This is an opinion piece written by Neils Bray, account manager at LINTEC Automotive. Opinions are the author's own.
There’s no better time to talk about supplier relationships than now — amid the largest disruption supply chains have felt in many years. The reality is that a lot of the obstacles faced by your supply chain partners will be out of your control. It’s a precarious position to be in, and we’re all doing our best to manage it.
The best we can do is to act in good faith, hedge our bets, make pragmatic decisions, control what we can control and nurture relationships for the future. The closer and stronger a pre-existing supplier relationship is, the more likely it will persevere through a crisis — even if business is paused or disrupted.
A crisis, such as the COVID-19 pandemic, also presents an appropriate time (perhaps even the best time) to work on building stronger relationships with new and pre-existing suppliers. Planting the seeds of a more robust supply chain now will help to dampen the disruption in a future global crisis event.
The prevailing wisdom is that suppliers should be selected primarily on cost. Internet-based channels, such as RFQ aggregator websites, even allow companies to engage in highly efficient cost competitions. And this is incredibly convenient; a buyer can simply accept the lowest bid that will meet spec. The consequence is there’s little loyalty in the exchange, and relationships come and go at any sign of complications.
It wasn’t always this way, though. This price-centric approach emerged from modern manufacturing economics. The globalization of the supply chain has made outsourcing (predominantly in China) for pennies on the dollar an attractive — and lucrative — business model.
But what has this model cost us? Without meaningful relationships built on loyalty and trust, a supply chain isn’t all that different from a loose company of mercenaries who work for gold and turn tail at first sight of trouble. When the going gets tough, it’s every man for himself. However, a focus on relationships, rather than price alone, creates the greatest success.
Not convinced? Let’s look at an example: the automotive supply chain.
The North American Automotive OEM - Supplier Working Relations Index Study is an annual survey of the working relationships between OEMs and their Tier 1 suppliers. What’s most interesting is that the study offers a clear comparison between the top three Detroit and top three Japanese automakers.
The comprehensive survey allows suppliers (414 of them in the latest edition) to rate their perceptions of working relations with automaker customers across a multitude of areas.
What takeaways emerge? Data suggests Japanese companies continue to enjoy an edge, using a traditional model. Japanese business has a concept called "keiretsu," which promotes tight-knit networks of vendors that collaborate in long-term relationships to improve, learn and contain costs.
These traits are all associated with — and are reliable indicators of — profits and competitive strength for OEMs and suppliers alike. All would be welcome in uncertain times where budgets are in flux and factory jobs are threatened.
This doesn’t mean unfailing loyalty. Not all relationships are meant to last. But it does mean operating from a position of trust, patience, cooperation and mutual best interest. In return, the downstream partners reap the benefits of a motivated, well-integrated upstream supply chain.
So what are the calling cards of a mutually beneficial, positive relationship in the supply chain? Here are a few priorities that are critical to establishing positive working relations.
The Five Calling Cards of a Strong Supply Chain
The supply chain is no stranger to competing priorities. Especially in a time of crisis, it can be hard to find time to meet regularly with every supply partner and stay on the same page. However, as attractive as a hands-off relationship might seem (out of sight, out of mind), there are inherent flaws in the mindset that suppliers should simply be self-sufficient.
Be proactive: Frequent touch-points lead to fewer miscommunications, clearer expectations and, ultimately, less backtracking and damage control. Like in medicine and health, it pays to be proactive rather than reactive. If you have an idea for a cost-down, a lingering question or foresee a potential future snag in the making, it’s best to get on it immediately and speak up.
Be transparent: Transparency means full disclosure of any obstacles, intentions, limitations and issues you’ve discovered — in-house or anywhere in the supply chain — as soon as possible. It’s also productive to offer, in good faith, to work together to fix them. Occasional site visits and production floor tours are a great opportunity to demonstrate that trust as well as talk about struggles, opportunities and cost-downs.
Be informative: Each side of the partnership is the expert in what it does. When an outside partner’s expectations or desires don’t line up with internal realities, it’s important to inform them about the rationale, functions and technology that drive your business processes.
This sort of consistent, open communication is what creates trust in a relationship. At times, buyers feel they should hedge and limit transparency, due to negotiations with multiple partners. While privileged information must, of course, be protected, it’s often helpful to be clear about where a supplier fits in your network and how much potential there is for future growth in that role.
In April 2017, Supply Chain Dive reported that collaboration leads to greater efficiency in the supply chain. A second report, just a month later, demonstrated that cost-cutting initiatives don’t necessarily hinder OEM-supplier relationships so long as consistent and cooperative treatment persists. The point was clear and still stands today: a team mentality improves productivity and preserves relationships.
Share goals: A shared strategy with precise terms for collaboration (who, what, how long, process) can make "two heads better than one" and benefit efforts to streamline logistics, join new markets, reduce acquisition costs or boost profits.
Share ideas: Rather than pushing for one-way concessions on timelines or price points, try collaborating in the search for mutual cost-downs. It’s often possible to achieve better margins or prices, if you’re willing to contribute something to help your partner achieve the goal.
Share costs and benefits: New manufacturing processes or technologies can be expensive to implement. Share these costs and establish a benefit-sharing agreement so both parties can profit from the advances. Supply chains always jump at cost-downs, but real gains come from buy-in on longer-term growth and improvements.
Matt Desmond, senior manager at an automotive consultancy called Capgemini, told Supply Chain Dive that Tier 1 suppliers, "realized a few years ago that to stay profitable, they need (to innovate)." It benefits both partners in a relationship when the supply chain has adopted an improved infrastructure tool or cutting edge equipment — at any level.
Prioritize innovation: Emphasize advancements in mutual strategic initiatives, so the relationship doesn’t become stuck in rote processes and fall behind. Working together from the start can create savings in the long run, so get suppliers involved well in advance of a new project for their input on the technical direction of the design.
Invest in technology: Up-to-date equipment and tools will boost productivity and serve the interests of the entire supply chain. Partners can contribute to mutual success by investing in the most important next step, wherever it lies in the chain.
Optimize infrastructure: Not all innovations are about reinventing the wheel. Work together to find opportunities to make one another’s contributions as lean and efficient as possible. There may be opportunities to shift responsibilities or share infrastructure tools and ideas.
When business partners are each the best at what they do, a fruitful, long-term relationship comes naturally. Part of building such strong relationships, then, is focusing inward.
Focus on what you do best: A helpful starting point may be to review your own product offerings. The highly specialized supply chains of today often focus on narrowing down the specialties of each member to only the things they do best — and adding to the network for each required niche. A singular focus frees up resources and allows you to refine and augment your best products.
Adapt to market changes: Specializations must evolve with the market. Value-added components can’t add value if demand has shifted to newer technologies or concepts. To stay profitable, keep your specialty up-to-date, and don’t be afraid to change.
Become a need: Need is the operative word, here. Two companies that need each other will naturally share a stronger relationship than partners with a contract forged on price point alone. It’s not enough to provide a product. If you create enough value, you become something your partner needs in order to achieve their competitive edge.
Mutual respect is important. So is establishing yourself in the industry as a thought leader. This positions you as a reliable authority on what you do and promotes a listening ear in supplier interactions. To earn loyalty and trust, it’s advantageous to bring glowing reviews from prior partnerships to the table.
Positive demeanor: A healthy balance of empathy, patience and urgency tends to be the most effective at promoting strong, but efficient, relationships. Keep bridges open and unburned when relationships end.
Service: Incredible service is the major differentiator in a competitive industry where costs are generally close. Be a partner that suppliers will want to work with by going above and beyond with communication and attention to detail. That said, avoid relying on "overservicing" to compensate for mistakes — apologies are less effective than rooting out the problem so it won’t recur.
Quality: Your products will speak for themselves, so be careful with QA to minimize flaws, failures and recalls. Tour one another’s facilities to get a strong sense of how your partner ensures top-notch-products that will make the supply chain proud.
The widespread disruption — and in some cases, collapse — of the global supply chain is a strong reminder of how much relationships matter for the future of our businesses in times of trouble.
Relationships founded on pricing will be quick to move on when disruption challenges production. A stronger partnership will persevere and support one another however possible through the crisis. In this way, both partners are more likely to recover and emerge from the event stronger than before.
This story was first published in our weekly newsletter, Supply Chain Dive: Procurement. Sign up here.