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(originally published by Booz & Company)


Transforming an Adversarial Relationship

The tendency to regard relationship-based sourcing as the superior model primarily comes from the success of Toyota and Honda, as well as a number of European manufacturers, in developing and perfecting it. But it must be remembered that Asian manufacturers often have a significant ownership stake in their suppliers, making direct comparisons difficult. Further, the relationship-based sourcing model has yet to be tested in an extended global downturn. In fact, in the current competitive environment, some automakers traditionally identified with the relationship-based sourcing model have begun to implement the profit improvement targets usually seen in price-based sourcing.

To a certain extent, a company’s choice of relationship model depends on its underlying company culture and how it perceives itself in the marketplace. Correctly or not, a company whose financial back is to the wall may not see itself as having the “luxury” of adopting a more collaborative approach. Taking a price-based approach may in fact be a rational choice, if one is in a position of strength or dealing in commodity goods. Such an arrangement, however, may not be optimal in the long run or even sustainable, especially if fortunes shift.

Manufacturer–supplier relationships are more fluid and less rigidly defined today than they once were. Some companies opt for a middle ground that acknowledges the possibility that collaborative relationships may become more adversarial (when focused, for example, on commodity goods); in companies that take a zero-sum approach, pockets of collaboration can emerge between manufacturers and suppliers. This evolving middle path, known as “co-opetition,” involves companies moving deliberately among competition, collaboration, and its various hybrids as the situation demands, but always with transparency and an eye on protecting the long-term relationship.

Survey respondents identified the elements they prized the most and the areas needing improvement in their manufacturer–supplier relationships. From these responses, we identified eight relationship best practices that apply no matter which model is used.

1. Securing commitment from the top. Establishing and maintaining a high-performing relationship between manufacturers and suppliers requires commitment from the CEO and senior management to trust and transparency, and assurance that the purchasing and supply leaders have the authority, people, and resources to perform as required. The CEO must communicate by word and action that behaviors that impede a high-performing relationship with business partners will not be tolerated.

2. Creating alignment. Partners share information more readily with manufacturers when they perceive their interests to be linked by growth opportunities.

3. Recognizing the value of a good relationship. Good relationships have a real impact on the bottom line and are nurtured like the assets that they are; the cost and effort of maintaining them is seen as an investment rather than as an expense.

4. Establishing clarity of purpose. Understand what can and cannot be accomplished in the relationship. Manufacturers, for example, can’t look to suppliers to erase their legacy costs.

5. Understanding the other side’s business. The innovation that comes from true knowledge sharing can’t take place unless each team has the technical expertise to roll up its sleeves and work alongside the other.

6. Streamlined decision making. Each side must have one accessible person who is in charge of the relationship both externally (to maximize responsiveness) and internally (to foster cross-functional communication between departments and teams).

7. Getting beyond the transactional. Manufacturers should realize that suppliers are eager to work with them to tackle complex problems, from reducing supply chain costs to achieving sustained excellence in areas that reinforce the brand message. Each side should challenge the other to think beyond conventional solutions and methods and to break down siloed thinking.

8. Codifying the relationship. Establish a knowledge management system and bilateral action plan that ensures the relationship survives beyond the involvement of current participants. This should include instituting agreed-upon key performance indicators for assessing the state of the relationship, identifying areas for improvement, and establishing protocols to maintain open communication and transparency. Setting priorities will also encourage thinking with a long-term horizon and help keep parties from reverting to old behaviors when times get tough.

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  1. Ronald Haddock, Michael Pfitzmann, and Reid Wilk, “Knowledge-based Sourcing in China,” s+b Leading Ideas Online, 10/14/08: How structural shifts in China’s economy are forcing companies to adopt more personal strategies for supplier relationships.
  2. Bill Jackson and Michael Pfitzmann, “Win-Win Sourcing,” s+b, Summer 2007: The most effective procurement model fosters knowledge sharing, not mistrust.
  3. Bill Jackson and Conrad Winkler, “Building the Advantaged Supply Network,” s+b Resilience Report, 09/15/04: Collaborative strategies with examples from aircraft, consumer products, and auto manufacturers, plus advice for step-change planners.
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