Supply Chain Optimization: The Distributor/Vendor Relationship
One of the first things you learn about this industry is that it is a relationship-based business. The more successful companies work hard to foster strong relationships with customers and suppliers alike.
Every distributor, whether large or small, touts a value proposition in terms of how it meets the needs and aspirations of its customer base. Central to that value proposition is the ability of the business to capitalize and coordinate its internal assets with the assets and capabilities of its vendors such that each contributes to its maximum capability. Those organizations that are strategically integrated, both internally and externally, with their business partners often enjoy a unique and explicit competitive advantage that serves its customer base and its bottom line. This does not take place by accident. Insightful companies have invested in the creation of a supply chain strategy. They are executed by a procurement group which understands what drives the requirements of its business and has a vested role in driving revenue, reducing costs and enhancing profits as opposed to simply facilitating the buying process.
The four working relationships between distributors and vendors include:
The Adversarial Relationship. Most businesses have them. Few would say that they want them. These are situations where firms only do business with each other because they feel they have no better option. Perhaps the incremental benefit served is worth the headaches. Neither party cares about what the other wants or needs. Seldom does either party achieve desired results. Relationships are often driven more by emotion, supposition, misunderstanding or indifference. Loyalty exists until something better comes along.
The Competitive/Zero Sum Relationship is more often found with product groups that are more commoditized but can be evident in all product categories. The focus here is transactional. The goal is to get the best deal that you can negotiate with little regard to the needs, goals and aspirations of the other. We often overlook the value proposition that focuses solely on price. The buyer thinks in the short term, and often he does not hesitate to use the “brass knuckles” to get the best deal. Reciprocally, the seller will return the favor during periods of shortages/allocations. The best relationships in this category get “last look.”
In The Cooperative Relationship, a maturation process occurs moving from lose/lose to lose/win to win/win. Relationships are more long term. Both parties understand the benefit of an alliance, but the relationship lacks depth and structure. It also lacks a keen understanding of the drivers and aspirations of each entity. There may be a number of good tactical plays, but there is still a void in clarity, consistency, depth and understanding of how to create enhanced value for each other.
The Collaborative Relationship seeks alignment, transparency and mutual attainment of goals and objectives. Strategic Procurement is a paradigm shift from transactional or reactive postures to relationships that are proactively nurtured with coordinated plans that define and align expectations of internal and external stakeholders in executable formats. Executives across the country are increasingly looking to supply chain optimization to engage their business in conversations about how vendors and distributors can work together to achieve the greatest returns. The use of key performance indicators (KPIs) is the critical component in this endeavor. The creation of vendor evaluations (or distributor evaluations) is the business practice that lends structure and substance to collaboration and alignment. The establishment of those values, the measurement thereof, the accountability of those tasked to perform and a format for open and candid dialogue are critical differentiators in driving revenue, driving down costs, enhancing market share and profitability in a dynamic and competitive marketplace.
An interesting exercise for your next procurement meeting would be to create a list of the top 20 percent of your firm’s vendors that represent 80 percent of your cost of goods sold. Create a scattergram and plot each as to where they would fall in a continuum from Adversarial, Competitive, Cooperative or Collaborative. Next, plot where you feel they need to be in order to maximize your investment and minimize the risk in the relationship. Are there any disconnects? Are they critical? Do your vendors clearly understand what drives your business, and are they helping you achieve it?