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Innovation and supplier management: is the relationship really aligned?

Value creationSupplier relationship managementInnovation

In this guest post, Procurement Leaders invites GEP’s Jim Kiser to discuss supplier relationships and how they can be developed to deliver long-term benefits for both parties.

 

"I’ve seen few companies that would invest the time and trust in developing such strategic relationships with their suppliers but the ones that do, realise long-term sustainable business benefits.”

 

Given the last statement from Santosh Nair of GEP regarding an organisation’s ability to identify, cultivate and then ultimately sustain the strategic relationship developed between a buying organisation and a supplier, is one for close scrutiny and consideration.

 

In order to reach its maximum effectiveness and benefits between two companies, innovation must be rooted in agreed executive working principles, shared responsibilities, open transparency, shared risk/reward and finally commitment to ultimate long-term benefits. Then, and only then, can a sound ’accord’ be established going forward as the basis of a relationship developed on trust.

 

To move from a competitive price management arm’s length relationship to one of a principled integrated relationship begins with understanding the nature of the current relationship, the financial benefit considerations between parties and if potential innovative capabilities can exist between organisations.

 

I was privy to work with a privately held manufacturer who provided finished products to large OEM’s in the automotive industry. They believed for many years that the relationship they had begun with an incumbent supplier located near to their manufacturing facility was a ’strategic’ relationship void of relationship risks and cost problems. We began to analyse what the current business agreement and performance considerations were between companies, and here is what we found:

  • Price increases were given by the supplier and accepted by the buying organisation
  • The supplier controlled the price of raw material by buying from whomever they chose, not the low cost provider
  • Specifications were never analysed to see if efficiencies could be gained through value analysis or value engineering efforts
  • Integrated forecasting of demand cycles was not in place
  • What percentage of sales did the buying organisation’s material components represent to the supplier in the beginning and then now after all this time?
  • Was cost management ever discussed over the years during this so called long term ’strategic’ relationship and what was the true cost of final delivery?

Only through agreed shared objectives like should cost modeling, supply chain analysis of raw material purchasing and principled executive meetings can the basis for a extended ’move forward’ relationship be established. Ideally, in order to develop a longer term integrated relationship both the buyer and supplier organisations need to view each other as growth to their business plans, not as small incremental profit.

 

Ultimately, the relationship needs to shift from a price focused relationship to one that focuses on performance management and cost management. Parties need to agree on new working principles for areas like raw material management, production efficiencies and transparency of forecasting. This will start an ongoing effort to work together towards a goal of beneficial mutual gain between organisations in the future.

 

Guest Blog
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