Though the phrase partnership is often used, what really constitutes a strategic supplier partnership?
In a previous article about supplier management, I suggested that the more a supplier tells you that they are strategic, the less they really are. Strategic is a term that is often overused. Whether the phrase refers to sourcing, procurement, relationships, or other matters, its use is prevalent.
The notion of partnerships is equally ubiquitous and similarly both mis- and over-used. This article will identify a taxonomy for a strategic partnership between two parties.
What are the essential attributes of a true partnership between a supplier and their customer/partner? Let’s start with a simple framework for the stratification of a supply base and then explore the attributes of the partnership segment.
Based on my earlier post about supplier relationship management, I introduced a three-tiered model for segmenting and managing suppliers.
- Strategic Partner – strategic, long-term relationship
- Preferred Supplier – operational, on-going relationship
- Approved Supplier (aka, Vendor) – tactical, transactional relationship
Vendor is the most commonly used term to define the entire spectrum of suppliers. A vendor is the most tactical of suppliers. They supply goods and/or services that are readily available, are commodities, and price rules.
A preferred supplier has a longer-term, more intimate relationship with the customer. This category of supplier earns the right to sell through a disciplined evaluation and selection process (RFP or RFQ). The relationship between the preferred supplier and customer is deeper than that of the vendor level. Supplier performance measurements are tracked and are the cornerstone of the longer term relationship.
The strategic partner is the most far-reaching relationship of all three levels. Of course, not all strategic suppliers become partners. The strategic partner occupies the elite position at the top of the supply base hierarchy. Partnerships develop over time with conscientious effort on both sides of the relationship. There must be a multi-faceted commitment between the companies to establish the requisite foundation for the relationship to be mutually productive and valuable. Strategic partners may be the fewest in number but they are the most critical to the success of the buying organization. Ideally, both parties have this perspective.
The baseline metrics for performance of a partner are the same operational parameters used for other suppliers. The partnership relationship compels the need for additional attributes to be evaluated between the two companies, including the relationship itself. This enhanced scope is crucial because both companies have significant financial and strategic business ties. This commands a more holistic set of criteria to assess the total partnership.
Defining a Strategic Partnership
Let’s introduce the following traits to categorize the multiple facets of a strategic partnership: vision, strategy, investment, planning and management systems, communications, risk, and reward. This forms the expanded domain for developing and maintaining a strong and viable partnership. In fact, each facet must also be “shared” between the parties to truly reflect the nature of this more intimate relationship.
Let’s look at each component in more detail.
Shared Vision & Strategy
The most fundamental aspect of a relationship between two companies is the vision both have for their businesses. These visions of what it takes to be successful in their respective markets must align or overlap to ensure that the partnership can develop and remain strong. The relationship must embrace the strategic plans of each entity or it will suffer under the stress of everyday business.
One example is in the world of out-sourced software development. For a relationship between two partners to be viable and value-generating, there must be a clear understanding about intellectual property ownership, market exclusivity, and more. If the partner who performs the work on behalf of the customer attempts to parlay the work they are paid to do into their own market entry, it would undermine the relationship completely. The shared vision and strategy in this example is one where access to valuable intellectual skills is required by one party to be successful and offered by another. From the other vantage point, skills to complement the core investment by the buyer are essential for market success.
There is money to be spent to bring new products or capabilities to market. Success will be contingent upon appropriate resource allocation and investment by all involved. This does not mean that the investment amounts are necessarily equal. The financial value received by both companies in this engagement may not be equal either. Regardless, it does require both parties to support the vision, strategy, and plans with the appropriate level of investment in human and financial resources and the commitment to stay the course.
Shared Planning & Management Systems
With both companies approaching their joint activities with alignment at the vision and strategy level, the detailed plans must also be congruent. Plans establish the resources involved, the milestones for the key activities, and responsibilities of both parties. Planning has to be mutual and both parties need to be actively involved and vested with the entire plan. Falling short here will set up misaligned expectations and when issues do surface, the ability to easily resolve them suffers. Regular business reviews are an integral part of a management system. Build them into the relationship plan to ensure alignment at all levels of the business.
Since a partnership sits atop the supplier hierarchy, a high degree of collaboration is required for the supplier and customer to be successful. This implies a structured and managed approach to communications and engagement across all dimensions of the relationship. Communications will span the management hierarchy and the functional disciplines of both parties. Open, transparent, and strong cross-functional engagement between the partners is as important as the contractual and formal aspects of long-term performance and value contribution. If communications channels are not open and bi-directional, long-term success will be compromised.
All business ventures have elements of risk. When two companies come together to do business, they are both taking on new and shared risks. Some of these are unique to their business or market and some are shared by the fact that they are collaborating to be successful. It is critical that both parties acknowledge these risks and be transparent with one another. An open, honest engagement will provide the clarity both parties need to deal with risks when they occur without jeopardizing the partnership.
Winners beget winners. At the end of the day, success in the marketplace needs to be shared all along the value chain. Supply chains with close, vested, and mutually-beneficial relationships at the highest levels of the supplier hierarchy will succeed the most. Successful partnerships will generate more mutual value than lesser relationships. When set up properly, there is reduced chance of arguing over who got what or not later on. Market share growth, access to technology, improved profits, and other measures are examples of what each party may accrue.
The strategic partnership is the pinnacle of supplier relationships and takes a more holistic management approach to be successful. When making decisions about very strategic engagements, consider each of the above elements to ensure that the partner selection is well-founded.
Michael Massetti is an Executive Partner with Gartner who really does enjoy being a supply chain professional! Seriously. All opinions are my own.