December 10, 2010
Column | basic training

The art of good supply chain relationships

Are your relationships all about you and your need to drive added revenue? If so, you have your eye on the wrong ball.

By Art van Bodegraven

It's time to talk turkey about this "relationships" thing. We've been awash in hot air for quite a while, leaving some with the impression that relationships and relationship management are the purview of the sales and marketing folks, as they try to wring more out of key customers. A corollary view has been that relationships are really all about doing the "right" things, making all parties feel good and, with some luck, realizing a few benefits along the way.

Rubbish.

For openers, 21st century relationships are bigger, bolder, and more powerful than anything we saw under the old customer relationship paradigm. In fact, the world of successful—and superior—supply chains is defined by high-quality relationships throughout the end-to-end chain. Without multidimensional relationships and active relationship management throughout, supply chains can't work as effectively as they need to in today's competitive and globalized arena. The game's new rules say, though, that it's not enough to hope for the best. It's vital to use relationship management to plan for the best. In our lexicon, "the best" indicates quantified improvements in the bottom line, and, as appropriate, the top line, as well.

The baby and the bath water
In considering the newer, richer panoramic view of supply chain management relationships, don't even think about diminishing efforts in customer relationship management. Do, however, rethink the focus of these relationships. Are they all about you? About your need to drive added revenue and strengthen margins? Or are they about you and your customers collaborating to deliver superior solutions to their customers?

It's the latter case that leads to the revenue and margin outcomes you are after—and makes your customer stronger and more viable in the process. And that's a big part of what you want: longevity in a successful relationship, sustained high performance, and mutual benefits with legs.

What if? What if your customers' customers began to see you as an integral part of their real-world value proposition? What if you could reposition your relationships toward selling value and away from selling commodities? What if you could increase your share of key customers' business by 10 percent? By 50 percent? What if your margins could increase by a third? By half? It's beyond satisfying to put trackable numbers into the feel-good equation.

A recent case validating the concept involved an office products distributor that doubled its top line, at no loss in margin. Its success was based on branding its identity and offering value-added services and solutions to major national and regional accounts. Its competitors, who were all still trying to differentiate themselves by lower price commoditization of products, were caught flat-footed.

Another shoe, another foot
Here's the moment at which the power of relationships begins to go exponential. Translate what you might be trying to accomplish as an enlightened business partner and supplier at the tail end of the supply chain, and drive the concepts upstream. Enlist your critical suppliers as supply chain relationship partners. Note: That commitment might involve focused supplier rationalization, not simply to reduce the complexity of managing a supply base but also to create high-powered, high-performing supply chain relationships.

Establishing strong supplier relationships can change your position as a competitor and as a downstream business partner. Collaboration with key suppliers can be a potent tactic in creating sustainable cost reduction and continuous improvement—and consistent high quality—in your products and services.

What if? What if you could focus your relationship efforts on a handful, rather than scores, of "key" suppliers? What if you could target—and achieve—documented cost savings year after year? What if you could leverage the talent and creativity of the heart of your supply base to help you get outside the box and get ahead of the game?

The crafting of focused supplier relationships is more or less a mirror image of the customer relationship process, with some important differences. The best example may be the multibillion dollar food processor that radically rationalized its supply base, based on relationship potential. The leaner and meaner combinations, working together, took millions of dollars and as much as 20 percent out of supply costs. Downstream, manufacturing savings also accrued through better engineering and packaging design. And the company quickly created a price/performance gap between itself and its key competitors.

Logistics service providers
The role of third-party logistics service providers (3PLs) in supply chains presents special challenges and opportunities in leveraging the power of relationships, irrespective of the industry vertical involved. You may use 3PLs for transportation management and/or execution. You may use them for storage and distribution—and value-added services. They may work with you on an arm's length transactional basis, or they may be the face of your company as far as the customer is concerned.

The opportunities in this arena for things to go wrong are legion. The power of things going right is enormous. But it requires building and actively managing relationships, with structured and disciplined processes as well as aggressive mutual approaches to the outcomes the relationship is intended to deliver.

The what-ifs are compelling: cost improvement; quality and accuracy gains; dependable performance without redundant, non-value-adding oversight. Imagine the focused payback involved in dealing with a limited number of compatible, reliable 3PLs. Imagine not having to worry about the rigors of going out for bid year after year because the relationships that were built right at the beginning are long-lasting.

Examples on both the upside and the downside are legion in the 3PL world. Today's cost pressures are making long-standing affiliations increasingly vulnerable. And they are even more fragile when the partners have failed to put a carefully constructed and maintained relationship process in place.

In one notable case, a well-known 3PL lost an account of some 25 years' standing—the relationship had been neglected and could not recover from the impact of a processing error. In the snap of a finger, a seven-figure account with a 15-percent margin disappeared.

Successful 3PLs tend to build the relationship gradually, based on a combination of trust and performance. They don't do the same old thing for a customer for a couple of decades; they do increasingly more—functionally—and further integrate themselves into the customer's value stream, becoming a visible and vital part of the customer's success.

In short, the 3PL relationship isn't about price; it's about cost and value. The stronger your 3PL partner is, the stronger you will become because of its performance. The scenario is on a parallel with the win-win-win relationships built with customers and suppliers.

Where are we, and where are we going?
So, let's assume that all these ideas make sense for you, your company, your customers, and your suppliers (including service providers). How do you figure out how well you're doing now? How do you get a handle on where you're good, and where you're not good yet?

The answers might lie in a term that only a CPA could love, an audit—a clear-eyed, no-holds-barred assessment of where relationships really stand, not where you would like to believe they are.

In fact, you really ought to begin here in any case. The things you suspect aren't going well may be the result of problems either upstream or downstream, so trying to deal with superficial symptoms may not get at the bedrock issues in existing relationships.

And your point is?
Look, this is hard work, but it isn't brain surgery. It takes an organized process to find the right starting point. Building relationships in a vacuum can pay off, but integrating the processes of relationship management throughout a supply chain is the real key to unleashing the power that lies within them.

We think that those organizations that make the right moves in supply chain relationships today are those that are going to prosper in the supply chains of tomorrow—in good times and in bad.

About the Authors

Art van Bodegraven
Columnist
Art van Bodegraven, president of Van Bodegraven Associates, may be reached at (614) 893-9414. He blogs for DC Velocity at The Art of Art.

More articles by Art van Bodegraven
Kenneth B. Ackerman
Columnist
Kenneth B. Ackerman, president of The Ackerman Company, can be reached at (614) 488-3165.

More articles by Kenneth B. Ackerman

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