creating breakthrough change, and structuring agreements that truly reflect the longer term goals of both sides. ADR International Purchasing Consultants argues that this reflects the full utilization of the purchasing resource achieving a business or competitive advantage.
World Class Tools for Change. It is true to say that significant changes have occurred worldwide in this area. Many long-established practices, beliefs, tools and techniques are being challenged and questioned. Major organizations across Europe, North America and the Asia Pacific region are becoming increasingly aware of the potential to improve organizational and business performance dramatically, by turning the spotlight on the purchasing and supplier management process. In turn, this calls for a systematic review of the different types and possibilities of supplier relationship that are available to the purchasing professional.
These leading organizations have demonstrated that when senior executives pay real attention to sourcing, the supply market and supplier management, this leads to fundamental changes in the way in which they operate. However, these drives have to be planned and managed carefully, with structured and reliable implementation of proven world-class methods and tools. And, they need to be fully supported by just in time training and development for the considerable numbers of staff who can influence suppliers.
However, a lot of purchasing thinking and practice in developing effective supplier relationships has pursued a simplistic approach. It has tended to focus on skills and behavior in isolation from the business context in which those relationships are operating. If an organization is going to derive maximum benefit from its suppliers, real added value, then there has to be a systematic framework for developing and taking forward clearly defined sourcing strategies.
Indeed, developing strategic relationships, almost by definition, is not so much about a deal being negotiated; it is about the way in which two or more parties intend to work together over the longer term. In essence, it is about developing a robust and rigorous business relationship that is capable of being tested against specified deliverables. Indeed, the crucial outcome of the process can often best be gauged in the quality of the relationship, and the commitment to the deliverables, by both the purchaser and the supplier. And that is something which has to make sound and significant business sense for both sides. So, let's look at the nature of supplier relationships in more detail.
Options in Supplier Relationships. There is a continuum in supplier relationships from competitive leverage, through to preferred supplier status, then to performance partnership, and, finally, to strategic alliance.
i) Competitive Leverage. Traditionally, competitive leverage is the heartland of tactical negotiation. Such leverage is characterized by an easy market place, where there are many suppliers to choose from, and where the purchaser is spending significant amounts of money. Therefore, the prime purchasing practices tend to be multiple sourcing, frequent and tough negotiation and lots of positioning and bargaining. Full use of competition is one of the main persuaders adopted by purchasers in this market place. It is an area where we find lots of competitive bids and full use of inquiries.
However, this traditional competitive purchasing approach is appropriate in many situations. Furthermore, there have been striking examples of competitive leverage purchasing in recent years, such as the major initiatives launched by automotive companies such as General Motors and their PICOS teams - their program for improvement and cost optimization of suppliers. Despite the howls of anguish from Detroit, a radical shake-up of the way in which General Motors was organizing its automotive parts purchasing across North America was long overdue. Many suppliers had become substantially less competitive than those in Europe, Japan and the rest of the world. So-called partnerships had become cozy, inwardly focused and out of touch. There was a need to drive huge productivity improvements, and fully implement global benchmarking of price, performance and supplier capability. To achieve the rapid breakthroughs that were required, competition and fierce re-bidding of suppliers were justified in the context of global competition to determine which ones were prepared to put the customer first in terms of quality, service, and very importantly, price.
Competitive leverage still has an important part to play in modern purchasing. But let's look at some alternative approaches, which move us into a more strategic focus on the supply market.
ii) Preferred Suppliers. Even in the competitive leverage area, it may make sense to concentrate on a smaller number of preferred suppliers, particularly where companies have systematically tested the performance of suppliers through structured appraisal, evaluation and regular benchmarking on costs. As a result of this appraisal process, the decision can be taken to select a smaller number of suppliers for preferred supplier status. Although they may have different names for their programs, organizations such as Toyota, BMW, British Airways and SmithKline Beecham have been pursuing this type of process with significant success. For example, when Toyota made a strategic decision to invest heavily in motor manufacture in the UK, they focused on their potential supplier network several years ahead of components actually being required for volume car production. In line with best practice, they majored on very structured supplier evaluation of quality, cost, technological expertise and, very interestingly, their suppliers' management styles, commitment and capability. Furthermore, they found through the joint investment with their preferred suppliers, that they had improved supplier relationships, significantly reduced defects and cycle times, and stimulated faster new product introduction times.
iii) Performance Partnerships. Having decided to concentrate on preferred suppliers, and having tested the quality and price performance in comparison with the best companies in the market place, it is a relatively straightforward step for an organization to select an even smaller group of suppliers for co-development through performance partnership agreements. Excellent examples can be seen in companies such as Motorola, Intel, Digital and Texas Instruments, in a sector where there has been major transformation in relationships between the semiconductor suppliers and their customers. Such companies have pursued similar routes, in terms of supplier rationalization, joint definition of improvement plans and priorities, the creation of joint purchaser-supplier fusion teams with specific improvement objectives, and a focus on maximizing strategic value within the context of total cost of acquisition. Significantly, in such companies, the direction and leadership have come from the top. Joint business steering teams are in place, with representatives being drawn from both companies and their suppliers.
However, it is worthwhile correcting a serious misunderstanding on such partnerships. As we have seen, they are only one of a number of approaches towards the management of the supply market. Furthermore, there needs to be a number of important preconditions and tests which are applied to suppliers, and also the purchasing organization, if they are to succeed. There has to be a commitment to openness on both sides, particularly on pricing, target costs, future business plans and investment. And all of this has to be benchmarked against developments elsewhere within increasingly competitive market places.
ADR International Purchasing Consultants' approach in this area is to advocate "performance partnerships", which explicitly map out the required performance, establish principles on continuous improvement, and which define an agreed process for evaluating the success of the agreement and the deliverables from both sides over a designated period of time.
In summary, with such partnership relationships, we are invariably talking about single or reduced sourcing, a joint focus on quality and value, technology sharing and dedicated resources, from top management down.
iv) Strategic Alliances. Finally, companies may get into a full strategic alliance. At this stage, there is likely to be cross share ownership, single sourcing, joint investment strategies, and even co-location and co-manufacturing. Not surprisingly, in most organizations there is limited scope for this approach. However, putting in place a successful strategic alliance is one of the most demanding, and satisfying, features of strategic purchasing.
The Evolution of Strategic Relationships Over Time. A very important perspective on the range of potential strategic relationships available to companies, is that they should not necessarily be regarded as fixed. They can change over time. They can become closer, and they can also become more arm's length. After all, you may, or may not, have full control over them, depending on changes in the market place, changes at senior management level, changes in your own products or product technologies. Furthermore, there are usually only a small number of suppliers who actually have the capability and the management commitment for you to enter into a full performance partnership or strategic alliance with them.
Indeed, a theme that has been running through this analysis of the continuum from competitive leverage, to preferred suppliers, to performance partnerships and then full strategic alliance, is the need for clear and strong guidelines on how you, as a purchaser, should be analyzing and mapping relationships with your suppliers. In Figure 1, a structured profile of relationship factors is provided to facilitate this process.
Linking Strategic Relationships to the Business Plan. One of the starting points for developing more effective supplier relationships is the definition and linking of business needs to the purchasing and supply chain, through an explicit source plan.
This provides a very sharp focus on what you are trying to achieve. Let's look at some examples. It could be:
- cutting lead times to give increased flexibility and high market responsiveness;
- close meshing in of systems and information flows to reduce administration costs dramatically;
- early involvement on product design and with full access to a supplier's design capabilities;
- reducing inventory through the meshing in of production planning and logistics;
- majoring on service improvement, delivery performance and overall product quality;
- emphasizing "right first time" and "zero defect" programs, rather than inbound quality assurance.
However, it is very important to develop some clear rules of engagement. One approach can be the framing of broad guiding principles into a detailed relationships agreement that states how both sides should be working together. ADR International Purchasing Consultants has found that particularly in strategic relationships, the framing of such principles and criteria can be used to resist the parties' slipping back into positional bargaining and very tactical responses. The development of such principles provides a very robust and rigorous process. Let's look at a number of examples in more detail.
- Best in Market Pricing. One example would be to agree "best in market pricing". If that principle were being negotiated, then for the duration of the strategic agreement, the supplier would be committing to remain commercially competitive and using his best endeavors to bring about ongoing cost reduction.
- Value for Money. A second, and linked, principle could be "value for money". The supplier is agreeing to be benchmarked against external indicators of lowest base cost, rather than merely market pricing.
- Continuous Improvement. A third principle could relate to an agreement on "continuous improvements in quality and service levels". Again, quality could be benchmarked at or beyond the best in class level, and be fully backed up by an itemized statement of deliverables.
- Business Development. A fourth example could be "jointly growing volumes of business". In this instance, the parties would be collaborating to use their combined expertise to provide designated customers with superior products or services. Having accepted that principle, then both sides would jointly focus on the value delivery required to achieve that end result, and the strategic relationships necessary to sustain it.
Similar principles can be developed to cover speed to market, access to a supplier's technology, transfer of expertise, joint collaboration on new product development and design, improved speed of response times, or labor productivity and efficiency. They are then integrated into the sourcing plan for that supplier.
Ten Keys to Success. It is quite timely to map out a number of keys to success in the whole area of strategic relationships. ADR International Purchasing Consultants believes that ten are crucial.
- Active Commitment of Business Managers. Significant improvement in supplier relationships requires senior management involvement from both the purchaser and the supplier. Successfully negotiated strategic outcomes are likely to bring about change in terms of new practices and ways of operating. Best in class practice in this area is for evidence of management commitment, at board level, to year on year purchasing improvement. You need sponsors and, when the occasion merits it, drivers of the process.
- Involvement of Team Members and Stakeholders. Developing effective strategic relationships calls for the realignment and refocusing of effort and expertise, particularly through the use of cross-functional teams. You need to get all the stakeholders working closely together at every point of the supply chain. This often calls for external facilitation and the introduction of structured processes to achieve strong teaming.
- Performance Accountability. There has to be an emphasis on performance accountability. Performance measurement needs to be introduced as a basis for regular feedback on successes and failures, as a prompt for learning, and as a benchmark for continuous improvement. Again, this calls for senior management to be involved in the development of prime performance indicators that will enable the success of strategic supplier relationships to be tracked in line with pre-defined target objectives.
- Strengthening of Competence and Capability. There has to be a focus on the strengthening of competence and capability. A growing number of organizations are recognizing that their success in this area depends on the skills and enthusiasm of their staff. It is certainly true to say that business development, supplier development and team development are necessarily closely linked.
- Development of Strategic Negotiation Skills. Movement from a competitive or quite distant relationship, into a performance backed and principled one, is quite a journey for most companies. It certainly is not a soft option, although unfortunately it has often been portrayed as such. Along the way, there will frequently be serious disagreements, friction and heated exchange. The need is to shift the focus from the traditional positional bargaining relationship, on to one that is thoroughly performance backed, with high expectations for a different style of delivery and way of working. These are the skills of strategic negotiation.
- A Defined Sourcing Strategy. Sourcing strategy is all about supporting organizational goals by maximizing value, controlling costs, managing risk and reducing complexity across the supply chain. It should be a defined, structured process; one that is driven by sourcing strategy teams and applied primarily to the key categories of expenditure which generate most of the potential benefits. An important element within that sourcing strategy is a definition of the supplier relationships appropriate to meet the strategy needs.
- External Market Analysis. Traditionally, purchasing has often operated within narrow boundaries and with inadequate focus on to the external or internal customer. It is important that the precise linkages between customers : business and operational needs : suppliers, are well understood, and for there to be a strong external focus on to the supply market. Understanding effective supplier relationships calls for well structured, systematic data gathering.
- Creating and Assessing Options. Challenging past thinking is at the heart of sourcing strategy and successful supplier relationships. The process calls for the generation of options, their evaluation, the determination of appropriate relationships and the securing of management support for the way forward. The key is to challenge the status quo, be open to creative alternatives and continually seek out new and radically different ways of moving forward. Hopefully, the relationship mapping tools described in this article will facilitate that outcome.
- Strengthening Supplier Management. In many organizations, there has been too much emphasis on "doing the deal", rather than putting in place the processes to ensure delivery of superior supplier performance. There needs to be a stronger focus on the practices of supplier management. In the past, supplier evaluation, measurement and improvement have often been based on intuition and narrow functional objectives. This needs to change. Measurement and reporting of supplier performance should reflect specific, targeted needs. Relationships with suppliers can then be developed in line with well analyzed and systematic strategies.
- Concentrate Your Effort and Expertise. A prime need in developing effective relationships is a concerted drive to reduce complexity in the business. This can be achieved by well structured sourcing strategies, supplier rationalization and the simplification of all purchasing administrative procedures, systems and routines. This enables you to refocus your efforts on to higher added value activity and to concentrate resource on to managing and developing appropriate relationships with your prime suppliers.
Both authors of this article wish to encourage increased networking on leading edge strategic tools. They can be contacted at the offices listed at the beginning of this paper.
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