Thursday, January 6, 2011

Supplier Relationships

Buying relationships can usually be categorized into 4 basic types.

Un-leveraged Relationships (Supplier is designed in / sole source, or well connected.)
Strategic relationships with win-win or balanced concerns. Strategic relationships may include either  custom or commodity purchases.
Individual point or spot
Purchases (usually low dollar low importance)
Leveraged relationships with  commodity / competitive purchases

The goal of supplier and commodity management is to move volume suppliers in the direction of leveraged or strategic relationships. A prerequisites of establishing a true strategic relationship is the relationship must already be a leveraged relationship. It is difficult, if not impossible, to move a un-leveraged supplier direct to a strategic relationship. They only get religion when they are placed in a competitive situation where they can easily see potential pain of losing significant portions of their business.

In point relationships, as volume increases the relationship will become either a un-leveraged or leveraged relationship. To move a strategic relationship you need to first convert the relationship to a leveraged relationship. To move leveraged relationships to a strategic relationship is much easier as they will see a benefits of  A strategic relationship.

The type of relationship you are entering into also has an impact on your negotiation approach and the degree of sensitivity you need to have with the concerns of the other party.
Relationship type.
Negotiation Approach
Sensitivity in negotiation
Point or one time relationship.

Moderate to  aggressive. Approach should vary depending on whether you need their specific product or service and whether it will be an immediate delivery or a project type relationship.
Item with immediate delivery and plenty of competition allow the most aggressive tactics.
If you need them for an extended  project, you need to be more sensitive to their needs.
Un-leveraged relationship
Moderate. You can't be too aggressive as they have control. Use problem solving or mutual interests
High. You are dependent on them unless you decide to replace them.
Leveraged relationship
Aggressive. Use the competition
and problem solving to drive best pricing and terms.
Moderate. The longer or the more you need them, the more sensitive you need to be.
Strategic relationship
Moderate. This must be seen as a win-win with a focus on problem solving and meeting mutual needs
High. You both need to understand the other's needs.

 What's the difference to the Buyer in a strategic relationship versus a leveraged relationship ?
§  A strategic relationship must provide market competitive prices or better without the need to go to the marketplace.
§  A strategic relationship must offer savings to both companies in terms of avoidance of the management time and cost required to compete.
§  A strategic relationship must allow the easy ability to expand the coverage to other products and services at market competitive prices.
§  A strategic relationship must address both the total and life cycle cost of the relationship so you are getting the most competitive offereing from both total cost and life cycle cost perspectives.
§  A strategic relationship must protect both the buyer and seller from dramatic swings in the marketplace.