Making Supplier

Relationships Work
A.T. Kearney offers nine ways to interact with your
suppliers, identifying formulas that characterize true
supplier relationship management. Each one gets to
the heart of what makes the most effective supplier
relationships tick.

Making Supplier Relationships Work 1

We rely on suppliers for a wide range of products and services that allow us to succeed, yet
we know surprisingly little about these relationships or how to fully harness them. Some believe
these relationships are all about cutting costs. Others think they are the sum of every category
management initiative ever tried. We have a different view. We believe that suppliers, and our
relationships with them, are an area yet to be fully explored or exploited. At a recent A.T. Kearney
Executive Roundtable, 50 chief procurement officers (CPOs) from major U.S. and global
corporations conceded that managing suppliers effectively is one of their biggest
challenges, and that they are not currently prepared to address it.

SRM is not new. What is new is recognizing

what characterizes a supplier in relation
to your business objectives.
A team of A.T. Kearney partners is spearheading an initiative to fill this void. Called the True
Supplier Relationship Management (TrueSRM) Project, and funded by leading high-tech
players around the world, we have developed a comprehensive approach to managing supplier
relationships—comprehensive because it works in all industries. This paper is about our initial
findings, which will culminate in a book scheduled for release in 2014.

Getting to the Heart of Supplier Relationships

When we look at supplier relationships, patterns emerge. Regardless of industry, company
size, or a dozen other factors, our suppliers tend to fall into distinct camps. There are those in
the “critical cluster” that, with some nurturing to the relationship, can contribute to competitive
advantage. The “ordinaries” provide needed but common products or services that could be
purchased from many other sources. Then there are the “problematics” that have been useful
sources of supply but pose serious problems that need to be fixed, or the supplier replaced.

Managing supplier relationships is nothing new, of course. What is new is our system for
recognizing what characterizes a supplier in relation to a company’s unique business objec-
tives (see sidebar: Where Suppliers Fall on the Performance-Relationship Curve on page 7).
What is the core nature of the relationship? How can it better serve our company’s success?
What do suppliers themselves want? And how do we communicate with them about where they
stand now and where we want them to be in the future? This last point is especially pertinent
because supplier relationships are rarely structured in a way that guides internal conversations
and planning, or communicates in practicable terms.

This is the premise that drove the TrueSRM project team to develop nine ways to interact with
suppliers—identifying individual formulas or models that together characterize true supplier
relationship management (see figure 1 on page 3). Each model gets to the heart of what makes
the most common and effective supplier relationships tick, while establishing expectations for
what each relationship is capable of and laying the groundwork for mutual success. While there
is no substitute for classic sourcing, our approach to supplier relationship management is to
identify and support those relationships that pose the greatest return on investment.

Let’s explore the nine supplier relationship models in detail.

Making Supplier Relationships Work 2
The Critical Cluster: Relationships to Nurture
The first under our microscope are suppliers that offer the most promise. Whether vendors that
already have a great relationship with you, or clearly could have with a little work, these relation-
ships are the valuable few that are worth time and attention.

Integrate—worthy of commitment

Here the goals of the two organizations are genuinely integrated and they work together as
partners. This is a partnership with a capital “P.” Although an often over-used term in business,
the true partnership is rare and based on a multi-year, differentiated, and comprehensive
relationship between you and your supplier to build an ecosystem that shapes the market. The
supplier chosen for this model should be in your sweet spot: Its performance is flawless, and it
holds the key to making you a formidable competitor by creating opportunities to grow
revenues and profits while jointly shaping or reshaping the industry.1

When Red Bull introduced its energy drink in 1987, it partnered with Austrian-based Rauch Group,
a contract bottler and beverage maker, to be its sole bottler.2 In turn, Rauch agreed not to work
with any other energy drink company. Such a commitment could have been a risk for both
parties, but Red Bull’s product strength and Rauch’s distribution capabilities in 90 countries

Figure 1
Nine supplier interaction models

High Critical cluster

Ordinaries

Harvest Influence Integrate Problematic

Performance
(At what level Improve Sustain Invest
is the supplier
performing today?)

Mitigate Develop Bail out

Low

Low Strategic potential High

(What could this supplier be to you?)

Source: A.T. Kearney analysis

1
For more on how to reshape an industry, see “The Strategy Chessboard” at www.atkearney.com
2
“F1nvestor: Red Bull” at pitpass.com

Making Supplier Relationships Work 3

made for a powerful integrated approach across the two businesses. Today, Red Bull enjoys
the largest market share in its category worldwide, selling 5.2 billion units in 2012, and is front and
center in sponsoring extreme sports such as Formula 1.

To build and maintain such an involved relationship in the Integrate model requires substantial
investment by both parties. Understand that the supplier that commits to this model takes on
significant risk. By giving you highly preferential treatment, it could be limiting its own growth
potential. Likewise, such concentrated, powerful Integrate relationships suggest that you
should have no more than a handful of these suppliers on board.

As with most relationships, good timing

and regular communication are crucial
for capitalizing on opportunities.
How to work with Integrate suppliers: A successful relationship with these suppliers thrives on
a shared vision and willingness to act as one smoothly running, extended enterprise. The stage
can be set by encouraging consistency across your own divisions, functions, and hierarchies in
terms of meeting needs, budgets, and timelines with the supplier. This model makes sense only
if both parties benefit in terms of profit, revenue, and growth. This means both parties should
be mindful of market shifts and how they may affect the other. For example, if your Integrate
supplier’s competitor offers the same product at a lower price, work with your Integrate
supplier to meet this price, perhaps by trimming specifications or improving productivity,
and by continually looking for mutual cost reduction opportunities. When each party
understands the other’s core competencies, duplications can be avoided.

Influence—jointly develop new offerings

Suppliers that fit the Influence model deliver nearly perfect products or services. What sets
them apart is that they offer the potential for innovation by working with you to jointly develop
new products or services. This factor shapes your relationship with them. These suppliers often
dominate an industry, as they are the crucial few that a company and its competitors rely on. In
turn, they do not favor any one customer, and in the case of monopolistic suppliers, are required
by law not to do so. The downside, of course, is that it is nearly impossible to outpace your
competition by working with these suppliers. What’s more, mismanage this relationship, and
you could alienate these suppliers enough that you fall behind competitors that may better
handle their relationship with the same supplier.

How to work with Influence suppliers: As with most relationships in life, good timing and
regular communication are crucial for capitalizing on opportunities with Influence suppliers.
You want to set the expectation up front that it is necessary to have access to their product,
technology, process, and innovation roadmaps. Evaluate them for opportunities that you can
tap into or even areas that could provide limited exclusivity. Request ongoing feedback on how
your company’s actions and plans dovetail with theirs for mutual advantage, and then negotiate
competitive pricing accordingly. Also, Influence relationships can consume a substantial
amount of internal resources, so make the investment pay off by encouraging confidence
in each other’s plans.

Making Supplier Relationships Work 4

This kind of close working relationship paid off for Transport for London, the U.K. capital’s
transportation authority, which needed to replace its aging, red, double-decker buses with a
modern fleet. In 2010, it chose a design from manufacturer Wrightbus, a global supplier of public
transport coaches. Working closely with Heatherwick Studio, the company created a unique
design that meets the specific needs of London’s ridership, with full wheelchair and pram
accessibility, and a hybrid electric and diesel power engine and aluminum frame that make it
one of the most environmentally friendly buses in the world. This joint supplier relationship
led to a world-class bus fleet and the largest order of hybrid buses in Europe.3

Invest—believe in capability

Does your company have suppliers that offer great ideas and innovations, but then stumble in
basic areas, such as providing continuous supply or consistent quality? A great future can be
had with these suppliers—as they ultimately could reach Integrate status—but their potential
rests on the relationship you build with them now and the extent to which they respond. Ideally,
an Invest supplier will aspire to Integrate status and will work with you in building capabilities to
achieve this title. Here, we recommend nurturing the relationship by investing time, money, and
resources in developing the supplier’s capabilities to meet your needs. The best candidates will
make capability-building a top priority. Be forewarned, however, that some suppliers may spurn
the help, believing that you are attempting to make them “captive” and to cut them off from
wider market opportunities.

Clearly define each party’s roles and

responsibilities to limit confusion.
The Invest model can become widely accepted in an industry. In aerospace, for example, it is
common for customers and suppliers to participate in new projects via risk and revenue sharing
partnerships, where both contribute to development costs and share in the returns.

Examples can be found in the automotive industry as well. SGL Group recognized the valuable
opportunity that working with BMW presented when the automaker approached it for developing
lightweight carbon fiber-reinforced plastics for use in its new i3 electric car. The companies
co-invested in a state-of-the-art factory in Moses Lake, Washington, to produce body components
that reduce the weight of the new electric car by 550 to 770 pounds, compensating for its
battery’s weight. Indeed, this joint venture is expected to set a precedent for use of carbon
fiber in mass-produced vehicles, a milestone for the automotive industry.4

How to work with Invest suppliers: Striking the right balance between nurturing
these suppliers, engendering their trust, and overcoming fears of being captured is key.
A transparent business case that both parties buy into will help alleviate supplier hesitancy.
It should present a compelling return on investment, both for you and the supplier. It is
crucial to stick to commitments with these suppliers to reduce their risks and thereby
deepen their commitment to you. Given the close cooperation that the model calls for,
it also is important to clearly define each party’s roles and responsibilities to limit confusion
over terms of engagement.

3
“London’s Hybrid Double-Decker Bus Officially Unveiled,” Inhabitat, 17 May 2010.
4
“New Carbon Fiber Plant to be Built in Moses Lake, Washington,” SGL Group press release, 06 April 2010.

Making Supplier Relationships Work 5

The Ordinaries: Leave Well Enough Alone
While suppliers that fall into this camp are generally more numerous, don’t let their average status
fool you. There is strength in numbers here. As the number of ordinary suppliers in your fold
increases, a keen understanding of what makes these relationships tick, and a simple set of tools
for maintaining or incrementally improving their performance, can have sizeable positive results.

Harvest—highly productive but still need cultivating

Harvest represents a well-functioning position for both parties. The company receives just the
type of products or services it needs. They’re nearly perfect, in fact, and support the company’s
competitiveness. For you and the supplier, this relationship is virtually hassle-free and ties up
few resources. It may seem to function on its own, and that’s exactly where both parties need
to focus. Complacency should be the red flag here. Great performance could be mistaken for
a great partnership, so we recommend not using the term “partner” loosely, because it can lead
to assumptions that nothing needs to be changed. Low investment of resources can communicate
that you don’t overtly value this relationship, and if the supplier falters, it could be dropped.
The Harvest supplier’s vulnerability, then, and the absence of discussion about maintaining
performance, can create tension that negatively influences interactions between the parties.

The challenge with the “ordinaries” is

striking a balance between investment
and return on the relationship.
How to work with Harvest suppliers: Harvest relationships will be fruitful as long as two
things remain constant. First, the supplier should maintain its performance. Be sure the
company understands that it is “on the team” because of its strong performance, not because
of a relationship with you. Communicating to a Harvest supplier that it is a partner supplier
is a mistake. Second, be sure to provide the supplier with everything it needs to continue
delivering at the current level. As long as these incentives require little of your own additional
time or resources, this continues to be a true Harvest relationship. If the supplier’s situation
changes, or there is any hesitation to invest in maintaining the relationship, then there are
specific steps to take, which we discuss shortly.

Sustain—drive for continuous improvement

You probably work with a number of Sustain suppliers. Their performance is average but
aspects of this type of relationship place it above that of most suppliers, usually because you
need these relationships to endure. They do not need major fixes or warrant significant
investment. However, incremental improvement to capture more value and move performance
toward world-class levels is usually beneficial.

How to work with Sustain suppliers: The challenge is to strike the right balance between invest-
ment and return from this relationship. When these suppliers recognize what you value about
working with them, they will be less likely to become complacent and allow their performance
to slip or present less desirable commercial terms to you. Always treat the Sustain supplier fairly

Making Supplier Relationships Work 6

Where Suppliers Fall on the Performance-Strategic Potential Curve

While supplier relationship have a relatively high strategic strategic potential axis, the
management (SRM) as a concept potential, for example); the distribution will lean toward the
and term is common, a universal size of the business with this left. The majority of suppliers will
definition is not. The TrueSRM supplier (a supplier that is be in mature relationships with
Project team began by defining important across all divisions the company and will not be the
SRM. 5 will have a higher value than source of exceptional events in the
others); the “business” foreseeable future. There will be,
At its heart, SRM: potential (the supplier might however, a few suppliers that have
have something crucial to a a very high strategic potential.
• Drives supplier behavior
company’s ability to realize its
• Encompasses the relationship future plans); and the supplier’s Looking at the overall picture,
between two enterprises attitude (honesty and reliability a pattern begins to emerge.
score high). Most suppliers will be center left
• Enables a company to capitalize
in the portfolio, all of them with
on its size by coordinating
In a real-world case, the distri- average performance and in
across divisions, functions,
bution of suppliers across these mature, strategic relationships.
and hierarchies
two axes is not flat. As illustrated A limited number of suppliers
Next, we tested workable frame- in the figure below, suppliers will will reside in the “interesting
works with clients to differentiate be spread across the performance areas” of the corners of the
supplier interactions, focusing axis in a bell curve or normal portfolio. This tendency immedi-
on current performance and distribution. The majority will have ately leads to the question of how
the future strategic potential average performance. Across the to interact with these suppliers.
of the relationship (see figure).
The two axes are defined as:

• Performance. Current perfor- Figure

mance is measured by output Distribution of suppliers by performance and potential
over time (such as percentage of
orders delivered in full on time),
cost (such as savings compared High
to the previous quarter), and
quality (including failure rate).
Capabilities are gauged on
Performance

performance in engineering,
procurement, manufacturing, Majority of suppliers
supply chain management,
sales, marketing, and finance.
In practice, supplier perform-
ance is often gauged with a mix
of output and input factors. Low

• Strategic potential. Character- Number Low Strategic potential High

ized as the future strategic of suppliers
potential of a supplier, this value
cannot be measured objec- Number
of suppliers
tively. It requires considering
the uniqueness of the products
or services provided (a mono-
polistic supplier will, by nature, Source: A.T. Kearney analysis

5
Category management, while related to SRM, focuses on the best approaches for managing a portfolio of purchased goods
or services.

Making Supplier Relationships Work 7

while not tying up disproportionate resources. The relationship is likely to be relatively arms-
length, with the supplier needing to compete for additional business. However, take care
in this respect. Market and performance changes can cause shifts in the relationship. Remaining
sufficiently close to the supplier will help you understand this dynamic and act accordingly.

Improve—address the shortcomings

The majority of your suppliers are likely to fit here. They perform at a level similar to that of
a Sustain supplier, with equivalent shortcomings. The key difference is that should they fail—
especially repeatedly—you would be more likely to replace them than a faltering Sustain supplier.
The Improve relationship can feel unstable for you and the supplier as a result. Instead, turn
the unknowns into opportunities by helping the Improve supplier to raise performance and
move toward Harvest status.

How to work with Improve suppliers: As long as Improve suppliers do not warrant major
investment of time and other resources, having them address their shortcomings is preferable
to replacing them. Clearly communicate how they need to perform more effectively and be
straightforward about their future strategic potential. Otherwise, these suppliers will lack a true
understanding of the situation and fail to improve, leading to the more laborious task for you
of replacing them.

The Problematics: Time for Serious Fixes

Rather than rue the day you hired certain suppliers that have become problematic, take a closer
look at what has gone wrong and learn from everyone’s mistakes. Indeed, this is the time
to contain the damage. It’s also a great opportunity to repair relationships that warrant the
investment, or at least keep the lines of communication open should you both go your separate
ways but later find that things look better.

Mitigate—disengage on good terms

Sometimes, it just doesn’t work out. A supplier has significant ongoing issues with delivery,
cost, or quality and it’s time to look for a more promising source. The risks and consequences
of doing this need to be mitigated. Relationships that reach the Mitigate stage are easy to
transition out of when the failing supplier is small or the business simply structured. But when
there are multiple lines of business, numerous product segments, or big outsourcing agreements
with a long-term supplier, replacement becomes a challenge. Paradoxically, the quality of this
relationship—even though it is ending—is one of the most important supplier interactions to
maintain at a level of openness and clarity while you are still working together.

How to work with Mitigate suppliers: Start with a transition plan to avoid misunderstandings
and even disasters. Your supplier should fulfill all remaining business obligations and articulate
steps for handing off the business to a new supplier. Large suppliers should have done this
preparatory work as part of ongoing risk management.

During the transition, be sure to have a window into the Mitigate supplier’s inner workings,
much like the transparent back of a pocket watch. Ask the supplier to update you on every
aspect of the phasing-out of the product life cycle for all categories and lines of business.
Understand their interdependencies and how they affect your business. Some of the processes
and services may not be obvious, so it is wise to conduct an in-depth assessment. Develop

Making Supplier Relationships Work 8

scenarios and business cases, including war gaming, which can help anticipate supplier
reactions and generate valuable input. An exit strategy crafted by top management and key
stakeholders and then communicated to everyone will help control communications and
extinguish conflicting messages before they flare up.

Finally, avoid characterizing the Mitigate relationship as permanent. Maintaining bridges via
a positive relationship could enable a fresh start should conditions change. After all, this
supplier has gained valuable insights into your business that could prove useful in the future.

Develop—invent the ideal source

For competitive advantage and operational benefits where none exists right now, consider
building a Develop relationship with a supplier whose current performance is poor and needs
to be addressed. This should be a hand-selected vendor with lots of potential for working
closely with you to identify opportunities across its value chain and yours. Reach out to your
in-house cross-functional teams to identify viable candidates that are currently not ready
for prime time but have the potential to become star suppliers. There are numerous examples
of Develop suppliers that became key sources in well-managed relationships. Consider, for
example, the many manufacturers that nurture low-cost country suppliers, providing
technology or engineering assistance to get them up to speed as component suppliers.

The Bail Out supplier relationship should

be brief, rare, and temporary.
How to work with Develop suppliers: This type of relationship works best with suppliers that
see your company as a unique chance for improvement and are willing to execute according
to your development plan. They should be open to working with your people across their
organization. Start the conversation by presenting a business case and plan that reflect the
interests of both parties, including informing the supplier about your volume allocation.
The objective is to motivate the supplier to change its setup and processes. We recommend
including standards for engineering, manufacturing, and quality, with strong program
manage-ment oversight. The plan and execution will call for both sides to free up core
resources, ideally in a way in which they pair up to manage projects and influence functions.
Finally, with both parties aiming for the same goal, monitor performance by cascading MBOs
down to every employee level affected by the new relationship.

Bail Out—when stepping in is necessary

A major supplier commits an egregious error or a chronic problem suddenly requires triage.
This is the abrupt formation of the Bail Out relationship. The situation can significantly
jeopardize business by threatening supply.

The immediate goal is to stabilize the supplier’s performance. The long-term goal is to learn
from the problem to avoid future Bail Outs with this supplier. It may seem counterintuitive, but
this is a relationship that will likely be maintained, particularly with important suppliers. The Bail
Out relationship should be brief, rare, and regarded as a temporary step toward improving the
overall supplier relationship.

Making Supplier Relationships Work 9

How to work with Bail Out suppliers: Immediate and swift recognition of the Bail Out situation
will minimize damage and help save the relationship. By acknowledging the situation’s severity
and allowing your company to intervene, the supplier sets the stage for crucial next steps.
Correcting this situation should be a joint effort. Provide specific guidance and expect the
supplier to comply with all instructions, including the expectation that it determine solutions to
the problem. Bail Outs will rarely be solved in your company’s offices and usually take place
completely on the supplier’s premises. So, have boots on the ground as soon as possible.

Usually, the Bail Out situation poses challenges that you will not have seen before in quite the
same form. For effective and speedy reaction, it is wise to put in place contingency relationships
with third-party experts up front. These additional resources can then be leveraged to help
solve the problem.

Bail Outs are expensive for everyone. Immediately on the heels of this phase, if there is a strong
mutual desire to maintain the relationship, then leverage the recent experience to work together
and specify plans to enhance the relationship. Debrief, reexamine systems, and establish a revised
working relationship that includes ongoing checks and balances so that future Bail Outs do not
occur. Most companies immediately jump to replacing the supplier at this point, which is the
wrong approach, because it does not consider the relationship’s potential longer-term value.

With these nine supplier interaction models, you and your suppliers can know exactly where
you stand and where you should plan to take the relationship in the future.

Authors

Christian Schuh, partner, Vienna Stephen Easton, partner, London

[email protected] [email protected]

Mike Hales, partner, Chicago Michael Strohmer, partner, Vienna

[email protected] [email protected]

Making Supplier Relationships Work 10

A.T. Kearney is a global team of forward-thinking partners that delivers immediate
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