Supplier relationships

An important topic in any operating model design is the design and maintenance of good supplier relationships.  The first step is to decide what should be done in house versus by suppliers.  For this, use the “supplier matrix” tool.  The next step is to design relationships with those suppliers that cannot be treated in a transactional way: these are tasks for which there are not ready alternatives to the supplier or ones that are particularly important to your success.   “Relationships” will include a formal or informal agreement that addresses “the purpose and strategy”, “who does what”, “who owns what” (important for IP or data), “how the performance specifications are defined and monitored”, “incentives and penalties”, and “how the relationship is dissolved”.  The “relationship” may be a formal JV, a contracted alliance or an informal understanding.

I was recently reading a McKinsey article on how to do a “health check” on these “designed” relationships.  The advice was pretty straight forward: clarify the purpose and strategy, collect performance information and then talk to leaders of both organizations. But the article also contained a list of six aspects of good supplier relationships … and it is this list that caused me to write this blog.  I partly agree and partly disagree.

  • Strategy—gaining agreement on the partnership’s objectives
  • Culture and communication—encouraging open and trust-based communication among all parties
  • Operations—establishing a new operating model and performance metrics (for instance, sales or quality-assurance metrics)
  • Governance and decision making—adherence to key decision processes, metrics regarding speed of decision making, stage gates, and time lines
  • Economics—defining how value will be created from the partnership
  • Adaptability—proactively planning how to “tend” the relationship over time, in the wake of industry and organizational shifts

I agree with “Strategy”, “Culture”, “Operations” and “Governance”.  All vital elements worth real attention in the design.  But “Economics” as a separate topic from strategy makes no sense to me.  Strategy should be primarily about the value that the partnership/relationship is trying to jointly create.  To think of strategy as a topic separate from value creation seems to me to misunderstand strategy or value creation.

Then I also felt uncomfortable with the final item “adaptability”.  In my nine tests of good organisation design, the last test is the “flexibility test”: will the organisation find it easy to change/flex/adapt to the changes that may be needed in the next couple of years?  So it is very similar to the McKinsey “adaptability test”: will the relationship easily change/flex/adapt in the wake of industry and organizational shifts.  So I like the point.

But, in my nine tests, I do not have a separate governance test.  I think of governance as covering legal due diligence stuff, like approval of accounts, decision making, especially what happens when people disagree, and appointments of those with “governing responsibilities”.   The ability to adapt to new events/pressures is about decision making and appointments, so it seems to me to be part of governance.  Hence, rather like “Economics”, I think the McKinsey list should either make the “Governance” point more specific or include “Adaptability” within it.


About Andrew Campbell

Ashridge Executive Education Focus on strategy and organisation Almost retired!
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