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Avoiding Distress in Key Business Relationships
It takes a significant effort on the part of supplier companies as well as their customers to ensure that strains on key supplier-customer relationships are avoided, and that there is a common focus on each one’s value-creating contributions. If your firm is involved in a “CoDestiny” relationship — one that has yielded value through shared successes and one you want to have survive and thrive — you need to be proactive in planning for the possibility of future distress that could derail a key business relationship.
Interviews with the two companies involved in a CoDestiny arrangement described the deterioration of their key business relationship. First, we heard from executives involved in the supplier side of the arrangement:
“Even though we have a great working relationship with all of the engineers and product development teams, a new purchasing executive arrived, introduced a totally new culture to his department, and began to run Internet auctions.
“We managed to get our bid to the point where we were confident that it would be the lowest, so our internal celebration began because we thought that there was no way we could lose given our aggressive bid and the superior quality of our product. But then, we got a call saying that we had lost to another supplier. We later learned that the winning supplier had put in a bid that was only about 1.5% lower than our bid.
“At this point, we concluded that this was no longer a customer that valued us or that we could be successful with, if they were willing to pass us over with a process like this. From our perspective, they were willing to make a horrible long-term decision, trading off all the contributions we had made to their success in order to gain a very small price concession up front.”
To the suppliers involved in such situations, it may seem like a game being played with loaded dice. Moreover, from the supplier’s perspective, the customer that ignores everything other than price often ends up worse off, failing to sustain leadership along dimensions such as product quality and innovation.
Like most stories, however, this one has two sides to it. Executives in the customer organization gave us a different view of the situation.
“Our business was changing, and even though we were the industry leader, we had tremendous concerns about our competitive position.
“Some of the things that were important to our customers in the past are now ‘unnecessary bells and whistles’ … There were a lot of things we had to change, often to the great disappointment of our own engineers who were used to being rewarded for upgrades rather than for cost savings.
“This supplier did have a long history with us, but they somehow stopped listening to us. Maybe the history got in the way. We had a bidder meeting that they attended and we were very clear about the direction we were heading, about why getting to a lower cost point was the focus of our procurement. We said over and over that our world had changed. Most of the bidders heard that message. I don’t think [this supplier] heard it very well… .”
Two recommendations emerge directly from this case study. The first recommendation is to recognize that it is essential for the principals in a CoDestiny supplier-customer relationship get together regularly and ask the following questions: In terms of your expectations and priorities, what has changed since we last met? Looking forward, what changes do we have to anticipate and address? What new nightmares are keeping you up at night?
The second recommendation reflects the fact that in any significant supplier-customer relationship, there are going to be many “touch points” between the two organizations. That’s almost always a very good thing, as the insights necessary to spark value contributions often emerge from unexpected connections across the two organizations’ departments and staff.
But sometimes there can be a downside to such unconnected exchanges of information. Therefore, the second recommendation is that the principals in the relationship must regularly say to each other: “This is what we’re hearing from your organization and how we plan to react to it. Are we all on the same page?”
The “two sides to the story” that are so sharply illustrated in this case study are especially dramatic in supplier-customer relationships that involve products with long lifecycles, in which total cost of ownership calculation is complex. In such circumstances, the focus on purchase price or “first cost” is often the basis of tension and the root cause of the differences between the perspectives of the supplier and the customer.
This fact leads to the third key recommendation. Within significant supplier-customer relationships, best practice organizations implement processes to ensure that there is a common understanding of what creates value — and what doesn’t. This process involves formal meetings, information sharing, and interaction about what should and shouldn’t be included in the valuation calculation. Each participant in an important supplier-customer relationship, at every stage of the customer chain, should carefully examine the value contribution calculation being made by the other participants in the customer chain. Furthermore, when an inconsistency is observed, participants should accept as an action plan the need to work through and create a fact-based resolution to that inconsistency. If there is any value to a solid relationship of the type that was described here between this supplier and their customer, it should have allowed for such a discussion to take place.
A final recommendation reflects the fact that in strong relationships, many of the most important contributions aren’t explicitly connected to the products and services sold by the supplier to the customer, and therefore aren’t formally embedded in the prices of such products and services. Therefore, it is essential that the principals managing an important CoDestiny relationship discuss these “adjacent” contributions and explicitly address the issue that the value associated with them isn’t reflected in product and service prices.
That discussion must be explicit: “Both of our organizations know that such contributions are a key ingredient in our shared successes, and both of our organizations want to ensure that they continue into the future. How do we jointly recognize such contributions and ensure that the value created is translated into rewards for both of our firms’ shareholders?”
This is not a step that is appropriate in every supplier-customer relationship, but it certainly is appropriate if the supplier’s contributions go beyond simply delivering a product that meets spec’s on time. Suppliers and customers both fail if they do not invest in processes and discussions to ensure that strategic contributions are jointly recognized and appropriately reflected in decisions about the relationship.
Formally engaging in supplier-customer discussions about what creates value is not an easy process, especially when everything seems to be going well, but it is far easier than losing a valued customer or a valued supplier because the discussion didn’t take place. Best-in-class organizations, both suppliers and customers, must take the steps to create a dialogue to ensure that each firm understands the other, and to form the basis for an effective flow of information and communications that establishes the foundation for shared successes. The firms that do so are well-positioned for success, with outcomes far more likely to be translated into bottom-line rewards for their shareholders.