Logistics and Supply Chain Relationships:

Fueling the Drive to Win-Win-Win

by Art van Bodegraven, S4 Consulting

That Was Then

It's time to talk turkey about this "relationships" thing.  We've been awash in hot air and bologna for quite a while, leading to interpretations that relationships and relationship management are the purview of the Sales and Marketing folks, as they try to wring more out of key customers.  A corollary view has been that relationships are really all about doing the "right" things, making all parties feel good, and, with some luck, realizing a few benefits along the way.

Rubbish.

This Is Now

For openers, 21st-century relationships are bigger, bolder, and more powerful than those that characterized the old customer relationship paradigm.   In fact, the world of successful – and superior – supply chains is fueled by the quality of relationships throughout the end-to-end chain.  Without multi-dimensional relationships and active relationship management throughout, supply chains can’t work as effectively as they need to in today’s competitive and globalized arena.  The game’s new rules say, though, that it’s not enough to hope for the best.  It’s vital to use relationship management to plan for the best.  In our lexicon, “the best” indicates quantified improvements in the bottom line, and, as appropriate, the top line, as well.

Brilliant.

The Baby And the Bath Water

In considering the newer, richer panoramic view of the importance of relationships in supply chain management, don’t even think about diminishing efforts in customer relationship management.  Do, however, rethink the focus of these relationships.  Are they all about you?  About your need to drive added revenue and strengthen margins?  Or, are they about you and your customers collaborating to deliver superior solutions to their customers?

It’s the latter case that leads to the revenue and margin outcomes you are after – and makes your customer stronger and more viable in the process.  And, that’s a big part of what you want.  Longevity in a successful relationship.  Sustained high performance.  Mutual benefits with legs.

What if?  What if your customers’ customers began to see you as an integral part of their real-world value proposition?  What if you could reposition your relationships toward selling value and away from selling commodities?  What if you could increase your share of key customers’ business by 10%?  By 50%?  What if your margins could increase by a third?  By half?  It’s beyond satisfying to put trackable numbers into the feel-good equation.

The literature is replete with success stories about the power of refocused customer relationships, key customer segmentation, and creative collaboration with customers that have generated double-digit top-line and bottom-line benefits.  At core, smart relationship building and management has been time-tested and field-proven – for those who can grab the vision and run with it.

A recent case validating the concept involved an office products distributor that doubled its top line, at no loss in margin.  Their success was based on branding their identity and offering value-added services and solutions to major national and regional accounts.  Their competitors, who were all still trying to differentiate themselves by lower price commoditization of products were caught flat-footed.

Reality?  Relationship building and management with customers are too important,  too pervasive, and too strategic to be abandoned to sales and marketing alone.

Another Shoe, Another Foot

Here’s the moment at which the power of relationships begins to go exponential.  Translate what you might be trying to accomplish as an enlightened business partner and supplier at the tail end of the supply chain, and drive the concepts upstream.  Enlist your critical suppliers as supply chain relationship partners.  Note: That commitment might involve focused supplier rationalization, not simply to reduce the complexity of managing a supply base, but - much more importantly – to create high-powered, high-performing supply chain relationships.

Establishing strong supplier relationships can change your position as a competitor and as a downstream business partner.  Collaboration with key suppliers can be a potent tactic in creating sustainable cost reduction and continuous improvement – and consistent high quality – in your products and services.

While those selected suppliers can begin to benefit from their relationships with you, in the same way you can benefit from modern relationships with your customers, they will get stronger – and so will you.  And, you’ll be a better relationship partner both upstream and downstream in the supply chain.

What if?  What if you could focus your relationship efforts on handsfull, rather than scores, of “key” suppliers?  What if you could target – and achieve – documented cost savings year-on-year and year-after-year?  What if you could leverage the talent and creativity of the heart of your supply base to help you get outside the box and get ahead of the game?

The crafting of focused supplier relationships is more or less a mirror image of the customer relationship process, with some important differences.  The best example may be the multi-billion dollar food processor that radically rationalized its supply base, based on relationship potential.  The leaner and meaner combinations, working together, took millions of dollars and as much as twenty per cent out of supply costs.  Downstream, manufacturing savings also accrued through better engineering and packaging design.  And, the company quickly created a price/performance gap between itself and its key competitors.

By the way, the office products distributor cited above relied on tighter working relationships with its key suppliers to support value delivery and consistently reliable project/event-level logistics to its top customers.

More reality?  Supplier relationship building and management are too important and too strategic to be left for sourcing and procurement functionaries to develop and administer.

Logistics Service Providers

The role(s) of 3PLs in supply chains present special challenges and opportunities in leveraging the power of relationships, irrespective of the industry vertical that might be involved.  You may use 3PLs for transportation management and/or execution.  You may use them for storage and distribution – and value-added services.  They may work with you on an arm’s-length transactional basis, or they may be the face of your company as far as the customer can tell.

The opportunities in this arena for things to go wrong are legion.  The power of things going right is enormous.

Recent study has clearly concluded that 1) the laundry list of attributes that customers believe are important in working with a 3PL is long, and getting longer as our supply chains get more complex; 2) the number of those critical success factors that can be built into contracts is very small (and most of those belong in frequently changing attachments, rather than in the body of a contract; and 3) the only effective way to manage and leverage the non-contractual – but vital – elements of high priority lies in building and actively managing relationships.  The third point embeds critical factors of structured and disciplined processes for relationships, as well as aggressive mutual approaches to the outcomes the relationship is intended to deliver.

The what ifs are compelling – cost improvement, quality  and accuracy gains, dependable performance without redundant, non-value-adding oversight.  Imagine the focused payback involved in dealing with a limited number of compatible, reliable 3PL relationships.  Imagine not having to worry about the rigors of going out for bid year after year because the relationships that were built right at the beginning are long-lasting.

Examples on both the up-side and the down-side are legion in the 3PL world.  Today’s cost pressures are making long-standing affiliations increasingly vulnerable.  And, they are even more fragile when there is not a carefully constructed and maintained relationship process in place.

In one notable case, a well-known 3PL lost an account of some twenty-five years’ standing – the relationship had been neglected and could not overcome the impact of a processing error.  In the snap of a finger, a seven-figure account with a fifteen per cent margin disappeared.  Imagine the time and cost involved in trying to replace the revenue, as well as the major challenge of equaling the margin performance.

On the other hand, successful 3PL’s tend to build gradually, based on a combination of trust and performance.  They don’t do the same old thing for a customer for a couple of decades; they do increasingly more – functionally – and further integrate themselves into the customer’s value stream, becoming a visible and vital part of the customer’s success.  Ultimately, it’s difficult to understand how an outfit that used to store overflow inventories is now doing light assembly for a Tier II automotive supplier, serving one of the most demanding vehicle brands in the world.

Still more reality?  The 3PL relationship isn’t about price; it’s about cost and value.  The stronger your 3PL partner is, the stronger you will become because of its performance.  The scenario is on a parallel with the win-win-win relationships built with customers and suppliers.

But, also paralleling the other cases, the 3PL relationships are too important to be left exclusively to the transportation and warehousing functionaries.  All of these strategic sets of potent supply chain linkages must involve functions and management throughout your organization.  And, their roles need to be structured with purpose, not the least of which is synchronicity with corporate strategies.

This Ol’ House

As tempting as it might be to jump into the deep end of the relationship pool, another reality is that your own house needs to be in good relationship order before you can expect to execute relationship construction and on-going maintenance with B2B outsiders.   There are two drivers for practicing what you preach about relationships within your own four walls.

One is that you’ll want to demonstrate mastery of the relationship basics to show how you do business in your own domain.  How you communicate with other functions, how you satisfy your internal customers, how inclusive your planning, decision-making, and execution are, how you lead versus how you manage/administer, and how you treat your people.

The other is the equally vital task of making sure that the entire organization is on the same page, that everybody “gets” what the relationship-powered organization is all about (and that everybody understands that the entire company is involved in making relationships work).

Where Are We, And Where Are we Going?

So, let’s assume that all these ideas make sense for you, your company, your customers, and your suppliers (including service providers) in a supply chain relationship perspective.  How do you figure out how well you’re doing now?  How do you get a handle on where you’re good, and where you’re not good yet?  How can you size the effort and benefits of prioritizing relationship development initiatives, and concentrating where there’s not only a short-term bang for the buck, but also a probability for long-term sustainable mutual payback?

The answers might lie in a term that only a CPA could love, an audit - a clear-eyed, no-holds-barred assessment of where relationships really stand, not where you would like to believe they are.

In fact, you really ought to begin here in any case.  The things you suspect aren’t going well may be the result of problems either upstream or downstream, so trying to deal with superficial symptoms may not get at the bedrock issues in existing relationships.

Who’s On First?

If these things are too important to be left to a company’s functional areas, who, then, should be involved?  There’s no one answer; it really depends on what’s key to effective collaborative performance.  For truly strategic relationships, however, you should count on regular contact and communications with Sales and Marketing, and logistics functions, and IT, perhaps HR, and certainly senior management, maybe even at the CEO level.  There are also possibilities for R&D, Manufacturing, and QA/QC.

And, Your Point Is?

Look, this is hard work, but it isn’t brain surgery.  It takes an organized process to find the right starting point.  Building relationships in a vacuum can pay off, but integrating the processes of relationship management throughout a supply chain is the real key to fully unleashing the power that lies within them.

We think that those organizations that make the right moves in supply chain relationships today are those that are going to prosper in the supply chains of tomorrow – in good times and in bad.

© S4 Consulting