Globalization and the internet have had a dramatic impact on supply chains. They have provided buyers with access to a wider array of options, and helped them to seek out the lowest prices available. They have, however, brought with them a raft of new challenges, one of the most pressing being the management of supplier relationships and collaboration.
In the DWF’s Trends and Innovations in Retail 2014-15 report, 55% of Supply Chain Directors from some of the UK’s top retailers cited supplier relationships and collaboration among their top three supply chain challenges - up from 42% in 2013-14. The importance of building strong relationships has come as firms have moved away from the traditional American model for supply chain, and towards a Japanese model.
The Japanese supply chain model places importance on long-term positioning over short term profitability. It also means dramatically reducing the number of suppliers they have. Whereas the traditional American model has been to have as many suppliers as possible, the Japanese have always looked to have just 2 or 3. This idea follows the train of thought that with multiple suppliers, both buyers and suppliers experience a high level of uncertainty, and therefore there are multiple controls to ensure successful transaction. These controls can be costly, and often decrease the efficiency of relationships. On the other hand, good supplier relationships cut down on such uncertainty, reducing the need for controls and increasing the efficiency of transactions.
Trust is key to any buyer-supplier relationship, but building it must be done without encouraging complacency on the part of the supplier. However, buyers have traditionally been more than willing to change suppliers, and they have to demonstrate a firm commitment. This can be done by involving themselves in the firm’s growth, which has the additional benefit of helping them to cater specifically for the buyer’s needs.
The global nature of supplier relationships also throws up a number of issues, particularly around communication. There are the obvious language difficulties, but more than this there is the differences between business cultures to consider. This is especially true when dealing with somewhere like China, and firms must often change their entire way of thinking when working in other markets. More than just causing offense to a supplier or being shortchanged in the dealmaking process, failure to understand the environment you are moving into can also have dramatic legal consequences. For example, in some cultures reciprocity is illegal and unethical, whereas in others it is the preferred way of doing business. An agency fee in one country could be seen as a bribe in another, and subject to prosecution under the anti-corruption laws in another.
There is also the issue of working practices and regulation. Mattel notably fell foul of this when lead was discovered in paint used in its toys. Mattel's main supplier of the Cars products, Early Light Industrial, had subcontracted out the painting of the toys to another company, Hong Li Da. Hong Li Da, rather than use paint supplied by Early Light, instead used paint that contained potentially poisonous lead. According to McDonalds, this is not an isolated issue, and lead use in paint is widespread in China. This also shows the importance of looking past your immediate supplier down the chain, to ensure that such damaging incidents do not occur.
It is also necessary to think hard about contracts. It should never be assumed that all parties will read the fine print. Making sure that all contracts are read and understood can help prevent disputes further down the line.
Achieving such strong partnerships with suppliers is fraught with challenges and is often resource-intensive and costly. Therefore, it can be only really be justified when the costs of extended involvement are exceeded by relationship benefits.