A Blueprint for Success With Suppliers

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A Blueprint for Successwith Suppliers

by George F. Brown, Jr.and

Atlee Valentine Pope

January 2008


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A Blueprint for Success with SuppliersAtlee Valentine Pope and George F. Brown, Jr.

2008 Blue Canyon Partners, Inc. Page 1

Over the past decade, most businesses have paid a significant amount of attention totheir suppliers. Such investments have yielded considerable value to these firmsshareholders. Supply base initiatives have helped these firms achieve an improved

cost position and facilitated their transition into global markets. In many situations, suchfirms define their supply base as among their sources of competitive advantage. Webelieve that the opportunity exists to build upon these foundations to realize evengreater levels of contributions from certain suppliers whose contributions can be ofstrategic value. The route to the realization of such contributions involves efforts toimplement best-in-class customer behaviors with a carefully selected group ofsuppliers. This paper describes our research into the ways that firms can implementsuch programs and realize such benefits.

In working with leading business-to-business suppliers across diverse industries, wefrequently encounter executives who lament that our customers treat us like a

commodity, not recognizing the value that we provide to them. Initiatives to strengthenthe contributions made by such firms whether through product development, services,brand initiatives, or other approaches are almost always included as high-priorityelements of the annual plans of such organizations. Much of our own research hasfocused on developing insights about how business-to-business suppliers can achievethe goal of becoming vital to their customers, and we have learned how both strategyand relationship management fit into that equation.

Discussions in which we hear the message that our suppliers arent contributing at thelevel we need are far more rare, and especially so if situations are eliminated in whichthe shortfall is either price or delivery. This is both surprising and disappointing. Over

the course of numerous consulting projects and research initiatives, we have hadliterally thousands of opportunities to interview executives and learn about theirperspectives about their suppliers and their contributions. There have been less than adozen instances, across all these discussions, in which an interviewee said that he orshe was unable to provide an example of a supplier success story. Most intervieweeshave numerous ones from which to choose, and the vast majority of those successstories have nothing to do with price, delivery, or such metrics.

Rather, the success stories typically focus on other types of contributions, oftenunexpected ones, brought to them by their suppliers. Sometimes the success storyinvolves a new product or technology advance. Sometimes it involves a way of taking

costs out of the combined supplier-customer systems. Sometimes it involves an insightabout how the two firms in combination can become more successful with thecustomers further along on the customer chain. Sometimes it involves an idea abouthow the relationship can be transported into some new market environment.Sometimes it involves creative ideas about how shifts in the roles and boundariesbetween the two firms can result in better performance. The examples are almost as


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diverse as are the business environments from which such supplier success storiesoriginate.

We recently worked with a client in the medical equipment industry that had made a

determination that their firm could realize more from its suppliers than what was beingrealized. To bring definition to that concept, this firm held a workshop to examine theirhistory with suppliers from many different segments of their business. As part of thatprocess, teams developed case studies of various supplier relationships, focusingparticularly on ones that had yielded some meaningful contributions. As the groupanalyzed these case studies, while they found many characteristics that were unique toa particular relationship or technology, there were several common elements to all ofthe success stories that this firm had documented. These common elements provide astarting point for developing a blueprint for success with suppliers.

First among the common elements was a sense of long-term alignment between the

supplier and this firm. In one case, the executive responsible for the relationshipobserved that it has been clear to both of our organizations that were in this togetherfor the long run. In another instance, the comment was made that we saw positivereasons for this relationship, ones that were based upon their particular focus andcompetency, as opposed to looking at them as a temporary fix to a problem or as arelationship we were forced into because of our cost structure.

Interviews with suppliers also confirm the importance of long-term alignment of interestsas a factor enabling strong and positive contributions. One supplier that we interviewedcommented about the reasons for this: There are at least three reasons why a longer-term perspective is critical to our success. First is the fact that it takes a while to build

knowledge and familiarity. Without that, were shooting in the dark and its hard to hitthe bulls-eye when you are doing so. Second is the fact that we need to create a senseof confidence on the part of our customer. No one is going to go out on a limb untilthere is some history on which to rely. The third reason is that we arent going to investour best efforts and best ideas in a transient relationship. Theres just no payoff fromdoing that. We hear similar thoughts over and over from suppliers. Just as thecustomer is looking for a commitment from them, they are looking for a commitmentfrom their customers. When there is sufficient alignment between the two organizationsto allow a long-term relationship to be sustained, there is the potential that therelationship can lead to supplier success stories.

The second common element of the case studies that were developed during thisworkshop was that there were effective communications channels between the twoorganizations. One participant commented that this had a What-Who-Whendimension to it. The successful collaborations involved an environment in which the twofirms knew what to talk about, who should be engaged in the discussions, and when the


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discussions needed to take place. Without any of the three being in place, thecommunications were likely to be ineffective.

The case study examples that were compiled during this workshop provided insights

along all three dimensions. With respect to what, there was one very frequentelement: discussions between the supplier and the customer were frequently focusedon their external environment, as opposed to being limited to discussions about theinteractions between them. Focusing on the external environment is unusual, as weoften hear supplier complaints about the ways in which their customers insulate themfrom the broader business environment in which they operate. Well tell you what youneed to know is the message that suppliers frequently charge that they hear from theircustomers. Some suppliers even report a second element to the communication: Andwe dont want you mucking around in our markets and with our customers trying to getaround us.

Insights regarding the who dimension of communication involve two themes. First isthe fact that there are champions of the relationship within both organizations,individuals who take a proactive role in making sure that appropriate interactions takeplace, that information is shared, and that the organizations are working togethereffectively. The second theme is that the communications are not restricted to thesepoint persons, but, rather, involve numerous touch points across business functions, upand down the organization, and in the various regions in which the collaboration takesplace. Many of these latter interactions take place independently of any specific requestof the champions, but are a direct result of efforts that the relationship champions havemade over the years to ensure familiarity and comfortable working relationships amongappropriate experts and business leaders. One individual participating in the workshop

who was one of her companys relationship champions noted that many of the bestsupplier contributions originated from some unexpected interaction between individuals,as opposed to taking place in the context of some formal, planned interaction.

The When dimension of the equation focuses on the future, as a key lesson is thatdiscussions need to take place in a timely fashion to allow the two organizations to reactand respond to opportunities and issues. The factor that seems to best ensuretimeliness is a high-frequency cadence to interactions between the two organizations.One case study that was developed during the workshop involved a relationship inwhich there was a significant annual meeting, during which there were frequent lamentsabout opportunities that had passed. One frequently expressed regret involved new

product and technology initiatives that had failed to yield value because the timing of thetwo organizations plans were not in sync. The case studies that involved high-frequency interactions did not share this characteristic, with the two organizations moreable to get action plans in place in a timely fashion and to coordinate the schedules toallow for effective linkage.


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Along with these two important common characteristics of the supplier success storiesthat were developed during this workshop, one further important insight emerged fromthe discussions among the participants. That insight was that supplier success storiesrarely just happen. Rather, they need to be motivated and managed by an

organization and individuals who consider it to be their goal to create an environmentwithin which supplier success stories can happen. The team at this workshop viewedsupplier relationships as their job, and their organization had much earlier recognizedthat suppliers could play an important role in the companys success, filling in somecases a void which could not be effectively addressed from internal resources. Therelationships managed by this team were often long-standing ones, and in many casesthe firms involved had clear roadmaps in place as to how the relationship would evolveinto the future. Even so, the teams motivation for the workshop discussion was to seehow they could take these relationships to a higher level. This organization, in ourexperience, is atypical. We have encountered relatively few firms that have such apositive, multi-faceted approach to supplier relationships.

One individual with whom we worked in another industry commented that weve gottenvery good at managing our supply chain in terms of the bidding process, with some realpayoff in terms of achieving cost savings and finding new low-cost sources of supply.He went on to note, however, that we have no parallel track record of success indeveloping high-value supply relationships, ones that yield contributions in terms of howwe are positioned in our markets or how much value we deliver to our customersthrough new innovations and new technologies. In discussions with an executive in stillanother firm1, one that was attempting to create a strategic supplier program, we heardof the message that this firm heard from one supplier: If we showed you (newinnovations and product extensions), youd have written a request for proposals and put

our ideas up for bid. The situations illustrated in these two examples are the far morecommon ones. Supplier relationships are most often managed reactively, with theorganization involved defining a need and putting out some form of a request forproposals to generate bids, most frequently selecting the lowest cost offer from amongthe firms that respond to the companys specifications. The underlying processes aredesigned to generate participation among competing suppliers, with efforts frequentlymade to simplify the requirements to allow more and more firms to bid, and to drive bidsto the lowest possible level, with e-auctions being one example of such a process. Thesuppliers and customers with whom weve talked mostly agree that these processesmake it hard for a firm to showcase and get credit for innovation or services or newapproaches to solving their customers problem.

The inconsistency between these typical approaches to supplier relationships and theesteem with which companies hold the suppliers who are the subject of the successstories that they tell suggests the need for a different approach, one that creates a fertile

1Atlee Valentine Pope and George F. Brown, Jr., Best-in-Class Behaviors in Business-to-Business Relationships,

Blue Canyon Partners, Inc., 2006.


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environment in which suppliers can bring their best contributions and not just lowercost to their customers. This paper outlines our research on the steps that firms cantake to create such an environment and translate the results into rewards for theirshareholders.

The remainder of this paper is organized into four major sections, with a short summaryat the end. First, we examine the characteristics of best-in-class customers, anddescribe an assessment process that firms can use to benchmark their own behavioragainst those of best-in-class customers. Our research suggests clearly that it thosefirms which exhibit the characteristics of best-in-class customers are those that realizethe greatest contributions from their suppliers. A subsequent section describes severalcreative customer practices that have yielded results for the firms that implementedthem. While there isnt the same wealth of data about these practices that exist for thebest-in-class behaviors that we have identified, these creative practices can stimulateideas as to how to take supplier relationships to a higher level.

It takes considerable work to implement best-in-class customer practices, and webelieve that many of these practices should be implemented selectively. The thirdmajor section of this paper provides a segmentation structure to help to identify whichsuppliers should be among those viewed as strategic. Based upon this segmentationstructure, we develop, in the fourth section of the paper, several supplier managementframeworks that are appropriate for different clusters of suppliers. While the number ofsuppliers that qualify for attention as strategic suppliers is typically small, the payofffrom correctly categorizing such suppliers and from implementing the appropriatemanagement framework for such relationships can be significant. The managementframeworks for other clusters of suppliers also introduce some important concepts

learned from the study of best-in-class customer organizations.

Becoming a Best-in-Class Customer

Our research into the ways a firm can become a best-in-class customer is rooted in thesuccess stories that are told about supplier-customer relationships. Over the pastdecade, we have interviewed several thousand pairs of organizations in business-to-business relationships, across a diverse spectrum of vertical industries. The suppliersinvolved in these relationships provided ingredients, capital equipment, infrastructure,and services as varied as can be imagined. Their products ranged from highly

differentiated patented products to the most basic of commodities. The customers inthese relationships not only spanned numerous industries, but also crossed globalmarkets and ranged from industry leaders to new entrants into their markets. Theproducts and services produced by these customer organizations also spanned thespectrum in terms of the level of differentiation they enjoyed from those of theircompetitors. Both suppliers and customers ranged from Fortune 10 firms through small


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businesses, although a significant majority of the organizations involved were largerfirms. Typically our interviewees included individuals in multiple job functions, so weoften heard the perspectives of individuals in purchasing, operations, sales, and generalmanagement.

In the context of these interviews, we asked open-ended questions about suppliersuccess stories, allowing the interviewee to provide his or her own definition of how asupplier contributed to success. As we noted earlier, virtually every interviewee, amongboth suppliers and customers, had not only one success story to share, but most oftenoffered to share several such stories. The stories themselves are intriguing,showcasing the creativity that strong companies can bring into their business-to-business relationships. But, in terms of action implications, the more important insightscame as a result of follow-up questions about what enables that success story to bewritten. Some interviewees had an immediate answer to that question, reflecting theirown attempts to understand the drivers of an important success for their firm and to

translate such learning into their own processes and relationships. Other intervieweeshad less clarity as to how the success occurred, with their answers ranging from theextreme of I dont have a clue it came out of nowhere to well-oriented hypotheses.

As weve organized these research findings, we have learned that success stories donthave a single point of origin. Rather, there are multiple customer practices that createthe environment within which suppliers are able to make contributions that form thebasis for success stories. There are in fact several dozen such best customerpractices that have emerged from our research with enough frequency to be valuableinputs to business decisions about how to manage supply relationships, and, in thissection, we will spotlight a number of these important practices. The learning that has

emerged as to these best customer practices can provide the foundation for decisionsthat create the framework that will help the suppliers identified as critical to success tostep up to the plate and deliver on their potential for creating success stories. As we willdiscuss in a subsequent section of this paper, we believe that these practices should beimplemented deliberately, focusing on those suppliers whose contributions are ofstrategic importance to the firm from an internal perspective, a customer chainperspective, or both.

On top of these best customer practices, another several dozen examples of actionstaken by firms qualify as creative customer practices, steps that a firm took that seemto have triggered valuable supplier responses. Unlike the first category of best

customer practices which we observed over and over, these creative customerpractices were in fact so creative that there isnt sufficient data to suggest that they willwork in other environments. In the next section, we will provide some examples ofthese creative customer practices to stimulate thinking as to what additional effortsmight be combined with a core focus on best customer practices to fuel future successstories.


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Becoming a best-in-class customer isnt an easy task. Our research suggests thatachieving that outcome requires creating a multi-dimensional environment within whichsupplier-customer relationships can flourish, as opposed to a single Do A, then B

happens sequence. Even the list that we will describe in this section includes actionsthat are highly disparate, all of which are evidenced to be ways in which such a positiveenvironment is created. We also find that results take time. The vast majority ofsuccess stories involve ongoing relationships, with only a few cases reflecting arelatively new supplier-customer relationship and almost none reflecting a situation inwhich the contribution involved a supplier who did not at that time have a relationshipwith the customer organization involved. The very few examples in this latter categoryall involved a technology breakthrough, so in some sense they are more realisticallyresearch and development success stories than supplier success stories.

The table below describes the best-in-class customer behaviors that appear from our

research to be most important in creating an environment within which key supplierscan make significant contributions to their customer. In this table, we have providedthree examples of possible behaviors within each of the categories, ranging from thosethat are contrary to the findings about creating an environment for success stories tothose that characterize the practices implemented by best practice customers.Following the table, we will provide some case study examples relating to theseimportant customer practices.

Customer Practice

Unsupportive

Practices

Supportive

Practices Best Practices

Information Flow

The information flowis one-way andlimited to need toknow messages

Regular meetingstake place to ensureeffectivecommunication

Efforts have beenmade to ensuresolid two-wayinformation flowabout all topicsrelevant to thesuccess of therelationship

Outcome FocusEnabling Solutions

Interactions focusonly on products,services, prices, etc.

The customerprovides thesupplier withinsights about whatsuccess means

The firms share aclear understanding

of the outcomes along multipledimensions thatyield sharedsuccesses and areopen to new ways


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of achievingsuccess

An OrganizationalApproach to theRelationship

The relationship is

purchasing tosales, mostlydefined by theindividuals involved

Organization-wideunderstanding ofthe relationship isfacilitated

Responsibilities forthe success of the

relationship areshared acrossbusiness functionsand units in bothorganizations

Openness of theRelationship withMultiple TouchPoints

The relationship ischanneled througha single touch point

Forums are createdfor interactionamong subjectmatter experts

Aggressive stepsare taken to ensureconnectivitybetween the twofirms across jobfunctions,

geography, andtopics

MarginManagement

The firms battle formargin, withimprovementsexpected to comeout of the potshared by the twoorganizations

The firms recognizethat each must beable to reward theirshareholders, andincorporate a long-term belief that theothers financialsuccess is important

to the relationship

The firms focus onwins against theircompetitors and onopportunities toreach new growthmarkets, withrelationshipsenabling both toshare in the rewards

from such externalsuccesses

SystemsPerspective withRespect toProcesses andLinkages

Roles andboundaries betweenthe supplier and thecustomer areinviolate

The supplier andcustomercollaborate onprocessimprovement in anopen environment

The supplier andcustomer are opento changes in rolesand boundaries inorder to optimizeperformance

Clarity as to

PerformanceMetrics

Customermessages are

limited to problemsituations

Goals are clearlydefined and

performance isjointly monitoredand measured

Collaborationaround performancegoals is a tool for

enabling therelationship to besustained

Ability to ResolveProblems

Problems fester andresult in finger-pointing

The two firms findworkarounds thatremove the problem

The two firmsidentify and resolvethe root causes of


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from center stage the problem

Timely and High

IntensityInteractions

Interactions areinfrequent, typically

around problems orcontracts

Regular interactionstake place with a

defined agenda andplanned roster ofparticipants

Relationshipsbetween thecustomer and the

supplier ensureinformal as well asformal interactions

Seat at the TableInvolvement inPlanning andProblem Solving

Customer plans aremade withoutinvolvement ofsuppliers

The supplier isbrought intodiscussions thatdraw upon theirarea of expertise

Customers routinelyinvolve the supplierin open-endeddiscussions of plansand problems

Focus on the Future

Discussions focuson recentperformance and

problems

The supplier isprovided a roadmapdefined by the

customers plans

The customer andsupplier collaborateon developing plans

and priorities

Focus on theCustomer Chain

Suppliers have novisibility beyondtheir direct customer

Customers providesuppliers withinformation aboutand access tosubsequent-stagecustomers

Suppliers andcustomerscollaborate tounderstandsubsequent-stagecustomers and theirpriorities

Before going into a discussion about these individual practices, it is useful to considerthe roster of these practices (and other ones beyond these practices) in totality. The

first observation that emerges is that there is an inherent conflict between thesepractices and open competition involving aggressive efforts to bring many competingsuppliers to the table. This is especially true when considering going beyond the pointof Supportive Practices in the table above. Almost along every item on the list, it ishard to conceive implementing the Best Practices with multiple suppliers who aregoing to compete for contracts at various points in time. Not only would the customerbe unlikely to involve multiple suppliers in the ways suggested above, but the suppliersthemselves would be unlikely to respond if their head-to-head competitor were alsoinvolved in the interactions. We have heard the supplier complaint that we broughtthem an idea, and the next thing that happened was that they put it into a request forproposals and sent it to our competitors far too often.

The screening process we will describe later in this paper can be used to identify thosesituations in which the supplier contributions are important and to create a frameworkfor supply management. Such a process is necessary to identify those suppliers forwhich the Best Practice foundations for the supplier-customer relationship areappropriate. We have found that customers can often implement many or even most of


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the Supportive Practices widely across their supply base, even in situations in whichcompetition remains a core element of the supply management framework, but thatgoing beyond that point to the Best Practice level should typically be reserved forthose supply relationships that are determined to be of strategic importance to the

customer.

The second general observation that emerges from thinking about these practices inaggregate is that their success depends heavily on having the right supplier partners. Itis not only important to identify the situations in which the supplier contributions can beof strategic importance, but also to identify the supplier partners that have the potentialto deliver on the goals of elevating them to strategic supplier status.

In various applications of the concepts in this paper, we have helped our client to createa supplier scorecard with which to rank candidate suppliers as to their potential forsuccess if elevated into a strategic supplier position. These scorecards have varied

from industry to industry, but have typically had three principal ingredients, as describedbelow:

An assessment of the suppliers likely commitment to the relationship. Does thissupplier view the relationship as an important one? Strategic relationships aretwo-sided coins; the supplier should view their customer as a strategic customerto the same extent that the customer views the supplier as a strategic supplier.The behaviors exhibited by the supplier must provide evidence of this investment in the relationship, a commitment to its success, outstandingunderstanding of the business environment in which the relationship takes place,etc. And it is important that the context of the suppliers business, including itsrelationships with competitors, be considered if the success of the relationship is

likely to depend upon confidentiality or first-look collaboration with respect toproduct and technology development.

A track record of success. Can this supplier be counted upon to deliver? Notonly should this supplier be one that has proven its ability to meet the on time, infull, at quality standards relevant to the relationship, but also should be anorganization whose foundations are those consistent with ongoing success.Such foundations include process capabilities relevant to the relationship, asituational awareness that allows them to be ahead of problems andopportunities, and even best practice standing with respect to factors critical tosuccess in the relationship.

Strengths relating to the areas in which strategic contributions are expected.

Does this supplier have the potential to contribute along the lines whichmotivated their elevation to strategic supplier status? Do a certain extent, thefirst two ingredients resolve the potential that the choice might turn out to be abad one; this third ingredient focuses on the potential for the supplier to becomethe focus of a future success story. Among the themes included in scorecardswithin this category are ones relating to the suppliers track record of innovation,


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the suppliers breadth vis--vis the way in which the relationship is likely toevolve, and the level of intensity which the supplier brings to the relationship.

Simply summarized, selecting a supplier as a strategic partner requires a full evaluationof the competencies that are likely to distinguish winning candidates from those in which

there will eventually be disappointment.

Returning to the table summarizing key customer practices, it is useful to provide a fewexamples of how firms have taken steps to position their supplier relationships forsuccess. The first observations relate to information flow. Practice shortfalls in thisarea are, more than any other area, cited by suppliers as the cause of avoidableproblems in their relationships with customers. We have heard the if only we knewlament so many times and accompanied by so many concrete examples that we believeit to be true. On numerous occasions, we have asked the customer involved about thatinformation gap, and heard responses that were in categories such as I had no ideathat they didnt know or At the time, it didnt seem relevant. Firms that have been

successful in creating a supportive supplier environment have taken aggressive steps tomake sure that the knowledge foundations for success are in place. Those firms thathave regular interactions with a pre-planned agenda appear to go far in terms ofachieving that outcome. If the agenda itself doesnt cover the topic, it appears that theinteractions create a forum within which questions can be asked and answered. Thestronger practitioners go beyond this, and systematically inventory the informationneeds of their suppliers, not just product specifications and order metrics, but insightsrelated to plans, problems, forecasts, and other factors that might impact on thesuccess of the relationship.

The second topic involves the outcome focus around which the relationship is

centered. In the case of non-strategic suppliers, the outcome focus is often quitesimple: the supplier is expected to deliver a certain quantity of product at certain specson a certain date, etc. For strategic suppliers, the outcome focus can be far morecomplex: the supplier is expected to help solve a marketing challenge, resolve atechnical issue or respond to a new regulation, identify ways in which system life-cyclecosts can be reduced, or make some similarly multi-dimensional contribution to thesuccess of the customer. The examples that every firm is aware of involvingopportunities lost because the request for proposals was written so tightly to inhibit anew solution are the antithesis of a strategic outcomes focus. The best practicecustomers engage their key suppliers in an open dialogue about where they are tryingto go and when they are trying to get there. These organizations also ensure that they

are ready to hear and consider new ideas that suppliers can contribute about how tofacilitate such journeys.

The focus on an organizational approach to the relationship and on adequate touchpoints reflects two key prerequisites to creativity, innovation, and unexpectedcontributions. In significant supplier-customer relationships, it is not possible for any


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individual, no matter how skilled, on either side of the relationship to bring the full arrayof knowledge and expertise to the discussion. This can sometimes be done intransactional relationships, but the more that the outcome focus involves multipledimensions, the more that organization-wide involvement is required. And, while a

strong procurement manager or account executive can keep transactional relationshipson a positive keel, as the contributions become more dimensional and significant, ittakes an organizational commitment to success. In best practice companies, we haveseen purchasing executives take the lead in assigning responsibilities for the success ofa supplier relationship to other departments as part of their formal goal structure. Onecompanys mantra that If its in the performance goals, it matters, but if its not, itdoesnt is probably something close to a universal truth. If a supplier relationship isimportant to the firm, it ought to be possible to identify the business units within the firmthat should be willing to work towards that success. With respect to touch points, wehave seen strong relationship champions from the two organizations formally discussthe question Who will be important to our success over the next year? and move to

ensure that these individuals are brought into contact with one another in a context thatensures continuity of their interactions.

Margin management is a theme that has emerged over and over in our research. Whenwe examined the challenges of channel conflict involving supplier-distributorrelationships2, margin management scored highest among the themes that often getbetween the participants in such relationships. In fact, we actually participated in a setof interviews in which both the supplier and the distributor characterized the other partyas a blood-sucking weasel. Obviously, suppliers that have that perspective about theircustomer are less than likely to make meaningful contributions to their success, andcustomers that feel that way about their suppliers are unlikely to invite them into

important plans and decisions.

The minimal supportive environment along this dimension, therefore, requires that bothorganizations feel that the relationship is consistent with their long-term businesssuccess, and that the other party will behave with integrity and reasonableness innegotiations and contract processes. In the thousands of interviews weve done, it hasbeen revealing how few organizations, on either side of the relationship, have unrealisticexpectations or expect the other organization to either be a pushover or to providecharity relief. At the same time, businesses are in business, and the expectation wehear voiced is that the other organization recognize that reality and not expectunbusinesslike outcomes. Usually this is voiced in the context of some negotiation

that went badly, with a prospectively solid relationship pushed beyond the limits of goodbusiness decisions. We note in this regard that firms that have solid information sharingprograms and effective touch points are far better than others in avoiding this outcome.

2 Atlee Valentine Pope and George F. Brown, Jr.,Realizing Shared Successes in Co-Destiny Relationships, Velocity,

Second Quarter 2004.


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At the best practice end of the spectrum are the relatively few supplier-customerrelationships in which weve observed formal planning as to how the team can winagainst competitor teams in their market or about how the organizations can

collaborate to reach new markets that are attractive in terms of scale, growth prospects,or margins. The few examples we have of such collaboration suggest that the rewardsfrom such a focus are extraordinary. Working with one supplier-customer team that didabout one-half billion dollars of business in partnership, we completed a structuredassessment of growth prospects, examining new vertical markets, new geographicmarkets, and opportunities for new product and systems development. The participantsin this review operated without company hats, set priorities, and agreed upon threeinitiatives for implementation. Three years after this took place, they had doubled theiraverage annual growth rate and both firms were celebrating bottom-line results atrecord levels. Not every supplier-customer team has the same opportunities that wereavailable to these firms, but partners that focus on their growth opportunities are well

positioned to translate that focus into rewards that come from their markets and out ofthe pockets of their competitors, as opposed to having to argue over the division ofrewards between their own organizations.

Practices related to the systems perspective that the two organizations develop arebased upon a simple fact. There are more opportunities for optimization when the fullsystem is considered than exist when two parts of the system are considered inisolation. Getting at these harder-to-find optimization opportunities is facilitated bystrong information exchanges and effective touch point relationships, one of the benefitsfrom the best practice concepts we described earlier. We have seen best practicerelationships undertake reverse audits and create collaborative process improvement

teams to see where improvements could be realized and where costs can be taken outof the system. In our study of practices in the automotive industry, we identified strongexamples in which collaboration resulted in lower supplier prices without impacting onthe margins being earned by the firms involved. But such successes often requiredchanges in the roles and boundaries between the two firms3. Openness to suchchanges is in part an element of the philosophy which customers must accept inbuilding strategic relationships with their supplier and in part a statement of confidencein the choices that they have made about their partner suppliers. But, when thesystems perspective can be adopted, the potential for improvements that aremeaningful, particularly in terms of taking costs out, are significant.

In some discussions of these best customer practices with clients with whom weveworked, weve gotten a reaction of Duh! to the row in the table focusing on clarity ofperformance measures, and in fact this is an obvious prelude to success in makingcontributions that matter. But these same organizations are often stunned by the

3Jon T. Gabrielsen, Atlee Valentine Pope, and George F. Brown, Jr., Win the Day: Managing Price Pressures in the

Automotive Industry, Blue Canyon Partners, Inc., 2003.


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number of examples we can cite about relationships that failed because the twoorganizations were not on the same page as to what is important. Without belaboringthis point, we will simply repeat the statement about the importance of clearperformance metrics made by one of our customers whose organization fits well with

the description of a best-in-class customer: Thats table stakes.

Problem solving is another customer practice that can be either a major negative or amajor positive. We have yet to see a single supplier-customer relationship that didnt atsome points in time experience problems. What distinguishes relationships is the abilityto solve these problems. In the worst cases, the problems recur and even become thefocal point of interactions. We have already noted the frequency with which we hearhorror stories associated with implementation problems4 in significant supplier-customerrelationships. When recurring problems become the focus of the relationship, there isnot much upside. More supportive approaches involve collaboration to ensure that theproblem doesnt interfere with the relationships. We have seen numerous examples of

workarounds that have achieved that outcome. For example, product shortages areoften among the implementation failures that threaten relationships, and we have seendecisions to increase safety stocks and manual intervention in order reviews amongmeans by which these problems were kept in bound. But weve also seen collaborationthat got at the root causes of the problem and identified solutions. In one instance, thetwo firms involved focused on the underlying forecasting systems that were being usedby the supplier to plan production and shipments, and found ways to strengthen thesesystems so that the problem was resolved without added cost or artificial overrides.This example is in the category of a best practice approach to problem solving.

Timely and high-intensity interactions are another practice that appears to be obvious to

many firms involved in relationships that have yielded strong successes. Themessages that weve heard from such firms have focused on three arguments. First,they suggest that timing is everything, with key contributions being as much about theright time as the right idea. Frequent and intense interactions are one route towardsensuring that the discussions happen early enough to allow results at the right time.Second, we frequently hear about how the two organizations put pressure on oneanother to take it to a higher level, in a constructive fashion, but one whichnonetheless isnt particularly satisfied with the status quo. Weve seen quite a fewexamples of the cultures associated with such relationships, and they are cultures thatinvolve a performance orientation. One individual characterized one suppliers positionas the most stable one in our supply base, but that their behavior was like that of

someone with a wolf pack closing in on them. That is a good characterization ofintensity in the relationship. Third, our research suggests that a significant portion of thesuccess stories emerge from unexpected directions and that they were triggered by

4Atlee Valentine Pope and George F. Brown, Jr.,Implementation Competencies: Creating Long-Term Growth

Foundations, Velocity, First Quarter 2003.


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informal interactions one of the key reasons for building strong and diverse touchpoints between the supplier and the customer organizations.

Among the practices that we hear over and over in discussions of strong relationships is

that the customer allowed the supplier a seat at the table in appropriate forums anddiscussions. One customer organization which has been quite successful in creating acontributing supply team did a systematic review to ask the question If that supplierwere part of our company, what meetings would we have them attend? As theyidentified such meetings, they asked the question Why are we excluding them?, andoften found that there was no good reason for doing so. An executive in this firm notedthat They are going to hear about our plans eventually, as one of our strategicsuppliers. So why not bring them into the discussion early enough to contribute? Asthis firm implemented that idea, they found that their suppliers had much to contributeand that their participation was typically done with the interests of the team at heart. Weasked the suppliers involved with this customer about their perspectives on this

inclusion, and heard from them that they found the invitation an honor and a challengeto prove that they were appropriate participants. One individual in one supplierorganization stated that Clearly a supplier who participates in an important customerforum from a self-serving perspective is not going to be invited back. And we want to beinvited back.

The final two practices included in the table above define the critical focus forsuccessful supplier-customer relationships: the future, and the external businessenvironment. The same can be said for any firm. If it looks through the rear view mirrorand only at internal issues, its prospects are probably dim. If the firm consistentlyfocuses on the future and on the needs and challenges of its markets and customers, it

is probably an organization with bright prospects. The same is true for supplier-customer relationships; the best ones emphasize the importance of these two focalpoints around which discussions and interactions should take place. In achieving thisfocus, the customer is in a pivotal position. Far more often than not, it is the customer inthe relationship that is in the lead role in terms of setting direction. And it is thecustomer that should have the strongest access and awareness of the markets andorganizations further along the customer chain. The customer can use theseadvantages to help their suppliers, or they can use their position to block the suppliersviewpoint. Best practice customers work hard to ensure that their key suppliers sharetheir portrait of future success and their understanding of customer critical successfactors. Often these organizations are rewarded by suppliers who bring insights of their

own into the discussion.

The short entries in the table above and the examples provided about these variouscustomer practices only provide a quick snapshot as to what goes into creating a strongenvironment within which supplier-customer relationships flourish. Furthermore, thecontext of these practices changes from environment to environment, for example,


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between what is relevant to a motivate contributions from an ingredients supplier vs. acapital goods supplier. The research leading to the identification of the best customerpractices provides considerable more depth as to these factors, with the assessmenttool developed for use in evaluating the quality of a customers environment involving

many more themes and topics that have been covered here.

This research has also allowed the identification of benchmark levels of achievementthat characterize supportive customer environments and best practice environments.Comparisons between the environment created by a customer for a particular supplierand these benchmarks involves a series of questions and practice evaluations, scoredon the basis of the research findings about the practices that are most associated withsuccess. The figure below shows one such assessment overlaid against thebackground showing scores associated with unsupportive environments (in red),supportive environments (in light green), and best practice environments (in darkgreen).

Information Flow

Outcome Focus Enabling Solutions

An Organizational Approach to the Relationship

Margin Management

Open Relationship with Multiple Touch Points

Systems Perspective

Clarity as to Performance Metrics

Ability to Resolve Problems

Timely and High Intensity Interactions

Seat at the Table Involvement

Focus on the Future

Focus on the Customer Chain

This particular customer relationship environment shows a complex mixture ofpractices, most of which are supportive of supplier contributions, a few even in the bestpractice realm, but three which are hostile to successful collaboration. Such patternsare not particularly unusual, as the characteristics of the environment in which suppliers


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operate have often evolved under various leadership regimes without necessarilyreflecting any deliberate strategy or goals. We have quite often seen patternsdominated by scores in the unsupportive zone, so this portrait, all in all, is a ratherpositive one, requiring only modest steps in order to improve the likelihood of eliciting

important supplier contributions.

Creative Customer Practices

Along with the best customer practices weve described in the previous section, ourresearch and work with clients has allowed us to observe other practices which arefascinating. At this point, we dont have sufficient examples or data to characterizethem as best customer practices although they might have the potential to be so sowe currently describe them as creative customer practices that weve seen to yieldpayoffs in terms of supplier responses. Of the three we will describe in this section, onecame as a surprise to the organization involved, one was an unexpected byproduct ofanother firms examination of its competitive strategy, and the third was a hoped-foroutcome of an idea that surfaced in a planning session.

The first example involves a firm that had embarked upon a systematic process toimprove its supplier relationships and get more contributions from them. About a yearinto this process, the management team working with these suppliers decided to makeawards and planned a banquet to which it invited key suppliers. The affair was apositive one, with good discussions and many new interactions taking place. Theorganizations that won the first awards were pleased and seemed to place value on thehonor.

Over the course of the next month, this firm got inquires from six other suppliers askingHow can we win next year? One executive in this client organization commented thatthe awards seemed to have awakened a competitive spirit, with these organizationsresponding with plans to take their performance to a higher level. Not only did theawards trigger this interest, but, more importantly, it provided a catalyst for discussionsabout what was required to take performance to a higher level. In a few instances, thediscussions became quite serious and moved into directions that the customer wouldnever have imagined possible. Given the leadtimes that exist in this firms industry forproduct development, the final judgment is still in the future as the impact on the incomestatements of the organizations involved in these new initiatives, but the betting is thatthis example will have a positive conclusion in terms of producing rewards for thecompanys shareholders.

The second example involves a firm in a business environment in which competitivebids for large projects are the norm. While working with this firm, we helped them todesign a competitive simulation in which teams role-played the various competitors for a


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project of significant importance. Such initiatives often provide early insights as to whatstrategies will work and which will not, and, given the strong knowledge base this firmhas about its main competitors, useful indications as to what the competitive bids willinvolve.

Out of this simulation, the team came to an important recognition. Each of thecompetitors involved in the process relied on third-party suppliers for some inputs totheir process and bid, but these were not parallel across the competitors. What one firmdid in-house might well have been done through a third-party supplier by anothercompetitor. When the firm reviewed the results, looking at the decisions made by theteam that represented its own strategy and bid, it realized that its supplier base hadessentially been ignored, or, more accurately, taken as a given, strengths andweaknesses alike. When the firm itself was involved, the team was creative anddeveloped some new competitive ideas, but where the bid involved a suppliers input,the team simply defined what they would get from the supplier involved. By contrast,

the team playing the role of a competitor who had an in-house capability in the samearea brought a high level of creativity and new thinking to their strategy and bid. Theexecutive in charge of this business unit noted that by ignoring our suppliers, we aregiving up part of the field of battle to our competitors.

This executive decided to bring three important suppliers into the process and re-do thesimulation several weeks later, after the suppliers had been briefed and introduced tothe simulation. The results were significantly better, by consensus evaluation. Thesuppliers each had ideas relevant to the project which they were trying to win, and oneof these ideas even negated the need for a concession that had appeared to benecessary in the earlier simulation. Additionally, while the customer organization prided

itself, rightly so, on knowing its business environment and competitors, they found thatthese three suppliers were still able to bring knowledge to the table, as a result of theirspecial areas of expertise and their own investments in understanding their ownbusiness and competitive environments.

There were two significant decisions made as a result of this second simulationexercise. One decision changed the fundamental bid strategy that the firm elected toemploy, as a result of the insights that emerged from the second simulation. Whetherthis made the critical difference cant be known, but the firm did win the project inquestion and, as one executive put it, thats all the proof I need about the value ofproviding suppliers with a seat at the table. The second decision was to institutionalize

this process, including supplier involvement, for similar complex competitive situationsin the future. In a recent discussion with an executive in this firm, we learned that thetrack record of meaningful supplier contributions has continued to this day.

The third creative practice is the only one of the three described in this section that wasplanned with the goal of triggering supplier involvement and contributions. Another firm


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with which weve worked had an annual supplier roundtable, to which it invited its top100 suppliers. The roundtable consisted of a business event, including presentationsby company officials and invited guests who had something to contribute in terms ofbusiness insights and observations. The day was concluded with a dinner allowing

interactions and relationship building.

On the day following this roundtable, the firm typically invited a smaller group ofsuppliers to stay and participate in smaller group discussions and enjoy a round of golfwith the companys executives. This group was selected with care, involving suppliersconsidered to be strategic contributors and with attention to ensuring that the supplierswerent themselves competitors. One year, we were asked to work with this companyspurchasing organization to create a few short case studies that could be used to triggerdiscussions among the participants, instead of the usual practice of further businesspresentations and discussions. Our client dubbed this their first attempt atimplementing their companys Supplier University. The case studies were written in

two completely different business environments from the one in which these firms wereinvolved, but ones that faced some parallel challenges.

The discussions were lively and filled with content. We have often noted the value oflessons from other environments, but this mornings discussion was a high point inthat regard. Each of the suppliers involved had some lessons to share, and appliedthem in the context of the case studies. Most of these lessons triggered back and forthdiscussions and further observations and ideas from the group engaged in this meeting.

At the end of the discussion of the two case studies, the group was asked to tackle thequestions What does this mean for us? and Can we apply these lessons from other

environments to our own situation? The discussion was once again passionate, withleaders from many of the organizations involved, including our client company,championing ideas sparked by the interactions around the case studies. Two of thesuppliers involved saw an opportunity for collaboration with one another to solve atechnical problem based upon ideas generated during one of the case studies. Severalother development initiatives were launched within several weeks following this firstsession of this companys Supplier University, with a few of them already making animpact in this companys markets.

When we encounter creative practices like the three described here, we look for keyunderpinnings. Often, as it the case with these three examples, these underpinnings

involve many of the best customer practices insights that we described in the previoussection. Scattered through these three creative practice examples are multipleillustrations of the best customer practices discussion of outcome metrics, frequentand high-intensity interactions, providing the supplier with a seat at the table, a focus onthe future, and many others. Our early conclusion is that the basic blocking and tackling


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involved in implementing best customer practices often creates the framework fromwhich creative practices can spring.

Which Suppliers Deserve the Attention?

As we have observed, it takes considerable work to implement best-in-class customerpractices. Therefore, the first topic that a firm must address is that of examining thespectrum of suppliers with which the firm is involved to determine suppliers qualify forsuch attention. Typically, the organizations with whom we have worked have thousandsof suppliers associated with a broad spectrum of products and services across thenumerous locations at which the firm conducts business. And, for each supplier withwhom the firm does business, there are typically many others that would like to be inthat position, with some of them in off and on situations depending upon the outcome

of various competitions. Even beyond that, there are typically numerous otherorganizations that believe that they can make an argument as to why they should beincluded in the firms supply base, either because they believe that they can do betterthan existing internal or third-party alternatives or because they believe that they canbring some new beneficial product or service to the firm. Clearly not all of theseorganizations are critical to the firms success, nor do all of them deserve the same levelof attention or investment in the relationship.

One firm with whom weve talked culled its long list of suppliers to a short list of justeight suppliers that it felt were critical to its success. While the length of the short listwill vary from firm to firm and depend upon multiple considerations, the process that this

firm undertook was logical in that they reviewed their supply base, ingredient byingredient, and asked the question Could a supplier make a difference to us? for eachingredient. In those cases in which they concluded that a supplier could make adifference through innovation or similar contributions, they investigated how they couldimplement a process to create a strong, high-value supplier relationship.

Our approach to developing an appropriate strategy for each supplier builds from therecognition that supplier contributions have multiple dimensions, reflecting the nature ofmost business-to-business customer chains. The customer chain in the figure belowsuggests the foundations for our approach to a customers decisions about whichsuppliers deserve attention:

Supplier CustomerChannelPartners

EndCustomers


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The figure suggests the complexity of the customer chain structures in most business-to-business markets. Typically, such markets involve multiple stages, with the figure

suggesting one example in which the customer in question sells through third-partysales channels (e.g., wholesalers, distributors, dealers, etc.) to end customers.Obviously there are numerous forms of customer chains, with other typical casesinvolving sequential manufacturing processes or the involvement of installers orcontractors. We believe that when the customer organization in question is making adecision about its suppliers, it must consider both internal and external dimensions ofthe relationship and of prospective contributions.

The internal dimension of a suppliers contribution is defined by the relative importanceof the links between the supplier and their customer in isolation. The externaldimension of a suppliers contributions is defined by the relative importance of what the

supplier does to the participants further along the customer chain. The table belowprovides a starting point for considering the various possible combinations ofevaluations along these two dimensions, with the first column of the table reflecting theevaluation of how the supplier fits into the customers business and the second columnreflecting the evaluation of the degree to which the supplier is important to theparticipants further along the customer chain. We fully recognize that both the internaland external perspectives about suppliers to any company fall along a spectrum, ratherthan falling cleanly within discrete categories, but we use this structure to first define theextreme positions and their implications, and will later reflect the more realistic spectrumof supplier positioning.

Internal Perspective about the Businessor Product into which the Supplier

Might Be Connected

External (Customer) Perspective aboutthe Business or Product into which the

Supplier Might Be Connected

Input in Question Is Visible and/orContributes to Differentiation in the Eyes ofthe CustomersStrategic or Important from a Financial

and/or Non-Financial Perspective Input in Question Is Either Not Visible toCustomers or Is Not Perceived to beSignificant or Differentiated by Customers

Not Strategic nor Important from Financialand Non-Financial Perspectives

Input in Question Is Visible and/orContributes to Differentiation in the Eyes ofthe Customers


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Input in Question Is Either Not Visible toCustomers or Is Not Perceived to beSignificant or Differentiated by Customers

The first column suggests that a customer should reflect upon the importance of thesupplier from multiple perspectives. We have developed a series of questions that areuseful in formalizing such a consideration. These questions relate to the business towhich the supplier contributes and its context within the overall framework of thecustomers position in its markets. We use a formal analytic structure that involvesseven core questions5 that we use to evaluate the internal perspective about thestrategic importance of the business (or businesses) to which the supplier contributes.These questions involve multiple themes:

Is this business significant in terms of scale? What percentage of the companysrevenues is associated with the business with which this supplier is involved?

Is this business important in terms of the companys growth? How much would aone percentage point increase in the growth rate of the business with which thissupplier is associated be worth to the company?

Is this business a high-margin business? How much would a 1% increase inprofits (or reduction in costs) from the business with which this supplier isassociated be worth to the company?

Is this business a flagship business for the company? Does this business helpto define the companys brand and to shape external perspectives about thecompany?

Is this business one that is important to the companys largest customers? Whatpercentage of the business that this supplier is associated with involves thecompanys strategic accounts?

Is this business one that is important across the companys most significantvertical and/or geographic markets? What percentage of the business that thissupplier is associated with involves the companys strategic markets?

Does success in the business to which the supplier contributes impact uponsuccess in other businesses in which the company is engaged?

The second column is somewhat more complex in that suppliers can provide a varietyof products and services to their customers. Some of them are ingredients, passedalong the customer chain in the form of embedded products or other closely connectedproducts like packaging. Others of them are capital goods facilities, equipment,technology, etc. directly associated with the production of the customers products andservices, but not passed along in the same sense that is an ingredient. Still others arepart of the firms operations and infrastructure services like accounting,telecommunications, and snow removal and products like information technology,

5 The in-depth analytic process includes other themes within these seven core categories, providing additional

insights into particular dimensions of the supplier-customer relationship and the opportunities that exist to take it to

a higher level.


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conference tables, and trucks in the firms logistics fleet that are not formally linked tospecific products and services.

The seven core questions6 that we use to evaluate the external perspective about the

supplier are summarized below: Is this suppliers product or service visible to the participants further along the

customer chain? Do these customer chain participants spec or evaluate thisproduct or service explicitly in their purchase decision making?

Do customer chain participants know which supplier has provided this product orservice? Would there be issues with these customer chain participants if adifferent suppliers products or services were substituted?

Does the product or service provided by this supplier impact on the performanceof the firms products, directly or indirectly? If the supplier enhanced theirproduct or service and improved its performance by 10% and the firm passedthrough such performance gains to the rest of the customer chain, how muchgain would be seen by the subsequent customer chain participants?

Does the product or service provided by this supplier impact on the cost of thefirms products? If the suppliers product or service increased in cost by 10% andthis cost increase were passed along, how much of a cost increase would beseen by the subsequent customer chain participants?

If this supplier began to provide their product or service to the firms strongestcompetitor, would the competitive balance shift?

If this supplier were only able to produce and deliver at 75% of the current levelof activity, for how long would the firms customers face shortfalls?

If this supplier froze its technology and design and only was able to offer itscurrent mix of products or services, how long would it be before the firmscustomers would find the firms offerings to be dated?

The formal process used to evaluate a firms supplier base involves a three stepprocess. The first two steps are focused on the firm doing the assessment and createthe overall framework for the assessment process, and the third step is focused on thesuppliers being evaluated.

The first step involves decisions as to how these questions should be weighted (withineach of the two categories), based upon the specifics of the business involved and thestrategies and priorities of the firm doing the assessment. Some firms find it preferableto start with a scoring system that gives equal weight to each of the seven questions ineach category, and then do sensitivity testing to ensure that there are no knife-edgeoutcomes. Other firms have strong feelings about the relative importance of the variousthemes (e.g., one firm may be focused on growth much more than on margins, while

6Once again, expanded questions within these seven core categories provide additional insights into the external

dimensions of a suppliers existing or prospective contributions.


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another firm may have the exact opposite priorities). The second step involves creatinga decision context for each question within the structure. For example, during this step,it is important to define the companys flagship businesses, its strategic accounts, thefirms strongest competitor, and to provide similar definition to enable answering the

various questions in the context of the suppliers being assessed.

Once these two steps are completed, the third step in the process involves answeringthe various questions for each supplier on the roster of companies being considered.Generally, we develop a scale from 0-10 for each question, with the weighting schemedeveloped in the first step of the process used to blend the answers to questions forwhich the metrics are vastly different. The 0-10 scale can be employed with questionsthat are inherently quantitative in nature (by translating the answers into an index) andwith questions that are by their very nature more subjective, requiring answers thatinvolve schemes like High-Medium-Low or direct use of the 0-10 scale.

While we recognize that this process inevitably involves a degree of subjectivity, we feelthat the process results in realistic evaluations for several reasons. First, the initial twosteps of the process create a structure that will be employed across all suppliers. Whileit is always possible for someone to anticipate and game the process, in multipleapplications, we have found the discussions among the team members involved to bereasonable and focused on appropriate considerations as they discussed weighting andquantification. Second, by going through the questions one by one, we find that theprocess avoids a circumstance in which a single vote is made on any supplier. Third,the assessment technology creates interesting displays on each question, whichstimulate discussions as to whether the assessments are accurately reflecting thesituation across suppliers; on numerous occasions, we have seen the team identify an

outlier and impose a correction. Finally, the results of the scoring process are alwayscompared to the subjective expectations of the team members involved. We havenever had to actually ask the question Does anything look crazy to you?, as the teamhas always gotten to that question before it was asked. And, when something lookscrazy to the team, it is possible to peel back the onion and identify exactly what steps inthe process yielded the outcome that defies the logic of the team. In our experience,about 80% of the time, the team concluded that its logic was flawed and theassessment was right; in the remaining 20% of the cases, the team made an argumentthat was convincing to us that there had been a mistake made at a key stage of theprocess.

We note that this process moves beyond the simple 2x2 structure that was developed inthe earlier table. In fact, the process yields a continuum of scores along both theinternal and external dimensions. We illustrate this with an example from one recentengagement with a firm in the energy industry. This firm selected 32 of its suppliers forassessment (with this number selected because there was a very large gap betweenthis firms level of purchases from suppliers 32 and 33). The graphic below shows the


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results of the assessment process for 16 of these 32 suppliers. The horizontal axisreflects the assessment from the internal perspective, the vertical axis reflects theassessment from the external perspective, and the size of the circles reflects the level ofbusiness done by each supplier with the firm which did the assessment. The other 16

suppliers not shown in the graphic were all located in the lower left quadrant of thediagram; we omitted them to avoid having a fourth of the diagram become a blur. Aboutall that is missed as a result is the fact that the lower left quadrant examples that remainall have twins (or even more clones).

P

O

N

M

L

K

J

I

H

G

F

E

D

C

B

A

Internal PerspectiveNot Important or Strategic Important and Strategic

Exte

rnal(CustomerChain)Perspe

ctive

NotVisibleorDifferentiating

VisibleandDifferentiating

While this diagram is only relevant to the firm involved in the assessment, it illustrates anumber of patterns that we have seen repeatedly. First (remembering to include the 16suppliers in the lower left quadrant that were omitted for visual purposes), relatively few

suppliers make it outside of the lower left quadrant of this diagram. In this instance, it isimportant to recognize that not only did 25 of the 32 suppliers evaluated fall in the lowerleft quadrant, but also that the 32 suppliers included in the process represented thelargest suppliers with which the firm worked. We have heard this message repeatedlyin working with business-to-business firms, as we suggested earlier through theexample of the firm that had culled its list of strategic suppliers to eight.


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The second observation from this case example that appears to be a goodgeneralization is that the suppliers outside the lower left quadrant are spread among theremaining three quadrants, rather than being concentrated heavily in any one of the

three. Our initial expectation was that we would find considerable alignment betweenthe internal and external assessments, with most suppliers either in the lower left or theupper right quadrant. But, as weve gone through supplier evaluation processes withvarious companies, weve come to see the distribution across all four quadrants asreasonable. There are many vital suppliers not just capital goods and infrastructuresuppliers, but also ingredient suppliers whose contributions are not seen further alongthe customer chain, and it is appropriate that there would be suppliers whose position isin the lower right quadrant. And we have yet to work with a company that didnt have asupplier whose products were treasured by end customers in a business that was arelatively minor part of the firms overall portfolio, accounting for the examples in theupper left quadrant.

The third observation which we see consistently in these assessments is the fact thatwhile larger suppliers are somewhat more likely to be located in the upper rightquadrant than elsewhere, this is not always the case. In this example, the firmssecond, fourth, fifth, and sixth largest suppliers were all located in the lower leftquadrant, with the largest and third largest supplier were joined by a much smallersupplier in the upper right quadrant. Size does not always equate to strategicimportance.

What Strategy Is Appropriate for Each Supplier?

Having developed a segmentation of the supplier base, the next question that must beaddressed focuses on the appropriate approach to each supplier relationship. Theassessment process we have gone through has repeatedly confirmed that not allsuppliers are of strategic importance. That doesnt mean that each and every suppliercant become a good supplier and earn the continued business of their customer. But,for many suppliers, the route to doing so is well defined: consistent efforts to deliverupon the promises made to their customers at a price that is competitive in the marketin which they operate. We have worked with many prosperous companies that haverewarded their shareholders by doing exactly that, without ever breaking into thecategory of strategic supplier.

In fact, when weve interviewed purchasing executives about their goals and philosophy,many have in fact espoused a framework that is consistent with a supplier that is not ofstrategic importance from either an internal or an external perspective. Theseexecutives have typically described a management framework that works to optimizethe supply base by locating and developing low-cost supply relationships with firms that


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can consistently deliver upon their firms expectations regarding quality, on-timedelivery, and other specs associated with the product or service in question. When weask these same purchasing executives what they do in order to be a good customer,most report efforts around creating a fair playing field, efforts to be accessible and to

listen to suppliers ideas with an open mind, and efforts to reward solid performancewith stable relationships as long as the supplier remains priced at market. We largelyconcur with both that framework and those insights as to how to be a good customer,and include them in the portion of the following table which applies to suppliers that arenot strategic from either an internal or an external perspective. And, as we have noted,this combination typically is the one that applies to the majority of any business-to-business firms supply base. However, for the other three segments of the supplierbase, we believe a different management framework is appropriate, as is reflected inthe following table and discussed further below.

InternalPerspective aboutthe Business or

Product into whichthe Supplier Might

Be Connected

External

(Customer)Perspective aboutthe Business or

Product into whichthe Supplier Might

Be Connected

CustomerPerspective aboutSupplier Roles and

Level ofInvolvement

ManagementFramework for theRelationship with

the Supplier

Input in Question IsVisible and/orContributes toDifferentiation in the

Eyes of theCustomers

Usually areluctance toinvolve suppliers

End customerpreferences may

force acceptanceof the supplier

Implement supplierrelationshipmanagement toensure security ofsupply and possible

eventual ownershipor exclusivity

Strategic orImportant from aFinancial and/orNon-FinancialPerspective

Input in Question IsEither Not Visible toCustomers or Is NotPerceived to beSignificant orDifferentiated byCustomers

Willingness toinvolve suppliersthat offer anadvantage withrespect to theirinputs

Implementrelationships thatbalance best-in-class sourcing withsecurity of supplierrelationships

Input in Question IsVisible and/or

Contributes toDifferentiation in theEyes of theCustomers

Receptive to

involvement ofsuppliers with astrong valueproposition

Implementrelationships to

ensure collaborationand association withbest-in-classsuppliers

Not Strategic norImportant fromFinancial and Non-FinancialPerspectives

Input in Question IsEither Not Visible to

Open to solutionsthat offer overall

Optimize to achievelow-cost supply


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Customers or Is NotPerceived to beSignificant orDifferentiated by

Customers

lowest cost withoutcompromising onkey specs

relationships thatconsistently deliverat expected levelsof performance

The second environment which we will consider is the one in which the supplier is notseen as strategic or important from an internal perspective, but in which the supplierand its product or service are visible and perceived positively by the participants furtheralong the customer chain. One executive with whom we worked described this as theenvironment in which the marketing department wins out. In making that comment, heunderscored the typical role that marketing has in bringing the voice of the customerinto decisions made within their firm, including ones relating to the supply base. Weview this win for marketing as a minimal success in this environment, and believe that

in this situation, the right management framework involves a proactive search for best-in-class suppliers who can add luster to the firms own offering, not just acquiescence tothe messages of the firms customers.

We have seen multiple examples of firms who were able to significantly strengthen theirown position by implementing that management framework. One automation andcontrol company created a strong cadre of applications partners who brought expertisein market niches that were individually too small to warrant the firms own attention.Over time, the portfolio of applications built upon the platforms offered by this firmbecame a significant source of competitive advantage, one that lead customers toselect their platforms over those of competitors because of the breadth of applications

which this company could support at a high level of quality. We once even heard acomment from an executive in a competitor company about how our platforms arebetter in the applications that constitute 90% of the market, but we are losing out to thisfirm because of its strength in the other 10%. While the firm with whom we workedwould debate whether this competitor was in fact better in the 90% segment, it was veryclear that their advantage in the 10% segments was material to their overall success.

We have also seen numerous examples of situations in which failure to heed themessage from the participants further along the customer chain resulted in businessproblems for the organization that selected an alternative supply source. In oneinstance, we observed a situation in which a business unit manager who was trying to

move his business into the important and strategic category attempted to introduce anin-house substitute for a significant ingredient that had previously been sourced from awell-known branded supplier. This firm saw their market share halve within a matter ofmonths, with even the reversal of their decision on this ingredient too late to enable it toregain its former level of sales. This firm learned a very hard lesson about the perils ofignoring the preferences of the firms further along the customer chain.


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As the two examples above both suggested, the majority of examples associated withthis market environment involve ingredients suppliers, rather than those whose productsor services involve capital equipment or contributions to infrastructure. This is natural,

given that ingredients are explicitly passed along the customer chain and have thepotential to matter to the firms further along the customer chain. But, while ingredientssupply relationships are the most frequent examples associated with this businessenvironment, we have seen a number of cases in which subsequent stage customershad strong preferences relating to the source of the capital equipment that was used inthe production process.

In the market environment, we therefore recommend that business-to-business firmswork aggressively to find and develop strong and lasting supply relationships withorganizations that can help them to build customer loyalty and achieve differentiation.Firms and managers in this environment should be receptive to supplier involvement

and contributions, and be willing to grant key suppliers a seat at the table in keyplanning and decision forums involving the lines of business that follow thiscategorization.

This is not to say that such suppliers should be able to define any price that they wantor otherwise dictate terms to their customer. In fact, one of the reasons for bringingsuch strategic suppliers to the table is to make sure that they too have a stake in thesuccess of the partnership, part of which will depend upon the ability of the two firms incombination to bring their products to the market at an appropriate price point given thecompetitive environment and other considerations relevant to the market in question.But, at the same time, customers in this environment must recognize that their suppliers

are contributing along multiple dimensions, and avoid focusing discussions only onprice. If suppliers in this environment can enable the team to grow share or realizepremium prices, then they should be rewarded for that cont

Documents

A Blueprint for Success With Suppliers