What can be done to ensure that cooperation with a supplier becomes a success rather than a failure? What are the benefits of long-term cooperation and how can they be maximized? What are the risks and how can they be eliminated? How to recognize the risk of signing a contract with a supplier and how to protect oneself against exit barriers? These are the most important questions that anyone entering into negotiations with a supplier should ask themselves. Especially when the supplier is perceived as a long-term partner for the company. The answer should absolutely be a well-developed strategy regarding: supplier selection, business onboarding, relationship building, and termination of cooperation. Otherwise, our recommendations regarding the selection of a strategic partner will be burdened with high risk.
Skillful risk management in supplier relationships is the key to success in contract execution. Any misunderstandings in this area at the negotiation stage will determine whether the contract ends in success or failure. This article aims to emphasize the importance of reliably preparing appropriate strategies for building relationships with suppliers. It will show the benefits associated with undertaking long-term cooperation and clearly point out the risks involved. Building a strategy based on full awareness of risk, not only at the beginning of the cooperation but mainly towards its end, can determine the success of the cooperation precisely at its final stage. This refers, among other things, to awareness of so-called “exit barriers” from a contract and the development of appropriate exit scenarios.
Additionally, it is worth emphasizing that the supplier selection process itself is only one stage of a large project, which undoubtedly is starting long-term cooperation with a new supplier and onboarding them into the business. The scope of work involved is so large that it requires a dedicated team of experts within the company, especially in the preparation and negotiation phase and at later stages of implementation. One must realize the fact that the project does not end the moment commercial terms are negotiated and the contract is signed. The project ends on the day cooperation with the selected supplier concludes, and it is worth being aware of this from the very beginning.
Several times in this article, the importance of reliably preparing a cooperation strategy with a supplier and managing risks in relationships with them will be emphasized. How to prepare for them? What to pay attention to so as not to forget anything important? How to protect oneself against undesirable supplier practices during cooperation and just after its conclusion? Is it worth building partner relationships at all? Below are some tips and answers to these questions.
Build long-term relationships, because it pays off
One should not be afraid of long-term contracts, i.e., those concluded for a period of over 1 year, if we ensure that the benefits flowing from them do not tie our hands and do not make the company dependent on the good or bad will of the supplier. Taking into account business benefits, it is worth highlighting the following:
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gaining a competitive advantage through the selection of the best suppliers from the company’s point of view
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cost reduction and improvement of net profit
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minimization of supply chain disruption risk
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knowledge exchange and creation of “tailor-made” services
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maximization of technological and commercial innovation
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cultivating shared values, such as the development of corporate social responsibility policy
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increased satisfaction of internal and external customers resulting from high-quality, tailor-made service.
The starting element in the process of building strategic relationships with a supplier is changing the approach to cooperation with them, from purely transactional to a partnership approach. In the first case, we rely on short contracts and frequent price inquiries, negotiations based solely on achieving cost reduction, the so-called “Beat them up” (BTU). In the second, the basis is a practice called “Bring them in” (BTI), which means introducing the supplier into the organization on the basis of full integration. Practitioners who have successfully implemented the supplier integration process in their companies state unanimously, on the pages of Purchasing Magazine Online, that integration with suppliers requires the following elements:
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dedicated resources on the buyer’s side
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a high degree of communication with the supplier
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active involvement of people from outside the purchasing department in cooperation with suppliers
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joint definition of the supplier’s role in the integration process.
Depending on the complexity of the delivered product, it is sometimes necessary to allocate resources (both financial and human) intended solely for the implementation and development of the supplier and to designate a person responsible for communication with the supplier. The main task of such a person will be to mediate between internal “stakeholders” and the people responsible for cooperation with our company. Early communication and involvement on the supplier’s side are particularly important already at the negotiation stage, and not just based on the exchange of numerical data, phone calls, and emails. Meetings, visits, conversations with people involved in the project on the supplier’s side, and even with representatives of senior management play a large role in the process of integration and proper relationship building. Examples of areas in a company where building partner and long-term relationships with suppliers brings the most measurable benefits are IT and telecommunications.
Due to the nature of products purchased in the high-tech industry, we start cooperation by viewing the supplier as our partner for a longer time. We base our strategy on this, while the subsequent execution of the contract over a period of 2-3 years, shared experiences, and the relationships we build during that time will determine whether they will remain our strategic partner or, which is also possible, be excluded from this group.
The article comes from the “Logistyka” magazine 6/2010.