How To Master Strategic Supplier Relationships
No one would be surprised to hear that businesses can save time, money, and headaches when they build stronger supplier relationships. What is surprising is how many companies don’t invest the time in strengthening their key supplier relationships and end up treating all of their suppliers and plug-and-play vendors. It’s not as hard as you may think it is, and you’ll see benefits early in the process.
When a company invests resources in key supplier relationships, the return on these investments is typically in one or more of the following area:
Increase Revenue
Improve margin/profitability
Create a competitive advantage
Build a technical capability
Increase reliability of supply
Let’s boil this down. The first step is to recognize who are the suppliers that comprise a business’s strategic partners. This means, we need a basis to stratify suppliers, so we know which ones are our key suppliers.
How to stratify your suppliers
Often, companies look at the amount of money they spend with suppliers and view the suppliers with which they spend the most as their top tier suppliers, those suppliers worthy of the investment of time to strengthen relationships. This approach though could miss some important suppliers. Here is one approach that we have used successfully with our clients’. It classifies suppliers into three levels based on how each supplier’s performance impacts the business. The three levels are Strategic, Operationally Critical, and Transactional.
Strategic Suppliers
Let’s start with identifying Strategic suppliers by answering these three questions about each supplier.
Do they drive revenues for the business? Examples would include where you partner with the supplier in joint sales efforts, or where the supplier teams with the business to include your products or services as part of their offerings. This could also include joint advertising and marketing, or a formal or informal referral network built between the two sales organizations.
If supply from the supplier were disrupted, would it have a significant business impact? If your business could easily switch to another supplier, the answer is no. If you could substitute another product or service and eliminate the impact, the answer is no.
Most of these are obvious, and procurement shops are well aware of what are essential products and services for their business. As we have seen though, through the pandemic, many companies have realized how critical to the business some previously irrelevant supplies and suppliers actually are. One example that caught many organizations by surprise, was the criticality to operations of PPE. Many procurement shops considered PPE a needed, but readily available category until it was no longer readily available. The pandemic is certainly an unusual circumstance, but this example points to the benefit of evaluating all categories of products and services when stratifying your suppliers. It’s another round of, “what if…”
Does buying from the supplier create a competitive advantage for the business? Can or does your sales organization point to specific components or services that come from a supplier as a way to distinguish your offerings. Automakers include brand-name audio systems in their cars and marketing, airlines boast of the coffee brand they serve, apparel companies boast of the onshore suppliers who make their garments.
Strategic suppliers will be a “yes” for 1 and 2, 2 and 3, or 1, 2, and 3. That is, in addition to a supply disruption having a significant impact on the business, strategic supplier also have market facing value.
These three criteria are a good start and, in most cases, will surface your top-strata suppliers; those that are most important to the business. If you want to add additional factors that are unique to your business, do so. For example, if your business establishes diversity or local spend goals (voluntarily or as required by regulation), then adding a factor for diversity and local spend would identify those suppliers that are important for reaching such goals. Now, let’s drop down to the next level.
Operationally Critical
Operationally Critical suppliers are those that are only operationally critical (criteria 2 above). That is, interruption of supply would materially impact your business’s ability to serve customers because switching costs are very high, there are a limited number of suppliers, or there is a shortage of products across the market. Examples could include ERP systems, process control systems, or a local electric utility. These suppliers, although not strategic, warrant keen attention. More on this later.
Transactional
The large majority of your suppliers are transactional. And, in one way this is good because your procurement team and executives would be hard-pressed to maintain deep relationships with all of the suppliers categorized as transactional. Transactional suppliers provide products and services that are readily available in the marketplace and switching costs are low or essentially zero. You may already have backup suppliers for your normal go-to transactional suppliers or leverage the competitive forces between transactional suppliers and have them bid against each other for your business.
The diagram below shows the three levels of supplier importance.
Now that we have found our Strategic Suppliers, we need to do more than talk with them, or conduct a periodic business review and sing kumbaya together. We need to create real value for both organizations.
Real value means that the relationship ultimately has a positive impact on financials, either short-term, such as improved margins, and long-term, such as joint product or service development. Below are listed some of the ways strategic relationships can create real value:
Co-develop intellectual property
Develop a joint go-to-market strategy
Joint process improvement and systems integration
Leverage the other’s brand to increase sales
Integrated product or services roadmaps
What Should I Expect from a Strategic Supplier?
Let’s just take a step back for a paragraph or three. I don’t want to complicate this process, but we do need to realize that in addition to being able to create real value, a strategic supplier must also be a top performer in the day-to-day business of supplying. If you have on your strategic supplier list a company with which you have supply issues, take them off—they are not strategic suppliers. Rather, they have challenged suppliers, and if your business is dependent upon them, they are a risk.
Every business, whether written or not, has a feel for what is expected of its suppliers. There is no one uniform list. What is important to a distributor is different from what is important to a manufacturer. Even across industries, what’s important to a distributor in the auto parts business is not the same as what’s important to a distributor in the health care industry.
We have used an exercise to help companies really understand what they need from a supplier—what is important for the supplier to get right. Below is a list of supplier traits. Select your top three and rank them 1–3 for each spending category. Add the traits you want if they are not listed.
| Rank | Trait |
|---|---|
| Low cost | |
| Best value | |
| Frequent new offerings | |
| Stable offerings | |
| Reliable supply | |
| Quick turn-around | |
| Flexible to order changes | |
| Great customer service | |
| Highly innovative | |
| Communicative | |
| Exceptional quality | |
| Strong warranty/stand behind work | |
| Understands your business | |
| Works with you, not sells to you |
Below is an example of one output from this exercise.
What’s Next?
Only through working with a strategic supplier and talking with them about how your organizations work together will you be able to see if your company can align with the supplier in a way that creates value greater than the norm between a buyer and seller. Don’t be surprised if a company you see as being a potential strategic supplier does not feel the same about your company. When this happens, the supplier moves off of the strategic supplier list and to the Operationally Critical list or the Transactional list. Wear a thick skin.
It is not atypical when looking to invest in supplier relationships that you see the true character of a supplier. As with any important relationship, there must be some synergies, driving reasons, why the relationship exists, and why it creates real value for both parties. After each meeting, use the matrix below and place the supplier where you think they belong.
Here is another way to assess the nature of the potential relationship you could have with those you think may be your strategic suppliers. Build a matrix crossing the willingness of the supplier to cooperate with you and their capabilities they bring as a supplier/partner.
Getting Started?
The hardest part, of course, is to make time to build supplier relationships. You likely have too much to do already. As with everything in business, the priority items get done. Remember that a business’ building strong supplier relationships will lead to Continuous Improvement. We’ve touched here on the importance of determining and working with the best fit strategic suppliers, where a business’s Selection of Strategic Suppliers is based on defined criteria. The next steps would be focused around 1) Monitoring Supplier Risk Indicators, 2) Performance Management and 3) Continuous Improvement with Supplier Relationships and Performance.
It’s not necessarily difficult. It’s a step-by-step process, like so many things in life.
Procurement and Contracting Excellence starts with the right plan. Knowledge helps. Experience enlightens. And we’re here to help share what we know and have learned over decades of serving in this role.
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