Companies with advanced procurement functions know that there are limits to the value they can generate by focusing purely on the price of the products and services they buy.
These organisations understand that when buyers and suppliers are willing and able to cooperate, they can often find ways to unlock significant new sources of value that benefit them both.
Buyers and suppliers can work together to develop innovative new products boosting revenues and profits for both parties. They can take an integrated approach to supply-chain optimisation, redesigning their processes together to reduce waste and redundant effort, or jointly purchasing raw materials. Or they can collaborate in forecasting, planning, and capacity management – thereby improving service levels, mitigating risks, and strengthening the combined supply chain.
In short, supplier collaboration really does move the needle for companies that do it well but what are the practical steps to achieving this?
How to collaborate better with your suppliers?
There are five core aspects to successful supplier collaboration:
1) Strategic alignment
Clearly defining what the organisation is seeking to achieve from its collaboration efforts is a critical first step in the alignment process. It will also require dedicating time and resources. A good example of recent and well-publicised collaboration was between Unilever and Novozyme – a major supplier of enzymes – to jointly develop new enzyme solutions. Unilever brought the market knowledge of the stains and materials most in need of new products and Novozyme brought the reagent expertise. As strategic alignment deepens it leads to joint business planning where specific targets and objectives are set in a formal collaboration matrix.
2) Cross-functional engagement
To generate value from changes in manufacturing methods, quality assurance regimes, or supply chain processes, representatives from the respective functions on both sides of the partnership will need to work together. Typically buyers and supplier sales teams, or suppliers and buyer R&D functions work well together but wider cross-functional engagement is normally patchy and poorly managed at best. P&G is an example of a company that has succeeded to drive forward cross functional engagement through its “open innovation” platform.
3) Organisational governance
Like cross-functional engagement, the organisation and governance of supplier collaboration programmes suffers from a lack of formal structures and processes. Introducing a clearer governance structure for the overall supplier collaboration programme and for individual projects has the potential to significantly improve outcomes in most organisations. Two-way scorecards, for example, allow buyers and suppliers to let each other know if they are effectively supporting the goals of the programme. Toyota has been a prominent example of supplier collaboration, whose success can be explained in part by the use of clearly defined targets and supplier performance metrics.
4) Communication and trust
There are normally high levels of trust in buyer-seller relationships particularly where those relationships are considered strategic. Often this trust has been built up over time and is a product of deep understanding of each other's businesses. However, there are often flaws in this general rule that can be detrimental to both sides of the relationship. L’Oréal’s annual “Cherry Pack” exhibition is an example of an initiative that works really well to promote good communication and trust. The exhibition offers suppliers a preview of the consumer trends that the company will be working on, and asks them to develop packaging solutions in harmony with these trends. During the exhibition, L’Oréal creates a trust-based forum for suppliers to present the ideas and products in development – including ideas that have yet to be patented. The forum thus gives suppliers access to practical short and long-term ideas and projects that ultimately accelerate packaging innovation.
5) Value creation and sharing
The pursuit of shared value is the reason buyers and suppliers take part in collaboration projects but most companies are really bad at keeping track of the impact of collaboration on sources of value beyond cost reductions. For buyers, additional volume remains the most common way that the extra value created by collaboration projects is shared. Performance-based incentives are another example. Cost transparency is key in these and for that reason some companies have found clean sheet cost modeling to be a very effective way to conduct fact-based discussions on costs and improvement opportunities with their collaboration partners.
ASML, a lithography-equipment manufacturer for the semiconductor industry, operates a value-sharing mechanism for its suppliers. The company allows suppliers to maintain healthy margins (as a volatility buffer), provides financing for the infrastructure needed to make its products, and offers staggered purchase guarantees. In this way, ASML incentivises and rewards its strategic suppliers for prioritising its business, gains access to cutting-edge technology, and reduces costs and improves stability in an industry with short life cycles affected by substantial swings in demand.
Supplier collaboration ultimately requires a commitment of time and resources and a willingness to strive to do things differently in order to effect change and rapid improvement in the organisation. Leadership in this area is also very important and cannot be overemphasised in terms of the level of importance this assumes in fostering truly strategic supplier relationships.
☛ Jamie Loder is a director at 4C Associates