How to Use Your Suppliers as a Key Competitive Advantage

How to Use Your Suppliers as a Key Competitive Advantage

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Here’s a thought: Being entrepreneurial is a way of life. It’s not lived in moments and it’s not curated. It’s about being always ‘entrepreneurially-on’. Since a fact of life is that nothing remains as it is and change is always happening, being entrepreneurially on allows you to be present in the change and find opportunity.

Customer Relationship Management (CRM) is a key business activity that occupies a large share of mind in any business. It leads to up-selling, cross-selling, inside-selling and all the forward momentum that any business can hope for. Supplier Relationship Management (SRM), the yang of CRM’s yin, is seldom spoken about beyond quality and price.

The supply-side of your business carries with it as much risk and reward as the demand-side and yet how much do we really know about our suppliers?

Turning disadvantage into opportunity

Pierre is ‘entrepreneurially-on’. As a romantic (and he loves his wife), his first love is concrete. In a trip to Paris a number of years ago he was photographing his wife with the Eiffel Tower in the background.

Beyond the romantic sentiment of the occasion, through his camera lens, Pierre saw a shape that could innovate the retaining walls and structures for the mining, agricultural and materials handling sectors. His mind swirled with the potential this shape offered.

Soon after his return home to South Africa, Pierre went on to develop a series of concrete retaining walls in the shape of the Eiffel Tower. Today his products stretch across all industries and the sectors within them. From creating storage capabilities to erecting temporary material depots on construction sites, his products look over an abundant horizon of opportunity.

With good margins offered by the uniqueness of his patented product and a solid understanding of his customers’ needs, Pierre has grown the business dramatically in the last few years. His order book continues to grow, as does his cash in the bank.

 

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Recently, Gauteng experienced unprecedented rains. The highest rainfall in 14 years impacted many businesses. From a drop in productivity due to power outages, broken traffic lights and an inability to operate outdoors, the construction industry bore a major part of the brunt. In particular, the forecasts of materials suppliers to the construction industry dampened down in the wet weather.

In a recent session with Pierre, I could sense that he was frustrated. Laying concrete structures such as materials handling cells, retaining walls, paving and the like is simply not possible in abundant rainfalls: The substrate upon which the concrete structures are laid keep on washing away. Orders were on hand and Pierre was on track to meet his first quarter forecast but sales where postponed for better weather.

To lift the cloud hanging over Pierre’s business meant that we had to look at an ‘entrepreneurially-on’ opportunity. Given the weather conditions that we had no control over, how could we turn this to our advantage? In addition, he had idle cash burning a hole in his pocket. I suggested we turn to SRM and see what was on offer.

Building collaborative relationships

Cement manufacturers in South Africa are large corporate businesses. Within these businesses, there are systems and procedures. With active shareholders always seeking returns, businesses are governed by extensive revenue forecasts demanded by shareholders.

Sure, one can blame an Act of God for non-achievement of a forecast, but one cannot ever blame inaction and poor imagination.

A deepening understanding by managers of the implications for production efficiencies, jobs, supplier contracts that they had in place and importantly their key performance indicators (KPIs), lent a new insight into the need to turn bad weather into sunshine for all.

KPIs are made up of targets that govern performance in an organisation. Meeting them means you keep your job. Superseding them means a bonus, and non-achievement of the KPIs is frowned upon and may even result in the loss of your job. KPIs are designed to keep managers thinking about their performance day and night.

As we unpacked our suppliers’ challenges further, we understood that further costs of storage were being incurred, deepening the crisis in their financial performance. Each of our meetings with the suppliers allowed us to develop a deeper understanding of their business processes and the individuals’ KPIs. Our process of SRM was deepening.

Recently, a deal was struck with a supplier of cement. We ran our numbers. Confidence in our sales forecast, the most valuable negotiating aid in any supplier deal, allowed us to commit to big volumes for delivery in two batches.

The prices agreed were unprecedented, providing Pierre with a massive cost advantage that he had not enjoyed for years. The orders on hand would absorb close to 28% of the cement stockpile. The balance would be absorbed in the next six months.

In addition, a long-term supply agreement was negotiated with price increases based on the recently negotiated stockpile prices. The sun would continue to shine on Pierre’s margins for a long while.

Maximising benefits

Being ‘entrepreneurially-on’ and understanding suppliers through SRM placed Pierre in a position where he could secure a number of short- and medium-term benefits.

A smart place to invest spare cash

We learnt what drives our suppliers and through that, when and how the managers operating the supply relationship with us are performance managed. Through this we were able to have quality conversations on how we could help each other.

In this instance, Pierre would invest his spare cash into stockpiling cement. His return was a splendid price point that yielded his business and invested cash a return in excess of any other investment he could have made in the money-market, JSE or bonds.

In return, the managers we worked with could move closer towards their targeted sales, reduce the pressure of costs by moving stockpiles from their warehouses and maintain production.

Suppliers are people too and business is about people

Even corporate suppliers. While entrepreneurs operating businesses in a concentrated economy like South Africa’s are often abused by large suppliers and customers, there are people behind these functions and they also have their fears and apprehensions about their responsibilities.

Understanding these fears places you in a position to do deals like Pierre when the time is right.

Think beyond your circumstances

SRM is a valuable tool to make sure that you buy right so that you can sell right. Whilst you may operate a business that sells to a local or regional market, large suppliers are often subject to global issues on a more profound level.

Being aware of the global issues impacting their business allows you the opportunity to interpret how you can help them as they help you.

Turn combat into collaboration

Bridging the formality of a supplier relationship with a corporate supplier means spending time getting to know the organisation, how it works, who impacts the life of your contact within the organisation, and how you can make a difference to their performance in your own small way.

Converting the often combative relationships with suppliers which are price-oriented into collaborative relationships driven by understanding will pay dividends.

Be ‘entrepreneurially-on’

Change is a given. It’s happening right now. Understanding how to capitalise on it and get the timing right is what entrepreneurship is about to a large degree. If you have idle assets in your business right now, consider how to make the best use of them to secure a lasting advantage for your business.

 

Pavlo Phitidis
Pavlo Phitidis is the CEO of Aurik Business Incubator, an organisation that works with entrepreneurs to build their businesses into valuable assets. Pavlo is a regular commentator on entrepreneurship on 702 Talk Radio and 567 Cape Talk Radio. He can be contacted at www.aurik.co.za