Australia, Companies, Features, Logistics

How to manage supplier relationships

Peter Jones, CEO, Prological.

Prological Managing Director Peter Jones discusses the essence of supplier relationships and their importance in the procurement process.

In supply chain and logistics, nurturing supplier relationships is often touted as a crucial component of effective procurement. While many businesses claim proficiency in managing these relationships, the reality is that the effectiveness of their management can greatly vary.

Peter Jones, Managing Director of Prological, provides a nuanced take on this. “Most businesses believe they excel at managing supplier relationships,” he begins. “But for many businesses, good relationship management means simply adhering to company policies.” 

Yet, this understanding can sometimes be limiting. 

“For example, many companies have policies that prohibit employees from even accepting a coffee treat from a supplier due to concerns about bias or undue influence. To them, that level of control signifies sound supplier management. They might argue that their monthly or quarterly meetings and checklists ensure suppliers meet their obligations.

“Adherence to policy is of course important, but it needs to be a policy that is good for the business and the people in the business, too.”

At its core, the supply chain industry is a human-centric domain. Peter notes the importance of the human touch.

“The supply chain industry revolves around people, and it’s not an exact science,” he says. 

According to him, this inherently imperfect landscape necessitates strong interpersonal connections. 

“If there’s a solid interpersonal connection, it’s easier to engage in continuous improvement and address significant challenges,” Peter says.

He illustrates his point with a recent example: “Just three weeks ago, I visited a large New Zealand company with over a billion dollars in annual sales. The company, despite having implemented a stringent procurement-based supplier management process for eight years, found a glaring gap in their approach. While suppliers were meeting requirements, there was no innovation.” 

Peter attributes this to the company’s “stringent contracts and lack of interpersonal relationships.”

Peter draws parallels between this and the way IT departments operated in the late 1990s. He observes that these departments “became overly influential and disconnected from the core business needs.” A similar trend was noted during the Global Financial Crisis (GFC), with purchasing departments gaining significant power.

Diving deeper into the ripple effects of the GFC on supplier relationships, Peter recalls the financial strains businesses underwent during the period. “During the GFC, businesses faced enormous cost pressures,” he says. This led to a dramatic shift in how these businesses approached supplier negotiations, with a heavy emphasis on cost-cutting. “From a supply chain perspective, the emphasis was on negotiating with suppliers for more cost-effective solutions,” Peter notes. This change “altered the nature of the supplier relationships, and it’s taken a decade or more for the balance to be restored.”

In light of these evolving dynamics, Peter emphasises the need for a more balanced approach in managing supplier relationships. “Mature businesses have both formal and informal management practices,” he says. For Peter, there’s a growing understanding in the industry: “There’s a growing recognition that informal interactions are crucial for fostering innovation, continuous improvement, and fostering a genuine partnership.”

The delicate balance between structured corporate policies and the human touch in supplier relationships has long been a topic of debate. As the industry navigates this balance, the emphasis on human relationships in the supply chain becomes increasingly important.

But how, precisely, does one create or manage an effective supplier relationship?

Drawing parallels between personal and professional relationships, he elucidates, “Outside work, what does a good relationship look like? For instance, during the holidays, I might gift someone based on our relationship’s depth.” 

Just as you might treat a close friend to a coffee or a gift, business interactions should embody a similar spirit. 

“Similarly, in business, I should be able to naturally engage with key contacts,” Peter explains.

In today’s era of rigorous rules and policies, it seems challenging to operate from a principle-based standpoint. As Peter points out, people prefer the safety of strict rules that delineate boundaries. “Operating on principles means allowing others to exercise judgment, accounting for varying personalities,” Peter says. His belief centres around the idea that relationships, especially with essential suppliers, should mimic the natural flow of personal interactions, while still respecting commercial obligations.

Such an approach can significantly impact how businesses address issues with suppliers. 

“Just yesterday, we received an email from a significant IT supplier, expressing discontent over a few issues.” Instead of a bureaucratic response, Peter adopted a personal touch, understanding the supplier’s grievances and rectifying the issue. This approach stems from his desire to “treat suppliers the way I would want to be treated,” while acknowledging that no process is perfect.

Peter notes that procurement professionals shouldn’t dominate supplier relationship-considerations, as they have a different set of skills and priorities.

“Typically, procurement isn’t responsible for maintaining relationships. They initiate and, when a contract nears its end, review them.” 

The true experts, from lawyers to logistics specialists, handle daily management. 

Procurement’s role becomes pivotal when issues arise or when contract nuances need understanding. 

Even if they’re not responsible for ongoing supplier relationship maintenance, what are the traits of a good procurement professional?

“Good procurement professionals have an eye for detail and understand contract intricacies, approaching them with a sense of fairness.”

Peter identifies a shift in the procurement landscape. Previously dominated by a hierarchical approach, today’s procurement process values relationship-building. Highlighting this evolution, Peter cites the example of non-disclosure agreements (NDAs) now being typically mutual. Once upon a time, NDAs were often one-sided – foisted by one party on another, creating a power asymmetry that wasn’t conducive to good ongoing relations. 

Modern procurement needs a blend of technical know-how and interpersonal skills. 

“I do see things moving in this direction,” he notes, recognising the growing maturity of purchasing departments in larger businesses.

Achieving this maturity is more important than ever, as supplier relationships constitute a key part of ensuring supply chain resilience.

Discussing the dynamic nature of sourcing over the last five to ten years, particularly in the post-COVID era, Peter touches upon a noticeable trend. 

“There absolutely has been diversification to mitigate risk,” he observes. The focus, he notes, has extended beyond the longevity of partnerships. “While businesses have traditionally relied on long-standing suppliers, the unpredictable nature of external factors, such as global crises or political shifts, forces them to consider risk from a broader perspective.”

But how does this shift impact supplier relationships? 

In Peter’s view, the key lies in transparent communication. 

“A good buyer will help their supplier understand this and guide them through this journey,” he says, emphasising the significance of strong relationships when navigating these waters. “While businesses must inevitably prioritise their own interests, it’s essential for suppliers to recognise and support this. Discussions about diversification become considerably more seamless when built on a foundation of trust.”

No matter how supply chains evolve in complexity, the essentials of supplier relationship management remain simple: it’s all about fostering and nurturing those invaluable supplier relationships. 

“The same goes for supplier relationships as goes for every other relationship,” Peter says. “Treat others as you’d like to be treated. Not necessarily how you are actually treated – but how you’d like to be treated.”

For more information on Prological Consulting, click here

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