“Knowing me, knowing you” – creating the strategies for successful supplier relationships.

Every successful business has its specialties, the things it does best. They are a function of their people, their knowledge, their technology and their processes. But no business is best at everything, which is why it has suppliers.

Suppliers are integral to almost every business, and without the right supplier relationships, most businesses would simply not be able to operate. But, not all your suppliers are equal. Who you choose and the nature of how you manage the relationship must reflect this, businesses need a strategy for managing their suppliers. Some of this is intuitive but doing it proactively reaps rewards.

“One of the basics of any procurement strategy is to understand your suppliers’ impact on your business now and how that may change in the future,” says Jonny Michael. “Each of your spend categories can be mapped to show how much the business spends in the category and the risk it presents to the business. That map determines the strategy the business should have with the suppliers in each category. For instance, a low risk and low-cost supplier, such as a stationary provider – where spend is low and there’s no risk to the business if the supplier defaults – should receive minimal attention to maintain what is essentially a transactional relationship. Conversely, a high-risk supplier, who is delivering an essential ingredient to your overall capability and for whom there maybe little alternative, requires protecting and nurturing to develop a mutually beneficial relationship. Where the spend with that supplier is also large they should be treated much like a partner with a longer-term strategy to reduce risk.”

Relationships are two-way of course and it’s very important to understand how the supplier views the client’s business. If the supplier is important to the business but the business isn’t important to the supplier them there’s a mis-match and a problem that needs addressing.

A further illustration of this point might be a utility provider. Utilities are commoditised i.e. it’s the same product and for most businesses there’s a lot of providers. Heating and lighting are an essential commodity and represent an increasing amount of spend. So the business should ensure it’s getting the right deal – and by the way that’s often not the case with brokers – but doesn’t need a close relationship with its supplier since it can switch relatively easily and still have exactly the same product. Looking at it from the supplier’s perspective the client’s power over the utility provider is minimal and it will have little loyalty to the business. These dynamics should drive the business’ supplier strategy

However, for a high-volume manufacturer or chemical plant, power is a vital element of production and cost has an enormous bearing on margins, price and competitive position. From a supplier perspective, if demand for power is large enough, losing that client will have a significant impact on the power company. Working together to manage risk for each other becomes a strategic imperative for both businesses and the relationship is more that of partners.

Where suppliers deliver a capability that is a high value necessity to the end business, the relationship with such suppliers requires a strategic approach, firstly to maintain the security of supply, but then to drive competitive advantage.

A recent client situation for JMCL is a great example. We recognised that a fast-growing health club had become dependent upon a small, family-run, foreign-based business for its member’s access to the club and lockers. Furthermore, little was known about this supplier, there was no proper contract and the supplier wasn’t being listened to or generally treated in a way that reflected its importance to the business. Member retention and acquisition is vital to health clubs and so the supplier strategy and relationship needed an overhaul in order to reduce the inherent risks.and drive competitive advantage.

JMCL did its due diligence on the supplier in a way that built the relationship and revealed, what the supplier wanted. JMCL negotiated and then managed a proper contract, with service levels and performance targets. We reduced the risk to our client by including escrow arrangements in the contract and on top of all that, negotiated a price reduction. By understanding the needs of both, it was possible to mitigate risk and create a satisfactory solution that kept the supplier happy and the client free from the risk of a possibly catastrophic future problem. Further we ensured that our client had exclusivity with this supplier and therefore an advantage over its competitors for what was a great product and service.

With the right strategy in place to manage your suppliers appropriately, your business will invest time where it should, deliver considerable savings, protect against risk and develop a mutually beneficial relationship with those value-adding suppliers, who provide the essential capabilities your business needs.