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  - March 11, 2008 -  

Procurement and Sourcing News: Should Breaking Up be Hard to Do?


When Seeing Signs of a Deteriorating Strategic Vendor Relationship, Companies Need to be Prepared, Think Through an Exit Strategy in Detail



SCDigest Editorial Staff

SCDigest Says:
The “nickel and diming” stage often comes after the vendor does an internal review that shows an account is not sufficiently profitable.

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No matter how valuable a strategic “vendor alliance” may be at various points of a relationship, for a high percentage of them, the relationship will change substantially and probably end somewhere along the way.

It’s critical that companies look for telltale signs of a deteriorating relationship and carefully pre-plan and execute exit strategies to navigate the break-up at maximum advantage for the company.

So says Lorrie Mitchell, a partner in consulting firm Mitchell Enterprises, which focuses on procurement and sourcing improvement, in a paper prepared for the upcoming The Institute for Supply Management’s International Supply Management Conference in May.

Strategic supplier relationships can wind down for many reasons, often without one or the other party being at fault from a relationship perspective. For example, the core business strategy of either side can change, negating some of the business drivers for the strategic relationship. The supplier’s product may fail to keep pace with industry developments/requirements.

In some cases, despite the best of intentions the supplier simply may not be able to meet buyer expectations. Perhaps most common of all, the relationship “is just not working,” – for any of a variety of reasons.

It could result from different corporate cultures that don’t blend well, individual and un-resolvable personnel issues, continuing conflicts that require great effort to repair, or the results of the relationship are just not meeting expectations,” Mitchell says. “In an extreme case, there may be some drastic incident, which severs the relationship, requiring legal action to be taken.”

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Signs of a Break-Up

In most cases, there are small signs that the relationship is starting to have cracks.  Common indications include:

  • It takes multiple requests on either side before the action is taken. Early in the relationship, the request-to-action cycle is usually very short.
  • It becomes necessary to make requests for items or service that used to be offered without asking.
  • The buying organization starts to feel it is being “nickel and dimed” by the supplier.

The nickel and diming stage is often a key sign that “the alliance is coming to an end. Now is the time that the supplier has forgotten who the customer is,” Mitchell adds. “When you see the commitment of the supplier decreasing rapidly, the sharing of information dwindling, and contractual language identifying each party’s dos and don’ts increasing, you know problems are brewing.”

Dan Gilmore, editor of Supply Chain Digest, notes that the “nickel and diming” stage often comes after the vendor does an internal review that shows an account is not sufficiently profitable.

“If the vendor can’t find ways to take out costs from the deal, and it can’t raise prices generally, it will often try to get back profitability by finding more subtle ways to increase revenue from the account,” Gilmore added.

Mitchell also notes that a supplier’s reaction to a new idea is also often a leading indicator, especially if what’s in it for the vendor isn't clear at the outset.

“It’s easy for a supplier to be enthusiastic when the benefits are obvious, but it takes a true committed alliance partner to be enthusiastic even when they know an idea needs some work,” Mitchell says.

Having a Plan

Ending a strategic supplier alliance will require the OK of many parties, often as high as the CEO or president level of the buying company. Usually, there will be intense lobbying from the vendor, again often at executive levels, unless it really does want out of the relationship.

If they see signs of a deteriorating relationship, procurement managers should begin assembling a list of all the areas that might be impacted from a major change in that supply relationship, besides the actual use of the product in its business or manufacturing application. Example areas can include: report generation, system changes, billing, order placement, EDI, invoice generation, funds transfer, inventory management services, technical support, Helpdesk services, warranty work, training services, ramp-up costs for supplier transition and many more. In the end, executives will want to see a detailed analysis of the economic and business impact of a switch, and a comprehensive transition plan that includes both the obvious and not so obvious areas of the business that will be impacted.

“Stop and identify the interfaces throughout the process. Meet with someone in charge of each step and find out what a change would do to their part of the process,” Mitchell recommends. “This is the point where communication will make or break it. Once you have checked out all processes, personnel, cost, etc. repercussions caused by a change of suppliers, you need to socialize this data to your end-users’ upper management. Basically, you have to construct a pros and cons statement of remaining or changing the alliance relationship. When you have facts, you can discuss and get the ever-important buy-in.”

Have the New Partner in Place

Mitchell says you should not end a strategic relationship with one supplier until a new one, or a clear alternative strategy, is in place. In addition to the direct impact of ending a supply relationship, companies will also need to consider other potential issues:

  • Legal: It’s ideal to end the relationship at the expiration of any current contractual arrangement, but this isn’t always possible. Companies in that case need to understand commitments, and whether a potential buy-out of that commitment makes sense.
  • Confidentiality Agreements: Take steps to ensure any agreements made with the partner around confidentiality are not violated, for example with users talking to new vendors about the current partner’s trade secrets.
  • Intellectual Property Issues: Companies need to well understand and enforce internal restrictions around the partner’s IP. They need to carefully vet and reolve any open intellectual property issues, which may be very tricky if negotiated during a break-up.

Alliance relationships create win/win opportunities and real partnerships. When the alliance relationship is good, it can be very, very good,” Mitchell concludes. “But when it starts to get bad, you won’t be able to get out fast enough.”

What’s your advice for winding down a strategic supplier relationship? Is it often possible to turn around such relationships that are currently not working well? Let us know your thoughts at the Feedback button below.

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