from vendor to partner: why and how leading companies collaborate with suppliers for competitive...

From Vendor to Partner: Why and HowLeading Companies Collaborate withSuppliers for Competitive Advantage JONATHAN HUGHES

Despite the emergence of supplier relationship man-agement, many types of barriers prevent companiesfrom transforming traditional purchasing relation-ships with key suppliers into powerful collab-orations that can produce substantial value forboth parties. The secret of collaborative customer-supplier relationships is not only what the parties dotogether but also what they believe about each otherand how they interact. Using recent survey data,the author discusses the behaviors, perceptions,and practices that inhibit vendor-customer collab-oration; examines several successful partnershipsinvolving leading companies; examines what con-stitutes a “good” business-to-business relationship;and recommends steps companies can take to beginto transform their key supplier relationships into realpartnerships. © 2008 Wiley Periodicals, Inc.

In a global marketplace characterized by ever-increasing levels of competition, companies need toreorient themselves to systematically identify andcapitalize on ways to create value with their sup-pliers. According to a recent study conducted byIndustry Week and IBM, more than 62 percent ofpurchasing executive respondents said that suppliercollaboration was the most effective means by whichto (further) reduce costs and increase profitability—significantly more than those who named globalsourcing, and nearly twice as many as named spendanalysis.1

The case for collaboration is not a new one—yetit still remains aspiration far more than reality.Supplier relationship management (SRM) programscan be vehicles for instilling collaboration, but they

are often implemented without systematic effortsto build the trust and mutual commitment essentialto collaboration, and without the cross-functionalinvolvement essential for capitalizing on value cre-ation opportunities. Partnering with key suppliers,not merely purchasing from them, requires a highdegree of coordination across multiple boundarieswithin companies, and a fundamental change inhow the entire enterprise views, and interacts with,suppliers.

Why Supplier Relationship Management MattersIn many fundamental ways, the emerging disciplineof supplier relationship management is analogous tocustomer relationship management (CRM). Just ascompanies have multiple interactions over time withtheir customers, so too do they with their suppliers—negotiating contracts, purchasing, managing logis-tics and delivery, working on product design andspecifications, etc. These various interactions withsuppliers are not discrete and independent—insteadthey are accurately and usefully thought of as com-prising a relationship.

It seems intuitively obvious that there is value inunderstanding customers better by tracking and an-alyzing all of a firm’s interactions with them, whichhelps a company market to, sell to, and service itscustomers more effectively, leading to more revenueand higher profits. Management can also make moreeffective decisions about how to allocate finite re-sources across the customer base, based on a betterunderstanding of the value that might potentiallybe realized from each customer. However, it is notequally obvious that there is a parallel benefit tounderstanding suppliers in the same way.

c© 2008 Vantage Partners . Repr inted by permission of Vantage Partners . A l l r ights reserved.Publ ished onl ine in Wi ley InterScience (www.interscience.wi ley .com)

Global Business and Organizat ional Excel lence • DOI : 10.1002/ joe .20201 • March/Apr i l 2008 21

SRM: The Discipline of Systematic Collaboration with Suppliers

Many companies have implemented a formal SRM function within their procurement organization. Despite an increasingly highdegree of interest in SRM, there is no standard definition of the discipline, and much of the business literature on SRM, as well asmuch actual business practice, is confused and contradictory—and at times at cross-purposes with collaboration. Furthermore,with software vendors increasingly at the forefront of the SRM wave, the discipline risks becoming like customer relationshipmanagement (CRM), a powerful concept overshadowed by a myopic focus on software tools for data management, with littleattention paid to the critical changes needed in business processes and the interpersonal aspects of business relationships.

We define SRM, when properly understood and implemented, as

1. The systematic, enterprisewide assessment of suppliers’ assets and capabilities with respect to overall business strategy2. Determination of what activities to engage in with different suppliers3. The coordinated planning and execution of all interactions with suppliers in order to maximize the value realized through those

interactions

In practice, SRM almost always entails expanding the scope of interaction with key suppliers beyond simple purchasing andfulfillment transactions to encompass activities such as joint research and development, sharing of strategic information aboutmarketplace trends, joint demand forecasting, and the like. It often also entails elimination of interactions that consumesignificant resources but add little value—for example, time and energy spent specifying exactly how a supplier should executetasks and then auditing compliance. SRM also involves putting in place the organizational capabilities needed to manage morecomplex supplier interactions—to manage them strategically, as part of an overall relationship, rather than tactically through thevarious and separate organizational and functional silos—R&D, Purchasing, Finance, Manufacturing, and others—that affect orinvolve suppliers.

With customers, the overwhelming goal is sales.There may be objectives beyond profitable sales thatmatter with some customers (reference-ability—which drives sales with other customers; reducingcost of sales; getting early insights about needs andpreferences that may represent major market oppor-tunities; and the like). Nonetheless, these interestsare largely peripheral. The best customer is one whobuys a lot at attractive margins. Companies want asmany of these customers as possible.

But is the best supplier one from which a companybuys a lot at low prices? Not in an analogous way.Typically, a high-volume, low-price supplier is acommodity vendor: relatively easy to replace, andby most measures not a source of competitive ad-vantage. An important supplier is distinguished byother factors, such as product and service quality,willingness and ability to innovate, and productsand services that help a customer differentiate itsown products in the marketplace. It is these sup-

pliers that represent sources of significant potentialvalue, and that effective SRM programs can identifyand target for development and systematic manage-ment. Unfortunately, a majority of SRM programsare launched without formalizing a clear businesscase for the results to be achieved. As a result, toomany SRM programs end up as a set of administra-tive activities (meetings, compilation of scorecards,etc.) that do little to enhance collaboration or de-liver tangible benefits. (See the Sidebar above for adiscussion of what constitutes a well-designed andproperly implemented SRM program.)

The Case for CollaborationAccording to a global research study on customer-supplier collaboration conducted by Vantage Part-ners in 2006 and 2007, customers report realizingan average of 40 percent more value from their mostcollaborative key suppliers compared with theirleast collaborative key suppliers. Similarly, suppliers

22 March/Apr i l 2008 Global Business and Organizat ional Excel lenceDOI : 10.1002/ joe

Exhibit 1. Potential Forms of Value from Customer-Supplier Collaboration

report delivering an average of 49 percent morevalue to their most collaborative key customers com-pared with their least collaborative key customers.2

Sources of ValueThe data above raise several questions, includ-ing, What form does additional value createdthrough collaborative relationships with supplierstake? There is no single, simple answer. Specific op-portunities will vary significantly from company tocompany (depending on industry, market position,strategy, etc.). Equally important, there will be verydifferent collaboration opportunities with differentsuppliers.

While not exhaustive, Exhibit 1 provides a frame-work within which executives across the enterprisecan think about the potential forms of value thatcan be realized through effective collaboration, andthrough more strategic and systematic managementof interactions with suppliers.

Defining CollaborationThe data on the value of collaborative relationshipsalso raise the question of what constitutes such rela-tionships. Clear definitions of collaboration are hardto find, and so we propose the following: Collabo-ration occurs when two (or more) companies worktogether to achieve one or more common objectives,and/or when they work actively to help each otherachieve their respective objectives.

Exhibit 2 compares the attributes of the least collab-orative relationships with those of highly collabora-tive relationships. True collaboration is not businessas usual. It requires dismantling traditional ways ofthinking about and managing traditional purchasingrelationships. For collaboration to occur, customersand suppliers need to view and relate to each otheras partners and commit to joint value creation, andto enabling each other’s success. (We’ll examine thedynamics in these relationships in more depth laterin the article.)

Global Business and Organizat ional Excel lence March/Apr i l 2008 23DOI : 10.1002/ joe

Exhibit 2. Comparison of Least and Most Collaborative Relationships

When is true collaboration worth the effort? Almostevery company has a number of suppliers—oftenmore than they realize—with whom true collabora-tion is the key to unlocking tremendous incrementalvalue. Such opportunities to realize potential value

� Require close integration of planning and opera-tions between partners (e.g., extensive sharing ofinformation, extensive integration of processes,coordinated decision making, etc.)

� Call for significant investments in time, effort,and/or capital by both sides

� Entail a high degree of risk—notably the risk ofopportunistic behavior from the other side, andvarious forms of competitive risk.

Barriers to CollaborationDespite stated aspirations to increase collaborationwith suppliers, and significant evidence that pointsto the value of increased supply-chain collaboration,most companies continue to keep their suppliersat arm’s length, and treat their strategic suppliersin ways that are only marginally or intermittentlydifferent from the way they treat their commodityvendors. It is worth noting that suppliers often re-ciprocate by continuing to align their efforts, po-

lices, and incentives around short-term sales objec-tives, rather than maximizing the value they deliverto key customers. Even those companies that haveimplemented formal SRM programs have usuallydone so with half measures, being unable or un-willing to truly transform these important businessrelationships.

Our research on collaboration indicates a numberof common customer and supplier behaviors thatimpede the creation of value (see Exhibit 3 andExhibit 4, respectively). Several of the most fre-quently cited behaviors—including a short-termfocus, lack of internal alignment, lack of trans-parency, and unwillingness to make long-termcommitments—have an especially toxic effect oncustomer-supplier collaboration.

Emphasis on Short-Term Gains RatherThan Long-Term ValueBuilding and sustaining collaborative relationshipsrequires a willingness and ability to consistentlyavoid actions that create short-term benefits butundermine significantly greater potential to realizelong-term value.


Exhibit 3. Types of Customer Behavior That Prevent Suppliers from Delivering More Value

Exhibit 4. Types of Supplier Behavior That Prevent Suppliers from Delivering More Value

Data from Vantage Partners’ 2006–2007 studyreveals that nearly three-quarters of supplier respon-dents and about two-fifths of customer-side respon-dents believe that in their most important relation-ships, the customer is either significantly or primar-ily motivated by a focus on price rather than totalvalue (see Exhibit 5). Another quarter of the suppli-

ers, along with more than half of the customer-siderespondents, see the customer as somewhat moti-vated by price rather than total value in these keyrelationships.3 This is a devastating indictment.

The average procurement organization is fo-cused on—and rewarded for—price reductions and


Exhibit 5. Perceptions of Customer Motivation: Price vs. Total Value

short-term cost savings. A senior sourcing executiveat a Global 2000 high-tech manufacturing company,which has a relatively mature and sophisticated pro-curement organization, acknowledged:

We are often driven by short-term savings targetsoriented around price measures to do things weknow do not make sense. For example, we have reg-ularly switched out key suppliers when we founda new supplier (often in a low-cost region) offer-ing a significantly lower bid price. Despite seriousreservations about their ability to deliver requiredvolumes at required quality levels, we made theswitch. Then, as we had suspected, they failed todeliver. The costs of finding new suppliers, certi-fying them, and negotiating new contracts far out-weigh the original cost savings. And that’s before weeven try to estimate the lost sales that occur duringthe transition.

The over-emphasis on short-term and overly narrowmeasures of value is endemic to both customers andsuppliers. The goals and incentives that shape theway companies act toward their customers are, ingeneral, overwhelmingly focused on selling, not ondelivering maximum total value to customers. This

is not surprising inasmuch as the management ofkey customer relationships is generally owned bysales organizations that are structured, equipped,and compensated to drive sales and meet quarterlyand annual revenue goals. Even strategic accountmanagement groups are typically part of the overallsales organization and reporting line, and subject tosimilar short-term revenue and margin pressures.

The vast majority of companies defines and em-ploys performance metrics and incentives for theirmost important suppliers that are strikingly simi-lar to those they use for the rest of their commod-ity vendors. Even those companies that have im-plemented supplier scorecards with key suppliersas part of their SRM programs generally focus onshort-term objectives and easy-to-measure indica-tors rather than the drivers and realization of long-term total value. Because short-term metrics and in-centives drive behavior and thus, ultimately, results,they systematically act to limit collaboration andconstrain the investments (of time, effort, and cap-ital) without which major opportunities to realizeadditional value cannot be realized.4


Lack of Internal AlignmentSuppliers and customers both cite lack of inter-nal alignment as a major barrier to collaborationand value creation. Consider the case of a con-sumer products company that desired to tap intothe R&D expertise and patent portfolios of key sup-pliers to develop new and innovative products. Itasked its key suppliers to contribute ideas and as-sign researchers and engineers to joint developmentteams, and a number enthusiastically agreed to doso. Such efforts were, on the customer side, drivenand managed by R&D. Before long, these effortsyielded some notable successes. New products werebrought to market that incorporated novel and pro-prietary supplier inputs. No sooner did this happenthan the procurement organization noticed these ar-eas of sole-source spend. Seeking to commoditizewhat they identified as high-priced inputs, they im-mediately searched out or tried to develop alter-nate sources. Before long, they too were successful—at what they were rewarded for, namely, reducingcosts. Of course, not long after that, R&D found it-self with some very unhappy suppliers complainingabout breaches of faith and goodwill, and refusingto participate in further joint development efforts.R&D and Procurement were completely out of syncin their focus on their different respective goals. Col-laboration with key suppliers was largely shut downfor years as a result, with the lost opportunities onjust one critical relationship estimated by key exec-utives to be in the hundreds of millions of dollars.

Suppliers and customers both cite lack of internalalignment as a major barrier to collaboration andvalue creation.

Collaboration with suppliers can only happen whenthere is a high degree of alignment and collabo-ration within both customer and supplier organi-zations. And this requires that various functionalareas across the enterprise (from Procurement, toR&D, to Marketing, to HR) all speak the same lan-

guage when it comes to supplier management andcollaboration, and all work in a coordinated fash-ion to maximize the value inherent in key supplierrelationships.

Risks (Real and Perceived)A number of the behaviors cited in Exhibits 3 and4 as the most significant barriers to delivering long-term value stem from fears and perceived risks onthe part of suppliers and customers. Consider thefollowing story from a sourcing executive at a mi-crochip company that had entered into a closer,more collaborative relationship with a key supplier:

This particular supplier had great technology andtalented engineers. We saw potential to move be-yond a traditional purchasing relationship into onewhere we actually worked together on the designand development of new technology. We did so withinitial success, and then found ourselves very de-pendent upon them. Sure enough, once we gave upcompetitive leverage and lost the ability to switchthem out, their prices began to rise precipitously.

The fear of being extorted acts as an enormous bar-rier to collaboration, making companies reluctant toshare information, enter into long-term contractualarrangements, make investments, or work with sup-pliers in ways that reduce leverage and create greaterdependency. In addition to concerns about oppor-tunistic behavior from business partners, companiesfrequently fear that by sharing too much informa-tion, they will enable a supplier to evolve into a di-rect competitor. Such risks should not be discounted,but neither should they be allowed to escape, as theyoften do, reasoned assessment. At many companies,simply raising the possibility of creating a competi-tor is sufficient to prevent joint research or develop-ment efforts with suppliers.

Reliance on traditional vendor contract languageto govern integrated, collaborative arrangementsleaves both sides unprotected, and indeed, a tra-ditional customer-vendor approach to negotiat-ing contracts will generally leave critical issues


Exhibit 6. Key Customer and Supplier Perceptions of Commitment to Each Other

significantly underdiscussed, and fail to involve thetechnical perspectives and degree of legal and com-mercial expertise needed to produce effective con-tractual arrangements.

Lack of CommitmentOur study found that approximately 90 percent ofsuppliers believe that their key customers are onlysomewhat or not at all committed to their suc-cess, while about two-thirds of buy-side participantshad similar perceptions about their key suppliers(see Exhibit 6).5 Our research and experience in-dicate that this perceived lack of commitment isrooted, to a significant degree, in reality. For ex-ample, the head of strategic account management ata packaging supplier told us that his company hadmade an enormous investment to create a dedicatedjoint innovation center for a top customer; withina year, after realizing significant innovation gains,that customer put most of its business with this sup-plier out to bid. Such bitter experiences are hard toovercome.

Buy-side and sell-side executives and relationshipmanagers are often aware of a similar lack of com-mitment on the part of their own company toward

its key customers or key suppliers. One high-techsourcing executive gave this example:

We have periodically negotiated so aggressivelywith our key suppliers that we knew we were de-priving them of the margin they needed to operate ahealthy business. Sure enough, a year or two into thecontract, they’re out of business, and . . . we incurlosses that dwarf the negotiated price savings weachieved on paper. We can see it all coming, but wecan’t stop ourselves.

Such findings should be cause for grave concern ascompanies become increasingly reliant on outsidesuppliers for noncore activities and on external ex-pertise to drive innovation.

Without a high degree of confidence in their key sup-pliers’ commitment to their success, customers arereluctant to share information or enter into long-term relationships, fearing a loss of leverage throughwhich to ensure effective performance from suppli-ers whose genuine commitment they (with reason)doubt. In the absence of a genuine commitmentfrom key customers to their success, and subjectto the uncertainty of short-term contracts, suppli-ers are similarly reluctant to share information or


make investments that could yield significant valueto customers. Consequently, both sides find them-selves locked in a self-perpetuating cycle where theimperative to avoid loss of leverage limits collabo-ration and constrains the realization of value.

Creating Value Through CollaborationMany companies can point to the occasional successstory of how collaboration with a key supplier pro-duced significant value. Very few companies, how-ever, have successfully embedded collaboration withkey suppliers into the fabric of how they conductbusiness. Even as formal supplier relationship man-agement programs proliferate, they are rarely imple-mented with an explicit focus on true collaboration,and have achieved limited results in consequence.Those companies that are able to institutionalizeconsistent collaboration with key suppliers recog-nize that radical cultural transformation is required.This entails not only formalizing new ways of inter-acting with suppliers but also actively dismantlingexisting business processes and policies that impedecollaboration.

Even as formal supplier relationship managementprograms proliferate, they are rarely implementedwith an explicit focus on true collaboration, andhave achieved limited results in consequence.

Expanding the Scope of InteractionAs long as interactions between customers and sup-pliers occur primarily or exclusively between theirsales and procurement personnel, significant valueis bound to be lost. Not surprisingly, broadeningsupplier access to stakeholders beyond Procurementemerged as a top priority from our research, withroughly 60 percent of buy-side respondents and70 percent of sell-side respondents noting this asa critical means of increasing the value customersderive from their key suppliers.6

Kraft Foods is a good example of a company thathas systematically expanded the scope of interac-tion with suppliers beyond the sales and procure-ment organizations, with such efforts facilitated bya dedicated SRM team within the procurement or-ganization. Rather than continue to rely primarilyon in-house solutions to technical challenges andthen source to defined specifications based on price,Kraft has adopted what it terms a nonprescriptiveapproach—engaging its suppliers as true partners injointly developing optimal solutions. For example,technical staff from Kraft and a key supplier, alongwith one of the supplier’s suppliers, worked closelyfrom the very outset of a major development project.The result was commercialization of Snack ‘n’ Serve,a patented packaging system with an innovative re-close feature. Beyond the initial patent granted, fiveadditional patents are pending.

In addition to collaboration between the supplier’sand its own technical staffs, Kraft also has promotedsenior management interaction with key suppliers.Joint strategic planning sessions enabled Kraft tocoordinate and thereby enhance efforts to expandits footprint in Latin America. In addition, joint in-novation sessions held with key suppliers in CostaRica, Brazil, Mexico, and Argentina led to the intro-duction of new Kraft products in the region, as wellas to new affordable packaging formats that enableKraft to be more cost-competitive.

Engaging in joint product development, sharing andaligning technology roadmaps, reengineering busi-ness processes for greater efficiency, and the like areall opportunities for interaction and value creationthat require perspectives and competencies fromacross the enterprise (R&D, Manufacturing, Logis-tics, Marketing, etc.), at both customer and supplier.Likewise, comprehensively assessing a company’slong-term goals and challenges, and analyzing whereand how to best leverage a supplier’s expertise andcapabilities in response, requires the involvement ofmultiple parties within the customer—all with dif-ferent ideas, goals, and ways of operating.


The need for such involvement and alignment—andthe opportunities they create for additional value—exists not only at a functional or business-unit levelbut also across the enterprise. To facilitate suchenterprisewide alignment, a major pharmaceuticalcompany established a cross–business unit commit-tee that meets quarterly to review key metrics de-signed to highlight areas for supplier improvementand development; provide early warning of potentialproblems across suppliers; and ensure the ongoinghealth and viability of preferred suppliers. The com-mittee compares metrics across suppliers in orderto diagnose systemic problems. It also identifiesnew collaboration opportunities that involve multi-ple suppliers, and ensures that supplier managementbest practices are shared across the company.

Mitigating Risk and Sharing ValueCompanies such as Kraft Foods that regularly andsuccessfully engage in joint research or developmentefforts with suppliers have codified ways to analyzeand manage the attendant risks. Most fundamen-tally, they systematically analyze the likelihood thata supplier would want—and be able—to move intoa competitive position. Far more often than not, theanswer turns out to be unambiguously in the nega-tive. They then weigh the probability-adjusted riskagainst the upside benefits of collaboration. Moresubtly, companies that are successful at collabo-rating focus less on avoiding loss of leverage andmore on ensuring that dependence is mutual, andthat clear opportunities for future joint gain act as astrong disincentive to opportunistic behavior.

Companies such as Kraft Foods that regularly andsuccessfully engage in joint research or developmentefforts with suppliers have codified ways to analyzeand manage the attendant risks.

Such companies also expend the time and effort re-quired to put in place innovative contracts that go

beyond traditional purchasing boilerplate in order toclearly define intellectual property ownership; clar-ify exclusivity and noncompete obligations; and de-fine supplier rights to commercialize new technologyin specific markets or after a defined exclusivity pe-riod. Best practices also include working with sup-pliers to map out and agree to a declining cost curvefor newly innovative products or solutions, as ex-perience and increased volume produce efficiencies,and incorporating risk-reward sharing and/or clearperformance and service-level expectations and in-centives into agreements.

A win-win arrangement between Kraft and a keysupplier for reducing risk and sharing value con-tributed to their successful collaboration on theSnack ‘n’ Serve development project describedabove. Kraft gained 5 percent incremental salesgrowth for Kraft’s Chips Ahoy!® Chewy cookies.It negotiated exclusive rights in perpetuity to thepackaging technology in the cookie category, whilethe supplier retained the right to pursue significantopportunities to commercialize the technology withother customers in different market segments. Thesupplier was granted an initial increase in price, withboth sides agreeing to an aggressive plan for next-generation cost reductions.

Companies that focus on creating joint value muststill set prices and determine how to share the gainsfrom collaborative efforts like joint product devel-opment. Those that are most successful engaging incollaboration have found that a fundamental changein mindset is required. Rather than focusing on howto use leverage to extract the maximum value fromsuppliers, those who interact with suppliers need tobegin to assess what is the most fair and appropri-ate way to allocate gains and share jointly createdvalue with key suppliers. Instead of adversarial orcoercive tactics, many of which revolve around ex-plicit or implied threats to terminate the relation-ship or reduce its scope, both sides, metaphorically(if not literally), sit side by side to come up witha mutually acceptable solution based on objective


Exhibit 7. Three Dimensions of a Business-to-Business Relationship

criteria. This is one of the animating insights be-hind the procedure known as “target costing” (orsimilarly, “should-cost” analysis) most notably em-ployed by Honda and Toyota. Rather than relyingon leverage, demanding arbitrary price concessions,utilizing cost-plus formulae, or relying on competi-tive bidding to try to force the lowest price, Hondaand Toyota both work backwards from estimatesof what the market will bear for the final product.They then work closely with key suppliers to deter-mine what various components and subsystems canand should cost. Obviously, such an approach doesnot eliminate contention, but it does transform in-evitably difficult negotiations over value allocationinto a joint endeavor. Conducted in a spirit of truecommitment to a fair outcome for both parties, italso opens the door to creative problem solving in away that more common and adversarial approachesdo not enable—and in fact actively shut down.

Building Collaborative RelationshipsCapitalizing on the power of collaboration is a func-tion of two major changes: (1) changing (specifically,broadening) the scope of interactions with key sup-pliers (i.e., what interactions occur), and (2) trans-forming the manner in which customers and theirkey suppliers interact (i.e., how customers and sup-pliers deal with one another). Companies that con-sistently treat their most important suppliers as part-ners rather than vendors work at both the procedu-ral and the substantive aspects of the relationship.

The Anatomy of a B2B RelationshipThe model shown in Exhibit 7 defines three dimen-sions of business-to-business (B2B) relationships:

� Dimension 1, the collective set of interactionsbetween two or more parties—the substantiverelationship


� Dimension 2, the manner in which interactionsare conducted—which, together with Dimension3, constitutes the procedural relationship

� Dimension 3, perceptions and beliefs the par-ties have about one another—which, togetherwith Dimension 2, constitutes the proceduralrelationship

Expanding the scope of interaction between cus-tomer and supplier (e.g., joint innovation and early-stage product design efforts), defining more robustcontracts, and implementing more equitable value-sharing arrangements all address the substantiveside of customer-supplier relationships. While tak-ing such steps is important, efforts to change thesubstantive dimension of relationships gain only lim-ited traction absent a systematic focus on transform-ing the procedural dimension as well. Companiesthat are most successful at collaborating with sup-pliers demonstrate a deep understanding of whatgood relationships entail, and in particular what ittakes to create and sustain them. These companiesspend significant time systematically nurturing andmanaging the procedural dimension of their sup-plier relationships—building trust, investing in un-derstanding their suppliers and helping their sup-pliers understand them (strategically, operationally,and culturally), and ensuring that the interpersonalinteractions so crucial to effective interfirm collab-oration are characterized by mutual respect, cre-ative joint problem solving, and a commitment tofairness.

Marcia Glenn, senior vice president of Global Pro-curement for Kraft Foods, articulates Kraft’s ap-proach to its key supplier relationships this way:“We want to earn access to their best ideas and theirmost talented people by being the company whomthey trust most, the one that works with them mosteffectively to help them improve, and the companymost willing and able to share information and re-sources with them to achieve more than either of uscould independently.”7

People tend to think of a good business relation-ship only as a consequence of the value it creates.Although beliefs and interactions that characterizea relationship will, over time, be influenced by thevalue each side receives, the procedural dimensionof business relationships is also a critical enabler ofvalue creation, as illustrated in Exhibit 8. The way inwhich companies manage the procedural dimensionof their key supplier relationships—not just whatthey do, but how they work together—has a hugeimpact on the value they realize.

The way in which companies manage theprocedural dimension of their key supplierrelationships—not just what they do, but howthey work together—has a huge impact on the valuethey realize.

Both our research and experience working withclients reveal a near-universal acknowledgment ofthe importance of the procedural dimension of re-lationship management, marked by constant refer-ences by executives and managers (both inside andoutside of Procurement and supply chain manage-ment) to communication and trust as critical issuesin customer-supplier relationships. At the same time,very few individuals are able to articulate a coher-ent view of why and how the procedural dimensionof relationships matters, much less how a companycan do anything to actively manage such soft andseemingly intangible issues.

A Focus on the Interpersonal LevelCollaborative relationships with key suppliers—which are more complex, interdependent, andstrategic than simple purchasing relationships—depend in large part on the ability of multiple in-dividuals on both sides to regularly solve problems,make decisions, and resolve conflicts in the face ofmultiple, competing priorities—some shared, and


Exhibit 8. Causal Connections in a Business-to-Business Relationship

some not. Because more complex interactions tendto require the application of human intelligence andjudgment, their success depends on whether peo-ple are able to work effectively together. Yet mostcompanies that implement SRM programs focuson things like supplier summits, new supplier re-lationship manager roles, and software tools formore efficient exchange of information with sup-pliers, while effectively ignoring the deeper, less tan-gible but more critical issues that lie at the heart ofcollaboration—namely, the interpersonal dimensionof relationship management.

Consider the experience of a manufacturer of indus-trial equipment that agreed to collaborate with a keysupplier on a new product design that would yieldbetter performance as well as lower manufacturingcost and lower defect rates. A joint engineering teamof the best and the brightest from each company

was assembled. Unfortunately, the individuals onthe team neither respected nor trusted one another.They also believed that the other company was com-mitted to systematically taking advantage of its busi-ness partners in order to maximize gains for it-self. Consequently, information was withheld ratherthan shared, ideas proposed by individuals from onecompany were attacked or ignored by individualsfrom the other, and six months after it began, theeffort was disbanded, each side blaming the other(somewhat schizophrenically) for a combination ofincompetence and conscious sabotage of the effort.The original business case (which ran into the tens ofmillions of dollars in benefit to each side) was neverrealized, and each side wasted the time and effort ofsome of its most talented people for half a year.

Debriefing the effort a year later, one of the executivearchitects of the deal explained:


I really thought that if the business case was there,although it might be difficult, rational self-interestwould inevitably lead to success. Now I know that’snot true. I also thought that a group of engineerswould behave rationally, that something as “soft”as relationship management didn’t matter. I nowknow firsthand that people don’t check their emo-tions at the office door. All the emotional energythat, in a collaborative, high-performing team, ischanneled into exchange of ideas and creative de-bate became, in this situation, absorbed and re-flected by ad hominem attacks, defensiveness, andabsolutely irrational, ego-driven arguments aboutwho was more or less competent, who was ethicaland who wasn’t, and who had secret agendas.

Because the procedural aspect of customer-supplierrelationships depends heavily upon the quality ofinteractions between individuals, individual skillstraining is a necessary part of a company’s com-prehensive strategy for building collaborative rela-tionships. We have identified five core competenciesthat lie at the heart of effective collaboration, andthat must be developed not only among individu-als in the procurement organization, but across allindividuals who interact with, or need to begin tointeract with, key suppliers:

� The ability to diagnose problems by identifyingeach party’s contributions to a situation or out-come, rather than by attempting to allocate andassign blame

� The ability to explore and learn from differentperspectives and opinions, rather than focusingon assessing who or what is right or wrong

� The ability to develop solutions that maximizejoint value by exploring the underlying interests(needs, goals, constraints) of each party, ratherthan by haggling over positions (preconceived so-lutions or demands) and trading concessions

� The ability to resolve conflicts through the iden-tification and application of relevant criteria,rather than through threats, bribes, or coercion,thereby setting useful precedents for the efficientresolution of future conflicts

� The ability to manage strong emotions (e.g., frus-tration, anger, anxiety)—one’s own and thoseof others—in a constructive way so that theydo not impede effective problem solving andcollaboration

A Focus on the Organizational LevelMany companies that address procedural issuessolely through skills training have processes, poli-cies, and procedures that militate against the veryskills they teach to those who manage relationships,or interact, with key suppliers. Leading companiesthat are most successful collaborating with suppliersstand out, not only in their focus on the proceduraldimension of relationship management, but also byvirtue of the sophistication with which they analyzeand adjust policies, business processes, and man-agement systems to enable effective collaboration atboth the interpersonal and the organizational level.

Many companies that address procedural issuessolely through skills training have processes, poli-cies, and procedures that militate against the veryskills they teach to those who manage relationships,or interact, with key suppliers.

Executives across the enterprise need to create anenvironment in which the many individuals whointeract with suppliers are optimally enabled andencouraged to exhibit collaborative behaviors. Thisrequires formalizing new business processes, as wellas adjusting existing business processes, that serve tostructure interactions among the myriad individualsat customer and supplier, including:

� Development of sourcing strategies� Supplier evaluation and selection� Negotiating and contracting� Supplier development� Joint business planning� Coordination of day-to-day operations


� Performance and value measurement� Issue escalation and resolution

As an example, the large pharmaceutical companymentioned earlier has developed a supplier perfor-mance management process that is collaborative andimprovement-focused rather than coercive and puni-tive. The company’s relationship managers have reg-ular meetings with their counterparts at suppliers toreview results. Working together, they diagnose po-tential sources of performance problems and discusshow they can collaborate to improve the supplier’sperformance and to increase the value the suppliergets from the relationship. Suppliers are also invitedto share feedback with the company on how it canimprove the way it works with them.

KLA-Tencor Corporation (KT), the leading manu-facturer of inspection and metrology equipment forthe semiconductor industry, is also an example ofan organization willing to adopt new processes andstructures to extend forms of collaboration with keysuppliers. KT invited the CEO of a key supplier tobrainstorm ways that KT could help them grow andimprove their overall competitiveness. This was oneof the factors that led the supplier to make an acqui-sition to expand both its capabilities and geographicreach. KT helped the supplier to complete the ac-quisition and to leverage the acquisition to growits business beyond the sum of the merged com-panies. Scott Paull, KT’s chief procurement officer,concludes:

It was in KT’s long-term interest to actively help oursupplier be successful. We get the benefit of their im-proved competitiveness and capabilities. And theyget to grow their business and leverage that withother customers as well. KT also received warrantsthat give us the option to take an equity position inthe firm if we so choose, and that could be beneficialto both of us.

As is often the case with collaborative efforts, it willtake years to fully evaluate the benefits. Nonetheless,

in an early sign of success, the supplier achieved suf-ficiently high growth that a grant of additional war-rants to KT was triggered. Such a level of strategicengagement and cooperation is evidence of the trustand commitment to mutual success that each partnerbrings to this relationship, and of the willingness topursue innovative collaborative practices that havethe potential to generate significant long-term value.

A New Paradigm for Interpersonal Collaborationand Relationship ManagementCompanies that aspire to value-maximizing collab-oration with suppliers need to change their orga-nization’s prevailing perception about what makesa relationship “good.” Without doing so, it is ex-ceedingly difficult to build and manage such nontra-ditional arrangements. Most individuals are unableto articulate a clear definition of what constitutes a“good” business relationship. Based on observationand extensive research, however, a very common(but usually implicitly held) definition emerges:

� You do what I want.� I keep you happy.� We like each other.� We have little or no conflict.

Companies that aspire to value-maximizing collab-oration with suppliers need to change their organi-zation’s prevailing perception about what makes arelationship “good.”

This common picture of what constitutes a good re-lationship provides little useful guidance on how tobuild one. Insofar as it involves a relationship wheresuppliers do what customers want, it is unrealistic—especially if suppliers hold a similar theory of whatconstitutes a good relationship (namely, that theircustomers do what the supplier wants). Moreover,while interpersonal affinity may be helpful, it is not


Exhibit 9. Strategies for Managing Supplier Relationships

nearly enough to make a complex relationship be-tween companies successful when large numbers ofpeople need to work together, and who those indi-viduals are regularly changes. To a large extent, thiscommon view of a good relationship is a fantasy—we might think we want relationships like that withsuppliers and other business partners, but we’renot going to get them. Moreover, even when suchrelationships exist, they rarely produce significantvalue—they are captive vendor relationships; theydo not nimbly respond to or weather change; andthey do not produce breakthrough savings, substan-tial innovation, or otherwise contribute to competi-tive advantage.

It is specifically this way of thinking about relation-ships that drives (again, usually unconsciously) mostcompanies to believe that building (or preserving) a“good working relationship” means that they can-not assertively pursue their business objectives, andthat they must make substantive concessions by notaggressively negotiating for the best price, not hold-

ing suppliers rigorously accountable for commit-ments made around project scope or delivery sched-ules, and the like. The common view that good rela-tionships must be “bought” produces an irresolvableparadox at the heart of relationship management,with buy-side and sell-side executives and relation-ship managers often struggling to choose between,or artfully combine elements of, the two basic ap-proaches outlined in Exhibit 9: Option A, the “HardApproach”—focus on maximizing value today(often at the expense of suppliers), recognizing thatthe tactics employed to do so will likely damage rela-tionships, and hence reduce opportunities to realizevalue over the longer term; or Option B, the “SoftApproach”—sacrifice substantive business value to-day in the hopes of getting greater value tomorrow.

Fortunately, there is a third way, Option C inExhibit 9, a more constructive approach we term“Principled Collaboration.” This approach coher-ently integrates both the substantive and the proce-dural dimensions of relationship management, and


transcends the false choice of either relying on lever-age to achieve business results or making conces-sions to preserve or “buy” a good working rela-tionship. This approach to relationship managementemphasizes mutual, balanced dependency betweenpartners, as well as mutual accountability. “Thisdoes not mean less stringent expectations for oursuppliers,” says Kraft Foods’ SVP of Global Procure-ment Marcia Glenn. “In many cases it means just theopposite. But it also means that we are committed toactively helping our suppliers be successful.”8 Whilesuch an approach is still relatively rare, Kraft andothers have demonstrated that it can be learned.

ConclusionIndividual skills training is one lever for instill-ing the competencies required for collaboration be-tween customers and key suppliers. But companiescannot stop there. Reward systems, corporate poli-cies, formal work processes, and management be-havior all need to be aligned in order to producesuch behavior consistently across all the parts ofthe enterprise that interact with suppliers. Onlythen can companies institutionalize a new view ofkey supplier relationships—as a strategic asset anda source of competitive advantage as opposed tomerely a cost center—and new ways of interactingwith suppliers—including openness to learning fromdifferent perspectives and an ability to find creativesolutions to competing goals and objectives. In thisway, arms-length vendor arrangements can be trans-formed into true partnerships, and companies can

finally unlock the tremendous value that such rela-tionships can deliver.

Notes1. 2005 Industry Week value-chain survey, Industry Weekin conjunction with IBM Business Consulting Services, withassistance from APQC, September 2005.

2. J. Hughes, J. Weiss, S. Morton, & C. Kim, Customer-supplier collaboration study (Boston, MA: Vantage Partners,2007). The study involved more than 300 companies andmore than 500 individual survey responses from both buy-side and sell-side executives and relationship managers.

3. Ibid.

4. This is especially true since incentives and managementsystems at most companies are generally biased in favor oflimiting downside risk, rather than maximizing upside oppor-tunity. Missed opportunities are, by their nature, intangibleand hard to quantify, and as a result, often have limited im-pact on executive decision making and day-to-day employeebehavior.

5. J. Hughes et al., Customer-supplier collaboration study.

6. Ibid.

7. J. Hughes, Supplier metrics that matter, CPO Agenda,Autumn, 2005.

8. Ibid.

Jonathan Hughes is a partner at Vantage Partners, a consult-ing firm spin-off of the Harvard Negotiation Project, and thehead of Vantage Partners’ Sourcing and Supplier Manage-ment Practice in Boston, Massachusetts.


from vendor to partner: why and how leading companies collaborate with suppliers for competitive...

Documents