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Corporate Procurement

Two Issues Where Supplier Trust is Slipping

Suppliers are increasingly worried that big companies are less interested in pursuing a mutually beneficial relationship and about how burdensome contract terms and conditions have become

Beyond the usual worries about keeping prices down and completing projects on time, those that sell their wares to big companies worry most about two issues. Suppliers are concerned that big companies don’t have a real interest in pursuing a mutually beneficial relationship, and they also worry about how much of a burden some of their contract terms and conditions have become.

CEB data show that procurement functions tend to see themselves as “better” in these areas than suppliers perceive them to be.

The gaps in perception are not yet substantial enough to indicate major problems for Procurement, but it’s clear that procurement executives should keep an eye on these areas and keep them from deteriorating further, before they turn into more significant obstacles further down the road.

For example, if a vendor providing a service that’s critical to the business loses trust in the company, or gets frustrated by restrictive terms and conditions, Procurement could end up in need of a new supplier — or the function could be less likely to enjoy the benefits that a strong collaborative association can bring, like new innovations and top-notch service.

Building Trust with Vendors

Suppliers’ belief that the procurement teams they work with are increasingly only looking out for their own interests could stem from price squeezes, as a result of companies’ bid to bring margins under control. But this can lead to one of two damaging outcomes: the vendor could find working with the company unprofitable and head elsewhere, or the vendor could cut corners, which can then lead to quality problems.

The key is for procurement teams to shows that it is able and willing to protect their interests as it seeks to further its own. One procurement team in CEB’s global member networks realized that saying one thing to its suppliers and doing another could cause real harm. The team also found that managers outside of the procurement team — such as a factory manager or the head of R&D — could also be damaging trust by making demands or pushing priorities outside of what Procurement had set with its vendors.

So the team created a simple, straightforward “common agenda” document. This one-page sheet spelled out in simple terms the highest-level priorities that the company and a supplier agreed on.

This helped the company secure significant savings with one of its materials suppliers. Procurement and the vendor agreed to reduce the number of distinct items the company purchased, in a bid to improve quality and reduce costs. The company added this project to the common agenda to make sure people on both sides understood what they would need to do. Because the initiative was on the agenda, it was prioritized correctly by the company and the vendor, and they both invested the right amount of resources in helping it succeed. The end result was scale advantage for the supplier, and significant cost savings for the company.

Terms and Conditions: Protect Interests Without Alienating Suppliers

As risks like data privacy and the loss of intellectual property (IP) become important, companies have tightened their terms and conditions, and got their legal and compliance teams more involved with managing third party relationships.

Procurement should find the right balance between protecting the company and taking care not to overburden suppliers. One the one hand, suppliers are less likely to follow lengthy terms and conditions if they are cumbersome (meaning more risk of something going wrong), or companies could end up alienating vendors who would prefer to work with businesses under less onerous terms and conditions.

On the other, it’s important for Procurement to make sure relationships with suppliers don’t expose its company to unnecessary risks. In particular, companies that have already experienced a problem with a third party may choose to increase control — to the point of angering suppliers.

When seeking to extract more innovative ideas from their supply base, procurement functions often bring in legal staff early in the process to help protect against IP loss. If Legal and Procurement solely prioritize protecting their own information, this can drag out negotiations and stifle supplier openness.

This posed a difficult dilemma for the procurement team at one global manufacturer CEB worked with. Third parties, such as suppliers or contractors, are one of the leading sources of IP risk. But the company knew that if vendors viewed it as overly protective and so difficult to work with, they would simply offer their innovations to other businesses. A worst-case scenario would mean giving up breakthrough supplier contributions for the sake of protecting less valuable information.

To balance risk coverage and innovation sharing, the company decided to transfer responsibility for all but the most complex IP-related supplier issues to procurement staff. This sped up negotiations with vendors, since in-house counsel got involved with only the most complicated IP issues. And, as a bonus, this actually improved risk coverage because front-line procurement staff could cover more exposures than the legal team working with other priorities.

Procurement also provided staff with tools to use when preparing to engage vendors, during negotiations, and during contracting. These resources guided buyers to encourage suppliers to be open.

More On…

  • Supplier Relationship Management

    One of the most powerful opportunities for a CPO to create a strategic advantage is to secure "customer of choice" status with a key supplier. Learn more about how to do this.

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