Strong relationships with suppliers 'crucial' for success

David Noble, Group CEO, Chartered Institute of Procurement & Supply
posted by David Noble
10 August 2015

Understanding suppliers’ motivations has never been more critical and research proves it makes good business sense

Our perception of, and reaction to, reality is subjective. Regardless of how much technology, data or training we rely on, or how much we depend on automation, this is how we as human beings interact and understand the world. But to take this one-sided view is a seriously defective approach to business. Putting our faith purely in our own biased views is unlikely to get us far.

If there needed to be some kind of proof that a more-rounded approach, including good working relationships with suppliers, and an understanding of their motivations and pressures, is crucial to the long-term success of any venture, then a quick read through the North American Automotive - Tier 1 Supplier Working Relations Index study released each year is a good place to start.

This year’s study results offered headline-grabbing news, by highlighting how US carmakers lose millions of dollars in profit as a result of weak supplier relationships. And the loss of revenue is quite substantial – around $2 billion could have been added collectively to the bottom line by Ford, General Motors, FCA US and Nissan if their relationships with their suppliers had improved to the extent that Honda’s and Toyota’s did in 2014.

Around 435 suppliers take part in the study each year and the correlation between business success and strong relationships is stark.

The index was started in 2002 by John Henke, a professor of marketing in the US. He began conducting the surveys among the automotive industry companies 10 years ago.

The index shows that the higher the rating an original equipment manufacturer (OEM) has in terms of the strength of its relationships, the more likely their suppliers are to share new technological developments, offer best pricing or put forward their best staff and ideas for improvements.

Collectively these have a significant bearing on an OEM’s profit line and strength in a highly competitive market and show the benefits of an open and transparent approach to business, developing trust and reducing subjectivity.

Conversely, using game theory – strategic decision making – may suggest the opposite approach to transparency, at first. With its origins in mathematics, it is now used in a number of professions and applications, including procurement and supply management.

No longer merely theoretical, game theory can be used to develop a deeper empathy with suppliers by understanding their motivations and increasing the ability to ‘see’ an outcome and prepare for it. It’s a serious tool for skilled category and supplier management as well as strategic sourcing.

This fits in perfectly with discussions on ‘soft’ skills, featured in last month’s magazine, and pardon the pun, it is a game changer. Where both parties want long-term futures in contracts and partnerships and the products and services to be negotiated are long and complex, the needs and challenges faced by the other party merit due consideration and appreciation.

This can only be achieved by embracing close working relationships and a circle of truth and trust, and by putting yourself into the other side’s shoes.

Winning at any cost is no longer viable and human behaviour is complicated. But as the American economist Joseph Stiglitz said, trust is the grease that makes society function. We can all resort to legalese and contracts, but this will only ever be second best compared to making the effort to understand others and their motivations.

☛ David Noble, group CEO, CIPS

David Noble, group CEO, CIPS

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