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Give A Little To Get More July 19, 2009

Posted by Tim Rodgers in International management, Supply chain.
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I’ve been managing supplier relationships for almost my entire career, including hardware component suppliers, contract manufacturers, technology alliance partners, and engineering service providers. Over that time I’ve worked with a number of people at all levels who seem to believe that their one-up position as the customer entitles them to demand more from suppliers while paying less. The attitude seems to be: “Do as I say or we’ll take our business elsewhere.”

I think this is very short-sighted, particularly if switching costs are significant. People often underestimate the time and effort required to establish a relationship with a new supplier and achieve the minimum level of performance that’s required to meet business objectives. Changing suppliers is a very big step, and that step should not be taken as an emotional reaction. Furthermore, “Negotiation 101” teaches that you don’t make threats that you’re not truly willing to execute. If you’ve really reached the breaking point in a supplier relationship, you must be sure to have a transition plan and back-up suppliers.

I believe that suppliers who are squeezed on price will give you the minimum performance necessary to maintain the relationship. They may even decide to drop you as a customer, depending on the power balance between buyers and sellers in that particular market. Whether in a one-time transaction or an ongoing relationship, the elements that are exchanged between customer and supplier are multi-dimensional: on-time delivery, assurance of supply (and demand), quality, return policies, technology transfer, intellectual property, licensing, warranties, and strategic plans. “Lowest price” is typically¬†not the most important consideration when choosing a supplier in the first place.

I’ll go further and suggest that leaving some money on the table — or compromising in other non-price dimensions — gives a supplier a reason to go above and beyond. You can’t specify every aspect of the transaction in Terms & Conditions, and how a supplier deals with those ambiguities depends on how much they value the relationship. I’m not saying that the customer should yield on every contentious issue. I am saying that suppliers have their own needs, and understanding those needs enables a smart customer to maximize the benefits for both sides.

I’ll go further still and say that the same thing applies to the relationship between a company and their employees. People who are working only “for the money” are not inspired, give only the minimum, and won’t fully contribute their talents.

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