4 attributes of win-win supply chain relationships
March 26, 2018 |
The C2FO Team
Win-win beats win-lose when it comes to your suppliers. Analysis of supply chain relationships show a direct link between four key attributes and performance of supply chain relationships. A win-win approach not only increases innovation and profits for both buyers and suppliers, but shows greater benefit for the buyer than a win-lose approach.
Search online for “better relationship” and the results will be a flood of listicles. Apparently, there are between 8 to 101 ways to build better relationships, 7 habits you need now, and even this single question you must ask to maintain good relations.
Beyond the clickbait, if building better relationships were so easy, why are there 991,000,000 search results? How do you build a long-lasting, productive connection?
Well, it’s complicated. Especially when it comes to your supply chain.
Researchers, including Sengun Yeniyurt, Ph.D., Associate Professor of Supply Chain Management and Marketing Sciences at Rutgers Business School, studied buyer and supplier relationships in the U.S. automotive industry for a twenty-year period. The team collected data for both buyers and suppliers, but focused their research findings on the suppliers’ perspective.
Like any relationship, two parties learn the most about one another during challenges. For this reason, data was gathered during close working relationships where suppliers were co-developing products with their buyers.
What the researchers identified were not “four easy ways” to build a relationship, but instead, four interlinked attributes that define successful supply chain relationships. Not surprisingly, the attributes are qualities of all successful relationships — business or personal.
The most successful new product development projects are those where the supplier- and buyer-side individuals understand each other’s needs and expectations. From the suppliers’ perspective, good communication means a buyer openly and honestly shares timely and adequate information. The quality of this communication has a significant impact on supplier attitudes toward co-innovation over time.
The most valued communication includes technology and product planning roadmaps, potential design considerations, and other current product development efforts. Suppliers also value receiving communication on future product developments, which, while not contractual, build confidence in the relationship’s long-term potential.
Making a commitment
Much like a romantic relationship, suppliers work best with buyers who provide them with a sense the relationship is “going somewhere.” This confidence creates more willingness by suppliers to consider innovations to support these buyers.
Shared discussions of future projects are one way to foster a sense of commitment. But the most impact — and benefit — occurs when suppliers are engaged earlier in a buyer’s product development process. Early engagement allows suppliers to plan for resources needs, better meet buyer needs, and build a sense of security for the long-haul together.
Engagement as early as the design phase, according to the research, allows suppliers to suggest improvements or requirements that save production costs later. The research data mapped a strong correlation between this expectation of long-term commitment and building another key attribute: trust.
Just like any one-sided connection, a “win-lose” supply chain relationship is more likely to end as a supplier has no expectation of reciprocal benefits. The research indicated that a supplier’s willingness to invest in new technology or share innovations with a buyer is directly correlated to the level of trust in the relationship. This established bond is a prerequisite for success for collaborative product development.
As in a long-standing marriage, however, this trust is not static, developing as both parties learn from shared experiences. This ideal state for buyer-supplier relations acts as a deterrent to “opportunistic behavior” and incentivizes value creation, especially shared value. From the suppliers’ perspective, trust is also a measure of their buyers’ integrity and reliability.
While the best relationships are between equal partners, not all relationships are balanced. Often, it is suppliers who are more dependent on buyers, a relationship attribute that the researchers linked with supplier willingness to invest in buyer-specific innovation. Buyers can be dependent on suppliers, however. These lop-sided affairs occur when there are limited supplier choices or when sourcing a critical product or service. “Arranged marriages” also occur when a supplier cannot be easily replaced because of a multi-year testing or regulatory compliance. In these instances, a buyer may have other supplier options, but the situation forces the relationship to continue.
In these instances, the stronger party may be tempted to exploit the situation, creating a win-lose scenario. But, attributes of a relationship are also interdependent, and may offset imbalances, creating mutual dependence — and mutual benefit.
1+1+1+1 > 4: an empirical model for relationships
Not all matters of the heart follow a logical path. Unless there is a research team and ten years of data. In this instance, researchers mapped attributes such as “dependency” and “trust” in a linear model against co-innovation behaviors such as “willingness to share technology” and finite outcomes including buyer and supplier revenues. The resulting formulas are long enough to fill up an entire page of a college algebra textbook. Fortunately, the researchers showed their work in a diagram that shows just how attributes, behaviors, and outcomes are linked.
Better together: how win-win impacts a bottom line for both suppliers and buyers
According to an old Beatles’ song, money can’t buy you love. But, when it comes to your supply chain, love can save you money. Here’s why win-win relationships make dollars and sense.
Early engagement on product development with a trusted supplier can lead to time- and cost-savings, especially if that supplier helps identify new requirements or ways to optimize the manufacture of a new product. Suppliers can also plan resources ahead of your needs, creating speed-to-market. Trusted relationships with key suppliers also reduce risk and build supply chain resilience. When there are issues, researchers discovered, suppliers offer their best level of buyer service to their most trusted buyers.
When suppliers have a high level of trust with a buyer, they are more likely to share technology or innovation with that buyer. Secure suppliers are also more likely to invest in their operations to better meet valued buyers’ needs. In turn, suppliers benefit, the support for innovation helps them evolve capabilities and skills to stay competitive.
The quality of a supplier relationship is correlated with pricing decisions, according to the same group of researchers. In a 20-year review of working relations between the six major U.S. automotive manufacturers and their hundreds of Tier 1 suppliers, the researchers determined that low trust relationships between a major auto manufacturer and its suppliers cost the company $688 per light vehicle sold in the U.S. between 2001 and 2013, resulting in $24 billion in lost operating profit.
While $24 billion is a compelling reason to reevaluate how you manage your supply chain, the most compelling finding of the research underscores more mutual benefit. The study noted that “joint efforts lead to mutually beneficial results that are superior to the outcome each party could otherwise achieve” based on innovation performance and both buyer and supplier revenues.
In other words, buyers and suppliers in good working relationships are “better together.”
“A longitudinal analysis of supplier involvement in buyers’ new product development: working relations, inter-dependence, co-innovation, and performance outcomes” Sengun Yeniyurt & John W. Henke Jr. and Goksel Yalcinkaya, Journal of the Academy of Marketing Sciences (2014) 42:291–308
“Lost supplier trust”John W. Henke, Jr., Thomas T. Stallkamp, and Sengun Yeniyurt, Supply Chain Management Review