Imbalanced supplier-customer relations and how to avoid them
The old adage “the customer is always right” may apply in a retail shop but in the more complex world of business it is neither a universal truth nor even a desirable one. The dynamics of supplier-customer relations have for a long time been viewed purely from the customer perspective. However, by looking at ways to enhance the working relationship through the lens of the supplier and proposing a more strategic set-up based not only on the end product but also service and performance offers an alternative. Treating the supplier like a commodity might just become a thing of the past…
Two main models of customer-supplier contract currently exist – the transactional version where the customer holds the whip hand and simply asks the supplier to deliver a certain product as per their specifications. The other is more relational, involving a strategic partnership where the supplier is cast in a more powerful role than in the transactional alternative and is given the margin to be proactive and suggest ways of working, rather than merely taking orders. The prevalence of these two models depends very much on the nature of the product, sector or industry in question.
Balances of Power
High-tech, complex projects such as one would find in the automotive or IT industries require a high degree of customisation – the supplier must often propose made-to-measure solutions that, by definition, involve genuine dialogue in the spirit of complete collaboration. On the flipside, industries such as food or textiles are more prone to seeing smaller suppliers being dominated by their customers within a top-down network structure. This article shows options open to partners working either on a transactional or relational basis.
Viewing commodities in differing lights
The two FMCG (Fast Moving Consumer Goods) firms under analysis both had French connections, one being a French multinational and the other the French branch of a multinational originating from another European country. In both cases the firms worked with a network of three suppliers, two of whom were also multinationals and one a mid-sized business. The main demarcation point between the two set-ups was the nature of the relations conducted with their suppliers – in the one case transactional, to the point of being adversarial, and in the other case relational and strategically-focussed. This case was selected for a particular reason as the suppliers were delivering what would generally be considered to be an especially un-complex commodity in all senses of the word – corrugated boxes for product delivery.
“Commodity” is a word that carries many meanings but, in a supplier-customer business context, ultimately refers to an important but nevertheless base product. On a theoretical and practical level, the only margin the supplier of such a product would have to mount anything resembling a strategic partnership with their customer would be to create inter-dependency through a long-term contract or to offer a highly flexible inventory process. Otherwise, the chances of manoeuvring a position to be a more proactive partner in the set-up would, on the face of it, seem limited. The case study found otherwise.
Findings and Implications
Through extensive empirical testing, setting the very contrasting ways in which the two FMCG firms handled operations with the same suppliers against one another illustrated the ways that both supplier and customer could go about doing business in the interest of the partnership. Above all, it underlines how suppliers could consider proceeding in order to avoid the so-called “commodity trap”, whereby the supplier remains in an ultimately subservient role. By focussing not only on proposing a quality product but also creating the necessary conditions to make the “relational” customer open to discussing services and performance, the suppliers capable of working with the more flexible customer were able to propose a more complete package with obvious financial benefits for all.
The relational and organisational ties established enabled the supplier to convince its customer of the interest of outsourcing certain business processes as well as relying upon them to supply the base product. The savings made by the customer were significant, thereby giving the supplier the margin to raise the cost of its base product. In addition, this climate of confidence created a healthy rivalry between the higher-performing suppliers retained by the customer, as opposed to playing off one supplier against the other, as was the case within the more “transactional” set-up.
Win-win situations do not come more obvious than this one, where performance by suppliers is no longer a source of negative pressure but actually an incentive to provide a quality product and service, in the interest of all. Such a process cannot reasonably happen overnight, but both suppliers and customers should take heed. Putting time and energy into negotiations and communications to emerge with a healthier partnership on all fronts makes better business sense.
This article draws inspiration from Supplier-Customer Relationships: A case study of power dynamics, written by Sylvie Lacoste and Rhona Johnsen and published in The Journal of Purchasing & Supply Management vol. 21 (2015).
Rhona Johnsen is a Professor of International Marketing at Rennes School of Business, France. Her research interests include business-to-business marketing, customer-supplier relationship development, the internalisation of firms in business networks, and the internationalisation process of SMEs.
Sylvie Lacoste is a Professor of Marketing, Sales and Purchasing at Léonard de Vinci University, France. Her research areas include B2B commercial marketing and key account-supplier relations.