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 organizations 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 optimization, 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.
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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 organization 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. 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.
3) Organizational governance
Like cross-functional engagement, the organization and governance of supplier-collaboration programs suffers from a lack of formal structures and processes. Introducing a clearer governance structure for the overall supplier-collaboration program and for individual projects has the potential to significantly improve outcomes in most organizations. Two-way scorecards, for example, allow buyers and suppliers to let each other know if they are effectively supporting the goals of the program.
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.
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.
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 organization. Leadership in this area is also very important and cannot be over-emphasized in terms of the level of importance this assumes in fostering truly strategic supplier relationships.