End of “business-as-usual” in managing supplier relationship -- a wake-up call

By Valekumar Krishnan - Associate Vice President, Oil&Gas, Retail / Fashion, BFSI, Telecom, Utilities and Indirects; and  Sakthi Prasad – Senior Manager - Content

A key supplier of General Motors filed for chapter 11 bankruptcy protection early in July, a move that had briefly threatened to shut down 19 GM assembly plants in North America, but was later amicably resolved, according to the Wall Street Journal.

Clark-Cutler-McDermott Co, an interiors supplier who had previously won best supplier award from GM, opted for the Chapter 11 route “due an unprofitable contract with GM that had cost $30,000 a day since 2013,” according to the Journal.

For its part, GM argued in court papers that the supplier was using the bankruptcy process and its position as a critical parts supplier to protect personal interests rather than honor contracts. However, the issue was later resolved with the automobile major agreeing to buy Clark-Cutler-McDermott‘s equipment and inventory to avoid any production disruption, the newspaper reported.

This news makes us ponder over whether the procurement team saw this coming. For that matter, can procurement organization ever preempt such situations wherein a supplier shutdown can potentially threaten production?

Procurement, per se, may not be able to prevent every such incident; however, it would help if sourcing managers put themselves in the shoes of a supplier in order to get 360 degree view of a business situation.

The issue is that not many CPOs really understand how their suppliers segment them – this is a critical element in managing supplier relationships.

Some key questions we need to ask ourselves:

• How much of future business plans are you willing to share with your suppliers in order to win the loyalty of critical players?
   
• What do our key suppliers want from our company?
   -- Predictability, consistency, low cost to serve, discipline, behavior, one face to the supplier?
   
• What percentage of our supplier conversation is purely centered on price negotiation? And what percentage of supplier’s cost is driven by my company?

An old adage goes “good fences make good neighbors.” If we extend this logic to buyer-supplier relationship, we could say “good partnerships leads to good business outcomes.”

In order to make the most of good partnerships, procurement teams need to take a high level view to understand various aspects of sourcing rather than viewing the relationship solely via a periscope.

Common Mistakes		Instead Focus On
1.We are getting all that we can from our suppliers !!!   2.We always think we know enough about the category   3.We do not consider who is competing for our suppliers capacity in category planning   4.We always think that we are important to our suppliers   5.We don’t get all party sign off to supplier strategies   6.If you tell a supplier your strategy, they will share it with your competitors   7.We think we communicate enough with our suppliers		1.What do we need to do to get more from our suppliers?   2.What else do we need to know about this category? Can our suppliers help us understand how others are buying this category?   3.How do we position ourselves to ensure we get the capacity from our suppliers? Do we need to fundamentally change the way we do business with this supplier?   4.How do our suppliers view us? Are we their customer of choice? If not, how do we get there?

It’s important to maintain a good relationship with suppliers under normal circumstances, especially if the supplier is the sole provider of key inputs.          

European multinational company with about 25 billion euros in sourcing spend per year. 

                  –    40 plants in 5 countries using the same supplier

                  –    No internal co-ordination of demand and no category plan

                  –    No understanding on supplier stability or growth potential

•   Management demanding lower prices every year

•   Procurement teams negotiating lower prices with supplier each year

                 –    Separate negotiations for each plant; localised rewards for good result

•   Supplier could not continually reduce costs to match lower pricing:

                 –    Procurement could not fathom the leading signals

                 –    No communication channels were in place 

                 –    Supplier reached strategic decision and declared bankruptcy

•   Supplier’s tool mouldings were used on every product that the company produced

•   And one fine day -- Supplier gates closed with tools inside

RESULT: The European company spent weeks trying to salvage the situation and engineered a takeover costing 100 million-plus euros to avoid disruption.

Procurement learned the hard way about the benefits of cross business category management and how important it is to know about the supplier and the market.

In a way it is better to treat suppliers as strategic partners if they happen to be sole suppliers of critical parts.

First and foremost companies need to identify how mature their procurement function is. For example, in stage 1 of procurement maturity, a company may look for only better prices from their suppliers and worry about nothing else.
Once the price appetite is satiated, the procurement organization would naturally move towards better managing their cost base, in what could be termed as stage 2 and move further towards collaborating with suppliers to drive performance, which could be labeled as stage 3. Then there is stage 4 -- perhaps the most critical of all procurement stages -- where companies look to strategically partner with suppliers.

Classifying a supplier as a “strategic partner” is easier said than done. You can watch our detailed webinar on this subject. (https://www.beroeinc.com/blog/strategic-supplier-relationship-management-spectacular-benefits/).

Business relationship between buyers and suppliers will occasionally break down – that’s the rule of the game. However, the key lies in managing the transition smoothly without any hiccups.