The Weak Link in Your Value Chain: Disengaged Suppliers

COVID-19 is spotlighting weaknesses in every link in the value chain and highlighting risks within the complex web of supplier relationships. Many organizations have come to discover that, despite all of their operational and financial performance SRM data, they're not their suppliers' customer of choice.

There's a scientific term for that: disengagement.

Disengaged suppliers damage businesses visibly and invisibly -- and engaged ones help customers more than they know. Engaged suppliers are 45% more likely to "go the extra mile," Gallup analytics shows, are 41% more willing to take risks for customers and are 45% more likely to give their customers "best in class" evaluations.

The best part? You don't need to pay for it. It's discretionary. But when an engaged supplier offers a jointly optimized cost structure, or collaboration in product development based on insider perspective, or flexible, unbureaucratic support in difficult situations, or preferential access to the latest processes and technologies, or the best quality under better conditions -- even just their full attention -- you get a lot more back than you pay for.

And by engaging suppliers emotionally, you make procurement a source of value creation to the top and bottom line.

You get more for your money when you treat people like people.

The emotional element may seem irrelevant. Traditional supplier management is essentially transactional: "I give you money; you give me stuff. If you can't, someone else will." Emotion has nothing to do with it -- it's all about using information to your advantage to improve risk management, supply chain optimization and cost reduction, using complex tools to measure all possible aspects of the customer-supplier relationship.

That approach is rational and systematic -- but that's not how people operate. Your suppliers are people, and despite human confidence that choices are unbiased and economically sound, up to 70% of economic decision-making is emotional.

Gallup research shows that suppliers emotionally engage with customers who demonstrate a high degree of clarity, simplicity, integrity, reciprocity and connectivity -- the five dimensions of supplier engagement.

• Clarity: Your expectations are clear, and you have communication pathways to express those expectations to the supplier.
• Simplicity: You don't complicate fulfillment requirements, and you don't make it difficult for the supplier to deliver excellence.
• Integrity: You're trustworthy, behave ethically, and will overcome problems to reach a fair and mutual agreement.
• Reciprocity: You value the supplier's place in the relationship.
• Connectivity: You demonstrate interdependence in the relationship and recognize that both sides share outcomes.

This is not a new phenomenon, and it's not related to any one industry or job role. For instance, in 2010, RTS Rieger Team and market research firm forum! Marktforschung interviewed 300 German business owners, general managers, and directors of purchasing and production in stereotypically rational and technological industries: mechanical engineering, electronics and automation. When asked how they made purchasing decisions, 77% said emotions played no part and 70% claimed to rely only on facts. Nonetheless, 54% admitted that even if the facts were favorable, they'd let a deal fall through if they had "a bad feeling" about the decision. Feelings are facts.

Even a supply chain hiccup can hurt you.

The pandemic is showcasing the value of engaged suppliers. And the aftermath is certain to demonstrate that the resilience of the supply chain is as or more important than cost, that dual sourcing may be quite worth the money and time, that new suppliers must be well-integrated with existing ones, and that local sources are hugely beneficial.

Yes, that may require more storage capacity for critical supplies -- a big reversal from prior cost strategies -- to beat today's production window. A medium-sized S&P company, according to German business publication manager magazin, can now maintain production for only 66 days from inventory. In a disaster, that's woefully insufficient. But even a supply chain hiccup can hurt a company badly.

Consider: In 2010, a French labor strike created nationwide gasoline shortages. Shockingly, one global company found that its French transportation supplier was down to one fueled truck … which it awarded to that company's main competitor. With no choice but to choke back production because it couldn't get raw materials, that company lost market share and a good deal of profit -- all because of a single truck.

We're not rational agents. It goes to show that even in the most rational, optimized, risk-assessed and cost-analyzed procurement system, suppliers get to make choices. And those choices benefit the customers who engage them.

In a volatile business environment, that's a serious advantage. To secure that advantage, Gallup's advice is to identify the suppliers with the most impact on your business success. Focus on improving or maintaining relationships with these top suppliers in all five dimensions of supplier engagement: clarity, simplicity, integrity, reciprocity and connectivity.

Then:

• Open more communication channels with them. Ask for feedback and listen.
• Involve your supplier. Be ready to share information.
• Make it easy for your supplier to do business with you. Ensure clear, simple, comprehensible processes.

As you do, you'll find weak links in your value chain. They may come as a surprise -- but approach them as an opportunity. Each weak spot tells you where a partnership can blossom, where emotional impact is needed, where value can be found. And as you begin to engage your suppliers more purposefully and more emotionally, bear in mind: Anything that enriches your relationships with your suppliers enriches your company too.