A recent LinkedIn discussion addressed the question of the best strategy for dealing with poor supplier performance.
A lot of the respondents seemed to advocate a punitive approach, either threatening the loss of future business if performance doesn’t improve, or combing through the terms & conditions of the contract for enforcement language.
I’ve always thought that there’s a lot of similarity between managing suppliers and managing subordinates, and I wonder if some of these same people threaten their teams with punitive actions when individual performance doesn’t meet expectations.
Are threats effective? Maybe not.
I’m not a psychologist, but I’ve always been suspicious about the long-term effectiveness of threats.
A supplier who works to avoid negative consequences may achieve a minimum level of performance, but probably not much more than that. If you expect your supplier to represent your interests when you’re not actively observing their performance, you have to provide a reason for them to do so.
What’s in it for them? An ongoing relationship with future business?
That assumes that the supplier actually wants or values your business, which is not a given, and that you are sincerely prepared to switch suppliers if you don’t get the performance you expect.
Two important questions to consider before threatening to switch suppliers are:
(1) What is the switching cost, including the risk to current production? and (2) Is switching suppliers really going to lead to higher performance?
Regarding the latter question, there’s an assumption that the supplier is the cause of the poor performance. Before changing suppliers you need to be confident that the same performance problems won’t be repeated elsewhere.
A supplier is more likely to behave as a partner if they get something more out of the relationship than money for services rendered.
So, what do suppliers want? Here are some examples:
- Large, well-known customers that they can use in their advertising to attract new customers. This is especially valuable for smaller suppliers that are looking for revenue growth.
- Technical capabilities that can be leveraged to other customers. If the customer’s requirements drive the supplier to develop new technology or higher levels of quality or throughput, then the supplier will be able to attract other customers.
- Entry into new markets. Suppliers that focus on specific markets (e.g., consumer electronics, semiconductors, automotive, aerospace) are at risk due to economic and demand cycles. A diversified portfolio of customers and markets provides more stability.
- Predictable demand for better asset utilization. Suppliers are just like any other business: they like being able to confidently plan into the future. This is so important that some suppliers are willing to give a discount if the customer is willing to commit to using a fixed level of their capacity over a period of time.
Most suppliers operate with very small profit margins, and if they are in a position to choose their customers, they have to consider the cost to service each customer.
If you can’t give them a reason to value your business, then you shouldn’t be surprised or disappointed if they don’t go the extra mile.