An earthquake causes extensive damage to a key supplier’s factory. Stocks of finished products vital to stop production lines grinding to a halt are severely limited, yet switching to another supplier could take months.
Or, one of your outsourced services providers designs a piece of software with the potential to improve your efficiency and boost your revenues. This provider works with most of your major competitors. Will you be the first to benefit?
Scenarios like these are neither uncommon nor new. What’s changed is that successful, well-managed suppliers are more sophisticated at categorising their customers into prioritised groups.
The size of your wallet, while still a hugely important element, may not in isolation be sufficient to guarantee your company receives preferential access to scarce resources, latest innovations or the best people.
Your supplier may also be serving plenty of other customers with equally deep pockets.
And what if the volume of business you place doesn’t classify you as a big league spender? Is it still possible to position yourself as an attractive customer?
The short answer is “yes”, but just as with larger customers it requires a more creative and open approach to buyer-supplier relationships than that traditionally practised by procurement professionals.
Be the number one clientThe term “customer of choice” is widely used to describe how they want to be seen by their most important suppliers. But there is often a lack of understanding about what this means in practice.
During the past 12 months, State of Flux has conducted research among hundreds of customers and suppliers and interviewed many key account managers – those individuals in the front line of running major customer relationships from the sales side. The aim of this article is to shed light on
what a customer of choice is, the benefits associated with it, and – perhaps most importantly – how you can improve your chances of being seen as one.
Supplier relationship management (SRM) activities invariably start with the segmentation of a supply base into a number of tiers – strategic, preferred and so on. Much the same approach is taken on the sales side when looking at a customer base. Indeed, as a business discipline, key account management (KAM) is far more established and widely practised than SRM. Companies such as Cisco, Siemens and DHL are well known for the way they manage customer accounts and the level of effort and investment they put into doing so.
According to KAM experts Malcolm McDonald and Diana Woodburn, there are three main elements that companies use to select key accounts (in other words, their customers of choice):
• Financial outcomes – not only past and present income streams, but also the potential for superior revenues, profit and “wallet share” (on the basis that it can cost five times as much to capture a new customer as to grow the relationship with an existing one) over, say, the next three years.
• Customer needs – how well aligned these are with the supplier’s vision and objectives (compatible technologies/platforms, global growth plans) and the extent to which the supplier is seen as a “trusted partner” to the customer. The length of the relationship and the number of competing suppliers may be other determining factors here.
• Customer attributes – a host of factors and behaviour that signal to the supplier whether “trusted partner” status is a reality. These include openness to ideas, a willingness to collaborate and pay for value, access to customer executives, brand and market share, and efficient decision-making.
Relatively few customers are classified as key accounts. McDonald and Woodburn suggest that the optimal number is generally 15-35, although it can be as few as five or as many as 50. And key account status by itself does not guarantee preferential treatment. According to research by the Procurement Strategy Council among key account managers at Global 2000 companies, only a third of key accounts (equivalent to 5 per cent of all customers) are regularly given preference when it comes to cost and productivity improvement resources, access to reliable sources of critical materials/services, and breakthrough innovation ideas.
Reflecting on this, our own experiences and feedback from both SRM and KAM practitioners, we propose the following definition: “A customer of choice is a company that, through its practices and behaviours, consistently positions itself to receive preferential access to resources, ideas and innovations from its key suppliers that give it a competitive advantage.”
Benefits and characteristicsIn our 2011 global SRM survey, completed by almost 400 practitioners, we asked a number of questions about the customer of choice issue. In terms of benefits received, more than half identified senior management support at the supplier, followed by preferential pricing and continuous improvement ideas (see Figure 1).
However, only a third believed they had benefited from “access to the best people and resources”, a quarter from “priority status for scarce materials and/or manufacturing capacity”, and just 15 per cent thought they had “first refusal on innovations”.
This suggests that many organisations have some way to go before they can justifiably claim customer of choice status, as we have defined it. And they agree. Almost three out of 10 believe less than a quarter of their strategic suppliers see them as a customer of choice, while only 14 per cent reckon more than three-quarters do (see Figure 2).
The supplier’s perspective
Data we have gathered during “voice of the supplier” research projects for clients among more than 225 companies and from almost 50 hours of interviews suggest that typical “pain points” can be grouped under five main headings, as follows:
1. Willingness to engage
The first non-financial attribute of customer of choice status is the degree of openness to external ideas and a willingness to listen to what suppliers have to say. This could be feedback on how existing processes might be made more efficient, suggestions for addressing business requirements in a different way, or innovative new technologies or services that add have the potential to add value to the customer’s product portfolio.
Organisations that engage in regular dialogue and workshops with their key suppliers – and, crucially, ensure that the right type and level of personnel within the business, including senior executives, are involved – are more likely to position themselves as attractive customers than organisations that take a more insular and one-way approach to relationships.
This requires both a degree of humility – recognising that not all the best ideas will be generated internally – and a deep understanding of suppliers’ capabilities and expertise.
2. Information sharing and communications
Similarly, organisations that willingly share information – for example, organisation charts, product strategies, demand forecasts, technology roadmaps – with key suppliers increase their chances of getting preferential treatment. Account managers at several suppliers serving a telecoms equipment maker told us how its unwillingness to provide data put it at a disadvantage compared with its major competitors. “The lack of openness makes my management worried and affects our allocation of resources,” explained one.
Feedback provided to suppliers on proposals or ideas they have submitted is another issue. All too often, suppliers complain that either these seem to have disappeared into a “black hole” or they are given only the most cursory feedback. Customers of choice ensure that they keep suppliers informed about the status of bids and explain clearly reasons for rejection. They also spend time educating suppliers about their requirements in an effort to filter out inappropriate ideas or innovations.
Although in some types of business it can be difficult to forecast demand more than a few weeks ahead, in many cases there is simply a lack of communication of information to suppliers to allow them to make sensible, cost-effective decisions about, say, raw material purchases, production plans, or the allocation of people to a project.
In best-practice organisations, clear communication also extends to being upfront with suppliers about how they are viewed and what they can expect in the way of executive access, regular meetings, invitations to supplier conferences, and so on.
3. Getting things done
Being open, sharing information and communicating in a consistent and thoughtful manner are important attributes of customers of choice. But key account managers are quick to point out that this isn’t enough. Organisations also need to be adept at taking decisions and implementing them – in other words, getting things done.
Those that routinely prevaricate, insist on large numbers of people being consulted about every last detail, engage in internal squabbles or fail to assign clear responsibility for project management are destined to drop down the priority list. Why? Because they are more expensive for the supplier to serve and, in some cases, may cause them to miss out on market opportunities.
Having well-designed governance structures and processes in place is one way of ensuring that actions are agreed, owned by appropriate people on both the customer and supplier sides and implemented in a timely manner. But it’s important to ensure that both operational and strategic issues are covered by these arrangements.
A global account manager at an Indian IT services firm explained that while his customer (an oil and gas company) generally did a capable job of managing their everyday interactions in the “commodity” arena, the same was not true when it came to value-added innovation.
Our SRM survey results support this view. Less than half of respondents believe their organisation does a good job of attracting, evaluating and implementing innovation proposals from key suppliers, while a third rate it as “poor”. When asked why this was the case, the top answer – given by 47 per cent – was “no formal process in place”. 4. Approach to business
An obvious, but perhaps underestimated, element in the way customers are viewed is the experience of doing business with them at both an organisational and personal level. In the former case, factors might include:
• How long-term a perspective does the customer take when making decisions or awarding contracts? And are the decision criteria clear?
• Is every new piece of business automatically bid, even when the idea has been submitted (and possibly even developed) by one supplier with whom the customer already has a strong relationship?
• Is performance evaluation a one-way street, in which the supplier receives a periodic update on its record in hitting certain SLAs/KPIs? Or are scorecards more balanced, including “softer” measures of perception on both sides?
• If things go wrong, is the default position to seek to blame the supplier and make aggressive demands for redress? Or is there an acceptance that at least some of the fault may be on the customer side?
• When things go well, are rewards shared with the supplier? Or should it just be
grateful for the business?
As human beings we generally respond more positively when we are treated in a fair and respectful manner. Organisational practices that offend this sensibility do not go unnoticed, even if they often go unchallenged. A number of suppliers to one large multinational company told us how it insisted on claiming intellectual property rights and exclusivity for their innovations, while refusing either to shoulder any of the investment risk or guarantee to buy any volume. At a personal level, “little” things like the way supplier representatives are spoken to or treated when they come in for meetings can make a difference, positive or negative.
One high-tech company has “friendliness” as a pillar of its SRM programme, while Toyota emphasises the need for its employees to be humble when dealing with suppliers. A smaller UK car maker invites engineers and workers from its key suppliers – rather than just senior managers – to experience its finished products and to corporate events. 5. Paying the bills
Although suppliers we interviewed grumbled about big customers imposing payment terms of 90 days or more, the main gripe was actually about late payment and the payment process itself.
Companies wouldn’t dream of paying their employees late, and yet many routinely do exactly this when it comes to their suppliers – in some cases by as much as half again of the original payment term period. To the suppliers affected, this displays a lack of respect for both the contractual agreement and their own cash flow, and pushes up their cost to serve the customer.
One of the main reasons for routine payment delays is inefficient processes and unwieldy IT systems. Outsourced and offshored accounts payable (AP) functions came in for particular criticism from suppliers, as they can add extra process steps, third parties and additional geographies into the equation. If not managed carefully, this can quickly become a combustible mix – and a major destroyer of supplier goodwill.
Companies that do outsource AP and require suppliers to use e-invoicing systems need to ensure dedicated people are available to guide suppliers through the process and resolve any issues.
The task for CPOs
Being regarded as a “customer of choice” requires jettisoning traditional procurement attitudes towards suppliers and an appreciation that, although market conditions may currently favour the buyer, history shows economic conditions can turn all too quickly. Ensuring your organisation is attractive to do business with, whoever the supplier and whatever the circumstances, is one of the key tasks for the new generation of CPOs.
☛ Alan Day is managing director of State of Flux, a procurement and supply chain consultancy based in London