The relationship between large organisations and their suppliers, particularly in the retail sector, has become headline news in the UK media in recent months. At Board level, supplier relationships are moving up the agenda as procurement becomes intertwined with reputation management.
The relationship between large corporates and their smaller suppliers has, in fact, been an issue for some years. In the summer of 2012, the Wall Street Journal was one of many to publish an article highlighting the challenge small firms faced as corporate payment periods lengthened – a legacy of the recession years.
In the past six months, the likes of Premier Foods, Tesco, global drinks giants Diageo and US-owned confectioners Cadbury have all faced criticism. The controversy over Premier Foods ‘pay-to-stay’ initiative has further raised media and political interest.
“The increasing demand for transparency, along with the speed at which bad news travels, has a profound influence on risk and reputation management.”
Focusing the procurement mindset
A combination of supplier pressure, public opinion and media interest has now raised the treatment of suppliers from a procurement issue to a matter of corporate reputation and risk management. Questions are now being asked when it comes to the management of supplier relationships:
1.Are the purchasing practices ethical? (Or perceived to be ethical)
2.Do these practices make sound commercial sense?
3.How is the consumer likely to react?
However you answer the above questions, it is surely a board matter to set the ethical standards and how they should translate into purchasing practices. The consequences of not doing so maybe unanticipated reputational damage and a less responsive supply base.
Making commercial sense
Developing balanced supplier relationships is not just about building a positive reputation – it also makes commercial sense. It can be short sighted to do otherwise – as being the ‘customer of choice’ will yield many benefits when suppliers have to prioritise between customers. These could include a smoother delivery of goods and services and better recovery from inevitable operational challenges.
Protecting reputations
The increasing demand for transparency, along with the speed at which bad news travels, has a profound influence on risk and reputation management. A business’ external reputation with customers, the City and in fact its suppliers, can have a huge bearing on its commercial success. A positive reputation can enhance customer retention, create differentiation from competitors and, potentially, increase the share price.
The way a procurement team collaborates with other internal departments and works with its suppliers also has a significant influence on procurement’s reputation within a company as a business partner rather than a service function. Being the ‘customer of choice’ can also drive innovation. We recently worked closely with the CEO of a global leisure business to transform its approach to procurement and more specifically to establish a position with its suppliers as the thought leader in the sector. There were challenges around cost and service, but the primary objective was to become the customer of choice to get preferential access to innovation and emerging technologies.
Due to poor relationships with the suppliers, decisive action was needed to get the suppliers on board as quickly as possible as there was a pressing need for new equipment. The suppliers participated in a series of supplier days to communicate the direction and vision for the business. There was then a series of tenders with emphasis on costs, service and innovation. Through the process the engagement with the suppliers demonstrated the commitment of the business to change the nature of the relationship, but was clearly grounded in the expectation of keen commercial terms. Costs came down, lead times reduced and service levels increased. By engaging with the key internal and external stakeholders, aligning business processes and creating a governance framework, the organisation was able to establish its credibility with its supply base, which in turn raised its reputation in the marketplace. In summary this changed the way the organisation viewed procurement and changed the way the suppliers viewed the organisation and gave preferential access to new products and services.
Reset for success
The debate has moved on. What started as a corporate strategy to manage cash flow, now has heightened public awareness. The time is ripe for a shift towards a more straightforward and transparent approach to managing the relationship between organisations and their suppliers. Issues related to the supply chain have never had such high profile, offering procurement a real opportunity to gain the ear of the board.
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