How to not do supplier relationships

You can’t win wars where your allies are also your enemies

Steve Tengler from Forbes Magazine recently wrote about how Audi was improving the reliability and quality of its cars … by helping its suppliers. And while I wished he had a little more robustness behind his conclusions, he reinforced just how important it is to focus on who makes your products and not just what they make.

Clinical interpretations of open-market capitalism will have you believe that all you need to do to pursue quality and reliability is to ‘deify’ the concept of ‘competition.’ The market becomes the only interface between the customer and the vendor, and the customer’s decision to purchase (or not purchase) then drives vendor behavior. Vendors who fail to adapt to evolving customer expectations go bankrupt. Those who do adapt stay in business. And those who anticipate what the customer wants (before the customer gets there) become wildly successful. Customers always win.

But there is a problem. Real life doesn’t work like that.

Tengler wrote about Audi’s Software Quality Improvement Leader (SQIL) Program, where suppliers that were assessed as ‘struggling’ were provided an ‘independent overseer’ to witness ongoing improvements towards agreed goals. Three years later, Audi has made ‘notable strides in vehicle reliability’ according to J.D. Power. It is difficult to think that all this improvement is down to SQIL alone … but perhaps this is simply a symptom of a more mature overall approach Audi has implemented to maintaining supplier relationships.

Relationships where the customer and supplier both win.

Focusing on ‘market’ driven forces alone rarely has a good outcome. Companies often devolve into simply demanding that vendors cut costs for things they are already providing (… like Boeing did – with disastrous consequences). This is always whitewashed as ‘OK’ because the customer can convince themselves that they are only passing on their ‘expectations’ in regard to price point and leave it up to the suppliers to make sure that there is no impact on quality or reliability.

Which is just not possible.

Companies who suck at reliability and quality only ever use sticks – not carrots. Contracts are written up that are legally defendable and try to allocate as much accountability as possible to the vendors. If something goes wrong – it’s the vendor’s fault. The ‘lowest bidder wins’ which means the remaining vendors (in some cases) become masters at writing great proposals (but can’t follow through when it comes to delivery.) Other vendor’s will switch focus and reallocate their ‘best’ employees to more rewarding customers. This leaves an ever-decreasing vendor pool for our militant customer – who ends up missing out on the competition their entire cut-throat strategy is based on.

And because of this, component reliability suffers, more crises happen, more blame is apportioned, et cetera.

The uncomfortable truth (at least for some) is that customers need to invest in their vendors. This might mean training them, working with them, offering rewards or incentives, eliminating penalties and otherwise establish trust.

And above all, making sure that the interests of one part aren’t mutually exclusive with the interests of the other.

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