One important supply chain lesson from the COVID-19 pandemic is that supplier relationship management is critical. It can make the difference between having the inventory you need or having empty store shelves. However, supplier relationships are not built overnight; they take a lot of effort and communication.
To help procurement professionals meet this objective, ASCM’s new Supply Chain Procurement Certificate offers essential education. The certificate program includes 18-20 hours of education and a comprehensive final exam, all available online. In addition, Mike Bunge, CPIM, CSCP, A.P.P., C.P.M., director of global sourcing and materials planning at Libbey Inc., now shares his advice for building and sustaining positive supplier relationships.
This is the second article in a three-part series. Read the previous story here.
ASCM: In both good markets and challenging times, supplier relationships are critical to procurement excellence, supply chain agility and logistics fluidity. What is your approach to developing and managing supplier relationships?
Bunge: Supplier relationship management goes through a maturity cycle. It is not a normal progression to jump into a stable and mature relationship with a new supplier from the start — especially if you’re working in a different country, in different time zones and in different cultures. It takes time, dedication and a formalized supplier management process.
A supplier management process should be documented and understood by both the company and the supplier. It should help to define the roadmap to maturity so that a supplier understands what is clearly expected and how it is being judged and graded. Also, the process should include a means for consistent feedback so the supplier knows how it is performing in the eyes of the customer.
At Libbey Inc., we have many opportunities to interface with our own supply base during the year. 2020 was no exception. We continued to connect with our supply base digitally. We also have a reward system in place that allows our suppliers to earn recognitions at our annual awards banquet. Our award packages include preferential supplier benefits, such as additional information sharing, access to our organization and our participation in their planning programs.
We also have an opposite program in place for suppliers that need to improve. We put these suppliers on a probationary status, and we very carefully outline the reasons why they have reached this status and offer steps to help them go back to our normal status. If the problems are not corrected, we also have a disqualification status and formal disengagement process. Of course, the purpose is not to disqualify suppliers but to instead drive continuous improvement and maturity within our supply base.
ASCM: Why is it important to set and enforce high standards and ensure suppliers align with your company’s values?
Bunge: There are some areas in the supplier relationship that are non-negotiable. Unless certain high standards are met, we do not place orders. This is especially true in the areas of values and ethics.
In our supplier evaluation programs, we code our audit principles as red, yellow and green based on the severity of an infraction. For example, something like forced labor is coded as red. There is no room for negotiation when it comes to forced labor. Something like finding a secondary or tertiary gauge out of calibration, though, would be coded as green. This means that the issue is not critical to the business, and it just is in need of a correction.
We view most areas of sustainability as a maturity model. There are certain areas where we are unable to compromise, but in most sustainability areas, we are just looking for continuous improvement. We are very clear on our sustainability standards with everything documented.
We also have somewhat of a unique approach to auditing. We do not want to harp on minor infractions. That just causes the factory to feel like it has failed, and it creates animosity at all levels. Instead, we approach audits like a maturity process. We want to address critical issues and identify smaller areas that just need minor improvements, but we also want to find opportunities to add value to supply chains.
ASCM: On the other side of the relationship topic, what do you do to ensure that your company is a customer of choice so that you can obtain the necessary materials or items to keep your own operations moving?
Bunge: We ask for feedback every chance we get. Most companies do not have a formal customer evaluation system — like they might for supplier evaluations — so we have to ask. And we don’t just ask a simple question. We probe deeper to gain an understanding of how we can improve. We ask for feedback in terms of how our company and account are viewed, including about the profitability and volume of our account and how we engage in the planning and ordering process.
With our top suppliers, we set goals together in these areas. We ask to participate in their account planning meetings and discussions and to be part of the budgeting process. Most suppliers are not used to a customer asking for this feedback and asking to be involved in these areas. But at the end of the day, we want our suppliers to be profitable and stable. We want them to view us as a preferred client. We want to work together to drive waste out of our supply chains. I’m very surprised it remains so uncommon today. 2020 proved to be a great example of how this collaboration helps us together manage the business.
For example, as we were struggling to get personal protective equipment (PPE) in the United States to keep our employees safe, some of our international suppliers reached out to offer PPE that they could obtain through their own supply networks. They wanted to help us keep our employees safe and our supply chains moving. Because we work together so closely, they realized how interconnected our operations are with theirs. We share a lot of information. They understand our organization and our market, and we understand their organizations and their challenges. We work together to try to solve their challenges, and this time they did the same for us.
ASCM: What are some common supplier relationship management challenges, and how can these problems be overcome?
Bunge: On the tactical side, problems can be as basic as the supply chain not running on time. We have a batch system, and every week we review the backlog at each supplier — which items are running ahead and which ones are running behind — and we update shipping schedules weekly. Sometimes it’s not a problem if some items are running behind, and we reach out to the supplier to let them know that we’re fine with the delay. Otherwise, we look to the five whys to figure out the constraints behind the delay and how we can solve the problem and get the order back on schedule — whether this means helping the supplier with its challenges or adjusting our own project parameters.
As I mentioned, having documentation and formal processes helps supplier relationship management run more smoothly. Clear communication can sometimes be challenging within an individual company. However, as you grow into a global context with cultural differences in communication styles, languages and interpretation, documentation is especially important. It’s not enough to just say what you are going to do. You have to document it too. This makes the statement clear to everybody. That way, you can spend your time figuring out how to add value and not what the directive is. When you have a clear playbook, both the customer and supplier know what to expect. Everything is not going to be perfect, but this will minimize surprises on either side.
ASCM: How do you inspire, influence, inform, grow and develop your own suppliers?
Bunge: This is one area where psychology comes into play. I’ve been very fortunate to work with some of the best industrial psychologists. The same skills and tactics leaders hone to lead their own personnel can be used to inspire suppliers.
At the end of the day, we want our suppliers to know us and love working for us as a customer of choice. Note that I didn’t say get rich off of us, though. Psychologists have studied money as a motivator in workers, and I think the same concept applies to suppliers. Maslow’s Hierarchy of Needs explains that once people’s basic needs are satisfied, their needs become more emotional and less financial. There is a basic level of profitability required for a supplier relationship to work, but beyond that, fulfillment comes in the form of nonmonetary motivators, like the award packages I mentioned before.
We give our preferred suppliers deeper access into our organization. For example, if they are collaborating with us on a big project, they might work with an engineer or the sales and marketing team rather than only a buyer. We also give our preferred suppliers the first opportunity when we launch a new program or are working to earn a new customer. These intrinsic rewards — the opportunities to grow, earn new business, understand our markets better and better align their capabilities with our marketplace — tend to make suppliers feel more fulfilled in their relationship with us.
Stay tuned for the next article in this series, when Mike Bunge will share his path to procurement and his advice for succeeding as a procurement professional.