Most buyers or purchasers who are working with Chinese manufacturers do not recognize that the supplier relationship is more than a single element and is, in fact, a systematic discipline. This means within a particular business operation all of the relationships within the operation are equal and deserve the same amount of attention. This means the supplier relationship management is no less important than the customer relationship management, dealer relationship management or public relationship management.
Many small or medium-sized businesses recognize the importance of the supplier relationship management, but the businesses fall short in successful and effective management. This is due to misunderstandings within the operation of the supplier relationship management. Therefore, it becomes difficult to reach the effective level of supplier relationship management.
There are 4 common mistakes made within the complex web of customer, supplier and dealer relationship management. Here is a detailed look into each of them.
The purchasing department is responsible for the relationship
The purchasing department is in charge of the supplier relationship management, and each department within the business is a part of the supplier relationship. Just remember that the purchasing department is the primary contact when dealing directly with suppliers.
Consider the following:
- Production – Needs a swift delivery time
- R&D – Needs to share product features to the supplier
- After-sales – Needs feedback from the customer for revisions and updates
Each of these independent departments has a specific need from the supplier. Without an established relationship from each individual department to the supplier, there will be a supply chain rupture – one that could have dire consequences.
The fallacy of ‘One size fits all’
As much as every business would like to have the ‘one size fits all’ utopia, it is simply not feasible. It is important to keep grounded and realistic when it comes to working along side your supplier. Trying to fit the relationship into this mold will have negative results.
Consider the following:
Whether it be done under extreme pressure of force majeure or because of first time problems, a supplier may not completely match the content of the order. There is, of course, the possibility of a lack of mutual understanding or perhaps order inconsistencies. Many times the supplier is willing to cooperate actively with the buyer to reach a fair plan of compensation, and there is no reason for the buyer to become overly upset or rude.
Many businesses will go above and beyond what is fair and reasonable to the point of punishing the supplier or completely severing the business relationship. There will be a swift and serious fallout as a consequence.
It is important to remember that many manufacturers within China are close to one another in many different ways. For example, they could share the same industry, be in the same industrial belt or have a certain cooperative relationship. This means word gets around about difficult customers and businesses with insane and unfair demands. It is like the Chinese adage, “The good does not go forth, but the bad spreads for thousands of miles.” In other words, difficult businesses and buyers often end up blacklisted from manufacturers with an uphill battle finding a decent supplier.
Resolution: Each individual situation needs to be judged and considered on an individual basis instead of adopting a “my way or the highway” approach of working strictly ‘by the book.’ Being too rigid and inflexible will damage partnerships with the better manufacturers of your chosen products.
Cutting too deeply into profits
The Internet and e-commerce has changed the face of accounting with accounts payable and receivable. With a bit of digging, it is easy to find the approximate amount it costs the manufacturer to create a product.
What happens is some businesses cut into the manufacturer’s profit line based on the research. The goal is to reduce the business’ cost and raise their own profits. This is done even at the expense of putting the manufacturer into deficit. If the manufacturer is put into this situation with regularity, it becomes serious.
The number one culprit for cutting into a supplier’s profit is the world’s largest retailer – Wal-Mart. Wal-Mart is well-known for hurting its suppliers with cutting profits for the benefit of Wal-Mart’s customers. Wal-Mart will delay payments to suppliers for an extended time. More technically, they have a long billing period and will infinitely lower purchase prices and increase supplier operating costs because of that. This leads to the suppliers operating risks rising and eventually folding because of the Wal-Mart model. As such, many of the better manufacturers and suppliers in China refuse to work with Wal-Mart under any circumstances.
Several other businesses similar to Wal-Mart try to do the same and cut into the manufacturer’s profit margin. However, there is only one Wal-Mart, and only Wal-Mart can successfully pull this trick.
Too many small businesses think it is acceptable to reduce a manufacturer’s profit margin to zero or yhave them take a loss. It is exceptionally simple for suppliers to note negative intentions of buyers – they want to push unfairly, leading to antagonistic relationships.
The knowledge of prices and pricing does go both ways, both sides are looking for the maximum profits for their business and are not concerned about the outcome for the other side. If either side recognize the plans of the other side in this case, it is only a matter of time before the relationship sours. Without working collectively towards the common goal, the total costs for the products for both sides go up and not down.
A basic relationship is all that is necessary
Many buyers dealing with manufacturers draw a comparison to a produce department in a supermarket. The thinking goes, “What is the difference between brand of apple A and brand of apple B? They are the same thing.”
Buyers see the manufacturer as a producer and nothing more. Because of that, there is no need for a deep business-focused relationship and feel a loose relationship is all that is necessary. When we say loose relationship, this means the purchasing group does not make many purchases, has a small MOQ and does not feel any reason to move beyond the fundamental business relationship.
Under a loose relationship, the supplier and buyer feel the relationship is temporary and only as good as long as there is an agreement in place. The buyer will only look for their own needs with the desire the supplier be around and ready at any time for another order. This is poor thinking. No supplier will sit idle and wait for orders. If this becomes the case, chances are the supplier will push any further orders, queries or issues well to the back of the line.
Meanwhile, the supplier will fulfill the terms of the contract but will not volunteer any information about the order. Additionally, they will only respond to questions posed by the buyer – nothing further. Without raising any questions about the products or product order, the supplier will not provide any information. This includes if there are any risks or defects in the product order. Any mistakes fall on that of the buyer, and the supplier adopts a philosophy of “sounds like a personal problem to me” attitude.
Recognize that a loose relationship can become a cooperative one, but the cooperation mechanisms in the agreement make it difficult for buyers to gain anything of value outside of the explicit terms of the contract. This can seriously hold back any long term strategic goals of the procurement process.
It is the movement to work fruitfully beyond the superficial relationship of buyer and producer that makes a difference in the relationship over a long term. Basically, if the buyer wants to survive and thrive, getting in good with the manufacturer is the best thing to do.
How to avoid these 4 issues
The number one thing to do is the same in any relationship – maintain an open venue of communication. Even at times when there is no active order, staying in touch is a good thing as it keeps the manufacturer and buyer on positive terms. The Chinese adage, “Business is off while friendship is on,” summarizes this idea nicely. It means that while there may not be an active business transaction, we can still be cordial and friendly with one another. When positive relationships are formed with a quality Chinese manufacturer, it is likely that perks will start happening – things like suggestions on product upgrades, reduced MOQ and the like are all potentially feasible. Of course, it is strongly recommended that if such is made available to leverage that information. The results can mean significant differences.
A positive business relationship with a manufacturer should be a goal. Sourcing Nova has already made and maintains these relationships with the OEM manufacturers from whom we source products. Let us know what product we can find for you. We look forward to hearing from you!