Companies are being forced to re-examine their relationship with suppliers, writes Barry McCall

The incipient global economic recession isn't bad news for everyone.

Purchasing managers are finding that their bargaining power has been enhanced considerably by the market downturn. Suppliers are finding their order books are looking a lot less healthy than they were even a few months ago and not seeking to drive such hard bargains with customers as a result.

However tempting it may be, paring prices down to the bone may not be in the best interest of the buyer in the long term though.

"If you screw a supplier into the ground they are going to screw you at the next opportunity," says Wolfgang Steck, vice-president of procurement solutions with global management consulting firm AT Kearney.

Steck was in Dublin last week to address a strategic procurement conference organised by supplier management solutions company Supplierforce. The conference dealt with managing costs in turbulent times and revealed some alarming facts.

For example, research showed that more than 75 per cent of organisations don't know how their suppliers are faring in the economic crisis. In addition, only a quarter of businesses are effective at identifying which suppliers have financial difficulties, while almost half don't know whether suppliers are having problems with short-term finance.

Furthermore, 80 per cent of organisations hadn't yet held meetings with suppliers to determine the impact of the economic crisis. Strangely enough the same proportion - eight out of 10 - said they had proactive close relationships with their strategic suppliers yet only one-third of them claimed to understand how those suppliers rated them as customers.

This lack of understanding of the supply base poses real risks to businesses at present. Ironically this risk has been exacerbated by increasingly sophisticated procurement practices over recent years. These practices have seen a consolidation of the supply base with companies now using just two or three key suppliers for each product or service required. However, in a severe economic downturn these suppliers could go out of business leaving their customers without vital supplies.

"It is surprises that kill businesses, not price rises," says Steck. "You need to bring real risk management to the table in terms of procurement expertise. But you also need different procurement strategies." The different strategies he points to are ones that involve creating collaborative rather than adversarial relationships with suppliers. "Businesses can't afford adversarial relationships any more," he claims.

"There is an opportunity now to change that mindset. Business as usual will not get us through the current crisis. We need to rewrite the rule book of relationships between organisations and their suppliers." He argues that companies were too busy counting their profits in recent years to think about their supply base.

"But now they are standing on a burning platform and they need to reinvent their procurement strategies," he says. "They need to develop flexibility and transparency in their relationships with their suppliers." But this is easier said than done.

"There needs to be the political will to do this. I still meet some people at the top of companies who say they will weather the storm over the next year or so and then go back to the old ways of doing things. But this won't do in the current situation."

The sort of relationship he is proposing is symbiotic rather than parasitic - one governed by enlightened self-interest where both parties gain something from the other rather than one simply feeding off the other. Such relationships exist in nature in abundance.

For example, the vampire bat does not kill its victims, instead it keeps them alive as a vital food source so once it has had its nightly feed of blood it secretes a substance not unlike an antibiotic onto the wound to help it heal and prevent infection.

Similarly, in Steck's world, companies would help their suppliers to survive and prosper because it is in their own best interests to do so.

"There are real opportunities to develop close collaborative relationships between companies and their suppliers at present," he points out. "Suppliers are more willing to sit down with their customers and discuss collaboration now. They don't have full order books and they need to engage with their customers. A lot of those suppliers have been burned by commodity risk in recent months and this makes their need for collaboration all the greater."

Declan Kearney of Supplierforce says the need for such collaboration is acute at present.

"Given the challenges facing organisations at the moment it is essential they also know how their suppliers are faring and the challenges they are facing. If they don't they run the risk of having their own bottom line impacted. Strategic supplier management is no longer just an option for businesses; it has become a necessity if they are to survive.

"It has never been more important for organisations to manage their suppliers more effectively. By pro-actively managing a company's strategic suppliers the procurement function can deliver considerable value to the organisation without impacting service delivery and product quality." Kearney also believes that too much lip service is being paid to collaboration.

"Collaboration is an overused buzzword at the moment," he says. "But there is very little understanding about what it actually takes."

Steck agrees. "Companies have talked a lot about collaboration with their suppliers over the years but the rubber has not hit the road very much. There is a big difference between the concept and the implementation. Most companies don't really know how to turn it into reality. Supplier relationship management, or SRM, is overly focused on price and contract management — the R is missing. But the economic slowdown is elevating the procurement function and making relationships with and intelligence on the supply base more important than ever. The supply base is now a major source of risk for business and this means that they need much greater visibility of the financial position of that supply base."

Ireland is not well positioned in this regard. "Ireland is in catch-up mode at present," says Steck.

"Globally, the multinational corporations have recognised the value of the procurement function and have chief procurement officers (CPOs) at the top level of management. Ireland has a long way to go in this regard, there are very few CPOs in corporate Ireland and without this level of expertise it is very hard to manage the supply base efficiently. Procurement needs to be given the recognition it deserves. After all, only procurement and sales give a company any insights into what is going on in the market externally. Every other function is internally focused."

And there is a payoff for giving the procurement function its head. "All of the research we have carried out shows that the companies who are top in terms of procurement and supplier collaboration are also the most successful companies globally," says Steck.

"And this is not confined to sectors such as the auto industry. We find it extends across all sectors and geographies. The companies who are the best in terms of supplier relationship management are also the best in terms of growth, sales and profits.

"That is the lesson for Ireland and the rest of Europe in the current economic downturn. The opportunity now exists for companies and their suppliers to form collaborative relationships and it should be taken."