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Supply chains are the backbone of any successful enterprise. How can you build win-win supplier relationships that strengthen the entire supply chain?
Factors such as COVID-19, climate change and geopolitical conflict are putting global supply chains under more pressure than possibly ever before. According to a 2022 survey by PwC, suppliers’ raw material availability, operational issues and financial health are considered moderate to major risks by supply chain professionals across a variety of sectors.
If you’re a large enterprise that relies on a supplier network, this is why win-win supply chain relationships are so important: If one link along the supply chain is weak, everyone is impacted.
In times of uncertainty, enterprises are prioritizing supplier relationship management (SRM) — a strategy that assesses supplier value and works to improve relationships with high-value suppliers. APQC’s 2022 Supplier Relationship Management survey found that almost 70% of supply chain professionals now value and prioritize SRM implementation, compared to just 31% in 2018. Additionally, 65% of respondents cited SRM as the most effective approach to mitigating COVID-19 impacts in a 2021 survey by State of Flux.
The question is, what makes a win-win supply chain relationship? Here are four signs that your supplier relationships are healthy and some benefits you can realize from these characteristics.
Researchers, including Sengun Yeniyurt, Ph.D., associate professor of supply chain management and marketing sciences at Rutgers Business School, studied buyer and supplier relationships in the United States automotive industry over 10 years. The researchers collected data for both buyers and suppliers but focused their research findings on the suppliers’ perspective. While the study involved a complex series of formulas to correlate relationship attributes over time, the results identified four key traits of successful buyer-supplier relationships: communication, commitment, trust and interdependence.
Like any relationship, buyer-supplier relationships thrive when each party communicates effectively. Effective communication requires routine buyer-supplier information sharing and a mutual understanding of each other’s needs and expectations.
The researchers qualify buyer communication as “the extent to which a buyer openly and honestly shares timely and adequate information with suppliers.” When it comes to product development, this can involve the sharing of designs, technology and other product planning considerations. The study found that communication not only makes suppliers more willing to invest in technologies specific to your enterprise but also makes suppliers more willing to share proprietary technology with you.
A willingness to share technology and invest in buyer-specific technology indicates another relational attribute: commitment. Some other signs that you and your suppliers are committed to each other include:
You and your suppliers frequently discuss and plan future projects collaboratively.
Your suppliers are engaged in your product development early on in the process.
You and your suppliers often share resources and engage in strategy alignment and product differentiation.
Commitment leads to long-term returns for both parties. Suppliers secure long-term business opportunities and can plan their resources more effectively, while you, the buyer, receive goods that more closely meet your needs. Early collaboration also means that you and the supplier are more likely to save production costs caused by miscommunication or inefficiencies later.
Commitment requires a level of trust between buyers and suppliers. Buyer-supplier trust can break down if one or both parties fail to see reciprocal benefits from the relationship. This is often the case in win-lose supply chain relationships — for example, if a buyer becomes dependent on a supplier and the supplier takes advantage of that position (or vice versa).
Trust is a measure of both buyer and supplier integrity and reliability. You need to know that your suppliers can deliver what they promise, and suppliers need to trust that investing in your needs will also be worth it for them. As with communication and commitment, the research found that over time, greater trust makes suppliers more willing to invest in buyer-specific technologies and share proprietary technology with buyers. If this sounds familiar, you most likely have established trust with your supplier.
It’s worth mentioning that trust takes time to develop and is not static, developing as the buyer and the supplier navigate challenges together and learn from shared experiences.
Depending on your industry, you might have limited choices when choosing suppliers — or you might be tied to a supplier relationship due to regulatory compliance or other factors. In some cases, such as a highly competitive or niche supplier market, a supplier may become dependent on you. In either case, such a dynamic can create an imbalance, especially if the less dependent party capitalizes on the situation. This can crush any trust, commitment or communication that you’ve built with a supplier.
If a buyer-supplier relationship is interdependent, both parties mutually benefit from the relationship and neither party holds power over the other. According to the study, a supplier is less incentivized to invest in the relationship if its buyer is supplier-dependent. If you are supplier-dependent, consider asking your supplier to become more involved in your product development process to balance the relationship. Many suppliers are willing to increase involvement when they can also realize long-term value from it.
Why invest in SRM? Strong supply chain relationships can save your business a significant amount of money, but the benefits also go beyond your bottom line.
In healthy buyer-supplier relationships, suppliers tend to be more involved in the product development process from early on. This allows both parties to share information, plan resources, optimize processes collaboratively and foresee issues that could cause delays down the road. As a buyer, you’re better positioned to deliver quality goods on time to your customers and build supply chain resilience when risks arise. When there are issues, suppliers that you’ve built strong relationships with tend to offer support and are willing to work with you to resolve the problem.
A more efficient, streamlined supply chain can increase on time in full (OTIF), a supply chain metric used to measure the proportion of fully fulfilled deliveries that ship on schedule. Timely product delivery improves customer satisfaction. If your suppliers are more integrated into your product development process, it’s also likely that they are providing buyer-specific goods or even supporting product innovation. This also improves customer satisfaction, ensuring that your quality standards and customer demands are closely met.
Enterprises face a variety of challenges when it comes to product innovation, from incorporating technologies outside their wheelhouse to addressing technology skills shortages. Suppliers play a crucial role in innovation, filling resource and expertise gaps that companies need to keep their products competitive. Successful innovation requires healthy supply chain relationships. The research shows that trust, commitment, communication and interdependence all correlate with a supplier’s increased willingness to invest in and share buyer-specific technologies.
In a 2022 supply chain management survey by APQC, supply chain professionals cited improving supplier reliability and reducing risk as the top benefit of SRM. Buyers and suppliers that are highly involved in each other’s product development — a clear sign of a healthy supply chain relationship — are more collaborative and proactive in risk planning. This helps maintain supply chain continuity and customer service.
Streamlined production, higher customer satisfaction, innovation and reduced risk all point to cost savings and profits for buyers and suppliers. Indeed, the Rutgers Business School research confirmed a financial win-win: The more a supplier is involved in a buyer’s product development process, the higher the sales performance for both parties. A 2014 paper offers the most reliable quantitative research to date on the link between supplier relationships and profit, arguing that SRM could have generated $24 billion in additional profit for Chrysler over 12 years.
This may be due in part to a more timely, resource-efficient supply chain. However, you can also generate cost savings by negotiating better pricing with suppliers you have strong relationships with, such as fixed costs or discounts in exchange for long-term contracts and high-volume orders. Additionally, maintaining healthy supply chain relationships will save you from having to replace suppliers, which — like replacing employees — is costly and resource-intensive.
Focusing on your customer relationships might seem like the most logical strategy if your goal is to stay profitable and grow. However, strengthening business relationships in supply chains is just as important, especially in a world fraught with supply chain disruptions.
Communicating and committing to your suppliers, building trust and fostering interdependence will all help strengthen your supply chain relationships and improve your business’s resilience in times of uncertainty. The research says it best: Buyers and suppliers in good working relationships are better together.
SRM takes time to develop, but early payment programs can help kick-start a win-win relationship right now. Learn more about C2FO’s Early Payment program.
This article originally published March 2018, and was updated December 2022.
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