Supplier Relationships are Complicated: Just ask Tesla and Panasonic
Supplier relationship management (SRM) isn’t always the topic of major news headlines. But this month it is. Panasonic and Tesla have gone public with their concerns about each other in the Nikkei (Japanese financial publication similar to the Wall Street Journal) and on Twitter. Currently, Panasonic is the sole supplier of the lithium-ion batteries that go into Tesla’s electric cars.
Some industry observers are shocked by this development in the partnership, saying, “We have never seen a supplier go after a top customer in public before.” In fact, the language being used in the media to describe the disagreements about supply, demand, and the production yield of the $4.5 billion joint Gigafactory has crossed into the realm of more personal relationships. According to an article in Bloomberg, one analyst has said, “Tesla and Panasonic need couples counseling ASAP.” And other headlines talk about each party “flirting” with other suppliers or customers.
There are discussions by many as to whether this spat is just an indication of growing pains in the relationship, or it heralds something more serious for the longer-term success of this couple.
In thinking about this very visible disagreement, there are important lessons to learn about building solid relationships with key suppliers. Here are five core principles to keep in mind.
How to Build the Most Strategic Relationships
With an organization’s most critical suppliers (as Panasonic is to Tesla), there are five critical elements that enable the creation of an interconnected system to share risks and rewards to encourage innovation and co-creation. These are considered the design principles of sourcing business models as described by www.vestedway.com based on research conducted with the University of Tennessee and embraced by APQC.
- For the most strategic relationships, shift to an outcome-based business model—Rather than contracting for specific transactions, organizations are best served by spelling out their desired outcomes. This requires the right sourcing business model to ensure a best-fit approach (for relevance), a shared vision statement (for perspective), and a statement of intent (for behaviors). The shared vision statement outlines how participants will work together to deliver value and improve performance. And the statement of intent details guiding principles and intended behaviors that will create a collaborative partnership. That is, how will each partner behave in terms of communication, focus, and feedback? These efforts align the buyer and supplier on the underlying constructs and ground rules for the contract.
- Focus on objectives, not how the work is conducted in strategic relationships—The supplier is empowered by a mutually developed statement of objectives to determine how to reach the desired results. The supplier may make significant changes to improve processes, but the statement clarifies who does what. It becomes a formal taxonomy and set of workflows that drive clarity and alignment. With this effort, the buyer and supplier understand the end-to-end process, the delineation of responsibilities, and—although driven by different motivations—the shared objectives for collaborating.
- Clearly define and measure desired outcomes for strategic relationships—It’s counterproductive to mire suppliers in numerous transaction-focused performance measures; the micromanagement absolves the supplier of responsibility to innovate or look for opportunities to overhaul the process to more efficiently reach the desired result. Developed collaboratively in a quality assurance plan, performance metrics should precisely gauge the attainment of desired outcomes, identifying which party is responsible for which process elements. Both partners should agree how performance measure results will be reported and acted upon. Any activity-level measures can then be conducted and scrutinized internally by each partner.
- Optimize pricing model incentives for strategic relationships—Rather than focusing on the lowest possible transaction price, organizations are best served by creating a pricing model with incentives for the supplier to innovate and improve efficiencies in reaching the desired result. The incentive-based pricing model should be collaborative, transparent, and flexible so that both parties are empowered to invest in target processes and rewarded for partnership success. It may include underlying financial assumptions, risk factors and allocations, the agreed-upon compensation method, margin-matching triggers and techniques, and contract duration. Simply put, both parties have incentives to take risks considering the size of the rewards.
- Establish an insightful governance structure for strategic relationships—Governance should move beyond oversight to generate insight. A sound structure should provide cohesive policies, processes, and decision rights that enable a symbiotic relationship. This requires relationship, transformation, and exit management, along with a focus on special concerns and external requirements. Relationship management involves establishing joint policies and mechanisms (e.g., tiered management structure and communication protocols) to maintain a flexible and collaborative partnership. Transformation management provides a framework for changing processes in a controlled manner and adjusting to new market conditions when required. And exit management outlines a credible, transparent exit plan for unwinding the relationship that allows for future unknowns.
How to Move to Next-Generation Supplier Relationship Management
Whereas traditional SRM focuses primarily on the costs of specific transactions in the final phase of the procurement process, next-generation SRM focuses on the bigger picture, beginning at the outset of the procurement process and continuing through the life of the supplier partnership.
In next-generation SRM, the buyer initiates a collaborative partnership with the following actions. These actions can transform a transaction-based business relationship into a strategic partnership.
1. Identify candidates to collaborate with.
Building healthy supplier relationships takes time and effort. As such, it does not make sense to invest in collaboration with all your suppliers. The buyer should scrutinize suppliers in terms of not only price and quality but also trustworthiness, transparency, and compatibility. This is the critical foundation for establishing a collaborative mindset.
2. Jointly agree on a shared vision and guiding principles for the partnership.
The buyer and supplier bring together their separate motivations to create a shared vision for collaboratively reaching a desired output. This vision guides the participants throughout the negotiation process, as well as the post-contract relationship. And the guiding principles ensure the partners continue to behave in a collaborative manner, focused on mutually beneficial outcomes.
3. Negotiate as partners.
With expectations set, the partners can negotiate how they will determine details such as the scope of work, pricing, and terms and conditions. Agreeing to strategies, tactics, and methods for ensuring a fair deal is especially important when it comes to allocating risk.
4. Let shared goals drive daily behaviors.
Because relationships are dynamic, the buyer should focus on maintaining a collaborative and transparent relationship. Continued effort and governance help maintain a prospering, long-term partnership with successive rounds of innovative thinking.
To Learn More
To further dive into building successful long-term relationships with key suppliers, I recommend you check out APQC's recent white paper: Reinventing Supplier Relationship Management. I wrote it in conjunction with Kate Vitasek, Emmanuel Cambresy, and Bonnie Keith. It is part of a larger collection of content items on supplier relationship management aimed at giving you the tools and guidance (as well as examples of successful relationships) to avoid finding yourself and your key suppliers in need of couples counseling.
Want to share your thoughts with me? You can reach me at firstname.lastname@example.org, via Twitter @MB_APQC, or on LinkedIn.