Defining Your Supplier Relationships Matters

By Ed Bernstein, IRI President, and Greg Holden, Business Writer

Elements of business that were traditionally taken for granted are coming to play ever greater roles in how we innovate. The horizontal growth of companies today, reflective of the rise of globalization and increased resource constraints, is eroding traditional structures. This is probably most visible in supplier relationship management (SRM), the topic of one of IRI’s newest Research-on-Research (ROR) working group projects.

Throughout most of history, supplier relationships have been dictated predominantly by buyers. Companies would approach a vendor with an order and it was the vendor’s responsibility to deliver. Today, however, smaller, weaker vendors are being run out of business by larger and/or more agile firms, making the supply side of SRM more difficult for buyers to negotiate favorably. Likewise, buyers no longer operate through vertically integrated, in-house negotiators. They have become networks of horizontally cooperative buyers competing with other networks within a supplier ecosystem populated by similar networks of suppliers.

The SRM game has changed and the ROR group meeting this week will be exploring just how much it has changed and what can be done about it.

A recent article in Lab Management® by F. Key Kidder, explores this issue, calling it The Procurement Dilemma, Kidder likened the negotiations between buyers and vendors as a “prisoner’s dilemma,” popular among game theorists. The negotiation process for supplies that are basic or commodity based—nuts and bolts, wire, raw ores, circuitry and so on—are understood by both sides to be short- to mid-term contracts determined by the price of those goods on the open market. But other types of supplier goods and services make negotiations more difficult and it is the procurement manager’s job to know whether he or she is entering “distributive” or “integrative” negotiations and whether the other side of the bargaining table sees the negotiations in a similar light.

“Distributive negotiations, or haggling,” says Dr. Roger Mayer, professor of management, innovation, and entrepreneurship at North Carolina State’s Poole College of Management, “is when you’re out to get everything you can, just trying to meet your own needs.” This type of relationship, says Mayer, tends to burn any chance of building a long-term relationship with the supplier; it’s win-lose negotiating. But “integrative” negotiations come to view the supplier as a possible long-term partner with a win-win, or win-balanced (i.e. win some, lose some), understanding about the relationship. This type of relationship, according to Mayer, “is far more achievable than it is given credit for.”

What buyers are beginning to understand is that win-lose negotiations do not have to be the norm in their SRM dealings. “The technology you’re counting on isn’t kept in house anymore,” says Edward Hummel, director of business development at Bell Labs, an IRI member company. He continues, “Companies want to find a way to flow their customer problems down to the supplier community and have them solve lower-tier things. So you pick suppliers that complement you fairly well and share, trusting them not to expose your crown jewels.”

But how do companies know which suppliers they can trust? The shortcut, says Mayer, is to turn to vendors in the new supplier’s network and ask about their reliability. The integration of buyers and vendors into cooperative networks means developing a relationship with one allows you access to reliability ratings about the others. It also means turning to your own network of buyers and asking them about past dealings with any suppliers you’re interested in from a specific network. Companies are no longer alone in dealing with the challenges of SRM, nor are vendors. Coming up with the right vendor, however, remains a challenge.

Kidder referenced a “hapless manager’s” predicament and how he likened his SRM dealings to a fishing expedition. “Suppliers are like fish in the ocean,” he said, “we are the fishermen. The key challenge facing us is how to put out the right bait so we can pull up the right suppliers at the right time… How do we know we’re using the right bait [or] that the right kind of fish are in the water? More important, when we catch a fish, do we keep it or throw it back?” This is where an integrative, long-term relationship with a supplier within a component network becomes important, according to Mayer. Through that relationship you may be allowed access to more information about other suppliers.

To investigate this issue of supplier relationships and how they can be better formulated, adapted, and constructed, the ROR working group (Reinventing Supplier Innovation Relationships) will be meeting for the second time this week at IRI’s Diamond Jubilee in order to explore the project’s feasibility and potential research paths. The participating companies so far include PepsiCo, Sherwin Williams, Schneider Electric, Hershey, J.M. Smucker, Goodyear, Ingersoll Rand and Kimberly Clark. All IRI members are welcome to come and participate in this group’s undertaking.

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