6 ways to demotivate suppliers

Much has been written, including by me, about improving supplier performance. In fact, I’ve written a lot about how a customer can enable and motivate rather than discourage and even prevent performance excellence. But an area that is rarely discussed is supplier performance demotivators. What do customers do to deflate and/or discourage supplier efforts? Many of these issues are embedded in a customer’s culture. Others are due to a lack of awareness. Some are due to a pure lack of operational effectiveness. In this post, I’ll describe 6 ways to demotivate suppliers that can cause performance problems and are a hidden added cost. Sometimes in the pursuit of saving money, firms end up wasting time and money.

  1. Less than optimal customer business processes can adversely impact supplier performance. Less than supplier lead time orders, difficult and inefficient procure-to-pay processes, and asking suppliers to carry inventory for customers are a few examples.
  2. Unclear expectations. These can come from flavor of the month initiatives at the customer that keep suppliers guessing about what’s next and has them lying low till the latest initiative blows over. If suppliers are not sure about how they’ll be evaluated and what the impact will be, then meeting amorphous or unknown requirements can result in supplier confusion and in tuning out the customer. Or, sometimes customer expectations are unclear because the customer has never defined or communicated them.
  3. Hypocrisy. An example of customer hypocrisy is telling suppliers that they want to be partners, but treating suppliers disrespectfully and as the lesser party in the so-called partnership. Or, purporting to care about total cost and best value when customer actions indicate the focus is entirely on price.
  4. Do as we say, not as we do. Some customers hold their suppliers to a higher performance standard than they hold themselves to. They may talk about the necessity of suppliers becoming lean, yet behave as if lean is a concept for suppliers not for them, actually making it harder for suppliers to adopt lean and turning them off in the process.
  5. Discouraging supplier ideas. Some customers ask suppliers for ideas, but are in fact not open to them. Suppliers are good at figuring out whether or not a customer really wants to hear their ideas. Even when ideas are sought, they may be met with NIH (not invented here) or “we tried that”. Another example is not taking a supplier suggestion to loosen up the spec because the engineering department is striving for the perfect specification, not for meeting customer requirements, which may not need to be so stringent (and so expensive).
  6. Lack of communication or poor communication. Communication problems within a customer firm can get reflected in the way they treat suppliers. Mushroom management as a control mechanism works internally for some managers, so why not manage suppliers like mushrooms too. Some customers think that playing close to the vest and keeping suppliers guessing keeps them on edge and sharper. Controlling rather than sharing of information with suppliers gives them less to go on and can prevent suppliers from doing a good job.

These are just a few of the ways to demotivate suppliers. I’m sure you can think of many more.

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3 ways to predict supplier performance

A supplier’s performance, potential and current, is typically looked at under two circumstances, the qualification and the selection process. An organization has the opportunity to avoid potentially poor-performing suppliers during the qualification and selection process. The other opportunity to view performance and take action is during the life of the supplier’s contract with the customer. But how do you know during the selection process which suppliers will be good and which will not?

Of course it’s better to avoid choosing poor-performing suppliers in the first place, during the selection process. However, if a supplier is not currently contracted with your organization, how do you determine and even predict how well the supplier will perform? Besides supplier RFI and RFP responses, other ways of determining performance potential can be used. Even suppliers who perform well today can always hit an unexpected bump in the road. The good performers of today can become the risky suppliers of tomorrow.

Here are 3 ways to predict supplier performance:  business rating services; site visits; and checking references of other customers with whom the supplier is currently contracted. One or all of these approaches can be used. How well any or all of these approaches work depends upon how well they’re deployed.

  1. Business rating services and analytics. Many kinds business rating services are available, such as Dun and Bradstreet, Briefcase Analytics, Rapid Ratings, Cortera, and many others. They use approaches ranging from analyzing  public available financial information to customer surveys to data mining and information crowdsourcing. They can alert the user to financial problems and supply chain risks (issues such as human rights, integrity, sustainability, environmental health & safety problems, etc.). One common gripe about rating services is the accuracy of information about private companies and also the dearth of good information about low-cost country suppliers. Rating services are typically used in conjunction with other methods.
  2. Site visits. Visiting a supplier and performing a business analysis of a supplier can be very useful in determining current and potential performance. Performing a reliable and robust site visit requires both expertise and a good site visit instrument. The customer must be able get past appearances and know how to tell what’s real and what’s staged for their benefit during the site visit.  When done well, site visits can be a vital tool. Typically organizations do their own site visits. But when it comes to offshore suppliers, third-party services can be useful. Good providers of offshore site visits know the local language, culture and customs, and can determine if suppliers can meet customer requirements. And very importantly, they can help firms avoid choosing sham, misrepresented, and inappropriate suppliers.
  3. Reference checking. Finding out how a supplier performed for another firm is very important and can help predict how well they will perform for you. According to a poll conducted during a recent webinar that I co-presented for NIGP on supplier selection, buyers can spend an average of 30-45 minutes per reference check (including reaching the reference, interviewing them, and transcribing notes). Besides being time-consuming, reference checking can yield uneven results. Some people are better than others at maximizing the value of reference calls. And some references are hesitant to say anything negative to a prospective customer of a current supplier. One company, eVendorCheck, helps overcome these challenges and scales the process with a software tool that gathers multiple data points from multiple respondents within each customer organization. However you go about supplier reference checking, don’t skip this critical step.

Predicting supplier performance is not an exact science. Using good qualification and selection techniques helps increase the odds of success.

-Sherry R. Gordon

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Supplier performance has gone mainstream

Recently Joyce Herlihy of eVendorCheck and I gave a webinar, “Selecting the Right Suppliers”, for NIGP (Institute for Public Procurement). I asked a group of public procurement professionals in attendance whether their organizations had ever lost significant time or money from supplier under-performance or failure. The overwhelming majority of the over 100 people who voted in the poll said yes. Only one person voted no. This says to me that avoiding poor supplier performance and failure is more than “nice to have”. It’s critical.  And using software tools and business practices to avoid poor supplier performance is without a doubt essential. This isn’t to say, however, that all organizations have these tools in place. But most have some sort of basic tools or scorecards in place even if they aren’t totally satisfied with their ability to manage performance. There’s awareness. Supplier performance has gone mainstream.

Not too long ago, when I was an entrepreneur in the software business (Valuedge) with a “bleeding edge” supplier evaluation application, many companies would agree that it was very cool, nice to have, but not essential for them. Many could not understand the ROI. Or if they did, they could not convince their senior management, who was ever in search of the quick fix. Typically, only the early adopters were on it. And the early adopters understood that purchasing cannot live by slick-looking supplier scorecards alone. They actually have to take action to resolve the problems that the scorecards bring to light.

Times have changed. There are many, many SPM software solutions and far wider adoption of supplier performance management ranging from simple scorecards to feature and function-rich SPM software solutions. It’s a far more competitive software landscape for SPM than it was 10 years ago. I’m not implying that firms have SPM covered and are happily working with their suppliers on performance. As usual, software is still ahead of actual business practice. But adoption has increased materially as has awareness, at least in North America and Europe. In my experience, SPM business practice in China is still behind. And for those who would like a how-to guide for the business processes and practices, my book, Supplier Evaluation and Performance Excellence, is still selling well and helping many practitioners address this topic.

Hoping nothing bad will happen to or with suppliers is not a reliable strategy. The word has gotten out. Poor performing (and failing) suppliers create undue risk, unhappy customers, destroy market competitiveness, and cost a lot of money.

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Supply chain risk management for small and medium-size businesses

Supply chain risk management isn’t just for the big guys*. As supply risk continues to grow as a business challenge, supply risk information and awareness have been spreading. Many approaches to supply risk identification, management and mitigation have been evolving. Firms can choose from many software solutions, hire consultants, read books, and attend meetings and conferences on the subject. As supply risk has become a more mainstream issue for firms and addressing it has gone beyond just early adopters, more solutions have become available. However, addressing supply chain risk still remains a larger challenge for the small to medium-size business, which doesn’t typically have the budget or resources for niche software solutions or expensive consulting services. What, if anything, can these smaller organizations do to address supply risk?

The key is: know your suppliers.

Here are some important actions small businesses can take to reduce supply risk:

  • Make sure that you have a good process in place for selecting the best and most reliable suppliers for your business
  • Identify your critical and key suppliers
  • Develop closer business relationships with and get to know those suppliers. Understand their business issues and challenges.
  • Measure and understand a few basic key performance indicators (KPIs) in order to identify, understand, and prevent risk situations. Supplier performance is a leading indicator for risk and often the best (and only) indicator for smaller suppliers for whom publicly available information can be unreliable.
  • Understand the early warning signs of supplier trouble (e.g., lengthening cycle times and delivery times, top management changes, etc.)
  • Communicate regularly with other stakeholders in your organization to share information about issues that can impact your firm’s supply risk (e.g., with accounts payable, quality, customer service).
  • Develop plans to address supply risk situations when they do inevitably occur.

For a small business, the above suggestions cost more time than money. Being small can (and should) mean fewer suppliers to get to know and track. Identify and focus on the vital few; that is, the 10-20% of suppliers who have the most impact on the business. Understanding their performance can be done with a few simple metrics. Or use web survey tools to ask internal stakeholders about how suppliers are doing. Developing closer relationships with key suppliers and understanding supplier performance are among the best and most underrated ways to prevent supply risk.

Small businesses can use their size to their advantage, as they often have more flexibility to make decisions and can react and make changes more quickly than a larger company. Key decision makers are often more accessible. These advantages can help reduce the disadvantages of fewer resources.

Small businesses are not exempt from supply risk. And even small businesses can plan for supply risk, take steps to prevent it and mitigate it when it occurs. Doing so can prevent potentially costly and devastating impacts.

*Note: The ISM Supply Chain Risk Management Group recently published its Q2 newsletter,  A Bit on Risk, which is available on its website. I’m a Director on its Board, and this is an article that I wrote for the publication.

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Extending payment times to suppliers: don’t bank on it

The practice of extending payment times to suppliers and using them as a funding source to fuel growth is described in today’s Wall Street Journal article, Firms Pinch Payments to Suppliers. Procter and Gamble, which till now was paying suppliers within a relatively quick 45 days, has decided to jump on the “supplier as banker” bandwagon, as many other large companies (such as Wal-Mart and JC Penney) have done. P&G is positioning this move as a win-win for them and for suppliers. They are even offering help by working out programs with banks to give suppliers cash advances on their receivables, but at a cost to suppliers, of course.

In 2009, in the middle of the recession, Robert Handfield wrote an article in the Wall Street Journal, “United They’ll Stand,” and promoted the idea of working with financially-stressed key suppliers to avoid pushing them over the brink into insolvency. The author was not advocating bailing them out but rather advocated several measures to help suppliers get through these difficult times — ways that are also favorable to the customer firm.

Handfield’s article pointed out that should critical suppliers fail, the ripple effect can end up costing the buying company far more than it anticipates, potentially millions of dollars in service failures and bankruptcies that could adversely impact the customer company. To avoid these catastrophes, Handfield suggested, for example, giving suppliers shorter payment terms. In stretching out payments to help their own cash flow, customer firms appear to suppliers that they are using them as a bank. In return for quicker payment, the buying firm should ask for better pricing. Customers could give reputable suppliers longer-term, fixed contracts with more favorable pricing linked to agreed-upon market indices, suggests Handfield. This could give the supplier the opportunity to stabilize and get additional lines of credit. Suppliers may be willing to give on pricing in exchange for long-term stability.  Handfield makes a number of other suggestions, such as the buying firm not only having its own contingency plans in place and identifying alternate sources, but working with key suppliers to do the same (and of course, choosing the suppliers that you work with in this way very carefully).

Handfield was advocating that customers work as a team with key suppliers on creative ways to make it through tough economic times with both sides giving up to get something in return. Critical supplier failures are the outcome to be avoided. This requires communication, give and take, and creativity.  Working with key suppliers in this way is not done just out of the goodness of your heart. The commitment and loyalty engendered by working with suppliers during tough times will pay off financially.

I have personally seen and been the recipient of the philosophy of stretched out payment terms to support the customer’s financials. Those suppliers that can withstand this practice in the short-term will be gone (if not gone, as in bankrupt) as soon as they are able to find customers with reasonable payment terms and performance. I have also worked hard to “go the extra mile” for a customer who paid quickly and to win more contracts from them.  Companies that have reasonable payment terms engender supplier loyalty. T.J. Maxx, for example, had a practice of paying suppliers quickly as a way to get the best fashion brands to sell them their excess inventory.

Using suppliers as bankers can get firms out of financial jams in the short term. And now it’s a strategy to fund long-term growth. Will suppliers find other ways to get the money back, such as raising their prices? Will it be sustainable as a long-term practice?  In a world of supply chain risks, it is not smart to put your suppliers out of business.

Posted in Supplier Relationship Management (SRM), supply risk | 1 Comment

Upcoming Webinar: Selecting the Right Suppliers

Want to learn more about how to select the right suppliers? Join Sherry Gordon of Value Chain Group and Joyce Herlihy of eVendorCheck on April 30th  at 1:00 PM ET for the upcoming webinar: Selecting the Right Suppliers: Barriers, Benefits, Best Practices. This event is being hosted by NIGP, the Institute for Public Procurement, an organization with over 16,000 public procurement members. Access to the webinar is available to both members of NIGP and non-members.

Summary: Choosing the right suppliers is critical. Poor supplier performance can have negative impacts on your agency, other government entities, and on the public. The supplier selection process can often be time-consuming and costly and may still not yield reliable results. This webinar will explain the benefits, challenges, and best practices in supplier selection. It will also address how to use electronic reference checking to consistently select responsible and ethical suppliers in an impartial and transparent way

For more information and to register, visit the event website.

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Customer-supplier relationships: how to dance with elephants

Do you know how to dance with an elephant? The elephant can crush you, either by attacking you out of anger or by accidentally stomping on you because it likes you so much. The trick is to get an elephant to like you with out accidentally crushing your business. And run for life if you hear that trumpeting noise.

When my company was a supplier to Boeing, I was of course happy to have landed them as a customer. Our relationship was excellent and added value to both parties.

Dancing with elephantsBoeing took a chance with my company, an emerging technology business. And the initial bureaucracy that we had to go through to become a supplier to such a large company was challenging beyond even their expectations. But on the other hand, there was a lot in it for them. The value that we added was clear: a solution that worked and provide ROI, thought leadership, alignment with and accommodation of their needs, excellent service, and a supplier who would always “go the extra mile” for them.  And for us, their use of our product and the benefits they derived helped affirm our value as an emerging company. Together we created synergies and value that we would not have been able to create alone, in spite of our disparate sizes. Clear value is a key ingredient for success in creating mutually beneficial relationships between customers and suppliers of unequal sizes and clout. The value that a small customer or supplier brings to the relationship can help equalize the relationship’s balance.

This takes me to the point that I was making in my previous post, “When your supplier is bigger than you are”. A smaller company, whether in a supplier or customer role, can develop a mutually beneficial and cooperative relationship with a bigger organization.

To do so requires developing and fostering good working relationships among the people at both companies.  While companies do business with each other, it’s really the people who do business with other people. Of course, you need to choose wisely when developing relationships, as doing so requires resources. Not every customer or supplier merits the resources required to develop deeper and trusting relationships.

Relationships can and should be built at different levels of the organization.

When the time comes for getting a larger company to cooperate with a smaller one, several things may happen. Your contacts are more likely to go to bat for you when needed or break through big-company bureaucracy. When senior management can develop relationships with counterparts at the larger company, it becomes much easier to make the business case for positive change, such as improving business processes and practices. However, if the relationship is purely transactional and arms-length, then introducing new processes, business ideas, opportunities, etc. will taken longer (best case) or won’t happen at all (likely case). Transactional relationships are less personal and do not require high levels of interaction and trust —  important ingredients for getting a bigger company to work cooperatively with a smaller one.

Sometimes the elephant is too large and too uncooperative, and the resources required to develop a collaborative relationship aren’t worth it.  Developing a good business relationship with and gaining cooperation from a larger supplier can be challenging, but in the end, the call must be made as to which elephants are worth pursuing.

 

 

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When your supplier is bigger than you are

What can you do when your supplier is bigger than you are? How do you get a 500-pound gorilla to cooperate with you? Can you actually use the term “manage” in relation to a big supplier company? Realistically, can you ever manage even small suppliers? Not really. You can try to manage and influence the relationship, but you can’t actually manage a supplier. Managing a supplier is a customer illusion. Customers and suppliers are part of the same value chain, but they remain independent entities, no matter how great or small you think your leverage over a supplier is. Once you stop thinking about managing suppliers, then new possibilities open up.   Many companies believe that they can have no leverage over their larger suppliers, so they do not even attempt to get suppliers to make changes and improvements in the way that they do things that impact them, the customer.  They focus on the smaller guys over whom they feel that they have financial clout. Or, in a supplier strategy session that I led, the team drew teardrops next to the names of some of their “big gorilla” strategic suppliers because they hadn’t yet figured out a way to get these companies to cooperate. They were suffering operationally and financially from the effects of low levels of cooperation, yet saw the potential benefits of alignment. Apparently, these large suppliers hadn’t seen the light yet.

I’d like to propose some ways to get larger suppliers to collaborate you and suggest how to make changes to the dynamics of the relationship. The first step in the process is  identifying key or strategic suppliers with whom you’d like to develop a better relationship and collaborate in order to reduce cost and waste for your firm. If you determine that your relationship with the big supplier companies is purely transactional but should be strategic, then don’t give up in advance on ever getting the situation to change. It’s time to rethink your approach. You are creating potential risk and cost and forgoing the benefits. Yes, it is possible to dance with elephants and not get trampled. Stay tuned.

 

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Customer, heal thyself

Customer, heal thyself. This phrase attributed to Aesop and applied to physicians can also apply to the customer side of the customer-supplier relationship.

To identify hidden cost drivers and waste, customers need to apply lean and operational excellence principles and practices to themselves and to work with key suppliers to adopt these practices as well. Each firm needs to look at not only what it can do to add value to customers and eliminate wastes and cost drivers within its own organizations as well as its internal processes and practices that create waste and cost at its customers and suppliers. Often customers are unaware of the extent that their business processes and practices, while seemingly cost-effective within their own four walls, cause risks, create and multiply waste and cost at the supplier and come back to bite them in the form of higher costs, service failures, quality problems and customer complaints.

When problems occur, some customers are quick to blame suppliers. They may subscribe to the mentality that suppliers have so many problems, it must be their fault. Or believe in the saying that “the customer is always right”.  But traditional customer behaviors such as less-than-leadtime orders, inaccurate communication of their requirements to suppliers, and simply knee-jerk blame the supplier responses don’t solve problems. They may even drive away good suppliers. Joint problem solving with suppliers not only builds relationships and trust, but it actually solves problems. Each party needs to take responsibility for their contribution to a problem and to try to fix the problem, not the blame. There are many examples of customers who discovered their own contributions to what they had assumed were supplier issues.

Nothing fancy is needed to jointly address problems. Standard problem-solving tools are effective such as: affinity diagrams to help organize ideas and define a problem; 5 whys to uncover root causes; and Pareto charts to focus improvement efforts by ranking problems and their causes.

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Customer-supplier relationship quality can drive success

Some of the hidden cost drivers in the supply chain are relatively easy to uncover, measure and address by adopting classic lean approaches. These approaches may include value stream mapping the processes between customers and suppliers. It is important to keep in mind that many supply chain problems begin and end with the customer-supplier relationship. The extent to which critical issues, wastes and cost drivers can be identified and mutually addressed depends heavily on the strength of the customer-supplier relationship. Customer-supplier relationship quality can drive success.

Developing good business relationships with key and critical suppliers can help in areas that are often weak, for example by:

  • Developing common and simple communications
  • Developing a common understanding of each others’ needs
  • Sharing business strategies in order to develop in the same direction
  • Understanding and overcoming differences in quality systems and IT systems
  • Mutual involvement in innovation and product design
  • Uncovering areas of risk through better knowledge of suppliers’ businesses

Many firms are realizing the importance of actively addressing these relationships and find that they do not have the internal organization and sometimes the talent to readily manage and develop suppliers. Supply management is often addressed from the sourcing and buying standpoint. Once the deal is done and suppliers are on board, developing relationships is not a priority. This may be due to resource issues (such as human and IT) or simply different approaches to supplier management that do not emphasize the customer-supplier relationship. Sometimes it’s a cost vs. value issue. Purchasing organizations may focus on reducing product or service cost without recognizing the value component and may neglect to address the value that their suppliers can add.  Instead of taking a proactive approach, many firms use triage and may ignore suppliers until there is a problem. Addressing critical supplier problems under duress, particularly without the benefit of a preexisting and reasonably developed relationship, is a challenge to avoid.

Sherry R. Gordon

 

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