10 best practices for managing strategic supplier partnerships

What is a strategic supplier?

Whereas a transactional supplier is typically one that offers a low cost in the short term just to fill a need, a strategic supplier is core to a company's business.

A strategic supplier's incentives are aligned with the company's, and both parties are willing to invest in the relationship over the long term, said Pat Edmonds, principal at Lync Consulting LLC, a consulting company located in Highlands Ranch, Colo. For example, a strategic supplier may offer discounts in exchange for volume purchasing.

"A strategic supplier relationship carries intrinsic value," Edmonds said.

Here are some best practices to protect the relationship.

Understand which suppliers are truly strategic

Starting with supplier segmentation and truly understanding which suppliers are strategic is the first step of managing strategic supplier partnerships.

Maintain a high bar on what you consider strategic given the high level of effort that can go into the relationship, said Josh Nelson, principal of strategy and operations at The Hackett Group, a Miami-based strategy consultancy.

"Ask yourself whether they allow you to create an advantage in the marketplace," Nelson said. "If not, then it would be hard to call them strategic."

You can consider a supplier important, but if that supplier does not provide a competitive advantage, it isn't strategic, he said.

Companies often determine a supplier is strategic but don't make that clear to the supplier.

Both parties need to buy into the concept in order for it to work successfully, Nelson said. Some organizations may not want to be considered strategic. Perhaps there is a size mismatch; they may have bigger customers that are strategic to them and they don't want to be distracted by your needs. Or, they may not be ready to commit -- perhaps because of bad experiences with your organization. In any case, the relationship needs to start with clarity about your intent, which should yield a similarly forthright response from the supplier.

Define the objectives

Partnerships of any kind suffer when there are vague expectations, and that applies to managing your strategic supplier partnerships.

An important step is to make sure you clearly define the objectives for your partnership, said John Wiborg, CEO of Stellar Industrial Supply, an industrial supplier in Tacoma, Wash.

"A lot of customers come in and have big strategic objectives, but then it still ends up coming down to the piece price," he said.

This occurs if someone in the chain is getting rewarded only on their ability to cut costs. In that case, they aren't inclined to support things that don't help that metric, such as more long-term goals that may not support reduced price in the short term.

"In those situations, companies are walking by hundred dollar bills to pick up a few dimes," he said.

Whereas a transactional supplier is typically one that offers a low cost in the short term just to fill a need, a strategic supplier is core to a company's business.

To address that challenge, companies need to understand their own organization and ensure they are really aligned around the strategic goals they are promoting, he said.

Align internal and external needs

Building strategic relationships requires understanding what the business needs and using that information to create understanding with suppliers.

Companies must take the time to understand business stakeholders' objectives before going out to vendors, said Len Riley, chief advisory officer at UpperEdge, a sourcing consultancy based in Boston.

Alignment is crucial across internal and external partners, and that requires true listening and understanding to avoid misunderstanding and unnecessary vulnerabilities.

Seek first to understand

When something goes wrong, your instinct may be to direct the blame toward your supplier -- but starting with self-reflection is far more helpful.

You may find your company spends little time reflecting on its partnership approach due to negotiation fatigue or competing priorities and politics associated with a "post-mortem." But that's a mistake.

"Successful companies take a step back to analyze internal issues, reflecting on their challenges," Riley said.

In addition, you might want to consider the following points:

• Understand past relationships that people at your company have had with the supplier.
• Recognize existing stakeholder expectations.
• Trust your relationship as a journey, not a one-time event.
• Know your company's reciprocal relationships.
• Consider any IT and procurement disconnect that could contribute to a problem.
• Focus on managing a dynamic strategy.
• Know what "good" looks like -- in other words, don't be unreasonable.
• Don't neglect communication.

Collect supplier feedback

Building a good relationship with a strategic supplier should include periodically collecting feedback. Your company's employees should ask what value they hope to achieve from the relationship and how your organization might support those expectations.

"Some buyers might explore additional partnership options beyond the terms of the current relationship," Edmonds said. "[These could include] expanding the categories of supplies or services offered, or entering into a joint venture together to create a third-party organization."

Build trust

Credibility is an essential foundation of strategic supplier relationships.

Companies need to model that in terms of personal behavior and dealings with suppliers, Riley said. That also means that organizational practices should build and uphold trust. He added that it is important to assemble a team who can undertake a complex negotiation with the vendor.

In addition, be prepared to do the following:

• Conduct an end-to-end relationship assessment over the years, and evaluate what you can do to improve it.
• Know the vendor thoroughly.
• Stay relationship- and principle-based: Come to the table with an informed point of view, and adjust your perspective of value based on the conversation.

Consider further investments

In some cases, it might be advantageous to invest financially in maturing the capabilities or capacity of a strategic supplier so that they can be an even more effective partner to help you achieve your goals.

For example, you could consider reducing a strategic supplier's expense structure, thereby preserving the supplier's margin while lowering the buyer's costs, Edmonds said.

Perform adequate due diligence

Supply chain-related risk is a concern for many organizations, and strategic suppliers are an important piece of the puzzle. With transactional relationships, the problem is lessened -- such suppliers can be replaced easily if there is a problem.

Performing due diligence on suppliers is important, said Fabien Joly de Bresillon, vice president of technical integrity and quality at Bureau Veritas Group, a certification company located in Paris. But relying on standard due diligence reports that are built on publicly available information may not be sufficient.

Instead, businesses need to go further to make sure they're not opening themselves up to problems.

Alan R. Earls is a Boston-based freelance writer focused on business and technology. He has done freelance work for publications ranging from CIO, Datamation and Computerworld to The Boston Globe, The Chicago Tribune, Modern Machining and Ward's Automotive.