Getting first in line with your key suppliers - How to become a Customer of Choice
Recent developments in the business landscape, such as continued outsourcing and open innovation, have driven companies to increasingly look to their supply base for innovations and other sources of added value. At the same time, specialization and consolidation have led to a decrease in the number of competent suppliers. As a result, suppliers in most industries have acquired more bargaining power, and no longer have to go to great lengths to ‘please’ the buyer in order to ensure good business. Instead, the buyer has become more dependent, and suppliers have gained the opportunity to decide with which customers they want to share their most valuable resources. This is typically done with their ‘customers of choice’. But what exactly do the benefits of being such a ‘preferred’ customer entail? And how do you become one?
Why become a customer of choice?
While it is clear that companies have become more dependent on their upstream supply chain partners, suppliers cannot ‘go the extra mile’ for all of their customers at the same time. Instead, they must choose to which customers they allocate their most critical resources. This may, for example, include early access to product or process innovations. Suppliers deploying new technology may have limited capacity, forcing them to choose with which partners they want to pilot or launch their innovations. Accessing new technology at an early state enables buying companies themselves to launch a superior offering and be first to market. Another situation in which organizations benefit from being a customer of choice is during supply scarcity. In case of a supply chain disruption that constrains production, suppliers must prioritize their customers. A customer of choice may receive the remaining production output or may be allocated buffer capacity and notice very little of the disruption, while regular customers have to wait in line for their goods to be delivered. Yet other advantages of being a customer of choice may be joint cost reduction initiatives, increased flexibility and responsiveness, or getting the suppliers’ best engineers to be involved in the customer’s innovation programs. Precisely these types of unique treatments often provide buying companies with a competitive edge against their rivals, underlining the relevance of being a customer of choice.
How to become a customer of choice?
How, then, can you become an attractive account or customer of choice to your suppliers? Unsurprisingly, most suppliers value substantial purchasing volumes and good margins. Underpaying your suppliers will hence likely result in low motivation and underperformance. However, while the saying indeed goes “if you pay peanuts, you get monkeys”, this is not merely a numbers game. World-class Procurement functions are able to receive preferential supplier treatment often without compromising on established price levels. Some of their most important levers for getting privileged treatment from suppliers are12:
- Ensuring a strategic fit
- Envisioning and working towards a shared future
- Establishing long-term relationships
- Developing smooth day-to-day processes
- Establish and work towards mutual goals
- Deploying supplier development programs where possible
- Being transparent about performance
- Establishing clear lines of communication
These objectives are likely to be part of a more general supplier relationship management (SRM) strategy aimed at improving the supplier experience. However, this is not easy to achieve. The biggest hurdle to such strategic collaborations was found to be a lack of internal stakeholder alignment3 . Organizations often have difficulty in getting the C-suite on board, which is required for partnering with suppliers on a strategic level. This is typically due to the absence of a clear business case, as the projected benefits of becoming a customer of choice are difficult to quantify. The potential value to be captured can nevertheless be critical. Therefore, carefully assess the potential for capturing additional value from specific supplier relationships, in order to be as concrete as possible when outlining the (benefits of the) SRM strategy to different stakeholders.
What can you do now?
Besides considering the aforementioned focus areas and taking into account the potential hurdles, it may be even better to develop your own approach, as each supplier may value different behaviors. A natural first step is to assume the position of your key suppliers: what are their goals? What type of behavior would they appreciate? For example: Can you support them by deploying technical staff to optimize their processes? Should you make efforts to ensure more timely payment of invoices? A second initiative that should be considered is to survey suppliers about your own performance and to allow them to raise points of dissatisfaction. Besides yielding concrete improvement areas, this is likely to contribute positively to the relationship as it makes the supplier feel heard and understood. Furthermore, as a final measure: be open towards your key suppliers about the challenges you face as a buyer. If you want to leverage suppliers’ innovative capability to solve your problems, they must be able to think ahead rather than merely deliver to spec.
Capgemini Consulting client example
Capgemini Consulting supported a global retailer in becoming a customer of choice for their key suppliers. Aiming to identify critical capabilities for improving supplier collaboration value, we developed a specific approach which eventually resulted in so called ‘supplier journeys’ (in analogy to ‘customer journeys’, which are commonly used to identify customer touch points in defining multi-channel customer relationship management strategies).
Based on a combination of these supplier journeys, industry best practices and a thorough analysis of client and supplier capabilities and stretches, key capabilities were defined. Ultimately, these insights enabled the client to develop a “future-proof” target operating model which included the way forward to become a preferred partner of its key suppliers.
In the end, keeping suppliers at arm’s length may feel safe, but safe is dangerous in a rapidly evolving procurement landscape that demands suppliers to add value to your business. In this regard, becoming a customer of choice is a powerful way of securing added value from suppliers beyond the terms of the contract.
Source: Ontario Trucking Company
2 Rudzki, R. A., & Trent, R. J. (2011). Next Level Supply Management Excellence: Your Straight to the Bottom Line Roadmap. Fort Lauderdale: J. Ross Publishing.
3 Capgemini Consulting 2015-16 Global Chief Procurement Officer Survey