Strengthening Supplier Collaboration, and leveraging benefits, are often discussed – but how to distribute value created?

Unlocking Opportunities in a specific buyer/supplier relationship

Tactical buyers play a critical role in shaping supplier relationships. These interactions aren’t just about purchasing products or services; they’re about fostering collaboration, enhancing processes, and creating shared value. A strong supplier development program is a key tool in the tactical buyer’s arsenal, providing benefits for both the buyer’s organization and the supplier. Let’s break down the benefits of this approach and explore how tactical buyers can guide the distribution of value generated.From a tactical buyer’s perspective, supplier development isn’t just a strategy; it’s an ongoing process that leverages multiple opportunities:

• Process Stability: Enhancing process consistency at the supplier’s end leads to fewer variations in product quality. This reduces rework, minimizes waste, and lowers overall costs. For a tactical buyer, this means more predictable timelines and better resource allocation.
• Raw Material Purchasing Bundles: By aligning raw material purchasing (including choice of raw material), the buyer and supplier can achieve economies of scale. This not only reduces per-unit costs but also simplifies logistics, making life easier for suppliers juggling multiple procurement responsibilities.
• Design Efficiencies: Encouraging design changes to eliminate complex supplier operations means leaner production processes. For a tactical buyer, this means more value for the same budget and a smoother production flow.
• Value-Add Analysis: Reviewing and eliminating unnecessary activities within the buyer-supplier relationship creates efficiency. This ensures that both the buyer and supplier are focusing only on activities that add value, allowing for more effective use of resources.

Strategic Decisions for Strengthening Supplier Collaboration

Supplier development activities are often triggered by specific circumstances or strategic decisions. Understanding these triggers is crucial for effective procurement management. Generally, there are three main scenarios that prompt supplier development initiatives:

1. Supplier Recovery Support

When a supplier encounters operational or financial difficulties, it can have a direct impact on their performance and, consequently, on the supply chain’s efficiency. In such instances, the buying company might initiate supplier development activities to support the supplier’s recovery. This support can take various forms, including:

• Technical Assistance: Providing expertise to improve production processes or product quality.
• Financial Support: Offering advance payments or loans to stabilize the supplier’s financial health.
• Management Guidance: Assisting in refining management practices or strategic planning.

The goal is to ensure the supplier returns to a stable and reliable operational state, which is mutually beneficial for both parties.

2. Changes Unveiled During Category Strategy Development

While developing a category strategy, opportunities might arise that require changes in the supply chain. These changes can lead to supplier development activities aimed at:

• Aligning Product Offerings: Developing suppliers’ capabilities to meet new product or service requirements.
• Expanding Capacity: Assisting suppliers in scaling their operations to meet increased demand or to enter new markets.
• Enhancing Compliance: Ensuring suppliers adhere to new industry standards, regulations, or sustainability practices.

These activities are geared towards aligning suppliers with the evolving strategic needs of the buying company, ensuring long-term growth and competitiveness.

3. Implementation of Company-Wide Changes

Sometimes, the impetus for supplier development comes from the buying company implementing broad changes across its entire supply base. Examples include:

• Supply Chain Finance Initiatives: Implementing supply chain finance solutions to optimize working capital. This could involve introducing early payment programs or dynamic discounting systems to improve cash flow for both the buyer and the suppliers.
• Order Management Systems: Introducing new technology platforms, such as order management portals, to streamline processes and reduce administrative costs. Suppliers may need support in integrating these systems into their operations, requiring training and development.

In these cases, supplier development is essential for ensuring that suppliers can adapt to and effectively operate within the new systems or frameworks, thus enhancing overall supply chain efficiency.

Distributing the Value: A Tactical Approach

Determining how to share the value created by these efficiencies is a nuanced task. Here’s a tactical guide to managing this complex issue:

• Open Lines of Communication: As a tactical buyer in a supplier development program, transparency with suppliers is paramount. Clearly outlining the rules of engagement and the principles for sharing benefits helps to set expectations and builds trust.
• Shared Goals and Metrics: Developing common objectives encourages collaboration. Linking incentives to these shared goals ensures that both parties are motivated to work together, aligning their efforts towards mutual benefits.
• Long-Term Perspective: Rather than focusing on immediate gains, taking a longer-term view fosters ongoing collaboration. This approach recognizes that the supplier’s success is interconnected with the buyer’s and promotes a more balanced relationship.
• Contractual Flexibility: Although contracts must be precise, allowing room for value distribution to adapt to changes in the relationship encourages ongoing improvement. This provides a framework that recognizes and rewards continuous collaboration.

Conclusion regarding Strengthening Supplier Collaboration

For tactical buyers, supplier development isn’t just a strategy; it’s a hands-on, day-to-day process that requires careful management and ongoing engagement. By focusing on process stability, bundling raw material purchases, driving design efficiencies, and conducting value-add analysis, tactical buyers can unlock significant value within their supplier relationships.

Supplier development activities are a critical component of strategic procurement. They are often triggered by the need for supplier recovery, changes identified during category strategy development, or the implementation of company-wide changes. By recognizing and proactively responding to these triggers, procurement professionals can ensure a resilient, efficient, and strategically aligned supply chain, contributing significantly to the overall success of the organization.

But the true art of the process lies in how this value is shared. Through open communication, shared goals, a long-term perspective, and contractual flexibility, tactical buyers can build supplier relationships that are not only cost-effective but also robust and rewarding.

In an environment where every advantage counts, leveraging the benefits of supplier development and skillfully managing the distribution of value can be a game-changer. It’s not just about buying smarter; it’s about building stronger, more resilient partnerships that drive mutual success.

Learn more about Supplier development in EFFSO’s course. The course will give you an introduction to the concept of supplier development and how to build a supplier development program.

Managing engineering change – buyer perspective.

Note: Illustration to the blogpost “Strengthening Supplier Collaboration” was created by DALL-E on Aug 12, 2023.

For more information about LHTS’ courses in Swedish, visit Utbildning Inköp.