Steps to Successful Supplier/Buyer Partnerships

Sept. 17, 2007
The relationship between a supplier and buyer can be a complex one. Each party wants to maximize its time, resources, and cash investment; these may be

The relationship between a supplier and buyer can be a complex one. Each party wants to maximize its time, resources, and cash investment; these may be competing priorities that can strain the relationship. For such a partnership to succeed, it is paramount there exists a mutual business understanding underscored with respect and a sincere wish for each party to prosper. Creating this balance does not mean driving for the lowest possible price with no regard for the true expense incurred, but rather recognizing that the success of one partner helps the success of the other. The relationship is complicated, but the best partnerships can be attained by focusing on three critical and intertwined business tenets:

1. Compliance with local and international regulations;
2. Conduct that breeds honesty, respect and open dialogue; and
3. Strategic financing that benefits both parties.

Steps to Drive a Win-Win Relationship

To develop and subsequently maintain a positive supplier-buyer relationship, organizations should periodically address compliance, conduct and strategic financing concerns with their business partners. Here are some steps to help establish mutually beneficial supplier/buyer relationships or improve upon your existing partnerships.

A critical first step of any new relationship is simply to know with whom you are conducting business. As we are constantly reminded in the post-9/11 world, the international trade community is under much tighter scrutiny than ever before. This includes knowing your customer, your supplier, and their suppliers and customers. To quote an 8th grade civics manual, “ignorance of the law is no excuse.” One cannot plead ignorance if found conducting business with a restricted party. The US government and many other governments around the world have various lists of parties with whom one cannot conduct business. It is incumbent upon the importer or exporter to take necessary steps to ensure that ALL parties in the supply chain are approved and are not restricted in any way.

There are multiple methods to accomplish the screening of restricted parties, including subscribing to the issued lists and their corresponding updates directly, or increasingly common, utilizing a third party provider to perform this service. As many businesses outsource pieces of the supply chain, outsourcing the screening function is a logical step.

While many suppliers, especially those of sensitive goods, have long been aware of the responsibility to know the identity of the final recipient and intended use of the goods, more importers are also adopting the “best practice” of screening all their suppliers, both domestically and internationally. It is an important step in the logistics program of any organization looking to adopt best practice procedures. In addition, by adopting such procedures, a company is sending the message to its partners (and the government) that it is serious about compliance and taking responsibility for supply chain security.

Trade regulations change at a rapid pace. In the past year, global and regional legislative bodies and governments have introduced myriad changes that impact supply chain operations: revised classification standards; tighter export controls; new environmental packaging requirements. Safeguarding the environment is now a global concern. The USA’s wood packaging requirements, European Union’s REACH initiative, and the China ROHS program have gained momentum in the past year. It is critical suppliers support these regulations.

Once the potential new partner has been given security and legal clearance, an organization can move on to the next level of approval. Today, suppliers for larger organizations are subject to more rigorous review than ever. Less-than-ethical labor practices have had severe impacts at major brands in the past 15 years. Just recently, the by-products found in dog food and other consumer goods from China have again highlighted the need to know and trust suppliers. As companies are more in tune with social responsibility, they are cognizant of its presence (or lack thereof) throughout the supply chain, and need to ensure goods are sourced from suppliers that are fulfilling their codes of conduct and maintaining their own level of financial, environmental and social responsibility.

To protect its interest, a company should scrutinize potential suppliers’ general and financial operational practices. Such a review could start with a questionnaire concerning the company’s business practices, employee benefit information and facility information. Insight also can be gained through a site visit and by interviewing a selection of the company’s employees. The chosen supplier could then be placed on probation for a given time frame until they have proven themselves to be an ethical, conscientious and compliant member of the organization’s global supply chain. From there, periodic physical audits are recommended to ensure conduct remains at a consistently high level while giving you the opportunity to further develop the relationship.

By having a supplier code of conduct in place, businesses demonstrate their commitment to maintaining high ethical standards—and this resonates with their conscientious end customers.

Strategic Finance
The third critical part of the relationship revolves around the financial aspect. While the buyer is looking to get a fair (again, not always lowest) price, the supplier has to ensure he is covering costs and, of course, making a profit. It is not always in the buyer’s interest to negotiate down to the very lowest price; the result can be less trust or loyalty from the vendor. Many buyers and importers happily report that price is just one factor in the negotiation; quality is huge, and they appreciate knowing they can demand a lot from their supplier and it will be delivered. A real world example is a high-end apparel retailer whose merchandise buyers expect quality goods and have very high expectations. These buyers also have wonderful, long-term relationships with their suppliers. The result is that both parties are grateful for the other partner and recognize that in order to succeed, they need to help each other.

This relationship extends to the payment terms. Especially in retail, the payment terms are often very favorable to the suppliers. These may include payment at sight of documents, payment at FOB port, or sight plus 15 days. For an international shipment, the goods are typically paid for well before they arrive at the final destination. Days are tied up in international transportation, as well as the journey through the inland transport, the distribution center and the retail stockroom before finally getting to the shelf and being purchased by the end consumer.

Consequently, the importer may have weeks or even months of cash outlay prior to selling the goods, leading more importers to look for payment alternatives and extended terms. Alternative payment methods could include changing from a traditional letter of credit to a Private Label Letter of Credit, or Open Account payment process, and payment terms of 30, 45 or 60 days. As with other aspects of the buyer-supplier relationship, changing payment terms leads to tradeoffs.

One benefit of moving away from letters of credit is lower transaction fees from the banking channel and less paperwork; tradeoffs include reduced access to financing for the supplier, as well as increased transactional risk to both parties. There are typically many options available for a business with good credit— and also for those with less-than-ideal credit. This is a conversation for the treasury department to have with the company’s financial service providers.

Another option is to reduce the risk of currency fluctuation by buying the goods in local currency. Typically most buyers in North America purchase their goods in US dollars. The recent decline of the dollar’s strength has resulted in suppliers getting less “real money” for their goods by the time they are paid. Contracts and prices are negotiated months in advance; in some cases a negative fluctuation could spell the difference between profit and loss for a supplier. Some importers are choosing to manage the currency risk through their own bank and remove the risk for the supplier/exporter. An additional benefit is it gives the importer more control over their capital and allows currency risk to be built into the product from the start, instead of seeing the costs gradually creep up over subsequent seasons while the supplier is trying to hedge risk.

Everyone Wins!
The above is not to say every supplier/buyer relationship is as valuable as the next. However it is important to realize that companies invest a lot of time, effort, and money to find qualified suppliers. Once the buyer secures a relationship with such a supplier, it should be constantly nurtured with the intention to grow further. This can only be accomplished when both the supplier and buyer develop a relationship that emphasizes compliance with international regulations, mutually acceptable conduct guidelines and strategic financing options.

Sara Ireton has been involved in the international trade environment for more than 15 years. She has worked with vendors, suppliers, service providers and clients globally, covering issues from origin operations and customer service to supply chain visibility and quality. Prior to joining JPMorgan, Sara worked for a UK-based supply chain management (SCM) software company. Prior to that, she spent several years at a freight forwarder and customs broker, both in local and international operations and at the corporate IT level. Her operations background has been an excellent foundation for working in the international supply chain industry.

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