I Can’t Get No (Supplier) Satisfaction?
Alright, I am giving away my age here with the title – and yes I remember when the song by the Rolling Stones first came out. Ouch, now that I have the age thing out of the way, when you think of your current supplier relationships are you satisfied? A question of even greater importance is whether or not your suppliers are satisfied with you?
At first, this may seem like either an oversimplified question or one that is perfunctory, even rhetorical. Let’s face it, traditionally the relationship between buyer and seller has been more transactional than it was relational. In fact, one would not be coming out of left field by suggesting that the majority of relationships between buying organizations and their suppliers was adversarial or predatory. That’s right predatory – check out my 2007 post in which I talk about the Vlasic Pickles story to see what I mean.
Suppliers In A Pickle
In that post, I not only talked about a large retailer’s predatory practices sending Vlasic into receivership by forcing the pickle maker to sell a gallon of pickles at the ridiculously low price of $2.97, when consumers were normally buying a small jar for $3.00, but the way in which the big retailer did it. Specifically, and when faced with supplier resistance to the low price, the retailer told Vlasic “If you do that, all the other products of yours we buy, we’ll stop buying.” It was the ultimate silver or lead proposition - without the silver. Vlasic acquiesced and dropped their price. Not long afterward, the company filed for bankruptcy.
One can only hope that not just retailers, but any buying organization recognizes the error of doing business this way, especially when doing so comes at too heavy of a cost for their suppliers.
In fact, one study that validates this last point reported that those companies “that sell more than a quarter of their product” to the above-referenced retailer “generate half the profit made by those companies who have smaller or non-existent business relationships” with them.
The following statistics, which are from a survey of 333 companies in six industry sectors that “sell heavily” to discounters and other retailers are eye-opening:
- On balance, firms that derive less than 10% of their sales through the large retailer averaged 39.1% in gross margin, which is the percentage of profit realized before the calculation of items such as fixed costs and interest expense. For those falling between 10% and 20%, gross margin was 36.2%. Above 20%, and margin dipped a little bit more, to 35.4%.
- This trend is most pronounced in the apparel-and-accessories category, where average gross margin drops from 48.7% for companies generating less than 10% of sales through the retailer to 28.7% for those selling 20% or more. Food and beverage also show a big disparity, where the same breakdown shows average gross margins dropping from 39% to 22%.
- In all, only 25 of 333 companies managed to beat their sector gross-margin average while generating at least 10% of their revenue through this same retailer. Only seven that sold more than 20% there did it.
Through stories and examples such as the one above, we have as an industry – at least from a recognition standpoint, come to realize that taking a transactional approach to our relationship with suppliers has a negative impact on the bottom line including the quality of the products or services we sell to our end customers. This last point isn't just an opinion but reflects more studies such as the auto industry report which concluded that organizations who maintain positive relationships with suppliers tend to offer the best products at affordable prices because they receive the “suppliers' best technology, the best pricing, and the best service.”
For Every Action There Is An Equal Or Greater Reaction
In another article, I wrote I shared a story of how the pendulum in supplier relations doesn’t always swing to the buyer’s side of the table. Specifically, the story that the head of purchasing from a major university once shared with me.
At the time, the institution depended on coal to power its campus. The challenge was that the primary mode of transporting the needed coal was by rail. Because there are few options regarding rail providers, the purchasing exec lamented that the supplier was giving it to them regarding transportation pricing. Since everyone at the table knew that “the supplier” was the only game in town, the latter took full advantage of the situation.
Now, I might have had more empathy for the university's purchasing head had I not witnessed first hand his approach to "negotiating" with suppliers who were in shall we say, less than a favorable position. I guess that it is true, what goes around comes around.
Not A One-Way Street
When it comes to supplier relationships, there is a cause and effect outcome that reverberates throughout the entire supply chain including the end customer. In this context, it makes a great deal of sense to look at your suppliers as strategic partners rather than transactional acquaintances.
During a recent interview I did with a senior executive from one of the world’s largest data management companies; he stressed that “we have to look beyond the bits and bytes to the people and the relationships that are the real drivers of data transformation.” He then added that “digital transformation is as much about people as it is technology.” Included in the “people” equation are your suppliers.
For me the senior executive’s big message is simply this; as amazing as the coming digital age is with its hybrid cloud, IoT, and Artificial Intelligence-driven technology, greater insight, and collaboration is needed between all stakeholders if we hope to harness the power and promise of emerging technologies. In conjunction with both the data and anecdotal evidence referenced above, it would be safe to conclude that satisfaction in the buyer-supplier relationship is not a one-way street.
Jon Hansen is an expert in all areas of Supply Chain Management and Procurement. He is the owner of Procurement Insights and as a lecturer/speaker he is also a business radio talk show host. He writes blog posts for SynerTrade North America, to share the best practices and knowledge around Digital Procurement.