Four Ways to Rekindle Supplier Relationships for Better Logistics Operations

by Michael Koploy on 2011-08-06 01:35:09

How do we keep the “human” factor in an age of software automation? While many modern logistics and supply chain operations are governed by software systems, there is still great value in maintaining positive supplier relationships.

An issue many deal with is the ability to effectively reward and punish supplier performance. A recent conference call hosted by the SS&P LinkedIn Group asked the question, “Do penalties improve supplier performance?” It’s my opinion that for rewards and penalties to be successful, the focus has to be put on improving the buyer/supplier relationship.

Here are four ways to do just that. These ideas can certainly be managed by software, but they’re all about the relationships.

(1) Pair Incentives with Penalties
If you’re looking at supplier penalties as a way to curtail poor performance, it’s almost as creating a negative environment that encourages failure. To combat this, you can balance penalties with incentives. By setting the precedent that you’ll not only expect suppliers to meet expectations, but reward them for exceeding them, you create a ceiling that’s higher than the minimum. This is key to long term development of both the supplier and your relationship with them.

(2) Communicate and Provide Visible Metrics for Suppliers
Key performance indicators (KPIs) are powerful and vital tools that measure both your own performance and your suppliers’. Experience allows managers to select the KPIs that will bring the most results. But, these results should not just be internal - sharing and creating visible supplier metrics spreads the responsibly to both parties, and can lead to a strong and lasting supplier relationship.

(3) Expect to Create Expectations that Escalate
One could argue that using a supplier incentive system can lead to improved - but lazy - suppliers. A simple solution is to create realistic, escalating incentives. These escalations should be reasonable, but enticing enough to keep suppliers improving. Negotiating this within the initial service level agreement helps both parties understand how and when expectations will rise.

(4) Focus These Initiatives with Risky Suppliers
If all of these initiatives are new, adopting them and applying them to all suppliers and being unable to deliver won’t do you or them any good. Instead, selecting a few suppliers that can be identified as “at-risk” is the most sound way to start applying penalties and incentives. Both you and these at-risk suppliers have the most to gain, and it allows you to discover what works and what doesn’t. Then, you can apply what you’ve learned to a wider range of your supply base.

Michael Koploy is an ERP Analyst at Software Advice that reviews WMS, TMS, SRM, and procurement software. He also manages the Warehouse Management Systems Guide. The original article on this topic can be seen at: Relationships 101: Back to Basics for Supplier Management.