Managing Relationships in the Supply Chain

Today’s global marketplace has heightened competition within the supply chain and fragmented factors that historically drove supplier selections, like low cost. Relationships in the supply chain, sometimes called supply chain collaboration or supplier relationship management (SRM), are critical for organizations to maintain a competitive edge with customers and finances alike. Good relationships in the supply chain can transform the transaction from route to collaborative, building a rapport and partnership between a business and its supplier that has short- and long-term benefits.

Types of Supply Chain Relationships

Multiple types of relationships can be established within the supply chain. First, relationships can differ based on position on the supply chain, according to the Central Asia Regional Economic Cooperation (CAREC) Program:

  • Vertical relationships are the most traditional, established between different types of firms along the chain, including retailers, distributors, manufacturers and raw materials suppliers.
  • Horizontal relationships exist between firms at the same position in the supply chain, such as two distributors who may partner to share truck capacity.
  • Full collaboration is amongst multiple firms along the chain working toward a common goal, such as a collective striving to reduce moving empty trucks. 

Then, relationships can also differ by depth of partnership:

  • Transactional relationships are limited just to the predetermined exchange, with no other relationship or connecting goal. Often, this is based purely on price.
  • In collaborative relationships, two or more organizations partner toward improving their collective results. This may also be a less formal form of cooperation to support better costs.
  • Strategic relationships can also involve multiple organizations; however, instead of focusing on a single result, firms in strategic relationships adapt business processes and objectives to support the collective long-term goals and objectives. This can include one firm investing in or purchasing another or a larger price relationship.

Benefits of Collaborative Relationships

Amidst market pressures to reduce costs and improve customer satisfaction, collaborative relationships offer multiple benefits, including:

Everyone Wins

Suppliers and the businesses they collaborate with benefit from collaboration because partnerships that keep both businesses in mind can improve success rates, minimize risk, and inspire innovation. Partnerships are also more likely to encourage reliability, price reduction, and timeliness to manage and reduce risks, according to the Chartered Institute of Procurement & Supply.

Cost Savings

Over time, business processes between two collaborators become more streamlined, boosting productivity and reducing waste, which ultimately reduces costs. In the long run, lower costs can be passed on to the consumers, which promotes competitive advantage.

Boosts Competitive Advantage

Cutting costs isn’t the only benefit to streamlined collaboration. When exchanges along the supply chain are optimized and efficient, existing products have lower time-to-market and decreased waste leaves room for innovation, ultimately positioning the businesses in a leading position in the marketplace for delivery and innovation.

Better Forecasting

Better relationships mean better communication and more timely information, which allows businesses to adjust forecasting when things change. In addition, the increased reliability means contracts should be fulfilled as planned, supporting accuracy.

Heightened Responsiveness

Sometimes, emergencies occur or a special request comes in. For buyers that cultivate respectful partnerships with suppliers, it is much more likely they will receive heightened responsiveness and flexibility.

How to Manage Relationships in Supply Chain

To establish a good working relationship with suppliers, buyers can follow these best practices:

Information Sharing

Buyers can capitalize on technology to view and analyze supplier data and assess potential risks or opportunities, spot weak areas and make plans to improve the process. And, this also allows buyers to analyze multiple partners to understand areas of strength. 

Collaborate in Areas of Strength

While it may be appealing for buyers to collaborate with suppliers who can fill gaps in their own offerings, strong collaborations should maximize existing strengths, not compensate for weaknesses, according to Supply Chain Quarterly.

For example, if a retailer is struggling with manufacturing, establishing a partnership that boosts demand isn’t going to provide any benefit to either party. But a company with top-notch analytical capabilities may experience great success in a collaboration with a data-rich organization. How are strengths assessed? Organizations need to establish baselines to measure key performance indicators (KPIs) to identify strengths.

The Best Partner May Not Be the Largest One

It’s natural to assume collaborating with the biggest suppliers or customers might be the most valuable move; however, a smaller company may be able to engage more. Again, the ability to make data-driven decisions about partners is advantageous in determining who are the best to collaborate with.

Establishing whether the return makes the up-front investment worthwhile for both organizations, examining the strategic interests for alignment, and evaluating existing infrastructure to determine if the business is set up to maximize a collaboration are critical steps to selecting the best partner, according to Supply Chain Quarterly. 

Create a Commitment

When a collaboration does make sense, establishing a formal commitment is vital to ensure the relationship is sustained during times for strain. For example, when capacity is limited during peak shipping times, a transportation company would be inclined to prioritize the highest paying freight. But with a commitment in place, they would instead be inclined to prioritize their partner even if the immediate value is lower. 

Develop a Joint Performance Measurement System

Just as performance within a company is benchmarked and measured, performance within a collaboration should be also. To do that, partners need to establish common metrics and targets, and then monitor progress together to ensure they remain aligned toward the same goal. Creating a regular schedule for dialogue, partnership review and problem-solving can help manage conflict. 

Adopt a Long-Term Perspective

Building any relationship takes time, and a supply chain relationship is no different. Organizations need to bear the end goal in mind, even when frustrated by the inevitable roadblocks in setting up a new partnership. While finding quick wins can boost confidence, the partners should also create and monitor long-term goals. Establishing a reward system for suppliers who maintain long-term relationships is one way to encourage extended partnership, according to an Industrial Engineering and Operations Management Society conference paper. 

Recruit and Develop Personnel

Successful supply chain relationships rely heavily on data, and to harness this best, organizations should recruit professionals with the qualitative and quantitative skills to manage this. Outside the specialization, organizations need to continuously train staff on the partnership and processes and expectations for working within it.

Cultivating and maintaining relationships in the supply chain requires careful planning, ongoing analysis, and constant dialogue, but when built correctly, these relationships can yield high strategic value for all organizations involved.

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